SCi Entertainment Group Plc, one of the world’s leading developers and publishers of computer and video games, is providing this trading update for the year ended 30 June 2007 in advance of its preliminary results to be published in September 2007.
Trading for year to 30 June 2007
The Board expects EBITDA before Exceptional Items to be within the range of brokers’ expectations. The Group shipped its most significant product releases into retail in June 2007. These products are selling through in line with expectations.
After taking into account the effect of the Exceptional Items arising as a result of hardware transition see below, the Group’s operating margins compare favourably with those of its major competitors. (See note 1)
Highlights of 2007 financial year
* Tomb Raider Anniversary celebrates ten years of the Tomb Raider franchise with a number one hit and approximately one million units shipped in the first month of launch.
* Two new franchises, Just Cause and Battlestations Midway, were successfully launched and became number one hits. Over one million units of Just Cause have now been shipped.
* Success with Pony Friends on Nintendo DS illustrates the Group’s ability to create new franchises for a younger and broader audience in line with the Group’s strategy. Following release in late May in Europe and June in North America, Pony Friends had shipped 0.3 million units on Nintendo DS by the financial year-end, ahead of original expectations for that period, and is continuing to sell well during the 2008 financial year. A version of Pony Friends for the Nintendo Wii is planned.
* Strength of Group’s IP confirmed by forthcoming release of the first Hitman Movie, and sale of film rights for Kane & Lynch.
* Strong distribution revenues, including recent number one European hit on Sony PlayStation 3 with Ninja Gaiden Sigma.
* Growth in New Media business accelerated by acquisitions of Rockpool, Bluefish Media and Morpheme.
* Strong investment in product pipeline, reflecting growing demand from a broader game audience and success of Nintendo Wii and DS platforms.
* Broader product portfolio strengthened by strategic partnership with Warner Bros. providing access to a number of mass market licences including Batman, Looney Tunes and the Hanna Barbara catalogue.
* Development of Kane & Lynch and Crossfire on track for multi-platform release in the 2008 financial year.
* Recent hardware price cuts for Sony PlayStation 3 in North America expected to drive increase in hardware installed base in 2007/8.
* Group development capability increased by technology programme and opening of new studio in Montreal. Development benefiting from investment in technology and asset sharing.
* Positive net cash balance of £32 million at 30 June 2007, plus strong trade debtors arising from product sales during June.
Tomb Raider Anniversary was launched on the PlayStation 2 and PC platforms in the first week of June 2007 in Europe and the second week of June 2007 in North America. In the four weeks to the end of the financial year the product had shipped approximately one million units.
The Group expects sales of the product to continue strongly during the 2008 financial year, particularly in North America where the product will benefit from extensive marketing campaigns during July. In addition Tomb Raider Anniversary will be launched on PSP, Xbox 360 and Nintendo Wii in the 2008 financial year.
Exceptional Items arising from the cyclical effect of hardware transition in the industry.
In line with our international peer group, 2007 was a period of investment in Next Generation technology (Microsoft Xbox 360, Sony PlayStation 3, Nintendo Wii and Nintendo DS) and the development of a substantial multi-platform product portfolio which will benefit the 2008, 2009 and 2010 financial years.
However, the year to 30 June 2007 was also a period marked by the well-publicised change in the hardware market, resulting in downward price pressure on Sony PlayStation 2 games primarily in anticipation of the launch of Sony PlayStation 3 and the uptake of the Nintendo Wii and DS platforms.
Sony launched the PlayStation 3 in North America in December 2006 and in Europe in March 2007. Both of these launches were later than originally announced by Sony.
During the period surrounding the introduction of the PlayStation 3, retail prices for PlayStation 2 games fell steeply. This pricing pressure has been most acute during the final months of our financial year when many of our most significant launches have taken place.
The Group’s results will reflect exceptional price protection of approximately £14 million, which the Board believes, is a prudent estimate of the cost of providing price protection to retailers. These costs, which are deducted from revenue, principally relate to PlayStation 2 products, but also to other older platforms including Microsoft Xbox, Nintendo GameBoy Advance and Nintendo
GameCube.
The popularity of these older platforms is expected to decline as the installed base of Next Generation platforms (Microsoft Xbox 360, Sony PlayStation 3, Nintendo Wii and Nintendo DS) builds. This increases the Group’s cost of price protection from a normal level of approximately 10% of gross revenue to approximately 20% of gross revenue in the 2007 financial year.
The Board believes its final provisions will be sufficient to cover price protection on all of the above older platforms. The Group has no material future releases planned on any of these platforms. The Board expects pricing on premium Next Generation products (on the Xbox 360, PlayStation 3, Wii and DS platforms) to remain strong for the foreseeable future.
After taking into account the effect of exceptional price protection costs arising as a result of hardware transition, the Group still expects operating margins for the 2007 financial year to be in excess of 6% of revenue. This operating margin is ahead of the performance of the Group’s major competitors. (See note 1)
The Board continues to believe in the long-term success of PlayStation 3 particularly after recently announced reductions in the retail price of the hardware in North America, but believes that it may take longer than originally expected to achieve a commercially successful installed base. The Group will prudently assess the carrying value of PlayStation 3 titles in development and the expected performance of those products relative to Sony’s success in driving the installed base.
The Board estimates that the cost of these provisions may be up to £4 million. Any such provision will be reflected as an exceptional charge in the year to 30 June 2007 and may be released in the 2008 financial year if the installed base of PlayStation 3 grows in line with expectations.
The installed base of both the Nintendo Wii and DS is growing and the Group has put into production further products for these platforms which will be launched in 2008 and 2009.
Future outlook
During the year the Group has made great progress in further building its established franchises, launching new and valuable intellectual property (including the introduction of successful new franchises such as Just Cause and Battlestations Midway) and expanding its portfolio of strong licensed products.
Our development studios have continued to build high quality technology and game engines which will maximise the efficiency and cost effectiveness of game development over the course of the hardware cycles. This engine technology provides the basis of the expansion of our development capacity at our newly opened Montreal studio. The technology is now at an advanced stage. The Group may be in a position to derive future revenue by licensing the technology to third parties.
The Board recognises the increasing importance of online and digital content and the new business opportunities which arise in these areas. During the year the Group has made three acquisitions to expand our online division and believes that new revenue streams will be derived from areas such as mobile phones, digital distribution of additional content, advertising revenue and casual games.
The Board believes that these new online markets, together with the broadening demographics of game consumers and the growth of the installed base of next generation hardware will all provide a strong basis for profitable growth in 2008 and beyond.
Note 1
The most recently published operating margins of SCi’s publicly quoted competitors were Ubisoft 5.6%, Activision 4.8%, THQ 3.0%, EA 1.2%. Take Two, Midway and Atari were all loss making. Source: Most recent public announcements for each company.
