GMD.L Regulatory News (GMD)

29 March 2017

GAME DIGITAL PLC

Interim results for the 26 weeks ended 28 January 2017

GAME Digital plc ("GAME" or the "Group") today announces its interim results for the 26 week period ended 28 January 2017 (the "period"). All comparator periods are for the 26 weeks ended 23 January 2016 unless otherwise stated.

Financial and Operational Headlines

Martyn Gibbs, Chief Executive Officer, said:

"We delivered a strong performance in digital and new VR technology, however our first half saw another tough period for console hardware and physical software sales in the UK, impacted by a weaker line-up of new games launches and the market-wide underperformance of certain key titles. Together, these dynamics resulted in a disappointing performance from our UK retail operations, however our Spanish operations and new business areas delivered further growth.

"We continue to prioritise our efforts on taking the necessary actions to respond to these challenges, whilst positioning the business to capitalise on major future market opportunities. Across the Group we are working hard to improve operational efficiencies and reduce costs whilst implementing our GAME Changing strategy to reposition and transform the business, and I am encouraged with the progress we are making.

"We delivered another positive performance across our focus retail categories in the half, including digital content, preowned tech, and PC gaming. We also made significant progress developing our live in-store gaming proposition under our new BELONGTM brand, with encouraging results from the first seven arenas, and as a result we are accelerating our investment and implementation of this initiative. Overall we more than doubled sales from our growing Events, Esports and Digital activities.

"We have been pleased with the positive trading performance delivered in the first few weeks of the second half. Although we expect industry-wide challenges in our core Xbox and PlayStation categories to continue, we anticipate the overall UK market to remain positive during the rest of 2017, underpinned by the successful launch and continued consumer demand for the Nintendo Switch™, the planned launch of Xbox Project Scorpio and a stronger slate of new titles later in the year."

Current Trading and Outlook

Whilst market wide activity trends seen in the first half have continued into the early part of our second half, the launch of the Nintendo Switch™ has, as with most new console launches, brought positive impetus and growth to the whole games market.

The total Retail mint market in the UK for the first seven weeks of the second half was 22% up compared to the equivalent period last year with our UK Retail GTV up 7% over the same period. In Spain the total mint market was up 51% compared to the equivalent period in H2 last year, with Game Spain's GTV up 38% in local currency during the first seven weeks of the half. This growth is largely explained by the successful launch of Nintendo SwitchTM in both markets and going forwards this positive momentum will be highly dependent on stock availability.

The Group expects to deliver continued growth from digital and other new retail categories in the second half, as well as across Events, Esports and Digital, with these business areas delivering a growing contribution to Group gross profit. Furthermore, we currently anticipate an overall positive sales performance for the second half with the sales of Nintendo SwitchTM, together with our other sales initiatives to offset the declines expected in Xbox and PlayStation console markets.

Looking further ahead, further supportive market developments are expected in the first half of the next financial year, with the launch of Microsoft's Project Scorpio and several major new game titles already announced, including Red Dead Redemption 2 and Super Mario Odyssey.

The Board will announce its full year results for the 52 weeks ending 29 July 2017 in October 2017.

Results Presentation

Management will be hosting a presentation for analysts and investors at 9.30 a.m. today at Citigate Dewe Rogerson, 3 London Wall Buildings, London Wall, EC2M 5SY. A live audio webcast of the presentation will be available via the Company's website at www.gamedigitalplc.com/investor-relations. A recording of the presentation will be made available on www.gamedigitalplc.com later today.

The information contained within this announcement is deemed to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014 ("MAR"). Upon the publication of this announcement this inside information is now considered to be in the public domain.

Enquiries

Notes:

1. Gross Transaction Value is a non-IFRS measure defined as total retail receipts excluding VAT and before the deduction of revenue deferral relating to loyalty points. Gross Transaction Value reflects the full retail sales value of digital sales, agency sales (including sales by business partners on GAME's Marketplace website), warranties and other similar arrangements and thereby includes the publishers' and sellers' shares of those transactions (see note 1). Gross Transaction Value provides the most reliable measure of activity in an environment where more sales are expected to move from physical to digital.

2. 'New' retail categories defined as preowned technology products, digital content, PC and other non-console accessory and peripheral products, virtual reality headsets, licensed merchandise and services, as well as Marketplace.

3. Adjusted EBITDA is a non-IFRS measure defined by the Group as operating profit before tax, depreciation, amortisation, net finance costs, exceptional and adjusting items (see note 1).

4. The calculation of Adjusted profit before tax excludes all exceptional and adjusting items (see note 3).

5. Adjusted basic earnings per share is calculated as set out in note 7.

6. Net funds is after the deduction of finance lease liabilities as set out in note 11.

Forward Looking Statements

This announcement contains certain forward-looking statements which have been made by the Directors in good faith using information available up until the date they approved the announcement. Forward-looking statements should be regarded with caution as by their nature such statements involve risk and uncertainties relating to events and circumstances that may occur in the future. Actual results may differ from those expressed in such statements, depending on the outcome of these uncertain future events.

Notification of Home Member State

Following changes made to the Disclosure Rules and Transparency Rules ("DTR") as a result of the Transparency Directive Amending Directive (2013/50/EU), the Company is required to disclose its Home State. Accordingly, pursuant to DTR 6.4.2, the Company announces that its Home State is the United Kingdom.

Notes to editors

GAME Digital plc is a leading gaming company, providing an authoritative range of gaming and gaming lifestyle products and services to customers. GAME's UK and Spanish retail businesses are the market leaders in those geographical areas, operating a total of 581 stores, a fully integrated omni-channel offer, and insight on more than 18 million consumers across its reward programmes. Through its esports and events activities the Group is delivering unparalleled consumer gaming experiences directly, and on behalf of third parties, including its flagship event, Insomnia, the UK's largest gaming festival. Across its digital businesses the Group is pioneering the use of new technologies to reach gamers and business partners outside its main markets. This is effected through Ads Reality Limited, the Group's visual recognition and augmented reality business and Multiplay, its specialist game sever hosting business. For more information visit www.gamedigitalplc.com, www.multiplay.com or www.adsreality.com.

You can view or download copies of this announcement and the latest Half Year and Annual Report & Accounts from the Group's corporate website at www.gamedigitalplc.com or request free printed copies by corporate@game.co.uk.

SUMMARY OF FINANCIAL RESULTS

1. Gross Transaction Value is a non-IFRS measure defined as total retail receipts excluding VAT and before the deduction of revenue deferral relating to loyalty points. Gross Transaction Value reflects the full sales value of digital sales, agency sales (including sales by business partners on GAME's Marketplace website), warranties and other similar arrangements and thereby includes the publishers' and sellers' shares of those transactions (note 1). Gross Transaction Value provides the most reliable measure of activity in an environment where more sales are expected to move from physical to digital.

2. Adjusted EBITDA is a non-IFRS measure defined by the Group as profit before tax, depreciation, amortisation, net finance costs, exceptional and adjusting items (see note 1).

3. Adjusted profit before tax is a non-IFRS measure defined by the Group as profit before exceptional and adjusting items (see note 3).

4. Adjusted basic EPS is calculated as set out in note 7.

5. Net funds is after the deduction of finance lease liabilities as set out in note 11.

CHIEF EXECUTIVE'S STATEMENT

Review of Group results

Whilst we were pleased with the positive performance of our Spanish business and strong revenue growth of 120.5% in our newer Events, Esports and Digital divisions, our UK Retail business faced significant market headwinds in the half, impacting our headline Group performance. Overall, the Group delivered revenues of £499.0 million (2016: £549.2 million), a decline of 9.1%. The Group's Gross Transaction Value (GTV), a better measure of underlying retail activity as it includes the gross value of digital receipts, was £566.3 million (2016: £608.0 million), down 6.9%, predominantly driven by the decline in low margin console hardware sales in the UK. Group GTV excluding hardware fell by £2.1 million or 0.5%, with further growth achieved in the Group's new retail categories (including digital content, PC gaming accessories and virtual reality headsets), with GTV up 28.3%.

Group gross margin (as a percentage of revenue) increased by 90 basis points to 24.7%, benefiting from the shift in sales mix to higher margin categories including mint content, preowned products, gaming accessories and licensed merchandise. Costs remain a key focus for us and were well controlled in the period. We have negotiated property savings and where appropriate selectively closed stores, rationalised retail working hours and delivered significant efficiency and procurement benefits across the rest of the business. We have worked tirelessly to deliver these savings, totalling some £5.3 million in the underlying costs of the UK Retail business. Overall, total underlying operating costs for the Group (excluding exceptional and adjusting items and depreciation and amortisation) were up by £2.5 million or 2.6% to £100.1 million, due to higher retail costs in Spain (up £4.8 million) reflecting the currency impacts of the Euro to sterling conversion; higher costs of the growing Events, Esports & Digital business (up £2.4 million) less the savings delivered in the UK Retail business.

Group Adjusted EBITDA in the half was £23.3 million (2016: £33.1 million), a decline of £9.8 million, with a Core Retail (UK & Spain) Adjusted EBITDA of £26.1 million (2016: £33.8 million) and an EBITDA loss of £2.8 million (2016: loss of £0.7 million) within Events, Esports and Digital as we continue to scale up these business areas. Profit before tax, adjusting and exceptional items was £16.9 million (2016: £27.7 million), whilst adjusted earnings per share before non-recurring items was 7.9p (2016: 12.2p).

The Group generated £25.7 million of cash from operating activities in the half (2016: £66.6 million), ending the period in a strong financial position, with a cash balance (net of overdrafts and finance lease liabilities) of £69.0 million (2016: £120.2 million) and access to aggregated facilities across the UK and Spain of £80 million (2016: £60 million).

The UK business has over 200 lease expiries over the next two years, giving rise to many important business and location decisions. In several markets, specifically those with higher footfall, the Group plans to relocate to new, larger venues which can accommodate its full social, experiential and competitive gaming proposition. At the same time the Group expects to move from other existing locations to new, lower cost sites where savings are not otherwise available. This property optimisation and transformation programme is likely to require additional capital investment over the next two years, over and above that allocated for the Group's other growth initiatives. Reflecting this additional investment, the Board has approved an interim dividend of 1.0 pence per share (2016: 1.67 pence).

Market update

* Source: GfK Chart-Track; based on value of retail sales of mint console hardware, software, digital and accessories. 26 weeks ended 28 January 2017 vs. 26 weeks ended 23 January 2016

^ UK and Spanish markets combined. Spain converted into sterling equivalent

The total value of the console gaming markets in which we operate declined during the first half as we entered the fourth year since the launch of the latest generation of Xbox and PlayStation consoles, with the overall retail market (hardware, software, digital and accessories sales) down 5.4% across the UK and Spain (source: GfK Chart-Track).

Software sales declined in the period due to three factors. The line-up of key game launches were not comparable to those of a year ago; there was an underperformance of certain key titles; and average selling prices were lower. Despite some strong new releases in the period, such as Pokémon Sun & Moon and FIFA 17, which were ahead of their prior year equivalent, overall figures were impacted by weaker than expected sales of certain other key titles. In particular, Call of Duty: Infinite Warfare sales were down on the previous year's title (Call of Duty: Black Ops III) and there was no major, non-perennial title in the current period to match the performance of Fallout 4, launched in Autumn 2015.

These market effects were more pronounced in the UK, resulting in a 12.5% decline in the UK market, with hardware and software sales down 21.6% and 13.2% respectively. Accessories and digital categories performed better, rising 4.0% and 2.6% respectively.

More positive regional dynamics saw the Spanish market grow in the period, up 1.8% overall. Whilst hardware sales fell 6.2%, this was more than offset by growth in all other categories, with software sales up 3.3% (helped by the relatively stronger PlayStation and Nintendo penetration), digital sales up 38.8% and accessories sales up 4.4%.

In the first weeks of the second half, several titles have launched including For Honor, Horizon: Zero Dawn, NieR: Automata and Tom Clancy's Ghost Recon: Wildlands. Sales of these titles have been either in line with, or ahead of our expectations in the UK and Spain, showing that good quality titles are still attracting strong consumer demand.

In addition, on 3 March the Nintendo SwitchTM console was launched, with initial sales in line with expectations in both the UK and Spain. Consumer demand is expected to remain strong for both the SwitchTM console as well as new and upcoming game titles, including the critically acclaimed Legend of ZeldaTM: Breath of the Wild, Mario Kart 8 Deluxe (releasing April 2017) and Super Mario Odyssey and Splatoon 2 (releasing later in 2017). Sales of both the console and key software titles are expected to be largely dependent on stock availability.

The total Retail market in the UK for the first seven weeks of the second half was 22% up compared to the equivalent period last year. In Spain the latest market statistics show an increase of 51% compared to the equivalent period in the H2 last year.

Looking further ahead to the second half of 2017, the market is looking forward to the launch of the Xbox Project Scorpio console and a stronger slate of new titles building for peak 2017, including the highly anticipated Red Dead Redemption 2, from developer Rockstar Games, the studio behind the critically acclaimed Red Dead and Grand Theft Auto series.

Operational and strategic update

Note:

* GTV growth rates converted into sterling equivalent

** New retail categories comprise digital content, preowned tech, PC and mobile accessories, licensed merchandise, services, VR and Marketplace

*** Source: GfK Chart-Track. Total market based on value of retail sales of mint console hardware, software, digital and accessories. 26 weeks ended 28 January 2017 vs. 26 weeks ended 23 January 2016

Figures in brackets denote H1 2015/16 comparatives as at 23 January 2016

UK Retail Performance

UK markets were challenging in our first half and against this backdrop our UK Retail GTV declined 18.1% on the prior year. Console sales declined 34.2%, a result of lower average selling prices and lower volumes, though we achieved higher gross margins on sales due to improved supplier terms. Total mint software sales fell 22.8% due to the tough comparison with last year's strong line up of new releases and the underperformance of certain key titles. Notably, whilst our sales of the top 10 selling titles fell over 30%, our sales of all other titles declined by a more modest 7.8%.

Overall, our share of the total mint console market at retail was 29%, with a 3% increase in our share of digital content, to 61%, more than offset by a reduction in other categories. The change in our overall market share was largely explained by the increased contribution of the online channel year on year. The UK market share in H2 has improved since the launch of Nintendo SwitchTM and with the benefit of strong new releases (including exclusives). Market share for the first seven weeks of the second half was 31.8%, up approximately three percentage points on the first half.

Although market conditions were challenging in the first half, the UK business continued to deliver growth in new retail categories. Overall, GTV from new retail categories (comprising digital content, preowned tech, PC and mobile accessories, licensed merchandise, services, VR and Marketplace) increased 17.9%, to over £100 million.

The increased contribution from higher margin categories and digital content sales together with the benefit of improved terms agreed with certain suppliers resulted in a strong improvement in our UK Gross Margin rate in the period, up 200 basis points, to 25.7% (calculated as a % of revenues).

Improving our performance through the realisation of organisational efficiencies and cost saving measures, as outlined in the UK action plan initiated in January 2016, remains a key focus. Considerable attention continues to be given to the review of our store footprint and reducing property costs wherever possible. Many recent lease renewals have been renegotiated on improved terms and where proposed new lease terms have not been acceptable, the Group has relocated to lower cost premises. We are also exploring opportunities to open new concession locations where lower cost of occupation and more flexible terms can be agreed. Within retail operations, we continue to carefully manage our store employee costs, adjusting resourcing levels as required to maintain service levels during periods of higher or lower demand. We have also continued to focus on reducing expenditure across the business, where possible, and have delivered procurement savings on certain business service contracts, productivity improvements in our distribution centres and other business process improvements.

These initiatives have seen the realisation of over £5 million in overall operational efficiencies and savings in the half, across our UK Retail operations including:

Overall, underlying operating costs (before depreciation and amortisation and adjusting and exceptional items) were reduced by £4.7 million. This reflects the cost savings outlined above together with the investments we made to support multi-channel and customer service improvements, additional rent from the recent Basingstoke property sale and leaseback as well as the continued development of our growth categories.

We ended the half with 311 stores (2016: 319) in the UK, with an average length to first break of 1.2 years and over 200 lease events over the next two years. We opened three new stores, closed five stores and relocated four stores in the year. We had one loss making store in the UK in the year (2016: one) (calculated as annual store EBITDA contribution before the allocation of central overheads, excluding new stores).

Spain Retail Performance

Our Spanish business delivered a robust performance in the half, with total GTV up 3.1% on a local currency basis, outperforming the wider Spanish market and growing our share of the overall market by 0.6 percentage points, to 38.9% (2016: 38.3%).

In local currency terms, our Spanish Retail business delivered Content GTV growth of 10.5%. Within this, PlayStation 4 and Xbox One software sales were up 27.8%, Nintendo 3DS sales were up 83.1% and digital sales were up 29.2%. Within the Preowned category, strong growth in PlayStation 4 and Xbox One software sales, up 46.6%, and preowned technology sales, up 33.3%, were more than offset by the fall in other software formats, resulting in a total decline of 5.0%. Sales of Accessories & Other rose 27.4% whilst low margin Hardware sales fell by 14.3%, reflecting the decline in average selling prices. The Spanish business prioritised the delivery of growth in new retail categories with GTV (comprising digital content, preowned tech, PC accessories, licensed merchandise, services and VR) up 64.2%.

In total, after the effects of a stronger Euro, which appreciated approximately 18% against Sterling, our Spanish GTV rose 22.1% and gross profit rose 17.5%, after a modest 0.6 percentage points decline in gross profit margin, to 23.3%.

Underlying operating costs (before depreciation, amortisation and adjusting and exceptional items) rose €1.1 million, or 3.6% on a local currency basis, broadly in line with the increase in sales.

We opened three new stores in Spain in the period, ending with 270 stores (2016: 270) of which four were loss making (2016: three).

Events, Esports & Digital Performance

Our Events, Esports and Digital divisions now include our local competitive gaming activity, managed under our new BELONGTM brand, together with Multiplay, Ads Reality and SocialNat. Having been purchased in February 2016, SocialNat has now been integrated into our Spanish business and rebranded as GAME Esports (Spain).

In aggregate, these areas grew sales by 120.5%, or £4.7 million, to £8.6 million in the half (2016: £3.9 million), with the majority of these sales attributable to the Events and Digital divisions of Multiplay.

Gross profit margin declined by 10.5 percentage points in the period to 15.1%, predominantly reflecting the higher cost of sales within the Events business following the move of the Insomnia festival to the NEC in August last year, as we scaled the venue to accommodate future growth.

We have continued to develop and invest in each of these business areas to support the future growth ambitions. As a result, underlying operating costs (before depreciation, amortisation and adjusting and exceptional items) across these areas increased to £4.1 million (2016: £1.7 million), resulting in an Adjusted EBITDA loss of £2.8 million (2016: EBITDA loss of £0.7 million).

Group Strategy Update

We are investing to realise the opportunities presented by an evolving games market, with exciting new games consoles and technologies coming to market and customers exploring new ways of buying and playing games, including digital; virtual and mixed reality; online multiplayer gaming; and competitive gaming and esports. The Group, through its strategic initiatives, is spearheading some of these industry developments and is therefore ideally positioned to benefit from the growth opportunities presented.

In the period, we have delivered the following important milestones against each pillar of our strategy as follows:

1. Improve our core multichannel businesses to maximise market potential and profitability

2. Expand the Group's live and online gaming services for gamers and publishers

3. Develop and grow the Group's digital enterprise services

4. Optimise organisational efficiency while investing for the future

Conclusion

The video games industry continues to evolve and develop, presenting both opportunities and risks to our business. Whilst recent dynamics in the UK console market presented a challenging trading environment in the first half, we expect a more favourable market backdrop during the remainder of 2017. The launch of the Nintendo Switch™ has already brought positive impetus to our markets and in the second half of the calendar year, we look forward to the launch of Microsoft's Project Scorpio and several major new game titles, including Red Dead Redemption 2 and Super Mario Odyssey.

The Group continues to pursue its diversification and growth strategies to mitigate the market and industry risks to its retail business. To this end, the Board remains committed to the necessary investment to develop and implement its planned initiatives. The Group is confident that by organising itself effectively, enhancing its consumer proposition and customer engagement, whilst building ever stronger and more collaborative partnerships with its key suppliers, it is well positioned to execute its strategy and deliver future growth.

FINANCIAL REVIEW

Group Results

The Group's Gross Transaction Value (GTV) fell by £41.7 million or 6.9% to £566.3 million (2016: £608.0 million), predominantly driven by the decline in low margin console Hardware sales. GTV excluding Hardware fell by £2.1 million or 0.5%. A key priority for the Group continues to be the further development of the Group's new retail categories (including digital content, PC gaming accessories and virtual reality headsets), where GTV growth of 28.3% was delivered.

Despite strong sales growth in the Spanish Retail business and across the Group's Events, Esports and Digital divisions, Group revenue declined by 9.1% in the period to £499.0 million (2016: £549.2 million), driven by the decline in UK Retail.

Group gross margins (as a percentage of revenue) increased by 90 basis points to 24.7%. Gross margin rates benefited from the shift in sales mix to higher margin categories including preowned gaming and technology products, gaming accessories and licensed merchandise as well as reflecting the benefit of improved terms agreed with certain suppliers.

Underlying operating costs (excluding exceptional and adjusting items and excluding depreciation and amortisation) increased by £2.5 million or 2.6% in the half, to £100.1 million. Overall underlying costs in Core Retail were flat, with the significant savings in UK retail operating costs being offset by the impact of higher Spanish retail costs, largely explained by the translation effect of weaker year on year sterling to Euro exchange rates. Costs across the Group's Events, Esports and Digital divisions, comprising Multiplay (acquired in March 2015), SocialNat (acquired in February 2016) and Ads Reality (acquired in May 2016) as well as the Group's new local competitive gaming activities, increased by £2.4 million to £4.1 million.

Group operating profit was £17.3 million (2016: £22.8 million). The change in operating profit is explained by lower gross profit generation, higher operating expenses, including a £0.8 million increase in depreciation and amortisation, and exceptional income of £6.3 million in the period (2016: £0.4 million). The Group achieved an Adjusted EBITDA of £23.3 million (2016: £33.1 million), reflecting a 22.8% decline in Core Retail to £26.1 million and the EBITDA loss of £2.8 million (2016: EBITDA loss £0.7 million) within Events, Esports and Digital incurred as the new business activities were being further developed.

Adjusted profit before tax in the year was £16.9 million (2016: £27.7 million) and Adjusted basic earnings per share was 7.9 pence (2016: 12.2 pence). On a statutory basis, profit before tax was £16.5 million (2016: £22.5 million) and basic earnings per share was 7.7 pence (2016: 9.7 pence).

Segmental results

Core Retail: UK

1. Calculated as a % of revenue

The core UK Retail business saw Gross Transaction Values decline by 18.1% and revenue by 20.7% in the half. Excluding lower margin hardware GTV declined by 12.2%. A key priority for the business continued to be the further development of its new retail categories (including digital content, PC gaming accessories and virtual reality headsets), where GTV growth of 17.9% was delivered. Overall, GTV from new retail categories exceeded £100 million for the first time in H1.

An increase in sales mix of higher margin categories drove a 2 percentage point improvement to the gross margin (as a % of revenue) in the first half, to 25.7% (2016: 23.7%).

Operating costs before depreciation and amortisation and adjusting and exceptional items were reduced by £4.7 million or 6.4%, reflecting operating cost savings of over £5 million. This was partially offset by inflationary cost increases, cost investment to support strategic growth initiatives and rent payable on the UK distribution centre and head office buildings of £0.3 million following the sale and leaseback of the property in October 2016.

Despite the improvement in gross margin and lower costs, the fall in GTV meant Adjusted EBITDA for the core UK Retail business declined £8.8 million in the half, to £13.4 million (2016: £22.2 million).

Core Retail: Spain

Note:

^ LC currency basis (LC). Calculated based on original Euro amounts.

GAME's Spanish Retail business (excluding esports) delivered GTV growth of 3.1% over the period on a local currency basis. Excluding low margin hardware, Spanish retail GTV grew 9.3%. Consistent with the UK business, a key priority for the Spanish retail business was the continued development of its new retail categories (including digital content, PC gaming accessories and virtual reality headsets), where GTV growth of 38.8% was delivered on a local currency basis.

On a reported basis, after the effects of a stronger Euro during the half, Spanish GTV rose 22.1%. On a reported basis, Spanish revenue grew 20.4% to £170.2 million.

Gross margin rates in the territory declined by 60 basis points to 23.3% (2016: 23.9%). Spanish operating costs excluding depreciation, amortisation and adjusting and exceptional items increased to £27.0 million (2016: £22.2 million), representing 14.1% of GTV (2016: 14.2%). Spanish operating costs excluding depreciation, amortisation and adjusting and exceptional items increased €1.1 million, or 3.6% on a local currency basis, broadly in line with the increase in sales.

The Adjusted EBITDA for the period was £12.7 million (2016: £11.6 million). In local currency terms Adjusted EBITDA was €14.6 million (2016: €16.0 million).

Events, Esports and Digital

Revenue from Events, Esports and Digital, comprising the Multiplay and Ads Reality businesses in the UK, Game Esports in Spain, as well as the Group's local competitive gaming activities in UK, grew 120.5% to £8.6 million (2016: £3.9 million).

Gross margins declined by 10.5 percentage points in the half, to 15.1%. The decline in gross margin was largely due to increased costs of sales within Multiplay's Events division as a result of moving to the NEC, in preparation for further expected growth in audience numbers.

Core underlying operating costs attributable to Events, Esports and Digital increased £2.4 million to £4.1 million in the first half (2016: £1.7 million) as the Group continued to expand its activities and further develop its operations. Cost investment across Multiplay's Events and Digital businesses amounted £1.1 million in the half, taking total Multiplay costs in the half to £2.8 million. In addition, £0.8 million of cost was incurred by the Group's new local competitive gaming activities (2016: nil) with the balance of the remaining cost investment split across Ads Reality and Game Esports, Spain.

Investment has continued during the period in the activities targeted to deliver future growth, including an upgrade to the Group's server management platform to enable it to run the global hosting requirements for major AAA titles such as Titanfall 2, which launched in the period. The Adjusted EBITDA loss in the half was £2.8 million (2016 EBITA loss: £0.7 million).

Gross Transaction Value (GTV) and Revenue

1 Includes sales contributed from Events, Esports and Digital businesses

Group Gross Transaction Value (GTV) fell 6.9% over the first half to £566.3 million (2016: £608.0 million). Foreign exchange rates positively impacted the reported GTV during the half. On a constant currency basis GTV fell by 11.2%.

Content GTV, which includes both mint boxed and digital game content, fell by 1.9% in the period, in part explained by the decline in physical sales for Xbox 360 and PlayStation 3, with sales down 81.2% in the UK and 55.0% in Spain (in sterling). The combined GTV of all other software formats was flat in the half, although the market reaction to certain key annual titles was not as strong as last year and there was no major, non-perennial title to match the performance of Fallout 4 launched in the equivalent period last year.

Within Content GTV, total digital sales continued to grow, rising 23.2% to £77.4 million in the half.

GTV from Preowned products decreased by 8.7% to £95.7 million. Sales of preowned PlayStation 4 and Xbox One software products rose 15.4%, and sales of preowned mobile phones and tablets (GAMEtronics) rose 5.2%, but these were more than offset by a decline in sales of preowned Xbox 360, PlayStation 3 and other older format hardware and software.

GTV from the Accessories & Other category increased by £12.1 million or 15.4% to £90.9 million, benefiting from a £4.7 million increase in Events, Esports and Digital sales, together with strong growth of PC accessories and licensed products.

Hardware sales were lower than in the same period last year, predominantly as a result of falling average selling prices, with GTV of £117.6 million in the half (2016: £157.2 million).

On a statutory basis, Group revenue declined 9.1% in the first half to £499.0 million (2016: £549.2 million).

Gross profit

Gross profit fell by 5.6% to £123.4 million (2016: £130.7 million). Foreign exchange rates positively impacted the reported gross profit during the half, with the Euro c.18% stronger relative to sterling in the 26 weeks ended 28 January 2017. This accounted for a year on year benefit to gross profit of c.£6 million. On an underlying, constant currency basis, total gross profit decreased by 9.9%.

Gross profit by category is analysed in the table below.

Note: Gross profit calculated as a % of revenue

Overall gross profit rates increased by 0.9 percentage points in the period due to the mix of higher margin products as well as the improvement in achieved margin rates on hardware sales.

The Content gross profit rate increased 0.8 percentage points to 29.2% in the half due to the mix of physical and digital product sales.

Preowned margin rates fell 2.5 percentage points due to the increasing mix of Xbox One and PlayStation 4 (new format) software and technology products, which achieve lower margin rates than older format preowned sales.

The gross margin of Accessories & Other fell 4.8 percentage points to 29.8%. This decline was due to the first-time contribution of virtual reality device sales launched in the period, which attract a lower margin than the category average as well as year on year decline in the gross margin achieved for the licensed merchandise sub-category, due to the mix of sales within that category.

Hardware margin rates improved 1.6 percentage points compared with the same period last year, to 5.0% due to improved supplier terms and higher achieved average selling prices on the new console iterations launched in the period, comprising the Xbox One S, PlayStation 4 Slim and PlayStation 4 Pro.

Operating expenses

Continuing operating expenses before exceptional and adjusting items, comprising selling and distribution and administrative expenses, increased by £3.0 million or 2.9% to £105.7 million. Continuing operating costs, before exceptional and adjusting items and excluding depreciation and amortisation increased by 2.6% to £100.1 million.

Group continuing selling and distribution expenses fell 1.1% or £0.9 million to £78.5 million, whilst Group continuing administrative costs increased by £3.9 million to £27.2 million. Expansion of the Events, Esports and Digital businesses accounted for £2.4 million of the increase in Group continuing administrative costs. Further investment was also made in UK Retail to strengthen the senior management team and an additional rent cost of over £0.3 million has been incurred following the sale and leaseback of the distribution centre and head office buildings. Both the UK and Spain have also invested in the new retail categories.

Underlying core retail costs were broadly flat year on year, at £96.0 million (2016: £95.9 million). Within this, UK retail costs were reduced by 6.4% or £4.7 million to £69.0 million whilst Spanish retail costs increased 21.6% to £27.0 million predominantly due to the impact of a weaker pound. Across the Group's UK retail operations a number of business efficiencies and cost savings were delivered in the period:

In local currency, Spanish retail costs for the period increased by 3.6% or €1.1 million, broadly in line with sales growth of 3.1%. Higher distribution costs and store variable costs mainly linked to greater sales activity were incurred together with further investment in central costs to similarly drive the new growth initiatives including costs associated with the repair centre and the greater focus on developing the PC category.

Operating expenses across the Group's Events, Esports and Digital businesses rose £2.4 million to £4.1 million (2016: £1.7 million), with further investments made across each of these growth areas. These costs in H1 2017 included for the first time expenses in relation to BELONGTM, (the Group's new live gaming UK retail concept), Ads Reality and GAME Esports (Spain) as well as increases in Multiplay's costs associated with the ramp up in trading.

Exceptional and adjusting items

Exceptional income of £6.3 million was recognised in the period relating to the gain on the sale and leaseback of the Group's UK head office and distribution centre. In 2016, exceptional income of £0.4 million was recognised relating to the movement of provisions associated with the former GAME Group plc.

The adjusting items before tax as detailed in note 3, are as follows:

Amortisation charges increased by £0.3 million in the half as a result of the acquisition of Ads Reality in May 2016. The share-based payment charge reflects the latest estimate of the cost of awards under the Group's share incentive plan and the associated national insurance provision required thereon. The post-acquisition remuneration of £1.7 million relates to future amounts of cash and shares payable to certain of the original directors of Multiplay and Ads Reality linked to their on-going employment.

Adjusted EBITDA

Note: EBITDA margin calculated as a % of revenue

Group Adjusted EBITDA (EBITDA less exceptional and adjusting items) of £23.3 million (2016: £33.1 million) fell by a total of £9.8 million in the period. Core Retail performance reflects an £8.8 million decline related to the UK Retail operation whilst the Spanish Retail operations delivered an Adjusted EBITDA of £12.7 million, up £1.1 million. The Adjusted EBITDA loss from Events, Esports and Digital totalled £2.8 million (2016 EBITDA loss: £0.7 million) reflecting the scaling of operations ahead of the delivery of the planned further growth initiatives.

Financing costs

Net financing costs totalled £0.8 million (2016: £0.3 million). The increase in financing costs reflects more frequent drawings in Spain over the period and the higher non-utilisation costs of the new and larger UK facilities.

Profit before tax

Profit before tax for the period amounted to £16.5 million (2016: £22.5 million). Profit before tax for Core Retail was £22.1 million (2016: £24.9 million) and Events, Esports and Digital incurred a loss before tax of £5.6 million (2016 loss: £2.4 million).

Taxation 

The effective tax rate (defined as the accounting tax charge divided by the accounting profits before tax) was 20.6% (2016: 27.6%), representing the best estimate of the average annual effective tax rate expected for the full year, applied to the pre-tax profit of the 26 week period. The reduction in tax rate is due in part to the reduction in the tax rate in Spain.

Earnings per share 

The earnings used for the calculation of Adjusted basic EPS are as follows:

* Basic shares outstanding excludes shares held in trust (EBT and SIP)

The Group delivered Adjusted basic earnings per share of 7.9 pence (2016: 12.2 pence). In order to give a better view of underlying earnings, adjustments to earnings per share have been made to remove exceptional and adjusting items.

On a statutory basis, after the impact of exceptional and adjusting items, basic earnings per share for the 26 weeks ended 28 January 2017 was 7.7 pence (2016: 9.7 pence).

Cash flow and net cash

Cash generated from operations

Cash generated from operations amounted to £28.0 million, £42.7 million lower than the previous year. This decrease has been impacted by the fall in EBITDA of £11.0 million and the adverse movement in working capital and other items of £31.7 million. After finance costs and corporation tax payments, cash generated from operating activities was £25.7 million (2016: £66.6 million).

The working capital outflow was largely explained by a timing issue, as the period end fell on 28 January rather than 23 January in the previous year, meaning that the majority of month end supplier payments were settled before the period end in the current year. To illustrate this timing difference, the net cash position (cash less overdrafts) as at 4 February 2017 was £50.6 million, £12.1 million above the balance last year on the equivalent date. After deducting the UK's December VAT liability payment of £12.3 million which was paid on 6 February 2017 (although last year this was paid slightly earlier on 2 February 2016), the adjusted net cash position was broadly in line with last year.

Note: Working capital generation ratio calculated as working capital generated as a % of net cash from operating activities

Capital Expenditure and proceeds from the sale of property

Group capital expenditure amounted to £5.8 million in the half (2016: £6.9 million), representing 25% of Adjusted EBITDA (2016: 21%) and 1.2% of revenue (2016: 1.3%).

Capital expenditure was incurred on investment in the UK and Spanish retail operations. This included expenditure on a small number of new retail and BELONGTM stores and store relocations, and further upgrade and maintenance capital expenditure for the existing store environment, core IT systems and in the distribution centre. In addition, capital expenditure was incurred on the Group's online and digital infrastructure and managed server hosting technology.

Future capital expenditure is planned for the existing physical estate, focused on the development of more experiential BELONGTM gaming zones within, and outside, the core store estate in the UK. Capital expenditure plans also include visual merchandising opportunities to improve sales densities in stores in both UK and Spain. Finally, additional capital expenditure is planned on online initiatives, core IT and digital infrastructure.

Proceeds from the sale of property of £13.3 million (2016: £nil) related to the net sale proceeds received in October from the sale and leaseback of the Group's freehold property interests of the distribution centre and head office buildings located in Basingstoke, UK. The Group will continue to operate its principal UK business activities from its Basingstoke head office and continue to use its distribution centre as its primary UK store and online storage and fulfilment centre.

The new lease for the distribution centre and head office property is for an initial 17 year term with a tenant only break clause after 12 years and an annual rent on commencement of £1.06 million. The rent will be subject to upward only rent reviews every five years. The first rent review will be to the higher of open market value or £1.13 million per annum and all subsequent reviews will be reset to open market value.

Dividends

An interim dividend of 1.0 pence has been approved by the Board (2016: 1.67 pence per share), reflecting the decision to increase investment in the Group's new retail concepts and accelerate the optimisation of the UK estate given the exceptionally short average lease length of 1.2 years.

The interim ordinary dividend will be paid on 4 August 2017. The ex-dividend date will be 29 June 2017 so the dividend will be paid to those shareholders on the register at the close of business on 30 July 2017

Cash resources and financing

The Group currently has aggregate available facilities of approximately £80 million (2016: £60 million) comprising a UK asset-backed revolving loan facility agreement with PNC Financial Services UK Limited and Wells Fargo Capital Finance (UK) Limited of £50 million and short-term financing facilities with Spanish banks BBVA and Banco Santander amounting to €34.7 million (2016: €38.5 million). The UK asset-backed facility can be increased annually over the peak season by a further £25 million.

As at 28 January 2017, both the UK and Spanish facilities were undrawn.

Working capital

Net investment in trade working capital increased by £45.1 million to £67.1 million (2016: £22.0 million), reflecting the timing issue referred to in the cash flow and net cash section above.

Despite increased stock investment in growth categories including PC accessories, licensed merchandise and preowned mobile phones, the Group reported lower stock balances of £102.7 million, down 1.2% on last year. This was achieved through more efficient management of software and hardware stock.

The trade receivables balance has modestly increased £2.2 million to £19.9 million.

Trade payables decreased by £44.1 million to £55.5 million. This movement was predominantly due to the timing of half year end, being one week later in the current year, and month end suppler payments having been settled in the current period but not the comparative period.

Going concern

The Directors have a reasonable expectation that the Group and the Company has adequate financial resources to ensure it continues to operate for the foreseeable future. The Directors have formed their view based on prudently prepared forecasts, the Group's cash position and the available credit facilities. Furthermore, the Directors have stress-tested these financial forecasts by considering significant but plausible risk scenarios and potential mitigating actions before concluding their views. On that basis they continue to adopt the going concern basis of accounting in preparing the condensed financial statements.

Principal risks and uncertainties

The Board has considered the principal risks and uncertainties for the remaining six months of the financial year and determined that the risks presented in the 2016 Annual Report, described as follows, also remain relevant to the rest of the financial year: Strategy and sustainable business model, competitive environment, people and organisational capability, key supplier dependency, peak trading and consumer confidence, data protection and cyber security, financial management and control, business disruption and crisis management, core systems and new technologies and health and safety.

Responsibility Statement

The Directors confirm, to the best of their knowledge and belief, that this condensed consolidated set of interim financial statements have been prepared in accordance with IAS 34 as adopted by the European Union, gives a true and fair view of the assets, liabilities, financial position and profit or loss of the Group and that the interim management report herein includes a fair review of the information required by the DTR 4.2.7 and DTR 4.2.8 namely:

A copy of the Company's 2016 Annual Report and Accounts is available on GAME's website www.gamedigitalplc.com

This responsibility statement was approved by the board of directors on 28 March 2017 and is signed on its behalf by:

Condensed Consolidated Statement of Comprehensive Income

For the 26 weeks ended 28 January 2017

All results relate to continuing operations.

Condensed Consolidated Statement of Financial Position

As at 28 January 2017

Condensed Consolidated Statement of Changes in Equity

For the 26 weeks ended 28 January 2017

Condensed Consolidated Statement of Cash Flows

For the 26 weeks ended 28 January 2017