Last checked at 7 Sep 2017 07:00
Frontier Developments plc
Year End Results
Record results: profits increase 550% as business transition completes
Frontier Developments plc (AIM: FDEV, "Frontier", the "Company"), a leading developer of video games based in Cambridge, UK has published its full year results for the 12 months to 31 May 2017.
Overview
Frontier's objective of transitioning to a business-to-consumer video game developer with multiple self-published revenue generating franchises has been successfully completed. The launch of our second franchise, Planet Coaster, combined with continued strong performance from Elite Dangerous drove a step-up in all financial measures. Our third franchise, based on the Jurassic World movie franchise, is on track for launch in summer 2018.
After successfully proving our ability to launch franchises, our ambition is to continue our evolution to create a self-publishing multi-franchise success story. Ongoing investment in our people, organisation and facilities, supported by the proceeds from the £17.7 million strategic investment by Tencent completed in July 2017, will enable the business to continue scaling up.
Financial Summary
| FY17 (12 months to 31 May 2017) | FY16 (12 months to 31 May 2016) | % change |
Revenue | £37.4m | £21.4m | 75% |
Operating Profit | £7.8m | £1.2m | 550% |
Operating Margin % | 21% | 6% | 15% |
EBITDA* | £12.7m | £4.9m | 159% |
EPS (basic) | 22.7p | 4.2p | 440% |
Operating Cash Flow | £3.4m | (£2.7m) | n/a |
Net Cash Balance | £12.6m | £8.6m | 47% |
*Earnings before interest, tax, depreciation and amortisation
Operational & Strategic Highlights
· The Company's transition to a fully self-publishing business model was completed in November 2016 with the successful launch of Frontier's second franchise, Planet Coaster. In July 2017 Planet Coaster's first paid additional downloadable content was launched.
· Elite Dangerous, which launched in December 2014, continues to perform well. In June 2017 the franchise's addressable audience was further expanded with release on the Sony PlayStation 4 platform.
· Frontier's next major game franchise, based on the Jurassic World movie franchise, was revealed in August 2017. Jurassic World Evolution is planned for launch in summer 2018 alongside the movie launch of Jurassic World: Fallen Kingdom.
· £17.7 million was raised in July 2017 through a strategic investment from Tencent, a leading Internet and interactive entertainment company based in China. This will improve and accelerate Frontier's growth into the key Chinese market and help drive scale-up of the business.
Financial Highlights
· Total revenue grew 75% to £37.4 million (FY16: £21.4 million) as the launch of the Planet Coaster franchise in November 2016 drove a step-up in annual sales.
· Self-publishing revenue of £36.4 million (FY16: £21.1 million) accounted for 97% of total revenue with the balance being related to our legacy work-for-hire business.
· Operating profit grew by 550% to £7.8 million (FY16: £1.2 million) representing an operating margin of 21% (FY16: 6%) and EBITDA increased to £12.7 million (FY16: £4.9 million).
· Operating cash flow (operating profit excluding non-cash items, less investments in franchises and other intangible assets) was an inflow of £3.4 million (FY16: outflow of £2.7 million).
· Cash balances increased £4.0 million during the year to £12.6 million (FY16: £8.6 million). Following the £17.7m strategic investment by Tencent the Company's cash balance was £27.5 million on 31 August 2017.
Current Trading and Outlook
The Board have been encouraged by trading since the year end (31 May 2017). The number of players of Frontier's games continues to grow. In August 2017, Planet Coaster, which launched in November 2016, passed 1 million cumulative franchise units, and Elite Dangerous, which launched in December 2014, exceeded 2.75 million franchise units.
We have further expanded the addressable audience for Elite Dangerous by launching on PlayStation 4 in June 2017. During the summer Planet Coaster and Elite Dangerous participated in successful price promotions on our major distribution channels with the Steam & Xbox Summer Sale events. These events were in turn supported by major updates for each game as we followed our strategy of continuing to further enhance the experiences they deliver.
We launched our first in-game Paid Downloadable Content (PDLC) for Planet Coaster in July 2017, and announced that Elite Dangerous 2.4 'The Return' will be released in September 2017 which supports the on-going story arc related to Thargoids, the franchise's first alien species.
In August 2017 we announced that our third franchise, Jurassic World Evolution, will launch in summer 2018 on PC, PlayStation 4 and Xbox One simultaneously. In 2015, Universal Pictures' Jurassic World became one of the biggest blockbusters in cinema history, grossing more than $1.67 billion at the global box office on its way to becoming the third-highest-grossing film of all time. Jurassic World Evolution will launch in the year that Universal Pictures' celebrates the 25th anniversary of the original Jurassic Park film, and the next chapter of the franchise Jurassic World: Fallen Kingdom will be in theatres June 2018.
We anticipate that the next step-up in our financial performance will be delivered by the launch of Jurassic World Evolution in summer 2018. The Board currently expect that the majority of initial revenues from this new franchise will fall into the financial year ending 31 May 2019, as the Jurassic World: Fallen Kingdom movie is released in June 2018. The Board therefore anticipates that trading in the current financial year, the twelve months ending 31 May 2018, will principally be based on sales from the Elite Dangerous and Planet Coaster franchises.
The Board is excited about the growth opportunities ahead in the coming years, as existing franchises continue to be strengthened and new franchises are developed and launched. Frontier is developing, evolving and investing in our people, organisational structure and facilities to effectively create, develop, market and sell even more distinct franchises aimed at different audience segments to achieve the Company's ambition to create a self-publishing multi-franchise success story.
David Braben, Chief Executive, said:
"We have successfully transitioned our business model, and I am delighted with the performance of both Planet Coaster and Elite Dangerous. Our next franchise, Jurassic World Evolution, is in development and scheduled for launch in summer 2018. We believe that developing our business to achieve repeatable success requires scale. We are continuing to grow our capability and over time we aim to double our output, from roughly one major launch every two years, to one every 12 months or so.
I'd like to thank our fantastic team who have already achieved so much and to our many players around the world who continue to make it all possible. However, we are at the start of our journey; our long term ambition is to become a global leader in entertainment and Tencent's recent strategic investment will help drive our scale-up plans."
Enquiries:
Frontier Developments +44 (0)1223 394 300
David Braben, CEO
David Walsh, COO
Alex Bevis, CFO
Liberum - Nomad and Joint Broker +44 (0)20 3100 2000
Neil Patel / Cameron Duncan
finnCap - Joint Broker +44 (0) 207 220 0500
Matt Goode/Giles Rolls
Alice Lane
Tulchan Communications +44 (0) 207 353 4200
James Macey White/Matt Low
About Frontier Developments plc
Frontier Developments plc, listed on the AIM stock market (AIM: FDEV), is a leading independent creator of self-published videogame franchises founded in 1994 by David Braben, co-author of the seminal 'Elite' game. Based in Cambridge, Frontier uses its proprietary 'COBRA' game development technology to create innovative games, currently focusing on videogame consoles and personal computers.
www.frontier.co.uk
About Elite Dangerous
Elite Dangerous - available for Windows PC, Apple Macintosh, Microsoft Xbox One and Sony PlayStation 4 - is the definitive massively multiplayer space epic, bringing gaming's original open world adventure to the modern generation with a connected galaxy, evolving narrative and the entirety of the Milky Way re-created at its full galactic proportions.
www.elitedangerous.com
About Planet Coaster
Planet Coaster - available for Windows PC - builds on Frontier's genre-defining expertise with coaster park games such as RollerCoaster Tycoon 3 and Thrillville. It further raises the bar for this popular genre, allowing players to let their imaginations run wild as they surprise, delight and thrill incredible crowds, and share their success with the world via the Steam Workshop community.
www.planetcoaster.com
About Jurassic World Evolution
Jurassic World Evolution - launching in summer 2018 for Windows PC, Microsoft Xbox One and Sony PlayStation 4 - evolves players' relationship with the Jurassic World film franchise, placing them in control of operations on the legendary islands of Isla Nublar and the surrounding islands of the Muertes Archipelago. Players will create and manage their own Jurassic World as they bioengineer new dinosaur breeds, and construct attractions, containment and research facilities. Every choice leads to a different path and spectacular challenges arise when 'life finds a way'.
www.jurassicworldevolutiongame.com
Chairman's Statement
I am pleased to report on a very satisfying year in Frontier's continued development. We fulfilled the transition of our business to our chosen multi-franchise self publishing model with the successful launch of our second franchise, Planet Coaster, and we are excited about the potential for our third franchise, Jurassic World Evolution. Meanwhile, Elite Dangerous continues to grow its addressable audience and is performing well.
Our long-term ambition is to become a global leader in entertainment and we are scaling up to continue our multi-franchise success story. Our recent strong self-publishing performance, as well as our long history of delivery and capability, positions us very well to achieve this. We have established a scale-up plan to achieve our next step which includes investments in people, organisation, geographical distribution and facilities. To support these plans we took a strategic investment from Tencent in July 2017, raising £17.7 million. This will enable us to further deepen the success of our franchises, reach new audiences, enrich the audience experience and continue to grow their number.
We continue to develop our organisation to fulfil our goals. In particular, we are focussing on our management teams and our infrastructure. As noted in last year's report, Jonathan Milner stepped down from the Board as a Non-Executive Director in July 2016 and Charles Cotton joined in his place. I would like to again express my thanks to Jonathan, who was a great help during our transition. Charles has a successful worldwide track record in high growth technology companies and has been a valuable source of advice and wisdom since he joined the Board. In April 2017 we further strengthened the Board with the appointment of Alex Bevis as CFO and Company Secretary. Alex brings extensive board experience as VP Finance and CFO of high technology growth companies from his work at CSR plc and Xaar plc.
I am delighted with our results and excited about our future. On behalf of the Board, I take this opportunity to thank our people for their dedication, engagement, skill and professionalism that has produced such pleasing progress for the Company.
Chief Executive's Statement
In 2013 we set out our plan to transition the business from work-for-hire to multi-franchise self-publication. The rise of digital distribution was the catalyst for our change, and our extensive experience in the games industry gave us the confidence to make the switch.
Four years later I am delighted with our achievements; we have overcome a number of challenges to transform our business model with two successful franchises, Planet Coaster and Elite Dangerous already in the market, and more to come. Our next major development, Jurassic World Evolution, is progressing well, and is scheduled for launch in summer 2018. I would like to thank our amazing team who have achieved so much since our decision to transition our business four years ago.
THE GAMES MARKET
We operate in an exciting industry. The games market is now the premier form of entertainment worth over $100bn per year, in the wider $300bn entertainment industry. That's larger than each of the film, TV or music industries, with the games sector overtaking film in 2017. The games sector is growing fast, increasing at 8% per year, with TV experiencing a decline of 8%.
Today the games market is split into three roughly comparable sectors by revenue: PC, console and mobile. However, the characteristics of each sector are quite different. Frontier has chosen to prioritise the PC and console sectors where audiences value high quality games, and that quality is a key determinant of success. In contrast the mobile sector is overcrowded, so success can be a lot more hit-and-miss.
The whole market is moving rapidly to digital downloads. Mobile and PC are now almost 100% digital, and consoles are at approximately 50% but are quickly moving to digital downloads, as focus moves from older consoles to the new generation, and older business models are gradually replaced.
There are already some very large and well established companies in the games market; for example EA and Activision Blizzard both based in the US, who have a combined value of over $80 billion. The nature of our industry is change and evolution, and it is interesting to see the rapid development of companies like Valve Inc (with their Steam platform) in the US and Tencent in China, based on their focus on the opportunities that digital distribution presents. It is also clear that the model Frontier has already adopted - supporting our games continually with community and regular updates: essentially 'games as a service' - is working very well, and has meant that the two franchises already released have continued to perform.
Strategy
We believe that publishing our own franchises is the best way to maximise the benefit of our core skills, assets and our COBRA technology platform. The Company's focus is on developing top quality self-published PC and console titles for digital distribution, as together these segments represent the majority of the available market by revenue. Generally the audiences on these platforms value high quality games, and quality is one of Frontier's key development strengths.
We will also continue to follow our repeatable model; to create further franchises in potentially successful but under-served sectors where we have key expertise and knowledge and/or IP, in order to further build our revenue pipeline over the long term.
Our strategic objective is to create long term sustainable growth through success in a multi-franchise self-publication business model. Our strategic focus is on two key areas:
· Developing our business to achieve repeatable success
· Creating and managing franchises
Further detail is set out in the strategy section of this report, but I'd like to briefly comment on the first area.
We believe that developing our business to achieve repeatable success requires scale. Over time we aim to double our output, from roughly one major launch every two years, to one every 12 months or so. To do this we will grow our capability to accelerate our progress, although it does not mean we need to double our workforce. We have established a scale-up plan, to expand our team, to invest in facilities and organisational development.
Strong partnerships have always been vital to our success. In our past as a work-for-hire developer we worked successfully with many prestigious industry partners including Atari, Lucasfilm, Microsoft and Sony, and became well-known in the games industry for our development track-record of innovation, quality and delivery.
Our new business model of self-publication has required us to build new partnerships. Our commercial partners now include Valve Inc (with their Steam platform), Humble Store and the distribution channel teams at both Microsoft and Sony - we are also excited to be partnering with Universal on the Jurassic World Evolution project.
I look forward to working with Frontier's people and our partners to build on our early self-publishing success and establish a new long-term, self-published track record of quality, innovation and delivery as we scale-up to create a multi-franchise success story.
Strategic report
1. Developing our business to achieve repeatable success
We invest our development resources in games with strong franchise potential. In order to maximise the return on our core skills and assets we target game genres where we have established expertise and intellectual property.
We continue to invest in our organisation to create a model of repeatable success. To accelerate our progress and increase the frequency of launches we are scaling up our organisation; not just in terms of staff numbers, but also in terms of leadership skills, training, organisational structure and process.
We are also investing in facilities. It is our belief that having all our people in Cambridge working together in a single building will maximise our operational effectiveness and efficiency, and in Spring 2018 we will achieve this when we move into new office space on the Cambridge Science Park.
Our development focus is on PC and console titles, as together these segments represent the majority of the available market by revenue and generally the audiences on these platforms have valued games that exhibit Frontier's key development strengths.
We use online channels to create and engage with a fan-base or community during game development, which provides a valuable source of feedback and an enthusiastic community for each franchise before first release.
Our development process uses our proprietary COBRA development tools and technology to facilitate innovative features and the creation of top quality self-published games with strong differentiation for the PC and console audiences. Our control of this technology also removes risk related to ongoing access to 3rd party licensed technology alternatives, risk relating to ability to fix uncovered problems in that technology and lack of control over the delivery dates and feature roadmap of such solutions. It also facilitates rapid response to market opportunities like support for Virtual Reality and Augmented Reality.
We continue to assess the distribution channels and platforms we use to achieve an optimal addressable audience for each game, and the monetisation strategy for each franchise. We participate in price promotions on each of the distribution platforms we use for each of our games as appropriate to its life-cycle stage, allowing us to reach the widest possible audience.
We also monitor the geographical performance of our franchises and will continue to look for opportunities to tailor our local price to a level more appropriate to the local economy, as we did with Planet Coaster in China in February 2017. In particular we note the growing Chinese market for premium PC games. Importantly, the recent strategic investment in our business by Tencent will allow us to more easily take advantage of their unparalleled expertise and distribution capabilities in their home market for our franchises.
Major new releases will be key drivers of revenue. Because of the small number of franchises and relatively infrequent major releases Frontier is currently able to make, revenue is sensitive to the specific schedule of such releases and may therefore exhibit 'stepped' behaviour, as those new franchises are released. In the future, as we successfully scale the number and frequency of franchise releases, annual revenue growth should accelerate and our dependency on each major release should decrease.
2. Creating and managing franchises
OVERVIEW
In order to maximise the return on our core skills and assets we target game genres on PC and Console platforms where we believe we can both i) deliver high quality, differentiated offerings using our established expertise and intellectual property, and ii) have a strong chance of successful market entry, based on past experience or knowledge of that sector.
We use this repeatable model to invest our resources with the intention of creating world-class games with strong franchise potential, and plan for strong post-launch franchise support to further help realise this potential.
We will continue to grow the capacity and capability of our organisation in both commercial and development areas in order to further the successful evolution of our franchises.
As part of this process, we will explore potential partnerships and licensing opportunities. We will also continue to review potential acquisition targets that could augment our capacity or add new capabilities as well as IP that may help us achieve our goals.
We will endeavour to enhance and expand our franchises and grow their audiences using appropriate additional products, platforms, media, marketing, distribution channels, and charging models through investing in the necessary people, organisation, resources and infrastructure.
ELITE DANGEROUS
Elite Dangerous is now in its third year of full release. We have continued to release expansions in the Elite Dangerous: Horizons season, and corresponding updates to the original Elite Dangerous game, simultaneously on both PC and Xbox One platforms following the launch of Horizons on Xbox One in June 2016.
Simultaneous releases on all supported platforms is planned to continue going forward, including Sony's PlayStation 4 following the franchise's debut on the platform in June 2017, after the end of the financial year, which significantly expanded its addressable audience.
These updates add to the quality of the game, renew the interest of existing players, and also generate additional coverage resulting in new sales. The attach rate of Elite Dangerous: Horizons to the base game continues to grow steadily, helped by the regular updates.
Having the base game and Horizons expansions in the market covers mid-price entry to the franchise with an upgrade path, and we bundle the two together and add some digital items to create a Deluxe edition for a premium price point entry. We believe each product in the franchise offers great value, and our further in-game monetisation avoids 'pay-to-win' game mechanics.
The Horizons Season of Expansions
Each expansion offers new headline gameplay features plus a large number of quality of life and other tweaks, fixes and improvements, and there is an accompanying '1.x' update to the base game.
2.0 'Planetary Landings' was launched in December 2015, and expanded gameplay to planetary surfaces for the first time.
2.1 'The Engineers' was launched on PC in May 2016 and Xbox One in June 2016, which added loot and crafting mechanics to the game to allow players to upgrade the performance of their ship and weapons.
2.2 'The Guardians' was launched in October 2016 and expanded the gameplay possibilities of each ship by adding ship-launched fighters.
2.3 'The Commanders' was launched in April 2017, and offered the ability for multiple players to crew a ship and represented player characters in game with sophisticated customisation options.
2.4 'The Return' will be released in September 2017, and supports the on-going story arc related to Thargoids, the franchise's first alien species, and their interactions with humans in the Elite Dangerous galaxy.
The release of 2.4 'The Return' will complete the Horizons season of expansions. Horizons will continue to be sold as a substantial expansion product with all content available at the time of purchase. We have announced that the 'season' model will be superseded by an alternative model of expansion after 2.4.
The Elite Dangerous franchise continues to perform strongly and we continue to focus on enhancements within the strategy of further improving perceived quality and sentiment, adding significant long-term new features and supporting the unique evolving player-driven story, which all players experience together. We expect to further expand the player base over the next financial year, adding new content and increasing the audience.
PLANET COASTER
Planet Coaster was successfully launched in November 2016 after a short Beta period, achieving the global #1 position on the Steam distribution channel and continuing to sell strongly through the subsequent holiday period. In accordance with our strategy we began to release free updates, each of which add headline features but also expand and improve different creative and management aspects of the game.
The Winter update was released in December 2016 with something for all players. In addition to new rides being added, there were further improvements to streamline management operations within parks, new scenarios, new shops, new transport rides and a new snowy Winter theme.
The Spring update was released in April 2017 and added security guard staff members and go-karts tracked rides for players to use in their parks, along with more rides, coasters, scenarios and further management improvements, as well as doubling the maximum size of blueprints that can be shared via Steam workshop to 4,000 pieces.
The Summer update was released in June 2017 and added customisable firework displays and video billboards for players to place in their parks, as well as more rides, coasters, scenarios and further management improvements plus a new Stars and Stripes scenery set.
At the time of writing we have announced a Fall update, and further details will be released in due course.
This update strategy is intended to further improve perceived quality and sentiment by adding significant long-term new features. Such updates add to the quality of the game, renew the interest of existing players, and also generate additional coverage resulting in new sales.
In July 2017 we released our first paid downloadable content ('PDLC'). As with Elite, this follows an in-game monetisation model that avoids 'pay-to-win' mechanics. We will continue to expand Planet Coaster's PDLC offering, as we have with Elite Dangerous.
We believe Planet Coaster offers great value at its current price-point and we anticipate franchise revenue over multiple years, similar to that seen with our RollerCoaster Tycoon 3 game from 2004 in the same genre.
JURASSIC WORLD EVOLUTION
Our third franchise, Jurassic World Evolution, was identified using the same approach described above that we used for Elite Dangerous and Planet Coaster. Our original concept for Jurassic World Evolution would leverage our management and builder game expertise, plus our unrivalled expertise implementing believable in-game animals from games such as Dog's Life, Kinectimals and Zoo Tycoon. In this case we felt that being able to use the Jurassic World IP would significantly benefit awareness with the next movie in the franchise to be released in June 2018, around the 25th anniversary of the original movie.
Jurassic World Evolution was announced in August 2017 for PC, Xbox One and PlayStation 4 that will be released in Summer 2018.
Jurassic World Evolution evolves players' relationship with the Jurassic World film franchise, placing them in control of operations on the legendary islands of Isla Nublar and the surrounding islands of the Muertes Archipelago. Players will create and manage their own Jurassic World as they bioengineer new dinosaur breeds, and construct attractions, containment and research facilities. Every choice leads to a different path, and spectacular challenges arise when 'life finds a way.'
Jurassic World Evolution will be Frontier's first self-published title (although not our first game) to debut on PC, PlayStation and Xbox simultaneously, and the first to benefit from such major marketing events in 2018 as the celebration of 25 years of Jurassic Park and the launch of the next film in the franchise, Jurassic World: Fallen Kingdom.
We will reveal more details of Jurassic World Evolution at FrontierExpo in London in October 2017, our first community event dedicated to all of Frontier's franchises.
FUTURE FRANCHISES
We are already scaling up for the future so we can release games more frequently. As well as Jurassic World Evolution being in full production we are in the early stages of planning our next two, as yet unannounced franchises.
All future franchises will be selected using the same approach described above that was used for Elite Dangerous, Planet Coaster and Jurassic World Evolution. The use of external IP in Jurassic World Evolution does not imply that this will be the case for all our future franchises; we will continue to review all possibilities to determine the optimum strategy for each franchise on a case-by-case basis. We are building a broad portfolio of franchises, each different to the last, and each with the capabilities to expand over time, as we have already seen with Elite Dangerous and Planet Coaster.
Financial Review
OVERVIEW
The Company achieved a significant step-up in financial performance in the year ended 31 May 2017, as the transition from a work-for-hire business model to multi-franchise self-publishing was completed through the launch of Planet Coaster in November 2016. The addition of this second franchise helped boost annual revenue by over 75% to £37.4 million and operating profit grew by 550% to £7.8 million. Cash flow was also strong, with an increase of £4.0 million in the year to £12.6 million. Cash balances were further boosted by the £17.7million strategic investment in July 2017; cash balances at 31 August 2017 stood at £27.5 million.
TRADING
Total annual revenue grew 75% to £37.4 million (FY16: £21.4 million) as the launch of the Planet Coaster franchise in November 2016 drove a step-up in annual sales. The Elite Dangerous franchise continued to perform strongly in the year, supported by on-going developments to further improve quality, add new features and support the unique evolving player-driven story.
Self-publishing revenue accounted for 97% of sales (FY16: 99%) with the balance being related to our legacy work-for-hire business. This legacy revenue included COBRA licensing, as a publisher partner took up two options in FY17 under previous work-for-hire contracts to license COBRA to facilitate ports of existing games to new platforms. Licensing our COBRA technology to new customers is not a current focus and remains a future strategic opportunity that we will continue to evaluate.
Gross profit grew to £27.4 million in the year (FY16: £16.3 million) with gross margin at 73% (FY16: 76%). The largest element of cost of sales is the margin payable to our digital distribution partners.
Gross research and development expenses in the period were £12.7 million (£12.6 million) with the majority of spend being internal staff costs. Capitalisation of development costs on franchise assets and other intangibles accounted for £9.6 million in FY17 (FY16: £8.9m). Amortisation charges grew to £4.5 million (FY16: £3.3 million) following the launch of Planet Coaster in November 2016. Net research and development expenses recorded in the income statement in the year were therefore £7.6 million (FY16: £7.0 million), being gross spend, less capitalised costs, plus amortisation charges.
Sales, marketing and administrative expenses grew £3.9 million to £11.9 million (FY16: £8.0 million). The increase was due to a combination of factors; investments in staff, facilities and marketing, higher bonus charges and forward contract related foreign exchange losses.
The growth in revenue in the period resulted in a significant increase in profits. Operating profit grew by 550% to £7.8 million (FY16: £1.2 million) representing an operating margin of 21% (FY16: 6%) and EBITDA (earnings before interest, tax, depreciation and amortisation) increased to £12.7 million (FY16: £4.9 million).
Corporation tax charges in the period were minimal overall at £0.1 million (FY16: a credit of £0.2 million) despite the growth in profits. This was due to a combination of brought forward tax losses and Video Games Tax Relief.
Profit after tax increased to £7.7 million (FY16: £1.4 million) and basic earnings per share increased by a similar proportion (FY17: 22.7 pence, FY16: 4.2 pence).
BALANCE SHEET AND CASH FLOW
The Company continued to run a robust balance sheet during the financial year, and this was further boosted by the strategic investment completed in July 2017.
Non-current intangible and tangible assets increased by £5.6 million to £22.6 million at 31 May 2017 (FY16: £17.0 million) as investments in franchise assets and other intangibles exceeded amortisation charges.
The balance of trade and other receivables was £2.9 million at the end of the period (FY16: £2.4 million), lower than the trade and other payables balance which totalled £4.9 million (FY16: £3.1 million). The increase in payables was in part due to a higher bonus provision following the strong growth in financial performance.
Total deferred income reduced to £1.4 million at the period end (FY16: £2.2 million) as a result of the launch of Planet Coaster, as pre-sales in the previous financial year had been deferred.
Cash balances increased £4.0 million during the year to £12.6 million (FY16: £8.6 million). Operating cash flow (operating profit excluding non-cash items, less investments in franchises and other intangible assets) accounted for £3.4 million of the increase (FY16: an operating cash outflow of £2.7 million).
Following the £17.7m strategic investment by Tencent the Company's cash balance was £27.5 million on 31 August 2017. In addition the Company has a £4 million overdraft facility with Barclays. Frontier's scale-up plans, which include significant investments in people and facilities, are fully supported by existing financial resources.
Share Issues
Employees exercised options over 359,150 Ordinary Shares during the 12 months to the end of May 2017. 241,150 of these Ordinary Shares were transferred under arrangements with the Employee Benefit Trust with the remaining 118,000 Ordinary Shares being newly issued shares.
In July 2017 the company completed a strategic investment with Tencent Holdings Limited. Tencent acquired 3,386,252 newly issued Ordinary Shares at 523.2 pence per share generating proceeds of £17,716,870.
CONSOLIDATED INCOME STATEMENT | |||
FOR THE YEAR ENDED 31 MAY 2017 |
|
|
|
|
|
|
|
| Notes | 31 May 2017£'000 | 31 May 2016£'000 |
Revenue | 3 | 37,363 | 21,366 |
Cost of sales |
| (10,007) | (5,098) |
Gross profit |
| 27,356 | 16,268 |
Research and development expenses |
| (7,630) | (6,989) |
Sales and marketing expenses |
| (4,310) | (3,887) |
Administrative expenses |
| (7,624) | (4,154) |
Operating profit |
| 7,792 | 1,238 |
Finance income |
| 21 | 37 |
Profit before tax |
| 7,813 | 1,275 |
Income tax |
| (102) | 157 |
Profit for the period attributable to shareholders |
| 7,711 | 1,432 |
Earnings per share |
|
|
|
Basic earnings per share | 4 | 22.7 | 4.2 |
Diluted earnings per share | 4 | 22.4 | 4.1 |
|
|
|
|
All the activities of the Group are classified as continuing.
|
|
|
|
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME | |||
FOR THE YEAR ENDED 31 MAY 2017 |
|
|
|
|
|
|
|
|
| 31 May 2017£'000 | 31 May 2016£'000 |
Profit for the period |
| 7,711 | 1,432 |
Other comprehensive income: |
|
|
|
Exchange differences on translation of foreign operations |
| 57 | (4) |
Total comprehensive income for the period attributable to the equity holders of the parent |
| 7,768 | 1,428 |
CONSOLIDATED STATEMENT OF FINANCIAL POSITION | |||
AS AT 31 MAY 2017 |
|
|
|
(REGISTERED COMPANY NO: 02892559) |
|
|
|
| Notes | 31 May 2017£'000 | 31 May 2016£'000 |
Non-current assets |
|
|
|
Intangible assets | 5 | 21,871 | 16,690 |
Property, plant and equipment |
| 696 | 304 |
|
| 22,567 | 16,994 |
Current assets |
|
|
|
Inventories |
| - | 9 |
Trade and other receivables |
| 2,941 | 2,443 |
Other short-term assets |
| 510 | 376 |
Cash and cash equivalents |
| 12,579 | 8,610 |
|
| 16,030 | 11,438 |
Total assets |
| 38,597 | 28,432 |
|
|
|
|
Current liabilities |
|
|
|
Trade and other payables |
| (4,894) | (3,073) |
Deferred income |
| (459) | (1,085) |
Current tax liabilities |
| (747) | (89) |
Provisions |
| (275) | - |
|
| (6,375) | (4,247) |
Net current assets |
| 9,655 | 7,191 |
|
|
|
|
Non-current liabilities |
|
|
|
Provisions |
| - | (273) |
Deferred income |
| (927) | (1,148) |
|
| (927) | (1,421) |
Total liabilities |
| (7,302) | (5,668) |
Net assets |
| 31,295 | 22,764 |
|
|
|
|
Equity |
|
|
|
Share capital |
| 171 | 170 |
Share premium account |
| 14,601 | 14,476 |
Equity reserve |
| 972 | 579 |
Foreign exchange reserve |
| (4) | (61) |
Retained earnings |
| 15,555 | 7,600 |
Total equity |
| 31,295 | 22,764 |
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY | ||||||
FOR THE YEAR ENDED 31 MAY 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Share Capital £'000 | Share premium account £'000 | Equity reserve £'000 | Foreign exchange reserve £'000 | Retained earnings £'000 | Total equity £'000 |
At 31 May 2015 | 168 | 13,963 | 633 | (57) | 6,180 | 20,887 |
Profit for the year | - | - | - | - | 1,432 | 1,432 |
Other comprehensive income: |
|
|
|
|
|
|
Exchange differences on translation of foreign operations | - | - | - | (4) | - | (4) |
Total comprehensive income for the year |
|
|
| (4) | 1,432 | 1,428 |
Issue of share capital net of expenses | 2 | 513 | - | - | - | 515 |
Share-based payment charges | - | - | 738 | - | - | 738 |
Share-based payment transfer relating to option lapses | - | - | 12 | - | (12) | - |
EBT share inflows from issues and/or purchases | - | - | (1,164) | - | - | (1,164) |
EBT share outflows from option exercises | - | - | 360 | - | - | 360 |
At 31 May 2016 | 170 | 14,476 | 579 | (61) | 7,600 | 22,764 |
Profit for the year | - | - | - | - | 7,711 | 7,711 |
Other comprehensive income: |
|
|
|
|
|
|
Exchange differences on translation of foreign operations | - | - | - | 57 | - | 57 |
Total comprehensive income for the year |
|
|
| 57 | 7,711 | 7,768 |
Issue of share capital net of expenses | 1 | 125 | - | - | - | 126 |
Share-based payment charges | - | - | 687 | - | - | 687 |
Share-based payment transfer relating to option lapses | - | - | (244) | - | 244 | - |
EBT share inflows from issues and/or purchases | - | - | (318) | - | - | (318) |
EBT share outflows from option exercises | - | - | 268 | - | - | 268 |
At 31 May 2017 | 171 | 14,601 | 972 | (4) | 15,555 | 31,295 |
| CONSOLIDATED STATEMENT OF CASHFLOWS | ||
FOR THE YEAR ENDED 31 MAY 2017 |
|
|
| 31 May 2017£'000 | 31 May 2016£'000 |
Cash generated from operations | 4,184 | (1,147) |
Taxes received/(paid) | 456 | (126) |
Cashflow from operating activities | 4,640 | (1,273) |
Investing activities |
|
|
Purchase of property, plant and equipment | (633) | (233) |
Expenditure on intangible assets (excluding capitalised development costs) | (157) | (108) |
Interest received | 21 | 37 |
Cashflow from investing activities | (769) | (304) |
Financing activities |
|
|
Proceeds from issue of share capital | 125 | 276 |
Employee Benefit Trust net investment | (50) | (563) |
Cashflow from financing activities | 75 | (287) |
Net change in cash and cash equivalents from continuing operations | 3,946 | (1,864) |
Cash and cash equivalents at beginning of period | 8,610 | 10,478 |
Exchange differences on cash and cash equivalents | 23 | (4) |
Cash and cash equivalents at end of period | 12,579 | 8,610 |
|
|
|
The accompanying notes form part of this financial information.
|
|
|
Reconciliation of operating profit to cash generated from operations |
| |
| 31 May 2017£'000 | 31 May 2016£'000 |
Operating profit | 7,792 | 1,238 |
Depreciation and amortisation | 4,864 | 3,638 |
EBITDA | 12,656 | 4,876 |
Capitalised development costs | (9,647) | (8,857) |
Movement in unrealised exchange (gains)/losses on forward contracts | (337) | 551 |
Share-based payment expenses | 687 | 738 |
Operating cashflow | 3,359 | (2,692) |
Net changes in working capital: |
|
|
Change in inventories | 9 | 4 |
Change in trade and other receivables | (479) | 603 |
Change in trade and other payables | 1,293 | 925 |
Change in provisions | 2 | 13 |
Cash generated from operations | 4,184 | (1,147) |
NOTES TO THE FINANCIAL INFORMATION
1. CORPORATE INFORMATION
Frontier Developments plc 'the Group' develops video games for the interactive entertainment sector. The Company is a public limited company and is incorporated and domiciled in the United Kingdom.
The address of its registered office is 306 Science Park, Milton Road, Cambridge CB4 0WG.
The Group's operations are based in the UK and its North American subsidiary, Frontier Developments Inc, in the US.
2. BASIS OF PREPARATION AND STATEMENT OF COMPLIANCE
The principal accounting policies applied in the preparation of this financial information are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated.
Basis of preparation
The financial information of Frontier Developments plc has been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU) and the Companies Act 2006 applicable to companies reporting under IFRS.
The financial information has been prepared under the historical cost convention, except for financial instruments held at fair value. The financial information is presented in Sterling, the presentation and functional currency for the Group and Company. All values are rounded to the nearest thousand pounds (£'000) except when otherwise indicated.
Going concern basis
The Group's forecasts and projections, taking account of current cash resources and reasonably possible changes in trading performance, support the conclusion that there is a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future, a period of not less than 12 months from the date of approval of these financial statements. The Group therefore continues to adopt the going concern basis in preparing its financial statements.
Post year end a strategic inward investment of £17.7 million completed. This investment was by way of a share issue and supports the company growth projections for investing in future franchises.
3. SEGMENT INFORMATION
The Group identifies operating segments based on internal management reporting that is regularly reviewed by the chief operating decision maker and reported to the Board. The chief operating decision maker is the Chief Executive Officer.
Management information is reported as one operating segment, being revenue from self-published franchises and other revenue streams such as royalties and licensing.
The Group does not provide any information on the geographical location of sales as the majority of revenue is through 3rd party distribution platforms which are responsible for the sales data of consumers.
All of the Group's non-current assets are held within the UK.
All material revenue is categorised as either self-publishing revenue or other revenue.
In the period ending 31 May 2017 'Other revenue' included licensing revenue of £520k (31 May 2016 £nil).
| 12 months to 31 May 2017£'000 | 12 months to 31 May 2016£'000 |
Self-publishing revenue | 36,357 | 21,122 |
Other revenue | 1,006 | 244 |
| 37,363 | 21,366 |
4. EARNINGS PER SHARE
The calculation of the basic earnings per share is based on the profits attributable to the shareholders of Frontier Developments plc divided by the weighted average number of shares in issue during the year.
| 31 May 2017 | 31 May 2016 |
Profit attributable to shareholders (£'000) | 7,711 | 1,432 |
Weighted average number of shares | 33,943,972 | 33,812,840 |
Basic earnings per share (pence) | 22.7 | 4.2 |
|
|
|
The calculation of the diluted earnings per share is based on the profits attributable to the shareholders of Frontier Developments plc divided by the weighted average number of shares in issue during the year as adjusted for the dilutive effect of share options. | ||
| 31 May 2017 | 31 May 2016 |
Profit attributable to shareholders (£'000) | 7,711 | 1,432 |
Diluted weighted average number of shares | 34,446,017 | 35,302,973 |
Diluted earnings per share (pence) | 22.4 | 4.1 |
|
|
|
The reconciliation of average number of Ordinary Shares used for basic and diluted earnings per share is as follows: | ||
| 31 May 2017 | 31 May 2016 |
Weighted average number of shares | 33,943,972 | 33,812,840 |
Dilutive effect of share options | 502,045 | 1,490,133 |
Diluted average number of shares | 34,446,017 | 35,302,973 |
5. INTANGIBLE ASSETS
Intangible assets comprise capitalised development tools and self-published software from internal development activities and acquired software licences.
| Development tools and licences £'000 | Self-published software £'000 | Third party software £'000 | Total £'000 |
|
|
|
|
|
Cost |
|
|
|
|
At 31 May 2015 | 4,342 | 13,141 | 994 | 18,477 |
Additions - arising from capitalised development expenses and purchases | 398 | 8,459 | 108 | 8,965 |
Disposals | (774) | - | - | (774) |
At 31 May 2016 | 3,966 | 21,600 | 1,102 | 26,668 |
Additions - arising from capitalised development expenses and purchases | 571 | 9,076 | 157 | 9,804 |
Disposals | - | - | (915) | (915) |
At 31 May 2017 | 4,537 | 30,676 | 344 | 35,557 |
|
|
|
|
|
Amortisation and impairment |
|
|
|
|
At 31 May 2015 | 2,252 | 4,221 | 903 | 7,376 |
Amortisation charges | 1,127 | 2,153 | 96 | 3,376 |
Disposals | (774) | - | - | (774) |
At 31 May 2016 | 2,605 | 6,374 | 999 | 9,978 |
Amortisation charges | 874 | 3,655 | 94 | 4,623 |
Disposals | - | - | (915) | (915) |
At 31 May 2017 | 3,479 | 10,029 | 178 | 13,686 |
|
|
|
|
|
Net book value at 31 May 2016 | 1,361 | 15,226 | 103 | 16,690 |
Net book value at 31 May 2017 | 1,058 | 20,647 | 166 | 21,871 |
During the period ended 31 May 2017 the Group performed a detailed review of the intangible asset register, and as a result a number of assets were written off. The assets disposed of were fully amortised and therefore there was no impact on the net book value of assets held.
The majority of amortisation charges for intangible assets are expensed with research and development expenses. A small proportion of amortisation charges for third party software are charged to administrative expenses.