AO. Ao World Plc

26 November 2024

AO WORLD PLC

INTERIM RESULTS FOR THE 6 MONTHS ENDED 30 SEPTEMBER 2024

 STRONG B2C REVENUE GROWTH OF 13% AND ADJUSTED PBT GROWTH OF 30%

FULL YEAR GUIDANCE UPGRADED AGAIN

AO World PLC ("the Group" or "AO"), the UK's most trusted electrical retailer, today announces its unaudited financial results¹ for the six months ended 30 September 2024 ("HY25").

The period saw continued delivery of strong revenue, profit and cash generation growth.

Financial highlights

·      Adjusted profit before tax and EPS continue to grow faster than revenue, as planned.

·    Continued progress on profit performance - adjusted profit before tax of £17m, up £4m or 30% YoY, delivering a PBT margin of 3.3% (HY24: 2.7%).

·     Gross Margin growth to 24.4% (HY24: 23.5%) driven by continued efficiency savings, which have more than offset inflationary pressures and the impact of reduced basket value in the retail business as a result of lower market product pricing.

·    B2C Retail revenue growth of 13% despite a tough market over the summer because of lower product pricing and weaker demand for cooling products. Overall group revenue growth of 6% reflected reductions in B2B² and mobile as we rebase towards profitability.

·    Free cashflow of £14m (HY24: £3m) driven by strong operating performance and efficient working capital management. Revolving Credit Facility increased and extended with the total facility increasing from £80m to £120m and now expiring in October 2028.

Operational highlights

·    Continued momentum in building our Five Star member base, with our first two year members now renewed. We continue to invest in Five Star and give our members even more reasons to shop with us across all categories.

·      Our third-party warehousing solution for small products went live in April. This will improve our unit economics enabling us to offer a wider range of products and, in turn, give our customers, particularly Five Star members, even more reasons to buy from us.

·      Customer satisfaction scores remain outstanding: Trustpilot ⁶ reviews have grown to over 600,000 averaging 4.8 out of 5 stars - further cementing AO as the UK's most trusted electrical retailer.

·   musicMagpie acquisition will augment our capability and value capture in the mobile and consumer technology categories as well as improving our ESG credentials.

·     Post period end, renewed network agreement with Three, and extended our Domestic & General agreement in relation to the sale and promotion of product protection plans to December 2033.

·    Significant progress made in mobile, with improved margins and acquisition costs but overall market down year on year.

·    Further capex investment in our Recycling facility including the addition of an extruder to the plastics plant which will both increase our in-house capability to refine the plastic output and is critical to our ambition of creating new fridges from old ones.

·      Our focus on cost continues and during the period we have delivered improved unit economics for warehousing small items. This has enabled us to expand our range of products and give Five Star members more opportunities to buy.

Outlook

Current year guidance is:

·      Adjusted profit before tax³ upgraded to between £39m and £44m.

·      Group revenue of £1.09bn to £1.13bn with growth >10% in B2C Retail

·      Capex of c£11m

Following the Budget in October 2024, our estimate of the annual impact is an additional c£4m of direct costs but, including indirect costs where the impact remains to be seen, this will likely be more than £8m. We will work hard to mitigate the impact of this to overall profitability.

AO's Founder and Chief Executive, John Roberts, said:

"I'm delighted to report another successful six months for AO during which our main B2C Retail business has returned to double digit growth alongside making more progress towards our medium-term ambition of delivering a PBT margin of over 5%.

"We've had a Morecambe and Wise summer sales period; all the right volumes just not in the right categories. The wet summer weather meant we sold fewer fridges and air conditioning units and more tumble driers than we had planned. Overall, our team did a fantastic job to play this out as a satisfying score draw.

"We also made good progress beyond our core MDA category, and I'm very encouraged with how our customers and members are responding to our improved range and value proposition in newer categories.

"Our laser focus on costs and efficiency remains which ensures, as planned, that profit grew faster than sales on the growth we've delivered.

"Reflecting our truly world class customer service, AO.com has now surpassed 600,000 Trustpilot reviews with an overall score of 4.8 out of 5. We're also giving our members even more reasons to shop with us.

"None of this has happened by accident and I'm grateful to the entire AO team, our suppliers and partners for their continued support and hard work.

"We're now well into peak trading with customers responding positively to the thousands of unbeatable deals we're offering for the Black Friday period"

Webcast details

An in-person results presentation and Q&A will be held for analysts and investors at 09:00 GMT with registration opening at 08:30 GMT today, 26 November 2024 at our Hatton Garden office. Advance registration, prior to arrival, is required by emailing ao@sodali.com. A playback of the presentation will be available on AO World's corporate website at www.ao-world.com shortly afterwards.

About AO

AO World PLC, headquartered in Bolton and listed on the London Stock Exchange, is the UK's most trusted major electrical retailer, with a mission to be the destination for electricals. Our strategy is to create value by offering our customers brilliant customer service and making AO the destination for everything they need, in the simplest and easiest way, when buying electricals.  We offer major and small domestic appliances and a growing range of mobile phones, AV, consumer electricals and laptops. We also provide ancillary services such as the installation of new and collection of old products and offer product protection plans and customer finance. AO Business serves the B2B market in the UK, providing electricals and installation services at scale. AO also has a WEEE (Waste Electrical and Electronic Equipment) processing facility, ensuring customers' electronic waste is dealt with responsibly.

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¹ Unless otherwise stated all numbers relate to the continuing operations of the Group and therefore exclude the impact of Germany.

² B2C (business-to-consumer) Retail revenue relates to products and services purchased by B2C customers through the retail websites (including membership fees and revenue attributable to protection plans sold with the products).  B2B (business-to-business) Retail revenue relates to products and services purchased by B2B customers and also includes funding for marketing services provided to suppliers. See note 2 for further information.

³ Adjusted profit before tax is calculated by adding back or deducting adjusting items to Profit before tax. Adjusting items are those items that the Group excludes in order to present a further measure of the Group's performance. Each of these costs are considered to be significant in nature and/ or quantum or are consistent with items treated as adjusting in prior periods.

⁴ Free cashflow is defined as the movement in cash and cash equivalents in the year excluding the cost of funding the EBT to acquire shares in the company.

⁵ Net funds is defined as cash less borrowings less owned asset lease liabilities but excluding right of use asset lease liabilities. Net funds includes any cash held in Germany.   

⁶ Trustpilot score sourced from their website October 2024.

⁷ Total electricals market data from GfK, for the 12 months to 30 September 2024. AO's value is from company data, net value.

Cautionary statement

This announcement may contain certain forward-looking statements (including beliefs or opinions) with respect to the operations, performance and financial condition of the Group. These statements are made in good faith and are based on current expectations or beliefs, as well as assumptions about future events. By their nature, future events and circumstances can cause results and developments to differ materially from those anticipated. Except as is required by the Listing Rules, Disclosure Guidance and Transparency Rules and applicable laws, no undertaking is given to update the forward-looking statements contained in this document, whether as a result of new information, future events or otherwise. Nothing in this document should be construed as a profit forecast or an invitation to deal in the securities of the Company. This announcement has been prepared for the Group as a whole and therefore gives greater emphasis to those matters which are significant to AO World PLC and its subsidiary undertakings when viewed as a whole.

FINANCIAL REVIEW

Unless otherwise stated, the below relates to continuing operations in the UK only.

Revenue

For the six months ended 30 September 2024, Group revenue increased by 6.3% to £512.1m (HY24: £481.7m).

B2C Retail revenue

B2C Retail revenue comprises products and services purchased by B2C customers through the retail websites, including membership fees and revenue attributable to protection plans sold with the product.  This revenue stream has increased 12.8% YoY as we continue to expand our range and capitalise on the growth of our membership and finance bases. Our MDA market share⁷ has increased to 16.4% (HY24: 15.8%) despite the total MDA market seeing a decrease of 1% in value terms against the comparable period.

B2B Retail revenue

B2B Retail revenue comprises product and service revenue purchased by a business customer. The planned decrease in this revenue stream is a consequence of our disciplined minimum profit return hurdles.

Mobile revenue

Mobile revenue includes all commissions generated by network connections in our Mobile business. As we entered 2024, we began re-engineering the business in partnership with the Mobile Network Operators (MNOs) to remove dysfunctionality and return this category to profitability. We also acquired the websites buymobiles.net and affordablemobiles.co.uk. Whilst this change in approach to trading has delivered significant improvements YoY in unit gross margin and acquisition costs, the past six months of trading, despite the addition of extra sales channels, has seen revenue in our mobile business decline by 12.7%. The bigger than forecast decline in the Contract Handset Market of c11.4% means there is still some work to do to return to profitability, and the headroom in recoverability of goodwill is obviously very small.

Third-Party Logistics revenue

Our expertise in complex two-person delivery is highly valued in our industry, and we undertake a number of deliveries on behalf of Third-Party clients in the UK. Revenue in this area grew by 6.5% and delivers incremental profitability. We will continue to optimise this revenue opportunity to leverage our operational gearing, without it distracting from our core business.

Recycling revenue

Recycling revenue has increased slightly to £11.8m for the period. Although volumes processed have increased, this has been partly offset by a reduction in output material prices due to commodity market pricing.

Gross margin

Gross profit, including product margins, services and delivery costs, increased by 10.6% to £125.0m (HY24: £113.0m) delivering an increase in gross margin to 24.4%.  Gross margin has been negatively impacted by inflationary pressures and during the period we have seen retail prices fall slightly, despite increasing market volumes which has resulted in a reduction in average basket revenue. However, these margin pressures have been more than offset by the continued drive in efficiency wins across the operation and are further supported by our strong relationships with suppliers. We continue to focus on making sure every sale is profitable. We have outsourced logistics for small items to third parties, acknowledging that this is the best way to continue to grow this category profitably. The change in approach to selling in our mobile business (as noted above) has contributed further to the strong growth in gross margin.

Selling, General & Administrative Expenses ("SG&A")

Whilst our focus on cost control has ensured the components of the SG&A cost base remain broadly flat, inflationary pressures, primarily relating to wages and rent, have driven an increase in the pound cost with total spend for the period being £108.6m (HY24: £98.9m).

Most of our advertising and marketing costs occur within our Retail and Mobile businesses. Mobile acquisition expenditure has reduced in cash terms as we look to deliver on our revised approach to our business model, focusing on the customer proposition with traditional network contract connections for our network partners.  In the Retail business we have reduced traditional TV advertising expenditure to focus on new routes to market to drive brand awareness, including out of home advertising and video on demand.   

Warehousing as a percentage of sales has increased to 5.6% (HY24: 5.3%) with an increase in costs of £3.1m to £28.6m (HY24: £25.5m). Despite efficiency savings across our warehousing operations, these have been offset by an increase in rent costs along with significant inflationary increases in wages.

Other admin, which includes staff and office costs, has stayed consistent YoY at 11.6% of revenue and increased on a cost basis by £3.5m to £59.5m (HY24: £56.0m). As previously noted, we expected inflationary pressures across the business which we have mitigated as far as possible.

Operating Profit and Adjusted Profit before tax

Operating profit for the period was £16.4m (HY24: £14.7m), for the reasons explained above.

Alternative Performance Measures

The Group tracks a number of alternative performance measures in managing its business. These are not defined or specified under the requirements of IFRS because they exclude amounts that are included in, or include amounts that are excluded from, the most directly comparable measure calculated and presented in accordance with IFRS or are calculated using financial measures that are not calculated in accordance with IFRS. The Group believes that these alternative performance measures, which are not considered to be a substitute for or superior to IFRS measures, provide stakeholders with additional helpful information on the performance of the business. These alternative performance measures are consistent with how the business performance is planned and reported within the internal management reporting to the Board. Some of these alternative performance measures are also used for the purpose of setting remuneration targets. These alternative performance measures should be viewed as supplemental to, but not as a substitute for, measures presented in the consolidated financial statements relating to the Group, which are prepared in accordance with IFRS. The Group believes that these alternative performance measures are useful indicators of its performance.

Adjusted profit before tax

Adjusted profit before tax "Adjusted PBT" is calculated by adding back or deducting Adjusting items to Profit Before Tax. Adjusting items are those which the Group excludes in order to present a further measure of the Group's performance. Each of these items, costs or incomes, is considered to be significant in nature and/ or quantum or are of consistent with items treated as adjusting in prior periods.

Excluding these items from profit metrics provides readers with helpful additional information on the performance of the business across periods because it is consistent with how the business performance is planned by, and reported to, the Board and the Chief Operating Decision Maker.

The reconciliation of statutory Profit Before Tax to Adjusted PBT is as follows:

Adjusting items

Post period end, on 2 October 2024, the Group announced that it had agreed the terms of a recommended cash acquisition of the whole of the issued and to be issued share capital of musicMagpie PLC ("MM") at 9.07p per share valuing the share capital of MM at c.£9,982,105 on a fully diluted basis. The FCA has given its approval in relation to the proposed acquisition of control and on 20 November 2024 the acquisition was approved by MM shareholders.  The acquisition is still subject to certain conditions including sanction of the Court, with a hearing scheduled for the 10 December 2024, and delivery of the related Court Order to the Registrar of Companies. 

Costs incurred during the period in relation to this transaction total £0.9m and due to their one-off nature have been treated as adjusting items in arriving at Adjusted Profit before Tax.

There were no adjusting items in the six months ended 30 September 2023.

Taxation

The tax charge is recognised based on management's best estimate of the weighted-average annual corporation tax rate expected for the full financial year multiplied by the pre-tax results of the interim reporting period. The Group's tax charge for the period is £5.1m (2023: £3.8m) as a result of the expected effective tax rate for the year of 30.14%.

Retained profit and earnings per share

Retained profit for the period was £11.2m (2023: £9.4m).

Basic earnings per share was 1.94p (2023: 1.64p) and diluted earnings per share was 1.86p (2023: 1.59p).

The calculations for earnings per share are shown in the table below:

Cash resources, cash flow and Total net debt

At 30 September 2024, the Group's available liquidity, being Cash and cash equivalents plus amounts undrawn on its Revolving Credit Facility, was £123.0m (31 March 2024: £116.4m). At 30 September 2024, the Group had £79.9m available on its facility. The amount utilised represents £0.1m of guarantees and letters of credit.

During the period, the Group generated a cash inflow of £3.0m (30 September 2023: £3.3m inflow) as set out in the table below:

Cashflow from UK operating activities £33.9m inflow (30 September 2023: £28.5m inflow)

This cash inflow is principally as a result of the improved operating performance in the period and an improvement in working capital.

The Group's working capital is set out in the table below:

Inventories increased in the period by £13m driven by investment in availability across both the core MDA range and broadening the depth of other categories. The increase was also impacted by our Mobile business due to the timing of the iPhone16 launch as well as a broadening of products and accessories ahead of peak trading season. Inventory days were 44 days at 30 September 2024 (31 March 2024: 43 days).

Trade and other receivables increased by £3m in the period with the usual build of supplier income and overhead prepayments being partly offset by a reduction in contract assets, particularly in Mobile due to lower connection volumes

Trade and other payables increased by £20m largely as a result of the inventory build noted above and an increase in deferred income due to the timing of deliveries and the increase in our membership base. This was partly offset by reduced connections in Mobile impacting advance payments received from the MNO's. Creditor days at 30 September 2024 were 54 (31 March 2024: 55 days) reflecting continued support from our supplier base.

Cashflow from UK investing activities £6.3m outflow (2023: £4.1m outflow)

Cash capital expenditure in the year of £6.8m principally related to the continued refresh of delivery vehicles in Logistics and further investment in our Recycling activities with additions including an extruder for the Plastics business to drive further efficiencies and routes to market.

Cashflow from UK financing activities (excluding purchase of own shares by EBT) £13.4m outflow (2023: £20.5m)

This cash outflow principally related to lease repayments of £10.8m (2023: £9.4m) and interest paid of £2.5m (2023: £3.6m) The prior years movement also included a net repayment of borrowings of £7.9m.

Other cashflows

The purchase, in the market, by the Company's EBT of shares in the Company amounted to £11.1m (2023: £nil) including fees.

As a result of the above movements, net funds and Total net debt were as follows:

Borrowings of £2.0m (March 2024: £2.1m) relate to a mortgage entered into during the prior year which was used to partly fund the acquisition of one of the Group's recycling sites.

Owned assets lease liabilities reduced by £1.0m in the period as a result of capital repayments.

Right of use asset lease liabilities decreased by £8.8m to £56.3m (March 2024: £65.1m) principally reflecting capital repayments of £9.9m offset partly by revisions to lease terms as a consequence of rent reviews and the decision to exit one of the Group's properties at its break clause (£0.5m). New leases in the period amounted to £1.6m mainly relating to vehicles.

On 8 October 2024, the group amended and extended its Revolving Credit Facility with the total facility increasing from £80m to £120m. This expires in October 2028.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the 6 months ended 30 September 2024

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at 30 September 2024

CONDENSED CONSOLIDATED STATEMENT OF CHANGE IN EQUITY

At 30 September 2024

At 30 September 2023

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

For the 6 months ended 30 September 2024

NOTES TO THE FINANCIAL INFORMATION

1.   Basis of preparation

The interim financial information was approved by the Board on 25 November 2024. The financial information for the 6 months ended 30 September 2024 has been reviewed by the Group's external auditor. Their report is included within this announcement. The financial information for the year ended 31 March 2024 is based on information in the audited financial statements for that period which are available online at https://www.ao-world.com/investor-centre/.

The comparative figures for the year ended 31 March 2024 are an abridged version of the Group's full financial statements and, together with other financial information contained in these interim results, do not constitute statutory financial statements of the Group as defined in section 434 of the Companies Act 2006. A copy of the statutory accounts for the year ended 31 March 2024 has been delivered to the Registrar of Companies. The auditors have reported on those accounts and their report was unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement under s498(2) or (3) of the Companies Act 2006. 

This condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting under UK-adopted international accounting standards. The annual financial statements of the Group for the year ending 31 March 2025 will be prepared in accordance with UK-adopted international accounting standards. As required by the Disclosure Guidance and Transparency Rules of the Financial Conduct Authority, the condensed set of financial statements has been prepared applying the accounting policies, judgements and presentation that were applied in the preparation of the Company's published consolidated financial statements for the year ended 31 March 2024.

Certain financial data have been rounded. As a result of this rounding, the totals of data presented in this document may vary slightly from the actual arithmetic totals of such data.

Going concern

Notwithstanding net current liabilities of £13.1m as at 30 September 2024, the financial statements have been prepared on a going concern basis which the Directors consider to be appropriate for the following reasons:

The Group meets its day-to-day working capital requirements from its cash balances and the availability of its £120m revolving credit facility (which was amended and extended in October 2024 to now expire in October 2028).

The Directors have prepared base and sensitised cashflow forecasts for the Group for a period of 12 months from the expected approval of the interim financial statements ("the going concern period") which indicated that the Group would remain compliant with its covenants and would have sufficient funds through its existing cash balances and availability of funds from its revolving credit facility to meet its liabilities as they fall due for that period. The forecasts took account of current trading, management's view on future performance and their assessment of the impact of market uncertainty and volatility as well as applying sensitivity analysis for severe but plausible downsides to the base case.

Under the severe but plausible downside scenarios the Group continues to demonstrate headroom against its banking facilities and remains compliant with its covenant requirements. Consequently, the Directors are confident that the Group and Company will continue to have sufficient funds to continue to meet its liabilities as they fall due for at least 12 months from the date of approval of these interim financial statements and therefore have prepared the interim financial statements on a going concern basis.

Critical accounting judgements and key sources of estimation uncertainty

In the application of the Group's accounting policies, the Directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant and are reviewed on an ongoing basis.

Actual results could differ from these estimates and any subsequent changes are accounted for with an effect on income at the time such updated information becomes available.

Accounting standards require the Directors to disclose those areas of critical accounting judgement and key sources of estimation uncertainty that carry a significant risk of causing material adjustment to the carrying value of assets and liabilities within the next 12 months.

As a result of macro-economic factors in recent years, the Directors consider that impairment of intangibles and goodwill and revenue recognition in respect of commission for product protection plans and network connections include significant areas of accounting estimation.

With regard to revenue recognition in respect of commission for product protection plans and network connections, the Directors have applied the variable consideration guidance in IFRS 15 and as a result of revenue restrictions do not believe there is a significant risk of a material downward adjustment. Revenue has been restricted to ensure that it is only recognised when it is highly probable and therefore subsequently, there could be a material reversal of restrictions.

The information below sets out the estimates and judgements used in these areas.

Revenue recognition and recoverability of income from product protection plans

Revenue recognised in respect of commissions receivable over the lifetime of the plan for the sale of product protection plans is recognised in line with the principles of IFRS 15, when the Group obtains the right to consideration as a result of performance of its contractual obligations (acting as an agent for a third party).

Revenue in any one year therefore represents an estimate of the commission due on the plans sold, which management estimate reliably based upon a number of key inputs, including:

•          the contractual agreed margins;

•          the number of live plans;

•          the discount rate;

•          the estimated length of the plan;

•          the estimate of profit share relating to the scheme;

•          the estimated rate of attrition based on historic data; and

•          the estimated overall performance of the scheme.

Commission receivable also depends for certain transactions on customer behaviour after the point of sale. Assumptions are therefore required, particularly in relation to levels of customer attrition within the contract period, expected levels of customer spend, and customer behaviour beyond the initial contract period. Such assumptions are based on extensive historical evidence, and adjustment to the amount of revenue recognised is made for the risk of potential changes in customer behaviour, but they are nonetheless inherently uncertain.

Reliance on historical data assumes that current and future experience will follow past trends. The Directors believe that the quantity and quality of historical data available provides an appropriate proxy for current and future trends. Any information about future market trends, or economic conditions that we believe suggests historical experience would need to be adjusted, is taken into account when finalising our assumptions each year. Our experience over the last decade, which has been a turbulent period for the UK economy as a whole, is that variations in economic conditions have not had a material impact on consumer behaviour and, therefore, no adjustment to commissions is made for future market trends and economic conditions.

In assessing how consistent our observations have been, we compare cash received in a period versus the forecast expectation for that period as we believe this is the most appropriate check on revenue recognised. Small variations in this measure support the assumptions made.

For plans sold prior to 1 December 2016, the commission rates receivable are based on pre-determined rates. For plans sold after that date, base-assumed commissions will continue to be earned on pre-determined rates but overall commissions now include a variable element based on the future overall performance of the scheme.

Changes in estimates recognised as an increase or decrease to revenue may be made, where for example, more reliable information is available, and any such changes are required to be recognised in the income statement. During the year, management have refined estimations in relation to the valuation of plans which has resulted in £1.5m of previously recognised revenue which has now been reversed in the period ended 30 September 2024.

The commission receivable balance as at 30 September 2024 was £98.3m (31 March 2024: £96.5m). The rate used to discount the revenue for the FY25 cohort is 5.79% (2024: 5.85%). The weighted average of discount rates used in the years prior to FY25 was 4.73% (2023: 4.34%).

Revenue recognition and recoverability of income in relation to network commissions

Revenue in respect of commissions receivable from the Mobile Network Operators ("MNOs") for the brokerage of network contracts is recognised in line with the principles of IFRS 15, when the Group obtains the right to consideration as a result of performance of its contractual obligations (acting as an agent for a third party).

Revenue in any one year therefore represents an estimate of the commission due on the contracts sold, which management estimates reliably based upon a number of key inputs, including:

·      The contractually agreed revenue share percentage - the percentage of the consumer's spend (to MNOs) to which the Group is entitled;

·      The discount rate using external market data (including risk free rate and counter party credit risk) 4.18% (2024: 4.49%);

·      The length of contract entered into by the consumer (12 - 24 months) and the resulting estimated consumer average tenure which takes account of both the default rate during the contract period and the expectations that some customers will continue beyond the initial contract period and generate out of contract ("OOC") revenue (c2%).

The commission receivable on mobile phone connections can therefore depend on customer behaviour after the point of sale. The revenue recognised and associated receivable in the month of connection is estimated based on all future cash flows that will be received from the MNO and these are discounted based on the timing of receipt. This also takes into account the potential clawback of commission by the MNOs and any additional churn expected as a result of recent price increases announced and applied by the MNOs, for which a restriction to revenue is made based on historical experience.

The Directors consider that the quality and quantity of the data available from the MNOs is appropriate for making these estimates and, as the contracts are primarily for 24 months, the period over which the amounts are estimated is relatively short. As with commissions recognised on the sale of product protection plans, the Directors compare the cash received to the initial amount recognised in assessing the appropriateness of the assumptions used.

Changes in estimates recognised as an increase or decrease to revenue may be made where, for example, more reliable information is available, and any such changes are required to be recognised in the income statement. During the year, management have refined the estimations in relation to the valuation of connections which has resulted in £1.4m of previously constrained revenue which has now been recognised in the period ended 30 September 2024.

In line with the requirements of IFRS 15, the Group only recognises revenue to the extent that it's highly probable that a significant reversal in the amount of cumulative revenue will not occur when the uncertainty associated with its variable consideration is subsequently resolved. This constraint results in potential revenue of £2.7m being restricted at 30 September 2024 (31 March 2024: £3.2m).

Whilst there is estimation uncertainty in valuing the contract asset, reasonably possible changes in assumptions are not expected to result in material changes to the valuation of the asset in the next financial year.

The commission receivable balance as at 30 September 2024 was £55.5m (31 March 2024: £63.1m). The rate used to discount the current year revenue is 4.18% (2024: 4.49%).

Impairment of intangible assets and goodwill - Mobile CGU

As part of the acquisition of Mobile Phones Direct Limited in 2018, the Group recognised amounts totalling £16.3m in relation to the valuation of the intangible assets and £14.7m in relation to residual goodwill. At 30 September 2024 these amounted to £20.9m.

In February 2024, the Group acquired further intangibles assets mainly related to the websites and domains of affordablemobiles.co.uk and buymobiles.net (together referred to as "Affordable Mobiles") totalling £2.3m which at 30 September 2024 amounted to £2.0m.

As required by IAS 36, goodwill is subject to an impairment review on an annual basis, or more frequently where indicators of impairment exist. The Group has considered if indicators of impairment exist with regard to a number of factors, including the decline in the overall Mobile post pay market, changes in inflation and interest rates and general uncertainty in the wider macroeconomic environment.

Management concluded that some of these factors are indicators of impairment and consequently, an update of the impairment review was undertaken per IAS 36 using the value in use ('VIU') method.

As a result of the impairment review, no impairment has been recognised in the six-month period to 30 September 2024. The review shows that headroom above the carrying value remains minimal (as was the case at 31 March 2024). Further details on the sensitivities and key assumptions are included in note 3.

2.   Revenue

During the period, management have considered whether the disaggregation of revenue continues to appropriately reflect the ongoing nature of the Group's business and how it is managed.  Having taken account of the nature, amount, timing and cashflows from the different parts of the business, management believe that a disaggregation which splits revenue based on where the revenue is generated rather than the product is more appropriate and provides greater clarity to the users of the financial statements. This re-presentation does not have any impact on the segmental analysis as set out in the Group's Annual Report and Accounts for the year ended 31 March 2024.

The table below shows the Group's revenue by each major business area.

B2C Retail revenue - relates to products and services purchased by B2C customers through the retail websites (including membership fees and revenue attributable to protection plans sold with the products). All revenue is recognised when performance obligations are met, which are typically at the point of delivery with the exception of membership fees (which are recognised over the membership period) and some product protection plans (that are sometimes sold after the product has been delivered).

B2B Retail revenue - relates to products and services purchased by B2B customers and also includes funding for marketing services provided to suppliers. All revenue is recorded once performance obligations are met such as at the point of delivery or on finalisation of marketing and promotional campaigns, and most customers pay on credit terms.

Mobile revenue - relates to revenue received primarily as commission from the Mobile Network Operators ("MNO's") for our service, as agent, of introducing connections to their networks (including the delivery of the handset to the end customer). Revenue is recognised when performance obligations are met, which is typically at the point of sale for the majority of this revenue stream.

Third-party logistics revenue - relates to the provision of third-party logistics services to a number of customers. Revenue is recognised when performance obligations are met being on completion of the delivery or service with customers paying on credit terms.

Recycling revenue - relates to revenue from the recycling of used electrical products. Revenue is recognised when performance obligations are met which is typically on delivery, with customers paying on credit terms.

3.   Goodwill

Goodwill relates to purchase of Expert Logistics Limited, the purchase by DRL Holdings Limited (now AO World PLC) of DRL Limited (now AO Retail Limited), the acquisition of AO Recycling Limited (formerly The Recycling Group Limited) and the acquisition of Mobile Phones Direct Limited (now AO Mobile Limited) by AO Limited.

Impairment of goodwill

UK CGU - £13.5m

At 30 September 2024, goodwill acquired through UK business combinations (excluding Mobile Phones Direct Limited) was allocated to the UK (excluding Mobile) cash-generating unit ("CGU").

This represents the lowest level within the Group at which goodwill is monitored for internal management purposes.

The Group performed its annual impairment test as at 31 March 2024. The recoverable amount of the CGU was determined based on the value in use calculations. Management do not believe that any reasonable possible sensitivity would result in any impairment to this goodwill.

During the six months ended 30 September 2024, there have been no significant changes in the assumptions or performance of the related businesses which would indicate an impairment test is required at 30 September 2024.

AO Mobile - £14.7m

At 30 September 2024, the goodwill allocated to the Mobile cash generating unit ("CGU") was £14.7m (2023: £14.7m). In addition to goodwill, at 30 September 2024 other intangibles assets relating to this CGU were £8.3m (2023: £7.8m.)

The Group performed its annual impairment test as at 31 March 2024 which showed there was headroom against the carrying value of £1.3m in managements base case and that a range of sensitivities against this base case could result in a material impairment to the carrying value. However, having considered the base case and the sensitivities, management concluded there was no impairment.

As set out in the trading review, during the six months ended 30 September 2024, despite significant improvements in unit gross margin and control over costs, revenue in the business declined broadly in line with the reduction in the Contract Handset market. Management have concluded that this continued downturn in the market is a trigger for an impairment review and as such have performed an exercise using the value in use methodology in line with that used at year end to assess the carrying value

The key assumptions in the forecast cashflows are:

·      Revenue growth beyond FY25 of 2%;

·      Working capital will normalise in the second half of FY25 resulting in a cash inflow of £10.7m;

·      Gross margin increases by 2 percentage points in the second half of FY25 and remain at the resultant margin throughout the remainder of the forecast period;

·      Cost inflation and cost savings of between +2% and -3% based on expectations for inflation, managements estimate of product price changes based on industry knowledge and reductions in brand spend

A pre-tax discount rate of 12.7% has been applied to the cash flows based on the capital structure of an equivalent business and reflecting market risk and volatility due to current macro- economic uncertainty.

As a result, using the base case, the value in use exceeds the carrying value by £0.8m at 30 September 2024 and management have therefore concluded that no impairment exists at that date.

Management however remain cognisant that relatively small changes in any of the assumptions used, which could be driven by the end customer behaviour with the Mobile Network Operators, could give rise to an impairment in the carrying value and have considered this by applying sensitivities as follows:

4.   Trade and other receivables

The trade and other receivables are classified as:

All of the amounts classified as non-current assets relate to contract assets.

Contract assets

Contract assets represent the expected future commissions receivable in respect of product protection plans and mobile phone connections. The Group recognises revenue in relation to these plans and connections when it obtains the right to consideration as a result of performance of its contractual obligations (acting as an agent for a third party). Revenue in any one year therefore represents the estimate of the commission due on the plans sold or connections made.

The reconciliation of opening and closing balances for contract assets is shown below:

Included in the contract asset above in relation to product protection plans at 31 March 2024, was an amount of £1.5m in relation to variable consideration recognised as revenue up to that date which has reversed in the period ended 30 September 2024 and is included in the "Revisions to estimates" above. Also included is previously constrained revenue of £1.4m in relation to network commissions which has now been recognised in the period ended 30 September 2024.

The Group still recognises that there is inherent risk in the amount of revenue recognised as it is dependent on future customer behaviour which is outside of the Group's control. Customer contracts with the MNOs are ordinarily for a duration of 24 months. Management assess each half year, the expected tenure of the live contracts based primarily on cancellations and cash collection. As a consequence, in line with the requirements of IFRS 15, the Group only recognises revenue to the extent that it's highly probable that a significant reversal in the amount of cumulative revenue will not occur when the uncertainty associated with its variable consideration is subsequently resolved. This constraint results in potential revenue of £2.7m being restricted at 30 September 2024 (31 March 2024: £3.2m).

Product protection plans

Under our arrangement with Domestic & General ("D&G"), the Group receives commission in relation to its role as agent for introducing its customers to D&G and recognises revenue at the point of sale as it has no future obligations following this introduction. It also receives a share of the overall profitability of the scheme. A discounted cash flow methodology is used to measure the estimated value of the revenue and contract assets in the month of sale of the relevant plan, by estimating all future cash flows that will be received from D&G and discounting these based on the expected timing of receipt. Subsequently, the contract asset is measured at the present value of the estimated future cash flows. The key inputs into the model which forms the base case for management's considerations are:

·      the contractually agreed margins, which differ for each individual product covered by the plan as is included in the agreement with D&G;

·      the number of live plans based on information provided by D&G;

·      the discount rate for plans sold in the year using external market data - 5.79% (2024: 5.85%);

·      the estimate of profit share relating to the scheme as a whole based on information provided by D&G;

·      historic rate of customer attrition that uses actual cancellation data for each month for the previous 6 years to form an estimate of the cancellation rates to use by month going forward (range of 0% to 9.0% weighted average cancellation by month); and

·      the estimated length of the plan based on historical data plus external assessments of the potential life of products (5 to 17 years).

The last two inputs are estimated based on extensive historical evidence obtained from our own records and from D&G. The Group has accumulated historical empirical data over the last 17 years from c.3.5m plans that have been sold. Of these, c.1.1m are live. Applying all the information above, management calculates their initial estimate of commission receivable. Consideration is then given to other factors outside of the historical data noted above that could impact the valuation. This primarily considers the reliance on historical data as this assumes that current and future experience will follow past trends. There is, therefore, a risk that changes in consumer behaviour could reduce or increase the total cash flows ultimately realised over the forecast period. Management makes a regular assessment of the data and assumptions with a detailed review at half year and full year to ensure this continues to reflect the best estimate of expected future trends. As set out earlier, the Directors do not believe there is a significant risk of a downward material adjustment to the revenue recognised in relation to these plans over the next 12 months. The sensitivity analysis below is disclosed as we believe it provides useful insight to the users of the financial statements into the factors taken into account when calculating the revenue to be recognised.

The table shows the sensitivity of the carrying value of the commission receivables and revenue to a reasonably possible change in inputs to the discounted cash flow model over the next 12 months.

Cancellations

The number of cancellations and therefore the cancellation rate can fluctuate based on a number of factors. These include macroeconomic changes such as unemployment and cost of living. The impact of reasonable potential changes is shown in the sensitivities above.

Profit share

The profit share attaching to the overall scheme is dependent on factors such as the price of the plan, the cost and incidence of claims and the administration of the scheme itself. Given changes in macro-economic conditions, there is an increased risk that claims cost could increase. The above sensitivity considers what any reasonable change in claims cost could mean to the overall profit share.

Network commissions

The Group operates under contracts with a number of Mobile Network Operators ("MNOs"). Over the life of these contracts, the service provided by the Group to each MNO is the procurement of connections to the MNO's networks. The individual consumer enters into a contract with the MNO for the MNO to supply the ongoing airtime over that contract period. The Group earns a commission for the service provided to each MNO. Revenue is recognised at the point the individual consumer signs a contract and is connected with the MNO. Consideration from the MNO becomes receivable over the course of the contract between the MNO and the consumer. The Group has determined that the number and value of consumers provided to each MNO in any given month represents the measure of satisfaction of each performance obligation under the contract. A discounted cash flow methodology is used to measure the estimated value of the revenue and contract assets in the month of connection, by estimating all future cash flows that will be received from the MNOs and discounting these based on the expected timing of receipt. Subsequently, the contract asset is measured at the present value of the estimated future cash flows.

The key inputs to management's base case model are:

·      revenue share percentage, i.e. the percentage of the consumer's spend (to the MNO) to which the Group is entitled;

·      the discount rate using external market data - 4.18% (2024: 4.49%);

·      the length of contract entered into by the consumer (12 - 24 months) and the resulting estimated consumer average tenure that takes account of both the default rate during the contract period and the expectations that some customers will continue beyond the initial contract period and generate out of contract revenue.

The input is estimated based on extensive historical evidence obtained from the networks, and adjustment is made for the risk of potential changes in consumer behaviour. Applying all the information above, management calculates their initial estimate of commission receivable. Consideration is then given to other factors outside of the historical data noted above which could impact the valuation. This primarily considers the reliance on historical data as this assumes that current and future experience will follow past trends.

The risk remains that changes in consumer behaviour could reduce or increase the total cash flows ultimately realised over the forecast period. Management make a regular assessment of the data and assumptions with a detailed review at half year and full year to ensure this continues to reflect the best estimate of expected future trends and appropriate revisions are made to the estimates. As set out in Note 1, the Directors do not believe there is a significant risk of a downward material adjustment to the revenue recognised in relation to these plans over the next 12 months given the variable revenue constraints applied.

The sensitivity analysis below is disclosed as we believe it provides useful insight to the users of the financial statements by giving insight into the factors taken into account when calculating the revenue to be recognised. The table shows the sensitivity of the carrying value of the commission receivables and revenue to a reasonably possible change in inputs to the discounted cash flow model over the next 12 months, having taken account of the changes in behaviour experienced in the period.

Cancellations

The number of cancellations and, therefore, the cancellation rate, can fluctuate based on a number of factors. These include macroeconomic changes e.g., unemployment, interest rates and inflation. The impact of reasonable potential changes is shown in the sensitivities above.

5.   Trade and other payables

Advanced payments on account includes payments on account from Mobile Network Operators where there is no right of set off with the contract asset within the mobile business.

The trade and other payables are classified as:

6.   Net funds/ (debt) and movement in financial liabilities

Whilst not required by IAS 1 Presentation of Financial Statements, the Group has elected to disclose its lease liabilities split by those which ownership transfers to the Group at the end of the lease ("Owned asset lease liabilities") and are disclosed within the Property Plant and Equipment table in note 18 of the Group financial statements, and those leases which are rental agreements and where ownership does not transfer to the Group at the end of the lease as Right of use asset lease liabilities which are disclosed within the Right of use assets table in the Group financial statements. This is to give additional information that the Directors feel will be useful to the understanding of the business.

The movement in financial liabilities in the period ending 30 September 2024 was as follows:

7.   Share capital, share premium and investment in own shares

On 8 July 2024, the Company issued 1,733,027 shares to satisfy options granted in July 2020 under the FY21 AO Incentive plan. The shares were acquired and are held in the Company's Employee Benefit Trust ("EBT"), at nominal values, and the EBT transfers to the participants as they are exercised.

On 1 and 2 August 2024, the Company's EBT also purchased 8,882,350 and 434,602 respectively, of the Company's ordinary shares at market value. Consideration paid was £11.1m, which includes transaction costs of £0.2m. Shares held by the EBT will be used to satisfy options under the Group's share schemes.

8,882,350 of the shares were purchased at market value (117.3p per share and total consideration of £10.4m) from John Roberts, Sally Roberts and Chris Hopkinson who are considered related parties. There were no outstanding balances with these related parties as at 30 September 2024.

8.   Post balance sheet events

MusicMagpie

Post period end, on 2 October 2024, the Group announced that it had agreed the terms of a recommended cash acquisition of the whole of the issued and to be issued share capital of musicMagpie PLC ("MM") at 9.07p per share valuing the share capital of MM at c.£9,982,105 on a fully diluted basis. The FCA has given its approval in relation to the proposed acquisition of control and on 20 November 2024 the acquisition was approved by MM shareholders.  The acquisition is still subject to certain conditions including sanction of the Court, with a hearing scheduled for the 10 December 2024, and delivery of the related Court Order to the Registrar of Companies .

Costs incurred during the period in relation to this transaction total £0.9m and are treated as adjusting items.  £15.0m of the Group's cash and cash equivalents is held in reserve and has been ringfenced for the proposed acquisition. These funds are not available to utilise within the Group.

Revolving Credit Facility

On 8 October 2024, the group amended and extended its Revolving Credit Facility with the total facility increasing from £80m to £120m. This expires in October 2028.

9.   Principal risks and uncertainties

There are a number of potential risks and uncertainties which could have a material impact on the Group's performance over the remaining six months of the financial year and could cause actual results to differ materially from expected or historical results.  The Directors do not consider that the principal risks and uncertainties have changed materially since the publication of the Annual Report for the year ended 31 March 2024.

The principal risks as set out in the Annual Report are summarised below and further information on these together with information as to how the Group seeks to mitigate these risks is set out on pages 43-47 inclusive of the Annual Report and Accounts 2024 which can be found at www.ao-world.com: 

·      Risks relating to our culture and people.

·      Risk relating to IT systems resilience, cyber security and agility.

·   Risks relating to compliance failures or to changes in laws and regulations, in particular Data protection and privacy legislation, the basis upon which the Group offers and sells product protection plans and driver employment status.

·      Risks of business interruption.

·  Risks relating to the UK electricals market encompassing a challenging macro-economic environment and competitive conditions.

·      Risks relating to our key commercial relationships and supply chain.

·      Risks relating to our funding and liquidity.

·    Risks in relation to significant accounting matters including revenue recognition and contract asset recoverability in relation to product protection plans, revenue recognition and contract asset recoverability in relation to network commissions and the carrying value of goodwill and intangible assets arising on the acquisition of AO Mobile Ltd .

·     Emerging risks in relation to the consultation on cold calling, extended producer responsibilities, the Government's proposed changes to employment rights, the transitional risks of climate change and the emerging opportunities/risks relating to Artificial Intelligence.

Responsibility statement

Responsibility statement of the directors in respect of the half-yearly financial report

We confirm that to the best of our knowledge:

·      The condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted for use in the UK;

·      The interim management report includes a fair review of the information required by:

(a)DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

(b)DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.

On behalf of the Board

INDEPENDENT REVIEW REPORT TO AO WORLD PLC 

Conclusion 

We have been engaged by AO World Plc ("the Company") to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 September 2024 which comprises the Condensed Consolidated Income Statement, Condensed Consolidated Statement of Comprehensive Income, Condensed Consolidated Statement of Financial Position, Condensed Consolidated Statement of Changes in Equity, Condensed Consolidated Statement of Cash Flows and the related explanatory notes. 

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 September 2024 is not prepared, in all material respects, in accordance with IAS 34 Interim Financial Reporting as adopted for use in the UK and the Disclosure Guidance and Transparency Rules ("the DTR") of the UK's Financial Conduct Authority ("the UK FCA").   

Basis for conclusion

We conducted our review in accordance with International Standard on Review Engagements (UK) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity ("ISRE (UK) 2410") issued for use in the UK.  A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.  We read the other information contained in the half-yearly financial report and consider whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements. 

A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit.  Accordingly, we do not express an audit opinion.  

Conclusions relating to going concern

Based on our review procedures, which are less extensive than those performed in an audit as described in the Basis for conclusion section of this report, nothing has come to our attention that causes us to believe that the directors have inappropriately adopted the going concern basis of accounting, or that the directors have identified material uncertainties relating to going concern that have not been appropriately disclosed.

This conclusion is based on the review procedures performed in accordance with ISRE (UK) 2410. However, future events or conditions may cause the Group to cease to continue as a going concern, and the above conclusions are not a guarantee that the Group will continue in operation.

Directors' responsibilities 

The half-yearly financial report is the responsibility of, and has been approved by, the directors.  The directors are responsible for preparing the half-yearly financial report in accordance with the DTR of the UK FCA. 

As disclosed in note 1, the annual financial statements of the Group are prepared in accordance with UK-adopted international accounting standards.

The directors are responsible for preparing the condensed set of financial statements included in the half-yearly financial report in accordance with IAS 34 as adopted for use in the UK.

In preparing the condensed set of financial statements, the directors are responsible for assessing the Group's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so.

Our responsibility 

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.  Our conclusion, including our conclusions relating to going concern, are based on procedures that are less extensive than audit procedures, as described in the Basis for conclusion section of this report.

The purpose of our review work and to whom we owe our responsibilities

This report is made solely to the Company in accordance with the terms of our engagement to assist the Company in meeting the requirements of the DTR of the UK FCA.  Our review has been undertaken so that we might state to the Company those matters we are required to state to it in this report and for no other purpose.  To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company for our review work, for this report, or for the conclusions we have reached. 

Roger Nixon

for and on behalf of KPMG LLP 

Chartered Accountants 

1 St. Peter's Square

Manchester

M2 3AE

25 November 2024