TIDMFDEV
RNS Number : 3949Y
Frontier Developments PLC
09 September 2020
Frontier Developments plc
FY20 Financial Results
Strong year and positive outlook
Frontier Developments plc (AIM: FDEV, 'Frontier', the 'Group' or
the 'Company') , a leading developer and publisher of videogames
based in Cambridge, UK, publishes its full-year results for the 12
months to 31 May 2020 ('financial year 2020' or 'FY20').
FY20 Financial Highlights
FY20 FY19
(12 months to (12 months to
31 May 2020) 31 May 2019)
Revenue GBP76.1m GBP89.7m
--------------- ---------------
Operating profit GBP16.6m GBP19.4m
--------------- ---------------
Operating margin % 22% 22%
--------------- ---------------
EBITDA* GBP31.5m GBP29.0m
--------------- ---------------
EPS (basic) ** 41.3p 46.9p
--------------- ---------------
Operating cashflow*** GBP13.6m GBP16.8m
--------------- ---------------
Net cash balance GBP45.8m GBP35.3m
--------------- ---------------
*Earnings before interest, tax, depreciation and
amortisation
** Restated for a deferred tax adjustment as per note 2
*** EBITDA excluding non-cash items less investments in game
developments and game technology
-- Our major new game release in FY20 was a 100% own-IP title,
Planet Zoo, which released exclusively on PC almost halfway through
FY20, in November 2019, and is Frontier's biggest selling game to
date on PC during an equivalent time period.
-- In comparison our major new game release in FY19 and our
biggest selling game to date, Jurassic World Evolution, benefited
from a major existing global IP franchise and launched
simultaneously on multiple platforms, releasing on PC, PlayStation
4 and Xbox One at the start of FY19 alongside the Jurassic World:
Fallen Kingdom film in June 2018.
-- Total revenue in FY20 was GBP76.1 million (FY19: GBP89.7
million). As expected the lower level of revenue year-on-year
reflected the timing of releases during the two financial years and
that Planet Zoo launched on the PC platform only.
-- All four games, Elite Dangerous, Planet Coaster, Jurassic
World Evolution and Planet Zoo, benefitted from Frontier's 'launch
and nurture' strategy in FY20, with each providing significant
revenue contributions through both base game sales and
paid-downloadable content ("PDLC").
-- Strong trading performance delivered operating profit, as
reported under IFRS, of GBP16.6 million for FY20 (FY19: GBP19.4
million), with operating profit margin maintained at 22% despite
the lower level of revenue.
-- Cash balances increased by GBP10.4 million during the year to
GBP45.8 million (FY19: GBP35.3 million).
FY20 Strategic Highlights
-- A fourth successful new game launch
o Planet Zoo released successfully in November 2019, quickly
establishing itself as a genre leader, reflecting its rich,
authentic animal and management simulations, with the tools which
enable players to craft and share the most beautiful creations with
a large and growing game community
o Over 1.0 million base game units sold in under six months
o Strong engagement with free content and PDLC has helped to
keep players active, attract new players and generate additional
revenue, with the Arctic pack released just before Christmas, the
South American pack at Easter and the Australia pack which launched
in August, after the end of FY20
-- Frontier's 'launch and nurture' portfolio strategy continues to deliver
o Frontier reduces risk by identifying opportunities to create
genre-leading games that build on its strengths and unique track
record
o Post-launch, Frontier nurtures its games for many years
through community engagement and additional content
o Elite Dangerous continues to grow, with the success of the
recent Fleet Carriers update helping to achieve its highest ever
player numbers. Elite Dangerous: Odyssey, our major new paid-for
update to launch in calendar Q1 2021 (in FY21), was revealed in
June 2020 to positive reception
o Planet Coaster also continues to grow, making more revenue in
FY20 than in FY19, wholly on PC. We have announced Planet Coaster
is coming to Xbox One, PlayStation 4, Xbox Series X and PlayStation
5 later this year
o Jurassic World Evolution benefitted from several PDLC packs in
FY20, including the Jurassic World Evolution: Return to Jurassic
Park pack at Christmas, our most successful PDLC to date, which
continues to perform well. Jurassic World Evolution: Complete
Edition is coming to the Nintendo Switch on 3 November 2020
o Nearly 60% of revenue in FY20 was generated by Elite
Dangerous, Planet Coaster and Jurassic World Evolution,
illustrating the ongoing popularity of the Company's games, and the
success of Frontier's launch and nurture strategy in generating
strong returns over many years
o Over 10 million base game units sold across our four titles as
of 31 May 2020 (Elite Dangerous 3.5 million, Planet Coaster 2.5
million, Jurassic World Evolution 3.0 million and Planet Zoo 1.0
million)
-- Strategic progress with new IP licences and the addition of third-party publishing
o IP licence signed for annual releases of Formula 1(R)
management games from 2022 onwards
o IP licence signed with Games Workshop for a real-time strategy
game based on the popular Warhammer Age of Sigmar brand
o Frontier Foundry, our own games label for third-party
publishing, started strongly with six games signed to date,
including one already released, one more announced and more coming
soon
-- Current trading and outlook: Strong roadmap for FY21 and beyond
o Sales across all our games in FY21 to date have been
consistent with expectations after a strong close to FY20
o Our fantastic team continue to deal positively with the
challenges posed by Covid-19; continuing to develop new content and
support our existing games, and each other
o Major platform launches for existing titles in FY21 - Planet
Coaster is coming to PlayStation and Xbox and Jurassic World
Evolution and RollerCoaster Tycoon 3 are coming to the Nintendo
Switch
o A new era for Elite Dangerous in FY21 with Elite Dangerous:
Odyssey coming in calendar Q1 2021
o Two award-winning new games launching from Frontier Foundry in
FY21: Struggling and Lemnis Gate
o On track to deliver record revenue in FY21 within the range of
GBP90 million to GBP95 million
o Two major new multi-platform internally-developed game
releases scheduled for each of FY22 and FY23, each benefitting from
world class IP licences
David Braben, Chief Executive, said:
"I am delighted to report on a year of great progress for
Frontier. We achieved our biggest PC launch to date with Planet
Zoo, we agreed two major new IP licences and we have now signed our
first six Frontier Foundry third-party publishing deals.
It's all thanks to our terrific team, who coped so well during
the Covid-19 lockdown, and our ever growing player communities
around the world. During the lockdown, we have seen an accelerated
move towards digital sales of games and many more people becoming
gamers, as games become an ever-more vital component of the
entertainment industry. Rich, community-focused games like ours
that are attractive to play but take years to master, have
performed very well during these challenging times, and we have
every expectation of them continuing to do so, notwithstanding the
macroeconomic uncertainties presented by the Covid-19 pandemic.
We have started the financial year well and are on track to
deliver record revenue in line with our expectations. Our future
looks bright with multiple major releases confirmed for FY21 and an
exciting roadmap for FY22 and beyond, adding great relationships
with Formula 1 and with Games Workshop to an already rich
portfolio."
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 394 300
David Braben, CEO
Alex Bevis, CFO
Liberum - Nomad and Joint Broker +44 (0)20 3100 2000
Neil Patel / Cameron Duncan
Jefferies - Joint Broker +44 (0)20 7029 8000
Max Jones / William Brown
Tulchan Communications +44 (0)20 7353 4200
Matt Low / Deborah Roney / David Allchurch
About Frontier Developments plc
Frontier is a leading independent developer and publisher of
videogames founded in 1994 by David Braben, co-author of the iconic
Elite game. Based in Cambridge, Frontier uses its proprietary COBRA
game development technology to create innovative genre-leading
games, primarily for personal computers and videogame consoles. As
well as self-publishing internally developed games, Frontier also
publishes games developed by carefully selected partner studios
under its Frontier Foundry games label.
Frontier's LEI number: 213800B9LGPWUAZ9GX18.
www.frontier.co.uk
Chairman's Statement
Frontier's amazing team has delivered another great year of
progress for the Company, which is particularly pleasing given the
operational challenges that were presented by Covid-19 during the
second half of the financial year.
The biggest launch event during the period was the release of
Planet Zoo in November 2019. I'm delighted for the team to see yet
another successful launch, the fourth major new game release since
the transition to self-publishing in 2013-2014, with Planet Zoo
becoming Frontier's biggest seller on PC to date, during an
equivalent time period. Frontier's 'launch and nurture' strategy
continues to deliver, with all four games achieving material
revenues in the period from both base game sales and PDLC sales. We
believe our proven model of identifying, and then executing upon,
opportunities to establish and maintain ourselves as genre leaders
creates one of the lowest risk and highest return business models
in the games industry.
FY20 was also a period of significant strategic progress for
Frontier. Our commitment to quality, expertise in digital
publishing and increased profile have helped us secure major new IP
licences with two fantastic organisations: Formula 1(R) and Games
Workshop. The Formula 1(R) licence is Frontier's first annual
sports licence and a significant strategic step, bringing together
our experience of developing deeply engaging, high-fidelity
simulation games and one of the most management-rich sports in the
world. The Games Workshop deal provides the team with a strategic
opportunity to bring a real-time strategy game to a wider audience
on console as well as PC. These agreements are further evidence of
Frontier's reputation as a trusted partner to some of the world's
highest-profile brand owners.
Significant progress was also made during the period with our
third-party publishing initiative, now branded under our Frontier
Foundry games label. Five games were signed during the period with
a further game signed in July 2020. Frontier Foundry is set to
become a material part of our business in the future, and it was
pleasing to see the first game, Struggling, release in August
2020.
Our Board of Directors, comprised of seven highly experienced,
capable and motivated individuals, continues to operate
effectively, facilitated by monthly reporting and regular meetings.
Meetings during the lockdown continued via video conference. There
is regular debate and challenge at Board meetings, which is
facilitated by each of our different areas of expertise, business
experiences and individual perspectives. I believe we are all well
aligned in terms of our strategy and direction, with a clear view
of Frontier's continued plans for success.
Frontier's success, as always, is due to the hard work and skill
of our talented team. I'd like to thank all of our staff for their
effort and dedication during the period, particularly through the
challenges of lockdown and working-from-home. We look to the future
with confidence based on our great team, our successful portfolio
and our exciting roadmap.
Chief Executive's Statement
Reflecting on our progress since writing my last report in the
summer of 2019, I am delighted with the achievements of our teams
across all areas of our business, particularly through the
challenges of Covid-19.
Regarding our internally developed game portfolio, we have
further expanded our offering with another successful major game
release, Planet Zoo, which has become our best-selling PC game,
crossing 1 million base game units in less than six months. As
usual we have supported all of our games with free and paid
content, together with active community management, which has in
turn delivered strong ongoing sales performance. As a result, all
four titles delivered material contributions in FY20, and it was
pleasing to pass a sales milestone for Frontier in the period with
a combined total of 10 million base game units sold across our four
titles since we listed.
In addition to new game developments and PDLC packs, our teams
have been working hard to deliver three major new releases for our
existing game portfolio during FY21. Jurassic World Evolution:
Complete Edition will be launching on the Nintendo Switch, Planet
Coaster: Console Edition is coming to PlayStation and Xbox, and
players will soon be able to get out of their ships and SRVs
(Surface Reconnaissance Vehicles) with Elite Dangerous: Odyssey.
These major achievements are made possible by the talent,
experience and hard work of our teams, combined with our technology
leadership through the continued investment in our own COBRA game
engine.
In spring 2020 we signed two major new IP licences to further
strengthen our future roadmap. In March 2020 we confirmed a deal
with Formula 1(R) with exclusive rights to an annual PC and console
management game, with the first game planned for the 2022 F1
season. In May 2020 we revealed a licence with Games Workshop for
exclusive rights to a real-time strategy game for the globally
popular Warhammer Age of Sigmar. It's great to see such strategic
progress with IP owners and follows on from our successful
partnership with Universal Games and Digital Platforms on Jurassic
World Evolution, Sony Pictures with Ghostbusters and previous
partnerships during our work-for-hire period.
These deals, together with the unrevealed major global IP
licence announced in March 2019, mean we now have two major new
multi-platform game releases for each of FY22 and FY23 which will
each benefit from world-class IP licences. We anticipate achieving
two major new releases per year on average thereafter from internal
developments, which is a significant step up from the cadence of
one release every two years from our first two releases in December
2014 (Elite Dangerous) and November 2016 (Planet Coaster).
FRONTIER FOUNDRY
Frontier Foundry, our own games label for third-party
publishing, leverages our publishing capability, industry
experience, commercial partnerships, and financial resources to
supplement our own development roadmap by partnering with other
high-quality developers to bring more games to market. It
emphasises the importance of our long experience of development and
our thorough understanding of the issues that arise during
development. I believe a significant reason we have been, and will
continue to be, successful here is that we are one of the few
developer-led publishers in the world and this translates to great
working relationships with developers who choose to work with
Frontier Foundry.
We have made excellent progress with six games signed to date,
including five signed during FY20. Through this initiative, we
published our first title, Struggling, on PC and Nintendo Switch in
August 2020. The response to this new and unique game has been
positive, for what is clearly quite a different game to our
existing internally developed portfolio. We have one more title,
Lemnis Gate, scheduled for the current financial year, FY21, with
three titles so far planned for FY22 and one for FY23. We are
aiming for Frontier Foundry to achieve five to six releases per
year from FY23 onwards, which should enable this exciting new part
of our business to become a material contributor.
CURRENT TRADING AND OUTLOOK
Frontier is very well placed for the future with exciting major
releases planned for FY21 to support and extend our four existing
and successful franchises, together with new games published by
Frontier Foundry.
Elite Dangerous has continued to be very successful since its
first early access launch in December 2013 and full release in
December 2014. It has hit its highest player numbers this year, in
its seventh year, helped by the launch of Fleet Carriers and the
announcement of the major forthcoming update Elite Dangerous:
Odyssey due later in FY21 (in calendar Q1 2021), in which players
will be able to explore and fight on foot.
Planet Coaster has also continued to perform well, earning
greater revenue in FY20 than it did in FY19, wholly on PC.
Traditionally, management and simulation games have tended not to
appear on console because of the complexity of the controls, but
the Frontier team did an excellent job with Jurassic World
Evolution on console and it was very successful. With this
invaluable experience now Planet Coaster: Console Edition is coming
to console later this year, on both the existing generation, Xbox
One and PlayStation 4, and the new generation coming out later this
year, PlayStation 5 and Xbox Series X, which is another exciting
milestone for the game.
Jurassic World Evolution is still very popular, with the
Jurassic World Evolution: Return to Jurassic Park PDLC pack
performing well in FY20. In August 2020 we revealed that on 3
November 2020 (in FY21) we will be bringing Jurassic World
Evolution to the Nintendo Switch console. We are incredibly proud
of the quality the team have achieved on Nintendo Switch, getting
the full game to work without compromise.
Planet Zoo launched to great acclaim in November 2019, and has
gone from strength to strength since its release. Both the Arctic
and South America PDLC packs performed superbly in FY20, with the
Australia PDLC pack in August 2020 (in FY21) following them after
the end of the financial year. Additional PDLC packs are
planned.
In addition to those major releases for our four existing games
in this financial year, FY21 will also benefit from two Frontier
Foundry games. The award-winning Struggling was launched in August,
and Lemnis Gate, also an award-winning game, is coming later in the
financial year. We are also very pleased that the timeless
RollerCoaster Tycoon 3 will be coming to Switch.
Taking into account actual performance to date and projections
for the remainder of FY21, including the anticipated sales of
future game/content/platform releases coming during the financial
year, the Company is on track to deliver record revenue within the
range of GBP90 million to GBP95 million for FY21 (the 12 months to
31 May 2021).
STRATEGIC REPORT
Our industry
The games market continues to grow strongly, and for several
years now it has been the largest sector within the $300+ billion
entertainment industry which includes games, film, TV, and
music.
With audiences craving greater levels of interactivity within
their entertainment experiences, the lines between games, film and
TV continue to blur as each look to add more interactions with
their audiences. Frontier already produces hundreds of hours of
live 'TV' content (via services like YouTube and Twitch TV)
directly each year supporting the different games and their
communities, with many thousands of hours from the numerous
streamers that regularly play the games, in addition to the games
themselves. Frontier is well placed to both drive and support
future changes in the wider industry, including the potential
addition of whole new forms of entertainment, leveraging our strong
relationships with leading entertainment companies.
Historically, the games market has been seen as three different
but very roughly equal sectors by revenue: PC, console and mobile,
but in the context of the rise of new services especially
streaming, it is worth looking at these again. PC and console are
characterised by their high-quality cinematic content. Typical
sessions are half an hour or more, with a fair amount of 'context'
that the player carries in their head. With mobile they are more
typically five minute sessions, where there is almost no 'context'
to remember - everything is immediately apparent on the screen.
That is not to say that 'cinematic' games with longer play times do
not appear on mobile, but they are more likely to be played
statically with a constant network connection, so arguably are not
literally 'mobile'; they are also not typically the more successful
- such games generally have better success on PC or console, at
least in the Western world. This, together with the expectation of
lower price or free to play makes mobile games a very different
market. The rise of streaming services may help blur the boundaries
once such services become more established over the next few
years.
Our main development focus is on rich, engaging cinematic
experiences on PC and console, as the audiences on these platforms
greatly value games exhibiting Frontier's key development strengths
of compelling gameplay and high production quality. Currently, the
mobile sector is overcrowded and has a very low barrier to entry,
making audiences less predictable and much less influenced by
quality. 'Discoverability' (the ability to find a title) is also
better on PC and console, with excellent support from reviewers,
content creators and social media.
The entire games market is moving rapidly towards digital
download as the primary delivery model, and this transition has
almost certainly been further accelerated by the Covid-19
stay-at-home restrictions during 2020. Mobile and PC have been
close to 100% digital for several years, and the console audience
is quickly catching up, as focus shifts to the new generation of
hardware, and older business models are replaced. Digital sales
represented 97% of Frontier's revenue in FY20, with only 3% from
sales of physical discs (FY19: 15%).
Streaming services provide an interesting new distribution model
which has emerged over the last couple of years. These services
have only taken a small share of the market to date, and technical
considerations and player inertia might mean that streaming games
from the cloud to consumer devices may take several years to become
mainstream.
Our particular focus on 'launch and nurture', which is
effectively a 'games as a service' model, is working very well,
producing four successful titles so far, but we will continue to
monitor and consider different delivery model options as the
industry continues to evolve.
Our vision
Our vision for Frontier is to become one of the most respected
entertainment companies in the world. As the boundaries between the
different entertainment mediums continue to blur, Frontier is in a
great position to lead the evolution and the merging of those
mediums. As a leading developer and publisher of high-quality
sophisticated and immersive game experiences, the foundations for
achieving our vision are strong. We have a long and diverse track
record of success in both development and publishing, we have
strong relationships with platforms and IP owners and have become a
trusted and go-to partner for major global IPs, and we nurture our
games and our player communities over many years to achieve
sustainable success.
In the medium term we are laser focused on continuing to support
and grow our game portfolio, which includes both our own internal
developments and our partner developments under our Frontier
Foundry games label. Meanwhile, we continue to expand our existing
relationships and add new ones within the wider entertainment
industry, to support our longer-term vision of being a key player
in digital entertainment.
If you look back ten years and imagine listing what you thought
the top dozen most respected entertainment companies would be in
2020, it is likely even those in the industry would only get about
half of them right (failing for example to include companies like
Amazon, Netflix and Tencent). The industry now is pretty well
unrecognisable from what it was then. Similarly in ten years' time
the entertainment industry will again be unrecognisable from where
it is now, as will Frontier, but our goal is to be on that
list.
Our strategy and business model
We believe that publishing our own games, and selectively those
of other high-quality development studios, is the best way to
maximise the benefit of our core skills, our assets and our COBRA
technology platform. The Company's focus is on identifying,
developing and delivering top-quality, PC and console titles for
digital distribution.
We will continue to follow our repeatable model to support our
games over many years with new releases and updates, and to create
further titles in underserved game genres where we can use our key
expertise, knowledge and/or valuable external IP to deliver highly
differentiated, best-in-class player experiences. Frontier's games
take a long time to fully master, so yield longevity and great
value for players. This longevity and loyalty of our great
communities should help further build our revenue pipeline over the
long term.
Our strategic objective is to create long-term sustainable
growth through successfully publishing a growing number of game
franchises. Our strategic focus is on two key areas:
-- developing our business to achieve repeatable success; and
-- creating and managing game franchises.
We continue to grow our teams so that we can continue to support
our existing games while also increasing the frequency of major new
releases. The increase in the number of releases supporting our
existing games, such as major PDLC launches, helps to smooth
revenue, but major releases of new games are still a significant
factor in the revenue stream. As we scale the frequency of new game
releases over future years this will have a smoothing effect on
growth, but in the meantime revenue is sensitive to the specific
schedule of such releases and may therefore exhibit 'stepped'
behaviour across financial years, as those new games are
released.
We are growing our portfolio, and consequently we are increasing
our development team to enable us to support additional games while
generating new content for our existing titles. We will continue to
grow our resources and capability to enable us to achieve two major
new internally developed releases per year, on average, from FY22.
This will not require us to increase our workforce linearly because
supporting an existing title typically requires fewer staff than
creating a new one.
As stated in the Group's previous Annual Reports and other
communications, in addition to the current core model of using
internal resources, supplemented by outsourced services, the Group
will continue to explore other opportunities to accelerate its
scale-up.
Frontier Foundry, our own games label for third-party publishing
first announced in June 2019, continues to grow, with six titles
signed to date, including two for FY21 (Struggling and Lemnis
Gate), three for FY22 and one for FY23. We are looking to achieve
five to six releases per year from FY23 onwards, which should
enable this exciting new part of our business to become a material
contributor.
We will also continue to explore opportunities for commissioning
(outsourcing the majority of development of Frontier games to other
developers) and enhancing the Group's franchise portfolio or
capabilities via acquisitions. The Group has considered a number of
possible acquisitions, but so far none has met our valuation,
product alignment and culture fit thresholds.
Our people
Frontier employs amazing people who are instrumental in making
games that define genres, break boundaries and sell millions of
copies to gamers around the world. We share a vision of developing,
launching and nurturing world-class games that put both Frontier
and the games industry itself at the forefront of the global
entertainment industry.
Our Frontier team continues to expand, giving us more
opportunity to grow our game portfolio. Three years ago Frontier
initiated an ambitious hiring and scale-up plan which enabled us to
achieve an average of 10 new hires per month during both FY19 and
FY20. This puts our Frontier team at 520 as of 31 May 2020 and over
560 as at 31 August 2020.
Frontier is committed to providing a stimulating atmosphere for
high achievers who are passionate about what they do. Our aim is to
create and maintain a safe, collaborative and rewarding environment
for our people.
As a self-publishing developer, we effectively plan our roadmap
in order to optimise team work schedules. We seek to avoid a need
for excessive overtime by plotting challenging yet realistic
timelines for project delivery. A healthy work-life balance is an
important part of our culture and we support this through offering
a range of family-focussed benefits as well.
We reward our teams through a structure of remuneration which
includes a competitive base package, bonus and equity schemes, as
well as a wide array of benefits and perks. Frontier reviews this
rewards and remuneration structure regularly to ensure that
everyone in the team continues to share in the success that they
help to deliver.
Developing our business to achieve repeatable success
We invest our development resources in games with strong
franchise potential, primarily on PC and console. In order to
maximise the return on our core skills and assets we target game
genres where we have established expertise and/or intellectual
property within our teams. Audiences on the chosen platforms tend
to value games that exhibit Frontier's key development
strengths.
To accelerate our progress and increase the frequency of
launches we are continuing to scale up our organisation, not just
in terms of staff numbers, but also in terms of leadership skills,
training, organisational structure, process and external
partnerships.
We also invest in the necessary facilities to support our
world-class team. In April 2018 we moved all of our staff into a
brand new office space on the Cambridge Science Park, with a great
many custom features. Our teams managed admirably during the
work-from-home restrictions of Covid-19, and now as we carefully
and selectively transition back to the office we will strive to
maximise the efficiency and effectiveness of office working,
potentially in combination with increased flexibility, and perhaps
ultimately the ability to grow further without seeking additional
office space.
We use online channels to create and engage with player
communities during game development, a practice which provides a
valuable source of feedback, and these player communities provide
excellent advocacy for each title prior to launch.
Our development process uses our proprietary COBRA development
tools and technology to facilitate innovative features and the
creation of top-quality games with strong differentiation for the
PC and console audiences. Our control of this technology also
removes the risks related to ongoing access to third-party licensed
technology alternatives, as has happened in the past where
successful tool providers are acquired by a major rival player. In
addition, the direct engagement with those involved in the engine
development, and the ability to control the delivery dates and new
feature roadmap of that technology can be invaluable, for example
giving first-mover advantage with new technologies.
Creating and managing game franchises
In order to maximise the return on our core skills and assets we
target game genres where we believe we can deliver both
high-quality, differentiated offerings using established expertise
and intellectual property, and have a strong chance of successful
market entry.
We use this proven, rigorous and repeatable model to invest our
resources with the intention of creating world-class games with
strong franchise potential and plans for strong post-launch product
support to help realise this potential. With Elite Dangerous we
knew there had been significant success in the past, not least
because of our own games in that area in previous decades, and also
that there were no games like it at the time, and we believed that
we possessed the differentiated technical capability to digitally
replicate our own Milky Way Galaxy. We verified that there was a
significant appetite for such a game with Kickstarter crowdfunding
at the end of 2012 and early 2013, and the game itself has now
vindicated that decision with continued success in its sixth year
of full release (its seventh year since early access). For
comparison, other high-profile space exploration games that entered
Kickstarter in the early 2010s have still not released at all,
speaking to the challenges of the genre and to our teams expertise
and ability to deliver compelling product in a timely fashion.
With Planet Coaster, we were releasing a title in competition
with an established and well-loved franchise, RollerCoaster Tycoon
3. Frontier developed RollerCoaster Tycoon 3 for Atari in 2004 when
we were a work-for-hire business and it was a very successful game
for over a decade. The success of RollerCoaster Tycoon 3 over such
a long period of time meant there was no meaningful Coaster Park
competition within the sector for all that time. We knew we could
do a better job, and many of the same team that made it back in
2002-2004 were still at Frontier, hence our confidence we could
'knock it out of the park' with a new game. In other words, we were
confident it was therefore underserved and that we could create its
natural successor as another genre-defining title. The fans loved
what they saw during early access and, despite Atari launching
RollerCoaster Tycoon World the day prior to Planet Coaster's
launch, we achieved that aim and Planet Coaster now dominates the
sector and continues to be successful in its fourth year of
release, indeed earning more revenue in FY20 than it did in FY19.
We believe our iterative success with RollerCoaster Tycoon 3 and
Planet Coaster has built up unique capabilities within Frontier to
create and manage "simulation management" experiences.
Jurassic World Evolution followed in June 2018 (in collaboration
with the team at Universal Games and Digital Platforms), and in
November 2019 Planet Zoo released as our fourth self-published
game, following the same model and leveraging our unparalleled
expertise of in-game creature portrayal, and management gameplay.
The last successful game in the zoo game sector was Zoo Tycoon with
Microsoft in 2013, developed by Frontier for Microsoft, and with
Planet Zoo we are confident we have developed a game that will
dominate its sector for many years to come. As we progressed from
Zoo Tycoon to Jurassic World Evolution and now Planet Zoo, we
believe we have developed unique skillsets in terms of
realistically simulating and bringing beautifully to life large
animals, alone and in herds, both historical and current.
With each of our game franchises, we plan for the long term, and
how best to support and sustain the audience for each one. A
dedicated team monitors progress based on sentiment towards the
games, success of each of the distribution channels and platforms,
and the up-take of additional content both free and paid, allowing
us to reach the widest possible audience over time. Free content is
a valuable tool to help retain and restore existing audiences and
support sentiment, while paid content both helps monetise the game
and brings new players as new content triggers online coverage on
platforms like YouTube or Twitch, increasing sales of the
corresponding base game and for other paid expansion content.
We also monitor the geographical performance of our titles,
understanding and monitoring under and over performance versus
expectations in each territory, and will continue to look for
opportunities to tailor our price to a level more appropriate to
each local economy.
Reducing risk
Over our long, successful track record of developing a wide
variety of game genres in the work-for-hire model we developed many
areas of unique technical expertise, as well as the understanding
of how to identify and execute developments to succeed in very
different game genres.
There is a great deal of risk in the work-for-hire model, with
the biggest issue being major changes at publishers, particularly
when they became financially compromised. Moving to self-publish
our own games allowed us to gain much greater commercial reward on
the deployment of our development resources compared to our
previous (pre-2013) work-for-hire business model, and addressed
this key risk. The change of business model has enabled us to
significantly grow our revenue and our profit margins, and generate
cash, helping us to build a strong balance sheet.
Self-publishing puts us in full control of our development
roadmap, allowing us to gain the efficiencies that come from a
long-term strategic overview of our development and publishing
plans, and also insulates us against the risk of the commercial
performance of third party publishers.
Our development expertise and strategic focus on sophisticated
games that engage audiences for the long term means we have been
able to deliver great commercial success and continuing multi-year
revenues for each of our first four genre-leading games.
Building an on-going revenue stream in this way - c.60% of
revenues in FY20 were generated by our first three titles which
first released in 2014, 2016 and 2018 respectively - acts to reduce
the overall risk to the company of each subsequent new game that we
develop. As part of our publishing operations we engage with
elements of our core audience for each new game early, during
development, which also greatly helps mitigate the risk of bringing
an entirely new game to market.
Our profitability has increased through our move to
self-publishing. While we do benefit from Video Games Tax Relief
(VGTR), we report our financial operating performance before VGTR
to represent better our underlying financial performance. With
operating profit margins of 22% achieved in both FY19 and FY20
(pre-VGTR) we believe our strategy - identifying opportunities to
develop, launch and nurture high-quality, self-published,
genre-leading games that build on our strengths and unique track
record - is one that reduces risk while achieving high returns in
an industry often associated with 'hit-risk'.
We are reducing risk further, while generating incremental
revenue and profit, through our Frontier Foundry games label for
third party publishing, a strategy which further leverages our
experience and expertise. Our intimate understanding of the
development process and the strong publishing expertise we have
developed are key elements of our attraction for third party
developers.
Our expertise also allows us to curate the overall balance of
our Frontier Foundry portfolio towards success, while rapidly
broadening our audience beyond our current internally developed
genres.
The third-party publishing business model is an efficient use of
capital that reduces risk and helps us bring scale and diversity to
our portfolio which in turn helps our retail monetisation
activities - it will allow us to accelerate the growth of revenues,
profits and shareholder value.
Our future plans
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 additional 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. In March 2019 we announced an as yet unrevealed
major global IP for a game launch in FY22, and during FY20 we
signed strategically important IP licences with Formula 1(R) and
Games Workshop.
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.
We are building a broad portfolio of franchises, each different
to the last and each with the capabilities to expand over time. At
the same time we are scaling up for the future so we can release
games more frequently. All upcoming franchises will be selected
using the same approach set out above, and we already have several
in different phases of development.
Our future franchise portfolio is likely to continue to contain
a blend of Frontier-owned IP, like Elite Dangerous, Planet Coaster
and Planet Zoo, and some with third-party licensed IP, like
Jurassic World Evolution and our future plans for the Formula 1(R)
and Warhammer Age of Sigmar games. Games based on owned IP provide
Frontier with the benefit of having complete creative freedom and
higher margins, while games based on licensed IP have the potential
to more easily reach large new audiences and leverage existing lore
and characters, such as with Jurassic World Evolution. We review
the value of licensing proven third-party major global IP versus
developing our own IP for each potential future franchise on a
case-by-case basis. We also consider the long-term benefits of
relationships with these IP partners and how they can help with
future opportunities as the wider entertainment sector continues to
change, presenting ever more opportunities for new types of
entertainment.
We plan to establish and grow a significant third-party
publishing business through our Frontier Foundry games label,
working with carefully selected development partners. We have six
titles signed to date, with Struggling and Lemnis Gate for FY21,
three games signed so far for FY22 and one for FY23. We are looking
for Frontier Foundry to achieve five to six releases per year from
FY23 onwards. This not only continues our existing repeatable
model, in terms of leveraging our expertise in identifying
opportunities and publishing, but also diversifies our business
model, allowing us to increase more quickly the size of our game
portfolio, which has retail cross-selling advantages and is an
efficient use of our financial resources.
OUR IMPACT - ENVIRONMENTAL, SOCIAL AND GOVERNANCE
Since the founding of the company in 1994, Frontier has
endeavoured to conduct business in a considerate, responsible and
ethical manner. To do this, we have placed our key stakeholders -
our people, our players, our partners and our investors - at the
core of everything we do. We aim to be a leader in our industry for
creating games which in themselves, and through the process of
creating and nurturing them, resonate with the key environmental,
social and governance ('ESG') principles of our stakeholders, as
well as society as a whole.
Environmental Principles:
Frontier is committed to reducing energy use, plastic
production, carbon waste and the use of fossil fuels.
Our digital-focussed business model is such that only 3% of our
games in FY20 were released onto physical disc, much lower than
many publishers in our industry. All of our games are also heavily
compressed to ensure that our players benefit from a reduction in
the energy usage required for download time.
Our office building has a BREEAM 'Excellent' rating, which puts
Frontier's headquarters within the top 10% of environmental
commercial buildings in the UK. We've also implemented
eco-initiatives such as solar panels, a heat recovery and
ventilation system, use of 100% green energy for electricity and a
segregated waste process.
Frontier encourages similar environmentally-conscious conduct
with our people, particularly in relation to their commute to work
and the use of energy in their roles.
The company aids teams in making smart journeys through our
association with Travel Plan Plus+. As part of this, prior to
lockdown, Frontier encouraged staff commuting via car to do so in
joint occupancy with at least one team member - thereby reducing
the harmful emissions and road congestion of their daily travel. We
are proud to report we hold the highest percentage of shared
occupancy car travel in the Cambridge Science Park community.
We are also an active promoter of the cycle-to-work scheme with
an average of 130 team members cycling to work on a typical day,
prior to the national lockdown. We incentivise our people to take
advantage of this environmentally-beneficial and tax-free scheme
through secure, complimentary bike parking as well as regular
on-site bike maintenance and repairs.
Both inside the office and during our current remote-working
period, our teams work together to reduce energy usage by adhering
to a 'switch-off' policy for computers, laptops and other
equipment.
Social Principles:
Frontier carefully considers the social impact of the business
across four core areas: our people, our games, our communities and
our wider social responsibility.
-- Our People - Employee welfare is of the utmost importance to
Frontier. We are committed to creating a safe, collaborative and
rewarding work environment where members of our team can prosper.
To achieve this Frontier looks to provide stimulating experiences
which ensure our staff feel engaged, connected and satisfied in
their work lives.
The wellbeing of our team is a key part of this experience and
we support this through various initiatives including promotion of
a healthy work-life balance, on-site and virtual facilities,
seminars and events, private healthcare, an employee assistance
programme and a flexitime work system. Frontier also looks to
provide a competitive remuneration package including an array of
optional benefits which can be tailored to best complement each
individual's personal lifestyle.
Our workforce is comprised of over 30 nationalities from around
the globe. We seek to diversify the company skillset through our
sponsorship for Tier 2 Visa, which enables us to source first-class
talent not only from our local regions but also across Europe. This
sponsorship status will automatically transfer to a similar scheme
post-Brexit.
Frontier is also proud to support a community of co-workers who
associate with LGBTQIA+ views and preferences. The team shares a
rich tapestry of culture and diversity which aids the business in
bringing authenticity and representation to our games and player
communities.
We aim to offer all team members equal opportunities for
development, progression and giving feedback; and continue to
identify new ways for the company to achieve more ground in this
area. One of the key challenges still facing the UK Tech sector is
a disparity in the national talent pool between female and male
software developers. As an illustration of these challenges, whilst
Frontier has increased our overall female-filled roles in the last
year, there has been less increase within technical programming
roles due to only 15% of the UK's coding talent associating as
female. Frontier will continue to support existing and new
initiatives to increase the female talent pool for technical
programming in the longer term. Our strategy is to target
individuals at a younger age in order to generate interest and
educate on the career possibilities within the gaming industry.
-- Our Games - Our portfolio delivers sophisticated, creative,
immersive and social experiences, which typically provide large
digital worlds that our players enjoy across 203 regions over 7
continents. Fundamentally we value quality in our products, through
a dedication to excellent standards which has continued to attract
existing and new players to our diverse titles. We have been
particularly proud of the strong engagement with our games during
the Covid-19 lockdown. Frontier has looked to positively contribute
to and support the lives of our players through these unprecedented
times.
Transparent communication with our users is another significant
focus for our business. We ensure that players are clearly informed
of what they are purchasing - whether it's a game or PDLC - and the
company seeks to avoid any systems which relate to a "loot box"
type of monetisation.
We also feel strongly about our responsibility for players' data
privacy and protection. Frontier secures any player data under
government GDPR regulations and through conditions of the Data
Protection Act of 2018.
-- Our Communities - We create and nurture large player
communities for our games, providing free and paid content, news,
video streaming, and competitions to achieve long-term positive
engagement. We support and encourage player connectivity through
forums and regular community events which allow the various
personalities of each title to come together. This year we pivoted
the annual 'Lavecon' event, which celebrates Elite Dangerous, onto
a digital platform to engage the community through virtual panels,
interviews and hosting gameplay streams whilst in lockdown.
-- Wider Social Contributions - Frontier looks for regular
opportunities to support both our physical neighbours and our peers
within the gaming industry and wider sector. We focus our
assistance on sponsoring various charitable initiatives, including
strong support and regular partnerships with a few key causes such
as:
-- Special Effect - A really worthwhile charity that puts fun
and inclusion back into the lives of people with physical
disabilities through discovery, exploration and creativity in video
games.
-- MIND - A reputable mental health charity supporting and
raising awareness for individuals with mental health problems.
-- Cambridge Half Marathon - A local fundraising event
supporting both national and Cambridge-based initiatives and
bringing the local community together to showcase our beautiful
city.
Frontier actively promotes computer science and digital skills
within the UK. This year we have sponsored the Centre for Computing
History in Cambridge, helping to fund the museum's ambitious
computer and video game preservation and education project. We hold
a strong and positive influence on computer science education -
with our CEO, David Braben as one of the founders of the Raspberry
Pi foundation, which has enabled affordable access to computing
technology across the world. Frontier continues to push for
positive change in education to support future generations in their
understanding of computer science and career development.
Governance Principles:
We take governance seriously, and strive to achieve best
practice, including through compliance with the QCA's corporate
governance code.
Our governance arrangements support our objective of creating
and maintaining a safe, collaborative and rewarding environment
with appropriate policies, processes and monitoring. Further
details are set out in the governance section of our Annual Report,
which can be found via the Frontier website.
2021-2025 ESG Plans
Frontier strives for quality and this includes our approach to
our internal and external systems which have an impact on our
stakeholders and the wider world. We continue to review
opportunities to implement best practice ESG processes as well as
improving communications of our progress through ESG reporting. Any
new initiatives will be reviewed on a periodic basis to ensure we
continue to evolve with new data and protect and strengthen our
alignment with stakeholder values.
Financial Review
OVERVIEW
The combination of the ongoing financial performance of our
first three titles, together with the successful launch of Planet
Zoo in the year, yielded a strong set of financial results in FY20.
In terms of both revenue and profit FY20 was Frontier's second
biggest ever year in our 26-year history, following the record set
of results posted in FY19 through the launch of Jurassic World
Evolution in June 2018. We start FY21 in excellent financial shape,
with a strong portfolio of four existing games, an exciting roadmap
to support those four games and develop new titles, the anticipated
financial contribution from our Frontier Foundry games label, and
our strongest ever cash position - GBP45.8 million as at 31 May
2020.
TRADING
Planet Zoo was our biggest revenue contributor in the period,
generating a positive reception during the pre-order and at launch
in November 2019. As planned, Planet Zoo has gone on to continue to
deliver strong sales after its initial launch spike, quickly
becoming the clear number one immersive and high-quality zoo
simulation experience. Our usual strategy of creating and
supporting a large and active game community, supported by both
free and paid content, continues to generate sales to both existing
players and new players. It's encouraging to see Planet Zoo become
our biggest selling title to date on PC during an equivalent time
period.
That strategy of supporting and nurturing both our game, and the
community of players of our game, has been learned and refined
through our experiences on our first three titles, Elite Dangerous,
Planet Coaster and Jurassic World Evolution. That strategy
continues to pay dividends across all three of those games, with
each title providing material financial contributions in FY20
through both base game sales and PDLC.
The performance of all four games generated total revenue in
FY20 of GBP76.1 million (FY19: GBP89.7 million), with almost 60%
coming from our first three titles. The record performance in FY19
reflected a full 12 months of sales of Jurassic World Evolution
which launched alongside the film Jurassic World: Fallen Kingdom in
June 2018 on PC, PlayStation 4 and Xbox One. In comparison, FY20's
big release, Planet Zoo, was a PC-only launch which released almost
halfway through FY20.
Our primary sales strategy is through digital distribution,
working with key partners like Steam and Humble on PC and with
console owners: Microsoft for Xbox, Sony for PlayStation and more
recently Nintendo for Switch. We also added digital PC platform
aggregator Genba as a partner during the period. Digital sales
represented 97% of revenue in FY20, with only 3% from sales of
physical discs (FY19: 15%). The higher proportion of physical in
FY19 related to disc sales of Jurassic World Evolution on
PlayStation 4 and Xbox One, which accounted for around one-third of
the base game unit sales of Jurassic World Evolution on console
during that financial year.
Gross profit was GBP51.6 million in the year (FY19: GBP54.6
million) with gross margin at 68% (FY19: 61%). The 7% increase in
gross margin percentage was due to three factors: a higher
proportion of own-IP revenue rather than licenced-IP revenue (with
associated royalty costs), with own-IP Planet Zoo the big release
in FY20, compared to licenced-IP Jurassic World Evolution launching
in FY19; a lower proportion of physical disc sales which typically
achieve lower profit margins; and the tiered commission structure
established by Steam in October 2018.
Gross research and development (R&D) expenses in the period
grew by 20% to GBP24.6 million (FY19: GBP20.5 million). The
continued growth reflects further investment to support Frontier's
franchise portfolio strategy, through increases in internal staff
combined with greater levels of outsourced activity. As at 31 May
2020, Frontier had grown its total headcount to 520 staff compared
to 466 at 31 May 2019 and 377 at 31 May 2018. An element of the
increase in gross R&D expenditure also related to investments
in externally developed games through the Company's Frontier
Foundry games label for third-party publishing, which kicked off at
the start of FY20 with the Haemimont Games deal announced in June
2019.
Capitalisation of costs for game development related intangible
assets, together with continued investment in our leading game
technology, accounted for GBP19.8 million in the period (FY19:
GBP13.4 million). Costs related to new chargeable products, or the
development of technology to support new chargeable products, are
typically capitalised, subject to the usual criteria set out under
accounting standard IAS 38. Development costs associated with the
development or support of existing products are generally expensed
as incurred. Costs capitalised in FY20 represented 80% of gross
R&D expenditure compared with 66% in FY19 and 85% in FY18. The
lower capitalisation percentage rate in FY19 reflected a greater
allocation of development time spent on free content during that
period, particularly related to the launch of the Beyond series of
free updates for Elite Dangerous. The capitalisation rates in FY20
and FY18 are more typical of the Company's usual approach to the
mix of development effort between free and paid content. Frontier
believes that investment in free updates is an important part of
its strategy in supporting and nurturing games after launch.
Amortisation charges for game development and game technology
related intangibles grew to GBP11.2 million for the period (FY19:
GBP7.8 million). The increase reflected the 48-month amortisation
of the development cost of Planet Zoo, starting at launch in
November 2019, together with amortisation charges for paid content
delivering during the year for all four games, including the
substantial PDLC launched in December 2019 for Jurassic World
Evolution, the Jurassic World Evolution: Return to Jurassic Park
Pack, which is Frontier's biggest selling PDLC pack to date.
Net research and development expenses recorded in the income
statement in the period were GBP16.0 million (FY19: GBP14.9
million), being gross spend, less capitalised costs, plus
amortisation charges.
Sales, marketing and administrative expenses totalled GBP18.9
million in FY20 (FY19: GBP20.4 million). The reduction mainly
related to marketing spend, which had been higher in FY19 to
support the launch of Jurassic World Evolution alongside the film
Jurassic World: Fallen Kingdom in June 2018.
Frontier adopted IFRS 16 effective 1 June 2019, which is the
International Financial Reporting Standard for lease accounting.
IFRS 16 requires a lessee to recognise assets and liabilities for
all leases with a term of more than 12 months, unless the
underlying asset is of low value. A lessee is required to recognise
a right-of-use asset representing its right to use the underlying
leased asset and a lease liability representing its obligation to
make lease payments. Frontier has identified that its one and only
lease impacted by this new accounting standard is the lease for its
office building on the Science Park in Cambridge, which Frontier
occupied from April 2018. A right-of-use asset valued at GBP24.4
million was therefore recorded as at 1 June 2019, with a
corresponding lease liability of GBP24.4 million. Before the
adoption of IFRS 16 all costs associated with the lease would have
been charged to administrative costs. During FY20, a total of
GBP2.3 million was charged to the income statement in relation to
the lease, being GBP1.6 million within administrative costs and
GBP0.7 million within interest charges.
Overall net operating expenditure in FY20 of GBP34.9 million was
similar to the total spend in FY19 (GBP35.3 million), with higher
R&D costs being offset by a lower level of marketing spend.
Operating profit of GBP16.6 million was recorded in the year
(FY19: GBP19.4 million) representing an operating margin of 22%
which is consistent with FY19.
EBITDA (earnings before interest, tax, depreciation and
amortisation) increased to GBP31.5 million (FY19: GBP29.0 million).
However, the Company does not consider this to be a particularly
useful 'cash profit' measure of performance since it adds back
amortisation charges relating to game developments and game
technology but without also adjusting for (i.e. deducting) the
costs capitalised in the period related to those intangible assets,
producing a one-sided measure. The operating cashflow measure,
described in the later cash section, is a more appropriate measure
of 'cash profit'.
A corporation tax charge of GBP0.3 million was recorded in the
income statement for FY20 (FY19: a restated charge of GBP1.7
million as per note 2). Frontier benefits from enhanced tax
deductions from Video Games Tax Credits (VGTR) and R&D Tax
Credits, both of which help to reduce taxable profits. The Company
also benefits from tax deductions relating to employee share option
exercises, although a large element of these deductions are
credited directly to reserves rather than being recorded in the
income statement.
Profit after tax for FY20 was GBP15.9 million (FY19: GBP18.0
million) and basic earnings per share was 41.3p (FY19: 46.9p).
BALANCE SHEET AND CASHFLOW
Frontier ended FY20 with its strongest cash position to date,
with GBP45.8 million in total (31 May 2019: GBP35.3 million). Total
net cash inflow during the year of GBP10.4 million (FY19: GBP11.2
million) reflected the continued strong financial performance of
the portfolio of four existing titles, supporting further
investments in those four games, in addition to investments in new
internally developed games and third-party developed games too.
Operating cashflow, which is effectively a measure of 'cash profit'
being EBITDA excluding non-cash items less investments in game
developments and game technology related intangible assets, was
GBP13.6 million in FY20 (FY19: GBP16.8 million).
Intangible assets increased by GBP16.2 million to GBP52.7
million at 31 May 2020 (31 May 2019: GBP36.5 million) across four
asset categories: game technology, game developments, third-party
software and IP licences. Game technology and developments account
for the majority of the asset value at GBP42.9 million at 31 May
2020 (31 May 2019: GBP34.3 million). The growth in value in FY20
reflected investments in assets exceeding amortisation charges as
Frontier continues to grow its portfolio of games. IP licences grew
to GBP9.5 million at 31 May 2020 (31 May 2019: GBP2.0 million) as a
result of the deals signed with Formula 1(R) in March 2020 and
Games Workshop in April 2020.
Tangible assets relate mainly to the fit-out of the leased
office facility, which the Company occupied in April 2018. The net
balance at 31 May 2020 was GBP5.9 million (31 May 2019: GBP6.4
million).
Following the adoption of IFRS 16 "Leases" effective for
Frontier from 1 June 2019, the Company's balance sheet at 31 May
2020 includes a right-of-use asset valued at GBP22.7 million for
the Company's lease over its headquarters office building in
Cambridge. A similar figure, being GBP23.5 million in total, is
recorded as a lease liability for the lease as at 31 May 2020,
split between current and non-current liabilities.
Trade and other receivables totalled GBP12.3 million at the end
of the period (FY19: GBP5.2 million). The higher balance was due to
the strong sales of all four of Frontier games running up to the
end of the financial year, with demand for Frontier's immersive and
creative games benefitting from a boost during Covid-19 lockdowns
around the world in March, April and May, as well as planned price
promotions.
Within current liabilities (amounts due within 12 months), trade
and other payables totalled GBP13.7 million (FY19: GBP9.0 million)
with the largest factor being distribution platform commissions due
on the strong sales during the final months of FY20. Within
non-current liabilities (amounts due after 12 months), the increase
in other liabilities from GBP0.9 million to GBP8.2 million related
to the IP licences signed with Formula 1 (R) and Games Workshop
during the period.
Deferred tax assets and deferred tax liabilities have been
recorded as at 31 May 2020 for the estimated values of temporary
and permanent timing differences, and the potential value of tax
deductions relating to future share option exercises. The net
position as at 31 May 2020 is a net deferred tax asset of GBP2.1
million (31 May 2019 restated: asset of GBP3.2 million).
The current tax asset balance as at 31 May 2020 of GBP2.4
million relates to VGTR claims for FY19 (31 May 2019: a net current
tax liability of GBP0.8 million).
IFRS 16 ADJUSTMENT TO RETAINED EARNINGS
As well as creating additional assets and liabilities in the
statement of financial position, and changing the way that lease
costs are charged to the income statement, the adoption of IFRS 16
also generated an adjustment to the retained earning reserve of
GBP1.3 million in FY20. This adjustment related to the rent-free
incentive period on Frontier's building lease. Previously the
benefit of the rent-free period was spread over the minimum lease
period, which at the inception of the lease was a period of over 15
years. For the adoption of IFRS 16 on 1 June 2019 lease costs were
calculated based on the remaining future cash outflows, which
therefore did not include the benefit of the rent-free period which
had expired prior to 1 June 2019. The result of this was an
acceleration of the remaining unaccounted value of the rent-free
period as at 1 June 2019, with this credit of GBP1.3 million being
recorded only in the statement of changes in equity, and not in the
income statement. This is a one-off credit adjustment to reserves
and further adjustments are not expected.
CONSOLIDATED INCOME STATEMENT
FOR THE YEARED 31 MAY 2020
Restated*
31 May 2020 31 May 2019
Notes GBP'000 GBP'000
------------------------------------------------ ------ ------------ ------------
Revenue 3 76,089 89,669
Cost of sales (24,532) (35,021)
------------------------------------------------ ------ ------------ ------------
Gross profit 51,557 54,648
Research and development expenses (16,014) (14,891)
Sales and marketing expenses (5,747) (7,852)
Administrative expenses (13,172) (12,536)
------------------------------------------------ ------ ------------ ------------
Operating profit 16,624 19,369
Finance income (401) 289
------------------------------------------------ ------ ------------ ------------
Profit before tax 16,223 19,658
Income tax (329) (1,668)
------------------------------------------------ ------ ------------ ------------
Profit for the period attributable to
shareholders 15,894 17,990
------------------------------------------------ ------ ------------ ------------
Earnings per share
Basic earnings per share 4 41.3 46.9
Diluted earnings per share 4 39.4 44.7
------------------------------------------------ ------ ------------ ------------
All the activities of the Group are classified
as continuing.
* Restated for a deferred tax adjustment
as per note 2
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEARED 31 MAY 2020
Restated*
31 May 2020 31 May 2019
GBP'000 GBP'000
------------------------------------------------ ------ ------------ ------------
Profit for the period 15,894 17,990
Other comprehensive income
Items that will be reclassified subsequently
to profit or loss
Exchange differences on translation of
foreign operations (6) (4)
------------------------------------------------ ------ ------------ ------------
Total comprehensive income for the period
attributable to the equity holders of
the parent 15,888 17,986
------------------------------------------------ ------ ------------ ------------
* Restated for a deferred tax adjustment as per note 2
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 MAY 2020
(REGISTERED COMPANY NO: 02892559)
Restated*
31 May 2020 31 May 2019
Notes GBP'000 GBP'000
----------------------------------- --------------- --------------- --------------------------------
Non-current assets
Intangible assets 5 52,668 36,450
Property, plant and equipment 6 5,926 6,352
Right-of-use asset 22,732 -
Deferred tax asset 6,175 3,185
87,501 45,987
----------------------------------- --------------- --------------- --------------------------------
Current assets
Trade and other receivables 12,284 5,178
Current tax asset 2,377 141
Cash and cash equivalents 45,751 35,332
----------------------------------- --------------- --------------- --------------------------------
60,412 40,651
----------------------------------- --------------- --------------- --------------------------------
Total assets 147,913 86,638
----------------------------------- --------------- --------------- --------------------------------
Current liabilities
Trade and other payables (13,669) (9,026)
Lease liability (1,337) -
Deferred income (1,439) (1,036)
Current tax liabilities - (966)
(16,445) (11,028)
----------------------------------- --------------- --------------- --------------------------------
Net current assets 43,967 29,623
----------------------------------- --------------- --------------- --------------------------------
Non-current liabilities
Provisions (27) (13)
Lease liability (22,198) -
Deferred income (234) (465)
Other payables (8,237) (939)
Deferred tax liabilities (4,038) -
----------------------------------- --------------- --------------- --------------------------------
(34,734) (1,417)
----------------------------------- --------------- --------------- --------------------------------
Total liabilities (51,179) (12,445)
----------------------------------- --------------- --------------- --------------------------------
Net assets 96,734 74,193
----------------------------------- --------------- --------------- --------------------------------
Equity
Share capital 195 194
Share premium account 34,589 34,390
Equity reserve (925) (3,073)
Foreign exchange reserve (22) (16)
Retained earnings 62,897 42,698
----------------------------------- --------------- --------------- --------------------------------
Total equity 96,734 74,193
----------------------------------- --------------- --------------- --------------------------------
*Restated for a deferred tax
adjustment
as per note 2
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEARED 31 MAY 2020
Share Foreign
Share premium Equity exchange Retained Total
capital account reserve reserve earnings equity
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
At 31 May 2018 193 34,132 780 (12) 20,195 55,288
------------------ --------------- --------------- --------------- --------------- --------------- ------------
Profit for the
year - - - - 17,990 17,990
Other
comprehensive
income:
Exchange
differences on
translation
of foreign
operations - - - (4) - (4)
Total
comprehensive
income/(expense)
for the year - - - (4) 17,990 17,986
------------------ --------------- --------------- --------------- --------------- --------------- ------------
Issue of share
capital net of
expenses 1 258 - - - 259
Share-based
payment charges - - 1,564 - - 1,564
Share-based
payment transfer
relating to
option exercises
and lapses - - (535) - 535 -
EBT share inflows
from issues
and/or purchases - - (5,000) - - (5,000)
EBT share
outflows from
option
exercises - - 118 - - 118
Tax credits on
share options
taken directly
to reserves - - - - 1,978 1,978
Deferred tax
movements posted
directly to
reserves -
restated
* - - - - 2,000 2,000
------------------ --------------- --------------- --------------- --------------- --------------- ------------
Transactions with
owners 1 258 (3,853) - 4,513 919
------------------ --------------- --------------- --------------- --------------- --------------- ------------
At 31 May 2019 -
restated* 194 34,390 (3,073) (16) 42,698 74,193
------------------ --------------- --------------- --------------- --------------- --------------- ------------
Adjustment for
adoption of IFRS
16 - lease
accounting - - - - 1,313 1,313
------------------ --------------- --------------- --------------- --------------- --------------- ------------
At 1 June 2019
(adjusted) 194 34,390 (3,073) (16) 44,011 75,506
------------------ --------------- --------------- --------------- --------------- --------------- ------------
Profit for the
year - - - - 15,894 15,894
Other
comprehensive
income:
Exchange
differences on
translation
of foreign
operations - - - (6) - (6)
Total
comprehensive
income/(expense)
for the year - - - (6) 15,894 15,888
------------------ --------------- --------------- --------------- --------------- --------------- ------------
Issue of share
capital net of
expenses 1 199 - - - 200
Share-based
payment charges - - 1,947 - - 1,947
Share-based
payment transfer
relating to
option exercises
and lapses - - (510) - 510 -
EBT share inflows - - - - - -
from issues
and/or purchases
EBT share
outflows from
option
exercises - - 711 - - 711
Deferred tax
movements posted
directly to
reserves - - - - 2,482 2,482
------------------ --------------- --------------- --------------- --------------- --------------- ------------
Transactions with
owners 1 199 2,148 - 2,992 5,340
------------------ --------------- --------------- --------------- --------------- --------------- ------------
At 31 May 2020 195 34,589 (925) (22) 62,897 96,734
------------------ --------------- --------------- --------------- --------------- --------------- ------------
* Restated for a deferred tax adjustment as per note 2
CONSOLIDATED STATEMENT OF CASHFLOWS
FOR THE YEARED 31 MAY 2020
31 May 2020 31 May 2019
GBP'000 GBP'000
---------------------------------------------------------- ------------ ------------
Cash generated from operations 32,415 32,312
Taxes received/(paid) - 480
Cashflow from operating activities 32,415 32,792
---------------------------------------------------------- ------------ ------------
Investing activities
Purchase of property, plant and equipment (666) (2,269)
Expenditure on intangible assets (21,044) (14,981)
Interest received 330 289
Cashflow from investing activities (21,380) (16,961)
---------------------------------------------------------- ------------ ------------
Financing activities
Proceeds from issue of share capital 200 259
Employee Benefit Trust net cash inflow/(outflow) 711 (4,882)
Payment of lease liabilities and related interest (1,551) -
Cashflow from financing activities (640) (4,623)
---------------------------------------------------------- ------------ ------------
Net change in cash and cash equivalents from
continuing operations 10,395 11,208
Cash and cash equivalents at beginning of period 35,332 24,124
Exchange differences on cash and cash equivalents 24 -
Cash and cash equivalents at end of period 45,751 35,332
---------------------------------------------------------- ------------ ------------
The accompanying accounting policies and notes form part
of this financial information.
Reconciliation of operating profit to cash generated
from operations
31 May 2020 31 May 2019
GBP'000 GBP'000
---------------------------------------------------------- ------------ ------------
Operating profit 16,624 19,369
Depreciation and amortisation 14,870 9,600
---------------------------------------------------------- ------------ ------------
EBITDA 31,494 28,969
---------------------------------------------------------- ------------ ------------
Movement in unrealised exchange (gains)/losses
on forward contracts (91) (340)
Share-based payment expenses 1,947 1,564
---------------------------------------------------------- ------------ ------------
Operating cashflows before movements in working
capital 33,350 30,193
---------------------------------------------------------- ------------ ------------
Net changes in working capital:
Change in trade and other receivables (7,046) 1,542
Change in trade and other payables 6,097 575
Change in provisions 14 2
---------------------------------------------------------- ------------ ------------
Cash generated from operations 32,415 32,312
---------------------------------------------------------- ------------ ------------
NOTES TO THE FINANCIAL INFORMATION
1. CORPORATE INFORMATION
Frontier Developments plc (the 'Group') develops and publishes
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 26 Science Park, Milton
Road, Cambridge CB4 0FP.
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 basis of preparation and going concern policies applied in
the preparation of these financial statements 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, for both
the Group and Company, 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 (GBP'000) except
when otherwise indicated.
Going concern basis
The Group's and Company'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 and Company 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.
Prior year restatement
During the preparation of the tax accounting for the Group and
Company for FY20, an error was identified in relation to the
absence of a deferred tax asset on potential future share option
exercises.
The Company benefits from corporation tax deductions when
employees exercise share options, and under IAS12 a deferred tax
asset should be recognised in the Statement of Financial Position
for potential future share options exercises, using the market
price of the Company's shares as at the relevant financial year end
date, in this case 31 May 2019.
This absence of a deferred tax asset in the reported accounts
has resulted in the following correcting restatement for FY19:
-- a reduction in the income tax charge within the FY19 Income Statement of GBP580,000
-- a credit directly to retained earnings as at 31 May 2019 of GBP2,000,000
-- an increase in deferred tax assets of GBP2,580,000 as at 31 May 2019
-- an increase in net assets of GBP2,580,000 as at 31 May 2019
When calculating the theoretical gains from potential future
share option exercises, the element of the deferred tax asset which
can be credited to the income statement is limited to the sum of
the IFRS2 share charges previously recorded in the income statement
relating to that particular share option. Any excess theoretical
gain is allocated directly to reserves. In this case, the majority
of the asset as at 31 May 2019 has been credited directly to
reserves, with a smaller element being posted as a restatement to
the income statement for FY19.
The adjustments to the financial statements for FY19 for this
restatement are set out below.
Consolidated Income Statement for the 12 months to 31 May 2019 - extracts
GBP'000 Reported Adjustment Restated
--------- -------------
Profit before tax 19,658 19,658
Income tax (2,248) 580 (1,668)
Profit for the period attributable
to shareholders 17,410 580 17,990
----------------------------------------------------- --------- ------------- ---------
Earnings per share for the 12 months to 31 May
2019
Pence Reported Adjustment Restated
--------- -------------
Basic earnings per share 45.4 1.5 46.9
Diluted earnings per share 43.2 1.5 44.7
----------------------------------------------------- --------- ------------- ---------
Consolidated Statement of Financial Position as at 31 May 2019 - extracts
------------------------------------------------------------------------------------------
GBP'000 Reported Adjustment Restated
----------------------------------------------------- --------- ------------- ---------
Deferred tax asset 605 2,580 3,185
Retained earnings 40,118 2,580 42,698
----------------------------------------------------- --------- ------------- ---------
There is no cash flow implication arising from these
restatements.
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 third-party
distribution platforms which are responsible for the sales data of
consumers. The cost to develop this information internally would be
excessive.
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.
The Group typically satisfies its performance obligations at the
point that the product becomes available to the customer and
payment has been received upfront.
In both the period ended 31 May 2020 and the period ended 31 May
2019, 'Other Revenue' mainly related to royalty income.
12 months 12 months
to 31 May to 31 May
2020 2019
GBP'000 GBP'000
------------------------- ----------- -----------
Self-publishing revenue 75,924 89,476
Other revenue 165 193
------------------------- ----------- -----------
76,089 89,669
------------------------- ----------- -----------
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.
Restated*
----------------------------------------------- ------------ ------------
31 May 2020 31 May 2019
----------------------------------------------- ------------ ------------
Profit attributable to shareholders (GBP'000) 15,894 17,990
Weighted average number of shares 38,483,762 38,337,119
----------------------------------------------- ------------ ------------
Basic earnings per share (pence) 41.3 46.9
----------------------------------------------- ------------ ------------
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.
Restated*
----------------------------------------------- ------------ ------------
31 May 2020 31 May 2019
----------------------------------------------- ------------ ------------
Profit attributable to shareholders (GBP'000) 15,894 17,990
Diluted weighted average number of shares 40,316,894 40,254,488
----------------------------------------------- ------------ ------------
Diluted earnings per share (pence) 39.4 44.7
----------------------------------------------- ------------ ------------
The reconciliation of the average number of Ordinary Shares used for
basic and diluted earnings per share is as follows:
31 May 2020 31 May 2019
----------------------------------------------- ------------ ------------
Weighted average number of shares 38,483,762 38,337,119
Dilutive effect of share options 1,833,132 1,917,369
----------------------------------------------- ------------ ------------
Diluted average number of shares 40,316,894 40,254,488
----------------------------------------------- ------------ ------------
* Restated for a deferred tax adjustment as per note 2
5. INTANGIBLE ASSETS
Group and Company
The Group and Company intangible assets comprise Game
Technology, Game Developments, Third-Party Software and IP
Licences. Game Technology includes Frontier's Cobra game engine and
other technology which supports the development and publication of
games. The Game Developments category includes capitalised
development costs for base game and PDLC assets for both internally
developed games and for games developed by partners within the
Frontier Foundry third-party publishing games label. Third-Party
Software includes subscriptions to development and business
software. Intangible assets for IP Licences are recognised at the
execution of the licence, based on the minimum guarantees payable
by Frontier to the IP owner.
Third-party
Game Technology Game Developments software IP Licences Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
----------------------------- ---------------- ------------------ ------------ -------------- ---------
Cost
At 31 May 2018 5,467 42,818 428 1,336 50,049
Additions 1,295 12,141 168 1,377 14,981
----------------------------- ---------------- ------------------ ------------ -------------- ---------
At 31 May 2019 6,762 54,959 596 2,713 65,030
Additions 2,396 17,369 497 8,111 28,373
At 31 May 2020 9,158 72,328 1,093 10,824 93,403
----------------------------- ---------------- ------------------ ------------ -------------- ---------
Amortisation and impairment
At 31 May 2018 4,428 15,130 305 - 19,863
Amortisation charges 365 7,469 178 705 8,717
----------------------------- ---------------- ------------------ ------------ -------------- ---------
At 31 May 2019 4,793 22,599 483 705 28,580
Amortisation charges 796 10,408 320 631 12,155
At 31 May 2020 5.589 33,007 803 1,336 40,735
----------------------------- ---------------- ------------------ ------------ -------------- ---------
Net book value at 31
May 2020 3,569 39,321 290 9,488 52,668
----------------------------- ---------------- ------------------ ------------ -------------- ---------
Net book value at 31
May 2019 1,969 32,360 113 2,008 36,450
----------------------------- ---------------- ------------------ ------------ -------------- ---------
The majority of amortisation charges for intangible assets are
expensed within research and development expenses. Amortisation
charges for IP licences are typically charged to cost of sales,
which reflects the IP licence royalties which the minimum
guarantees relate to.
6. PROPERTY, PLANT AND EQUIPMENT
Group and Company
Fixtures Computer Leasehold
and fittings equipment improvements Total
GBP'000 GBP'000 GBP'000 GBP'000
------------------------------- -------------- ----------- -------------- ---------
Cost
------------------------------- -------------- ----------- -------------- ---------
At 31 May 2018 574 1,522 3,971 6,067
Additions 276 616 1,377 2,269
At 31 May 2019 850 2,138 5,348 8,336
Additions 13 643 10 666
At 31 May 2020 863 2,781 5,358 9,002
------------------------------- -------------- ----------- -------------- ---------
Depreciation
------------------------------- -------------- ----------- -------------- ---------
At 31 May 2018 125 914 62 1,101
Charge for the period 121 478 284 883
At 31 May 2019 246 1,392 346 1,984
Charge for the period 150 607 335 1,092
At 31 May 2020 396 1,999 681 3,076
------------------------------- -------------- ----------- -------------- ---------
Net book value at 31 May 2020 467 782 4,677 5,926
------------------------------- -------------- ----------- -------------- ---------
Net book value at 31 May 2019 604 746 5,002 6,352
------------------------------- -------------- ----------- -------------- ---------
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END
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September 09, 2020 02:00 ET (06:00 GMT)
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