17 January 2024

Frontier Developments plc

FY24 Interim Results

Frontier Developments plc (AIM: FDEV, 'Frontier', the 'Company', or the 'Group'), a leading developer and publisher of video games based in Cambridge, UK, publishes its unaudited interim results for the 6 months to 30 November 2023 ('H1 FY24').

H1 FY24 Financial Headlines

*Adjusted EBITDA is earnings before interest, tax, depreciation and amortisation charges related to game developments and Frontier's game technology, less investments in game developments and Frontier's game technology, and excluding restructuring costs, share-based payment charges and other non-cash items.

·   Good back-catalogue performance, with games which released before the start of the period delivering 72% of total revenue in H1 FY24

·   Within the back-catalogue, creative management simulation ('CMS') games achieved £26.3 million of revenue (55% of total revenue), representing a sustain rate of 81% versus the comparative period (H1 FY23: £32.6 million)

·   The revenue contribution from new games launching during the period was lower than expected

·   Adjusted EBITDA loss of £4.9 million (H1 FY23: loss of £0.6 million) reflected the lower level of total revenue and a 3% increase in cash operating costs, partially offset by a higher gross profit margin

·   The Organisational Review announced in October is on-track, including the planned 20% reduction in annual operating costs to support a return to profitability in FY25

·   Non-cash amortisation and impairment charges resulted in an operating loss before restructuring of £30.8 million in H1 FY24 (H1 FY23: profit of £6.9 million)

·   Cash balance of £17.1 million at 30 November 2023 (31 May 2023: £28.3 million)

Operational & Strategic Update

As explained in the Business Update in November, Frontier's move to diversify its game portfolio, including through third-party publishing and entering new genres, has not delivered the anticipated success. As a result, the Company has refocussed on CMS games which have delivered more predictable and recurring returns through Frontier's expertise and leadership in that genre.

Frontier has confirmed three future CMS games with one releasing in each of the next three financial years - FY25, FY26 and FY27. Whilst developing those three future CMS games the Company will continue to support and nurture its existing portfolio.

Alongside the strategic refocus to CMS games, in the last three months the Company has undertaken an Organisational Review to reshape Frontier to deliver on the updated strategic plan more efficiently, return the Company to profit, and create a sustainable foundation for the future. The cost reduction elements of the review are now largely complete, and the targeted savings of 20% of annual operating costs will be fully in place from the start of FY25.

Current Trading and Outlook

Total sales during the important trading period of late November to early January were in-line with the revised expectations set in November, with strong sales performances across Frontier's CMS portfolio offsetting lower sales from some other games.

Frontier has two successful PC games coming to consoles before the end of this financial year. The first of these was confirmed on 16 January, with Warhammer 40,000: Chaos Gate - Daemonhunters announced for release on PlayStation®5, Xbox Series X|S, PlayStation®4 and Xbox One on 20 February 2024. The second PC game coming to consoles will be announced in the next few weeks.

The Board continues to expect FY24 revenue to be within the guidance range of £80-95 million, and the guidance on Adjusted EBITDA is also unchanged from the Business Update provided in November.

Jonny Watts, Frontier's CEO, said

"2023 was a challenging year for Frontier and for many companies across the games industry. The last few months have been a tough period of change for everyone at Frontier, and of course it's been particularly difficult for those people in teams who have suffered redundancies. I'd like to thank everyone for their hard work and patience while we make the necessary changes.

We are confident that our renewed focus on our world-class CMS games is getting us back on track, and it's pleasing to see the strong ongoing performance of our established portfolio of games, led by Jurassic World Evolution 2 and Planet Zoo. I'd like to thank our players across our whole portfolio for their ongoing engagement and support.

We have two exciting console releases coming in the next few months, including Warhammer 40,000: Chaos Gate- Daemonhunters, and we are making great progress on our new own-IP CMS game for release in FY25.

I look forward to providing further updates during 2024."

There will be a call for analysts and institutional investors at 9:30a.m. today. To register please contact Frontier@teneo.com.

Enquiries:

Frontier Developments  +44 (0)1223 394 300

Jonny Watts, CEO

Alex Bevis, CFO                                                                                        

Peel Hunt - Nomad and Joint Corporate Broker  +44 (0)20 7418 8900

Neil Patel / Paul Gillam / Richard Chambers / Kate Bannatyne

Liberum - Joint Corporate Broker  +44 (0)20 3100 2000

Max Jones / Matt Hogg / Nikhil Varghese

Teneo  +44 (0)20 7353 4200

Matt Low / Arthur Rogers

 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.

Frontier's LEI number: 213800B9LGPWUAZ9GX18.

www.frontier.co.uk

Interim Results Statement

REVENUE AND GROSS PROFIT

Revenue in H1 FY24 of £47.7 million was 17% lower than the comparative period (H1 FY23: £57.1 million).

The back-catalogue of games which released before the start of the financial year performed well in H1 FY24, generating 72% of total revenue. The largest contribution came from Frontier's established portfolio of CMS games - RollerCoaster Tycoon 3, Planet Coaster, Planet Zoo, Jurassic World Evolution and Jurassic World Evolution 2 - which together recorded £26.3 million of revenue in H1 FY24 (55% of total revenue), representing a sustain rate of 81% versus the comparative period (H1 FY23: £32.6 million).

The ongoing revenue contribution from those genre-leading CMS games shows the strength of Frontier's select, develop, launch and nurture strategy. As expected, the strongest performers in the period were Jurassic World Evolution 2 and Planet Zoo, which were both supported with free updates and multiple PDLC packs. Across the whole portfolio, PDLC accounted for 29% of total revenue in H1 FY24 (H1 FY23: 30%).

Revenue from new game releases in the period was lower than expected. Revenue from F1® Manager reduced 34% from H1 FY23 to H1 FY24 through lower sales of F1® Manager 2023 compared with F1® Manager 2022. Launch sales of Warhammer Age of Sigmar: Realms of Ruin ('Realms of Ruin'), which released in November 2023, were lower than expected.

Although revenue reduced by £9.4 million (17%) against the comparative period, gross profit only decreased by £3.1 million (9%) to £33.0 million (H1 FY23: £36.1 million) through the positive impact of subscription fees and product mix, which boosted the gross profit margin percentage to 69% (H1 FY23: 63%). Frontier's gross margin percentage tends to vary between periods based on the revenue mix of own-IP games, licenced-IP games and subscription deals.

COSTS

In October 2023 Frontier announced an Organisational Review to reshape the Company to deliver more efficiently on its updated strategy. The cost-saving element of the Organisational Review is on-track to deliver against the targeted 20% reduction in annual operating expenditure. The timing of the cost reductions meant limited financial benefits in H1 FY24, with the impact of reductions starting in November and building during December and January. Costs will continue to reduce during H2 FY24 and it's expected that all cost reductions will be in place for the start of the next financial year on 1 June 2024. The Company recorded a £2.5 million provision for restructuring costs in H1 FY24.

Gross research and development expenses (before capitalisation and amortisation under IAS 38) in H1 FY24 reduced slightly to £25.5 million (H1 FY23: £25.9 million), with a rise in people costs being more than offset by a significant reduction in outsourced development costs and funding for Foundry games. Of the total gross spend 59% (£15.1 million) was capitalised (H1 FY23: 71%, £18.4 million) with the development costs for F1® Manager 2023 and F1® Manager 2024 being expensed as incurred instead of being capitalised, following the lower than expected financial performance of F1® Manager 2022 in 2023.

R&D amortisation and impairment charges related to previously capitalised game developments and Frontier's game technology increased to £37.6 million (H1 FY23: £8.6 million). The total charge in the period included a non-cash accounting full impairment for Realms of Ruin of £16.9 million following the lower than expected sale performance of the game at launch in November 2023. Amortisation charges accounted for the remaining £20.7 million of the total (H1 FY23: £8.6 million), with the increase over the comparative period the result of the updated approach to amortisation profiles as highlighted in the 2023 Annual Report and Accounts. Intangible assets are now amortised more rapidly in the first 12 months following their release, through the adoption of a steeper amortisation charge profile than the previous default method of straight-line amortisation. The impairment charge and the updated approach to amortisation has not impacted Adjusted EBITDA, which is a measure of cash profitability, but has resulted in a short-term adverse impact on the reported IFRS operating result.

As a result of the lower level of development cost capitalisation, the increased amortisation charges and the impairment charge for Realms of Ruin, net research and development expenses as recorded in the consolidated income statement increased to £48.1 million (H1 FY23: £16.1 million), being gross spend of £25.5 million, less capitalised costs of £15.1 million, plus amortisation and impairment charges of £37.6 million.

Sales and marketing expenses in the period increased to £8.4 million (H1 FY23: £6.9 million) through two Frontier game launches in the period (F1® Manager 2023 and Realms of Ruin) versus one launch in H1 FY23 (F1® Manager 2022).

Administrative expenses of £7.4 million were higher than the comparative period (H1 FY23: £6.3 million), largely due to foreign exchange differences, with a foreign exchange gain of £1.0 million having been recorded in H1 FY23.

A restructuring charge of £2.5 million was recorded in the period following the announcement of the Organisational Review in October 2023.  The charge included a full provision for all costs expected to be incurred through the review, which will conclude by the end of FY24.

FINANCIAL PERFORMANCE

Although gross profit in H1 FY24 only reduced by £3.1 million against the comparative period, operating performance as reported under IFRS fell by £37.7 million from an operating profit of £6.9 million in H1 FY23 to an operating loss before restructuring of £30.8 million in H1 FY24. This was primarily due to three factors; the Realms of Ruin impairment charge; a higher level of amortisation from the adoption of steeper amortisation charge profiles; and a lower level of development cost capitalisation.

In comparison to the IFRS result, performance as measured by Adjusted EBITDA, a measure of cash profitability, only reduced by £4.3 million to a loss of £4.9 million (H1 FY23: loss of £0.6 million), with gross profit reducing £3.1 million and cash operating costs increasing by £1.2 million. Adjusted EBITDA is earnings before interest, tax, depreciation and amortisation charges related to game developments and Frontier's game technology, less investments in game developments and Frontier's game technology, and excluding restructuring costs, share-based payment charges and other non-cash items.

Consistent with H1 FY23, a nil corporation tax amount was posted in H1 FY24. A net credit is expected to be posted in the full year FY24 results for the anticipated Video Games Tax Relief cash claim for qualifying development activity in the financial year. The Group will provide additional corporation tax disclosures in the FY24 financial statements. 

A loss after tax of £33.1 million was recorded in the period (H1 FY23: profit of £6.7 million). Basic loss per share was 85.7 pence (H1 FY23: earnings per share of 17.2 pence).

BALANCE SHEET AND CASH FLOW

The Group continues to be well capitalised, with a cash balance of £17.1 million at 30 November 2023 (31 May 2023: £28.3 million). Microsoft Game Pass subscription fees for F1® Manager 2023 and Jurassic World Evolution 2 were received in December 2023, with cash at 31 December 2023 growing to £19.9 million. Cash from the sales recorded in December will be received from platform and channel partners in January and February.

The accompanying accounting policies and notes form part of this financial information.

The accompanying accounting policies and notes form part of this financial information.

The accompanying accounting policies and notes form part of this financial information.

NOTES TO THE FINANCIAL INFORMATION

1.    CORPORATE INFORMATION                                                                                                                                 

Frontier Developments plc (the 'Group' or the 'Company') 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 and headquartered in the UK, with subsidiaries based in Canada and the US.

2.     BASIS OF PREPARATION AND STATEMENT OF COMPLIANCE

Basis of preparation

The consolidated interim financial statements have been prepared in accordance with International Accounting Standard 34 'Interim Financial Reporting' (IAS 34), as issued by the International Accounting Standards Board (IASB) and as adopted by the UK, and the disclosure requirements of the Listing Rules.

The consolidated interim financial statements do not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006 and have not been audited or reviewed by the Company's auditors.

The consolidated interim financial statements should be read in conjunction with the financial statements for the year ended 31 May 2023.

Statutory accounts for the year ended 31 May 2023 were approved by the Board of Directors on 12 September 2023 and delivered to the Registrar of Companies. The Auditor's Report was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 of the Companies Act 2006.

The financial information has been prepared under the historical cost convention except for financial instruments held at fair value. The financial information is presented in Sterling, the presentation and functional currency for the Group and Company. All values are rounded to the nearest thousand pounds (£'000) except when otherwise indicated.

Going concern basis

The Group's 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 a period of not less than 12 months from the date of the consolidated interim financial statements. The Group and Company therefore continue to adopt the going concern basis in preparing their financial statements.

3.    ACCOUNTING POLICIES

The consolidated interim financial statements have been prepared in accordance with the accounting policies adopted in the Group's most recent annual financial statements for the year ended 31 May 2023.

4.    ACCOUNTING ESTIMATES AND KEY JUDGEMENTS

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

The judgements, estimates and assumptions applied in the interim financial statements, including the key sources of estimation uncertainty, were the same as those applied in the Group's last annual financial statements for the year ended 31 May 2023.

5.      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 publishing games and revenue from other 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.

The majority of the Group's non-current assets are held within the UK.

All material revenue is categorised as either 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 is received upfront by the distributors.                                                                                          

Other revenue mainly related to royalty income in all periods.

6.  EARNINGS PER SHARE

The calculation of the basic earnings per share is based on the profit/(loss) attributable to the shareholders of Frontier Developments plc divided by the weighted average number of shares in issue during the period.

The dilutive effect of share options is nil for the 6 months to 30 November 2023 because a loss was recorded for the period.

7.  OTHER INTANGIBLE ASSETS

8.  KEY PERFORMANCE INDICATORS - NON-STATUTORY MEASURES

In addition to measures of financial performance derived from IFRS reported results - revenue, operating profit, operating profit margin percentage, earnings per share and net cash balance - Frontier publishes, and provides commentary on, financial performance measurements derived from non-statutory calculations. Frontier believes these supplementary measures, when read in conjunction with the measures derived directly from statutory financial reporting, provide a better understanding of Frontier's overall financial performance.

EBITDA

EBITDA, being earnings before tax, interest, depreciation, and amortisation, is commonly used by investors when assessing the financial performance of companies. It attempts to arrive at a 'cash profit' figure by adjusting operating profit for non-cash depreciation and amortisation charges. In Frontier's case, EBITDA does not provide a clear picture of the Group's cash profitability, as it adds back amortisation charges relating to game developments, but without deducting the investment costs for those developments, resulting in a profit measure which does not take into account any of the costs associated with developing games. Since EBITDA is a commonly used financial performance measure, it has been included below for the benefit of readers of the accounts who may value that measure of performance.

Adjusted EBITDA

Frontier also discloses an Adjusted EBITDA measure which, in the Group's view, provides a better representation of 'cash profit' than EBITDA. Adjusted EBITDA for Frontier is defined as earnings before interest, tax, depreciation, and amortisation charges related to game developments and Frontier's game technology, less investments in game developments and Frontier's game technology, and excluding impairment charges, share-based payment charges and other non-cash items. This effectively provides the cash profit figure that would have been achieved if Frontier expensed all game development investment as it was incurred, rather than capitalising those costs and amortising them over several years.

Research and development (R&D) expenses

Research and development (R&D) expenses recorded in Frontier's consolidated income statement are arrived at after capitalising game development costs and after recording amortisation charges for games which have been released. Similar to the principles of the Adjusted EBITDA measure showing financial performance as if all game development investments were expensed as incurred, Frontier provides commentary on the difference between gross R&D expenses (before capitalisation/amortisation) and net R&D expenses (after capitalisation/ amortisation). The net R&D expenses figure aligns with the R&D expenses recorded in the consolidated income statement, whereas the gross R&D expenses figure provides a better representation of 'cash spend' on R&D activities.