Chief Executive Officer's Review

Strategic progress

I am pleased to report that the Company delivered revenue of £39.8 million (H1 2019: £39.7 million), with one new launch during the period in comparison with two in H1 2019.

As expected, digital sales continued to increase, representing 61.7% of total sales in the period (H1 2019: 53.4%), helping the revenue performance and delivering an improved gross margin of 89.0% (88.5% H1 2019). The shift to digital is a trend that we expect to continue in the future.

As a result of the strong financial performance in the first half and with continued momentum into the second half, the Board is confident that the results for the full year will be in line with its expectations.

Alongside the launch of Dirt Rally 2.0 we introduced our Games as a Service ("GaaS") strategy. This strategic focus has enabled us to continuously engage with our community and bring them new downloadable content and features post-launch. DiRT Rally 2.0 completed the first two post-launch seasons including six new locations, 12 vehicles and a new training area.  The impact of this has doubled the 90-day retention when compared to the original DiRT Rally and average session times 34% longer. This is the most significant service programme we have embarked on at Codemasters - giving players more and more reasons to keep coming back to the game.  Season 3 commenced on 27 August 2019, including rally stages in Greece and Finland, along with the introduction of the Yas Marina circuit in Abu Dhabi for FIA World Rallycross Championship.  Season 4 will launch later this calendar year.

GaaS for Codemasters remains at a nascent stage and yet we are very pleased with the initial results. We are already seeing positive signs that it is driving player engagement, satisfaction and retention, resulting in a longer life cycle for our games. As an example, on DiRT Rally 2.0, 90-day retention is double that noted for the original Dirt Rally, average session time has also increased by 34% between the two releases. We remain convinced that this continues to represent a significant opportunity for driving additional revenue in the short and long term.

The mobile game being co-developed with NetEase, one of China's leading internet and online game services providers, is progressing as planned and a Beta version of the game is expected to launch for testing in 2020.

The Company is focused on driving growth organically but will review acquisition opportunities when appropriate in order to accelerate growth.

Operational review

Codemasters has a portfolio of racing games and generates sales through both new releases and through its existing catalogue of titles. Trading in H1 2020 benefitted from the launch of the annual instalment of the F1® franchise, F1® 2019, on 28 June 2019, as well as the Company's back catalogue of games.

F1 2019® has received widespread critical acclaim and the 2019 instalment of the F1® franchise was the first year that the game benefited from a two-year development cycle, with a second team deployed. The benefits have been tangible and give us confidence for future performance under the two-team structure. For the first 90 days since launch the average Daily Active User tracked 50% above that of F1 2018 in a comparable period highlighting how fans are continuing to become more and more engaged with the game.

Due to the earlier release date of this year's instalment, in June rather than August, launching two months earlier to move the release date closer to the start of the season, it has made a more significant contribution to revenue in the first half. This year's instalment also provided gamers with the option to buy additional content for the first time in an F1® game, enabling player recurring investment. Car liveries, helmets, suits and gloves could all be purchased in-game and the response has been encouraging. The Company anticipates that F1® 2019 will still benefit from the normal promotions around the Black Friday and Christmas periods, which have historically delivered strong sales for prior versions of the F1® game. For the third year running, our F1® release was the highest rated racing game on PlayStation 4 in its respective year.

F1® Mobile Racing, our free to play mobile game for Apple and Android devices has attracted over 13.4 million players in less than a year since launch and went to number one in the Racing category chart in 150 countries. In June 2019, it launched on iOS in China and in the first half of the year we have delivered four major upgrades to the game, including Elite Leagues and a Season Championship. In May, we introduced a subscription service for the game and are delighted that user acquisition is now profitable on a monthly basis. We will continue to invest in this mobile title over the coming years, releasing regular updates to satiate demand.

F1® Esports Series is now in its third season and continues to grow the number of entries and viewers. Broadcasted live across Facebook and Sky Sports TV, the 2019 Series attracted 5.5 million viewers and 100 million impressions.  The first series in China is now underway.

The popularity of F1 Mobile Racing and Esports, alongside our PC and console game are symbiotic, helping to create an ever-greater audience in all aspects of our F1 outreach and moving forward, we see more opportunities to drive cross-ownership.

The performance of the Company's back catalogue has been strong thanks to the accelerated growth of the digital business reflecting the longer life cycle of high-quality products. The Company expects digital growth to continue with future releases. Codemasters' three key franchises are long established and each one of them has built a passionate and growing fan base. Through digital channels we can now engage with these fans constantly and offer new content to existing games which will help to extend and increase the commercial success of each instalment of our franchises.

Board change

In June, Shibasish Sarkar resigned as Non-Executive Director of the Company with immediate effect. His resignation was in accordance with the terms of the relationship agreement between Codemasters and Reliance Big Entertainment Pte. Ltd ("Reliance"), and followed Reliance's holding in the Company becoming less than 20% of the total voting rights in the Company. The Company intends to appoint an additional independent Non-Executive Director and has progressed its search to identify suitable candidates. A further update will be provided in due course.

Post period 

In October we were pleased to re-launch the GRID® franchise for the first time since 2014 debuting on this generation of both Sony and Microsoft consoles. The game has also been selected as a launch title on Google Stadia which will be available to millions of new consumers later this year and Google have been featuring the game in dedicated GRID Stadia advertising in all key markets for several months.

GRID® recently won "Best Racing Game" at the gamescom Awards 2019 having previously picked-up "Best Racing Game" at E3, the world's premier event for computer and video games, from Game Informer and DualShockers.  The game launched on 11 October 2019 in standard and ultimate editions. GRID® is one of a select number of games available (and the only racing game currently) on Google Stadia, which launched in November 2019.  It is also the first game to partner with Fernando Alonso as a racing consultant, and delivers genre leading racing AI, accessible handling and some of the most iconic cars ever created

In November we announced that we had extended our exclusive license agreement with Formula One Management Limited to secure the rights to publish an annual title from 2020 to 2025. In addition, within the agreement there is an option to further extend until 2027 based on certain performance conditions. Securing a longer-term arrangement demonstrates the quality of the product consistently delivered by the Group and the strength of the relationship between the Group and F1®. The Agreement represents the longest extension in the partnership's history, demonstrating the global success of the game and the shared vision for increasing the international appeal of F1®. We are excited by the prospect of further investment in the franchise and the ability to bring more F1® content to the market.

Outlook

The Board is pleased with the progress being made across all aspects of the business and trading in the second half of the year has begun in line with management's expectations. With a material revenue contribution expected from GRID®, the ongoing success of the F1 2019 release and further GaaS updates from DiRT® we remain confident in meeting expectations for the full year. We also expect to benefit from the normal promotions around the Black Friday and Christmas periods which have historically delivered strong sales for the Group.

Frank Sagnier

Chief Executive Officer

26 November 2019

Chief Financial Officer's Review

Overview

As referred to in the Chief Executive Officer's review, the Group continues to deliver against the strategic objectives set at the time of the IPO and continues to grow year on year. The Group has delivered revenue of £39.8 million in H1 2020 (£39.7 million in H1 2019.  In absolute terms revenue is marginally ahead. However, there has only been one major release in H1 2020 (F1® 2019) versus two in H1 2019 (F1® 2018 & ONRUSH).

Continued growth in the proportion of digital sales generated has contributed to a gross margin percentage of 89.0% which has increased by 0.5% from 88.5% in H1 2019 and 1.4% from 87.6% when compared to the year ended 31 March 2019.

Adjusted EBITDA of £9.4 million (H1 2019: £10.0 million) is lower than the prior period but reflects the timing of releases. Overall trading has been positive, and I am confident that the full year profitability will be in line with our expectations.

Adjusted EPS of 6.7 pence has reduced by 0.4 pence from 7.1 pence per share in H1 2019 (again driven by timing of releases).

Cash balances as at 30 September 2019 were £24.8 million (net cash of £24.6 million after deducting finance lease creditors). This reflects an increase of £6.4 million since 31 March 2019.

Trading

The Company delivered £39.8 million of revenue in H1 2020, driven by the release of F1® 2019 and the continued strength of the Group's back catalogue (titles released in prior periods).  In H1 2019 £39.7 million of revenue was delivered following the release of F1® 2018 & ONRUSH.

The Group continues to benefit from the market shift toward digitally downloaded games, with 61.7% of revenue delivered via digital channels (H1 2019: 53.4% and 2019 full year delivering 59.2%), this has benefitted the Group in terms of increased gross margin and enabling greater shelf life of the back catalogue.

H2 2020 trading prospects are encouraging, with an exciting post launch schedule of content and features for GRID®, further offerings for F1 2019®, additional content in F1® Mobile Racing and further GaaS updated from DiRT®, and therefore the Board remains confident in meeting its expectations for the full year.

As mentioned in the Group's 2019 Annual Report, the Company's Board of Directors use Adjusted EBITDA as a key trading performance indicator. This provides a meaningful measure of the underlying operational cash generation of the Company.

As noted above, Adjusted EBITDA of £9.4 million (H1 2019: £10.0 million) is lower than the prior period but reflects the underlying strength of the F1 2019® title supported by the back catalogue, including DiRT Rally 2.0, in a period where there were fewer releases when compared to H1 2019.  

Regarding the reconciling items between operating profit and adjusted EBITDA (which includes cost of sales development costs and sales, general and administrative costs), the key observations are as follows:

·      Amortisation (which includes long-term amortisation of capitalised development costs and long-term contracts). The key component is amortisation of capitalised development costs, whereby the development costs of each title are released over a 12-month period into the income statement, 65% in the first month, with the remainder split equally over the eleven remaining months. Amortisation is a non-cash accounting entry and is dictated by the timing of releases.

·      Amortisation of £9.3 million has been incurred in H1 2020, the release of F1® 2019 being the key driver. In H1 2019 £18.3 million of amortisation included two major releases and a £2.6 million impairment charge in relation to ONRUSH (which was released in June 2018). However, whilst there is a significant variance between the two periods driven by timing of releases, there is an underlying increase in the level of investment in current titles, reflecting the Group's commitment to deliver products of the highest quality.

·      Interest on unwinding of licensing agreements of £0.8 million (H1 2019: £1.0 million) form a recurring licensing cost, which is necessary for the Group to be able to release certain titles. Whilst the cost is recognised within interest expense it is added back into the adjusted EBITDA calculation. All licensing costs are considered together by the Board of Directors and are included in the adjusted EBITDA calculation. The reduction when compared to the prior period reflects the number of contracts unwinding across the two periods.

·      Depreciation of £1.0 million (H1 2019: £0.7 million) includes £0.2 million associated with Right of Use assets under IFRS 16 following transition on 1 April 2019. As part of the Group's capitalisation policy certain overheads, including depreciation are capitalised where they are directly related to developing the Group's games. In the period £0.6 million (H1 2019: £0.5 million) of depreciation was capitalised within capitalised development costs.

·      Capitalisation is the measure of development costs incurred that are held as an intangible asset prior to release of the applicable title. Certain long-term licences entered into are also capitalised (none in the current and prior period).  Both are non-cash measures.

·      Capitalisation of £12.8 million has increased by £2.1 million from H1 2019, where £10.7 million was capitalised. This reflects the increased in investment in the Group's releases. However, the costs are in line with H2 2019 where £12.5 million was incurred.  

·      Share-based payments charge of £0.6 million (H1 2019: £5.8 million) represents a non-cash charge. In the current period this relates to the fair value attributed to the LTIP, NED & ESOP options granted on or after the IPO. In the prior period £5.5 million related to the accounting fair value of share options awarded to executive management prior to the IPO of the Company, which were a one-off associated with the IPO and did not reflect a cash outflow to the business.

·      In the current period the Group has re-visited the valuation methodology of the LTIP share options, the fair value attributed to these were previously calculated using a Black Scholes model. The Group now uses a Monte Carlo model, which is more robust in estimating share options with performance conditions associated with the LTIP share options. The impact of this is that the fair value has increased, albeit the true-up is less than £0.1 million, which has been charged in full in the period.

Creative sector relief

Creative sector relief recognised in the period of £4.2 million (H1 2019: £3.2 million) represents the expected receivable for H1 2020 based upon the qualifying costs incurred in the period, plus £0.2 million received in the period relating to the prior year claim. The claim in respect of the 2019 financial year was submitted in June 2019 and settled in full in August 2019.

Operating profit

Whilst Adjusted EBITDA is broadly in line year on year, operating profit of £12.0 million has increased by £15.0 million from H1 2019. The key drivers of this are the timing of releases leading to an £11.0 million favourable variance when comparing capitalisation and amortisation across the periods. There is also a £5.1 million favourable variance from share-based payments charges in the current period when compared with H1 2019.

Interest payable

Net interest payable of £1.5m in H1 2020 includes £0.8 million (H1 2019: £1.0 million) in relation to the unwinding of licensing agreements and interest on the unwind of leases under IFRS 16. There are also £0.6 million of foreign exchange losses associated with the licensing agreements. In H1 2019 there was a £2.3 million foreign exchange loss driven by the movement on loans held at the start of that period (settled as part of the pre-IPO restructuring).

Profit after tax

The Group continues to benefit from tax losses brought forward of approximately £120 million. As such, corporation tax charges reflect the ability of the Group to utilise these losses. There has been a £0.4 million charge recognised in the period reflecting the expected tax rate applicable to the Group for the full year.

Deferred tax has been reviewed and no adjustments were required to the underlying value held.

H1 2020 profit after tax was £10.1 million. H1 2019 generated a loss of £7.7 million (although this did include approximately £7.0 million of one-off share-based payments or non-recurring items).

Basic earnings per share was 7.3 pence (H1 2019: loss per share 0.0 pence).

Adjusted EPS was 6.7 pence (H1 2019: 7.1 pence). This is a non-GAAP measure presented as a meaningful comparison of earnings per share across periods. It is defined as adjusted net income per share (which is also a non-GAAP measure used as a proxy for cash earnings), where the number of shares across each period is the current amount of Ordinary shares in issue.

Given the significant variance in the number of shares in issue pre and post IPO and the associated impact on weighted average number of shares in issue between the periods, an adjusted measure has been presented. Adjusted net income is defined as adjusted EBITDA less cash interest and tax paid.

Statement of Financial Position and Cash flow

Prior to the Company's admission to AIM, it undertook a pre-IPO restructuring, a description of how this impacted the Group's balance sheet was detailed in the 2019 Annual Report.

There are £10.0 million of tangible fixed assets as at 30 September 2019 (31 March 2019: £9.1 million), the increase in the period has been driven by the transition to IFRS 16, with an asset of £1.2 million held in respect of four leasehold assets at 30 September 2019.

There were £8.5 million trade and other receivables at 30 September 2019 (31 March 2019: £9.2 million). The variance is driven by the timing of the DiRT Rally 2.0 release increasing the amount of accrued income from console providers and other customers. The reduction is driven by settlement of trade receivables offset by an increased in accrued income on sales yet to be invoiced.

Within trade and other payables there is £3.9 million that is payable in a period greater than one year (31 March 2019: £6.2 million). One of the agreements outstanding at the end FY19 has become due in less than one year in the first half of 2019. However, there is now £0.7 million of IFRS 16 lease liabilities due in a period of greater than one year.

As at 30 September 2019, the Company had £24.6 million in net cash (31 March 2019: net cash £18.2 million). The increase reflects trading performance and collection of the 2019 VGTR claim.

The Group continues to build its portfolio of titles, invest in its products and has sufficient strength in its balance sheet to take advantage of investment opportunities.

Rashid Varachia

Chief Financial Officer

26 November 2019

Unaudited condensed consolidated income statement

*Adjusted EBITDA is a non-GAAP measure used by the Company, which is defined as profit before finance costs on borrowings, tax and capitalisation of development costs, depreciation, amortisation and non-recurring items.

** Non-recurring items relate solely to the costs of the IPO. These are one-off and non-operational in nature and have been separately stated outside of operating costs accordingly.

Unaudited condensed consolidated statement of comprehensive income

Unaudited condensed consolidated statement of changes in equity

Full details regarding the pre-IPO transactions were disclosed in the prior year RNS and in the Group's FY19 Annual Report.

Unaudited condensed consolidated statement of financial position