SCi results reaction

SCi results reaction
Business Review
On 29 February 2008 we announced a restructuring plan and concluded that our focus should be on cornerstone franchises in order to optimise returns on these titles. The key aspects of the new business plan are as follows:

Fundamental change in business structure
The Group’s business structure has changed from a centrally controlled development and publishing model to one that is studio-led, focused on building appropriate studio infrastructure around the Group’s cornerstone franchises, such as Tomb Raider, Hitman, Championship Manager and Deus Ex.

The Group’s studios are now responsible for the development of games from initial design through production and branding to product marketing, working in conjunction with sales, channel marketing and distribution expertise.

We have a dedicated team responsible for our other titles and third party products, including casual games. Titles currently in production include: Just Cause 2, Battlestations Pacific, Pony Friends 2 and Batman: Arkham Asylum.

Product improvement initiatives
The decision to shift the Group’s business structure to a studio-led model has enabled it to form focused teams around its key products with the aim of not only producing high quality games, but high-impact, focused and coordinated marketing campaigns.

The marketing of our core products is beginning further out from the product launch date in order to generate the right level of consumer awareness, build anticipation, establish and work with relevant online communities and deliver a strategic marketing campaign which can gather momentum towards the product launch.

Over the past six months the Group has cancelled a number of projects that the Board considered either loss-making, unlikely to generate acceptable returns on investment or not of appropriate quality. We have also introduced a new, tougher ‘green-light’ process to monitor product quality of all future projects.

Cost reduction plan
Leaner operating structure now in place with a 25% lower headcount level to deliver the targeted reduction in operating costs of £14 million in the new financial year.

We raised £60 million (before expenses) by way of a successful Placing and Open Offer of new shares to provide working capital and we have made fundamental and beneficial changes to our business in order to take advantage of the continued growth in the games industry.
 
A ‘New’ Company
We are more than six months into the new structure and revitalised business. Progress is in-line with expectations and we are benefiting from transitioning key publishing roles into our major studios, with a highly coordinated and executed development, marketing and sales campaign for Tomb Raider: Underworld well under way.

We have identified the areas we need to focus on in order to achieve both our short and long-term goals. Our North American partnership with Warner Bros. is key to maximising our presence in this crucial market.

This agreement became effective on 23 May 2008 and we are working with Warner Bros. in a number of ways, including the delivery of high-impact channel marketing and PR campaigns to benefit our forthcoming product releases in North America including Tomb Raider: Underworld, and Warner Bros.’ own intellectual property, Batman, in our recently unveiled game Batman: Arkham Asylum.

We have also entered into a strategic mobile relationship with Electronic Arts for the exclusive multi-regional distribution and licensing rights to certain Eidos titles across mobile devices.

In Europe, our sales and distribution business continues to deliver but with greater focus and momentum. We have agreed the sale of our Spanish distribution business, Proein SL, to Koch Media and will now focus on maximising returns in the UK, France and Germany through our offices in those territories, whilst working with distribution partners in other European and export territories.

Results overview
Our revenue for the year declined to £118.9 million (2007: £128.8 million) reflecting the transitional nature of our financial year. These figures exclude the revenues of £14.8 million (2007: £15.2 million) from Proein SL since it has been treated as a discontinued operation.

Published products contributed 60.0% (2007: 52.3%) of our total revenue with 10 titles released in the year and 7.1 million units sold (2007: 7.6 million units) with Kane & Lynch (1.4 million units), Tomb Raider: Anniversary (1.0 million units) and Conflict Denied Ops (0.5 million units) our largest unit selling titles.

Our distribution revenue declined to £42.2 million (35.5% of revenue) from £53.7 million (41.7% of revenue) in 2007 as a result of the reduction in the number of global and local distribution titles released. The majority of our distribution revenue was derived from sales of Age of Conan, which sold in excess of one million units since release in the final quarter of the year to 30 June 2008. The remainder of our revenue in both years was licensing and other income.

Both gross profit and gross margin improved as a result of the change in mix from lower margin distribution products to higher margin published products, which also showed improved margin due to higher achieved premium price points and our biggest release occurring in the holiday season.  Gross profit increased to £56.1 million (2007: £54.3 million) and our margin improved five percentage points to 47.2%.

Development costs including royalty payments charged to the income statement for the year totalled £104.3 million (2007: £32.8 million) of which £38.4 million relates to product releases. The remaining £65.9 million are adjustments to the net realisable value of ongoing and discontinued projects.

The Group spent £17.6 million (2007: £12.8 million) on product advertising in the financial year, representing 14.8% of revenue (2007: 10.0%). The increase is primarily due to additional investment to launch a new intellectual property in the holiday season.

Our administrative costs excluding exceptional charges were £62.9 million (2007: £39.5 million) of which £31.7 million (2007: £15.3 million) is amortisation, depreciation and impairment charges and £0.1 million (2007: £2.2 million) share based payment compensation.  

The amortisation charge of acquired brands, technology and software was £11.7 million (2007: £11.4 million) with an additional impairment charge of £16.3 million (2007: £nil), which reflects the result of the strategic review and the decisions to restructure various components of the business, in particular the acquisitions made last year.

Our loss before tax was £136.0 million (2007: loss £30.0 million) giving a basic loss per share of 136.3p (2007: loss 35.3p).
                                    
Market overview
The market is substantial and continues to grow, with new opportunities for publishers to develop revenue streams and grow margins.

The current videogame cycle is expected to be the biggest and longest in the industry’s history. Screen Digest reports software revenues will be 23% higher than the previous cycle which ran from 2000 and was dominated by Sony’s PlayStation 2. In 2007 the value of the global software market reached a new record of £14.7 billion of sales and is forecast to grow by 12.5% in 2008. Western Europe and North America remain our key markets, with a combined software value of over £13.2 billion.  

As a business, we are well placed to maximise the opportunities presented by the continued global growth in the market, which we believe is primarily driven by higher retail prices and an increased number of platforms, along with higher tie ratios (the number of games sold per console owner). In addition there is a broadening demographic appeal for games today and new revenue opportunities presented by online gaming, such as premium downloadable content, in-game advertising and micro transactions.

In the hardware market the Nintendo Wii is the current leader in terms of number of consoles sold to consumers, however no hardware manufacturer can yet assume ascendancy. As a publisher this presents a number of exciting opportunities. Nintendo has undoubtedly broadened the demographic appeal of videogames, while the Sony PlayStation and Microsoft Xbox 360 continue to appeal to the core gamer.

We believe the online gaming market will benefit from increased broadband speed and penetration, presenting new revenue opportunities for our core games. We also believe that online gameplay features will help maintain premium price points for our products by extending their appeal and we intend to grow our presence in this online environment to exploit the strength of our games.

Priorities and Outlook
We have emerged from the past months of change as a stronger business and over the next year we will begin to see the results of our restructured and revitalised operation. The Group is focused on delivering higher quality games with our priorities set clearly on maximising the returns from our cornerstone franchises.

We remain totally focused on, and we are excited about, the worldwide release of Tomb Raider: Underworld on 18 November in North America and 21 November in Europe. Tomb Raider: Underworld has benefited from additional development time  and a carefully choreographed build up to launch with increased tactical online presence, delivery of high quality marketing assets and the unveiling of a new ‘live’ Lara Croft - all helping to build ‘buzz’ prior to launch.

Our first Tomb Raider: Underworld trailer was launched exclusively on MTV in July in the US and Europe. Closer to home, the London unveiling of our new live Lara Croft secured national news coverage with the BBC and ITV in August and has continued to drive excitement and buzz for this key title across all key territories over the past month.  

We will continue to drive innovation and encourage creativity throughout the business as we look to strategically grow our portfolio of videogame franchises. Products for our new financial year include:  Just Cause 2, Battlestations Pacific, Monster Lab, Championship Manager 09, Batman: Arkham Asylum and Tomb Raider: Underworld.

A consistent identity
We are focusing our efforts on our cornerstone franchises, which are predominantly associated with the Eidos brand. The Eidos name is widely recognised in the games marketplace and is our trading name. The Board feels that it would be beneficial to align the name of the listed Company to the strong product brand that Eidos represents in order to benefit from a single identity and clearer outward and internal communication. Therefore it is the Board’s recommendation to change the name of the Company to Eidos plc.

A resolution to approve the change of name will be proposed at the Annual General Meeting, which will be held on 2 December 2008.

Our staff remain absolutely fundamental to the success of the business. This has been a most challenging year and I would like to thank our employees for their contribution and continued commitment over the past 12 months.

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