21 November 2023

 AO WORLD PLC

INTERIM RESULTS FOR THE 6 MONTHS ENDED 30 SEPTEMBER 2023

 STRATEGIC PIVOT PROGRESS CONTINUES AND PROFIT GUIDANCE UPGRADED

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 2023 ("HY24").

The first six months to September 2023 saw the continued delivery of profit and cash generation. As a result, we are upgrading our profit before tax guidance for FY24 to between £28-33m.

Highlights

·      Step change in profitability year-on-year as we continue to deliver on our strategic pivot to profit and cash

·      Statutory profit before tax of £13m (HY23: £(12)m). Gross margin has improved to 23.5% (HY23: 19.5%) as a result of decisive action:

o  Removing unprofitable sales as well as the introduction of delivery charges on all deliveries.

o  Advertising and Marketing costs have been tightly controlled with a change in focus of spending from acquisition to brand investment.

o  Warehousing costs have fallen to £25.5m (HY23: £31.3m) or to 5.3% of sales (HY23: 5.7%). Operational efficiencies and annualisation of property rationalisation, offset by inflationary increases in wages.

o  Other admin costs have decreased by £9.4m to £56m. Tight control over ongoing spend has helped offset inflationary pressures.

o  The overall mobile market has declined in the year, which has negatively impacted the Group's ability to hit network volume targets set for the calendar year 2023. This will have an overall single digit millions profit drag in FY24 and this is absorbed within the upgrade today.

·      Adjusted EBITDA of £27m (HY23: £9m), achieving an adjusted EBITDA margin of 5.6% (HY23: 1.6%)

·      Improved cash generation in the period leading to overall liquidity³ of £99m (31 March 2023: £89m: 30 September 2022): £68m and net funds⁴ of £16m (31 March 2023: £4m: 30 September 2022: net debt £19m)

·      Revenue decreased by 12% as expected as we continue to annualise the actions taken to remove non-core channels and unprofitable sales, and increase gross margins.

·      Over 290,000 new customers⁵ experienced the AO Way during the period with an increase in the repeat customer purchase percentage rate.

·      Customer satisfaction scores remain outstanding: Trustpilot reviews have grown to over 440,000 averaging 4.7 out of 5 stars - continuing to position AO as the UK's most trusted electrical retailer.

·      Focus on branded advertising has increased spontaneous brand awareness by about 10% YoY.

Outlook

Our previous FY24 guidance in July was for PBT around £28m^9. Whilst mindful of the ongoing cost of living crisis and geopolitical events that give rise to uncertainty and volatility, we continue to optimise for profit outturn and are increasing our profit before tax expectations to between £28m and £33m for the full year. We now expect FY24 revenue to be around -10% YOY.

We will continue to invest prudently in the business and seize the significant market opportunities that we see in front of us, with our growing and loyal customer base.

Our medium-term ambitions remain unchanged:

·      Annual revenue growth in a corridor of 10 -20%

·      PBT margin 3 - 5%

·      Profit converting to cash

Longer-term, our addressable market in the UK is significant as it currently stands at c£27.6bn⁶, and in order to take advantage of this we will look to deepen our presence in categories such as televisions, laptops, audio visual and small domestic appliances ("SDA").  The online segment of the market in those categories remains a key opportunity for us as the long-term structural migration to online retailing continues.

AO's Founder and Chief Executive, John Roberts, said: "I am very pleased with the clear progress that we are making as a result of our strategic pivot to focusing on profit and cash. We have generated more profit in the first half of this year than we did in the whole of last year, and are also upgrading our profit expectations for the remainder of FY24.   

"As we anticipated, sales have reduced year on year as we continue to annualise the actions that we've taken to remove non-core channels and unprofitable sales from the business. However, we expect to end the year having returned to run rate revenue growth.  

"Our core fundamentals are in great shape and our service to customers has never been better. Our Trustpilot scores continue to be the best in the market, our spontaneous brand awareness is at record levels, and our transacted customer base now stands at 11.6m people.

"As ever, I'm grateful to our manufacturer partners for their continued support and of course to the fantastic AO team who continue to be magical in the moments that matter for customers while maintaining the discipline and focus needed to deliver our plan.

"We look forward with cautious optimism, given the macro challenges, as we turn our attention back to delivering profitable revenue growth to drive our operational gearing."

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, 21 November 2023 at our London Creative Hub. Advance registration, prior to arrival, is required by emailing ao@powerscourt-group.com. A playback of the presentation will be available on AO World's corporate website at www.ao-world.com in the afternoon.

About AO

AO World PLC, headquartered in Bolton and listed on the London Stock Exchange, is the UK's most trusted major electricals 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 processing facility, ensuring customers' electronic waste is dealt with responsibly.

______________________________

¹ Unless otherwise stated all numbers relate to the continuing operations of the Group and therefore exclude the impact of Germany. Refer to note 11 for further details.

² Adjusted EBITDA is defined as Profit/ (Loss) before interest, tax, depreciation, amortisation, profit/ (loss) on disposal of fixed assets, impairment of assets and Adjusting items (see page 8).

³ Liquidity is the total of cash and cash equivalents and the remaining availability on the revolving credit facility.

⁴ Net funds is defined as cash less borrowings less owned asset lease Liabilities but excluding right of use asset lease liabilities.

  Net funds also includes any cash overdrafts and owned asset lease Liabilities in Germany.   

⁵ A customer is defined as an individual customer who has purchased via ao.com.

⁶ Total electricals market data from GfK, for the 12 months to 2 April 2023. AO's value is from company data, net value.

⁷ GfK data for FY24. AO's value is from company data.

⁸ Where comparison change is a swing from negative to positive, this is judged to be a non-meaningful ("NM") comparison.

⁹ Guidance was for 2.5% PBT on sales of c£1.1bn

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.

CHIEF EXECUTIVE'S REVIEW

The first half of the year has seen the business continue to deliver on the changes from our pivot to profit, and we have continued to join the business up in order to drive further efficiencies.

UK inflation has remained high relative to the last 40 years and, combined with continuing global economic uncertainty, this has served to create a challenging environment in the UK and for retail consumers, specifically.

However, we have an in-built resilience because of our more affluent customers base and the fact that 81% of our sales are MDA with the majority coming from distress purchases; consequently, we remain cautiously positive. We are focused on driving our model through a lens of profitability and cash generation whilst maintaining our world-class service and being magical in the moments that really matter for our customers.

AO has 16.4%⁷ of the total major domestic appliance ("MDA") market and 29.6%⁷ of the online MDA market, with the reductions noted in the period resulting from proactive decisions that we have made to deliver  profit and cash generative sales. Against that backdrop, it is also worth noting that in the last year the total MDA market has declined by 2%⁷.

As we annualise our pivot to profit and cash, it is clear that the strategy is delivering. We generated more profit in the first six months of this financial year than we did in the whole of FY23. As we head into H2, we will continue to focus on actions that continue to generate profit whilst also exploring avenues for revenue growth.

FINANCIAL REVIEW

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

Revenue

For the six months ended 30 September 2023, UK revenue decreased 11.8% to £481.7m (HY23: £546.3m).

Product revenue

Product revenue, comprising sales generated from ao.com, marketplaces and third-party websites, decreased 14.4%. In the short term the business continues to annualise actions taken to improve margin and profitability as part of the strategic pivot. The total MDA market value has seen a decline of 2%, which has further contributed to the decline in revenue. We continue to review our product range and look for category expansion opportunities that contribute further to our profitability.

Service revenue

Service revenue, which includes delivery and customer installation services, increased by 30.5% reflecting the annualisation of the introduction of delivery charges for all deliveries.

Commission revenue

Commission revenue includes commissions generated by network connections in our Mobile business and from the promotion of AO Care warranties for Domestic and General. Commissions from the sale of warranties decreased in line with product sales. The Mobile industry has seen a significant decline, with the Contract Handset Acquisition Market declining by c13% on a LFL basis for the past six months of trading. Connections have fallen as a result of market conditions; this has been partly offset with improvements in the average life of new contracts and the impact of some RPI increases but has resulted in losses in our Mobile business.

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 2.8% and delivers incremental profitability. We will continue to maximise this revenue opportunity to leverage our operational gearing, without it distracting from our core business.

Recycling revenue

Recycling revenue has decreased by £0.6m as a result of a reduction in processed volumes and a reduction in output material prices due to market forces.

Gross margin

Gross profit, including product margins, services and delivery costs, increased by 6.2% to £113.0m (HY23: £106.5m). The actions that the business has taken in the last 12-18 months to pivot to profit is contributing to this large increase in gross margin. The actions taken in product pricing supported by strong relationships with suppliers, the introduction of delivery charges on all deliveries and our focus on profitable sales which fit our model have contributed to this shift in gross margin. The mobile business, as noted above, has had a negative impact on gross margin and is an area of focus for the business in the second half of the financial year.

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

SG&A costs have decreased YOY by 16.2%. As a percentage of revenue there has been a decrease during the period from 21.6% to 20.5% as we continue to look to maximise efficiencies and reduce our cost base in line with our strategy of pivoting to profit and cash.

The majority of our advertising and marketing costs occur within our Retail and Mobile businesses. As noted the Mobile industry has been highly competitive in the year which has led to an increase in acquisition spend year on year as attracting customers in a declining market has become less efficient. In our Retail business we have continued to look to improve the efficiency of acquisition spend such as Pay Per Click (PPC) and affiliate spend, both of which have fallen as a percentage of sales.  We have increased our brand investment significantly which has contributed to our spontaneous brand awareness increasing YOY by about 10%.

Warehousing costs have materially fallen in cash terms and as a percentage of sales. This is the result of several efficiency savings across our warehousing operations, as well as the annualisation of property rationalisation, offset by inflationary increases in wages. Warehousing costs are geared ready for growth and continue to present an opportunity for further cost savings in process efficiencies.

Other admin costs, which includes staff and office costs, decreased by £9.4m to £56.0m (HY23: £65.4m). Savings are a result of the annualisation of actions taken regarding property rationalisation and rightsizing the headcount for being a UK business after the closure of Germany, offset by inflation pressures in the last 12 months. The business continues to focus on controlling overhead costs.

Operating Profit

Operating profit for the period was £14.7m (HY23: £9.3m loss), 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.

EBITDA

EBITDA is defined by the Group as Profit/(Loss) from continuing activities before interest, tax, depreciation, amortisation, profit/ (loss) on the disposal of fixed assets and impairment of assets.

Adjusted EBITDA

Adjusted EBITDA is calculated by adding back or deducting Adjusting items to EBITDA. Adjusting items are those items that 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 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 operating profit/ (loss) to Adjusted EBITDA is as follows:

Adjusting items

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

In the six months ended 30 September 2022, following the Group's change of strategy to focus on the UK business, the Group started a simplification of its operations which included exiting various loss-making parts of the business including the trial with Tesco, simplifying the organisational structure and associated contracts. As a consequence, the Group recognised an expense of £3.6m relating to the restructuring which, due to its size and nature, was added back in arriving at Adjusted EBITDA.

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 £3.8m (2022: £1.1m credit) as a result of the expected effective tax rate for the year of 31.1% in entities taxable in the UK, before prior period adjustments and discrete tax adjustments relating to the period ended 30 September 2023 only. This results in a combined effective tax rate for the period ended 30 September 2023 of 28.14%.

Discontinued Operations

Following the closure of the Groups German business in June 2022, the German operations are now treated as a discontinued activity under IFRS5. The results and cashflows are therefore shown separately on the face of each of these condensed primary statements.  Further details are included in note 11.

Retained profit and earnings per share

Retained profit for the period, including discontinued operations, was £9.4m (2022: £18.9m loss).

Basic earnings per share from continuing operations was 1.64p (2022: 2.14p loss) and diluted earnings per share from continuing operations was 1.59p (2022: restricted to 2.14p loss).

Basic earnings per share from continuing and discontinued operations was 1.64p (2022: 3.65p loss) and diluted earnings per share from continuing and discontinued operations was 1.59p (2022: restricted to 3.65p loss).

The calculations for earnings/ (loss) per share are shown in the table below:

In the period to 30 September 2022, the diluted loss per share had been restricted to the basic loss per share to prevent having an anti-dilutive effect.

Cash resources and cash flow

Net funds, which comprise Cash and cash equivalents less borrowings and owned asset lease liabilities, were £15.6m (31 March 2023: £3.6m; 30 September 2022: net debt £18.6m).

At 30 September 2023, the Group's total net debt, being net funds less right of use lease liabilities, was £54.8m (31 March 2023: £76.1m; 30 September 2022: £102.3m).

Cash balances at 30 September 2023 were £22.4m (31 March 2023: £19.1m; 30 September 2022: £42.9m). The cash generation in the period was largely driven by the improved operating performance which has also enabled the Group to fully repay its revolving credit facility.

Cash drawdowns on the Group's revolving credit facility, which are classed as borrowings, were £nil at 30 September 2023 (31 March 2023: £10.0m; 30 September 2022: £55.0m). In the current period, the Group entered into a mortgage to part fund the acquisition of the site from which its main Recycling business operates and at 30 September 2023 an amount of £2.2m was outstanding being the only external borrowing at that date.

Lease liabilities of £75.0m (31 March 2023: £85.3m, 30 September 2022: £90.2m) relate primarily to right of use assets with the reduction in the period due to cash repayments.

On 6 April 2023, the Group entered into a new £80m Revolving Credit Facility which replaced its existing facility. The new facility runs to April 2026. The total amount utilised against this facility at 30 September 2023 was £3.7m relating to letters of credit/guarantees.

Working Capital

At 30 September 2023, UK inventories were £68.4m (31 March 2023: £73.1m) and UK stock days were 35 days (31 March 2023: 40 days). The reduction is partly driven by the lower sales volumes in the period albeit this has been balanced against ensuring we maintain appropriate levels to maintain customer availability.

UK trade and other receivables (both non-current and current) were £222.5m as at 30 September 2023 (31 March 2023: £230.9m).  The decrease is largely driven by the slowdown in volumes and hence revenue in our Mobile business and the subsequent reduction in the related contract asset.

UK trade and other payables were £239.6m at 30 September 2023 (31 March 2023: £253.5m). UK trade payables days at 30 September 2023 were 59 days (31 March 2023: 58 days). The reduction in retail volumes in the period has resulted in lower payables. In addition, the year on year decline in new contract connections in our Mobile business has resulted in a reduction in the amount of advanced payments from network

Capital expenditure

Cash capex of £4.1m in the first half (30 September 2022: £1.0m) was mainly related to the acquisition of the previously leased land and buildings at our Recycling site. This was part funded by a £2.2m commercial mortgage.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the 6 months ended 30 September 2023

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at 30 September 2023

CONDENSED CONSOLIDATED STATEMENT OF CHANGE IN EQUITY

At 30 September 2023

At 30 September 2022

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

For the 6 months ended 30 September 2023

NOTES TO THE FINANCIAL INFORMATION

1.   Basis of preparation

The interim financial information was approved by the Board on 21 November 2023. The financial information for the 6 months ended 30 September 2023 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 2023 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 2023 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 2023 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 2024 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 2023.

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.

Discontinued operations

Following the closure of the German operations in the previous year, the remaining principal liability of AO Deutschland Limited is now a GBP denominated intercompany balance and therefore from 1 April 2023, the functional currency of this subsidiary was changed from Euros to GBP. This has led to previous exchange differences on translation of foreign operations being recycled to the profit and loss reserve as set out in the condensed Consolidated Statement of Changes in Equity.

Furthermore, the German operations are now treated as a discontinued activity under IFRS5 and the results and cashflows are therefore shown separately on the face of each of these condensed primary statements.  Further details are included in note 11.

Non-controlling interest

In the prior year, on 22 November 2022, the Company acquired the remaining 18.4% of issued share capital in AO Recycling Limited for consideration of £2.5m. AO Recycling is now a wholly owned subsidiary and subsequently there are no non-controlling interests to report for the period.

Going concern

Notwithstanding net current liabilities of £29.4m as at 30 September 2023, 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 £80m revolving credit facility (which was renewed in April 2023 to now expire in April 2026). At 31 October 2023 total available liquidity amounted to £103.4m.

The Group annual report and accounts for the year ended 31 March 2023 were signed on 4 July 2023 for which the Directors prepared base and sensitised cash flow forecasts for the Group which covered the period to 31 March 2025 ("the going concern period"). The forecasts 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 (full details can be found in Note 3 of the Group's Annual Report and Accounts for the year ended 31 March 2023).

The Directors have considered whether the going concern conclusion for the Group accounts signed on 4 July 2023 is still appropriate for the assessment of going concern for these interim financial statements. The results for the first half of FY24 demonstrate positive variances against the base case profitability and liquidity used and whilst the potential downsides are still considered plausible, the business has not seen any material impact during the first half of the year. Therefore, given the going concern period extended to 31 March 2025, 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 which 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 the revenue recognition in respect of commission for product protection plans and network connections include significant areas of accounting estimation. 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 recognising revenue in these two 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 estimated historic rate of attrition; 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 restricted revenue in relation to improvements to plan cancellations by £3.5m principally as a result of continued uncertainties in the wider economic outlook. As with all years, other small refinements have been made but have had an immaterial impact on the revenue recognised.

The commission receivable balance as at 30 September 2023 was £93.9m (31 March 2023: £93.1m). The rate used to discount the revenue for the FY24 cohort is 5.80% (2023: 5.45%). The weighted average of discount rates used in the years prior to FY24 was 4.34% (2023: 3.91%).

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) 4.52% (2023: 2.83%);

·    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 (c4%).

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 reduction 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 assessed estimations in relation to the assumed collection of commissions once customers reach out-of-contract periods based on the performance in the period. As a result, £2.9m of revenue has been recognised in the period relating to previously restricted revenue.

The commission receivable balance as at 30 September 2023 was £71.2m (31 March 2023: £81.3m). The rate used to discount the current year revenue is 4.52% (2023: 2.83%).

Other areas of estimation uncertainty

Impairment of intangible assets and goodwill

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 2023 the carrying value amounted to £22.5m.

Goodwill and intangible assets are reviewed for impairment if events or changes in circumstances indicate that the carrying amount may not be recoverable. If no event, goodwill is reviewed for impairment on an annual basis. When a review for impairment is conducted, the recoverable amount is determined based on the higher of value in use and fair value less costs to dispose ("FVLCOD"). The value in use method requires the Group to determine appropriate assumptions (which are sources of estimation uncertainty) in relation to the cash flow projections over the forecast period, the long-term growth rate to be applied beyond the initial period and the risk adjusted pre-tax discount rate used to discount the assumed cash flows to present value.

Whilst at 30 September 2023 the Directors have concluded that the carrying value of the intangibles and goodwill is appropriate, significant changes in assumptions, which could be driven by the end customer behaviour with the Mobile Network Operators, could give rise to an impairment in the carrying value.

2.   Revenue

The table below shows the Group's revenue by each major business area. All revenue is accounted for at a point in time as the Group has satisfied its performance obligations on the sale of its products/services.

Major product/services lines

3.   Segmental analysis

Previously, the Group had two reportable segments; online retailing of domestic appliances and ancillary services to customers in the UK, and online retailing of domestic appliances and ancillary services to customers in Germany. Following the decision in June 2022 to close the German operations (which are now treated as discontinued), the UK operation is now the only reportable segment.

Operating segments are determined by the internal reporting regularly provided to the Group's Chief Operating Decision Maker. The Chief Operating Decision Maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Executive Directors and has determined that the UK operations now form three reportable segments after considering the threshold guidance in IFRS 8, being retail, logistics and recycling.

However, having consideration for the economic characteristics of each of these segments including the nature of products and services, the type of customer and methods used to distribute product, the Chief Operating Decision Maker has concluded that the majority of the Group's business is retail related and has determined it is appropriate to aggregate these segments into one reportable segment.

4.   Finance income

5.   Finance costs

6.   Goodwill

Goodwill relates to the 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 2023, goodwill acquired through UK business combinations (excluding Mobile Phones Direct Limited) was allocated to the UK cash-generating unit ("CGU") which is part of the UK operating segment.

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 2023. The recoverable amount of the CGU was determined based on the value in use calculations. The Group prepared cash flow forecasts derived from the most recent financial budget and financial plan for three years, and extrapolated cash flows for the following years, up until year five, based on an estimated growth rate of 1%. This rate does not exceed the average long term growth rate for the market. The final year cash flow is used to calculate a terminal value.

During the six months ended 30 September 2023, 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 2023.

AO Mobile - £14.7m

At 30 September 2023, the goodwill allocated to the Mobile cash generating unit ("CGU") was £14.7m. In addition to goodwill, at 30 September 2023 other intangibles stood at £7.8m.

The Group performed a full annual impairment test as at 31 March 2023 which showed there was headroom against the carrying value.

During the second quarter of the current period, a significant reduction in demand for new connections, partly driven by the significant inflationary increases applied by the networks, was evident and this trend of reduced demand is expected to continue through to the year end. With the results of the mobile business partly reliant on volume related targets, competition in the mobile market for a smaller number of connections has had a material adverse effect on the results and expected outturn of the mobile business for the current financial period compared to the forecasts used in the annual impairment review and as a result management considered this to be a trigger to perform an updated full impairment review at 30 September 2023.

Consequently, management have assessed the recoverable amount of the CGU using a value in use model. This has been based on management's Board approved forecast cashflows for the business up-to FY28 with the final year being the basis for a perpetuity calculation.

The forecasts are therefore dependent on a number of key assumptions and these include:

·      Revenue growth of 4% based on the amount expected to be applied by the networks over and above inflation each year and considering the outlook for addressable markets;

·      Total cost inflation and cost savings- between +4% and -2.5% based on publicly available expectations for inflation, managements estimate of product price changes based on industry knowledge and reductions in brand spend beyond year 1; and

·      Pre-tax discount rate - 12.6% based on the capital structure of an equivalent business and reflecting market risk and volatility due to current macro-economic uncertainty.

The total recoverable amount of the CGU is greater than it's carrying value by £0.8m in managements base case and therefore no impairment is required. However, given the minimal amount of headroom at 30 September 2023, reasonably plausible changes in assumptions could lead to a material impairment in the future as demonstrated below:

7.   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:

During the period, revenue of £0.3m which had been recognised in periods up to 31 March 2023 was reversed. This is included in the revisions to estimates above.

In relation to revenue from network connections, an amount of £3.5m was recognised in the period which had been restricted at 31 March 2023. This is included in the revisions to estimates above.

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 and therefore at 30 September 2023 amounts of £3.5m and £1.6m have been constrained in relation to revenue recognised in relation to product protection plans and network commissions respectively.

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. 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 - 5.80% (2023: 5.45%);

·      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 8 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 16 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 15 years from c.3.3m plans that have been sold. Of these, c.1.08m 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 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. 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 e.g., unemployment, but will also reflect the change in nature of the plan itself (insurance plan vs service plan). 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 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 but also the possibility that to counter any increase in cost that D&G could further increase the price per plan. The above sensitivity considers what any reasonable change in either of these 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 - 4.52% (31 March 2023: 2.83%);

·      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 albeit there could be a material upward adjustment.

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.

Prepayments and accrued income

At 30 September 2023, included in prepayments and accrued income is £8.7m (30 September 2022: £12.3m) in relation to volume rebates receivable. The amounts are largely coterminous and are mainly agreed in the month after recognition.

At 31 October 2023, the balance outstanding was £1.0m (31 October 2022: £3.5m).

8.   Trade and other payables

Contract liabilities includes payments on account from Mobile Network Operators where there is no right of set off with the contract asset and cashback liabilities due to the end customer within the mobile business.

The trade and other payables are classified as:

9.   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, for 31 March 2023 comparatives, are disclosed within the Property Plant and Equipment table 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 2023 was as follows:

On 6 April 2023, the Group entered into a new £80m Revolving Credit Facility which replaced the existing revolving credit facility and expires in April 2026. The total amount drawn at 30 September was £3.7m which relates to letters of credit/guarantees.

On 14 July, AO Recycling Limited, a wholly owned subsidiary, acquired the land and building at its Halesfield site for £3.5m. This was partly funded by a ten year commercial mortgage from HSBC of £2.2m which is shown as New borrowings in the reconciliation above.

10.  Financial Instruments

As detailed in the Group's most recent annual financial statements, our principal financial instruments consist of trade and other receivables, accrued income, cash and cash equivalents, trade and other payables and leases and borrowings. As indicated in Note 1, there have been no changes to the accounting policies for financial instruments, from those disclosed in the Company's Annual Report at 31 March 2023.

There have been no changes to the categorisation or fair value hierarchy (level three) of our financial instruments. The fair values of cash and cash equivalents, trade and other receivables, accrued income, and trade and other payables, leases and borrowings are all deemed to approximate their carrying values and these can be identified on the face of the Statement of Financial Position and accompanying notes.

11.  Discontinued operations

In June 2022, the Group announced that it had taken the decision to close its business in Germany. As a consequence, the German operations are treated as a discontinued activity under IFRS5. The tables below show the results and cashflows of the German operation for the relevant reporting periods.

Income Statement of discontinued operations

Cash flow statement

12.  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 2023.

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 41-44 inclusive of the Annual Report and Accounts 2023 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 extended producer responsibilities and the Governments Resources and Waste Strategy together with their link to 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 2023 which comprises 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 2023 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. 

David Neale

For and on behalf of KPMG LLP 

Chartered Accountants 

15 Canada Square

London

E14 5GL  

21 November 2023