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=== Rent more === MMAG’s smartphone rental business, Rent-a-Phone was launched in October 2020, and represented the company’s first move into generating recurring revenue versus its traditional one-off transactional relationship in the core business. In February 2022, MMAG announced the extension of its rental offer to other consumer technology products, namely tablets, games consoles, MacBooks and wearables, following the popularity of the smartphone rental offer. Management sees potential to expand into other types of consumer technology in the future. As highlighted later (see Financials section), the rental business has the potential to increase MMAG’s revenue growth profile (Edison estimates adding 2–5% to annual revenue growth rates) and significantly improving its profitability (from FY21 adjusted EBITDA margin of 8.4% to low-teens and above from FY26). The smartphone subscription is for at least 12 months, with an option to then either upgrade, renew or return the phone. More than 9,000 stock keeping units (SKUs) are currently available to rent on the UK website. The consumer benefits from a relatively inexpensive upfront cost (first month subscription is paid in advance before despatch of the device) to access more desirable and up-to-date editions of a full range of smartphones, with greater flexibility of options at the end of the rental period. Monthly rental fees start at £8.99 for a refurbished phone, £11.99 for a console, £12.99 for an iPad and £19.99 for a MacBook. The latest iPhone 13 is available from £31.99/month. MMAG benefits financially from a recurring revenue stream, hopefully over a number of years as the customer extends or renews the subscription with the same or another phone, as well as the ultimate on-sell revenue of the product if it is no longer rented by a customer. Through this, the customer essentially becomes MMAG’s supplier. By definition, the length of time that a phone can be rented is limited by the time its operating system is kept up to date by the phone manufacturer, and there is an inter-play between how long the phone can be rented and the ultimate selling price. From a customer relationship management perspective, management also expects to benefit from the ability to cross-sell its other product offers given regular opportunities to interact with customers. Since its launch, the service has generated strong sequential (month-on-month) growth in the number of subscriptions, reaching c 4.4k subscriptions at the end of March 2021 and 7.5k at the end of May 2021 by which time it was building at 50+ rentals per day and momentum was increasing. By the end of FY21, there were 13.5k active subscribers, after allowing for customers that had either defaulted before the end of the first year or left the service after year one. The number of active subscribers increased to c 19k by the end of February 2022, taking the forward order book to £2.2m. Exhibits 7 and 8 demonstrate management’s initial estimates at the time of the IPO of the relative economics of a smartphone sale versus a three-year subscription, with monthly subscription revenues indicated gross and net of VAT. '''Exhibit 7: Sale versus rental example<ref name=":1">Source: musicMagpie IPO presentation.</ref>''' [[File:Sale versus rental example.png]] '''Exhibit 8: Relative contributions of sale versus rental<ref name=":1" />''' [[File:Relative contributions of sale versus rental.png]] An outright sale of a smartphone in the example given generates revenue of £290, trading profit of £90 (margin 31%), gross profit of £78 (margin c 27%), EBITDA of £59 (margin c 20%) and EBITA of £59 (margin 20%). In this example, over the (estimated) three-year life, management estimates a subscription should generate significantly higher revenue and profitability than an outright sale: revenue of £480, trading profit £480 (margin 100% with no cost of sale, the smartphone is capitalised as an asset and depreciated over the estimated useful life of the device), gross profit of £364 (margin c 76%), EBITDA of £335 (margin c 70%) and EBITA of £213 (margin 44.3%). The near-term dampening effect on year-one revenue is highlighted by a comparison of the revenue recognised of the rental of £200 versus an outright sale of £290. However, offsetting this, management estimates the EBITA of a subscription is higher than an outright sale after nine months. MMAG’s FY21 results included full disclosure for revenue and profitability of outright sales (i.e. one-off) and rental income, and the total for the whole of Technology. {| class="wikitable" |+Exhibit 9: Technology revenue and profit<ref>Source: musicMagpie.</ref> !£m !FY20 Outright !FY20 Rental !FY20 Technology !FY21 Outright !FY21 Rental !FY21 Technology |- |Revenue |83.491 |0.005 |83.496 |84.245 |1.809 |86.054 |- |Growth year-on-year | | | |0.9% |36080.0% |3.1% |- |Gross profit |19.363 |0.004 |19.367 |19.973 |1.311 |21.284 |- |Gross margin |23.2% |80.0% |23.2% |23.7% |72.5% |24.7% |- |Contribution (after direct labour) |15.703 |0.004 |15.707 |15.985 |1.311 |17.296 |- |Contribution margin |18.8% |80.0% |18.8% |19.0% |72.5% |20.1% |} Just after the first anniversary of the smartphone rental launch, FY21 rental revenue of £1.8m represented more than 1% of group revenue (c £145.5m) and the gross profit and contribution after direct labour of £1.3m was c 3% of group gross profit (£44.3m) and c 4% of group contribution (£32.1m). The significantly higher rental margins (gross margin 72.5% and contribution 72.5%) than for outright sales (23.7% and 19.0%, respectively) highlight the potential improvement for group margins if management can further scale the rental business successfully.
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