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MusicMagpie
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=== 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.
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