GMD.L Regulatory News (GMD)

13 January 2015

GAME DIGITAL PLC

TRADING UPDATE

GAME Digital plc ("GAME" or the "Group"), the specialist video games retailer, today issues its Christmas trading update for the 11 week period to 10 January 2015, as well as providing an update on trading for the first 24 weeks of the financial year to 10 January 2015.

· Highly competitive Christmas trading period

o increased promotional activity across the market, including highly attractive hardware and software bundles, drove significant hardware volume growth of both next generation consoles - installed base in UK and Spain now over 4 million, ahead of market expectations at launch in November 2013

o Black Friday activity accelerated consumer behaviour, driving lower average selling prices (ASPs) and unprecedented bundling of games over the period

o UK content performance robust, with UK mint software sales up 8%; Spanish market challenging

· The Group's strategy is to recruit customers to whom it is then able to sell mint and preowned physical and digital content over the medium to long term in order to drive customer lifetime value

o our leading customer offers over the period have driven substantial hardware volume growth ahead of budget, but at lower ASPs and margin

o as a result, although hardware volume sales increased 25.1% year-on-year in the UK, Group sales for the 11 week period declined by 5.4% on a constant currency basis

o we continue to make good progress on customer engagement and strategic initiatives

§ further momentum in sale of digital content; digital receipts up over 40% year-on-year since the start of the year; market share increased to approximately 60% in UK and Spain

§ over 250,000 reward card customers added across the Group over Christmas

· The Group's operational execution over the Christmas period was smooth, resulting in a clean stock position and continued control of operating costs, delivering strong cash generation

o the Board reiterates its intention to return excess cash to shareholders and will update shareholders in due course

Outlook 

The Board expects to achieve sales growth in the second half, with a good schedule of new software releases against the backdrop of a rapidly growing installed base of Xbox One and Playstation 4 consoles to which to sell physical and digital content and accessories.

Due to the lower than expected margin rates being achieved on hardware, the Board expects that underlying earnings before interest, tax, depreciation and amortisation for the 52 weeks ending 1 August 2015 will be broadly in line with last year of £51.3 million.

The Board will announce its half year results for the 26 weeks ended 24 January 2015 on 24 March 2015.

Martyn Gibbs, GAME Digital Chief Executive Officer, said:

"Our market has experienced significant uptake of Xbox One and PlayStation 4 with both achieving the current installed base in half the time of their predecessor consoles in our core UK market. We have exceeded our expectations for the first year of the new console releases and are well placed to capitalise on over 4 million Xbox One and PlayStation 4 owners in our two major markets.

"Our strategy is to grow customer lifetime value and over the Christmas trading period, starting with Black Friday, we invested margin in offering gamers competitive product propositions through the bundling of games with hardware and reduced pricing, to recruit as many new generation customers as quickly as possible. We now have a huge customer base within the new formats, to sell both mint and preowned physical and digital content and accessories to over the long term.

"We have a solid line up of new physical and digital games being launched in our second half and have already secured a number of key exclusives. Our teams remain focused on delivering our unique specialist gaming experience for our customers."

Enquiries:

Market and Business Update

* On a constant currency basis

1. Source: GFK-Chart Track; market share based on value of retail sales of mint hardware, mint software, console digital content and gaming accessories. Data available to period ending 3 January 2015.

2. Total mint games markets of UK and Spain aggregated

Compared with last year, greater hardware availability over the Christmas period fuelled intense competition between the platform holders across the market, presenting incredible value for our customers and driving substantial unit volume growth over the period (the Group's next generation hardware volumes in the UK were +25% over the Christmas trading period, with some 16% of H1 unit console sales sold between Black Friday and Cyber Monday).

The unprecedented promotional activity seen has also driven a faster than expected fall in the average selling prices of hardware as well as a greater prevalence of software 'bundling', leading to lower market value growth than unit growth in both of the Group's markets.

As a result, over the 11 week Christmas trading period, the Group delivered overall revenues of £369.3 million (2013/14: £396.0 million), down 6.7%, or 5.4% on a constant currency basis, whilst over the first 24 weeks of the year, total Group revenues have increased 0.4% (1.9% on a constant currency basis) to £558.9 million.

GAME continues to perform well in the sale of digital content, with total digital receipts up over 40% year-on-year since the start of the year across the UK and Spanish businesses. The Group's market share on digital content has increased by 5% in the UK this year and by over 11% in Spain and now stands at approximately 60% in each market.

Our preowned category performance continues to be strong, with sales up 12.1% in the first 24 weeks. New generation formats, mobile phones and tablets are proving popular for customers to trade-in and purchase and we expect this trend to continue into H2, helped by the increased supply of popular titles due to bundling of software over Christmas.

As a result of our customer recruitment initiatives, over 250,000 new customers signed up to the Group's reward card programmes during the period, with total membership across the UK and Spain over 16 million. Our GAME App added over 200,000 newly registered customers over the peak period, taking the total number of registered users to over 1 million, and in the first six months since its launch we have signed up over 300,000 customers to GAME Wallet (our e-payment system).

We have recently launched a beta trial of our Mobile Games App for Android phones and are set to launch GAME Marketplace in the coming weeks.

The Group's overall market share by value for the financial year has been maintained at 33% in the UK, whilst in Spain our share has risen 2% to 37% following the addition of 44 GameStop stores in November 2014 which have all been rebranded as GAME stores.

This activity has driven the installed base of Xbox One and PlayStation 4 owners in our two major markets to over 4 million within 13 months of the new console format launches, well ahead of expectations at the time of launch - and twice as fast as the previous generation of consoles.

The divergence in the performance of the UK and Spanish markets has become more pronounced since the end of the first quarter. In the UK, the value of software sales rose 8% year-on-year over the Christmas period, as consumers purchased more content for next generation consoles, whilst in Spain, software sales fell 7% over the same period.

The impact of lower hardware prices and bundling on gross margin has been partially offset by mix effects, resulting in a net 40 basis point reduction in margin compared with the comparative period last year. The underlying impact on margin is expected to continue into H2, although due to the impact of an improving mix, the Group's overall gross margin percentage for the full year is expected to be broadly in line with last year.

Stock levels were well controlled during the period and the Group continues to maintain strict cost disciplines across the business.

Cash generation remains strong, with average week-ending Group cash balances across the 11 weeks to January 10, 2015 of approximately £110 million (2013/14: approximately £45 million). The Group continues to benefit from significantly improved supplier credit terms since IPO. The Board reiterates its intention to return surplus cash and will update shareholders in due course.