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== Financials == === Income statement === MMAG demonstrated strong revenue growth from FY18 (£115.5m) through FY20 (£153.4m) and further into H121 (2.3% y-o-y to £72.8m) as revenue in all product categories increased due to the underlying structural drivers highlighted earlier, ahead of management’s commissioned estimates of market growth, and with the apparent boost to demand during the COVID-19 pandemic that began in H120 (period ended May 2020). FY21 revenue declined by c 5% to £145.5m, in line with management’s expectations, as Technology continued to grow (+3% y-o-y) despite the dampening effect of new rental income (outright revenue +0.9%), and growth rates normalised for Media (-14% y-o-y) and Books (-21% y-o-y) towards pre-COVID-19 levels. On a combined basis, Media and Books revenue declined by c 15% in FY21 to £59.5m, versus guidance of c 10%. FY21’s revenue was c 11% ahead of FY19’s pre-COVID-19 levels of £131.5m. {| class="wikitable" |+Exhibit 12: Summary income statement<ref>Source: musicMagpie, Edison Investment Research.</ref> ! !FY18 !FY19 !H120 !H220 !FY20 !H121 !H221 !FY21 !FY22e !FY23e |FY24e |- |Revenue |115.5 |131.5 |71.1 |82.2 |153.4 |72.8 |72.7 |145.5 |154.7 |166.1 |179.9 |- |Growth y-o-y (%) | |13.8 |N/A |N/A |16.6 |2.3 |(11.6) |(5.1) |6.3 |7.4 |8.3 |- |Outright sales | | |39.4 |44.1 |83.5 |39.4 |44.9 |84.2 |96.9 |106.6 |117.2 |- |Rental income | | |0.0 |0.0 |0.0 |0.3 |1.5 |1.8 |6.0 |12.1 |19.1 |- |<nowiki>- Technology</nowiki> |51.8 |70.4 |39.4 |44.1 |83.5 |39.7 |46.4 |86.1 |102.9 |118.7 |136.4 |- |<nowiki>- Media</nowiki> |58.0 |54.8 |27.1 |31.7 |58.8 |28.0 |22.7 |50.7 |44.6 |40.2 |36.1 |- |<nowiki>- Books</nowiki> |5.7 |6.3 |4.6 |6.4 |11.0 |5.1 |3.6 |8.7 |7.2 |7.3 |7.3 |- |Trading profit |N/A |N/A |36.9 |45.4 |82.4 |41.5 |36.3 |77.8 |75.3 |80.7 |87.7 |- |Trading margin % |N/A |N/A |51.9 |55.3 |53.7 |57.1 |49.8 |53.5 |48.7 |48.6 |48.8 |- |Gross profit |26.8 |30.4 |19.1 |25.7 |44.8 |23.7 |20.5 |44.3 |42.9 |47.5 |53.2 |- |Gross margin (%) |23.2 |23.1 |26.9 |31.2 |29.2 |32.6 |28.2 |30.4 |27.7 |28.6 |29.6 |- |Operating costs |(24.2) |(25.8) |(13.6) |(17.3) |(30.9) |(17.5) |(14.6) |(32.1) |(33.6) |(36.2) |(37.6) |- |Growth y-o-y (%) | |6.8 | | |19.6 |28.4 |(15.4) |3.9 |4.6 |7.9 |3.8 |- |EBITDA |2.6 |4.6 |5.5 |8.4 |13.9 |6.2 |5.9 |12.2 |9.3 |11.3 |15.6 |- |EBITDA margin (%) |2.2 |3.5 |7.7 |10.2 |9.0 |8.6 |8.2 |8.4 |6.0 |6.8 |8.7 |- |Depreciation and amortisation |(2.8) |(2.6) |(1.3) |(1.3) |(2.6) |(1.5) |(2.2) |(3.7) |(7.0) |(9.3) |(9.4) |- |Normalised operating income |(0.2) |2.0 |4.2 |7.1 |11.3 |4.8 |3.7 |8.5 |2.3 |2.0 |6.2 |- |Normalised margin (%) |(0.2) |1.5 |5.9 |8.6 |7.4 |6.6 |5.1 |5.8 |1.5 |1.2 |3.4 |- |Exceptionals/ share-based payments |(0.6) |(0.7) |(0.7) |(1.0) |(1.7) |(21.5) |(0.5) |(22.0) |(0.5) |(1.0) |(1.5) |- |Operating income |(0.8) |1.3 |3.5 |6.1 |9.6 |(16.7) |3.2 |(13.5) |1.8 |1.0 |4.7 |- |Operating margin (%) |(0.7) |1.0 |5.0 |7.4 |6.3 |(23.0) |4.4 |(9.3) |1.2 |0.6 |2.6 |} === H122 trading and outlook: Expected moderation === FY21 ended strongly with record sales in the UK and US during Black Friday. The sales momentum continued in to Q122, however, as the period progressed volumes and trade-in activity moderated in line with consumer trends. The H122 (end May 2022) trading update confirmed a modest c 2% year-on-year decline in revenue to £71.3m (£72.8m in H121). Strong growth in Technology revenue of 15.9% to £46.0m (£39.7m in H121) partially compensated for the previously flagged normalisation of Media and Books revenue, a decline of 23.6% to £25.1m from H121’s £33.1m, a period that benefited from increased sales due to COVID-related lockdowns. Adjusted EBITDA of £2.6m in H122 compares with H121’s £6.2m, reflecting the strength of growth in rental subscriptions and the decline in revenue, and was in line with management’s expectations, with confidence in achieving full year expectations. The rental business has continued to demonstrate strong growth, with c 24k active subscribers at end H122 versus c 19k at end Q122, 13.5k at end FY21 and 7.5k at end H121. The growth highlights the appeal of the rental offer, which may become even more so given the challenging economic backdrop and outlook for consumer discretionary income due to inflationary pressures from utility bills and national insurance increases. The forward contracted order book was £2.2m at end Q122. Consumer Technology revenues for Q122 were in line with management’s expectations, but management noted a trend towards lower sales volumes at a higher average selling price and an increase in the proportion of products sourced from intermediary wholesale partners, which was expected to compress the gross margin on outright sales by four percentage points in FY22. The H121 trading update confirmed that margin performance during the period was in line with the revised expectations for the full year. The H121 Technology revenue performance reflected the expected near-term dampening of Technology outright revenue growth from the new rentals. Management expects a gradual acceleration of growth in the UK as the incremental rental revenue increases to complement underlying market growth. At the Q122 stage, management highlighted that disc media revenue had performed in line with management’s expectations, ie a long-term underlying decline of close to 10% pa. In addition, Books revenue had maintained at levels seen in H221 with expectations it will remain at this level for the remainder of the year, consistent with its outlook for the medium-term of remaining relatively stable. Management believes both categories will continue to provide a good level of profitability and cash generation. At the end of Q121, as already highlighted, there was ongoing momentum in trading through the SMARTDrop kiosks, with a cumulative 8,000 units traded at a cost of £2.3m, versus c 5,300 smartphones at a cost of £1.5m at end FY21. === Revenue: Mid-single-digit growth guidance === As highlighted previously, management’s estimates of market growth rates for the product categories would indicate a weighted average market growth profile of 4–6%, using FY20’s pre-rental business mix, increasing as Technology’s importance to the group grows. As rental income grows, it should be incremental to group revenue growth. Its forecast of c 6–8% revenue growth in FY22–24 is consistent with management’s medium-term guidance. Edison forecasts Technology revenue growth of c 20% to £103m in FY22, 15% growth to £119m in FY23 and further 15% growth to £136m in FY24, to c 89% of total group revenue in the final year. For outright sales, Edison assumes 15% growth in FY22 (helped by the rollout of SMARTDrop kiosks and the launch of corporate recycling) and 10% growth thereafter, lower than the anticipated mid-teens market growth rates indicated earlier, recognising the substitution effect of new rentals. For rental income, Edison assumes the number of active subscribers grows from 13.5k at the end of FY21 and 24k at the end of H122, to c 36k by end FY22, c 62k by FY23, and c 89k by end FY24 that is, net new additions of c 23k, 25k and 27k pa, respectively. The growing number of active subscribers at the period ends reflects an increase in gross customer additions per day to 80, 100 and 120 respectively and a modest annual reduction in the rate of defaults of new customers in the first year (starting at 10% in FY22) and churning customers after the first year (starting at 25% in FY22). Edison assumes revenue per active subscriber per month of £20 in FY22, which increases by 3% thereafter. These assumptions lead to forecasts for rental income of £6m in FY22 (+230% y-o-y), £12m in FY23 (+102% y-o-y), and £19m in FY24 (+58% y-o-y). Edison forecasts revenue declines for Media of 12% to £45m in FY22, and declines of 10% in both FY23 (to £40.2m) and FY24 (to £36.2m). Its FY22 forecast represents a decline of c 2% versus H221’s revenue of £22.7m when annualised. For Books Edison forecasts a revenue decline of c 18% in FY22 to £7m, which is equivalent to H221’s revenue of £3.6m on an annualised basis, and thereafter assume modest growth of c 1% pa. It represents c 5% of its FY22 group revenue forecast and will become a gradually less significant part of the group as Technology increases. Management believes there is still good money to be made in Books and Media well into the future whilst recognising the structural challenges, given the variable operating costs and ability to transfer resources to focus on the higher growth offered by Technology. === Profitability: Driven by mix changes and new costs === The historical strong revenue growth, improved sourcing and mix changes led to an improvement in the overall gross margin from 23.2% in FY18 to 29.2% in FY20 and 30.4% in FY21. Broadly, the higher gross margins are due to a combination of better optimisation of prices between channels, better product selection (restricting purchases to products that have a better chance of selling with optimal margin versus previously taking items MMAG was less confident of selling), and a greater proportion of sales through MMAG’s store versus third-party channels (thus saving commissions). Management also believes it has been able to buy at lower prices than competitors given its brand strength, guarantee of payment and the customer experience offered. In the Admission Document, management guided to a similar gross margin for FY21 as FY20 (29.2%) but reported an improvement to 30.4%, and for growth thereafter due to margin enhancement for the Technology segment as rentals increase. In addition, management anticipates gross margins across Media and Books will remain resilient despite the expected revenue decline. Since the Admission Document, Rent-a-Phone has continued to grow strongly, which should be helpful for both gross and operating margins. As highlighted above, given trends in Q122, management anticipates the gross margin for technology outright sales in FY22 will reduce by four percentage points. For all categories, except Technology outright sales as guided above, Edison assumes a stable trading margin (selling price less buying price of the item), which along with the growing contribution of higher-margin Technology rental income, leads to a reduction in the gross margin to 27.7% in FY22 before resuming growth to 28.6% in FY23 and 29.6% in FY24. As a result, in absolute terms, Edison forecasts a 3% decline in FY22’s gross profit to £43m, before 11% growth in FY23 and 12% growth in FY24. Below gross profit Edison assumes inflationary growth for operating costs, including 6% growth in the National Minimum Wage in FY22 and higher marketing costs as MMAG increases spend on brand and promoting its new rental and SMARTDrop kiosk initiatives. As Media revenues decline, Edison assumes its operating cost base naturally reduces. This leads to estimated EBITDA margins of 6.0% in FY22, 6.8% in FY23, and 8.7% in FY24, and normalised operating margins of 1.5% in FY22, 1.2% in FY23, and 3.4.% in FY24 versus 5.8% in FY20. The lower margin in FY22–24 is due to mix changes, central cost investment and higher depreciation charge on the capitalised smartphones. FY21 bore the costs of the exceptional IPO expenses (£3.9m) and the vesting of options on the IPO (£17.4m). Edison accrues £1.5m of share-based payments in future years. Following the IPO, which raised gross proceeds of £15m, there was a net cash position of £1.8m at the end of FY21. In FY22, its interest expense predominantly relates to its IFRS 16 liabilities as well as platform fees. The company has no plans to pay a dividend as management intends to re-invest profits and cash generated in developing and expanding the business. === Cash flow and balance sheet === {| class="wikitable" |+Exhibit 13: Summary cash flow<ref>Source: musicMagpie, Edison Investment Research.</ref> ! !FY18 !FY19 !H120 !H220 !FY20 !H121 !H221 !FY21 !FY22e !FY23e !FY24e |- |Operating cash flows |(0.0) |2.3 |5.5 |6.5 |12.0 |2.0 |0.3 |2.6 |8.9 |11.3 |14.5 |- |<nowiki>- Net income</nowiki> |(4.4) |(0.9) |2.6 |6.0 |8.6 |(17.6) |5.5 |(12.1) |1.3 |0.4 |3.0 |- |<nowiki>- Depreciation and amortisation</nowiki> |2.8 |2.6 |1.3 |1.3 |2.6 |1.5 |1.8 |3.3 |7.0 |9.3 |9.4 |- |<nowiki>- Working capital</nowiki> |(0.1) |(1.9) |0.5 |(1.1) |(0.6) |(0.2) |(4.7) |(4.9) |(0.6) |(0.2) |(0.3) |- |<nowiki>- Tax paid</nowiki> |0.0 |0.0 |0.0 |0.0 |0.0 |0.0 |0.0 |0.0 |(0.0) |(0.0) |(1.1) |- |Investing cash flows |(1.7) |(1.4) |(0.8) |(1.1) |(1.9) |(2.5) |(4.7) |(7.2) |(13.6) |(11.6) |(12.9) |- |<nowiki>- Capex</nowiki> |(1.7) |(1.4) |(0.3) |(0.2) |(0.4) |(1.6) |(2.8) |(4.4) |(9.6) |(9.1) |(10.4) |- |<nowiki>- Intangibles</nowiki> |0.0 |0.0 |(0.6) |(0.9) |(1.5) |(0.9) |(1.9) |(2.8) |(4.0) |(2.5) |(2.5) |- |Financing cash flows |2.7 |0.1 |(0.9) |(5.9) |(7.0) |1.9 |0.4 |2.3 |2.9 |1.8 |(1.2) |- |<nowiki>- Equity issue</nowiki> |0.0 |0.0 |0.0 |0.0 |0.0 |14.5 |(0.0) |14.5 |0.0 |0.0 |0.0 |- |<nowiki>- Borrowings</nowiki> |4.0 |2.4 |0.0 |(3.2) |(3.2) |(10.2) |1.0 |(9.2) |4.0 |3.0 |0.0 |- |Change in cash |1.0 |1.1 |3.8 |(0.5) |3.1 |1.4 |(4.1) |(2.3) |(1.8) |1.5 |0.3 |- |Cash at end |1.0 |2.0 |5.8 |5.4 |5.1 |6.4 |2.4 |2.9 |1.1 |2.6 |2.9 |- |Net debt/(cash) at end excl. IFRS 16 |11.1 |12.6 |9.6 |6.3 |6.3 |(6.4) |(1.8) |(1.8) |3.8 |5.3 |4.9 |- |Free cash flow pre-interest |(1.7) |0.9 |4.7 |5.4 |10.1 |(0.5) |(4.5) |(4.6) |(4.7) |(0.3) |1.5 |- |Free cash flow post-interest |(2.2) |(0.3) |4.2 |3.2 |7.4 |(2.5) |(4.8) |(6.9) |(5.1) |(0.9) |0.9 |- |Relative to sales: | | | | | | | | | | | |- |Operating cash flow |0.0% |1.8% |7.7% |7.9% |7.8% |2.7% |0.4% |1.8% |5.8% |6.8% |8.1% |- |Net income |(3.8%) |(0.7%) |3.6% |7.3% |5.6% |(24.2%) |7.5% |(8.3%) |0.8% |0.2% |1.7% |- |Working capital |(0.1%) |(1.4%) |0.7% |(1.3%) |(0.4%) |(0.2%) |(6.5%) |(3.4%) |(0.4%) |(0.1%) |(0.2%) |- |Capex |(1.4%) |(1.1%) |(0.4%) |(0.2%) |(0.3%) |(2.2%) |(3.9%) |(3.0%) |(6.2%) |(5.5%) |(5.8%) |- |Intangibles |0.0% |0.0% |(0.8%) |(1.1%) |(1.0%) |(1.3%) |(2.6%) |(1.9%) |(2.6%) |(1.5%) |(1.4%) |- |Total fixed asset investment |(1.4%) |(1.1%) |(1.2%) |(1.3%) |(1.2%) |(3.4%) |(6.5%) |(5.0%) |(8.8%) |(7.0%) |(7.2%) |- |Free cash flow pre-interest/sales % |(1.5%) |0.7% |6.6% |6.6% |6.6% |(0.8%) |(6.2%) |(3.2%) |(3.0%) |(0.2%) |0.9% |- |Free cash flow post-interest/sales % |(1.9%) |(0.2%) |5.9% |3.9% |4.8% |(3.5%) |(6.6%) |(4.7%) |(3.3%) |(0.5%) |0.5% |} There was a notable improvement in MMAG’s operating and free cash flow generation from FY18 to FY20. Excluding interest payments, free cash flow improved from an outflow of £1.7m in FY18 to an inflow of £10.1m in FY20. The key driver to the improved cash flow generation was the company’s higher profitability, offset in part by modestly higher investment in tangible and intangible assets. FY21’s operating cash flow was negatively affected by the one-off costs for the IPO. Working capital has represented a modest cash outflow on a consistent basis, which is impressive given the scale of the revenue growth from FY18 to FY20. Its forecast for higher investment in tangible assets from FY22 reflects the capitalisation of devices for rentals (Edison assumes £280 for each new phone in FY22–24) and the costs of rolling out the SMARTDrop kiosks (FY22 only). The capital investment leads to estimates of negative free cash flow in both FY22 and FY23.
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