Aferian delivers record software revenues and improved visibility of earnings

[shareaholic app="share_buttons" id_name="post_below_content"]

Progress on software-led strategy with record software revenues and improving quality and visibility of earnings

Structural industry shift towards convergence of video streaming services and traditional pay TV supports strategic positioning and growth ambitions

Continued 24i new business momentum in H1 in line with expectations with recovery in Amino expected later in the financial year

Aferian plc (LON:AFRN), the B2B video streaming solutions company, has announced its results for the year ended 30 November 2022.

Donald McGarva, Chief Executive Officer of Aferian plc, said:

“Aferian delivered record software revenues up 8% to $24.1m in 2022 against a challenging macroeconomic environment. We have continued to invest in innovation across the Group, strengthening our data-centric product offering and are seeing increasing quality of engagement with current and prospective customers.

“The wider macroeconomic environment during the year led some customers to review their capital expenditure and delay new orders, with particular impact on Amino device revenues and Group cash flow. While Amino continues to have a strong sales pipeline for the second half of 2023, this customer trend has continued longer than we expected into the first half of this year. Conversely, 24i has continued its strong new business momentum into the first half of 2023. Aligned to our goals, the quality and visibility of our earnings has continued to improve as we entered the new financial year with Annual Recurring Revenue (ARR) 23% higher than last year.

“Post period end, we have taken several actions to reduce the Group’s operating cost base and capital R&D spend in order to streamline the way we do business and position us for future growth. Video streaming is everywhere, all the time and Aferian is well-positioned to benefit from the continued convergence of streaming and pay TV across our industry.”

Financial Key Figures

*US$m unless otherwise stated*	2022	2021	Change %
Revenue	91.1	92.9	(2%)
Exit run rate Annual Recurring Revenue (ARR) ⁽²⁾	18.7	15.2	23%
Statutory operating (loss)/profit	(16.6)	5.2	N/A
Statutory operating cash flow before tax	6.4	14.1	(55%)
Statutory basic (loss)/earnings per share (US cents)	(20.5)	7.0	N/A
Adjusted operating profit ⁽³⁾	7.5	11.8	(36%)
Adjusted operating cash flow before tax ⁽⁴⁾	8.9	16.7	(46%)
Adjusted basic earnings per share (US cents) ⁽⁵⁾	6.6	11.5	N/A
Net cash	4.0	14.2	(72%)
Dividend per share (pence)	1.0	3.1	(68%)

Notes

(1)	Constant currency basis calculated using the closing FX rate for FY21 in both years.
(2)	Exit run rate ARR is annual run-rate recurring revenue as at 30 November 2022.
(3)	Adjusted operating profit is a non-GAAP measure and excludes amortisation of acquired intangibles, impairment of goodwill exceptional items and share-based payment charges
(4)	Adjusted operating cash flow before tax is a non-GAAP measure and excludes exceptional items and impairment of goodwill.
(5)	Adjusted basic earnings per share is a non-GAAP measure and excludes amortisation of acquired intangibles, impairment of goodwill, exceptional items and share-based payment charges.

Financial Highlights

· Progress in the Group’s transformation to a software-led business:

o Record higher-margin software and services revenue of $24.1m, up 8% year-on-year.

· Further momentum demonstrated in improving the quality and visibility of Group earnings:

o Recurring revenue of $16.1m, up 25% year-on-year.

o Exit run rate ARR of $18.7m, up 23% year-on-year.

· The wider macroeconomic environment led to some customers temporarily reducing capital expenditure and delaying new orders, resulting in a decline in revenues in the Amino device business and a weaker operating cash flow performance.

o Device revenues were down 5% year-on-year, leading to reported revenue of $91.1m for 2022 (2021: $92.9m).

o Adjusted EBITDA of $14.6m, down 21% year-on-year, due to the decline in Amino device revenues.

o $12.5m non-cash impairment loss recognized on goodwill which was included in the statutory operating loss

· Good operating cash flow generation despite significant investment in inventory to mitigate global supply chain disruption during the period.

o Adjusted cashflow from operating activities before tax was $8.9m (2021: $16.7m) representing an adjusted EBITDA cash conversion of 61% (2021:91%)

· No final dividend payment (2021: 2.09 pence / 2.87 US cents), resulting in a total dividend for the year of 1.0 pence (1.26 US cents) (2021: 3.09 pence / 4.26 US cents)

Strategic and Operational Highlights

· Strengthened our data-centric product portfolio

o Acquisition of The Filter, now fully integrated with 24i, is attracting new customers and offering new capabilities for existing customers.

o Launched 24iQ: the Group’s personalisation and content recommendation service, shortlisted for four separate innovation awards in the USA and Europe.

· Continued innovation in consumer experience and product capability:

o 24i: Strong market response to launch of 24i Mod Studio as the new identity and go to market name for 24i’s video streaming platform, highlighting its flexibility and modularity. Launched new fully managed, cloud-hosted TV as a Service solution, FokusOnTV.

o Amino: Launched new version of the device management platform targeting the $1.6bn global digital signage market, with encouraging initial traction. Over 120 customers have now deployed our SaaS device software management platform.

· Supported customers with critical, innovative rollouts and deployments:

o 24i: Supported KAN, the Israeli Public Broadcasting Corporation, enhancing the experience for its viewers on multiple Smart TV devices to watch the FIFA World Cup. FokusOnTV launch led to new partnership with Swisscom Broadcast and the addition of three new customers.

o Amino: Device management platform enabled Vodafone Iceland to upcycle its deployed base of video streaming devices with enhanced video streaming services. Supported PCCW to publicly launch its new generation of Now TV streaming services, facilitating the integration of Netflix and other third-party streaming content alongside its own.

Post period end update

·	Actions to identify and deliver efficiencies in the Group’s cost base have reduced the Group’s annualized cost base by c.$5m, underpinned by efficiencies identified in the operations and research & development teams of both our 24i and Amino divisions.
·	As of 25 April 2023, Donald McGarva stepped-in to the role of 24i CEO, alongside his existing duties as CEO of parent company, the Aferian group. He will lead 24i for the foreseeable future.
·	Board Changes:
	o Max Royde appointed Non-Executive Director on 4 April 2023 and was subsequently appointed Chair of the Remuneration Committee.
	o Steve Vaughan stepped down as Non-Executive Director and Chair of the Remuneration Committee on 27 April 2023.
·	At the date of this announcement, the Group is in compliance with its banking covenants and is in discussions with its banks regarding its current facility arrangements.

Current trading and outlook

We expect to report growth in the 24i division (which focusses on streaming video experiences) in H1 FY23 over H1 FY22, reflecting the Group’s position in the fast-growing video streaming market.

For the Amino division (which connects Pay TV to streaming services), as previously announced on 10 March 2023, the impact of the wider macro-economic situation has continued for longer than we expected. Therefore, device sales in H1 FY23 have been materially lower than initially anticipated. While Amino continues to have a strong medium-term sales pipeline, we expect Amino’s full year revenue for FY23 to be significantly lower than delivered in FY22. The FY23 outcome for Amino remains heavily dependent on the receipt of expected orders that have, to date, been deferred or delayed. However, we have been encouraged by the recent receipt of the first material order in seven months from one of our US distributors.

In light of the Amino performance, we have taken appropriate steps to identify and deliver significant efficiencies in the Group’s cost base during the first quarter of 2023 to improve margins and cash generation.

Following the investment made in inventory within the Amino business, the Group currently has a net debt position, and expects this to continue throughout the current financial year. As previously announced on 10 March 2023, we expect Group revenue and adjusted EBITDA for FY23 to be significantly below FY22, albeit that the Group is expected to generate a material positive EBITDA.

Chairman’s statement:

In 2022, Aferian made good progress with its key ambition of becoming a software-led company. During the year, Aferian increased its higher margin software and services revenues by 8% to $24.1m and has grown exit annualised run rate recurring revenue (ARR) by 23% to $18.7m. However, challenging macro-economic conditions in the second half of the year negatively impacted device revenues, meaning that total Group revenues declined by $1.8m to $91.1m.

In my report last year, I explained that the Group is at the heart of a structural industry shift towards convergence of video streaming services and traditional pay TV. Today, video streaming is omnipresent. While Aferian doesn’t address the household-name streaming giants like Netflix, and you won’t see our name on screen, we are very much part of this booming market behind the scenes. Our B2B solutions power the tier 1 to tier 4 companies who distribute video to consumers.

Aferian’s portfolio of video streaming products and services combine the cost savings and fast time-to-market of white label solutions with an advanced level of configurability. This allows our customers to create unique and attractive consumer experiences. This focus on building a configurable, integrated video streaming platform differentiates Aferian from its competitors.

On a divisional level, the Board is confident that investments made in 2022 in enhancing the 24i video streaming platform will ensure 24i continues to deliver double digit percentage revenue and ARR growth in 2023. The launch of 24i’s fully managed TV as a service platform in September 2022 illustrates that the Group is continuing to expand its product roadmap with a focus on continual improvement of the consumer experience whilst decreasing costs and operational complexity for its customers.

Macro-economic conditions for the Amino video streaming device business in the second half of 2022 were challenging and negatively impacted revenues and operating cash flow. As indicated in our March 2023, trading update, this has worsened in the first half of 2023. That said, this business has historically maintained strong gross profit margins and in 2022 the Group invested in expanding its product line into digital signage, additional software-led device management tools as well as inventory to de-risk the well-publicised, industry-wide hardware supply chain challenges. The Board is, therefore, confident that this division is well placed to capitalise on the growth opportunities it sees in the video streaming market in the second half of the year and beyond.

The acquisition of The Filter in April 2022 strengthened the Group’s data-centric product portfolio by adding its advanced video streaming analytics, recommendations and personalisation service. Personalisation is becoming a key consumer pre-requisite and we are now able to deliver this. Unfortunately, as previously disclosed, due to adverse factors the Group was unable to complete a material and transformational acquisition that had been planned for the second half of 2022. While M&A growth remains a core part of our strategy, our focus in 2023 will be on driving organic growth and profitability to deliver strong levels of cash generation until markets normalise.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE

We have continued to make excellent progress on our ESG commitments. This year, the Board set ESG targets for the Executives for the first time. I am pleased to report these targets were met in full, including the removal of all non-recyclable packaging from the Group’s supply chain. We will continue this focus on ESG in the coming year with both internal and external initiatives on sustainability, equality and diversity.

BOARD CHANGES

2022 has seen several changes to the Group’s Board of Directors. Erika Schraner stood down in July 2022 after three years as a Non-Executive Director. Joachim Bergman also left the Board in April 2022 after stepping down as 24i CEO. Steve Vaughan, non-executive director of Aferian since March 2019 and chair of the Remuneration Committee during the year, resigned from the Board on 27 April 2023. I thank them all for their valuable contribution to the success of the Group during their tenure. I was pleased to welcome Bruce Powell MBE to the board as a Non-Executive Director and Chair of the Board’s Audit Committee in August 2022. At the same time, Steve Oetegenn transitioned from Non-Executive Director to a new Executive Director role as Group President of the Americas. On 4th April 2023, Max Royde was also appointed to the Board as a Non-Executive Director. Following the resignation of Steve Vaughan, Max Royde took up the position of Chair of the Board’s Remuneration Committee on 27 April 2023. Max is a managing partner at Kestrel Partners, an investment management company specialising in business-critical software companies, which has a beneficial holding in Aferian. At the time of his appointment, this holding amounted to 22,781,891 shares or 26.12% of the issued share capital of the Company.

We are keenly aware of the need for both diversity and a balance between Executive and Non-Executive Directors on the Board. We are currently reviewing the composition of the Board and expect to improve the diversity of its membership in the coming 12 months.

DIVIDEND

In August 2022, the Company paid an interim dividend of 1.0 GBP pence (1.26 US cents*) per share in respect of the year ended 30 November 2022. The Board is not proposing a final dividend (2021: 2.09 pence / 2.87 US cents). This represents a total dividend for the year of 1.00 GBP pence (1.26 US cents) per share (2021: 3.09 pence / 4.26 US cents) and is 19% of adjusted earnings per share. This is lower than the Group’s stated policy of 33-50% of adjusted earnings per share and reflects the short-term impact on the Group of the challenging macro-economic environment in the first half of 2023.

SUMMARY

Aferian addresses the fast-growing video streaming market with forward-thinking technology solutions. The 24i division’s performance has been robust and it is expected to continue to grow during FY23, which leads the Board to remain positive about prospects for the Group.

As announced on 10 March 2023, the challenging macro-economic environment and, in particular, the impact of lower shipping and production lead times have resulted in both our US distributors and their clients wishing to reduce inventory levels. This has resulted in significantly decreased sales within the Amino division in the first half of FY23. The management team therefore took appropriate steps to identify and deliver significant operating cost efficiencies during the first quarter of 2023, to improve margins and cash generation over the remainder of the year.

Whilst the speed of recovery in sales within the Amino division remains uncertain, the Board is encouraged by its strong medium-term sales pipeline. The Board is confident that the steps taken to reduce the Group’s cost base have not compromised its core strengths in software, or the ability of the Amino division to recover as the market for streaming devices normalises.

Mark Wells
Chairman
15 May 2023

*Average FX rate for the year was £1 : $1.26 (2021: £1 : $1.38).

Chief Executive Officer’s Review

INTRODUCTION

Aferian’s transition to a software-led business has continued to make progress in 2022 and, aided by both organic growth and the acquisition of The Filter in April 2022, software revenues grew to a record $24.1m in the year. Management’s focus in 2022 was to continue to grow recurring revenues whilst also accelerating the transformation of the Aferian Group to a software-led business by investing in accretive acquisitions. Recurring revenue growth was achieved as exit annualised run rate revenues (“ARR”) increased by 23% to $18.7m. Whilst we completed one small acquisition in April 2022, unfortunately, we were forced to abort a transformational acquisition in October 2022 having invested a significant amount of time and effort on the process.

As previously communicated, the wider macro-economic situation also resulted in a decline in revenues within the Amino device business. Rising interest rates have understandably led to our customers looking more carefully at their investment in working capital and seeking to defer capital expenditure. As a result, we have seen some customers delaying their orders of new streaming devices, preferring to run down their existing inventory rather than maintaining stock levels at this time.

We, therefore, report revenue for 2022 of $91.1m (2021: $92.9m), which includes a $3.5m decrease in device revenues compared to 2021.

Whilst we have experienced device revenues being negatively impacted by current economic headwinds in the first half of 2023, we have confidence in the medium and long-term growth drivers of the video streaming market as well as Aferian’s ability to address that market. In February 2023, we completed a restructuring programme to improve the efficiencies of the Group’s operations during which we took the difficult but necessary decision to reduce the Group’s operating cost base by c.$2.9m and capital research and development spend by c.$1.8m.

These cost reductions were underpinned by efficiencies identified in the operations and research and development teams of both our 24i and Amino divisions. In our 24i video streaming platform division, cost savings were identified as the culmination of synergies generated by merging the operations and management of 24i, Nordija and The Filter. Despite these cost reductions, we continue to expect 24i to deliver double digit percentage growth in both revenue and ARR in 2023. In addition, cost reductions in the Amino business were made, whilst retaining the core talent who are delivering new opportunities which we expect to drive growth in the second half of the year.

At the date of the approval of this document, the Group remains in compliance with its banking covenants and, as we disclosed on 10 March 2023, discussions are ongoing regarding its current facility arrangements. Further details are provided in the CFO report and note 2 to the condensed consolidated financial statements below.

MARKET GROWTH

Aferian’s video streaming platforms serve a fast-growing market that continues to be driven by the consumer-led transition from traditional linear TV to video streamed over the internet anytime and anywhere. The global video streaming market continues to grow and is fast becoming the most popular way to consume video. For example, in July 2022 monthly Nielsen data showed that, for the first time, video streaming accounted for a larger audience share (34.8%) in the US than either cable TV (34.4%) or broadcast TV (21.6%). In addition, average global video viewing time (minutes consumed per day) is predicted to continue to increase at around 10% ¹ until at least 2026² .

Growth in Aferian’s 24i video streaming platform revenue is expected to be driven by the launch of new video streaming services using Aferian’s platforms and the continued growth in those streaming services as a result of the above trends. In addition, all video service providers, including our Pay TV, broadcast and content owner customers are investing in upgrading their streaming infrastructure and operations to keep pace with the latest features offered by market leaders such as Netflix and Disney+.

For Pay TV operators, it’s not just about keeping up with these giants of the streaming industry, they also need to partner with those giants – offering consumers a way to access the widest-possible range of content from a single device. This cannot be done using traditional linear satellite and cable technology; hence operators need to continue investing in next-generation, content-aggregating, managed streaming devices.

Media headlines that focus on churn rates for the leading video streaming services naturally miss a great deal of the nuance in this dynamic market. In March 2022, a quarter of US consumers were found to have cancelled a streaming video service in the past 12 months only to re-subscribe to the same service. In the United Kingdom, Germany, Brazil, and Japan, the figure for this “churn and return” behaviour is around 22% overall, and globally it’s the younger generations of subscribers who are most likely to come back³.

Although cost-of-living pressures will inevitably make our customers look harder at their cost base and the prices they charge their consumers, we believe this presents an opportunity for the Group. Our cost-effective, off-the-shelf solutions and managed services represent an excellent alternative for video service providers who want to continue delivering great consumer experiences but are re-assessing the value of their current custom-built solutions and the cost of employing in-house expertise.

¹ Boston Consulting Group, 2021

² Deloitte, 2009 State of the Media Democracy survey

³ Deloitte, 2022 Digital Media Trends survey

2022 KEY PERFORMANCE INDICATORS

The Group reported a decrease in revenue of 2% driven by lower video streaming device sales. Importantly, however, software and services revenue has increased by 8% and exit run rate ARR by 23% (32% on a constant currency basis). Adjusted gross profit margin was 2 percentage points lower than the prior year. The Group also continues to generate good operating cash flows, albeit reduced by the strategic impact of the investment in inventory made in the year to mitigate against supply chain disruptions. The Group reports a net customer revenue retention rate⁴ of 107% (2021: 117%). This is due to growth in the subscriber base of our existing customers during the year, in addition to a very low customer churn rate.

	2022$m	2021$m	Change%
Total revenue	91.1	92.9	(2%)
Software & services revenue	24.1	22.4	8%
Annual run rate recurring revenue (“ARR”) at 30 November	18.7	15.2	23%
Adjusted operating cash flow before tax	8.9	16.7	(55%)
Net customer revenue retention rate on recurring revenue*	107%	117%	(16%)

*Net customer revenue retention rate on recurring revenue based on constant currency basis.

In 2022, the Group invested heavily in 24i sales and marketing as well as research and development to successfully drive growth in recurring revenue, although negatively impacting both cash flow and profit margins. In addition, in order to mitigate against potential supply chain delays in the second half, Amino invested in inventory of streaming devices which required further investment in working capital. In 2023, the management team will focus on reducing inventory and improving cash flows whilst also improving the returns generated by the investments already made in 24i.

⁴ Net revenue retention rate is calculated by reference to recurring revenue from existing customers, including upsells, less recurring revenue lost from customer churn during the year

OPERATIONAL REVIEW

The Group has two operating divisions: 24i and Amino.

24i

24i offers a robust video streaming platform that supports all the key use cases a video content owner must address in order to prepare and stream TV and video content to the full range of consumer connected devices. Operating since 2009, 24i serves Pay TV operators, broadcasters and content owners in Europe, North America, Latin America and the Middle East.

The market has responded well to the December 2021 launch of 24i Mod Studio as the new identity and go to market name for 24i’s video streaming platform. This was designed to highlight the flexibility and modularity of the platform as well as 24i’s turnkey solutions for different verticals. In September 2022, Mod Studio was named “Best TV Everywhere or Multi-screen Video” solution in the CSI Awards, a leading industry barometer of streaming technology.

New customer wins in the period have included KAN, the Israeli Public Broadcasting Corporation, and SEGI.TV in North America. In addition, in September 2022, 24i launched its new fully managed, cloud-hosted TV as a Service solution, FokusOnTV. This is based on the technologies of Nordija, which it acquired in May 2021, and has resulted in a new partnership with Swisscom Broadcast and the addition of three new customers to this service.

The acquisition of The Filter in April 2022 led to the launch of 24iQ, a new data-driven, fully managed personalisation service in May 2022. 24iQ is offered as an integrated solution or a standalone service. Work to integrate the 24iQ technology and expertise into 24i Mod Studio is complete and the solution is being deployed to the first Mod Studio customers. Since its launch, 24iQ has been shortlisted for four separate innovation awards in the USA and Europe.

24i continues to grow recurring revenue and has reported a significant year-on-year increase of 29% in exit run rate ARR (40% increase year-on-year on a constant currency basis). This growth is as a result of low customer churn and subscriber growth in our customers’ video streaming services which has led to increased use of recurring software licenses. Growth has also resulted from the use of an increased range of 24i solutions. For example, we have supported existing customers Waoo in Denmark and Telenor Sweden with their rollouts of advanced new streaming services based on devices using Google’s popular Android TV operating system.

Notwithstanding this excellent performance, I believe further performance enhancements can be made. For this reason, in April 2023, I decided to step-in as CEO of the 24i division. Investments made in sales and marketing in 2022 have resulted in an increase in the rate of new business wins. For 2023, the 24i management team and I are focused on growing revenue and ARR at double digit percentages, whilst also increasing profit margins. In addition, investment in research and development will be reduced in 2023 now that the initial phase of the 24i video platform development has been completed.

Amino

Amino’s managed video streaming devices enable Pay TV operators to bring their live and on-demand content to every connected household with the quality of service and level of support that consumers demand for their big-screen viewing experience. Amino has recently celebrated its 25th anniversary as a force for innovation and growth in the video streaming market.

Our SaaS device management platform remains a key differentiator for Amino in the Pay TV market. During the year, we added a new dashboard that better visualises customer service KPIs. This enables more proactive customer support, helping our customers to keep their video services running smoothly. 120 customers have now deployed the SaaS platform solution, leading to a 5% year-on-year growth in the number of end-user devices managed. Combined with Amino’s streaming device operating system, this device management platform enabled Vodafone Iceland to upcycle their deployed base of video streaming devices with enhanced video streaming services. This project was completed in partnership with 24i whose software is also part of the Vodafone Iceland device ecosystem. In addition, this platform was also deployed at PCCW in Hong Kong which launched its Now TV video service using Amino’s software to integrate Netflix alongside PCCW’s own selection of live and on-demand content.

In May, we launched a new version of this device management platform specifically targeting at the needs of the $1.6bn global digital signage market. We have seen encouraging developments in the growing digital signage market, including new business in 2022 with a leading UK-based audio-visual provider to supply video streaming devices that deliver high-quality live video content to a leading chain of betting shops around the UK and Ireland.

In the first half of 2022, our device revenues were impacted by global supply chain challenges including shipping and production delays, caused principally by COVID-19 related manufacturing shutdowns in China. Second half device production was, therefore, weighted into the third quarter of the year in order to mitigate any further potential delays. Following this, well-documented global economic headwinds, which have resulted in increased interest rates, led some customers to delay device orders as they seek to temporarily reduce working capital and defer capital expenditure. As a result, device revenues were down 5% year-on-year and inventory levels increased, negatively impacting operating cash flows.

These economic headwinds continue to negatively impact device sales in the first half of 2023. Management had forecast a decrease in device sales for a share of FY23 due to shortened supply chain lead times. Consequently, the assumptions used in the review of the carrying value of Goodwill relating to the Amino business have been revised, which reflect the expected, based on a probability expected basis, negative impact of both the current macro-economic uncertainty as well as a more conservative view of long-term performance and growth rates of streaming devices. Following these revisions an impairment to the carrying value of this goodwill of $12.5m has been recorded.

Despite these near-term headwinds, in the second half of 2023 we expect a return to growth in streaming devices and device management software having invested in both new product lines such as digital signage as well as sales and marketing in new geographic markets in 2022.

The focus of the Amino management team in 2023 will be to reduce inventory levels and improve working capital as well as to drive additional orders as anticipated growth returns in the second half of the year.

M&A

In April 2022, we completed the next step in our targeted M&A programme with the acquisition of The Filter, a UK-headquartered, AI-powered video recommendation service for an initial consideration of £1.2m ($1.5m). An additional consideration of up to £2.5m ($3.2m) for this acquisition is payable on achievement of certain ARR growth over the first two years.

The Filter’s managed services combine cutting-edge data science, analysis and machine learning technologies to help consumers find and watch more of the video content they love. This technology has now been fully integrated into 24i and has been launched as 24iQ, a standalone managed service which combines the Filter’s enhanced analytics, recommendations and personalisation with 24i’s existing data analytics services.

More and more of our customers are looking for innovative ways to personalise their services for individual consumers, improving the speed at which each user can find content that’s appealing to them on the device of their choice. Harnessing the power of the data available in video streaming services to optimise the user experience in this way is an essential strategic step to drive customer satisfaction and retention to counteract churn and protect revenue.

A further, significant acquisition opportunity which would have been transformational for the Group was aborted at an advanced stage in October 2022, resulting in a one-off charge of approximately $5.1m. Whilst M&A remains a core part of our medium-term software-led strategy to grow the business, the management team’s focus in 2023 will be on organic growth and cash generation.

ENVIRONMENT, SOCIAL AND GOVERNANCE (“ESG”)

Aferian has continued to focus on ESG in 2022 and we published a detailed update to our ESG report in August 2022. For the first time, the Executive Team were given specific ESG targets by the board, all of which were achieved before year end. Examples of our achievements in this area include:

·	All our Tier 1 hardware suppliers operate under our Code of Conduct, which aligns with the Responsible Business Alliance (RBA) Code of Conduct and the UN Global Compact. In 2022 we completed the audit of these Tier 1 hardware suppliers using RBA recognised auditors to enhance and complement our existing facility audit programmes.
·	This year we completed a project to eliminate all non-recyclable packaging from our product supply chain. Plastic packaging and cable ties have now been replaced with paper-based products that can be recycled in most households. We also upcycled more than 2 metric tonnes of Amino streaming devices.
·	In October 2022 we launched an internal initiative called “Do The Right Thing” that is designed to highlight the importance of ESG topics to Aferian’s staff and to inspire them to get involved in making a difference both in their local communities and to Aferian’s overall ESG performance. We are pleased to see the enthusiastic way in which staff have embraced the campaign, already suggesting creative ways in which the Group can advance make greater progress towards sustainability and its target of making all Group offices Carbon Neutral by 2025.
·	Our global #FutureIsBright graduate programme has admitted its second cohort of trainees, including the first graduate of our partnership with the pioneering non-profit organisation Czechitas which trains women in the Czech Republic for jobs in IT. This year we have increased our involvement with Czechitas, providing mentors for trainees as well as sponsorship, industry talks and office tours.

It is important that we pay tribute to the continued dedication and commitment of Aferian’s people around the world who have once again delivered a sterling performance in the face of ongoing supply chain challenges as well as economic factors beyond their control. While most of the world has enjoyed a growing sense of post-pandemic normality this year, our team in Hong Kong has still faced significant disruption to their personal and working lives as a result of COVID-19 restrictions. We are proud of the resilience and fortitude with which they have borne this enduring situation and thank them for their continued hard work and good humour in the most difficult of circumstances. At the same time, our small but valued team of developers based in Ukraine has continued to work as normally as possible under the most extraordinarily difficult circumstances since the start of the conflict in February 2022. I wish to personally thank all our staff for their contribution to our performance during 2022.

CURRENT TRADING AND OUTLOOK

We expect to report growth in the 24i division (which focusses on streaming video experiences) in H1 FY23 over H1 FY22, reflecting the Group’s position in the fast-growing video streaming market.

The Group is currently trading, and expects to finish the current financial year, in a net debt position. As previously announced on 10 March 2023, we expect Group revenue and adjusted EBITDA for FY23 to be significantly below FY22, albeit that the Group is expected to generate a material positive EBITDA.

Donald McGarva

Chief Executive Officer

15 May 2023

Chief Financial Officer’s Review

OVERVIEW

Whilst showing a decline in total revenue, the Group’s financial results for the year ended 30 November 2022 demonstrate continued progress against the Group’s primary financial objectives: to grow high margin software & services revenue, with a focus on recurring revenue.

High margin software & services revenue increased by 8% to $24.1m (2021: $22.4m). Software & services adjusted gross profit represented 45% of total adjusted gross profit in the year, an increase from 42% in 2021. Adjusted gross margin has remained broadly consistent with the prior year at 46% (2021: 48%). In addition, the visibility of the Group’s revenues increased as exit run rate Annual Recurring Revenues (ARR) increased to $18.7m (2021: $15.2m), representing growth of 23%. On a constant currency basis, exit run rate ARR increased by 32%.

However, device revenues decreased by $3.5m year-on-year and, as a result, total revenue decreased by 2% to $91.1m (2021: $92.9m).

The Group continued to generate good operating cash flows albeit reduced due to the additional $6.7m strategic investment in inventory made during the year. Adjusted operating cash flow before exceptional costs was $8.9m (2021: $16.7m) representing an adjusted EBITDA cash conversion of 61% (2021: 91%). Operating cash flow was $6.4m (2021: $14.1m).

The Group had net cash of $4.0m at 30 November 2022 (2021: $14.2m). The Group has a banking facility with Barclays Bank plc, Silicon Valley Bank, and Bank of Ireland of which the Group had drawn $7.5m at 30 November 2022 (2021: $nil). This facility of $50m, split evenly across the new three bank club, also includes up to a further $50m available by way of an accordion. On 30 December 2022, the Group executed an amendment letter to update the covenant definition in the existing banking facility which has a committed term to 23 December 2024 with options to extend by a further one or two years. As part of the amended covenant definition, the amount of available facility is subject to a cap of 2.5 times the amount of 12 month rolling Adjusted Lender EBITDA, tested on a monthly basis. We have prepared a base case cash flow forecast covering a period of at least 12 months from the date of approval of the financial statements and various sensitivity analyses. If the base case forecast is achieved, the Group and parent company will be able to operate within the monthly liquidity covenant test. However, the recovery of the Amino division revenues, continued growth in 24i division revenues and cash conversion expected in H2 2023 are key assumptions. Failure to achieve the base case view of forecast sales pipeline conversion assumed in the base case forecast could result in the Group failing to comply with financial covenants associated with its existing banking facility, potentially resulting in the facilities being withdrawn. We are currently in further active discussions with the Group’s existing loan facility providers to negotiate a further covenant definition revision taking account of current management forecasts however there is currently no certainty as to the outcome of these discussions with the lender as referred to in Note 1 of the financial statements.

REVENUE AND ADJUSTED GROSS PROFIT

	2022$m	2021$m	Change
Software & services
Revenue
Recurring	16.1	12.9	25%
Non-recurring	8.0	9.5	(16%)
Total revenue	24.1	22.4	8%
Adjusted gross profit	19.0	18.4	4%
Adjusted gross profit margin %	*79%*	83%	(4%)
Devices including integrated software
Revenue
Non-recurring	67.0	70.5	(5%)
Total revenue	67.0	70.5	(5%)
Adjusted gross profit	23.0	26.3	(13%)
Adjusted gross profit margin %	*34%*	37%	(3%)
Total
Revenue
Recurring	16.1	12.9	25%
Non-recurring	75.0	80.0	(6%)
Total revenue	91.1	92.9	(2%)
Adjusted gross profit	42.0	44.7	(6%)
Adjusted gross profit margin %	*46%*	48%	(2%)

Devices revenue (which includes integrated software) decreased by 5% year-on-year. In the second half of the year global economic headwinds which have resulted in increased interest rates led some customers to delay device orders as they seek to temporarily manage their working capital and capital expenditure.

Software & services revenue increased by 8% year-on-year. Software & services revenues as a proportion of total revenues for the year increased slightly to 26% (2021: 24%). However, the Group continues to focus on growing recurring revenues that increased by 25% from $12.9m to $16.1m. Overall, recurring software & services revenue accounts for 67% of total software & services revenue (2021: 58%). At 30 November 2022, exit run rate ARR increased to $18.7m (2021: $15.2m). On a constant currency basis exit run rate ARR at 30 November 2022 would have been $20.0m.

The software and services gross profit margin has reduced by 4bps compared to the prior year. This decline was due to a difference in the revenue mix of the 24i business and investment made in additional resources for customer-onboarding.

The increase in exit run rate ARR provides enhanced revenue visibility as the Group moves forward. In addition, we report a net customer revenue retention rate, based on recurring revenue at constant currency, for the Group of 107% (2021: 117%). The net revenue retention rate is calculated by reference to recurring revenue from existing customers, including upsells, less recurring revenue lost from customer churn during the year. Whilst the retention rate is still above 100%, which is positive as our customer subscriber base continues to grow, it is lower than the prior year due to less upsell revenue from existing customers.

REVENUE AND ADJUSTED EBITDA

	Revenue		Adjusted EBITDA
	2022$m	2021$m	2022$m	2021$m
24i	19.1	17.8	0.7	1.2
Amino	72.0	75.1	15.8	19.7
Central costs	–	–	(1.9)	(2.5)
Total	91.1	92.9	14.6	18.4

Adjusted EBITDA for the year ended 30 November 2022 was $14.6m (2021: $18.4m). Adjusted EBITDA is reconciled below, and is calculated as operating profit before depreciation, interest, tax, amortisation, impairment of goodwill, exceptional items and employee share-based payment charges. This is consistent with the way the financial performance of the Group is presented to the Board. The Directors believe that this provides a more meaningful comparison of how the business is managed and measured on a day-to-day basis.

24I SEGMENT

	2022$m	2021$m
Software & services	19.1	17.4
Devices including integrated software	–	0.4
Revenue	19.1	17.8
Adjusted cost of sales	(5.1)	(3.8)
Adjusted gross margin	14.0	14.0
Adjusted gross margin %	*73%*	79%

Adjusted operating costs	(13.4)	(12.8)
Adjusted EBITDA	0.7	1.2
Adjusted EBITDA %	3%	7%

Capitalised development costs	5.8	5.8

Revenue in the 24i segment increased by 7% to $19.1m (2021: $17.8m). This is due to a shift in focus during the year towards driving recurring software revenue. This change has resulted in the growth of exit run rate ARR from $11.1m to $14.3m, which represents 29% year-on-year growth (40% on a constant currency basis). The increased focus on exit run rate ARR aligns with the Group’s software-led strategy.

The gross profit margin for the 24i segment has reduced by 6% compared to the prior year. This was, in part, due to the completion in 2021 of a significant high-margin project. In addition, gross profit margin for 2022 was impacted by investment made in additional resources for customer-onboarding. We expect that the gross margin will improve in 2023 as the 24i business increases in scale.

Furthermore, adjusted operating costs increased by $0.6m during the period. The majority of this increase results from the cost of running the Nordija business for a full year following the acquisition in May 2021. As a result, adjusted EBITDA has reduced from $1.2m in 2021 to $0.7m in 2022. Following the cost reduction actions taken in February 2023 as outlined in the CEO report we expect EBITDA margin to improve in 2023.

AMINO SEGMENT

	2022$m	2021$m
Software & services	5.0	5.0
Devices including integrated software	67.0	70.1
Revenue	72.0	75.1
Adjusted cost of sales	(44.1)	(44.4)
Adjusted gross margin	27.9	30.7
Adjusted gross margin %	*39%*	41%

Adjusted operating costs	(12.1)	(11.0)
Adjusted EBITDA	15.8	19.7
Adjusted EBITDA %	22%	26%

Capitalised development costs	2.0	2.3

Device revenues decreased by 4% during the year to $67.0m (2021: $70.1m). In the first half, volumes shipped were negatively impacted by delays in the supply chain caused by significantly increased lead times, lack of availability of components, and scarcity of shipping capacity caused by the COVID-19 pandemic. In the second half, the key driver behind the overall 4% decline in device revenues has come from decreased order volumes as a result of global economic headwinds resulting in increased interest rates which have led some customers to delay device orders as they seek to temporarily reduce working capital and capital expenditure.

The Group has a core customer base in respect of device revenues, whereby repeat orders are placed by the same customers over multiple financial years. Taking the last three financial years, repeat orders from existing customers over that period has accounted for 93% (2021: 94%) of total device revenue.

Management had forecast a decrease in device sales for FY23 due to shortened supply chain lead times. Consequently, the assumptions used in the review of the carrying value of Goodwill relating to the Amino business have been revised which reflect, on a probability expected basis, negative impact of both the current macro-economic uncertainty as well as a more conservative view of long-term performance and growth rates of streaming devices. Following these revisions an impairment to the carrying value of this goodwill of $12.5m has been recorded.

CENTRAL COSTS

	2022$m	2021$m
Operating costs	(1.9)	(2.5)

Central costs comprise the costs of the Board, including executive directors, as well as costs associated with the Company’s listing on the London Stock Exchange. The decrease of $0.6m during the year is primarily in respect of a reduction to bonuses.

ADJUSTED EBITDA

	2022$m	2021$m
Revenue	91.1	92.9
Adjusted cost of sales	(49.1)	(48.2)
Adjusted gross margin	42.0	44.7
Adjusted gross margin %	*46%*	48%
Customer support and professional services	(5.3)	(6.0)
Research and development	(6.0)	(5.0)
SG&A	(16.1)	(15.3)
Total adjusted operating expenses	(27.4)	(26.3)
Adjusted EBITDA	14.6	18.4

RESEARCH & DEVELOPMENT COSTS

The Group continues to invest in research and in the development of new products and spent $13.8m on R&D activities (2021: $13.0m) of which $7.8m was capitalised (2021: $8.0m).

	2022$m	*% of revenue*	2021$m	% of revenue
Core engineering expenses	12.2	*13%*	11.9	13%
Product management	0.7	1%	0.6	1%
R&D senior management	0.9	1%	0.5	1%
Total research and development expenses	13.8	*15%*	13.0	14%
Capitalised development costs	(7.8)		(8.0)	–
Net research and development costs	6.0		5.0	–

Aferian Plc’s spend on core engineering activities has increased by $0.3m in the year to $12.2m (2020: $11.9m). The increase of $0.3m reflects a combination of an increased workforce and salary inflation, the latter being driven by the Group’s continued investment in software development and related products. Specifically, the Group has invested in the products that have been driving ARR such as 24i’s video streaming platforms and Amino’s SaaS device management platform.

Selling, general and administrative (SGA) expenses have increased by 5% in the year to $16.1m (2021: $15.3m).

A reconciliation of adjusted EBITDA to operating profit is provided as follows:

	2022$m	2021*$m
Adjusted EBITDA	14.6	18.4
Exceptional items:
· Within cost of sales	0.0	0.2
· Within operating expenses	(6.7)	(1.7)
· Impairment of goodwill	(12.5)	–
Employee share-based payment charge	(0.4)	(1.1)
Depreciation and amortisation	(11.6)	(10.6)
Operating profit	(16.6)	5.2

EXCEPTIONAL ITEMS

Exceptional items within cost of sales in 2022 comprised a $0.05m credit (2021: $0.2m credit) in respect of royalty costs recognised in prior years which have subsequently been renegotiated.

Exceptional items included within operating expenses in 2022 comprised:

· $5.2m (2021: $0.4m) one off costs relating to diligence costs in respect of the aborted material acquisition

· $0.4m (2021: $0.6m) one-off costs in respect of acquisitions and legal costs; and

· $1.1m (2021: $0.3m) post-acquisition integrations and associated restructuring costs

· $12.5m (2021: $nil) goodwill impairment charge

DEPRECIATION AND AMORTISATION

Excluding amortisation of intangibles recognised on acquisition, depreciation and amortisation was $7.0m (2021: $6.7m).

Amortisation of intangibles recognised on acquisition was $4.6m (2021: $4.0m), which represents an increase of $0.6m. The increase of $0.6m in the year primarily relates to the amortisation of the acquired intangibles from the Nordija acquisition during the prior year and The Filter during the current year.

TAXATION

The tax charge of $0.5m (2021: $0.6m credit) comprised:

· $2.0m (2021: $2.8m) current tax charge; offset by

· $0.8m release (2021: $0.1m) of an uncertain tax provision held in respect of the use of tax losses in the USA; and

· $0.7m (2021: $3.4m) credit relating to the unwind of deferred tax assets and liabilities recognised on acquisitions in the current and prior years.

Loss after tax was $17.4m (2021: $5.4m profit).

CASH FLOW

A reconciliation of adjusted operating cash flow before tax to cash generated from operations before tax is provided as follows:

	2022$m	2021$m
Adjusted operating cash flow before tax	8.9	16.7
Post-acquisition remuneration in respect of the acquisition of 24i Unit Media BV	–	(1.3)
Post-acquisition integration and associated restructuring costs	(1.5)	(0.3)
Acquisition and one-off legal costs¹	(1.0)	(1.0)
Cash generated from operations before tax	6.4	14.1

Adjusted cash flow from operations was $8.9m (2021: $16.7m) and represented 61% of adjusted EBITDA (2021: 91%). The reduction in adjusted cash flow from operations and the conversion from adjusted EBITDA was due to a cash outflow from working capital¹ of $5.6m (2021: $2.4m cash outflow). Whilst the Group continues to generate good operating cash flows, navigating the well-known supply chain issues in the year was challenging and resulted in an additional $6.7m investment in inventory in the year to mitigate potential supply chain delays.

Exceptional cash flows in 2022 comprised one-off costs of $2.5m (2021: $2.6m) including $1.0m (2021: $0.3m) post-acquisition integrations and associated restructuring costs, and $1.0m one off costs associated with the aborted material acquisition paid by the Group¹. Including these exceptional cash outflows cash generated from operations before tax was $6.4m (2021: $14.1m).

During the year the Group spent $0.2m (2021: $0.3m) on capital expenditure in respect of tangible fixed assets and capitalised $7.8m (2021: $8.0m) of research and development costs and software licenses. The acquisition of The Filter included initial cash consideration of $1.5m.

The Group paid dividends of $3.3m (2021: $3.1m) during the financial year, relating to 2021 ($2.3m) and 2022 interim ($1.0m).

Notes

(1)	Cash outflow from working capital excludes the impact of a $4.1m increase in payables for the aborted acquisition costs to be settled in Q1 FY23.

The Group generated adjusted free cash outflow of $3.0m (2021: $3.8m cash inflow) in the year and a reconciliation is provided below:

	2022$m	2021$m
Adjusted operating cash flow before tax	8.9	16.7
Corporation tax paid	(2.4)	(3.2)
Purchases of intangible assets	(7.6)	(8.0)
Purchase of property, plant and equipment	(0.2)	(0.3)
Net interest paid	(0.7)	(0.1)
Lease payments	(1.1)	(1.3)
Adjusted free cash flow	(3.0)	3.8

The decrease in the year of $6.8m can be attributable to the increase of $6.7m relating to the investment in inventory in the year to mitigate potential supply chain delays, that has been described above.

FINANCIAL POSITION

Aferian Plc had net cash of $4.0m at 30 November 2022 (2021: $14.2m). The Group has a banking facility with Barclays Bank plc, Silicon Valley Bank, and Bank of Ireland of which the Group had drawn $7.5m at 30 November 2022. This facility of $50m, split evenly across the new three bank club, also includes a further up to $50m available by way of an accordion which is designated for M&A activity. The facility has a committed term to 23 December 2024 with options to extend by a further one or two years. The facility includes financial covenants whereby the banking facility may be restricted as a result of not meeting certain financial metrics.

At 30 November 2022 the Group had equity of $78.9m (2021: $104.0m) and net current liabilities of $1.4m (2021: net current assets of $9.2m).

Goodwill has reduced by $13.2m to $56.3m (2021: $69.5m), reflecting the $12.5m impairment charge on Amino software and devices CGU (formerly Entone, Inc) together with foreign exchange translation movements. Management had forecast a decrease in device sales for part of FY23 due to shortened supply chain lead times. Consequently, the assumptions used in the review of the carrying value of Goodwill relating to the Amino business have been revised, which reflect the expected, based on a probability expected basis, negative impact of both the current macro-economic uncertainty as well as a more conservative view of long-term performance and growth rates of streaming devices.

GOING CONCERN

These financial statements have been prepared on the going concern basis. The Directors have reviewed the Group’s going concern position taking account of its current business activities and their future forecast performance. The factors likely to affect its expected future financial performance is set out in this document and include the Group’s objectives, policies and processes for managing its capital, its financial risk management objectives and its exposure to credit and liquidity risks.

The directors have prepared a base case cash flow forecast covering a period of at least 12 months from the date of approval of the financial statements. In addition, they have prepared various sensitised analyses. These reflect a variety of possible cash flow scenarios where the Group achieves further reduced revenues, reduction in gross margins and combinations of both, together, if required, with the timely deployment of cost containment and reduction measures that are aligned with the anticipated levels of performance. Overall, if the base case forecast is achieved, the Group and parent company will be able to operate within its existing working capital facilities. However, the recovery of the Amino division revenues, continued growth in 24i division revenues and cash conversion expected in H2 2023 are key assumptions. Failure to achieve the base case view of forecast sales pipeline conversion assumed in the base case forecast could result in the Group failing to comply with financial covenants associated with its existing banking facility, potentially resulting in the facilities being withdrawn.

We are currently in active discussions with the Group’s existing loan facility providers to seek solutions in order to increase the safety headroom based on the current covenant definitions. Should those not be successful we may need to seek additional funding through a placement of shares or other sources of funding which have not yet been secured. The Group has a history of successfully negotiating covenant revision, and raising financing.

Taking account of these matters, the Directors have concluded that the circumstances set forth above indicates the existence of material uncertainty that may cast significant doubt on the Group’s ability to continue as a going concern. However, given the Group’s current performance, the Directors have considered it is appropriate to prepare the financial statements on a going concern basis and the financial statements do not include the adjustments that would be required if the Group were unable to continue as a going concern.

DIVIDEND

In August 2022, the Company paid an interim dividend of 1.0 pence (1.26 US cents*) per share in respect of the year ended 30 November 2022. The Board is not proposing a final dividend (2021: 2.09 pence / 2.87 US cents*). This would represent a total dividend for the year of 1.00 GBP pence (1.26 US cents) per share (2021: 3.09 pence / 4.26 US cents) and is 19% of adjusted earnings per share.

* Average FX rate for the year was £1 : $1.26 (2021: £1 : $1.38).

Mark Carlisle

Chief Financial Officer

15 May 2023