Development of Earnings
In fiscal year 2006/2007, the Group achieved earnings before interest and taxes (EBIT) of EUR 3.1 million, which amounts to a decrease of 63% in comparison to the prior year. The EBIT margin thus amounted to 9.4% after a figure of 23% in 2005/2006. The main reasons for this development are the drop in revenue amounting to EUR 3 million and the additional investments in the area of research and development amounting to EUR 1.9 million.
In the region “Europe and Rest of World” earnings before interest and taxes decreased accordingly by 53%, from EUR 6.9 million to EUR 3.2 million. The decrease in the USA amounted to EUR 1.5 million, so that it was necessary to post a negative EBIT of EUR 0.1 million for that region. This result is primarily due to a decrease in revenue of EUR 1,9 million in the region.
The net income of the Group for the period reflects the changes in the EBIT. It sank in the past fiscal year by just under 51% to EUR 2.52 million.
Retained earnings thus amount to EUR 8.6 million and can be broken down into revenue reserves from fiscal year 2005/2006 amounting to EUR 6.12 million and the current net profit of the Group for the year.
Revenue
In fiscal year 2006/2007, the MAGIX Group achieved sales of EUR 32.7 million, therefore around 8.7% below the 35.8 million achieved in the prior year.
In the first quarter it was essentially the uncertainty on the part of consumers in connection with the launch of Windows Vista, as already described above, that led to a global drop in demand. In Germany this effect was additionally amplified by the imminent VAT increase. Despite increasing sales in the portal division, revenue dropped by 10.6% over this period compared with the first quarter of the fiscal year 2005/2006.
In the second and third quarter, however, it was mainly the poor results in the retail segment for the Anglo-American market that brought about the declining sales. The Group had agreed with various partners that distribution would be switched to sale on commission, meaning that the products – contrary to previous practice – are not invoiced upon shipment but only when they are sold to consumers. In return, the MAGIX Group achieved an improvement in how its products are placed in the sales areas. However, this change in the system led to a negative one-off effect which placed a considerable burden on revenue over this period. The Group had to credit products that had already been paid for at that time until they were sold on again. Alongside the revenue figures for the slowly recovering European retail segment, this switchover led to a decline in revenue of 10% in the second quarter and 14.1% in the third quarter.
While the turnaround in the USA still did not come about over the last four months of the fiscal year, the German retail segment saw a significant upward trend by the end of the fiscal year. In conjunction with the continuing growth in the portal business, this made it possible to achieve in total in the fourth quarter the revenue of the corresponding prior-year period.
Sales by Region
Sales in the various regions developed in extremely different ways over the fiscal year. This arose from special effects which did not have the same results in all areas. The following table shows the developments in both regions:
Development of sales by region
Along with the developments described above, the difficult situation in the British retail segment was primarily responsible for the decline in revenue in the “Europe and Rest of World” region in the past fiscal year. The switchover of the distribution system to sales on commission caused a drop in sales due to the related crediting of goods already invoiced.
Within this segment, the German-speaking world contributed EUR 21 million to the MAGIX Group’s revenue for the year. Comparatively speaking, this is just under the figure for the prior year – EUR 21.5 million. As the German-speaking area constitutes the most important market for the Company, the revenues from the rapidly expanding portal business are greater here than in other regions. This almost made up for the fall in revenue in the retail segment. The poorer performance in the US region led to an increase in the share of the German-speaking area in overall revenue from 60.2% to 64.5% in comparison to fiscal year 2005/2006. This share can be expected to decrease again as the situation on the US market continues to improve.
In some countries, such as Spain, Italy and the Netherlands, the Group recorded a slight growth in sales. Such growth was possible because in comparison with Germany, the market for multimedia products in these countries is relatively small, making the overall potential for growth greater.
The drop in the share of the region “USA” primarily resulted from the fundamental changes currently being experienced by the US retail trade. Some of the largest specialist retail chains closed down a considerable number of their branches in the past fiscal year. In addition to this, the sales space for software was reduced to the benefit of higher-price consumer goods. These circumstances had a negative influence on the Group’s sales. Although the US portal business increased in excess of 62% in the past fiscal year, the absolute sales figures in this area were not sufficient to balance out the drop in sales in the retail sector.
Revenue by Division
As already mentioned, development within the various business segments in the past fiscal year was mainly characterized by the specific situation in the retail trade. Due to the fact that sales did not meet expectations in that area, the portal division substantially increased its share of overall sales. The development of the individual business segments in comparison to the prior year can be seen as follows:
Development of sales by segment
The Consumer & Professional division continued to generate the largest share of the Group’s revenue in 2006/2007. As a consequence of the developments described above, revenue fell by 17.7% in comparison to the prior year. In order to counter this trend, the Group opened up various new channels of distribution in the past fiscal year. For professional audio software and the products of the newly acquired Xara Group a partner for distribution to the specialist trade in Germany was discovered in the form of what is known as the VAR Channel. Furthermore, the Company concluded various agreements with grocery stores. These stores sell less expensive special versions of the MAGIX products and thus increase the Company’s reach.
The revenue growth in the Portal business segment essentially results from the rise in the number of registered users from 4.26 to 7.03 million. This figure includes 1.2 million users that were gained through the acquisition of Xara Group Ltd. However, the remaining organic growth of 1.57 million new users practically equals the figure for the record year 2005/2006. While the revenue generated by the MAGIX portal increased by almost one third also this year, the revenue achieved with the portal partners dropped by EUR 0.2 million. Negotiations with other interested parties progressed only slowly so that it was not possible to conclude new partnerships. This resulted from the high initial investments which require an online service to be built into the partner’s website. As a consequence, the Group intends to amend its B2B strategy in order to further speed up the expansion of the portal business in the coming year.
Results in the OEM division in 2006/2007 were below those seen in the prior year. The revenue flow in the OEM division is generally very irregular as it is very dependent on the conclusion of individual agreements. Furthermore, in this business segment, the Group focuses more on the distribution of the products in large numbers of units than on generating income from license fees.
Gross Profit
The product costs developed virtually sideward over the past fiscal year. At 87.2%, the gross profit was only 0.5% under the prior year and thus still far above the figures from fiscal years 2004/2005 (84.9%) and 2003/2004 (85.3%).
The slight drop results from the fact that, as of the beginning of the past fiscal year, the Group has been combining various products with hardware in its audio division, and this increases product costs. As an example of this, a music creation program is supplied together with a keyboard or software for making copies of records is using a pre-amplifier. Selling these products as a package has the advantage that the MAGIX Group’s range of products is also present in different sales areas of the retail business, for example in the instrument department.
In absolute terms, the margin was 9.3% under the prior year at EUR 28.5 million due to the revenue development already depicted.
Product costs at MAGIX comprise cost of materials for packaging and any third-party licenses for “codecs”. All other production steps are performed by the MAGIX Group, meaning that no other costs are incurred.
The aforementioned codecs are based on standard media formats, such as the established mp3 format. As it would not make economic sense to develop these functions internally, licenses for the use of intellectual property must be paid. The Group has drawn up its license agreements in such a way that payments only have to be paid when the codec is actually used by the consumer. This leads to a significant reduction in payments for third-party licenses.
Cost Structure
Without taking amortization, depreciation and write-downs into consideration, the operating expenses in fiscal year 2006/2007 increased by 7.7% to EUR 22.9 million, as the Group invested in the development of new technology independently of the negative revenue development. Amortization, depreciation and write-downs increased by 29% over the reporting period from EUR 2.3 million in the prior year to just under EUR 3 million. This increase primarily results from the customer base and the software development of Xara Group Ltd. as well as additional intangible assets of MAGIX AG and MAGIX Development GmbH.
In detail, operating costs (excluding amortization, depreciation and write-downs) developed as follows:
Operating Expenses (excluding depreciations)
Consequently, the greatest increase was seen in the “Research and Development” (R&D) division due to the investment in new technologies. Within this division, the department responsible for preparing Internet services was expanded in particular; it is here that the new online portals “myGoya” and “mufin” were developed. In addition to this, the acquisition of the Xara Group also led to an expansion of the development department. After a significant increase in fiscal year 2005/2006, the costs for R&D consequently rose once again by 33.7%, meaning that their portion of revenue climbed from 12.7% to 18.6%. Once there is a positive revenue development this portion will decline again.
The increase in administrative costs primarily results from currency differences and loss of receivables. While these two cost items increased by around EUR 0.4 million, personnel expenses were lowered by 1%.
In contrast to this, it was possible to slightly lower the costs in the “Distribution” division. In times of weak consumption by final customers, promotional activities often fall flat without bringing about the corresponding revenue increase. For this reason, marketing expenditure was significantly decreased in the past fiscal year. The savings achieved were able to compensate for the slight increase in personnel expenses and the additional costs arising from the acquisition of Xara Group.
Operating expenses excluding depreciations (in % of revenues)