REG - Frontier Developmnts - FY22 Results – a thriving and expanding portfolio
21/09/2022 07:01
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RNS Number : 0588A Frontier Developments PLC 21 September 2022
Frontier Developments plc
FY22 Financial Results
Frontier's game portfolio continues to thrive and expand
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 full-year results for the 12 months to 31 May
2022 ('FY22').
Financial Highlights
FY22 FY21 Year-on-year change (%)
(12 months to 31 May 2022) (12 months to 31 May 2021)
Revenue £114.0m £90.7m 26%
Operating Profit £1.5m £19.9m (92%)
EBITDA* £41.1m £38.1m 8%
Adjusted EBITDA** £6.7m £11.8m (43%)
EPS (basic) 24.6p 55.4p (56%)
Net Cash Balance at year end £38.7m £42.4m (9%)
· The successful release of Jurassic World Evolution 2, together
with the ongoing performance of our established portfolio of genre-leading
games and our Foundry titles, delivered record revenue in FY22 of £114.0
million (growth of 26% over £90.7 million in FY21)
· Adjusted EBITDA** in FY22 was in line with expectations at £6.7
million (FY21: £11.8 million), with EBITDA* at £41.1 million (FY21: £38.1
million)
· Operating profit in FY22 was reduced to £1.5 million following
the previously announced one-off non-cash accounting charge following the
under-performance of the major Elite Dangerous: Odyssey expansion which
released in May 2021 (FY21: £19.9 million)
· Cash resources remain strong with £38.7 million at 31 May 2022
(31 May 2021: £42.4 million). The £3.7 million reduction during FY22
reflected a greater investment in significant game developments for release in
future years, working capital movements, and the £5.0 million purchase of
shares by the Employee Benefit Trust undertaken in April 2022. Cash balances
at 31 August 2022 were £53.1 million
*Earnings before interest, tax, depreciation and amortisation
** 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 share-based payment charges and other non-cash items
Operational & Strategic Highlights
Frontier's launch and nurture portfolio strategy continues to deliver
· Frontier plays to its strengths by creating deep, immersive and
high-fidelity games using a strategic mix of in-house and licensed IP that
builds on its proven capabilities and unique track record
· Post-launch, Frontier nurtures its games for many years through
community engagement and additional content
· Our major game release in FY22, Jurassic World Evolution 2
(November 2021), was the biggest sales contributor to FY22, and in June 2022,
after the end of FY22, we successfully launched a major themed expansion
alongside the Jurassic World Dominion film. Jurassic World Evolution 2 has so
far delivered over £60 million of revenue (as at 31 August 2022)
· Our portfolio of established titles which released before the
start of FY22 each achieved material revenues in FY22, and each game continues
to deliver sales and reach new players. Planet Zoo performed especially well
in FY22 with an annual revenue sustain rate of 94%, supported by four new
paid-downloadable content (PDLC) packs released in FY22, alongside free
content
· In August 2022 we successfully released F1® Manager 2022. As
expected, initial sales have been strong for this major new annual game
franchise
Frontier Foundry achieves success
· Our games label for publishing carefully selected partner
developments made good progress in FY22, with three new games released
· Warhammer 40,000: Chaos Gate - Daemonhunters has been our biggest
Foundry title to date, releasing in May 2022, to a very positive reception
· Foundry is set for future success as a material part of our
business with three more titles releasing in FY23
A strong portfolio and future roadmap
· Our existing portfolio of games and PDLC continues to perform
well, supported by planned new PDLC for Jurassic World Evolution 2 and Planet
Zoo
· Initial sales for F1® Manager 2022, the first title in our
annual Formula 1® management game series, have been strong and in line with
our expectations, giving us further confidence as we continue to develop F1®
Manager 2023 (for release in FY24)
· Our first real-time strategy game, using Warhammer Age of Sigmar
IP licensed from Games Workshop® will launch in FY24
· We are already in development for a new title for FY25, as well
as early-stage scoping for another new game in FY26
Current Trading and Outlook
We have achieved a pleasing start to FY23. Our existing portfolio continues to
perform, with Jurassic World Evolution 2 benefitting from our themed PDLC and
the hype around the Jurassic World Dominion film in June 2022, and Planet Zoo
also seeing new PDLC. Our major new game release in FY23, F1® Manager 2022,
launched a few weeks ago on 30 August, and initial sales have been strong, as
expected. Foundry looks set for a good year with ongoing sales from Warhammer
40,000: Chaos Gate - Daemonhunters and three more titles to come in FY23.
Based on trading performance to date, the Board remains confident of
delivering on current analyst expectations for FY23.
Over the medium term, the Board expects Frontier to continue to grow revenue
by around 20% on average per annum, with any annual growth rate variability
largely driven by the timing and scale of new releases in each year.
Jonny Watts, CEO from 10 August 2022, said:
"Our team did a terrific job during FY22 and we were delighted to achieve
record annual revenue with growth of 26%. In the last 12 months we have
successfully released three new games with each achieving chart-topping
success; Jurassic World Evolution 2 in November 2021; Warhammer 40,000: Chaos
Gate - Daemonhunters (a Foundry title) in May 2022; and F1® Manager 22, which
released just a few weeks ago at the end of August. We have three more
exciting titles coming in FY23 from Foundry, as well as PDLC for Jurassic
World Evolution 2 and Planet Zoo. For FY24 we have two more major internally
developed titles - our Warhammer Age of Sigmar real-time strategy game, and
F1® Manager 23. We look forward with confidence based on our strong existing
portfolio, and our exciting roadmap of new releases which includes unrevealed
future developments."
The information contained within this announcement is deemed by the Company to
constitute inside information as stipulated under the Market Abuse Regulation
(EU) No. 596/2014 as amended by The Market Abuse (Amendment) (EU Exit)
Regulations 2019. The person responsible for making this announcement on
behalf of the Company is Alex Bevis.
Enquiries:
Frontier
Developments +44
(0)1223 394 300
Jonny Watts, CEO
David Braben, President and Founder
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 / Mark Burgess / Alex Dart
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 (http://www.frontier.co.uk/)
Chairman's Statement - David Gammon
In FY22 we achieved record revenue for the second consecutive year, growing by
26%. This was achieved through the strength in depth of our portfolio and the
success of new titles, most notably Jurassic World Evolution 2. Our most
recent new game release, F1® Manager 2022, launched successfully at the end
of August and is set to deliver a substantial contribution in FY23.
As ever, our financial success is a testament to the talent and hard work of
our great team of people. I'd like to thank everyone at Frontier for their
dedication and teamwork, continuing to support our games, our players and each
other.
I believe our chosen business model and strategy - developing, launching and
nurturing genre-leading games which best fit our expertise and competitive
advantages - will continue to deliver long-term value to our stakeholders. We
have an exciting roadmap of future content alongside our existing portfolio.
As announced on 10 August, in December 2022 I will be retiring from Frontier's
Board after 10 years, most of which I have spent as Chairman. I am privileged
to have been a witness to the success of Frontier's transition from a
third-party developer to a publisher of its own titles. I am delighted to be
passing my Chairman responsibility to the excellent David Wilton, who joins
our Board as Non-Executive Director and Chairman Designate on 22 September
2022.
The news of my planned retirement has coincided with the announcement of
another significant Board change. On 10 August 2022, Frontier's Founder, David
Braben, who has been CEO since the foundation of the Company in 1994, passed
the CEO baton to his long-time colleague, and proven deliverer of multiple
genre-leading games, Jonny Watts, our former Chief Creative Officer. David
will continue to add huge strategic value to Frontier in his new role of
President and Founder. He will remain an Executive Director on the Board.
As CEO, Jonny has assumed responsibility for day-to-day management of the
business and delivery of Frontier's operational and longer-term strategic
plans. I am looking forward to seeing Jonny now take the Company on to even
greater success.
On 10 August 2022 we also announced two further Board-related changes, with
James Dixon stepping up to become Chief Operating Officer (an Executive
Director position on the Board), and Jessica Bourne promoted to General
Counsel and Company Secretary, taking on company secretarial responsibilities
from our Chief Financial Officer, Alex Bevis.
Our Board has always benefitted from a diverse membership of highly
experienced, capable and motivated individuals. I believe the changes we have
announced in the last 12 months, including the appointment of the terrific
Ilse Howling as a Non-Executive Director in March 2022, have, and will,
strengthen it even further.
It is with sadness that I sign off my last Chairman's Statement for Frontier's
Annual Report. I'd like to thank David Braben for his entrepreneurial
brilliance and support throughout my tenure. I cannot thank my Board
colleagues enough for letting me watch, learn at and chair their meetings. I
leave Frontier in a confident mood with a very talented senior leadership
team. I look forward to watching Frontier's continued growth and evolution!
Chief Executive Officer's Statement - David Braben (CEO for FY22, President
and Founder from 10 August 2022)
Our great teams have worked hard and successfully delivered another great
year. It has been a year of change - with Frontier adapting successfully to
new working practices and moving into new adjacent game genres - while growing
and delivering great new games like Jurassic World Evolution 2. Revenue was up
by 26% year-on-year, and headcount grew by over 25% - which is a real
investment, increasing our development firepower for future titles.
Hybrid working
During FY22 we emerged from the 2020 and 2021 Covid-19 restrictions of home
working and into the new mixed model of hybrid working of in the office and at
home. Our diverse teams of people were able to connect with each other both
virtually and in person, with the ability once again to use our splendid
studio facility. I feel those opportunities to reconnect are important for
people's personal development and wellbeing, as well as being important for
successful delivery of our complex content.
Like many companies we are still refining the new ways of remote and hybrid
working, but we believe we are getting the balance right, which puts us in a
strong position to continue to deliver great games and content which benefits
all of our stakeholders. We put a lot of effort into fostering team engagement
through communication and social opportunities. In July 2022 we held our
biggest ever party, which saw almost 900 people (staff plus partners/families)
attend a summer event which celebrated all of our games with themed zones.
Our people
We saw record numbers of people join us during the last 12 months, with net
headcount growing by 158 people or over 25% during FY22. The benefit of this
increased headcount will help us grow in future years. Growing and investing
in our people is a crucial element of our strategy, and like many companies we
have experienced strong competition for talent, which when combined with the
negative impact of coronavirus on staff engagement and connectivity has
created some challenges for staff retention. We continue to believe that our
sophisticated and diverse portfolio of genre-leading games, together with our
self-publishing business model and our competitive reward packages, provides
an attractive home for talent, but of course we can never be complacent and we
will continue to review opportunities to improve our offering.
Our players
Our players have continued to support us, and the wonderful communities around
each of our games have continued to grow, with total all-time base game unit
sales having increased by over 30% in the period. Though there is some overlap
between our different titles, many of these are new players joining these
communities for the first time. These communities continue to evolve over the
years - many players have been members of the Elite Dangerous community for
around 10 years since it started in 2012, while other communities, like that
for F1® Manager are still in their early stages. I would like to thank all
our players for their continued support, and we look forward to many further
adventures together in the future.
Our portfolio
FY22 saw the delivery of great games and content from our teams, most notably
with Jurassic World Evolution 2 releasing in November 2021 and Planet Zoo
benefitting from four new PDLC packs during the financial year. The success of
these new releases, when combined with our existing portfolio, drove a 26%
growth in revenue to a record £114.0 million in FY22, and we are well set to
deliver another record performance in FY23.
Our teams have delivered more great content already in FY23, with the Jurassic
World Evolution 2: Dominion Biosyn Expansion releasing in June 2022 alongside
Universal Pictures and Amblin Entertainment's Jurassic World Dominion film,
another excellent PDLC pack for Planet Zoo, and a major new game release
through the launch of F1® Manager 2022 at the end of August 2022 (all after
the end of FY22). I am particularly pleased with initial player engagement
with F1® Manager 2022, since this is a major new sports franchise for
Frontier, with annual titles scheduled for at least the next three years
(2023, 2024 and 2025).
As previously reported, the one area of disappointment in FY22 was the lower
than expected level of player engagement with our major Elite Dangerous:
Odyssey expansion. Our team did a terrific job with that very ambitious
expansion, which made the decision to cancel future console development and to
focus our attention on PC even more difficult. We are supporting and growing
our Elite Dangerous player community and will build on the narrative aspects
of Elite Dangerous during FY23.
During FY22 our team working on our Warhammer Age of Sigmar real-time strategy
game made good progress, and we look forward to bringing that game to market
in FY24. Looking a little further out, we have now started development of a
new internal title for FY25 and are scoping out another new game for FY26.
I think it's fair to say that we have our strongest ever release line-up,
supported by our superb existing portfolio. Looking further out into 2023 and
beyond, I am delighted to say that we continue to have even more great game
opportunities.
Frontier Foundry
Frontier Foundry is our own games label for third-party publishing, which
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. We take a developer-led approach to publishing, benefitting from our
long and varied experience of being a developer under a variety of different
business models.
Foundry released three titles in FY22, with Warhammer 40,000: Chaos Gate -
Daemonhunters quickly becoming our biggest selling Foundry title to date. Our
approach to third-party publishing is resonating well with our existing and
potential new partners. We have three games releasing from Foundry in FY23,
Stranded: Alien Dawn (from Haemimont Games), Deliver Us Mars (from KeokeN
Interactive) and The Great War: The Western Front (from Petroglyph Games), and
we continue to expect Foundry to build and become a material part of our
overall business over time.
Our strategy and business model
We have a repeatable business model of releasing and supporting high- quality
games in under-served genres where we have relevant experience, and where
there is a reasonable expectation of our title becoming the dominant game in
that sector. We build a community around the title, and continue to support it
with free and paid content over many years, to create the longevity we have
already seen with our existing titles, and hope to see with those in the
future. We will use our key expertise and where applicable valuable external
IP to deliver highly differentiated, best-in-class player experiences.
Frontier's games are set in rich environments and take a long time to fully
master, thereby yielding longevity and great value for players. This long-term
engagement and loyalty of our passionate player communities will help further
build the Company over the long term.
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 game development technology
platform. The Company's focus is on identifying, developing and delivering
top-quality titles with long play times.
We will continue to follow our repeatable model to support our games over many
years with new releases and updates to create long-term sustainable growth
which benefits all of our key stakeholders, through successfully publishing a
growing portfolio of games. To achieve our strategic objective, we focus on
three key areas:
· our portfolio strategy for our internal developments;
· our strategy for our Foundry games label; and
· our people strategy
This third key area is crucial for our long-term success. We must continue to
grow and invest in 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 have just seen with Jurassic
World Evolution 2 in FY22 and we are seeing with F1® Manager 2022 in FY23.
We are growing our portfolio, and consequently we are increasing our
development, publishing and other teams to enable us to support additional
games while generating new updates for our existing titles. We will continue
to grow our resources and capability to enable us to scale-up the number of
major releases we are able to deliver each year. This will not require us to
increase our workforce linearly because supporting an existing title typically
requires fewer staff than creating a new one.
Board changes
As previously announced, after over 28 years as Frontier's CEO, in August 2022
I changed my role to become President and Founder. The excellent Jonny Watts
has taken over as CEO, taking over the day-to-day Company activities, many of
which he has already been doing. I will remain at Frontier, and will still be
actively involved, retaining oversight and involvement in strategic direction
and key external relationships.
I'd like to say a massive thank you to David Gammon, our departing Chairman,
and a big welcome to David Wilton, our new Chairman. This will be my last
CEO's Statement in our Annual Report, and I'd just like to thank everyone at
Frontier and all of our partners and stakeholders, for your support over my
many decades as Frontier's CEO. I will be actively engaged with Frontier for
the foreseeable future, so you will still hear from me on a regular basis.
Chief Financial Officer's Statement - Alex Bevis
The combination of ongoing contributions from our existing titles (games which
released in earlier financial years), the significant sales delivered by new
game Jurassic World Evolution 2, and revenue achieved by our Foundry games
label resulted in a record revenue performance in FY22 of £114.0 million, 26%
ahead of the preceding financial year (FY21: £90.7 million).
Our strategy of developing, launching and nurturing genre-leading games
continues to deliver financial performance for our shareholders, financial
returns and audience expansions for our IP partners, compelling content for
our players, and engaging and challenging projects for our people.
Adjusted EBITDA*, a measure of cash operating profit whereby game development
costs are expensed as they are incurred, was in line with expectations in FY22
at £6.7 million (FY21: £11.8 million). The year-on-year reduction reflects
greater investment in significant game developments for release in future
years, including F1® Manager 2022 which successfully released in August 2022
(in FY23), and our Warhammer Age of Sigmar real-time strategy game for FY24.
Due to the lower than expected engagement with Elite Dangerous: Odyssey on PC,
and the decision to cancel further console development of this major
expansion, the Elite Dangerous: Odyssey capitalised intangible asset was fully
amortised in FY22, resulting in an additional one-off impairment charge of
£7.4 million.
This non-cash accounting adjustment had no impact on cashflow, cash balances
or Adjusted EBITDA, but reduced operating profit as reported under IFRS to
£1.5 million (FY21: £19.9 million).
Frontier continues to benefit from a strong balance sheet, with total cash
balances at 31 May 2022 of £38.7 million (31 May 2021: £42.4 million) and
balances of £53.1 million at 31 August 2022. The small reduction in cash
during FY22 reflected a greater investment in significant game developments
for release in future years, and the £5.0 million purchase of shares by the
Employee Benefit Trust undertaken in April 2022 to satisfy future share option
exercises by employees.
* 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 share-based payment charges and other non-cash items
Trading
Jurassic World Evolution 2
FY22 benefitted from the release of another successful new Frontier title,
Jurassic World Evolution 2, which has continued to attract an expanding player
base since its launch in November 2021. By 31 May 2022 Jurassic World
Evolution 2 had achieved over 1.3 million base game units sold across all
platforms and formats, excluding base game digital downloads through
Microsoft's Game Pass subscription service, through which the base game became
available on 17 May 2022.
The development and release of paid-downloadable content (PDLC) and free
content has, as usual, been an important element of our strategy in continuing
to engage and entertain existing Jurassic World Evolution 2 players while
attracting new ones. We saw strong uptake of the three separate PDLC packs
available as at 31 May 2022.
In June 2022, after the end of FY22, we saw strong engagement with our
compelling new PDLC, the Jurassic World Evolution 2: Dominion Biosyn
Expansion, which released alongside Universal Pictures and Amblin
Entertainment's Jurassic World Dominion film. This major new expansion for
Jurassic World Evolution 2 delivered a strong start for FY23, and additional
PDLC will be released during FY23.
Jurassic World Evolution 2 had so far delivered over £60 million of total
cumulative revenue as at 31 August 2022, a period covering its first 10 months
from release.
Our existing game portfolio
Our portfolio of internally developed titles which released before FY22 -
Elite Dangerous, Planet Coaster, Jurassic World Evolution and Planet Zoo -
continues to reach new audiences, and each delivered material revenues in
FY22. Most notably, Planet Zoo performed especially well, with an annual
revenue sustain rate of 94% (FY22 vs. FY21), supported by four new PDLC packs
releasing in FY22, alongside free content. We have new PDLC packs for Planet
Zoo in FY23.
As previously reported, following the launch of the major Odyssey expansion in
May 2021, Elite Dangerous revenue in FY22 fell below our original
expectations. We are focussing on supporting and growing our player community,
and will build on the narrative aspects of Elite Dangerous during FY23.
Frontier Foundry
Alongside our internally developed titles, Frontier Foundry, our games label
for publishing carefully selected partner developments, made good progress in
FY22, with three new game releases.
Our most recent Frontier Foundry title, Warhammer 40,000: Chaos Gate -
Daemonhunters, received a very positive reception at its launch on 5 May 2022.
It quickly became our most successful Frontier Foundry title to date, with
performance above expectations.
We have three more Frontier Foundry titles planned for release in FY23, and we
continue to expect Frontier Foundry to become a material part of our business.
Financial Performance
Our record revenue of £114.0 million in FY22 (FY21: £90.7 million) delivered
a record gross profit of £73.6 million (FY21: £63.2 million) with gross
margin of 65% (FY21: 70%). Our gross margin percentage tends to vary across
different periods based on five factors: the split of own-IP versus licensed
IP game revenue (since licensing IP attracts royalty costs), the proportion of
revenue from Foundry (which tends to attract developer royalties), variations
in commission rates on digital stores (for example Steam versus Epic), revenue
from subscription models such as Microsoft's Game Pass, and the proportion of
revenue derived from the sale of physical discs. The reduction in our gross
margin percentage in FY22 versus FY21 was mainly the result of a higher
proportion of sales from licensed IP games, most notably through the release
of Jurassic World Evolution 2.
Gross research and development (R&D) expenses in the period grew by 37% to
£47.5 million (FY21: £34.9 million). The substantial year-on-year growth
reflected our continued investment to support our growth strategy through
three main areas: investment in our team including significant headcount
growth; investment in our portfolio through greater outsourcing activity which
allows our internal teams to focus on the most value-adding development work;
and investment in Frontier Foundry development partner projects. Outsourced
work for our F1® Manager 2022 game was particularly significant, driven by
the need to deliver a large volume of assets to support the modelling of 22
race circuits and their surrounding environments. We'll be able to leverage
that investment across our future F1® Manager titles.
Capitalisation of costs for game development related intangible assets,
together with continued investment in our leading game technology, accounted
for £35.2 million in the period (FY21: £27.8 million). Costs related to the
development of new chargeable Frontier or Foundry content, or the development
of technology to support new content, 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 FY22 represented 74% of gross
R&D expenditure which is broadly consistent with prior periods (FY21: 80%,
FY20: 80%).
Amortisation and impairment charges for game developments and Frontier's game
technology related intangible assets grew significantly to £33.9 million in
total for the period (FY21: £14.9 million), with Elite Dangerous: Odyssey
accounting for the majority of the increase.
Amortisation charges for the Elite Dangerous: Odyssey expansion accounted for
£8.4 million in FY22. Additionally, a one-off, non-cash impairment charge of
£7.4 million was recorded in FY22, which resulted from lower than expected
engagement with Elite Dangerous: Odyssey on PC following its launch in May
2021, and the decision to cancel further console development of this major
expansion.
New games and PDLC content released in FY22 was also a factor in the
year-on-year growth in the total amortisation charge, with the launch of
Jurassic World Evolution 2, three Foundry titles, and PDLC packs for Planet
Zoo and Jurassic World Evolution 2.
Net research and development expenses recorded in the income statement, being
gross spend, less capitalised costs, plus amortisation and impairment charges,
increased to £46.2 million in FY22 (FY21: £22.0 million). The substantial
rise reflected a combination of our increased investment in newly released and
future content, together with the large one-off, non-cash Elite Dangerous:
Odyssey charge.
Sales, marketing and administrative expenses grew to £25.9 million in FY22
(FY21: £21.2 million) as a result of greater investment in marketing to
support the launch of Jurassic World Evolution 2, our major new game release
in the year, new Foundry titles, and our existing game portfolio including new
PDLC releases and price promotion events.
Overall net operating expenditure in FY22 grew to £72.1 million (FY21: £43.2
million) with higher costs across all three areas: R&D, sales and
marketing, and administration. The Elite Dangerous: Odyssey charge was also a
large factor in the increase. After taking account of that charge, operating
profit as reported under IFRS was reduced to £1.5 million (FY21: £19.9
million).
Adjusted EBITDA*, a measure of cash operating profit whereby game development
costs are expensed as they are incurred, was in line with expectations in FY22
at £6.7 million (FY21: £11.8 million). The year-on-year reduction reflects
greater investment in significant game developments for release in future
years, including F1® Manager 2022 which successfully released in August 2022
(in FY23), and our Warhammer Age of Sigmar real-time strategy game for FY24.
During FY21, Frontier elected into HMRC's Patent Box regime and made a Patent
Box claim on patent-related profits from FY19 onwards. Patent Box has
delivered future benefits in FY21 and FY22, including in the form of
enhancements to the value of tax losses carried forward to future periods. The
full effect of the benefits of the Patent Box claim will therefore be realised
through cash tax benefits in the future.
Frontier also benefits from enhanced corporate tax deductions on certain
expenditures under the Video Games Tax Relief (VGTR) scheme and under the
R&D tax credits scheme, both of which help to reduce taxable profits.
Frontier also benefitted during the period from tax deductions related to
employee share option gains. The combination of the enhanced tax deductions on
expenditures and share option tax deductions in the period, together with tax
adjustments for prior periods, generated a corporation tax credit of £8.7
million in the income statement in FY22 (FY21: £2.4 million).
Profit after tax for FY22 was £9.6 million (FY21: £21.6 million) and basic
earnings per share was 24.6p (FY21: 55.4p).
Balance sheet and cashflow
We continue to benefit from a strong balance sheet, with £38.7 million of
cash at 31 May 2022 (31 May 2021: £42.4 million) and £53.1 million at 31
August 2022. The £3.7 million reduction during FY22 reflected a greater
investment in significant game developments for release in future years,
working capital movements, and the £5.0 million purchase of shares by the
Employee Benefit Trust undertaken in April 2022.
Our intangible asset values include game technology, internal game
developments, Frontier Foundry game developments, third-party software and IP
licences. Total intangible assets actually reduced slightly during the period
to £70.8 million at 31 May 2022 (31 May 2021: £71.3 million). Significant
investments in new content and technology were offset by total amortisation
and impairment charges of £15.8 million for Elite Dangerous: Odyssey. Our
investments in the period related to our own internally developed titles,
including new content for our existing portfolio, our technology, and support
for our Frontier Foundry partner developments.
Tangible assets relate mainly to IT equipment and the fit-out of the leased
office facility, which the Company occupied in April 2018. The net balance at
31 May 2022 was £6.6 million (31 May 2021: £6.1 million).
Following the adoption of IFRS 16 "Leases" effective for Frontier from 1 June
2019, the Company's balance sheet at 31 May 2022 includes a right-of-use asset
valued at £19.5 million (31 May 2021: £21.1 million) for the Company's lease
over its headquarters office building in Cambridge. A similar figure (the
difference related to timing of actual rental payments) of £20.7 million at
31 May 2022 (31 May 2021: £22.2 million) is recorded on the balance sheet as
a lease liability, split between current and non-current liabilities.
Trade and other receivables due within one year totalled £24.7 million at 31
May 2022 (31 May 2021: £13.7 million) with the majority of the balance
related to gross revenue due from digital distribution partners. The
year-on-year increase reflected strong sales activity and content releases
towards the end of FY22, including the launch of Warhammer: Chaos Gate -
Daemonhunters in May 2022, and amounts due for Jurassic World Evolution 2
entering Microsoft's Game Pass subscription service in May 2022.
Trade and other payables due within one year totalled £21.8 million at 31 May
2022 (31 May 2021: £14.8 million), being mostly made up of distribution
platform commissions, IP licence royalties and developer royalties due on the
sales transactions not yet settled, and bonus costs and other staff-related
accruals. The increase in liabilities reflected the strong trading performance
towards the end of the financial year, as mentioned above.
Within non-current liabilities (amounts due after 12 months) a balance of
£6.1 million is held at 31 May 2022 (31 May 2021: £9.2 million) which
includes IP licence costs for the minimum guaranteed royalties payable on the
licences with Formula 1® and Games Workshop®.
The current tax asset balance as at 31 May 2022 of £7.9 million (31 May 2021:
£6.5 million) relates to the filed tax returns, including VGTR claims, for
FY21, and the draft tax returns for FY22. In July 2022, £4.0 million was
received from HMRC related to the FY21 tax returns.
The net balance for deferred tax assets less deferred tax liabilities recorded
as at 31 May 2022 totalled £1.3 million (31 May 2021: £0.4 million).
Deferred tax assets and liabilities have been recorded as at 31 May 2022 for
the estimated values of temporary differences, and the potential value of tax
deductions relating to future share option exercises. A deferred tax asset
valued at £1.0 million was recognised as at 31 May 2022 for carried forward
tax losses from the Jurassic World Evolution 2 VGTR income stream. The
recognition of this asset is based on a high level of certainty that the
accumulated losses will be utilised against the taxable profits projected to
be generated in FY23 and FY24 by Jurassic World Evolution 2.
Frontier's tax arrangements concerning income streams under VGTR and Patent
Box enhancements can be complex, and as at 31 May 2022 there was insufficient
certainty concerning the utilisation of other tax losses to create any other
deferred tax assets related to accumulated losses. Frontier's total
unrecognised tax losses as at 31 May 2022 were £50.2 million (31 May 2021:
£55.1 million).
CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED 31 MAY 2022
Notes 12 months to 31 May 2022 12 months to 31 May 2021
£'000
£'000
Revenue 3 114,032 90,688
Cost of sales (40,420) (27,538)
Gross profit 73,612 63,150
Research and development expenses (46,179) (22,025)
Sales and marketing expenses (12,339) (7,269)
Administrative expenses (13,558) (13,940)
Operating profit 1,536 19,916
Net finance costs (592) (731)
Profit before tax 944 19,185
Income tax 4 8,684 2,373
Profit for the year attributable to shareholders 9,628 21,558
Earnings per share
Basic earnings per share 5 24.6 55.4
Diluted earnings per share 5 23.7 53.3
All the activities of the Group are classified as continuing.
The accompanying accounting policies and notes form part of this financial
information.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 MAY 2022
12 months to 12 months to
31 May 2022 31 May 2021
£'000
£'000
Profit for the year 9,628 21,558
Other comprehensive income
Items that will be reclassified subsequently to profit or loss:
Exchange differences on translation of foreign operations (19) 23
Total comprehensive income for the year attributable to the equity holders of 9,609
the parent
21,581
The accompanying accounting policies and notes form part of this financial
information.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 MAY 2022
(REGISTERED COMPANY NO: 02892559)
31 May 2022 31 May 2021
£'000
£'000
Notes
Non-current assets
Intangible assets 6 70,833 71,318
Property, plant and equipment 6,640 6,078
Right-of-use asset 19,484 21,108
Deferred tax asset 1,348 384
Total non-current assets 98,305 98,888
Current assets
Trade and other receivables 24,705 13,741
Current tax asset 7,867 6,468
Cash and cash equivalents 38,699 42,423
Total current assets 71,271 62,632
Total assets 169,576 161,520
Current liabilities
Trade and other payables (21,797) (14,768)
Lease liability (1,461) (1,419)
Deferred income (2,466) (2,180)
Total current liabilities (25,724) (18,367)
Net current assets 45,547 44,265
Non-current liabilities
Provisions (56) (41)
Lease liability (19,278) (20,739)
Other payables (6,148) (9,219)
Total non-current liabilities (25,482) (29,999)
Total liabilities (51,206) (48,366)
Net assets 118,370 113,154
Equity
Share capital 197 197
Share premium account 36,468 36,079
Equity reserve (12,769) (9,351)
Foreign exchange reserve (18) 1
Retained earnings 94,492 86,228
Total equity 118,370 113,154
The accompanying accounting policies and notes form part of this financial
information.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 MAY 2022
Share capital £'000 Share premium account £'000 Equity reserve £'000 Foreign exchange reserve £'000 Retained earnings £'000 Total equity £'000
At 31 May 2020 195 34,589 (925) (22) 62,897 96,734
Profit for the year - - - - 21,558 21,558
Other comprehensive income:
Exchange differences on translation of foreign operations - - - 23 - 23
Total comprehensive income for the year - - - 23 21,558 21,581
Issue of share capital net of expenses 2 1,490 - - - 1,492
Share-based payment charges - - 2,155 - - 2,155
Share-based payment transfer relating to option exercises and lapses - - (1,770) - 1,770 -
Employee Benefit Trust cash outflows from share purchases - - (10,000) - - (10,000)
Employee Benefit Trust net cash inflows from option exercises - - 1,189 - - 1,189
Deferred tax movements posted directly to reserves - - - - 3 3
Transactions with owners 2 1,490 (8,426) - 1,773 (5,161)
At 31 May 2021 197 36,079 (9,351) 1 86,228 113,154
Profit for the year - - - - 9,628 9,628
Other comprehensive income:
Exchange differences on translation of foreign operations - - - (19) - (19)
Total comprehensive income for the year - - - (19) 9,628 9,609
Issue of share capital net of expenses - 389 - - - 389
Share-based payment charges - - 2,452 - - 2,452
Share-based payment transfer relating to option exercises and lapses - - (1,376) - 1,376 -
Employee Benefit Trust cash outflows from share purchases - - (5,000) - - (5,000)
Employee Benefit Trust net cash inflows from option exercises - - 506 - - 506
Deferred tax movements posted directly to reserves - - - - (2,740) (2,740)
Transactions with owners - 389 (3,418) - (1,364) (4,393)
At 31 May 2022 197 36,468 (12,769) (18) 94,492 118,370
The accompanying accounting policies and notes form part of this financial
information.
CONSOLIDATED STATEMENT OF CASHFLOWS
FOR THE YEAR ENDED 31 MAY 2022
12 months to 12 months to
31 May 2022 31 May 2021
£'000
£'000
Profit before taxation 944 19,185
Adjustments for:
Depreciation and amortisation 32,199 18,167
Impairment of intangible assets 7,398 -
Movement in unrealised exchange losses/(gains) on forward contracts 474 (223)
Share-based payment expenses 2,452 2,155
Interest expense - 88
Interest received (57) (48)
Payment of interest element of lease liabilities 649 691
Research and Development Expenditure Credit (RDEC) (375) -
Working capital changes:
Change in trade and other receivables (10,964) (1,233)
Change in trade and other payables 4,465 119
Change in provisions 15 15
Cash generated from operations 37,200 38,916
Taxes received 3,956 38
Net cash flows from operating activities 41,156 38,954
Investing activities
Purchase of property, plant and equipment (2,500) (1,375)
Expenditure on intangible assets (36,243) (31,502)
Interest received 57 48
Net cash flows used in investing activities (38,686) (32,829)
Financing activities
Proceeds from issue of share capital 389 1,492
Employee Benefit Trust cash outflows from share purchases (5,000) (10,000)
Employee Benefit Trust cash inflows from option exercises 506 1,189
Payment of principal element of lease liabilities (1,419) (1,377)
Payment of interest element of lease liabilities (649) (691)
Interest paid - (88)
Net cash flows used in financing activities (6,173) (9,475)
Net change in cash and cash equivalents from continuing operations (3,703) (3,350)
Cash and cash equivalents at beginning of year 42,423 45,751
Exchange differences on cash and cash equivalents (21) 22
Cash and cash equivalents at end of year 38,699 42,423
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') 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 financial information contained in this preliminary announcement of
audited results does not constitute the Group's statutory accounts for the
years ended 31 May 2022 and 31 May 2021. The accounts for the year ended 31
May 2021 have been delivered to the Registrar of Companies. The statutory
accounts for the year ended 31 May 2022 have been reported on by the Company's
auditors. The report on these accounts was unqualified, did not draw attention
to any matters by way of emphasis and did not contain any statement under
section 498(2) or (3) of the Companies Act 2006 or equivalent preceding
legislation.
The statutory accounts for the year ended 31 May 2022 are expected to be
posted to shareholders in due course and will be delivered to the Registrar of
Companies after they have been laid before the shareholders in a general
meeting on 8 November 2022. Copies will be available from the registered
office of the Company, 26 Science Park, Milton Road, Cambridge CB4 0FP and
will be accessible on the Frontier Developments website,
https://www.frontier.co.uk. The registered number of Frontier Developments plc
is 02892559.
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 consolidated financial statements of the Group have been prepared in
accordance with International Accounting Standards (IASs) in conformity with
the requirements of the Companies Act 2006 and in accordance with UK-adopted
IASs. The financial information has been prepared on the basis of all
applicable IFRSs, including all IASs, Standing Interpretations Committee (SIC)
interpretations and International Financial Reporting Interpretations
Committee (IFRIC) interpretations issued by the International Accounting
Standards Board (IASB) that are applicable to the financial period.
Except for the application of UK-adopted IASs, for which there are no material
differences from IFRSs as issued by the IASB and adopted by the EU when
applied to the Group, accounting policies have been applied consistently to
all years presented unless otherwise stated.
The financial information has been prepared on a going concern basis 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 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
period to 30 November 2023 ('the going concern period'). The Group and Company
therefore continue to adopt the going concern basis in preparing their
financial statements.
The Group's day-to-day working capital requirements are expected to be met
through the current cash and cash equivalent resources (including treasury
deposits) at the balance sheet date of 31 May 2022 of £38.7 million along
with expected cash inflows from current business activities. The Annual Plan
approved by the Board of Directors, which has been used to assess going
concern, incorporates the impacts and considerations to revenue and costs due
to Covid-19 and the current macroeconomic conditions arising from the ongoing
Ukraine crisis. The Annual Plan also reflects assessments of current and
future market conditions and the impact this may have on cash resources.
The Group has also performed stress testing on the Annual Plan in respect of
potential downside scenarios to identify the break point of current cash
resources and to identify when current liquidity resources may fall short of
requirements.
The scenarios both consider a reduction in predicted revenues, however the
reduction would need to be severe in order to prevent the Group from
continuing as a going concern and is considered to be highly unlikely to
occur. The Group have also identified mitigating actions that could be
reasonably taken, if required, to offset the reduction of cash inflows, to
enable it to continue its operations for the period to 30 November 2023.
The sensitivities included in the stress testing include the following
potential scenarios to revenue:
• severe operational disruption across all third-party
distributors resulting in a significant reduction of revenue for the Group;
and
• some operational disruption across all third-party
distributors resulting in a reduction of revenue for the Group.
As expected, the scenarios resulted in an accelerated use of current cash
resources, however, in all scenarios tested the current cash resources were
sufficient to support the Group's activities. This is due to a variety of
factors:
• the Group currently has significant cash reserves to
maintain the current level of operations;
• the Group has been able to continue with current
headcount growth plans and has sustained a high level of recruitment to
support the roadmap;
• there has been no impact to debtor recoverability; and
• should a more extreme downside scenario occur the Group
could take further mitigating actions by reducing discretionary spend.
Having considered all of the above, including the current strong cash
position, no current impact on debtor recoverability and the continued strong
trading performance for the Group, the Directors are satisfied that there are
sufficient resources to continue operations for the period to 30 November
2023. The financial statements for the year ended 31 May 2022 are therefore
prepared under the going concern basis.
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 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.
All 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.
Other revenue mainly related to royalty income in both FY22 and FY21.
12 months to 31 May 2022 12 months to 31 May 2021
£'000
£'000
Publishing revenue 113,555 90,471
Other revenue 477 217
Total revenue 114,032 90,688
Cost of sales (40,420) (27,538)
Gross profit 73,612 63,150
Research and development expenses (46,179) (22,025)
Sales and marketing expenses (12,339) (7,269)
Administrative expenses (13,558) (13,940)
Operating profit 1,536 19,916
Net finance costs (592) (731)
Profit before tax 944 19,185
Income tax 8,684 2,373
Profit for the year attributable to shareholders 9,628 21,558
4. TAXATION ON ORDINARY ACTIVITIES
The major components of the income tax credit for FY22 and FY21 are:
12 months to 31 May 2022 12 months to 31 May 2021
£'000
£'000
Consolidated income statement
Current tax:
Credit in respect of current year (3,471) (2,512)
Adjustments in respect of prior years (1,509) (1,616)
Total current tax (4,980) (4,128)
Deferred tax:
(Credit)/charge in respect of current year (4,507) 684
Adjustments in respect of prior years 552 1,071
Relating to changes in tax rates 251 -
Total deferred tax (3,704) 1,755
Total taxation credit reported in the income statement (8,684) (2,373)
Consolidated equity 12 months to 31 May 2022 12 months to 31 May 2021
£'000
£'000
Deferred tax related to items recognised in equity during the year:
Net change in share option exercises 2,740 (3)
Reconciliation of total tax credit at statutory tax rates:
12 months to 31 May 2022 12 months to 31 May 2021
£'000
£'000
Profit on ordinary activities before taxation 944 19,185
Tax on profit on ordinary activities at standard statutory tax rate 19% (2021: 179 3,652
19%)
Factors affecting tax expense for the year:
Expenses not deductible for tax purposes 80 13
Adjustments in respect of prior years (957) (545)
Tax rate benefit on surrender of tax losses (850) (415)
Losses on which deferred tax previously not recognised (878) -
Research and development tax credits - (816)
Video Games Tax Relief enhanced deductions on which credits claimed (3,864) (2,430)
Benefit of Patent Box (2,665) (1,430)
Deferred tax not recognised 20 (402)
Effect of changes in tax rate 251 -
Taxation credit (8,684) (2,373)
In the Spring Budget 2021, the Government announced that from 1 April 2023 the
corporation tax rate will increase to 25%. At the balance sheet date, deferred
taxes have therefore been measured using the tax rate at the date that the
deferred tax asset or liability unwinds of 19-25% (31 May 2021:
19%).
For FY22 the Group has recorded a total corporation tax credit of £8.7
million (FY21: £2.4 million). The Group benefits from the enhanced tax
deductions available from the Video Games Tax Relief (VGTR) scheme. The Group
also benefits from the Patent Box relief that reduced the taxable profits for
Jurassic World Evolution, Jurassic World Evolution 2 and Planet Zoo during the
year.
The Group recognised a prior year adjustment of £957k during the year as a
result of Jurassic World Evolution 2's Video Games Tax Relief claim in the
final FY21 corporation tax return after receiving the final certificate from
the British Film Institute (BFI) in March 2022, in which the surrender of
losses were carried forward.
The tax rate benefit on surrender of tax losses of £850k is the additional 6%
tax benefit received in respect of surrendering the current year losses for
the VGTR tax credit at 25% for the following trades: Elite Dangerous, F1®
Manager 2022 and Warhammer Age of Sigmar.
Due to the increased certainty of the Jurassic World Evolution 2 forecast for
FY23 and FY24, the Group recognised a deferred tax asset of £878k in respect
of the £4.6 million of losses carried forward for this VGTR trade.
The Group claimed research and development tax relief under the Small or
Medium-sized Enterprise (SME) scheme in FY21. The Group elected into the
Research and Development Expenditure Credit (RDEC) scheme in FY22. The
Research and Development (R&D) tax credit in FY22 is offset against and
recognised in research and development expenses. The tax charge applied to
R&D tax credit is currently included within the deferred tax assets, which
is due to the Group making a taxable loss in FY22.
During the year, deferred tax not recognised relates to the tax effected tax
saving on the employee share scheme deduction of £78k, netting off with the
unrecognised tax losses movement of £58k for trades other than Jurassic World
Evolution 2. The movement on employee share scheme deduction of £78k is the
deferred tax movement of £306k posted to the income statement at a tax rate
of 19%, less the current tax deduction of £228k. Unrecognised tax losses
movement of £58k is the net of £5.0 million brought forward losses now
utilised and the £4.7 million current year loss carried forward, tax effected
at 19%.
The losses do not have an expiry date.
5. 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.
12 months to 31 May 2022 12 months to
31 May 2021
Profit attributable to shareholders (£'000) 9,628 21,558
Weighted average number of shares 39,172,987 38,909,932
Basic earnings per share (p) 24.6 55.4
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.
12 months to 31 May 2022 12 months to
31 May 2021
Profit attributable to shareholders (£'000) 9,628 21,558
Diluted weighted average number of shares 40,606,756 40,471,633
Diluted earnings per share (p) 23.7 53.3
The reconciliation of the average number of Ordinary Shares used for basic and
diluted earnings per share is as follows:
12 months to 12 months to
31 May 2022 31 May 2021
Weighted average number of shares 39,172,987 38,909,932
Dilutive effect of share options 1,433,769 1,561,701
Diluted average number of shares 40,606,756 40,471,633
6. 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 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 Total
£'000 £'000
Cost
At 31 May 2020 9,158 72,328 1,093 10,824 93,403
Additions 7,851 25,138 620 361 33,970
Transfer - (347) 347 - -
At 31 May 2021 17,009 97,119 2,060 11,185 127,373
Additions 2,724 32,496 330 - 35,550
Disposals - (222) - - (222)
At 31 May 2022 19,733 129,393 2,390 11,185 162,701
Amortisation and impairment
At 31 May 2020 5,589 33,007 803 1,336 40,735
Amortisation charges 1,469 13,427 424 - 15,320
At 31 May 2021 7,058 46,434 1,227 1,336 56,055
Amortisation charges 2,115 24,360 424 1,738 28,637
Impairment charge - 7,398 - - 7,398
Disposals - (222) - - (222)
At 31 May 2022 9,173 77,970 1,651 3,074 91,868
Net book value at 31 May 2022 10,560 51,423 739 8,111 70,833
Net book value at 31 May 2021 9,951 50,685 833 9,849 71,318
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.
The Group recognised an impairment loss of £7.4 million during FY22 in
respect of Elite Dangerous: Odyssey as a result of lower than expected
engagement with Elite Dangerous: Odyssey on PC following its launch in May
2021 and the decision to cancel further console development of this major
expansion. The value in use recoverable amount of Elite Dangerous: Odyssey at
31 May 2022 is £nil (31 May 2021: no impairment charge) using a pre-tax
discount rate of 9% (31 May 2021: 9%). No reasonable possible change in key
assumptions for other intangible assets would result in an impairment charge.
7. 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.
12 months to 12 months to
31 May 2022 31 May 2021
£'000
£'000
Operating profit 1,536 19,916
Depreciation and amortisation 32,199 18,167
Impairment of intangible assets 7,398 -
EBITDA 41,133 38,083
Adjusted EBITDA
Frontier also discloses an Adjusted EBITDA measure which, in the Company'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 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.
12 months to 12 months to 31 May 2021
£'000
31 May 2022
£'000
Operating profit 1,536 19,916
Add back non-cash intangible asset amortisation charges for game developments 26,475 14,896
and Frontier's game technology
Add back non-cash intangible asset impairment charge for game developments 7,398 -
Deduct capitalised investment costs in game developments and Frontier's game (35,220) (27,793)
technology
Add back non-cash depreciation charges 3,562 2,847
Add back non-cash movements in unrealised exchange losses/(gains) on forward 474 (223)
contracts
Add back non-cash share-based payment expenses 2,452 2,155
Adjusted EBITDA 6,677 11,798
Research and development (R&D) expenses
Research and development (R&D) expenses recorded in Frontier's 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 income statement, whereas the gross R&D expenses
figure provides a better representation of 'cash spend' on R&D activities.
12 months to 12 months to
31 May 2022 31 May 2021
£'000
£'000
Gross R&D expenses 47,526 34,922
Capitalised investment costs in game developments and Frontier's game (35,220) (27,793)
technology
Amortisation charges for game developments and Frontier's game technology 26,475 14,896
Impairment of intangible assets 7,398 -
Net R&D expenses 46,179 22,025
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