Codemasters Group Holdings Plc

("Codemasters" or the "Company")

Interim Results

Codemasters (AIM: CDM), the award-winning British video game developer and publisher specialising in high quality racing games, announces unaudited results for the six months ended 30 September 2020 ("H1 2021").

Financial highlights:

·    Revenues of £80.5 million with three game releases in the period (H1 2020: £39.8 million with one game release)

·    Trading gross margin* of 88.9% (H1 2020: 89.0%), underpinned by accelerated digital sales growth, representing 72.9% of total revenue (H1 2020: 61.7%)*

·    Reported gross margin* of 70.9% as a result of non-recurring accounting classification of development costs on Slightly Mad Studios ("SMS") game where IP is not owned

·    Adjusted EBITDA¹ of £21.2 million (H1 2020: £9.4 million)

·    Reported operating profit of £20.3 million (H1 2020: £12.0 million)

·    Adjusted earnings per share² ("Adjusted EPS") of 13.3 pence (H1 2020: 6.7 pence)

·    Net cash of £50.1 million at 30 September 2020 being cash held less right of use liability (30 September 2019: net cash £24.6 million)

Strategic and operational highlights:

·    Successfully launched three titles

o  F1® 2020

o  Fast & Furious Crossroads

o Project CARS 3

·    The Group's back catalogue continues to contribute significant sales

·    Increased focus on Games as a Service ("GaaS") is delivering positive results by driving player engagement and extending each game's lifecycle

Business Development progress:

·    Continued progress with the commercial partnership with Netease

o On course for mobile IP launch in FY2022

·    Signed 5-year agreement with WRC Promoter GmbH ("WRC Promoter") for the exclusive rights to develop and publish the FIA World Rally Championship ("WRC") videogames and esports tournaments

o  Annual iterations of the FIA and support categories from 2023 through 2027

Post-period:

·    DiRT 5 released on 6 November 2020

·    Project CARS GO went into closed beta testing in October 2020 with encouraging initial results

·    On 10 November 2020 the Company announced that the Board had reached an agreement with the Board of Directors of Take-Two Interactive Software, Inc ("Take-Two") on the terms of a recommended cash and shares offer to be made by Take-Two to acquire the Company (the "Acquisition"):

o  The Board believes that Codemasters will benefit by leveraging Take-Two's global distribution and marketing infrastructure, and its core operating expertise in live operations, analytics, product development, and brand and performance marketing​

o  Codemasters' Directors intend to recommend unanimously that Codemasters Shareholders vote in favour of the Scheme at the Court Meeting and the resolution to be proposed at the Codemasters General Meeting​

o  It is anticipated that the Acquisition will complete in the first quarter of calendar year 2021​

Outlook:

·    Trading in the second half of the year has begun well, including the successful release of DiRT 5 on 6 November 2020

·    Project CARS GO scheduled for release in H2 2021

·    Expect to launch three new titles in H1 2022, including the first iteration of the F1® franchise on the next generation consoles

Frank Sagnier, CEO of Codemasters, commented:

"I am delighted to report a record first half in which we benefitted from three game launches, including our most successful iteration of the F1® franchise. We continued to make significant progress against our strategic objectives, to strengthen the Group's overall leadership position in racing, grow the audience and increase average revenue per user.

We are fortunate to operate in an industry which has shown incredible resilience over the course of the year, shielding us from the impacts of COVID-19. During the period we continued to see an accelerated shift to digital delivery, supported by a decline in traditional retail and boxed sales which were affected by COVID-19.

The offer received from Take-Two Interactive Software, Inc post-period end demonstrates the strength of our offering and our reputation as leaders in the racing genre."

*See CFO Review for further detail on trading and reported gross margin

This announcement is released by Codemasters Group Holdings Plc and contains inside information for the purposes of Article 7 of the Market Abuse Regulation (EU) 596/2014 ("MAR"), and is disclosed in accordance with the Company's obligations under Article 17 of MAR.

For the purposes of MAR and Articles 2 of Commission Implementing Regulation (EU) 2016/1055, this announcement is being made on behalf of the Company by Rashid Varachia, Chief Financial Officer.

Notes:

¹ Adjusted EBITDA, is a non-GAAP measure used by the Group, which is defined as profit before finance costs on borrowings (restricted to represent cash basis), tax, capitalisation, depreciation, amortisation, non-recurring items, share based payments, the phasing of milestone payments received from publishers and takes into account the contract accounting where game IP is not owned by the Group.

² Adjusted earnings per share 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 a non-GAAP measure used as a proxy for cash earnings), where the number of shares across each period is the outstanding Ordinary Shares in issue at the end of each period. Given the significant variance in average number of shares in issue between periods, an adjusted measure has been presented. Adjusted net income is defined as Adjusted EBITDA less cash interest and tax paid.

ABOUT CODEMASTERS:

Codemasters (AIM:CDM) is an award-winning British video game developer and publisher with over 30 years of heritage. The company specialises in high-quality racing games including DiRT, GRID and the BAFTA award-winning official F1® series of videogames. In November 2019, Codemasters acquired Slightly Mad Studios, creators and developers of award-winning IP including the Project CARS franchise and Fast & Furious Crossroads.

Codemasters' LEI number is: 213800NOITSDQVNP5W91 

Chief Executive Officer's Review

Strategic progress

I am pleased to report on an exceptional period for the Group and one in which the business has outperformed against the expectations set at the start of the financial year. Revenue more than doubled to £80.5 million (H1 2020: £39.8 million), with Adjusted EBITDA of £21.2 million (H1 2020: £9.4 million). As previously announced, COVID-19 substantially affected the sales mix, accelerating the shift to digital delivery and impacting traditional retail and box sales, exacerbated by the closure of the majority of game retailers globally. As a result, digital sales as a proportion of revenue represented 72.9% of total sales in the period (H1 2020: 61.7%), leading to a trading gross margin of 88.9% (H1 2020: 89.0%). The trading gross margin of 88.9% is in line with the prior year, with the greater proportion of higher margin digital revenue being offset by higher licence royalties as a result of the strong performance of F1® 2020. This trading gross margin of 88.9% is lower than the 92.9% incorrectly reported in the Company's trading update on 7 October 2020. This discrepancy is due to licence costs not being included in the margin disclosed on 7 October.

These strong results were driven by the release of three titles in the period: F1^® 2020, Fast & Furious Crossroads and Project CARS 3, as well as the continued success of the Group's back catalogue of games (titles released in prior periods). DiRT Rally 2.0 recently passed 9 million players, and F1^® 2019 benefitted from F1® drivers competing in Virtual Grand Prix Series which replaced the postponed start to the 2020 F1^® season and delivered 30 million views across digital platforms and linear TV.

The performance also demonstrates the continued progress being made against our strategic objectives: strengthen the Group's overall leadership position in racing, grow the audience and increase average revenue per user.

Through the acquisition of Slightly Mad Studios ("SMS"), we have cemented our leadership in racing. The SMS team is now fully integrated and the performance of their titles met our expectations in H1 2021. The addition of SMS brought diversified revenue streams via Project CARS and access to a licenced blockbuster IP with the launch of Fast & Furious Crossroads in August.

Esports continues to be a high growth area for the Group and we expect to create revenue from sponsorship and broadcast opportunities as the market matures. The opportunities available to us through esports were highlighted during the early months of the COVID-19 pandemic - esports helped fill the void of real-life F1® Grand Prix with virtual races aired on both streaming platforms and linear TV. It also underlined the symbiotic nature of the relationship as stars from different sports and entertainment fields introduced their fans to our games.

Our nascent Games as a Service ("GaaS") strategy is performing well, driving player engagement, satisfaction and retention, resulting in a longer lifecycle for our games. We anticipate GaaS to form an increasing share of our revenue going forward. We are seeing rapid growth, although revenues currently remain small.

Further progress is being made in the commercial partnership with Netease and this is on track to deliver a new mobile IP to the market in the financial year 2022. We remain excited about the game's potential, both in China and global markets.

Looking further to the future we were pleased to sign a licence agreement with WRC Promoter GmbH ("WRC Promoter") for the exclusive rights to develop and publish the FIA World Rally Championship ("WRC") videogames and esports tournaments. This allows the Group to release videogames based on the franchise including its support categories (e.g. the FIA WRC 2, WRC 3 and Junior WRC Championships) across console, PC and mobile platforms, including annual iterations for the five seasons from 2023 through to 2027. The Group expects to release the first title in this series in the financial year ending 31 March 2024.

In April, we were pleased to announce that Lisa Thomas had joined our Board as a Non-Executive Director. With over 32 years of experience and featured in Campaign's Power 100 for 2019, she is a highly talented consumer marketer and has already brought insight into consumer behaviour and the relationship between brands and their customers.

The above progress would not have been possible without the unwavering dedication and support of our employees, who have risen to the challenges presented by the pandemic. Our teams continue to work remotely as a result of COVID-19 and we are pleased to report that the Group has not seen any material disruption or loss of efficiency as a result of these different working environments. I thank them all.

Operational review

Codemasters has a portfolio of games and is renowned for developing high quality, AAA rated games, focused solely on the racing category.

F1® 2020 was released on 10 July 2020 on PlayStation 4, Xbox One, PC and Stadia. This year's iteration materially over-performed compared to the previous year and is one of the highest-scoring games of 2020 according to aggregator site Metacritic, averaging 91% on Xbox, 89% on PC and 86% on PlayStation 4. The superior quality of the game and the growth of the sport, especially in the United States, helped to attract new players. The game catered for race fans of all levels and experience with two new circuits, the introduction of the driver-manager feature, My Team, improved on-track options, and the reintroduction of split-screen and more. The Company anticipates that F1® 2020 will continue to perform strongly throughout the Black Friday, Christmas and New Year promotional periods, which have historically delivered strong sales for prior versions of the F1® game.

F1® Mobile Racing, our free to play mobile game for Apple and Android devices continues to grow and has attracted over 25 million players since launch and the game is now on its 15^th update. We will continue to invest in this mobile title over the coming years, releasing regular updates to satiate demand.

H1 2021 also saw the release of the first two titles developed by SMS since the Company acquired the studio in November 2019. Both titles were published by Bandai Namco Entertainment on PlayStation 4, Xbox One and PC. Revenues from these titles in H1 2021 principally coming in the form of milestone payments and royalties as disclosed at the time of the SMS acquisition, were in line with the Company's expectations for H1 2021.

Fast & Furious Crossroads, a team-based, vehicular-heist action game set in the adrenaline-fueled Fast & Furious universe, was launched on 7 August 2020. Packed with gadgets, heists and iconic vehicles, Fast & Furious Crossroads puts players in the driver's seat of the non-stop cinematic-style action of the Fast & Furious saga. Whilst the critical reception was disappointing, the Company expects sales of the game to be positively impacted by the upcoming holiday period, post launch downloadable content and following the release of the next film in the Fast and Furious franchise.

Project CARS 3 was launched on 28 August 2020 boasting the biggest car roster in franchise history, new tracks, including the home of the Brazilian Grand Prix, Interlagos, and the roads of Tuscany. The game delivered an authentic motorsport simulation tailored for every type of racer and featured a fully-fledged career mode. It received the gamescom Award for "Best Simulation Game" and is a Finalist for "Best Racing Game" at the TIGA Awards​.

The Group's back catalogue continues to perform strongly. This is driven by the accelerated growth of the digital business reflecting the longer lifecycle of high-quality products and well-established IP, together with the ever-increasing number of digital channels for exploitation. The Board expects digital growth to continue with future releases.

Post period

DiRT 5 was released on 6 November 2020 on PlayStation®4 computer entertainment system, the Xbox One family of devices including the Xbox One X and PC. The revised launch date (originally scheduled for 16 October 2020) has enabled the Group to release all versions of the game in a shorter timeframe, with the next generation of consoles (Xbox Series X/S and PlayStation®5) launched on 10 November and 19 November 2020 respectively. A Google Stadia version will also launch later in H2 2021.

Project CARS GO went into closed beta testing in October with encouraging results. We look forward to its launch in H2 2021.

On 10 November 2020 the Company reached agreement on the terms of a recommended cash and shares offer by Take-Two for the entire issued and to be issued share capital of Codemasters. Take-Two believes that the combination of Take-Two and Codemasters would bring together two world-class interactive entertainment portfolios, with a highly complementary fit between Take-Two's 2K label and Codemasters. Take-Two believes that it can bring benefits to Codemasters' performance by leveraging its global distribution and marketing infrastructure, together with its core operating expertise in live operations, analytics, product development, and brand and performance marketing. The Codemasters' Directors intend to recommend unanimously that Codemasters' Shareholders vote in favour of the Scheme at the Court Meeting and the resolution to be proposed at the Codemasters General Meeting. It is anticipated that the Acquisition will complete in the first quarter of 2021.

Outlook

H1 2021 has been a milestone period for the Group in which we delivered a record performance with further growth in revenues and Adjusted EBITDA. We are fortunate to operate in an industry which has shown incredible resilience over the course of the year, shielding us from the wider impacts of COVID-19.

Trading in the second half of the year has begun well with the release of DiRT 5 on 6 November 2020 and Project CARS GO due for release in H2 2021 which are both expected to contribute to the full year results. Beyond the current financial year, we expect to launch three new titles in H1 2022, including the first iteration of the F1® franchise on the next generation consoles.

The long-term structural growth drivers in our sector remain strong with the launch of the next generation consoles, the accelerated shift to digital sales and services, and the roll out of 5G all likely to drive more opportunity for greater engagement with our audiences. As our industry grows, so does the level of investment needed to meet increasing consumer expectations. The Board has recommended that shareholders vote in favour of the offer we received from Take-Two as it believes Take-Two's broad capabilities will help propel the long-term success of Codemasters.

We remain excited about what the future holds and would like to thank our teams, once again, for their hard work and dedication.

Frank Sagnier

Chief Executive Officer

23 November 2020

Chief Financial Officer's Review

Overview

As referred to in the Chief Executive Officer's review, the Group has delivered record performance in H1 2021 with revenue of £80.5 million (£39.8 million in H1 2020). The H1 2021 numbers also incorporate the results of the SMS group which was acquired on 28 November 2019 (in H2 2020).

The impact of COVID-19 has accelerated the growth in the proportion of digital sales from 61.7% in H1 2020 to 72.9% in H1 2021. The trading gross margin of 88.9% is in line with the prior year, with the greater proportion of higher margin digital revenue being offset by higher licence royalties as a result of the strong performance of F1® 2020. This trading gross margin of 88.9% is lower than the 92.9% incorrectly reported in the Company's trading update on 7 October 2020. This discrepancy is due to licence costs not being included in the margin disclosed on 7 October 2020.

Impact of SMS Acquisition

Following the interim review of contract accounting on the SMS acquisition by the Company's auditors, as mentioned below, development costs in relation to Fast & Furious Crossroads, where SMS does not own the game IP, have been reclassified from Administrative Expenses to Cost of Sales. The impact of this is to reduce the reported gross margin from 88.9% to 70.9%. There is no impact on Operating profit or Adjusted EBITDA of this non-recurring accounting reclassification.

The deferred contingent consideration on the acquisition of SMS has been reviewed as at the end of H1 2021 in line with the future expected performance of the SMS group and as a result the goodwill and corresponding liability have both been reduced by £12.2 million. An impairment review of the intangible assets was also undertaken which resulted in no impairment being necessary.

The Statement of financial position as at 31 March 2020 has been restated following a review of the contract accounting on acquisition. This has resulted in additional IP being recognised along with a reclassification of IP and development costs on Fast & Furious Crossroads into contract assets. Additional deferred income and contract liabilities have also been recognised. The overall impact on both assets and liabilities is an increase of £13.6 million. This amount is the milestone payments that have been received by SMS prior to its acquisition. It is important to note that there is no impact on profit or net assets as a result of this restatement.

Adjusted EBITDA, Adjusted EPS and Cash

Adjusted EBITDA of £21.2 million (H1 2020: £9.4 million) is significantly higher than the prior period as a result of the strong sales performance of both new releases and the back catalogue.

Adjusted EPS of 13.3 pence has increased by 6.6 pence from 6.7 pence per share in H1 2020 (again driven by the strong sales performance).

Net cash as at 30 September 2020 was £50.1 million, £0.3 million higher than the number disclosed in the Company's trading update on 7 October 2020. This slight discrepancy is due to the reduction in the right of use liability following notice being given on the SMS offices shortly before the period end. This reflects an increase of £25.5 million since 30 September 2019.

Trading

The Group delivered £80.5 million of revenue in H1 2021, driven by the release of F1®2020, Fast & Furious Crossroads and Project CARS 3 coupled with the continued strength of the Group's back catalogue. In the prior period H1 2020, only F1® 2019® was released.

The Group continues to benefit from the market shift toward digitally downloaded games, with 72.9% of revenue delivered via digital channels (H1 2020: 61.7% and 2020 full year delivering 67.7%). This has benefitted the Group's trading gross margin and enabled greater shelf life of the back catalogue. However, this benefit to trading gross margin from a greater proportion of digital sales in H1 2021 has been offset by higher licence costs as a result of strong sales performance from F1® 2020.

H2 2021 trading prospects are encouraging, with an exciting post launch schedule of content and features for DiRT, and the expected release of Project CARS GO, a mobile version of the Project CARS franchise. Additionally, with further offerings for F1® 2020, additional content in F1® Mobile Racing and further GaaS updates from DiRT, the Board looks to the future with confidence.

As mentioned in the Group's 2020 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 Group.

As noted above, Adjusted EBITDA of £21.2 million (H1 2020: £9.4 million) is significantly higher than the prior period and reflects the underlying strength of the F1® 2020 title supported by the release of Fast & Furious Crossroads and Project CARS 3 coupled with the strength of the back catalogue, in a period where the impact of COVID-19 has meant more people being at home having time to play games.

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 licence 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 £17.3 million has been incurred in H1 2021, the release of F1® 2020, Project CARS 3 and Fast & Furious Crossroads being the key drivers. 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 continued commitment to deliver products of the highest quality.

·    Interest on unwinding of licensing agreements of £1.4 million (H1 2020: £0.8 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 increase when compared to the prior period reflects the number of contracts unwinding across the two periods.

·    Depreciation of £1.2 million (H1 2020: £1.0 million) includes £0.5 million (H1 2020: £0.2 million) associated with Right of Use assets under IFRS 16. 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 £0.9 million (H1 2020: £0.6 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 £16.5 million has increased by £3.7 million from H1 2020, where £12.8 million was capitalised. This reflects the increased in investment in the Group's releases.

·    Share-based payments charge of £0.4 million (H1 2020: £0.6 million) represents a non-cash charge.

·    The adjustment for SMS milestone payments received arises as SMS develop their titles on behalf of a publisher. They receive milestone payments which are not reflected within revenue until the games are released. Therefore, the net movement in these payments is adjusted for to reflect the cash position. The costs incurred in developing the games are included within the capitalisation of development costs.

·    The SMS contract accounting adjustment reflects the net costs of development where the IP is not owned by SMS.

Creative sector relief

Creative sector relief recognised in the period of £5.0 million (H1 2020: £4.2 million) represents the expected receivable for H1 2021 based upon the qualifying costs incurred in the period with the increase being partly attributable to the impact of the SMS acquisition. The claims in respect of the 2020 financial year were submitted in August 2020 and settled in August and September 2020.

Operating profit

Operating profit of £20.3 million has increased by £8.3 million from H1 2020. The key driver of this is the success of F1® 2020, coupled with the sales performance of the back catalogue.

Interest receivable / payable

Net interest receivable of £0.2 million in H1 2021 includes £1.4 million (H1 2020: £0.8 million) in relation to the unwinding of licensing agreements and interest on the unwinding of leases under IFRS 16. There are also £1.6 million of foreign exchange gains (H1 2020: £0.6 million loss) associated with the licensing agreements.

Profit after tax

The Group continues to benefit from tax losses brought forward of approximately £125 million. As such, corporation tax charges reflect the ability of the Group to utilise these losses. There has been a £0.6 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 2021 profit after tax was £19.9 million (H1 2020: £10.1 million).

Basic earnings per share was 13.1 pence (H1 2020: 7.3 pence).

Adjusted EPS was 13.3 pence (H1 2020: 6.7 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 number of Ordinary shares in issue at the end of each period.

Adjusted net income is defined as Adjusted EBITDA less cash interest and tax paid.

Statement of Financial Position and Cash flow

There are £77.0 million of intangible fixed assets as at 30 September 2020 (31 March 2020: £92.2 million). The reduction is mainly attributable to the amortisation of the development costs of the F1® 2020 and Project CRAS 3 games released in the period offset by the capitalised spend on games yet to be released. It has also been impacted by the reduction in the expected earnout following the SMS acquisition.

There are £10.6 million of tangible fixed assets as at 30 September 2020 (31 March 2020: £10.4 million).

There were £20.8 million trade and other receivables at 30 September 2020 (31 March 2020: £33.5 million). The reduction is driven by the release of contract assets and the settlement of trade receivables.

Within trade and other payables there is £32.1 million that is payable in a period greater than one year (31 March 2020: £45.5 million). The reasons for the reduction are the lower earnout following the SMS acquisition and the impact of being six months later on the timing of the long-term contract liabilities.

Trade and other payables falling due within one year of £23.7 million have reduced by £18.1 million from the year end. The reduction is a mix of the payment of deferred consideration due on the release of Fast & Furious Crossroads and the settlement of year end trade creditors and the release of contract liabilities.

As at 30 September 2020 the Group had £50.1 million of net cash, £0.3 million higher than the number disclosed in the Company's trading update on 7 October 2020. This slight discrepancy is due to the reduction in the right of use liability following notice being given on the SMS office shortly before the period end . This reflects an increase of £25.5 million since 30 September 2019.

 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

23 November 2020

Unaudited condensed consolidated income statement

*Adjusted EBITDA is a non-GAAP measure used by the Group, which is defined as profit before finance costs on borrowings, tax and capitalisation of development costs, depreciation, amortisation, non-recurring items, SMS milestone payments received and SMS contract accounting adjustments.

Unaudited condensed consolidated statement of comprehensive income

Unaudited condensed consolidated statement of changes in equity

Unaudited condensed consolidated statement of financial position