Focusrite (LON: TUNE)

Per its most recent Annual Report, Focusrite (LON: TUNE) is a high return on capital business that operates as “… a global audio technology group that develops and markets proprietary hardware and software solutions. Our portfolio is used for both the creation and reproduction of high-quality audio by the beginner and hobbyist all the way through to the professional user and commercial facility.” Per its Fiscal Year (FY) 2021 Annual Report, the business generated £173.9 million of revenue and £28.3 million of net income which were year-over-year increases of 34% and 590% respectively (profits plummeted in FY 2020 due to COVID). Focusrite is headquartered in the mean streets of High Wycombe, England.

History

Focusrite was founded in 1985 by famed electronics engineer Rupert Neve. The business and its assets were purchased in 1989 by Phil Dudderidge who had previously made his name in the audio/sound engineering space. Ever since, it has been primarily known for its audio interfaces and preamps which I explain in more detail later in the What Does Focusrite Do section of this writeup.

The business has branched out significantly over the last several years from being a pure interface/preamp hardware business and has made five acquisitions since the early 2000s. Novation, a manufacturer of keyboards, synthesizers, controllers and interfaces was acquired in 2004. I was unable to find out how much Focusrite paid for Novation. ADAM Audio, a manufacturer of professional studio monitors and headphones, was acquired in 2019 for £16.2 million. Per its most recent Annual Report, Martin Audio, also acquired in 2019 for £39.6 million, “… is the United Kingdom’s largest manufacturer of professional loudspeakers for both live and installed sound.” Sequential, the iconic synthesizer designer and manufacturer, was acquired in 2021 for £18 million. The most recent acquisition was Linea Research which was purchased in March of this year for £12.6 million. Linea Research is a designer and manufacturer of professional audio equipment. Besides hardware, Focusrite has branched out in to offering software through its Ampify brand. The business went public in December of 2014.

CEO

Timothy Carroll is the CEO of Focusrite. Per p. 56 of the FY 2021 Annual Report, “Tim was appointed Chief Executive Officer of Focusrite in January 2017. Previously, he was Vice President of Avid Technology, responsible for product development, commercialisation and delivery on all of Avid’s audio portfolio including the industry standard Pro Tools audio workstation, the S6 Control surface, the Venue and S6L Live Sound solutions, and Sibelius notation and music learning applications. He is a professional musician by background, having recorded and toured for nearly 20 years as a keyboard player before joining Avid.”

CEO Compensation

Mr. Carroll’s compensation is comprised of a base salary, a performance based annual bonus, long-term share incentives, a pension contribution and other benefits. I will only discuss the first three components of his compensation as the last two are immaterial.

Mr. Carroll’s base salary was £291,000 in FY 2021. He received a 2% increase for FY 2022.

Per p. 69 of the FY 2021 Annual Report, “The annual bonus for the 2021 financial year was based on three performance criteria which were unchanged from the 2020 financial year: adjusted EBITDA, which represented 70% of the maximum bonus; adjusted free cash flow as a proportion of revenue, which represented 20% of the maximum bonus; and their individual contributions to developing strategic opportunities for the Group, which represented 10% of the maximum bonus and which was assessed qualitatively by the Remuneration Committee. The three performance criteria operated independently of one another.” The bonus is capped at 100% of his salary. Let’s take a look at what “adjusted EBITDA” and “adjusted free cash flow” mean.

Per Note 5 on p. 97 of the FY 2021 Annual Report, adjusted EBITDA is defined as “comprising earnings adjusted for interest, taxation, depreciation, amortisation and adjusting items.” I had to search for the “adjusting items” and found them in Note 15 on p. 102 of the FY 2021 Annual Report. They are shown in the screencap below.

The “adjusting items” are added back EBITDA which inflates the figure which then can possibly increase the CEO’s bonus. For FY 2021, the adding back of “adjusting items” did in fact help Mr. Carroll reach his full EBITDA bonus payout of 70% of his base salary. This isn’t a full red flag considering the bonus amount was a little more than £200,000, but I’m not a fan of it either. What was a full red flag 🚩was adding back the impairment of goodwill on an acquisition the year before. It was related to the Martin Audio acquisition which included £12.6 million in goodwill at the time. The impairment was due to COVID affecting the business which makes sense. However, there is risk in making any acquisition whether you know about it or not. Adding back the impairment is essentially rewarding the CEO for striking out on an acquisition. Must be nice.

Focusrite defines free cash flow a little differently than I do. Per p. 97 of the 2021 Annual Report, it is defined as “… net cash from operating activities less net cash used in investing and financing activities, excluding dividends paid.” For those of you wondering at home, this reduces free cash flow significantly in Focusrite’s case because it had to repay loans and borrowings over the last couple of years. I found the adjustments made to free cash flow in the notes to the Director’s Bonus Table on p. 70 of the 2021 Annual Report. Per Note 2 which is found in microscopic print under the Bonus Table, “The free cash flow as a percentage of revenue excludes the impact of the cash cost associated with the purchase of Sequential, the non-underlying costs paid up to the year end and the movements in the bank loan taken out to acquire Sequential.” I think this is okay as it basically gets free cash flow back to what it would’ve been without the acquisition.

The bonus based on his “… individual contributions to developing strategic opportunities for the Group” is nebulous at best. I did not find any further information provided in the FY 2021 Annual Report about what the contributions are or could be. I’m not even sure what “… individual contributions to developing strategic opportunities for the Group” means. Luckily, it’s only 10% of the bonus, but still. I wish it was more clearly defined.

Long-term share incentives are shown in screencap below which was taken from p. 71 of the 2021 Annual Report.

Like the annual bonus, the long-term share incentives include “adjustments” made to the performance criterion. The “adjustments” are the same ones in the screencap above from Note 15 of the 2021 Annual Report. The screencap below was taken from Note 18 on p. 104 of the 2021 Annual Report shows the affect that the “adjustments” had on EPS.

As you can see, “adjusted” EPS is materially higher than regular EPS and is provides significant assistance in helping the CEO realize his long-term share incentives. Management was again rewarded for striking out on the Martin Audio acquisition in FY 2020. This is another red flag 🚩.

The table below shows Mr. Carroll’s FY 2021 bonus payments. It was taken from p. 70 of the FY 2021 Annual Report. He received a bonus of 100% of his annual salary.

The screencap below was taken from p. 73 of the 2021 Annual Report and shows the total compensation for Mr. Carroll and other Directors at Focusrite for FY 2020 and FY 2021.

The last topic I’d like to touch on is insider ownership which is a mixed bag. Directors at the business held over 33.19% of issued share capital as of FY 2021. That sounds great, right? You’ll recall that Phil Dudderidge bought the business in 1989. He also serves as Executive Chairman to this day. Per TIKR, he currently owns 32.84% of the business meaning that the rest of the directors own <1%. In aggregate, this looks great, but I wish the stock ownership was more spread out amongst management and Directors. Per TIKR, Tim Carroll owns a little more than 0.1% of the total stock outstanding which equates to <£1 million. It doesn’t seem like he has a lot of skin in the game which is another red flag unfortunately 🚩.

What Does Focusrite Do?

From the introductory paragraph, Focusrite “develops and markets proprietary hardware and software solutions”. What does that mean though? What exactly are proprietary hardware and software solutions? The answer includes everything from interfaces and preamps to keyboards, synthesizers, controllers, studio monitors, headphones, professional loudspeakers and software package. Listed below are each of Focusrite’s business units along with a description of the products they sell.

Focusrite – The namesake and flagship business unit. It also happens to be the highest revenue and profit driver by far for the overall business which is discussed in further detail later in the Valuation section of this writeup. Focusrite’s three product lines are all interfaces: Scarlett, Clarett+ and Vocaster.

Before going further, I’d like to explain what an interface is. I had no idea what it was before researching the business. Per Wikipedia, “An audio interface is a piece of computer hardware that allows the input and output of audio signals to and from a host computer or recording device.”

Sweetwater, the largest online retailer of musical instruments and pro audio equipment in the United States, has a video that explains interfaces in more detail here:

Why does one need to use an interface? Why not use the audio equipment in your computer? Well, you can, but as Mitch Gallagher stated in the video above, there are two reasons why you want to go with an interface. The first is that the sound and microphone jacks in a computer or laptop are designed to be functional and do not offer the best quality. Second, the standard audio capabilities from a computer or laptop are limited. You need more control and versatility if you want to record music, a podcast or stream content and an interface helps immensely with all of these.

I also mentioned preamps, short for preamplifiers, earlier too. These are included in Focusrite’s interfaces, but I wanted to give you an explanation of them before moving forward with the product descriptions. Per Wikipedia again, “A preamplifier, also known as a preamp, is an electronic amplifier that converts a weak electrical signal into an output signal strong enough to be noise-tolerant and strong enough for further processing, or for sending to a power amplifier and a loudspeaker. Without this, the final signal would be noisy or distorted. They are typically used to amplify signals from analog sensors such as microphones and pickups. Because of this, the preamplifier is often placed close to the sensor to reduce the effects of noise and interference.”

The Scarlett interface product line starts with the Scarlett Solo and ends with the Scarlett 18i20. You could have guessed from its name, but the Solo offers one microphone plugin and preamp, one instrument input and one set of outputs to left and right speakers. The 18i20 is pretty hardcore quite frankly. It offers 18 inputs and 20 outputs. Both products and the others offered in the Scarlett line have other features, but they’re more nuanced and not really the focus (*Paulie Walnuts laugh*) of this writeup. The Scarlett line is geared primarily towards amateur and hobbyist musicians with the price range falling between $109 and $509.

The full range of Scarlett interfaces can be found here: https://focusrite.com/en/scarlett

Up next is the Clarett+ line. It is the premium version of Focusrite’s interfaces with the price points to match. The Clarett+ 2Pre is the base of this product line and will cost you $499.99 brand new. The “premium” aspects of the Clarett+ line are its superior audio features such as better mic preamps and individual switches for condenser microphones which are the preferred type of microphones used in studios. Clarett+ interfaces also come with a larger software package versus their Scarlett counterparts.

Please refer to this video for a detailed breakdown of the Clarett+ versus Scarlett line:

The Clarett OctoPre is as good as it gets in the Clarett+ line. Per the Focusrite website, “The Clarett+ Mic Pre helps you achieve clear recordings in any session. With eight professional quality, low distortion, low noise mic preamps featuring fully balanced signal paths that give sessions the professional Focusrite sound.” A brand new one will cost you $799.99.

The full range of Clarett+ interfaces can be found here: https://focusrite.com/en/clarett-plus

Vocaster is the third and final type of Focusrite interface and is geared towards podcasters. There are only two products offered in this line: the Vocaster One and Vocaster Two with both having been released over the summer. If you couldn’t tell from their names, the Vocaster One is for a solo recorder while the Two is meant for……………… two. Given that they’re geared for podcasts, the sound quality and control functions aren’t quite as robust as the Scarlett, but they get the job done.

The Audio Hotline YouTube channel gave an excellent review of the Vocaster One if you have 25 minutes to spare:

Do be aware that Focusrite sent him a Vocaster One, but I feel like he gives an honest review.

A good review of the Vocaster Two can be found here:

Julian Krause, the reviewer, buys or is sent each product he reviews from viewers of channel and, in my opinion, gives unbiased and straightforward reviews.

The Vocaster One goes for $199.99 and the Vocaster Two goes for $299.99.

Focusrite Pro – Per the FY 2021 Annual Report, “The Focusrite Pro suite of solutions provides professional audio engineers and facilities with the best quality audio in scalable systems that fit the need for any professional workflow, including music creation, postproduction, broadcast and live sound.” It was launched a few years ago and generates <£5 million in sales per year so I will not describe it further given that it is such a small piece of Focusrite’s overall business.

The full range of Focusrite Pro products can be found here:

https://pro.focusrite.com/

Novation – This business unit is known for its Launch series, Grooveboxes, synthesizers and keyboards.

The Launch line features the Launchpad Pro, Launchpad Mini, Launchpad X and Launch Control XL. These products are called MIDI controllers. Per Rolling Stone, “A MIDI controller is a simple way to sequence music and play virtual instruments on your Mac or PC. It works by sending MIDI data (Musical Instrument Digital Interface) to a computer or synthesizer, which then interprets the signal and spits out a sound.” The Launchpads feature a series of buttons in an 8x8 format that allow the user to introduce sounds, loops and other sound effects into their work.

The key feature of the Launch line is its deep integration with Ableton Live. What is Ableton Live? Well, there’s a video for that here:

Borrowing from the 0:24 – 0:27 mark of the video, the TL;DR is that it’s a powerful piece of software used for music production and live performances. The Launchpad’s range in price from $109.99 to $349.99.

The full range of Launch products can be found here: https://novationmusic.com/en/launch

Let’s move on to the Grooveboxes. I’m guessing most of you have no idea what a groovebox is and neither did I before I started researching Focusrite. Per Wikipedia, “A groovebox is a self-contained electronic or digital musical instrument for the production of live, loop-based electronic music with a high degree of user control facilitating improvisation.” Novation offers two physical Grooveboxes, the Circuit Rhythm and Circuit Tracks, along with a piece of software called Ampify Groovebox.

The first product, the Rhythm, is a sampler and will cost you $399.99 out of the box. Circuit Tracks, which Focusrite brands as an “all in one studio”, is geared primarily towards electronic and dance music producers. Like the Rhythm, it costs $399.99. Ampify Groovebox is a free download and, per its website here, allows you to build beats, arrange tracks, mix your music and send it to Ableton Live amongst other things.

The full range of Grooveboxes can be found here: https://novationmusic.com/en/grooveboxes

We now arrive at the synthesizers. Users of Novation synthesizers include Radiohead and Nine Inch Nails. This range includes the MinoNova, Bass Station II, Peak Polyphonic Synthesizer and the top-of-the-line Summit. I will not describe them in further detail as I feel like most of you know what a synthesizer is and what they do. They range in price from $449.99 to $2,299.99.

The full range of Novation synthesizers can be found here: https://novationmusic.com/en/synths

We’ve made it to keyboards which marks the end of the Novation product line. Surprisingly, at least to me, there are six different kinds of keyboard models. They are the Impulse, Launchkey Mini, Launchkey, Launchkey 88, FLKey and SL MkIII. In addition to being keyboards, they also function as controllers and integrate with a host of software products to give users that extra dose of ease and functionality. Like the synthesizers, I feel like most of you generally know what keyboards are and what they do so I do not feel like they deserve a further explanation. The cheapest keyboard is the Impulse 25 which costs $199.99. The most expensive keyboard is the 49SL MkIII which costs $649.99.

The full range of Novation keyboards can be found here: https://novationmusic.com/en/keys

ADAM Audio – This business unit is known for its studio monitors. Wikipedia saves the day again for those of you who don’t know what a studio monitor is. Per Wikipedia, “Studio monitors are loudspeakers in speaker enclosures specifically designed for professional audio production applications, such as recording studios, filmmaking, television studios, radio studios and project or home studios, where accurate audio reproduction is crucial.”

ADAM Audio’s product lines include the T-Series, A-Series, S-Series, Subwoofers and Headphones.

Per ADAM Audio’s T-Series site linked here, these monitors are the more affordable option and geared mainly towards music production, video post-production and radio broadcasts in small rooms. The product line includes the T5V, T7V, T8V and T10S. The prices range from $199.99 to $399.99.

The A-Series is a step up from the previously mentioned T-Series and is the successor to the AX series. It offers five products: the A4V, A44H, A7V, A77H and A8H and range in price from $499.99 to $1,499.99.

This video does an excellent job of giving an overview of each product in the A-Series:

The S-Series is as good as it gets from ADAM Audio and is geared towards professional audio recording and producers. The product line includes the S2V, S3V, S3H, S5V and S5H. They range in price from $2,274.99 to ~$10,000.00. There is an additional speaker, the S6X, that’s designed for large control rooms and film studios that cost an eyewatering $25,999.99 a pop.

The Subwoofer line includes the Sub7, Sub8, T10S, Sub10 MK2, Sub12, Sub15 and Sub2100. Some of the subwoofers are designed specifically to complement the previously mentioned T and A series. The cheapest subwoofer, the Sub 7, will cost you $699.99 while the Sub2100 will cost $9,599.99.

There is only one set of headphones, the SP-5. They’ll run you $499.99. I’m not sure why ADAM Audio still makes these. Besides being the only headphones in the entire product line, they haven’t been updated since they were released over three years ago. Odd.

A link to ADAM Audio’s main site which allows you to see its entire product line is here: https://www.adam-audio.com/en/

Martin Audio – Per the most recent Annual Report, “Martin Audio remains the UK’s largest manufacturer of professional loudspeakers for both live and installed sound.” I decided not go into a ton of detail about their products for a few reasons. First, this writeup is pushing 3000 words already and I need to get a move on. Second, I think a lot of you have been to a concert, conference or a church before, so you know what these products look like. Third, Martin Audio has a lot of product lines, but doesn’t list prices on its site. You must go to its global vendor list to buy or rent the speakers. This lack of transparency into its pricing isn’t suspicious, but it did raise my eyebrow and has been noted.

The full range of Martin Audio’s products can be found here: https://martin-audio.com/products

Sequential – Its synthesizers are the industry standard. I decided not to go into a ton of detail on its products for the same reasons listed in the previous paragraph. Like Martin Audio, it does not list the prices of its products on its website. You must work with a verified dealer to get a quote. Given that its products are the industry standard, you can bet that Sequential’s synthesizers are not cheap. The quality is unmatched though.

A link to Sequential’s full product list: https://www.sequential.com/all-products/

Software

Focusrite’s software is offered primarily through its Ampify brand.  Per p. 19 of the 2021 Annual Report, “Ampify expands the Group’s electronic music offerings into iOS and cross-platform desktop solutions that allow anyone to experiment with and create high-quality soundtracks. The apps are all free to download.” Ampify had 1.4 million downloads in FY 2021 with 565,000 in-app purchases. It is also bundled with Focusrite and Novation products. Management currently does not break out revenue or profitability figures for its software offerings which makes me think they are minimal.

A link to Ampify’s full product list: https://ampifymusic.com/products/

Why is Focusrite Unique?

Before I started my research, I had no idea how to answer this question. I had never heard of or knew why Focusrite was a good business. It screened well financially, so that was my starting point. I needed to figure out why. How could a company that makes interfaces and other musical hardware and software be a good business?

I flirted with the idea of setting up some kind of tent like structure similar to the mobile COVID testing stations that are all over New York City. I wanted to have “POSSIBLE VALUE RESEARCH MOBILE LABS” emblazoned on the flaps of the tent to make it seem official. The plan included a sign on the sidewalk asking people if they were musicians or producers and if they had heard of any of the Focusrite brands before, what they thought about the products and then offering them a bottle of water and a snack for their time. This didn’t come to fruition for three reasons. One, I’m pretty sure I needed a permit to do this and I didn’t know where to get one. Two, I’m poor and couldn’t afford the water and snacks. Three, water and ice are heavy and I didn’t want to schlep them around the city. I needed a new plan and got to thinking. Three things eventually came to mind. First, I work with some people who are musicians, so I could talk to them and get their general feedback. Second, there are a lot of music stores in New York City given all the creative and musical types that live and pass through here so I could go to them and talk to employees and customers. Third, I could check out reviews on the internet. You may be wondering why I solicited reviews from three different sources. I give my explanation at the end of this section… Now keep reading!

Coworker Feedback

I spoke to a handful of my fellow coworkers who make music. They only knew about the Focusrite interfaces. None of them used the Novation controllers / synthesizers, ADAM Audio monitors or Sequential synthesizers. The feedback about Focusrite was positive. All of them knew about the interfaces and the consensus was that they were of good quality especially at their price point. More on that later. Their feedback served a dual purpose because it gave me an indication as to who uses the interfaces. I work at a grocery store so neither I nor my coworkers are raking in the ‘scarole. That meant the interfaces must be affordable if they were using them. One other interesting thing I learned is that while its interface quality is excellent, Focusrite is not the industry standard. That title belongs to Universal Audio’s Apollo interface. One of my coworkers, who has been making music for over 15 years, said that the Apollo sound quality is just better. It’s made strictly for professional producers and musicians. I asked him how much better the quality really was because the Apollo interface was about 4x the price of the Focusrite. He said most people can’t hear the difference between the two, but the people who can (the professionals) demand that extra sound quality to make their music as close to perfect as possible and that’s why they go with Apollo. On to the feedback from some music stores around town.

Store Feedback

I went to four music stores in the city: Sam Ash on 34th Street, a small, independent spot called Rogue Music and two Guitar Centers; one located on 14th Street and the other in downtown Brooklyn by the Barclays Center. My notes from each location are shown below.

Sam Ash

Focusrite

• Spoke to an employee about Focusrite interfaces. He said they’re good but not a top end product.

• Top end products are Apollo and Solid State. They offer better sound quality.

• Said there isn’t a ton of differentiation amongst the interfaces. He said he knows professionals that use both. It’s more about the producer/engineer than the interface at the end of the day. A good producer/engineer can use almost any interface because the baseline quality of them is so good.

• Their interfaces just work. Good bang for your buck.

Novation

• Their pads are controllers.

• Works well with Ableton Live. It was designed to integrate with it.

• Its controllers just work. They are well engineered and designed.

• They’re rugged and can take a lot of constant use. I found this interesting because it was something that I didn’t think about beforehand.

• Not a ton of differentiation in this space. It’s more about how consistent and durable the product will be after repeated use.

ADAM Audio

• Designed for professionals with the price(s) to match.

• Users aren’t super concerned with price due the fact that they can write off the expense. The employee spoke at length about this as he runs his own production business and has his own studio.

• Well designed and engineered.

Rogue Music

Focusrite

• Their interfaces are really good.

• The bang per buck is excellent.

Novation

• Works and integrates well with Ableton Live.

ADAM Audio

• No info. Didn’t say anything specific.

The information I gathered at this store was sparse. The guy working the counter wasn’t the owner and frequently went off on tangents about the current state of the music business, how it used to be and how much things have changed. Getting him to answer my questions and stay on topic wasn’t easy, but he had good stories. He was the type of person that you could only meet in New York City.

Guitar Center – 14th Street

Focusrite

• Spoke to an employee and he said Focusrite’s interfaces are excellent overall.

• He also said he would use its professional grade equipment if he could afford it.

• Its interfaces just work and have a good price point.

• He said they aren’t great for drumming. That’s the only negative about them.

• He didn’t know much about Novation or Adam Audio.

• Spoke to a kid in his late teens or early twenties about Focusrite. He repeated a lot of what has already been said. He mentioned that his friend uses a Focusrite interface for his home studio. His friend uses it because it has good quality and is cheaper than a Solid State or Apollo interface.

• I’ve received a “Yes” every time I’ve asked whether Focusrite’s interfaces had good bang per buck.

Novation

• N/A. Couldn’t get any information on Novation’s products.

ADAM Audio

• N/A. Couldn’t get any information on ADAM Audio’s products.

Guitar Center – Downtown Brooklyn by Barclays Center

Focusrite

• Took a really long time to speak to someone.

• Ended up speaking to a Pro-Audio rep.

• She said that Focusrite is good for the home user and that it just works. Apollo is much higher quality.

• There was an older guy meandering around while I was talking to the Pro Audio rep. He said, regarding the Focusrite interfaces available for sale, “You’ll find these in every apartment in New York City.” After talking to him further, what he meant was that people who do at-home recording will most likely have a Focusrite interface because of its quality and affordable price.

Novation

·       N/A. Couldn’t get any information on Novation’s products.

ADAM Audio

• The Pro Audio rep referenced above said Adam Audio is for professional use.

• Its products are well designed and engineered.

• Very high quality.

You’ll notice that I don’t have any feedback about Martin Audio or Sequential. This is due to the former not being available at any of the stores that I went to. I remember seeing Sequential synthesizers at Guitar Center, but the selection wasn’t huge and I didn’t ask about it. Both segments generated ~15% of total sales combined in FY 2021 so most of the heavy lifting was done by the other three segments.

Internet Reviews

There were three sites I went to for reviews on Focusrite products: Trustpilot, Sweetwater and YouTube.

Trustpilot

Focusrite promotes its Trustpilot reviews heavily and I’m not sure why. I’ve even heard the CEO reference Trustpilot reviews in a podcast interview. Almost all the Focusrite, Focusrite Pro and Novation products have links to Trustpilot reviews. The business is also verified on the Trustpilot site and has a 4.4/5.0 rating with over 2,700 reviews. A link to the combined Focusrite and Novation Trustpilot page can be found here: https://www.trustpilot.com/review/store.focusrite.com

ADAM Audio is the other business segment that has a Trustpilot page. However, the business is not verified, but does feature its logo. It has 52 reviews and a 4.6/5.0 rating.

Martin Audio and Sequential do not have Trustpilot review pages.

Sweetwater

I used Sweetwater as a review source because, as mentioned above, it is the largest online retailer of musical instruments and pro audio equipment in the United States. I figured that distinguishing factor made it a reliable place for reviews and ratings.

Of the Focusrite products that have been reviewed on Sweetwater, the lowest rated one has a 4/5 star review. Everything else is rated 4.5/5 stars or higher. A link to Focusrite products and reviews on Sweetwater can be found here: https://www.sweetwater.com/store/manufacturer/Focusrite

Like Focusrite, Novation’s reviews on Sweetwater are excellent with all of them being 4/5 stars or higher. A link to Novation’s products and reviews on Sweetwater can be found here: https://www.sweetwater.com/store/manufacturer/Novation

ADAM Audio’s products all have a 4.5/5 star or higher rating on Sweetwater. A link to ADAM Audio’s products and reviews on Sweetwater can be found here: https://www.sweetwater.com/store/manufacturer/ADAM_Audio

Martin Audio unfortunately does not have any products available on Sweetwater.

Every Sequential synthesizer on Sweetwater has a 5/5 star rating except one which has a 4.5/5 star rating. A link to Sequential products and reviews on Sweetwater can be found here: https://www.sweetwater.com/store/manufacturer/Sequential

YouTube

There are some potential issues I’d like to address with YouTube reviews before I post the links to them for each business segment. The first is that the reviews are subjective. There is no standard scale or measurement system that the reviewers use. Also, some of them have affiliate links to the products they’re reviewing so you can make a case that they aren’t being totally honest. Third, they’re all different and one might like Feature X, but not Feature Y on an interface while the next Youtuber might like Feature Y and not Feature X on the same interface. Last, I had no idea how vast the music hardware, software and technology review spaces were on YouTube. They seemed almost limitless, and I have only so much bandwidth, so I couldn’t watch all the reviews for each product of each segment. Don’t be surprised if you get sucked into the vortex if you watch any of the reviews below.

Foucsrite product reviews. These cover almost all of the interfaces from the Scarlett, Clarett+ and Vocaster lines: https://www.youtube.com/results?search_query=focusrite+interface+review

Novation product reviews: https://www.youtube.com/results?search_query=Novation+review

ADAM Audio product reviews: https://www.youtube.com/results?search_query=ADAM+Audio+review

Martin Audio product reviews. Admittedly, there aren’t many: https://www.youtube.com/results?search_query=Martin+Audio+review

Sequential synthesizer reviews: https://www.youtube.com/results?search_query=Sequential+synthesizer+review

Focusrite has pretty good reviews across the board for all its business segments. I didn’t encounter any YouTubers who definitively wouldn’t recommend its products. That’s not to say that there weren’t criticisms or nuanced features that some of the reviewers wished for. Also, Focusrite isn’t the industry standard in all its product categories. The only business segment that seemed to hold that title was Sequential which matched up with previous feedback.

General takeaways for Focusrite’s interfaces, Novation and ADAM Audio were their quality, bang per buck, performance and ease of use. Another takeaway is that each of these segments seem to be mostly for the amateur, hobbyist or “at home” studio user. Yes, there were reviews by some professionals that recommended their products, but I saw more of them from non-professionals.

Why the Three Review Sources?

The answer includes my limited resources and base rates. I’ve previously mentioned my lack of resources. I had to use review sources that were mostly free besides the time spent obtaining them. I think using all three sources was simple and effective. Why? Base rates. I asked myself this question, “What are the chances that my coworkers, employees and customers at several musical equipment stores and internet reviewers from Trustpilot, Sweetwater and YouTube are lying about Focusrite’s products?” I think the base rate is low. By “low” I mean close to zero. Did they all say the exact same thing? No. Was there some overlap and general takeaways? Yes. The big one was that Focusrite, as a group, knows who its customers are and makes high quality products at reasonable prices for them. Why would it have such good reviews otherwise?

Valuation

Revenue

I used 2012 as the base year because it was as far back as the data goes on TIKR. Revenues increased from £25.27 million in FY 2012 to £173.94 million in FY 2021 which is a CAGR of 21.28%. That type of growth is impressive to say the least.

The table below is a breakdown of Focusrite’s revenues by business segment. The data were taken from TIKR and are off by a tenth here and there compared to the figures above due to rounding. Focusrite started out with three business units (Focusrite, Novation and Distribution) and has since added each acquisition as its own business segment along with Focusrite Pro.

The Focusrite segment has traditionally made up close to 60% of sales and is showing no signs of slowing down as it has experienced revenue growth every year since FY 2012. The revenues from the other business units are encouraging too; especially Novation as its revenues have ticked up every year besides FY 2019 and FY 2020. I’ll give it a pass because of COVID. Initial signs from the ADAM Audio and Martin Audio acquisitions are positive as their revenues have increased between FY 2020 and FY 2021.

The table below shows the geographic breakdown of revenues and was taken from TIKR. Like the business segment revenue data, they are off by a tenth here and there due to rounding.

The North American (U.S.A. and Canada) and EMEA markets make up 80+% of revenues. The Rest of the World includes the Asia Pacific and LATAM markets. Given the low number of sales and huge populations, the Rest of the World present sizable areas of potential growth for Focusrite.

Capital Structure

The balance sheet data were taken from TIKR and are shown in the screencap below.

Focusrite has a pristine balance sheet. Current assets are greater than total liabilities and have remained that way since at least 2012. Debt is almost non-existent which you love to see. Retained earnings and stockholders equity have both increased every year too.

Free Cash Flow

My calculations for free cash flow, what I call “real free cash flow” (RFCF), are shown in the screencap below.

One thing to note about Focusrite’s cash flow is that it took a Goodwill impairment of £10+ million in 2020 on its acquisition of Martin Audio. Per p. 127 of the FY 2021 Annual Report, “In FY20 a £10,200,000 impairment was recognised against the investment of Martin Audio as forecasts made at that time indicated the fair value of the investment was lower than the carrying value. However due to the improved trading in FY21 and forecast revenue in the next five years, which include new revenue streams generated in FY21, which will be reoccurring within Martin Audio, it is considered that this impairment is no longer required and so has been reversed.”

The business has done a great job of increasing RFCF over the last ten years along with not issuing a lot of stock-based compensation. RFCF has CAGR’d at 35.63% since FY 2012. Not too shabby. The business trades at ~13x multiple of its RFCF based on its current market capitalization of ~£480 million.

Returns on Invested Capital

The screencap below shows my calculations for Focusrite’s returns on invested capital (ROIC).

Besides FY 2020, which I’ll issue a pass for because of COVID, the business has produced excellent returns on invested capital. NOPAT and Net Income were the same because the business had minimal finance/interest costs of <£750,000 each year since going public which I didn’t think were material.

Returns on Incremental Invested Capital

My calculations for Focusrite’s returns on incremental invested capital (ROIIC) are shown below.

Per my calculations, Focusrite has been compounding the value of its business by 29% per year since FY 2012. Its stock price has compounded at ~24% since going public as of the publishing date of this writeup. The spread between my figures and what the market thinks about the business is narrow at best. Put another way, the market generally likes Focusrite’s business and financial performance and has rewarded it in kind.

Risks

Focusrite sources materials and components from China which has experienced increasingly strict COVID lockdown protocols over the last few weeks. How these lockdowns will affect Focusrite’s supply chain remain unknown, but I don’t see how they can be positive.

Fiscal Year 2022 is most likely going to be a down year. Per its First Half FY 2022 Presentation linked here, revenue and EBITDA were down for each business segment except Martin Audio which was up 44% versus the same period in FY 2021 due to people returning to live music performances. Overall sales were down 2.5% versus the first half of FY 2021 while half year EBITDA was down ~24%. To be fair, sales for each business segment and the overall business were up materially versus FY 2020.

In the previous section, you would’ve seen that Focusrite generates 56% of its sales from its namesake interface segment. That is all fine and dandy, but its biggest market per the First Half FY 2022 Presentation linked in the previous paragraph is the “Live Venue” space which was valued at £2 – £2.5 billion. The risk here is that Focusrite generated a little more than £20 million from this market in FY 2021. Does it have the chops to expand and pivot towards sustained, profitable growth in the “Live Venue” market? Initial signs have been positive because of Martin Audio’s increase in sales but this wasn’t enough information for me to decide either way.

I mentioned that sales are up materially across all segments versus FY 2020. There are two questions to be asked here. First, “Did Focusrite experience a bump in sales post COVID that it wasn’t expecting?” I think the answer is obviously, “Yes.” The second question is, “Is the bump in sales the new normal or will there be a structural decrease in sales over the next few years?” I’m unsure how to answer that question. Focusrite is obviously bullish on its outlook, but I’m not so sure considering that sales will most likely be down for FY 2022. The prudent thing to do is wait and see.

Tailwinds

The business estimates its total addressable market to be ~£4.5 billion. Assuming that “Live Venue” takes up £2.5 billion of this, we’re left with ~£2 billion for the other Focusrite business segments. Given that its namesake segment that slings interfaces does ~£100 million in sales per year, I’d say there is ample opportunity for the overall business to grow. I think podcasting and streaming represent huge areas of growth for Focusrite given their explosion in popularity over the last several years.

Focusrite has not rested on its laurels. It has been open to introducing new products and making acquisitions over the last few years. This is a qualitative aspect that I like about the business after having researched it and something that I can’t put a number on. You could make an argument that the acquisitions are risky given the M&A track record of most corporations, but they have been made at reasonable prices and fit with the overall brand of Focusrite. I think this shows that the business is willing to evolve from its roots as an interface manufacturer, but ultimately what matters is how profitable that evolution will be in the future.

Expansion into the “Rest of the World” (Asia Pacific and LATAM markets) represents a huge growth opportunity. I stated it earlier, but sales in both markets make up less than 20% of overall revenues. Both geographies have a combined population well in excess of 2 billion people and could well be the biggest market for Focusrite in the future. Will that happen? We’ll have to see, but the opportunity is there.

It is financially robust for a small-cap business. I’ve seen few businesses that generate <£200 million in sales with a financial profile like Focusrite. It has minimal debt, a net cash position and has grown its RFCF 21x since going public. This doesn’t guarantee future results or anything close to it, but it gives the business and management a great platform to launch from. This isn’t a recent phenomenon either. If you look at the business’ financial performance or capital structure in any year, you’ll see solid results in all three financial statements.

Conclusion

Is Focusrite a good business? From an operating and financial performance perspective, the answer is definitely “Yes”. Based on my research and the feedback from the three sources I looked at, it makes great products and is serving the needs and desires of its customers. I believe this is verified by its consistent increases in sales and profits over the years combined with its high returns on capital. This kind of financial performance wouldn’t happen without a great operating business behind it. What I don’t like are the incentives, especially the bonus and long-term incentive payments. Those were both red flags and I can only hope that the business stops using “adjusted” financial metrics in the future. Additionally, I’d like to see the CEO own more of the stock. I’m also unsure about its growth prospects in to the “Live Venue” space and whether its uptick in sales is the “new normal”. The size of the markets each business segment operates in are massive, but will the business be able to grow in to and have industry standard products like it does with its Sequential synthesizers? Only time will tell. I’ll keep tracking the business, but I’ll pass on it for now.

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Please reach out to me at possiblevalueresearch@gmail.com, @PossibleValue on Twitter and @Heshy on MicroCapClub with any comments, concerns or questions. Lastly, don’t forget to tell someone that you love them.

*** Remember that this isn’t investing advice. Consult a trusted financial or investment advisor before making any kind of investment decision. ***

Disclosure: I do not own shares in Focusrite.