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Frontier Dev PLC - Annual Results

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

(12 months to

31 May 2020)

FY19

(12 months to

31 May 2019)

Revenue

£76.1m

£89.7m

Operating profit

£16.6m

£19.4m

Operating margin %

22%

22%

EBITDA*

£31.5m

£29.0m

EPS (basic) **

41.3p

46.9p

Operating cashflow***

£13.6m

£16.8m

Net cash balance

£45.8m

£35.3m

 

*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 £76.1 million (FY19: £89.7 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 £16.6 million for FY20 (FY19: £19.4 million), with operating profit margin maintained at 22% despite the lower level of revenue.

·    Cash balances increased by £10.4 million during the year to £45.8 million (FY19: £35.3 million).

FY20 Strategic Highlights

·    A fourth successful new game launch

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

Over 1.0 million base game units sold in under six months

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

Frontier reduces risk by identifying opportunities to create genre-leading games that build on its strengths and unique track record

Post-launch, Frontier nurtures its games for many years through community engagement and additional content

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

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

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

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

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

IP licence signed for annual releases of Formula 1®  management games from 2022 onwards

IP licence signed with Games Workshop for a real-time strategy game based on the popular Warhammer Age of Sigmar brand

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

Sales across all our games in FY21 to date have been consistent with expectations after a strong close to FY20

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

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

A new era for Elite Dangerous in FY21 with Elite Dangerous: Odyssey coming in calendar Q1 2021

Two award-winning new games launching from Frontier Foundry in FY21: Struggling and Lemnis Gate

On track to deliver record revenue in FY21 within the range of £90 million to £95 million

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® and Games Workshop.  The Formula 1® 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® 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 £90 million to £95 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® 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® 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 - £45.8 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 £76.1 million (FY19: £89.7 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 £51.6 million in the year (FY19: £54.6 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 £24.6 million (FY19: £20.5 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 £19.8 million in the period (FY19: £13.4 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 £11.2 million for the period (FY19: £7.8 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 £16.0 million (FY19: £14.9 million), being gross spend, less capitalised costs, plus amortisation charges.

Sales, marketing and administrative expenses totalled £18.9 million in FY20 (FY19: £20.4 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 £24.4 million was therefore recorded as at 1 June 2019, with a corresponding lease liability of £24.4 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 £2.3 million was charged to the income statement in relation to the lease, being £1.6 million within administrative costs and £0.7 million within interest charges. 

Overall net operating expenditure in FY20 of £34.9 million was similar to the total spend in FY19 (£35.3 million), with higher R&D costs being offset by a lower level of marketing spend.

Operating profit of £16.6 million was recorded in the year (FY19: £19.4 million) representing an operating margin of 22% which is consistent with FY19.

EBITDA (earnings before interest, tax, depreciation and amortisation) increased to £31.5 million (FY19: £29.0 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 £0.3 million was recorded in the income statement for FY20 (FY19: a restated charge of £1.7 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 £15.9 million (FY19: £18.0 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 £45.8 million in total (31 May 2019: £35.3 million).  Total net cash inflow during the year of £10.4 million (FY19: £11.2 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 £13.6 million in FY20 (FY19: £16.8 million).

Intangible assets increased by £16.2 million to £52.7 million at 31 May 2020 (31 May 2019: £36.5 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 £42.9 million at 31 May 2020 (31 May 2019: £34.3 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 £9.5 million at 31 May 2020 (31 May 2019: £2.0 million) as a result of the deals signed with Formula 1® 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 £5.9 million (31 May 2019: £6.4 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 £22.7 million for the Company's lease over its headquarters office building in Cambridge.  A similar figure, being £23.5 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 £12.3 million at the end of the period (FY19: £5.2 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 £13.7 million (FY19: £9.0 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 £0.9 million to £8.2 million related to the IP licences signed with Formula 1® 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 £2.1 million (31 May 2019 restated: asset of £3.2 million).

The current tax asset balance as at 31 May 2020 of £2.4 million relates to VGTR claims for FY19 (31 May 2019: a net current tax liability of £0.8 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 £1.3 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 £1.3 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 YEAR ENDED 31 MAY 2020

 

 

 

 

 

 

 

 

 

 

Restated*

 

Notes

31 May 2020
£'000

31 May 2019
£'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 YEAR ENDED 31 MAY 2020

 

 

 

 

 

 

 

 

 

 

Restated*

 

 

31 May 2020
£'000

31 May 2019
£'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*

 

 

 

Notes

31 May 2020
£'000

31 May 2019
£'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 YEAR ENDED 31 MAY 2020

 

 

 

 

 

 

 

 

Share capital    £'000

Share premium account     £'000

Equity reserve    £'000

Foreign exchange reserve    £'000

Retained earnings    £'000

Total equity     £'000

At 31 May 2018

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 YEAR ENDED 31 MAY 2020

 

 

 

31 May 2020
£'000

31 May 2019
£'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
£'000

31 May 2019
£'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 (£'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 £580,000

·    a credit directly to retained earnings as at 31 May 2019 of £2,000,000

·    an increase in deferred tax assets of £2,580,000 as at 31 May 2019

·    an increase in net assets of £2,580,000 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

£'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

£'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 to 31 May 2020
£'000

12 months to 31 May 2019
£'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 (£'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 (£'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.                                                                   

 

Game Technology

£'000

Game Developments

£'000

Third-party software

£'000

 

 

 

IP Licences

£'000

Total

£'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 and fittings

£'000

Computer equipment

£'000

Leasehold improvements

£'000

Total

£'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

 

 

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact [email protected] or visit www.rns.com.

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Price: 2705

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Market Cap: £10.37 m
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