Frontier Developments plc

Interim Results

H1 revenue up 33%. Well positioned for an exciting 2022.

Frontier Developments plc (AIM: FDEV, "Frontier", the "Company"), a leading developer and publisher of video games based in Cambridge, UK has published its unaudited interim results for the 6 months to 30 November 2021 ('H1 FY22') and provides a trading update following the important Holiday season.

Financial Highlights

*Earnings before interest, tax, depreciation and amortisation

** EBITDA excluding non-cash items less investments in game developments and Frontier's game technology

·    Revenue grew 33% over the comparative period to £49.1 million (H1 FY21: £36.9 million) through the release of Jurassic World Evolution 2 in November 2021 and the ongoing performance of our existing game portfolio

·    Gross profit margin of 63% reduced versus the comparative period (H1 FY21: 71%) through a higher proportion of revenue attracting IP licence royalties (Jurassic World Evolution 2) and console physical discs sales of Jurassic World Evolution 2 which achieve lower profit margins compared with digital sales

·    The combination of a lower gross profit margin percentage and game release related marketing costs resulted in a slightly lower EBITDA compared with the comparative period (£14.1 million in H1 FY22 versus £15.5 million in H1 FY21) with an operating cash inflow in the period of £0.7 million (H1 FY21: £3.1 million)

·    Exceptional non-cash foreign exchange and amortisation charges resulted in a small operating loss of £1.3 million in the period (H1 FY21: profit of £6.9 million)

·    Net cash balance of £33.6 million at 30 November 2021 (31 May 2021: £42.4 million). The net cash outflow of £8.8 million in the period was mainly due to an increase in working capital, with significant net cash receipts for November sales receivable from channel partners, including for the launch of Jurassic World Evolution 2, in December 2021 and January 2022

Operational & Strategic Highlights

·    Our launch and nurture strategy continues to deliver, through sustaining and growing our portfolio of genre-leading titles:

o  Jurassic World Evolution 2 is the latest successful addition to our portfolio, already selling nearly 1 million base game units since release in November 2021

o  Planet Coaster, Planet Zoo and Jurassic World Evolution all continue to entertain existing players whilst attracting new ones, with each title delivering material contributions to sales throughout calendar 2021

o  Elite Dangerous experienced a difficult calendar 2021 following the disappointing launch of the major Odyssey expansion in May 2021. We continue to support the game and our passionate players with development updates, and we have seen an upturn in player sentiment as a result 

·    Frontier Foundry, our own games label for third-party publishing, continues to grow with a number of exciting titles in discussion as well as those already signed.  We have at least four titles coming in calendar 2022 including FAR: Changing Tides and Warhammer 40,000: Chaos Gate - Daemonhunters.

·    Our team continues to grow, with over 250 people joining us during 2021, taking us to a total headcount of 745 as at 31 December 2021. Our amazing people continue to operate positively through the challenges posed by Coronavirus and, in particular, in adapting so well to remote and hybrid working during the last 18 months

·    We are very well positioned for the future. This calendar year will see us enter the incredible world of Formula 1 - a truly global sport - with the first release for our annual F1 management game franchise. Furthermore, it will see Foundry continuing to build momentum to become a material contributor to the business, and we will see the release of Universal Picture's hugely anticipated Jurassic World Dominion film, and the expected corresponding benefit to Jurassic World Evolution 2

Current Trading and Outlook

December is always an important month for sales in the games industry, and we were pleased to achieve our highest ever December revenue in 2021, as expected. Jurassic World Evolution 2 delivered a strong second month of sales following its release in November 2021, and our existing portfolio of established titles all provided solid contributions.

We start the calendar year with a great portfolio and an exciting pipeline of new titles, through both our own internal developments and through Frontier Foundry, working closely with external partners. We are building valuable long-term relationships with all of our partners and have some phenomenal projects in development, which in time will further enrich our portfolio of great games.

In the remaining five months of the current financial year (to 31 May 2022) we look forward to delivering two new games from Frontier Foundry, FAR: Changing Tides (now confirmed for release on 1 March 2022) and Warhammer 40,000: Chaos Gate - Daemonhunters, whilst supporting our existing portfolio with new content. Based on current estimates for the remaining period, the Board have narrowed the revenue guidance range for FY22 to £100 million to £120 million.

Looking a little further ahead, we have exciting plans for FY23 (the 12 months to 31 May 2023):

·    The first of our annual Formula 1® management games will release during the 2022 F1 season (in FY23), as part of our exclusive licence for Formula 1® management games

·    Jurassic World Evolution 2 is expected to benefit from the release of the Jurassic World Dominion film in June 2022 (in FY23) and all the promotional awareness that this film release will bring to the game, with multiple exciting PDLC packs planned through the year

·    Planet Zoo will also benefit from a continuing roadmap of new PDLC packs

·    Frontier Foundry, our games label for 3^rd party publishing, will release multiple new titles as it continues to grow

Our Warhammer Age of Sigmar IP real-time strategy game planned for release during calendar 2023 will now release later in that calendar year, falling in FY24. This change will further improve the quality and longevity of the game, and overall make it more successful. As a result of this scheduling adjustment, the Board have revised the revenue guidance range for FY23 to £130 million to £160 million, implying 18% to 45% annual growth from the mid-point of FY22 guidance.

We have excellent prospects for sustainable long-term growth based on the longevity of our existing portfolio and our future development and publishing plans, underpinned by our world-class and growing team. 

David Braben, Chief Executive, said:

"We have had an unprecedented couple of years because of Coronavirus and the resulting changes, both positive and negative. We have seen increased sales and changes to purchasing patterns, the acceleration of the transition towards interactive entertainment and digital purchasing, and changes to production that embrace home-working. Although Coronavirus challenges remain, we believe we now have sound production processes that work in the new hybrid world, as demonstrated by the on-time and high quality delivery of the excellent Jurassic World Evolution 2, and this sets us up for future success. Our team has done a fantastic job adapting to all these challenges and finding new ways of working. We have the potential for much greater growth in the next few years as we reap the benefits of all the hard work we have done to adapt to these changes and capitalise on a great portfolio of existing games together with the exciting new franchises such as Formula 1® management games and our Warhammer Age of Sigmar real-time strategy game. We are well set up with a great portfolio for an exciting future."

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

David Braben, CEO

Alex Bevis, CFO                                                                                        

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

Neil Patel / Cameron Duncan                                                             

Jefferies - Joint Broker                                                                          +44 (0)20 7029 8000

Max Jones / William Brown

Tulchan Communications                                                                      +44 (0)20 7353 4200

Matt Low / Jordan McCulla / Olivia Lucas 

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

Interim Results Statement

MAJOR NEW RELEASES

Our biggest new release in the period was our latest multiplatform game, Jurassic World Evolution 2, which released as planned on 9 November 2021 on PC via Steam and the Epic Games Store, PlayStation®5, Xbox Series X|S, PlayStation®4 and Xbox One, with both digital and physical formats available to PlayStation and Xbox players from day one.

The critical and audience reception from launch has been very positive, thanks to the hard work of our talented people across our development, publishing and support teams. Our player community are enjoying the enhancements we have made, as well as the new content that we have introduced, building on the strong foundations of Jurassic World Evolution. Game reviews are very good - the scores compiled by Opencritic show 67 reviews providing a Top Critic Average score of 78.

Base game sales have reached almost 1 million units after 9 weeks from release, with strong sales in both November and December. Sales rates as we start calendar 2022 are encouraging.

PDLC is an important element of the post-launch strategy for Jurassic World Evolution 2 as part of Frontier's proven launch and nurture approach to game development and publication. Two well-received PDLC packs have been released to date, with the Deluxe Upgrade pack available at release and the Early Cretaceous Pack launching a month later on 9 December 2021. Multiple exciting PDLC packs are planned for 2022.

Significant sales of both the base game and PDLC are expected from June 2022 when the Jurassic World Dominion film releases.

REVENUE

Total revenue in H1 FY21 grew to £49.1 million, 33% ahead of the comparative period (H1 FY21: £36.9 million). Jurassic World Evolution 2 was the main catalyst for growth, launching in the final month of the period. Planet Zoo also delivered growth over the comparative period, with revenue growing 14% through sales of new and existing PDLC as well as sales of the base game. Planet Coaster and Jurassic World Evolution delivered solid sales performances during H1 FY22 against a tough comparative period which included major new platform releases for each title: in November 2020 Planet Coaster expanded onto Xbox Series X|S, Xbox One, PlayStation 4 and PlayStation 5, and Jurassic World Evolution released on Nintendo Switch. The overall sales performance of Elite Dangerous in the period was below expectations following the disappointing launch of Elite Dangerous: Odyssey in May 2021. Frontier Foundry, our games label for 3^rd party publishing, launched innovative strategic shooter Lemnis Gate during the period, with more material revenues expected in the second half of the financial year from FAR: Changing Tides, now confirmed for release on 1 March 2022, and Warhammer 40,000: Chaos Gate - Daemonhunters.

PROFITABILITY

Gross profit of £30.8 million was recorded in the period (H1 FY21: £26.2 million) with gross profit margin at 63% (H1 FY21: 71%). The lower percentage margin resulted from a higher proportion of revenue attracting IP licence royalties (Jurassic World Evolution 2) and console physical discs sales of Jurassic World Evolution 2 which achieve lower profit margins compared with digital sales.

Gross research and development expenses in the period increased by 41% to £22.2 million (H1 FY21: £15.8 million).  The growth resulted from a continued growth in headcount to support Frontier's development plans, an increase in outsourced activity and investments in Frontier Foundry partner developments.

Capitalisation of development costs on game developments and game technology accounted for £15.8 million in the six months to 30 November 2021 (H1 FY21: £13.1 million).  The percentage of gross research and development costs which were capitalised in the period was 71%, lower than the 83% recorded for H1 FY21 as more development staff were working on free updates (as opposed to chargeable content) during the recent period, notably the ongoing post-release support for Elite Dangerous: Odyssey.  Frontier's normal expectations for capitalisation is 70-90% of gross development spending.

R&D amortisation charges related to previously capitalised development costs grew 73% to £12.2 million (H1 FY21: £7.0 million).  Charges in H1 FY22 included a full six months of amortisation for major expansion Elite Dangerous: Odyssey and one month for Jurassic World Evolution 2, as well as an accelerated amortisation charge for Lemnis Gate following its relatively low sales performance at release.

Net research and development expenses recorded in the income statement in the period grew 91% to £18.6 million (H1 FY21: £9.7 million), being gross spend of £22.2 million, less capitalised costs of £15.8 million, plus amortisation charges of £12.2 million.

Sales and marketing expenses in the period were £7.5 million (H1 FY21: £3.4 million) with the largest element of the increase from the launch of Jurassic World Evolution 2.  Administrative expenses were £6.0 million in the period (H1 FY21: £6.1 million).

Exceptional non-cash foreign exchange and amortisation charges, together with a lower gross profit margin percentage, higher net R&D expenses (including some one-off items) and game release related marketing costs resulted in a small operating loss of £1.3 million in the period (H1 FY21: profit of £6.9 million).

A net zero corporation tax charge was recorded in the income statement for the period (H1 FY21: £0.6 million), since for the full financial year enhanced deductions from the Video Game Tax Relief scheme are expected to offset tax charges on profits. The Group expects to provide additional corporation tax disclosures in the FY22 financial statements. 

A loss after tax of £1.7 million was recorded in the period (H1 FY21: profit of £5.8 million).  Basic earnings per share was a loss of 4.2 pence (H1 FY21: profit of 15.0 pence).

BALANCE SHEET AND CASH FLOW

The Company continues to benefit from a strong balance sheet, with cash balances of £33.6 million at 30 November 2021 (31 May 2021: £42.4 million; 30 November 2020: £34.9 million). The majority of the £8.8 million reduction in cash during the period was due to an increase in net working capital at the end of the period related to the release of Jurassic World Evolution 2. Trade and other receivables grew by £14.1 to £27.8 million at 30 November 2021 (31 May 2021: £13.7 million), with trade and other payables increasing by £5.4 million to £20.2 million (31 May 2021: £14.8 million). This working capital increase is expected to unwind during the second half of the financial year.

Although cash balances reduced in the period, Frontier recorded an overall operating cash inflow of £0.7 million in the period (H1 FY21: £3.1 million), defined as EBITDA excluding non-cash items less investments in game developments and Frontier's game technology.