REG - Frontier Developmnts - FY23 Financial Results
13/09/2023 07:15
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RNS Number : 2247M Frontier Developments PLC 13 September 2023
13 September 2023
Frontier Developments plc
FY23 Financial Results
Frontier Developments plc (AIM: FDEV, 'Frontier', the 'Company', or the
'Group'), a leading developer and publisher of video games based in
Cambridge, UK, publishes its full-year results for the 12 months ended 31 May
2023 ('FY23'). This announcement contains inside information.
Financial Highlights
FY23 FY22
(12 months to (12 months to
31 May 2023) 31 May 2022)
Revenue £104.6m £114.0m
EBITDA* £33.0m £41.1m
Adjusted EBITDA** (£4.6m) £6.7m
Operating (loss)/profit (£26.6m) £1.5m
EPS (basic) (53.6p) 24.6p
Cash balance at year end £28.3m £38.7m
· Revenue of £104.6 million (FY22: £114.0 million) was achieved
through the ongoing performance of games which released in earlier financial
years, sales from F1® Manager 2022 which released in August 2022, and modest
contributions from new Foundry titles released during the period.
· Adjusted EBITDA** was a loss of £4.6 million (FY22: profit of £6.7
million), reflecting lower revenues achieved in FY23 versus the prior period
and investment in titles for release in future years as Frontier gears up to
deliver two new game releases per financial year from FY24 onwards.
· Operating profit in FY23 was negatively impacted by £28.7 million of
non-cash intangible asset impairment and accelerated amortisation charges
resulting from the closure of Foundry and a prudent re-assessment of the
overall future performance of the F1® Manager franchise following lower than
expected initial sales of F1® Manager 2023. The incremental non-cash charges
resulted in an operating loss of £26.6 million in the period (FY22: profit of
£1.5 million).
· Frontier continues to be well capitalised, with a cash balance at the
end of FY23 (on 31 May 2023) of £28.3 million and £24.8 million as at the
end of August 2023. The net cash outflow of £10.4 million in FY23 was after
outflows of £10.9 million for the acquisition of Complex and £3.0 million
for the purchase of shares in the Employee Benefit Trust. Cash would have
grown in FY23 if the acquisition and share purchases are disregarded.
*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 impairment charges, share-based payment charges and
other non-cash items.
Operational & Strategic Highlights
A thriving and growing game portfolio
· Frontier's post-launch nurturing strategy delivered another strong
performance in FY23, with games released before the start of the financial
year delivering 72% of the total revenue in the period.
· Jurassic World Evolution 2, created in collaboration with Universal
Products & Experiences and released in November 2021, was the biggest
revenue contributor in the portfolio for FY23, benefitting from new content in
the period including two major PDLC packs inspired by Universal Pictures and
Amblin Entertainment's Jurassic World franchise.
· In August 2022 Frontier further expanded its portfolio with the
release of F1® Manager 2022, the first title in an annual series of Formula
1® management games, which sold over 800,000 units in FY23.
· The second annual title in the Formula 1® series, F1® Manager
2023, released in July 2023 (in FY24). This second iteration of the series has
achieved good reviews and a positive reception from players, although initial
sales were lower than expected.
· Support for F1® Manager 2023 continues whilst plans for F1®
Manager in 2024 are developed.
· In November 2023, Frontier's first entry into the popular real-time
strategy (RTS) genre will be released. Warhammer Age of Sigmar: Realms of
Ruin, set within Games Workshop's globally popular Warhammer IP, gives unique
perspectives on the in-game action with unprecedented visual fidelity, and
introduces an innovative control system to the proven gameplay mechanics of
the genre, allowing console players to fully experience the RTS genre for the
first time.
· Frontier has a strong position in the creative management simulation
(CMS) genre, and development of further CMS games continues - the first is on
track for release in FY25, with another title now in development for release
in FY26.
First acquisition
· In November 2022, Frontier added a new development team through the
acquisition of experienced game development studio Complex Games Inc.
(Complex). This followed the successful collaboration between Complex and
Frontier on the development and publication of the turn-based strategy game
Warhammer 40,000: Chaos Gate - Daemonhunters, the biggest selling title in the
portfolio of games published by Foundry.
· The acquisition has created a core development footprint for
Frontier in Canada, a region with an extensive and growing talent pool for
video game development, and the team is in the process of scaling-up to
support future growth.
· Integration activities and growth plans for Complex are on track,
and the acquisition delivered modest accretive financial benefits in FY23, as
expected.
Closure of Frontier Foundry
· In June 2023 Frontier confirmed the closure of its third-party
publishing label, Frontier Foundry (Foundry), following the completion of a
strategic review.
· The decision has already enabled a heightened level of operational
focus to be applied to Frontier's own internally developed portfolio of
titles.
Current Trading and Outlook
We have achieved a solid start to FY24, which began on 1 June 2023, through
the ongoing performance of the existing portfolio over the summer.
The release of F1® Manager 2023 in July 2023 has so far not delivered the
expected sales contribution, but any revenue shortfall in FY24 is expected to
be offset by continued strong performance across the rest of the portfolio, as
well as confirmed but as yet unannounced additional revenue streams, including
for F1® Manager 2023.
The big new game release for FY24 is still to come, with Warhammer Age of
Sigmar: Realms of Ruin scheduled for release in November 2023. Our marketing
campaign for launch kicked off strongly with our presence at Gamescom at the
end of August.
The Board continues to be comfortable with market expectations for FY24, with
consensus revenue at £108 million and consensus Adjusted EBITDA* loss of £9
million.
The Board is confident that the Company can return to attractive levels of
financial performance over the medium-term, based on the strength of its
existing portfolio and planned new releases, underpinned by the refocusing of
its strategy.
* 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 impairment charges, share-based payment charges and
other non-cash items.
Jonny Watts, CEO, said:
"I would like to thank our team of over 900 people who have worked tirelessly
over the past year and beyond to deliver great content to our players. The
last twelve months has been a challenging time for Frontier, and as we
approach our 30(th) birthday we have drawn on that longevity and success to
refine our strategy. I am confident that the heightened focus we are applying
to project selection and development priorities will return us to attractive
levels of financial performance. We'll shortly be entering the RTS genre with
the release of Warhammer Age of Sigmar: Realms of Ruin in November, and I look
forward to the reaction from our players."
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
Alex Bevis,
CFO
Peel Hunt - Nomad and Joint Corporate
Broker +44 (0)20
7418 8900
Neil Patel / Paul Gillam / James Smith
Liberum - Joint Corporate Broker
+44 (0)20 3100 2000
Max Jones / Nikhil Varghese
Teneo +44
(0)20 7353 4200
Mark Burgess / Matt Low / 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.
Frontier's LEI number: 213800B9LGPWUAZ9GX18.
www.frontier.co.uk (http://www.frontier.co.uk/)
Chairman's Statement
It has been an interesting and eventful time at Frontier. I joined the Board
on 22 September 2022 and became Chairman at the start of December 2022,
succeeding David Gammon, who had been Chairman for 10 years. My thanks go to
my predecessor for his significant contribution to the evolution of Frontier
throughout his tenure. There have been several other changes to the Board with
Jonny Watts becoming Chief Executive Officer and David Braben moving to the
role of President and Founder in August 2022. Alongside those changes, James
Dixon stepped up to join the Board as Chief Operating Officer and Jessica
Bourne was promoted to the role of General Counsel and Company Secretary. More
recently, on 1 June, Charles Cotton retired as a Non-Executive Director after
nearly seven years on the Board, and I thank him for his contribution. On the
same day, Leslie-Ann Reed joined the Board as Non-Executive Director and Chair
of the Audit Committee.
I have long admired Frontier and the games it develops and publishes, and I am
honoured to have been asked to join the team. I believe in Frontier's strategy
to Select, Develop, Launch, & Nurture genre-leading games that best fit
Frontier's expertise and competitive advantages to deliver long-term value to
our stakeholders.
The financial year that ended 31 May 2023 was a challenging one. In January
2023 we announced a reset of our revenue expectations following a
lower-than-expected sales contribution from F1® Manager 2022, the general
sales underperformance across the portfolio during the Christmas holiday
period, and the poorer than expected performance of the Foundry games.
Subsequently, we took the difficult decision to cease all activity relating to
acquiring new third-party titles within Foundry. We took this opportunity to
refocus and reset, with all of the Group's efforts on Frontier's own
internally developed portfolio of titles.
For FY23 we are reporting a loss before interest and taxation of £26.6
million after incremental non-cash charges totalling £28.7 million relating
to the closure of Foundry and a cautious assessment of the future performance
of the F1® Manager franchise following the initial underperformance of F1®
Manager 2023 which released in July 2023.
The Board is confident that the Company can return to attractive levels of
financial performance over the medium-term, based on the strength of its
existing portfolio and planned new releases.
Frontier is a people business. We have a team of talented people who work hard
to develop and publish our games. I am very grateful to them for their
dedication and commitment. We now have more than 900 people, some of whom are
working in the studio, some remotely and others on a hybrid basis. In common
with many businesses post-pandemic, we are constantly considering how best to
operate to safeguard and accommodate the preferences of our people while
efficiently managing the business. For the first time we have had people join
us through acquisition, when on 1 November 2022 we completed the acquisition
of developer Complex Games. I welcome all our new joiners to the Frontier
team.
We want to ensure that the Board's time and expertise is utilised to support
the strategic development of the Group. We consider updates on industry
developments and market trends. The Board takes its governance
responsibilities very seriously. The structures and processes we have in place
are summarised in this Annual Report. We are placing increasing emphasis on
environmental, social, and governance (ESG) matters to ensure we have the
right framework in place to enable our business to operate in a sustainable
and responsible way.
I would like to thank all our stakeholders, including our people, our players,
and our shareholders, for their support.
Chief Executive Officer's Statement
I was delighted to step up to the role of CEO in August 2022, having worked
with David Braben and the team at Frontier for many years. I continue to be
amazed every day by what our talented teams are able to deliver - we have
terrific people and an exceptional culture of quality and creativity.
Since I took up the baton from David last summer, our Board and our senior
management team have been investing more time in reviewing our future plans.
We are conscious that our financial performance over the last two years has
not been good enough, and although there is always room for improvement on
project execution and operational delivery, I firmly believe that the majority
of our financial challenges have been driven by some of the decisions that we
collectively made over the last five to six years, which did not always result
in the expected financial outcomes for the Company. Foundry is an obvious
recent example of this, where our financial and operational investments across
seven diverse, externally developed games over a four-year period did not
deliver a positive return.
With a greater focus on decision making, particularly around project
selection, the good news is that we remain very positive about the internal
project decisions that we have taken in the last two to three years. In
particular, we are excited about the upcoming release of Warhammer Age of
Sigmar: Realms of Ruin and the own-IP creative management simulation game we
are developing for release in FY25.
I am delighted to announce that we are now starting work on a further creative
management simulation game for release in FY26, a genre where we have a strong
track record.
Game selection
In January 2024 we'll be celebrating 30 years since David Braben founded
Frontier in 1994. That has provided the perfect context in which to look back
at our games, and re-evaluate what makes a 'Frontier' game when it comes to
our project selection decisions.
Analysing our successes, and also where we have had our greatest challenges,
we have defined four project selection pillars: Strategic, Experience,
Gameplay, and Longevity.
1. Strategic - we need to be strategic in our selection process. We seek
out opportunities to achieve 'first' or 'best' status in viable, currently
under-served, market segments where we can be the top title in that segment.
We choose projects which build upon existing IP, Frontier experience or
technology. We aim to select projects which have strong potential to be
profitable within one month of launch and to achieve 100% return on investment
within one year. So far, we have achieved this with open-world simulations of
galaxies, rollercoasters, zoos, and dinosaurs.
2. Experience - it is all about the player's experience. We want to deliver
a game which is authentic and accurate to its subject matter, and to nurture
or engage with existing communities around those games. We provide non-linear
emergent gameplay, with player-enhanced experiences and player-led narratives.
We seek an engaging and satisfying player onboarding experience both at launch
and post-release.
3. Gameplay - we make sophisticated and challenging games that provide
player agency and choice. We offer deeply rewarding playstyles, with multiple
options for problem-solving. To support the principles of 'easy to pick up,
challenging to master', our games have layered complexity.
4. Longevity - we seek to provide open-ended experiences, with the
potential for substantial, sustainable, and profitable post-release content.
We nurture our games post-release with ongoing live project support, often
through both free and paid content. We enjoy making games that offer creative
building, especially where communities of players can share their creations.
We aim to support competitive and cooperative play and socialisation both in
and out of game. We actively seek to create hooks that keep our communities
engaged.
Our game genres
These four game selection pillars align strongly with our most successful
segment, which we call creative management simulation (CMS). We consider
ourselves to be leaders in CMS games, as evidenced by our success with Planet
Coaster, Planet Zoo, Jurassic World Evolution and Jurassic World Evolution 2.
This is a market space where we know we can find opportunities to deliver
genre-leading games, and we will continue to focus on this segment. We are in
full development for a CMS game for release in FY25 and we have another CMS
game scheduled for FY26.
Alongside our strategy for CMS games, we will continue to expand into
carefully selected new genres, with a focus on segments which share
characteristics with the CMS genre and which therefore align closely to the
four selection pillars.
Our F1® Manager game series, being an annual sport management game, leverages
our CMS expertise. We delivered a solid first game with F1® Manager 2022,
with over 850,000 units sold. For F1® Manager 2023, which released in July
2023, initial sales have been below the level achieved by the first game,
despite good reviews and a positive reception from players. We continue to
support F1® Manager 2023 as we develop our plans for F1® Manager in 2024.
Looking ahead to November 2023, I am excited about the release of Warhammer
Age of Sigmar: Realms of Ruin, our first foray into the real-time strategy
genre. We are pleased with the early pre-release reaction to the game and are
excited to continue to work to build real-time strategy into a strategic
pillar for the Company.
We were pleased to welcome the team from Complex Games, developers of
Warhammer 40,000: Chaos Gate - Daemonhunters, to Frontier in November 2022
through our first acquisition. Their expertise in turn-based strategy games
has given us a strong entry into another new genre, which we are already
working to build upon.
The final genre is open-world space simulation. With Elite Dangerous, our
first self-published game which fully released on PC in December 2014, we
captured the imagination of space simulation fans around the world. After
nearly 10 years since its first public beta, we have greatly exceeded the
original vision for the game.
Our people
During FY23 we grew our headcount through both the 800 and the 900 people
milestones, finishing with 915 people as at 31 May 2023, across all of our
teams. Organic growth is as strong as ever, with over 230 people choosing to
join us during the period, and a further 18 people joining us from Complex
Games through the acquisition we completed in November 2022.
Growing and investing in our people is a crucial element of our strategy, as
we seek to both nurture and expand our game portfolio. For some of our
development teams that means growth in terms of both headcount and capability,
and over time we will look to increase the number of our development teams in
order to grow the number of projects that we can support at any one time.
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 hub for talent.
In the last few years, engagement and communication has emerged as an
important element of our people strategy, which was vital during the pandemic
and with the emergence of hybrid and remote working as new models of
collaboration. It's important that everyone across Frontier understands and is
excited by our current projects and our future plans, so we invest time in
communicating to everyone across the studio through regular internal
livestreams, along with offering regular opportunities to celebrate, socialise
and learn.
I'd like to take the opportunity to thank everyone at Frontier for their hard
work and support during the year.
Our players
Our players continue to respond positively to the content that we provide to
them, through new game releases, free content and updates, and paid content
like PDLC packs. Our publishing strategy is very much community focused - we
aim to identify, create and nurture communities of players for each of our
titles. That aim is best supported where we have opportunities to provide
engaging new content, with Planet Zoo and Jurassic World Evolution 2 being
particularly good examples of that in FY23, with multiple packs releasing for
each title during the period.
We were pleased to add a new player community in the last 12 months, with the
release of F1® Manager 2022 in August 2022 and F1® Manager 2023 which
released in July 2023.
We are currently in the midst of creating what we hope will be another big new
community of players, with Warhammer Age of Sigmar: Realms of Ruin scheduled
for release in November 2023.
As ever, we remain very much player focused, since ultimately all of our
success is dependent on what we deliver and how we deliver to our target
audiences, and I would like to thank all our players for their continued
support.
Our shareholders
Our financial performance over the last two financial years has been
disappointing, and I'd like to thank our shareholders for their patience and
support during what has been a challenging time for us. We continue to believe
that we have a solid strategic plan, with a pipeline of releases which will
get us back on track to deliver the sustainable and growing revenue and
profitability that we should be able to achieve with our world-class team of
people.
Chief Financial Officer's Statement
Overview
FY23 revenue of £104.6 million (FY22: £114.0 million) was delivered through
a solid performance from the existing portfolio of games (released prior to 1
June 2022), which accounted for 72% of revenue during the financial year,
together with contributions from games released during the period. Jurassic
World Evolution 2, which released in November 2021 through collaboration with
Universal Products & Experiences, was the strongest performer in the
portfolio, with revenue in its first 18 months exceeding the performance of
the first Jurassic World Evolution game during its first 18 months. F1®
Manager 2022 was the leading revenue generator amongst new games, selling
over 800,000 units in its first nine months following its release in late
August 2022 up to the end of the financial year on 31 May 2023.
Adjusted EBITDA*, a measure of cash profitability, was a loss of £4.6 million
in FY23 (FY22: profit of £6.7 million), which reflects the decrease in
revenue, an increase in costs, and continued investment in future games as
Frontier gears up to deliver two new game releases per financial year from
FY24 onwards.
* 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 impairment charges, share-based payment charges and
other non-cash items.
Operating profit as reported under IFRS was adversely impacted by non-cash
intangible asset impairment and accelerated amortisation charges totalling
£28.7 million in the year arising from two events: the underperformance and
subsequent closure of Foundry, and a prudent re-assessment of the future
financial performance of the F1® Manager franchise following a lower than
expected initial sales contribution from F1® Manager 2023 which released in
July 2023, after the end of the financial year.
These non-cash intangible asset impairment and accelerated amortisation
charges led to an operating profit before those adjustments of £2.1 million
becoming a reported operating loss of £26.6 million. The non-cash
intangible asset impairment and accelerated amortisation charges had no impact
on cashflow, cash balances or Adjusted EBITDA.
In November 2022 Frontier added a new development team with the acquisition of
experienced game development studio Complex Games Inc. (Complex), following
the successful collaboration between Complex and Frontier on the development
and publication of turn-based strategy game Warhammer 40,000: Chaos Gate -
Daemonhunters. Integration activities and growth plans for Complex are on
track, and the acquisition delivered modest accretive financial benefits in
FY23, as expected.
Frontier continues to be well capitalised, with total cash balances on 31 May
2023 of £28.3 million (31 May 2022: £38.7 million) and £24.8 million on
31 August 2023. The reduction in cash during FY23 reflected a greater
investment in significant game developments for release in future years,
£10.9 million for the acquisition of Complex, and the £3.0 million purchase
of shares by the Employee Benefit Trust undertaken in May 2023 to satisfy
future share option exercises by employees. Cash would have grown in FY23 if
the acquisition and share purchases are disregarded.
We're confident that our renewed and proven strategy of selecting, developing,
launching, and nurturing genre-leading games will get us back on track in
terms of our financial performance.
Our existing game portfolio
Our portfolio of titles which released before FY23 - Elite Dangerous, Planet
Coaster, Planet Zoo, Jurassic World Evolution, Jurassic World Evolution 2 and
Warhammer 40,000: Chaos Gate - Daemonhunters - continues to reach new
audiences, and each delivered material revenues in FY23. Jurassic World
Evolution 2 and Planet Zoo performed especially well, each supported by four
new PDLC packs releasing in FY23, alongside free content. In FY24 new PDLC
packs and free content for both Jurassic World Evolution 2 and Planet Zoo have
already been released, with more planned during this financial year.
Jurassic World Evolution 2 was the strongest performer in the portfolio, with
revenue in its first 18 months exceeding the performance of Frontier's
all-time leading revenue generator, the first Jurassic World Evolution game,
during its first 18 months.
F1® Manager
FY23 benefited from the release of another new Frontier game in late August
2022, F1® Manager 2022, the first annual title in a major new sports
franchise for Frontier. By 31 May 2023 F1® Manager 2022 had achieved over
800,000 units sold across all platforms and formats, with strong engagement at
release. This level of sales was a solid performance for the first game in the
series but was below Frontier's original expectations.
Our second title in the series, F1® Manager 2023, released after the end of
the financial year in July 2023. Sales during the pre-order phase for F1®
Manager 2023 were below the level achieved by F1® Manager 2022, and although
the sales performance post-launch has been more encouraging, the current
revenue projections for F1® Manager 2023 in FY24 are now below the level
achieved by F1® Manager 2022 in FY23. The Company will continue to build on
the more positive recent sales trends, including through support of the title
through the remainder of the 2023 F1® season. We are currently developing our
plans for F1® Manager in 2024.
As part of the annual audit process for FY23 we reviewed the carrying values
of our intangible assets across the portfolio, with a particular focus on the
F1® Manager series due to the performance of both F1® Manager 2022 and F1®
Manager 2023. Following a prudent re-assessment of the overall future
performance of the F1® Manager franchise a non-cash impairment charge of
£15.0 million was recorded in the FY23 financial statements against the
intangible assets relating to the franchise.
Foundry
Foundry is Frontier's game label for publishing games developed by external
partners.
Financial performance across the Foundry game portfolio has been disappointing
and, overall, the business has not delivered Frontier's expectations of a
positive return on investment within the first year of each title.
As a result of this financial underperformance, and an increased level of
competition amongst third-party publishers, in June 2023 Frontier announced
the decision to cease all activity relating to acquiring new third-party
titles and instead re-focus on internal titles.
This decision has enabled an increased level of operational focus to be
applied to Frontier's own internally developed portfolio of titles, which has
delivered a strong return on investment. Foundry games which have already been
released will continue to be supported, including those in active post-release
development.
The disappointing financial performance of games published under the Foundry
games label resulted in non-cash intangible asset impairment and accelerated
amortisation charges totalling £13.7 million being recorded in FY23, with
£10.6 million being accelerated amortisation charges reflecting the
relatively steep decline of Foundry game sales post-release compared with the
more sustained trends for Frontier developed games, together with Foundry game
asset impairments totalling £3.1 million.
Complex Games
In November 2022 Frontier added a new development team with the acquisition of
experienced game development studio Complex Games, following the successful
collaboration between Complex and Frontier on the development and publication
of turn-based strategy game Warhammer 40,000: Chaos Gate - Daemonhunters,
which is the biggest selling game published under the Foundry games label.
Founded in 2001 by Noah Decter-Jackson and Adrian Cheater, Complex has over 21
years of experience in a wide variety of game genres and platforms. The studio
is based in Winnipeg, in the Canadian Province of Manitoba, and at acquisition
Complex employed 18 talented people, primarily developers. As at 31 August
2023 the team had grown to 25.
The acquisition, which is Frontier's first, supports Frontier's strategic
objectives through the creation of a core development footprint for Frontier
in, Canada, a region with an extensive and growing talent pool for video game
development. Frontier intends to grow the development team in Winnipeg to
support future growth.
Having worked closely during the development and launch of Warhammer 40,000:
Chaos Gate - Daemonhunters, the acquisition had been de-risked through a deep
mutual understanding and alignment of the culture, ability and ambition of the
two companies, and the closer collaboration achieved by the acquisition has
enabled Complex and Frontier to more effectively nurture Warhammer 40,000:
Chaos Gate - Daemonhunters.
In the medium to long term, the growing development team in Winnipeg will add
to Frontier's game portfolio through the application of Frontier's Select,
Develop, Launch, & Nurture strategy, which will support Frontier's
continued delivery of sustainable and profitable growth.
Frontier acquired 100% of the shares in Complex for an upfront cash
consideration of CAD$13.3 million (£8.4 million). Conditional deferred cash
consideration of up to CAD$5.2 million (£3.3 million) will be payable subject
to Complex meeting certain operational milestones during the period to 31
December 2023. In addition, the four employee shareholders - the two founders
and the two studio principals - will participate in a five-year profit-share
cash earn-out scheme, which aligns with Frontier's strategy to Select,
Develop, Launch, & Nurture new games developed by the Winnipeg studio.
The total maximum upfront and deferred consideration of up to CAD$18.4 million
(£11.7 million) will be funded from Frontier's existing cash resources. The
additional profit-share earn-out of up to CAD$11.8 million (£7.5 million)
payable annually over five years to the four employee shareholders will be
funded from future cash profits generated from games developed by the Winnipeg
studio.
Net identifiable assets and liabilities on acquisition totalled net assets of
£1.2 million and fair value adjustments in respect of assets identified
through the purchase price allocation (PPA) process totalled £2.9 million.
This resulted in a goodwill balance of £7.7 million being recognised on the
consolidated statement of financial position on acquisition. Further
information is included in note 9 of the financial statements.
Integration activities and growth plans for Complex are on track, and the
acquisition delivered modest accretive financial benefits in FY23, as
expected.
Following Foundry activity ceasing, the operations of Complex, including
Warhammer 40,000: Chaos Gate - Daemonhunters and future games developed, will
be reclassified into our portfolio of internally developed titles.
Financial performance
FY23 revenue of £104.6 million fell short of our record revenue of £114.0
million in FY22 following the underperformance of F1® Manager 2022 against
original expectations, the general sales underperformance across the portfolio
during the Christmas holiday period and disappointing sales for Foundry games.
As a result of this, gross profit decreased to £67.3 million (FY22:
£73.6 million) with a gross profit margin of 64% (FY22: 65%). The small
reduction in our gross profit margin percentage in FY23 versus FY22 was mainly
due to subscription deals, which do not attract commission payable,
representing a higher proportion of revenue in FY22 than in FY23.
Gross research and development (R&D) expenses in the period grew by 11% to
£52.9 million (FY22: £47.5 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; the staff costs in respect to Complex Games from November 2022; and
investment in Foundry development partner projects.
Development costs for supporting Foundry games in FY23 were £9.6 million,
representing 18% of total gross R&D investment. Following the decision to
cease activities for any new games for Foundry, there will be a significant
reduction in this spend in FY24, although post-release development funding and
support are being provided in FY24 for Stranded: Alien Dawn and The Great War:
Western Front.
Capitalisation of costs for game development related intangible assets,
together with continued investment in our leading game technology, accounted
for £37.6 million in the year (FY22: £35.2 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 FY23 represented 71% of gross
R&D expenditure which was similar to FY22 (74%).
Amortisation and impairment charges for intangible assets related to game
developments and Frontier's game technology grew to £52.6 million in total
for the year (FY22: £33.9 million) including the additional one-off non-cash
Foundry intangible asset impairment and accelerated amortisation charges of
£13.7 million and the F1® Manager non-cash impairment charge of £15.0
million. In the prior year, FY22, a one-off, non-cash impairment charge of
£7.4 million was recorded for Elite Dangerous: Odyssey.
For FY24 the Company has reviewed and updated its approach to intangible asset
identification and amortisation following the incremental accounting charges
suffered in FY22 and FY23. As a result of this review, intangible assets
related to games and PDLC which release after 1 June 2023 will be amortised
more rapidly in the first 12 months following their release, through the
adoption of a steeper amortisation charge profile than the previous default
method of straight-line amortisation. This updated approach will not impact
Adjusted EBITDA, which is a measure of cash profit, but it may have a
short-term adverse impact on reported operating profit in FY24 as we
transition from the previous amortisation profile to the updated model.
Updated amortisation profiles were applied in FY23 to Foundry games which
released in the period and to the F1® Manager game franchise.
Net research and development expenses recorded in the consolidated income
statement, being gross spend, less capitalised costs, plus amortisation and
impairment charges, increased to £67.9 million in FY23 (FY22:
£46.2 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 Foundry and F1® Manager intangible asset impairment
and accelerated amortisation charges.
Sales, marketing, and administrative expenses remained largely the same at
£26.1 million in FY23 (FY22: £25.9 million) as a result of sustained
investment in marketing to support the launch of F1® Manager 2022, our major
new game release in the year, new Foundry titles, and our existing game
portfolio, including new PDLC releases and price promotion events, as well as
slightly higher administration costs due to the continued growth of the
business.
Overall, net operating expenditure in FY23 grew to £93.9 million (FY22:
£72.1 million), mainly as a result of higher net research and development
expenses, along with the additional non-cash intangible asset impairment and
accelerated amortisation charges of £28.7 million which were due to the
financial performance of Foundry and the F1® Manager series. After taking
account of those charges, this resulted in an operating loss as reported under
IFRS of £26.6 million (FY22: profit of £1.5 million).
Adjusted EBITDA*, a measure of cash profitability whereby game development
costs are expensed as they are incurred, was in line with the expectations set
in January 2023, being a loss of £4.6 million (FY22: profit of £6.7
million). The year-on-year reduction reflected the decrease in revenue, an
increase in costs, and continued investment in future games as Frontier gears
up to deliver two new game releases per financial year from FY24 onwards.
On corporation tax, Frontier continues to benefit strongly from HMRC incentive
schemes, specifically Video Games Tax Relief (VGTR), R&D tax credits and
Patent Box. Frontier receives enhanced corporate tax deductions on certain
expenditures under the VGTR and R&D tax credit schemes, both of which help
to reduce taxable profits.
Frontier elected into HMRC's Patent Box regime in FY21, making claims for
patent-related profits from FY19 onwards. Patent Box has delivered benefits
from FY21 onwards, 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 benefited 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
£5.6 million in the consolidated income statement in FY23 (FY22: £8.7
million).
Loss after tax for FY23 was £20.9 million (FY22: profit of £9.6 million)
and the basic loss per share was 53.6p (FY22: earnings per share of 24.6p).
Balance sheet and cashflow
We are well capitalised, with £28.3 million of cash at 31 May 2023 (31 May
2022: £38.7 million) and £24.8 million at 31 August 2023.
The £10.4 million reduction in cash during FY23 reflected a greater
investment in significant game developments for release in future years,
working capital movements, £10.9 million for the acquisition of Complex, and
the £3.0 million purchase of shares by the Employee Benefit Trust undertaken
in May 2023. Cash would have grown in FY23 if the acquisition and share
purchases are disregarded.
Goodwill relates wholly to the acquisition of Complex Games in November 2022,
with a balance of £7.2 million at 31 May 2023 following a £0.5 million
exchange rate movement in the period (31 May 2022: £nil).
Our other intangible asset values include game technology, internal game
developments, Foundry game developments, third-party software, and IP
licences. Total other intangible assets decreased during the year to
£57.0 million at 31 May 2023 (31 May 2022: £70.8 million) as a result of
the Foundry and F1® Manager intangible asset charges. Our investments in the
year related to our own internally developed titles, including new content for
our existing portfolio, our technology, and support for our Foundry partner
developments. Those investments in new content and technology were more than
offset by amortisation and impairment charges which included the one-off
£28.7 million adjustment for Foundry and F1® Manager 2023.
Property, plant and equipment relate mainly to IT equipment and the fit-out of
the leased studio facility, which the Group has occupied from April 2018. The
net balance at 31 May 2023 was £5.7 million (31 May 2022: £6.6 million).
Following the adoption of IFRS 16 "Leases" effective for Frontier from 1 June
2019, the consolidated statement of financial position at 31 May 2023 includes
a right-of-use asset valued at £17.9 million (31 May 2022: £19.5 million)
for the Group's lease over its headquarters studio building in Cambridge. A
similar figure (the difference related to timing of actual rental payments) of
£19.3 million at 31 May 2023 (31 May 2022: £20.7 million) is recorded on
the consolidated statement of financial position as a lease liability, split
between current and non-current liabilities.
Trade and other receivables due within one year totalled £15.6 million at
31 May 2023 (31 May 2022: £24.7 million) with the majority of the balance
related to gross revenue due from digital distribution partners. The
year-on-year decrease primarily relates to higher revenue in the final months
of FY22 versus FY23, which included Jurassic World Evolution 2 entering
Microsoft's Game Pass subscription service in May 2022.
Trade and other payables due within one year totalled £16.5 million at 31
May 2023 (31 May 2022: £21.8 million), being mostly made up of distribution
platform commissions, IP licence royalties and developer royalties due on the
sales transactions not yet settled, and other staff-related accruals. The
decrease in liabilities largely relates to the year-end revenue variances
mentioned above and the absence of a bonus provision being included at 31 May
2023 due to the minimum bonus performance payout not being achieved.
Within non-current liabilities (amounts due after 12 months) a balance of
£4.2 million is held at 31 May 2023 (31 May 2022: £6.1 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 at 31 May 2023 of £9.4 million (31 May 2022:
£7.9 million) relates to the filed tax returns, including VGTR claims, for
FY22, and the draft tax returns for FY23. In June 2023, £3.9 million was
received from HMRC related to the FY22 tax returns.
The net balance for deferred tax assets less deferred tax liabilities recorded
at 31 May 2023 was a liability £0.4 million (31 May 2022: £1.3 million
asset). Deferred tax assets and liabilities have been recorded at 31 May 2023
for the estimated values of temporary differences, the potential value of tax
deductions relating to future share option exercises, and a portion of carried
forward tax losses in the Group.
The Group's tax arrangements concerning income streams under VGTR and Patent
Box enhancements can be complex, and at 31 May 2023 there was insufficient
certainty concerning the utilisation of other tax losses to create any other
deferred tax assets related to accumulated losses. The Group's total
unrecognised tax losses as at 31 May 2023 were £80.2 million (31 May 2022:
£50.2 million).
CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED 31 MAY 2023
Notes 12 months to 31 May 2023 12 months to 31 May 2022
£'000
£'000
Revenue 3 104,575 114,032
Cost of sales (37,230) (40,420)
Gross profit 67,345 73,612
Research and development expenses (67,857) (46,179)
Sales and marketing expenses (12,012) (12,339)
Administrative expenses (14,056) (13,558)
Operating (loss)/profit (26,580) 1,536
Net finance income/(costs) 71 (592)
(Loss)/profit before tax (26,509) 944
Income tax credit 4 5,604 8,684
(Loss)/profit for the year attributable to shareholders (20,905) 9,628
(Loss)/earnings per share
Basic (loss)/earnings per share 5 (53.6) 24.6
Diluted (loss)/earnings per share 5 (53.6) 23.7
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 2023
12 months to 12 months to
31 May 2023 31 May 2022
£'000
£'000
(Loss)/profit for the year (20,905) 9,628
Other comprehensive income
Items that will be reclassified subsequently to profit or loss:
Exchange differences on translation of foreign operations (578) (19)
Total comprehensive (loss)/income for the year attributable to the equity (21,483) 9,609
holders of the parent
The accompanying accounting policies and notes form part of this financial
information.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 MAY 2023
(REGISTERED COMPANY NO: 02892559)
31 May 2023 31 May 2022
£'000
£'000
Notes
Non-current assets
Goodwill 7 7,160 -
Other intangible assets 8 56,987 70,833
Property, plant and equipment 5,696 6,640
Right-of-use asset 17,860 19,484
Deferred tax assets - 1,348
Total non-current assets 87,703 98,305
Current assets
Trade and other receivables 15,558 24,705
Current tax assets 9,438 7,867
Cash and cash equivalents 28,311 38,699
Total current assets 53,307 71,271
Total assets 141,010 169,576
Current liabilities
Trade and other payables (16,521) (21,797)
Lease liability (1,505) (1,461)
Deferred income (4,355) (2,466)
Total current liabilities (22,381) (25,724)
Net current assets 30,926 45,547
Non-current liabilities
Provisions (71) (56)
Lease liability (17,773) (19,278)
Other payables (4,235) (6,148)
Deferred income (163) -
Deferred tax liabilities (419) -
Total non-current liabilities (22,661) (25,482)
Total liabilities (45,042) (51,206)
Net assets 95,968 118,370
Equity
Share capital 197 197
Share premium account 36,547 36,468
Equity reserve (14,553) (12,769)
Foreign exchange reserve (596) (18)
Retained earnings 74,373 94,492
Total equity 95,968 118,370
The accompanying accounting policies and notes form part of this financial
information.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 MAY 2023
Share capital £'000 Share premium account £'000 Equity reserve £'000 Foreign exchange reserve £'000 Retained earnings £'000 Total equity £'000
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/(loss) 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
Loss for the year - - - - (20,905) (20,905)
Other comprehensive income:
Exchange differences on translation of foreign operations - - - (578) - (578)
Total comprehensive loss for the year - - - (578) (20,905) (21,483)
Issue of share capital net of expenses - 79 - - - 79
Share-based payment charges - - 3,340 - - 3,340
Share-based payment transfer relating to option exercises and lapses - - (2,357) - 2,357 -
Employee Benefit Trust cash outflows from share purchases - - (3,000) - - (3,000)
Employee Benefit Trust net cash inflows from option exercises - - 233 - - 233
Deferred tax movements posted directly to reserves - - - - (1,571) (1,571)
Transactions with owners - 79 (1,784) - 786 (919)
At 31 May 2023 197 36,547 (14,553) (596) 74,373 95,968
The accompanying accounting policies and notes form part of this financial
information.
CONSOLIDATED STATEMENT OF CASHFLOWS
FOR THE YEAR ENDED 31 MAY 2023
12 months to 12 months to
31 May 2023 31 May 2022
£'000
£'000
(Loss)/profit before taxation (26,509) 944
Adjustments for:
Depreciation and amortisation 41,438 32,199
Impairment of other intangible assets 18,117 7,398
Movement in unrealised exchange (gains)/losses on forward contracts (239) 474
Share-based payment expenses 3,340 2,452
Interest received (677) (57)
Payment of interest element of lease liabilities 607 649
Canadian Scientific Research and Experimental Development (SRED) credit (365) -
Research and Development Expenditure Credit (RDEC) (116) (375)
Working capital changes:
Change in trade and other receivables 11,084 (10,964)
Change in trade and other payables (3,114) 4,465
Change in provisions 15 15
Cash generated from operations 43,581 37,200
Taxes received 4,294 3,956
Net cash flows from operating activities 47,875 41,156
Investing activities
Purchase of property, plant and equipment (1,335) (2,500)
Expenditure on other intangible assets (42,046) (36,243)
Acquisition of subsidiaries (net of cash acquired) (9,606) -
Interest received 677 57
Net cash flows used in investing activities (52,310) (38,686)
Financing activities
Proceeds from issue of share capital 79 389
Employee Benefit Trust cash outflows from share purchases (3,000) (5,000)
Employee Benefit Trust cash inflows from option exercises 233 506
Repayment of loans (1,260) -
Payment of principal element of lease liabilities (1,461) (1,419)
Payment of interest element of lease liabilities (607) (649)
Net cash flows used in financing activities (6,016) (6,173)
Net change in cash and cash equivalents from continuing operations (10,451) (3,703)
Cash and cash equivalents at beginning of year 38,699 42,423
Exchange differences on cash and cash equivalents 63 (21)
Cash and cash equivalents at end of year 28,311 38,699
The accompanying accounting policies and notes form part of this financial
information.
NOTES TO THE FINANCIAL INFORMATION
1. CORPORATE
INFORMATION
Frontier Developments plc (the 'Group' or the 'Company') develops and
publishes video games for the interactive entertainment sector. The Company is
a public limited company and is incorporated and domiciled in the United
Kingdom.
The address of its registered office is 26 Science Park, Milton Road,
Cambridge CB4 0FP.
The Group's operations are based and headquartered in the UK, with
subsidiaries based in Canada and the US.
2. BASIS OF PREPARATION AND STATEMENT OF COMPLIANCE
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 2023 and 31 May 2022. The accounts for the year ended 31
May 2022 have been delivered to the Registrar of Companies. The statutory
accounts for the year ended 31 May 2023 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 2023 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 1 November 2023. 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.
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 have adequate resources to continue in operational existence for the
period to 31 December 2024. 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 cash and cash equivalent resources (including treasury deposits)
at the balance sheet date of 31 May 2023 of £28.3 million along with expected
cash inflows from current business activities. Cash and cash equivalent
resources (including treasury deposits) at 31 August 2023 were £24.8 million.
The Annual Budget approved by the Board of Directors, which has been used to
assess going concern, 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 Budget 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 has 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 31 December 2024.
Consideration has also been made over the impairment charges (as disclosed in
note 8), however given these are accounting charges as opposed to cash
outflows do not materially change the forecasts for going concern purposes.
The forecasts reflect the latest expectation of revenues across all key
titles, including those which were subject to impairment in 2023.
The sensitivities included in the stress testing include the following
potential scenarios for 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;
· the development and publishing of titles has progressed as expected;
and
· should a more extreme downside scenario occur the Group could take
further mitigating actions by reducing discretionary spend.
Having considered all 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 31 December
2024. The financial statements for the year ended 31 May 2023 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.
The majority of the Group's non-current assets are held within the UK.
All material revenue is categorised as either publishing revenue or other
revenue.
The Group typically satisfies its performance obligations at the point that
the product becomes available to the customer and payment is received upfront
by the
distributors.
Other revenue mainly related to royalty income in both FY23 and FY22.
12 months to 31 May 2023 12 months to 31 May 2022
£'000
£'000
Publishing revenue 104,084 113,555
Other revenue 491 477
Total revenue 104,575 114,032
Cost of sales (37,230) (40,420)
Gross profit 67,345 73,612
Research and development expenses (67,857) (46,179)
Sales and marketing expenses (12,012) (12,339)
Administrative expenses (14,056) (13,558)
Operating (loss)/profit (26,580) 1,536
Net finance income/(costs) 71 (592)
(Loss)/profit before tax (26,509) 944
Income tax credit 5,604 8,684
(Loss)/profit for the year attributable to shareholders (20,905) 9,628
4. TAXATION ON ORDINARY ACTIVITIES
The major components of the income tax credit for FY23 and FY22 are:
12 months to 31 May 2023 12 months to 31 May 2022
£'000
£'000
Consolidated income statement
Current tax:
Credit in respect of current year (4,749) (3,471)
Adjustments in respect of prior years (68) (1,509)
Total current tax (4,817) (4,980)
Deferred tax:
Credit in respect of current year (610) (4,507)
Adjustments in respect of prior years (9) 552
Relating to changes in tax rates (168) 251
Total deferred tax (787) (3,704)
Total taxation credit reported in the income statement (5,604) (8,684)
Consolidated equity 12 months to 31 May 2023 12 months to 31 May 2022
£'000
£'000
Deferred tax related to items recognised in equity during the year:
Net change in share option exercises 1,571 2,740
Reconciliation of total tax credit at statutory tax rates:
12 months to 31 May 2023 12 months to 31 May 2022
£'000
£'000
(Loss)/profit on ordinary activities before taxation (26,509) 944
Tax on (loss)/profit on ordinary activities at standard statutory tax rate of (5,302) 179
20% (2022: 19%)
Factors affecting tax expense for the year:
Expenses not deductible for tax purposes 73 80
Adjustments in respect of prior years (77) (957)
Tax rate benefit on surrender of tax losses (972) (850)
Video Games Tax Relief enhanced deductions on which credits claimed (4,963) (3,864)
Benefit of Patent Box (234) (2,665)
Deferred tax not recognised 6,163 (858)
Effect of changes in tax rate (168) 251
Effect of higher tax rates in Canada (124) -
Total taxation credit reported in the consolidated income statement (5,604) (8,684)
In the Spring Budget 2021, the Government announced that from 1 April 2023 the
corporation tax rate increased to 25%. On 31 May 2023, tax on profit on
ordinary activities was therefore being measured at a hybrid rate of 20% and
the deferred taxes have been measured using the tax rate at the date that the
deferred tax asset or liability unwinds of 20-25% (31 May 2022: 19-25%).
For FY23 the Group has recorded a total corporation tax credit of £5.6
million (FY22: £8.7 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 2 during FY23.
The Group recognised a prior year adjustment of £77k during FY23 due to
additional core expenditure in the Elite Dangerous VGTR claim and brought
forward balances on Complex Games Inc. The Group recognised a prior year
adjustment of £957k during FY22 as a result of Jurassic World Evolution 2's
VGTR 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
losses not utilised were carried forward.
The tax rate benefit on surrender of tax losses of £972k during FY23 is the
additional 5% 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 franchise, Warhammer Age of Sigmar: Realms of Ruin,
and a new creative management simulation game trade scheduled for release in
FY25. The tax rate benefit on surrender of tax losses of £850k during FY22 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: Realms of Ruin.
The Group benefits from VGTR and can claim an additional (enhanced) deduction
from its taxable profits relating to the video game trades. In FY23, the
additional deduction in respect of VGTR was £24.1 million at a tax rate of
20% (FY22: £20.3 million at 19%). The increase year on year of the additional
deduction of £3.8 million was due to the increase in core development
expenditure in respect of video games that are subject to VGTR.
During FY23 deferred tax not recognised of £6.2 million relates to the tax
effected saving on the employee share scheme deduction of £0.9 million,
temporary difference arising on the deferred income in respect of the Research
and Development Expenditure (RDEC) grant of £0.1 million, and unrecognised
tax losses movement of £5.2 million.
The unrecognised tax losses movement of £5.2 million is the £29.1 million of
current year losses less £3.1 million of losses carried forward recognised
during FY23 to offset the deferred tax liability to £nil due to the
unlikelihood of the Company having a taxable profit in the foreseeable future
to utilise the additional losses, at a tax rate of 20%. Refer to note 20 for
more details on tax losses.
In November 2022, Frontier acquired Complex Games Inc which is based in
Manitoba, Canada. The Province of Manitoba has a combined corporation tax rate
of 27% (31 May 2022: 27%) and therefore the effect of the higher tax rate in
respect of Complex Games Inc is recognised in FY23.
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 2023 12 months to
31 May 2022
(Loss)/profit attributable to shareholders (£'000) (20,905) 9,628
Weighted average number of shares 39,025,746 39,172,987
Basic (loss)/earnings per share (p) (53.6) 24.6
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 2023 12 months to
31 May 2022
(Loss)/profit attributable to shareholders (£'000) (20,905) 9,628
Diluted weighted average number of shares 39,025,746 40,606,756
Diluted (loss)/earnings per share (p) (53.6) 23.7
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 2023 31 May 2022
Weighted average number of shares 39,025,746 39,172,987
Dilutive effect of share options - 1,433,769
Diluted average number of shares 39,025,746 40,606,756
For the 12 months to 31 May 2023, there are 1,878,211 options that have not
been included in the table above as they would be anti-dilutive, however could
potentially dilute basic earnings per share in future years.
6. BUSINESS COMBINATIONS
On 1 November 2022 the Group acquired experienced game development studio
Complex Games Inc following a successful collaboration with the development
and launch of Warhammer 40,000: Chaos Gate - Daemonhunters.
Frontier acquired 100% of the share capital in Complex for an upfront cash
consideration of CAD$13.3 million (£8.4 million) and conditional deferred
cash consideration of up to CAD$5.2 million (£3.3 million), which is payable
subject to Complex meeting certain operational milestones during the period to
31 December 2023. The deferred cash consideration will be payable regardless
of the employment status of the sellers.
In addition, the four employee shareholders - the two founders and the two
studio principals - will participate in a profit-share earn-out of up to
CAD$11.8 million (£7.5 million) payable annually over five years. The
purchase agreement stipulates that the profit-share earn-out will only be paid
to each employee if they remain employed by the Group and therefore this
purchase consideration is deemed to be post-acquisition expenses under IFRS 3.
The finalised fair values of identifiable assets acquired and liabilities
assumed at the acquisition date are:
Carrying value at acquisition £'000 Fair value adjustment
£'000 Fair value
£'000
Non-current assets
Intangible assets - 3,910 3,910
Property, plant and equipment 6 - 6
Total non-current assets 6 3,910 3,916
Current assets
Trade and other receivables 2,216 - 2,216
Cash and cash equivalents 411 - 411
Current tax assets 143 - 143
Total current assets 2,770 - 2,770
Current liabilities
Trade and other payables (330) - (330)
Loans payable (1,260) - (1,260)
Total current liabilities (1,590) - (1,590)
Non-current liabilities
Deferred tax liability - (1,056) (1,056)
Total non-current liabilities - (1,056) (1,056)
Net identifiable assets and liabilities 1,186 2,854 4,040
Goodwill (note 7) 7,685
Total consideration 11,725
A technology-based intangible asset of £3.9 million has been recognised on
acquisition in game developments within other intangible assets, which relates
to the software IP behind Warhammer 40,000: Chaos Gate - Daemonhunters. The
recognition of the intangible asset also generated a deferred tax liability of
£1.1 million, being the asset value at a tax rate of 27%, which is the
corporation tax rate in the Province of Manitoba.
The main factors leading to the recognition of goodwill on the acquisitions
are the presence of certain intangible assets in the acquired entity, which
are not valued for separate recognition. These include expertise in the
acquired entity, enhancing and growing our development capabilities,
broadening our portfolio, and extending our geographical footprint.
The goodwill balance has not resulted in a deferred tax asset as the goodwill
balance is not tax deductible in the UK.
Advisor fees incurred in respect of the acquisition totalled £0.3 million in
FY23 (FY22: £nil) and were charged to the consolidated income statement, with
no further costs anticipated.
Deferred cash consideration of £1.6 million was paid during FY23, with a
further £1.5 million due for payment during FY24 and is included within trade
and other payables. The probability of the remaining deferred cash
consideration being paid is highly likely.
From acquisition date to 31 May 2023, Complex Games Inc contributed revenue
and loss after tax of £nil and £2.7 million respectively in the consolidated
income statement. IP royalties payable to Complex Games Inc from Frontier
Developments plc in relation Warhammer 40,000: Chaos Gate - Daemonhunters
totalled £1.1 million from the acquisition date to 31 May 2023, which were
retained within the Group. These IP royalties retained within the Group are
not included within Complex's contributed revenue and loss after tax reported
above. If the acquisition had occurred on 1 June 2022, the consolidated income
statement would have presented revenue of £0.1 million and loss after tax of
£2.9 million in FY23.
7. GOODWILL
2023 2022
£'000
£'000
At 1 June - -
Recognition on acquisition of subsidiary (note 6) 7,685 -
Exchange rate movement (525) -
At 31 May 7,160 -
The Group tests goodwill for impairment annually, or more frequently if there
are indications that goodwill might be impaired. Goodwill acquired in a
business combination is allocated to the CGUs that are expected to benefit
from that business combination. The Group has one CGU for goodwill purposes,
defined as the one operating segment as disclosed in note 3.
Goodwill impairment tests were carried out at 31 May 2023 in line with the
impairment tests carried out on other intangible assets and therefore further
detail is included within note 8 in respect of these tests.
As a result of these tests, no impairment charge was required.
8. OTHER INTANGIBLE ASSETS
The Group's other 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 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
Additions 3,449 34,182 429 - 38,060
Acquisition of a subsidiary - 3,910 58 - 3,968
Exchange rate movement - (300) - - (300)
At 31 May 2023 23,182 167,185 2,877 11,185 204,429
Amortisation and impairment
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
Amortisation charges 3,869 31,898 421 1,341 37,529
Acquisition of a subsidiary - - 58 - 58
Impairment charges 3,919 12,474 - 1,724 18,117
Exchange rate movement - (130) - - (130)
At 31 May 2023 16,961 122,212 2,130 6,139 147,442
Net book value at 31 May 2023 6,221 44,973 747 5,046 56,987
Net book value at 31 May 2022 10,560 51,423 739 8,111 70,833
Amortisation charges for other intangible assets that relate to game
technology, game developments and third-party software 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 recoverable amount of each of the assets at 31 May 2023 is determined from
the value in use. The key assumption in calculating the value in use was the
expected future cashflows. A five-year bottom up forecast for FY24 to FY28
inclusive has been created as a basis of the expected future cashflows, with a
pre-tax discount rate of 10% (31 May 2022: 9%) being applied to the future
cashflows. The Directors have assessed the sensitivity of the impairment test
to incorporate reasonable possible changes in the key assumptions and noted
that no material impairment exists in any cases. Climate change is not
expected to have a material impact on future cashflows. Impairments disclosed
below were recognised in FY23 as a result of the impairment tests at 31 May
2023.
The Group recognised an impairment charge of £15.0 million in FY23 in respect
of intangible assets relating to the F1® Manager franchise following an
assessment of the overall future performance of the F1® Manager franchise
following the release of F1® Manager 2022 (August 2022 - FY23) and F1®
Manager 2023 (July 2023 - FY24). We are currently developing our plans for the
F1® Manager franchise in 2024.
The Group recognised an impairment charge of £3.1 million in FY23 in respect
of games published under the Foundry games label following disappointing
financial performance following release. As a result of this financial
underperformance, and an increased level of competition amongst third-party
publishers, in June 2023 Frontier announced the decision to cease all activity
relating to acquiring new third-party titles and instead re-focus on internal
titles.
Game developments include a technology-based asset with a fair value of £3.9
million acquired through business combinations (note 6).
9. 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 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 2023 31 May 2022
£'000
£'000
Operating (loss)/profit (26,580) 1,536
Depreciation and amortisation 41,438 32,199
Impairment of other intangible assets 18,117 7,398
EBITDA 32,975 41,133
Adjusted EBITDA
Frontier also discloses an Adjusted EBITDA measure which, in the Group's view,
provides a better representation of 'cash profit' than EBITDA. Adjusted EBITDA
for Frontier is defined as earnings before interest, tax, depreciation, and
amortisation charges related to game developments and Frontier's game
technology, less investments in game developments and Frontier's game
technology, and excluding impairment charges, share-based payment charges and
other non-cash items. This effectively provides the cash profit figure that
would have been achieved if Frontier expensed all game development investment
as it was incurred, rather than capitalising those costs and amortising them
over several years.
12 months to 12 months to 31 May 2022
£'000
31 May 2023
£'000
Operating (loss)/profit (26,580) 1,536
Add back non-cash intangible asset amortisation charges for game developments 34,490 26,475
and Frontier's game technology
Add back non-cash intangible asset impairment charges 18,117 7,398
Deduct capitalised investment costs in game developments and Frontier's game (37,632) (35,220)
technology
Add back non-cash depreciation charges 3,909 3,562
Add back non-cash movements in unrealised exchange losses/(gains) on forward (239) 474
contracts
Add back non-cash share-based payment expenses 3,340 2,452
Adjusted EBITDA (loss)/profit (4,595) 6,677
Research and development (R&D) expenses
Research and development (R&D) expenses recorded in Frontier's
consolidated income statement are arrived at after capitalising game
development costs and after recording amortisation charges for games which
have been released. Similar to the principles of the Adjusted EBITDA measure
showing financial performance as if all game development investments were
expensed as incurred, Frontier provides commentary on the difference between
gross R&D expenses (before capitalisation/amortisation) and net R&D
expenses (after capitalisation/amortisation). The net R&D expenses figure
aligns with the R&D expenses recorded in the consolidated income
statement, whereas the gross R&D expenses figure provides a better
representation of 'cash spend' on R&D activities.
12 months to 12 months to
31 May 2023 31 May 2022
£'000
£'000
Gross R&D expenses 52,882 47,526
Capitalised investment costs in game developments and Frontier's game (37,632) (35,220)
technology
Amortisation charges for game developments and Frontier's game technology 34,490 26,475
Impairment of other intangible assets 18,117 7,398
Net R&D expenses 67,857 46,179
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