Frontier Dev Regulatory News (FDEV)

Frontier Developments plc

Interim Results

Performance sustained following a record year

Frontier Developments plc (AIM: FDEV, "Frontier", the "Company"), a leading developer of video games based in Cambridge, UK has published its interim results for the 6 months to 30 November 2017.

Overview

Frontier has a proven track record of world-class video-game development in many different genres on many different platforms, delivered over multiple decades, using its own COBRA engine. In November 2016 Frontier completed its successful transition to a higher margin self-publishing business model when it launched its second high profile franchise, Planet Coaster, building on the continued success of its first, Elite Dangerous. Frontier's third game franchise, Jurassic World Evolution, based on the Jurassic Park/World movie franchise, will launch in summer 2018.

Frontier's ambition is to continue to create a self-publishing multi-franchise success story. Ongoing investment in 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 by increasing the frequency of major releases.

For the six months to 30 November 2017, Frontier delivered a sustained level of performance compared to the record results achieved for financial year 2017 (the twelve months ended 31 May 2017), with revenue of £19.0 million in the period compared to £18.1 million for the six months to 30 November 2016 and £19.3 million for the six months to 31 May 2017. Both Elite Dangerous and Planet Coaster continue to perform well. 

Financial Summary

*Earnings before interest, tax, depreciation and amortisation

Operational & Strategic Highlights

Financial Highlights

Current Trading and Outlook

Both Elite Dangerous and Planet Coaster continue to perform well. Sales of Elite Dangerous in the first six months of the year benefitted from its release on Sony PlayStation 4 and the launch of physical disc sales on both Sony PlayStation 4 and Microsoft Xbox. Trading through the holiday period (Thanksgiving and Christmas) was in line with the Board's expectations, with both Elite Dangerous and Planet Coaster performing well in price promotion events.

Taking the above factors together, the Board anticipates that Elite Dangerous revenue will normalise down from the first half to the second half of the financial year as PlayStation 4 sales settle to a post-launch run-rate, but that underlying run-rate sales (including downloadable content) will sustain at healthy levels. As a consequence, the Board remains confident about achieving its expectations for the current financial year ending 31 May 2018.

The Board continues to anticipate that Frontier's next step-up in financial performance will be delivered by the launch of Jurassic World Evolution in summer 2018 on PC, PlayStation 4 and Xbox One. The Board continues to expect that revenue 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 continues to anticipate 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.

David Braben, Chief Executive, said:

"Our strategy of supporting and nurturing our game franchises continues to deliver, with sales in the first half of the year sustaining last year's record breaking levels. Our extensive and expanding player community continues to enjoy the evolving story within Elite Dangerous and the endless creativity of Planet Coaster, particularly with the addition of the 'Spooky' and 'Adventure' add-on packs.

We look forward to our next major milestone; the release of Jurassic World Evolution, our third franchise, in summer 2018. Beyond this we are working on plans to further scale up our business to accelerate the frequency of our major releases".

This announcement contains inside information as defined in Article 7 of the Market Abuse Regulation (EU) 596/2014. The person responsible for making this announcement on behalf of the Company is Alex Bevis.

Enquiries:

Frontier Developments +44 (0)1223 394300

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) 20 7220 0500

Matt Goode/Giles Rolls / Alice Lane

Tulchan Communications +44 (0) 20 7353 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, UK, Frontier uses its proprietary 'COBRA' game development technology to create innovative videogames for home consoles and personal computers. Frontier's LEI number: 213800B9LGPWUAZ9GX18.

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, allowing players to create, manage and share coaster parks with friends and content creators around the world. Players can let their imaginations run wild to surprise, delight and thrill incredible crowds of park guests as they build their own coaster park empire.

www.planetcoaster.com

About Jurassic World Evolution

Jurassic World Evolution - launching 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

Financial Review

TRADING

Total annual revenue in H1 FY18 (the six months to 30 November 2017) grew to £19.0 million (H1 FY17: £18.1 million) with sales of Elite Dangerous benefitting from its release on Sony Playstation 4 and physical disc on both Sony Playstation 4 and Microsoft Xbox. Planet Coaster also performed well in the period, through both sales of the game and sales of additional downloadable content. Self-publishing revenue accounted for 97% of sales (H1 FY17: 96%) with the balance being related to legacy work-for-hire business. In October 2017 we came to a settlement over the outstanding historic royalties owed by Atari on RollerCoaster Tycoon 3, payment of which is being made in instalments and will be completed by 31 May 2018.

Both of Frontier's existing franchises continue to perform well. For the calendar year 2017, and for the second year in a row, both Elite Dangerous and Planet Coaster achieved places in the annual "Top 100 Sellers" chart based on worldwide gross revenue on Steam (a leading PC digital distribution platform), with Planet Coaster achieving a top 40 position (consistent with 2016). As at 31 December 2017 cumulative sales of Elite Dangerous, which launched in December 2014, had exceeded 3.25 million franchise units and Planet Coaster, which launched in November 2016, had passed 1.4 million units.

Gross profit of £13.2 million was recorded in the period (H1 FY17: £13.5 million) with gross margin at 69% (H1 FY17: 74%). The largest element of cost of sales is the margin payable to our digital distribution partners. The reduction in gross margin percentage compared to the prior period reflected a higher proportion of sales through distribution partners and the launch of physical disc sales. Whilst margins on physical discs are lower they still make economic sense as they enable sales to an otherwise difficult to reach audience.

Gross research and development expenses in the period were £6.8 million (H1 FY17: £6.9 million) with the majority of spend being internal staff costs. Capitalisation of development costs on franchise assets and other intangibles accounted for £5.0 million in the six months to 30 November 2017 (H1 FY17: £4.9 million). Amortisation charges related to previously capitalised development costs grew to £2.8 million (H1 FY17: £1.9 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 £4.6 million (H1 FY17: £3.9 million), being gross spend, less capitalised costs, plus amortisation charges.

Total sales, marketing and administrative expenses reduced to £5.6 million (H1 FY17: £5.9 million), although this included unrealised exchange gains on forward contracts of £0.3 million in H1 FY18 and losses of £0.9 million in H1 FY17. Adjusting for these non-cash items, total expense increased by approximately £1.0 million (20%) mainly due to increases in sales and marketing costs to support Frontier's self-publishing model.

Operating profit of £3.0 million was recorded in the period (H1 FY17: £3.6 million) representing an operating margin of 16% (H1 FY17: 20%). The margin reduction largely resulted from the lower gross margin percentage. EBITDA (earnings before interest, tax, depreciation and amortisation) increased slightly to £6.0 million (H1 FY17: £5.8 million).

Corporation tax charges in the period were minimal overall, consistent with the interim results for FY17. This was due to a combination of brought forward tax losses and Video Games Tax Relief. Full tax accounting will be performed for the full year results.

Profit after tax in the period was £2.9 million (H1 FY17: £3.6 million). Basic earnings per share was 8.0 pence (H1 FY17: 10.7 pence).

BALANCE SHEET AND CASH FLOW

The Company continued to run a robust balance sheet during the six month period to 30 November 2017, and this was further boosted by the strategic investment completed in July 2017.

Intangible assets increased by £2.6 million in the six month period to £24.4 million at 30 November 2017 (31 May 2017: £21.9 million) as investments in franchise assets and other intangibles exceeded amortisation charges.

Tangible assets increased by £2.8 million to £3.5 million (31 May 2017: £0.7 million) through investment in the fit-out of Frontier's new leased building on the Cambridge Science Park. Works are scheduled to complete in early 2018 with a move-in scheduled in the spring, enabling all of Frontier's talented people to work together in a single purpose built facility.

Trade and other receivables of £3.4 million at 30 November 2017 were similar to the position at the end of the last financial period (31 May 2017: £2.9 million). At 30 November 2016 the balances were much higher (£9.6 million) as Planet Coaster released in that month.

Trade and other payables totalled £5.1 million (31 May 2017: £4.9 million). The high balance at 30 November 2016 (£7.7 million) was due to accrued distribution costs on Planet Coaster.

Total deferred income reduced slightly to £1.1 million at the period end (31 May 2017: £1.4 million). 

Cash balances increased by £16.5 million during the period to £29.1 million (31 May 2017: £12.6 million). The increase in cash was mainly due to the £17.7 million strategic investment by Tencent which completed in July 2017. During the six months to 30 November 2017 operating cash flow (operating profit excluding non-cash items, less investments in franchises and other intangible assets) accounted for an inflow of £1.0 million (H1 FY17: an operating cash inflow of £2.2 million). The remaining significant factor on cash flow was the new building, which accounted for a cash outflow of £2.8 million.

Share Issues

Employees exercised options over 904,967 Ordinary Shares during the 6 months to the end of November 2017. 65,600 of these Ordinary Shares were transferred under arrangements with the Employee Benefit Trust with the remaining 839,367 Ordinary Shares being newly issued shares, which generated exercise proceeds for the Company of £1.5 million. 

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 £17.7 million.

BOARD CHANGES

Following the strategic investment by Tencent, Frontier's Board invited James Mitchell, Chief Strategy Officer of Tencent, to become a Non-Executive Director in order to gain his insights into the Chinese market and the wider global entertainment industry. James was appointed on 19 September 2017.

CONSOLIDATED INCOME STATEMENT

All the activities of the Group are classified as continuing.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

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.

The condensed, consolidated interim financial statements do not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006. Statutory accounts for the year ended 31 May 2017 were approved by the Board of Directors on 5 September 2017 and delivered to the Registrar of Companies. The Auditors Report was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 of the Companies Act 2006. 

2. BASIS OF PREPARATION AND STATEMENT OF COMPLIANCE

Basis of preparation

The consolidated interim financial statements should be read in conjunction with the financial statements for the year ended 31 May 2017.

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 consolidated interim financial statements have been prepared in accordance with International Accounting Standard 34 'Interim Financial Reporting' (IAS 34).

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.

3. ACCOUNTING POLICIES

The consolidated interim financial statements have been prepared in accordance with the accounting policies adopted in the Group's most recent annual financial statements for the year ended 31 May 2017.

4. ACCOUNTING ESTIMATES AND KEY JUDGEMENTS

When preparing the interim financial statements, management undertakes a number of judgements, estimates and assumptions about recognition and measurements of assets, liabilities, income and expenses. The actual results may differ from these estimates.

The judgements, estimates and assumptions applied in the interim financial statements, including the key sources of estimation uncertainty, were the same as those applied in the Group's last annual financial statements for the year ended 31 May 2017.

5. SIGNIFICANT EVENTS AND TRANSACTIONS

There were no significant events or transactions in the interim period (1 June 2017 to 30 November 2017) which were not included within the interim financial statements. There have been no significant events or transactions during the period from the end of the interim period to the day preceding the date of this report (1 December 2017 to 5 February 2018).

6. 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.

11. FAIR VALUE MEASUREMENTS OF FINANCIAL INSTRUMENTS

Foreign Currency Forward Contracts

The Group used foreign exchange forward contracts to mitigate exchange rate exposure arising from forecast sales in US Dollars. The forward contracts are considered by management to be part of economic hedge arrangements but have not been formally designated.

All forward contracts are held at fair value through the profit and loss by reference to the exchange rate at the balance sheet date.