Eidos  (EID)

25/01/01 Eidos issues further profits warning
Almost a year after issuing a profits warning following product release postponement and slippage coupled with poor trading conditions, the Company finds itself in exactly the same position. The Company has revealed that a number of key titles (Commandos 2, Gangsters 2 and Startopia) have slipped into FY02 and that it was deliberately (and sensibly) holding back the release of three new PS2 titles until the installed base of PlayStation 2s could sustain a higher potential level of software sales. With the revenue streams from the 6 titles having originally featured in the FY01 year-end forecasts, the Company has been forced to revise its immediate forecasts downwards. Whilst this could be taken as further bad news, the decision to delay their release simply postpones the financial benefit to the Company and will almost certainly have also increased their sales potential (due to the greater level of quality assurance work/tweaking that can be done on them and the larger addressable markets).
Given the theme of getting bad news out of the way during this financial year (see last November's news), it was almost a shame that Eidos enjoyed a much better than expected Christmas period with Championship Manager and in particular Who Wants to be a Millionaire performing well. Indeed the latter (which Eidos, at the end of last year, secured extended rights to) has broken all UK sales records for a single title being the fastest to clock up over 1m sales in  the UK alone. This coupled with the fact that Eidos has now forward sold its remaining stake in Opticom should give Eidos a significant cash boost over the next few months.

28/02/01 Eidos unveils Q3 results

Eidos' Q3 period is normally its strongest of the year since it encompasses the all-important Christmas trading period. However, despite returning to the black for the first time this year (excluding exceptionals), the results also revealed the extent of the continuing problems in the market and within the Company. Sales for the period were down 16% whilst profits before tax nearly halved. Gross margins were down (principally reflecting the increased percentage of back catalogue and mass-market-priced product such as WWTBAM and previous Tomb Raider titles) from 62% to 56% although admin costs continue to be reduced as the Company goes through its streamlining process. Although the Company appears to have perilously low cash reserves with only £7.8m in cash at 31/12/00, it has around £97m in debtors (which more than covers its £81m creditor position) and is confident it can trade through the market transition without needing to seek additional funding. Even if the need arises, Eidos' remaining stake in Opticom could be realised for a healthy (£15m) gain.
The trading outlook for the Company during FY02 looks mixed with no major new Tomb Raider product expected at Christmas nor, more surprisingly, during the summer to coincide with release of the Tomb Raider film. However the Company does have some promising sequels (Commandos 2, Gangsters2, Soul Reaver 2, WWTBAM 2 - see below) as well as new IP (Herdy Gerdy) which should make FY02 less painful than FY01 is proving. 

29/03/01 Eidos extends WWTBAM deal
Eidos has announced an extension of its deal with Celador International, owners of the Who Wants To Be A Millionaire gameshow. Eidos have gained the rights to publish a junior version aimed at children and a follow-up to the original 2000 PC, PlayStation and Dreamcast release. Eidos retains the distribution rights for the UK, Germany and France and has achieved considerable success in the former territories whilst the French version of the original is due for release this summer.

31/05/01 Eidos Prelims and rights issue
As expected, Eidos reported substantial losses in its Q4 and FY01 year-end results. As has been discussed elsewhere within the Eidos section, Eidos had every intention of using the temporary weakness within the overall games market to get as much bad news out of the way as possible, thus paving the way for a period of growth it hopes will be uninterrupted by exceptional losses etc. To a great degree, therefore, these results are irrelevant and Eidos used them to reinforce the market's belief that the global games industry is emerging from its transitional recession and is poised to experience at least 4 years of solid growth as PS2 builds upon its already impressive launch and Xbox and GameCube begin their sales cycles later this year.
Eidos also used the results to unveil details of its rumoured new share issue. The Company is seeking to raise £51.7m net (of some very hefty expenses) by way of a deep discounted (44% at the time of announcement) 1 for 3 rights issue. Existing shareholders can thus buy one new share at 155p for every three held although Eidos has sought protection in the form of both underwriting and sub-underwriting from its broker DKW and associated banks. The extent of the discount and the use of sub-underwriters as well as a lead underwriter is a reflection of a number of factors: the current games and capital market conditions, the historic volatility of the Eidos share price, the financial status of the Company and the absence of a finance director at the time the rights issue was arranged (since corrected with the appointment of Stuart Cruickshank). The net result is a fund raising that will definitely raise its target £51.7m but will also cost a significant amount in underwriting and corporate financial fees.
The fund-raising is important as it will allow the company to reduce its reliance on a bank credit facility and will provide working capital for the Company as it moves back to profitability. Although the timing within the context of the capital markets is poor, the timing within the context of the games market is spot-on with the company being freed to focus its resources on preparing properly for the next boom.

12/07/01 Eidos completes rights issue
With a unsurprisingly high acceptance rate of 96%, Eidos completed its £52m rights issue. As indicated in the previous news item, the proceeds will be used to reduce the Company's gearing and give it sufficient working capital to profitably exploit the 4 year growth period the industry is about to enter (see Thinkpieces for information about the games industry cycle).

20/09/01 Q1 results
As is customary for the Company, Eidos revealed seasonally low sales for its first quarter but which were in line with expectations. The Company's cost reduction programme remains on schedule with a 32% reduction of operating expenses and the Company reported strong pre-orders for forthcoming releases Who Wants to be a Millionaire 2, Commandos 2, Championship Manager 01/02 and Sould Reaver 2.

12/12/01 Interim results, profits warning and year-end change

Eidos' interim results were in line with expectation but were accompanied by the revelation that sales of Commandos 2 and Who Wants to be a Millionaire 2 had fallen short of expectation. Although sales during the financial year are expected to hit 700,000 and 800,000 units respectively, these are less than the originally anticipated 2.2m units for both. In addition Startopia and Gangsters 2 sales fell short of management expectation and the Company canned 4 projects. Finally, key release Time Splitters 2, has moved into FY03. As a result of these developments, the Company is not expected to meet current forecasts and now appears unlikely to make profitability this year.
Gross margins were higher than expected (61%) but are expected to fall to 58% for the year-end. The cost-reduction programme continues on track and the Company confirmed strong sales of Soul Reaver 2 and Championship Manager 01/02. In addition, Eidos revealed that a new Tomb Raider film has begun production and is due for release during summer 2003.
Following the £53m rights issue during the summer, Eidos' balance sheet remains reasonably strong and although the Company has retained a £15m banking facility as a safety net, it re-affirmed that it does not expect to use it during the current financial year.
Finally, the Company has decided to move its year-end from March to June in order to spread the seasonality of the Company's results (something with which regular readers of Games Investor will be familiar) and aid the Company's budget planning.

01/02/02 Eidos sets up Japanese License label
Eidos has launched a new publishing brand which will specialise in the release of Japanese product in Western markets. The majority of Japanese games titles are never released outside of the Far East and although most are perhaps too idiosyncratic for Western tastes, there is no doubt that some will appeal. We expect sales to be more "useful" than "substantial" and the deal will undoubtedly improve Eidos' standing amongst the Japanese publishers. The Company has already revealed 3 products, Mr Mosquito, Lagaia 2 and Mad Maestro, due for release during FY03.

19/03/02 Second profit warning issued
Eidos revealed today that its decision to postpone the release of 4 SKUs (Hitman 2 on PC,
Blood Omen on Xbox in Europe, Championship Manager on Xbox and Deus Ex on PS2 in
Europe) originally scheduled for release during March will result in an approximate £15m
shortfall in turnover for the 12 months to March 02.
Despite the new Eidos management team's assurance that development was being brought under closer control, slippage clearly remains a major problem. It appears that the delays all took place within the last 4 weeks and were principally for technical rather than strategic reasons.
All publishers experience slippage.  Eidos, however, appears to suffer it more than most and the blame must be put on the management, who have clearly not established sufficiently transparent and efficient internal processes to be able to identify and address such issues at an early stage. This will need to be corrected soon, both to help restore the confidence of the City as well as to bring Eidos up to industry standards.
However, as regular readers of these pages will be well aware, slippage is a two-sided coin, the obverse of which is that the fundamental prospects for Eidos' FY03 have improved. The 4 delayed releases will all now come out during 1H03 and will benefit from larger installed bases of consoles. In addition, the delay allows Eidos to launch all 3 Hitman2 SKUs (PC, Xbox and PS2) at the same time rather than via a cost-ineffective, staggered launch. The Company also confirmed that it had no cash concerns and even boasted a cash level higher than following its July 01 rights issue. 

20/03/02 Sony secured Tomb Raider exclusivity
Eidos has once again give Sony console exclusivity for the next three Tomb Raider games, until 2005 in a deal similar to that struck for the original Tomb Raider titles. Details of the deal have not been made public but will likely feature marketing contributions and a preferential royalty rate from Sony. The deal reinforces the belief that the Tomb Raider brand will be resurrected successfully when the first game under the agreement, Tomb Raider: The Angel of Darkness, is released in mid November. The title, by then, will have been in development for over 2 years although much of this can be attributed to the creation of a brand new Tomb Raider engine which will likely serve all three titles.
Although Sony is not expected to dominate the console market as it did during the last cycle, most expect it to match the sales of the original PSX. Whilst there are clear opportunity costs in excluding the other video game platforms (Tomb Raider will continue to appear on PC), Eidos should make up for this with the contributions and preferential treatment received from Sony. The original games averaged over 5m units per title (albeit including budget and PC versions)  and, based on early feedback on the quality of the first product, the prospects for the next three products look just as bright.

15/05/02 Eidos prelims
Having already notified the City of its sales expectations only 10 days before the end of its financial year, there were few surprises in today's prelim results. A higher than normal gross margin (59.5%) was due to a greater ratio of PC sales Vs console sales and the healthy balance sheet (with net assets of £73.4m including £50.6m in cash) showed that the Company had kept its cash outlfows to a minimum. Backing this up, the Company revealed that it had reduced overheads by a total of £22.7m since the cost-reduction programme began two years earlier, £2.7m more than was originally expected.
The Company also went some way towards demonstrating how it had refined its development management process to minimise slippage and other development problems. During the course of the year the Company axed 4 products (although others are known to have been dropped),  and revealed that it had suffered a total of 41 months slippage (Vs schedule at the beginning of the year) on 26 products. The resulting slippage "ratio" of 1.58 compares favourably with 1.92 in FY01 and 3.65 in FY00 although still needs work. Concerns, as a result, remain about the Company's ability to deliver its key products on time and Eidos will have to deliver on these before investors will truly believe its development management problems have been properly dealt with.

05/09/02 15mth Results
As part of its planned financial year-end change (from March to June), Eidos released its 15 month results to 30/06/02. The figures were in line with expectation and revealed that the Company had over £59m in cash at the June year-end, a number bolstered by an exceptional tax credit of £10.5m. The high cash level is expected to be put to full use over the next 6 months as the Company enters the most working capital intensive period of the year.
Whilst trading during the 3 month period to June was limited (the Company only had one major new release, the Xbox version  of Championship Manager), the first half of its FY03 is expected to be comparably frenetic with 4 AAA titles due before December - Tomb Raider: The
Angel of Darkness, Hitman 2, TimeSplitters 2 and Championship Manager 4 - as well as a number of other, smaller titles. Whilst retail interest in Tomb Raider, predictably, suggests that this latest version will ship and sell in substantial volume (most analysts are expecting around 2m unit sales), Time Splitters 2 could prove a more surprising hit with phenomenal critical acclaim and a substantial day one ship-out. Key to the success of Time Splitters 2 is the US release which, if handled correctly, could propel unit sales well beyond the 1m mark. 

22/10/02 Trading update
Eidos has decided to postpone the release of both Tomb Raider: The Angel of Darkness and the latest iteration of Championship Manager, version 4. Whilst the decision to delay the former product comes as little surprise given the mounting press speculation about delays, the latter product, despite representing a major updgrade from the previous version, was more unexpected. However, the delays may well prove to be a blessing in disguise for a number of reasons:
1) The products will launch into a less crowded market where marketing budgets will go further and there is less likelihood of losing sales to larger cross-promoted licenses such as Harry Potter and Lord of the Rings.
2) Eidos can focus its attention on maximising sales for its key Autumn releases Hitman2 and Time Splitters 2, both of which have received strong reviews in the UK and internationally.
3) The products can now be honed, much as Eidos did with Hitman2 and Time Splitters 2, both of which were deliberately delayed several months and both of which undoubtedly benefited from the fine-tuning.
4) Clearly due to concerns about eventual ship dates, Eidos had not initiated promotional campaigns for either product and a rushed launch would have been under-supported.
5) With a sequel to the Tomb Raider film due in mid 2003, Eidos may well benefit from launching a new product closer to the film launch.
The delays, though, also present three major problems:
1) Eidos evidently still has project management problems which do not appear to have been solved by management changes over the last 12 months. Most of the larger US publishers adopt an ultra-prudent policy of making (and making known to analysts) release schedule changes 6-9 months in advance rather than the 1 month Eidos has given in this instance. A key late release for the Company during FY03 is Deus Ex2 which, also given the historic slippage problems of its developer Ion Storm, will now be considered a real slippage contender.
2) Whilst Championship Manager sells into a loyal base of fans and can be more or less assured of hitting sales targets (the series has been Eidos' most consistent seller and should exceed 700,000 unit sales with this iteration), the return of Lara Croft is more difficult to forecast for and although February has historically seen some blockbuster releases down the years, unless the product is outstanding it is difficult to see sales remaining unaffected (in spite of management assurances).
3) Perhaps most importantly, it raised the question of whether the delay to TR:TAoD will have a knock-on effect for the Tomb Raider after that. If there is now a danger that the next TR will slip out of the 2004 financial year, then forecasts would be seriously adversely affected.
Thankfully for the Eidos management any downside risk to forecast TR:TAoD sales (and possibly Deus Ex 2 release slippage) has been mitigated by better than expected sales of Hitman2 (now over 1m units) and the strong launch for Time Splitters2. Encouragingly, both products are continuing to sell with a further iteration of Hitman2 (GameCube) still to come. Management have therefore reiterated their confidence that market forecasts will be met.

20/11/02 October proves a bumper month
Eidos announced today that, thanks to the performance of new releases Hitman 2 and Time Splitters 2, it had achieved its highest monthly market share in the UK and USA for 4 years.US sales for the month weighed in at over $25m with Eidos making the No. 3 slot behind US publishers EA and Take2. The majority of the 522,000 unit sales reported by NPD  in the US (which excludes Walmart) were attributable to Hitman 2 with Time Splitters 2 only being released later in the month. Hitman2 sales are understood to have continued strongly into November with current estimates at around 1.5m units sold to date.

21/01/03 Trading update
Indicating the return of better times for the Company, Eidos unveiled a positive trading update. The announcement is a stark contrast to the profits warnings issued during the first quarters of the last three years but also represent a return to the regular positive Q1 trading updates issued between 1997 and 1999.
Eidos revealed that sales of Time Splitters 2 and in particular Hitman 2 have continued to exceed expectation with combined unit sales of 2.9 million. Our estimate, based on US and UK retail figures, is that Hitman 2 sales represent around 1.9m units of this although the success of both has contributed to an unexpected interim profit for Eidos. In Hitman, Eidos has found a franchise that can sit along side Tomb Raider and is precisely what the Eidos management need to begin getting Eidos into a sellable state.
Eidos also revealed more release schedule changes with several key products moving towards the back-end of the second half of the year, including key releases Tomb Raider: The Angel of Darkness and Championship Manager 4. As indicated in our news analysis of 22/10/02, this has as many positive implications as negative implications. Eidos has clearly learnt that even if it means annoying the City in the short term, a patient approach to improving gameplay at the final stage of a game's development can yield substantial sales enhancements. The principal concern is whether the continued delays to TR:TAoD will force the next TR product out of FY04 and into FY05. Eidos do not believe that this is the case, but the risk remains high. An additional negative impact of the delays is that although lifetime sales forecasts may improve, depending on the final release date for the products, an increasing proportion of of those sales will likely fall within the FY04 period. However, the net effect of this and the strength of the H1 performance has still given Eidos sufficient confidence that it will hit market forecasts.

06/03/03 Interim results

The success of Hitman 2 and Time Splitters 2 was very much evident in Eidos' encouraging interim results and heralds an expected strong return to full-year profitability for the first time in 3 years. Following just a couple of weeks on from its positive trading statement, Eidos' figures provided only a few surprises. The level of profitability and the strength of the Company's balance sheet were particular examples although the interim profits were bolstered by a £1.4m exceptional gain from successful litigation in the US and an unexpectedly good performance from Spanish distributor Proein (in which Eidos has a 75% stake) which contributed £2.7m to the bottom line. Eidos also used its interims to clarify its FY04 line-up, with Hitman 3, 3rd person shooter Tour of Duty - Vietnam and new film licence The Italian Job adding to the impressive list of already-announced AAA-potential products that includes Tomb Raider 7 (now due in the second half of FY04), Commandos 3, a new Legacy of Kain title and Thief 3.
Eidos maintained that Tomb Raider 6 and Deus Ex2 were all still due before the end of June although, based on the status of current work in progress, there are concerns about the proportion of anticipated sales of the former product that will now fall in the current year and, based on industry feedback, it seems very unlikely that latter product will make it before the end of the financial year. However, we believe that the continued strength of Hitman 2 and Time Splitters 2 sales will go some way to mitigating any negative effect of a delay to Deus Ex2 although much will also depend upon just how late in the financial year Tomb Raider is launched and also the performance of anticipated hit Championship Manager 4. As argued in previous analyses, such delays simply defer revenue generation until a subsequent period - and can even enhance sales in many instances - but will not be well received by the City. Whilst acknowledging that Deus Ex 2 may miss the current year, the Company still believes it will hit its consensus targets.
Some light was also shed on FY05 with Tomb Raider 8, Time Splitters 3 and console spin-offs from the Commandos and Deus Ex franchises all penciled in for the period. The latter franchise will be bolstered by the release of the Deus Ex film, due around the middle of calendar 2005.

27/06/03 Profit warning issued
Continued delays with Tomb Raider: The Angel of Darkness have forced Eidos to issue a last minute profit-warning. The non-English language SKUs appear to be at the root of this latest upset and the Company now expects a million units to ship in July, after the year-end. What proportion of those were originally anticipated for FY03 is unknown but the Company now expects profits for FY03 to be "significantly" reduced, even if the aggregate of expected profits over FY03 and FY04 remains unchanged. Amazingly, despite the extended development duration, the product has, initially at least, begun to receive highly critical reviews and this combined with the latest slippage only raises more questions about whether Eidos has really solved the development management problems that have plagued the Company over the last few years.

15/07/03 Jeremy Heath-Smith resigns
Jeremy Heath-Smith, the founder and head of Core Design and Development Director at Eidos has quit. Heath-Smith was directly responsible for the development of Tomb Raider: The Angel of Darkness and his "resignation" (though it is more likely he was asked to resign) is clearly a direct result of the slippage and development quality problems experienced by his company over the creation of this latest Tomb Raider product. TR:TAoD slipped by 8 months (although arguably there should have been a Tomb Raider product the previous year) and despite this extra development time has remarkably also garnered universally poor reviews. Whilst this has not hampered sales of the product, Tomb Raider is Eidos' biggest and most important games franchise and the long-term damage done to it by this release may not be felt until the next product is released.

30/07/03 27th June profit warning reversed and Tomb Raider franchise moved
In a somewhat bizarre volte-face, Eidos has reversed its June profits-warning, now claiming that it will meet the original market expectations for its FY03. It appears that since the 27th and 30th June, the Company actually managed to ship an additional 500,000 units of Tomb Raider: The Angel of Darkness (of the 1m anticipated to be shipped in July) and thus book an extra £10m+ in FY03. This prompts a number of observations:
1) Eidos' inventory management and channel visibility leaves a lot to be desired. To get ship-out figures wrong with such a magnitude and in such a short space of time was a remarkable piece of mis-management.
2) A profit warning should be given when there is absolute certainty that profit expectations will be missed.
2) The booking of shipped units rather than sold-through unit sales (a practice that is theoretically acceptable under UK and US GAAP) is becoming increasingly controversial as it has, in the past, been used by some publishers who have stuffed the channel with product just before a financial period-end in order to provide a short-term bolster to its financial performance. The problem has been that returns and price mark-downs (the result of poor sell-through of the shipped product) have then resulted in exceptional losses in the following financial period and this has now happened on such a scale that the SEC in the US have begun an investigation into the practice of booking shipped units and sales. I would hasten to add that Eidos has not done anything wrong in this instance and it looks like all the shipped units have sold through but the SEC might recommend changes to the way in which these sales are accounted for that may impact the Company in future.
Equally surprisingly, Eidos has revealed that the Tomb Raider franchise is to be moved from Core to Crystal Dynamics as a direct result of the problems Core have encountered with TR:TAoD. This is a drastic and extremely bold move by Eidos which will result in a year delay until the next Tomb Raider product (now expected during FY05) but is necessary as Eidos realise that the next Tomb Raider product will have to sell on the merits of its quality as much as its brand power (as pointed out earlier, we believe that the franchise will have been damaged by the poor reception that TR:TAoD received).
The decision to move the franchise was undoubtedly also influenced by the fact that Jeremy Heath-Smith's contract saw a percentage of Core profits paid to him which, during Tomb Raider release years, has totalled many millions of pounds. His "resignation" (see 15/07/03 news) may well have been accompanied by a substantial settlement claim based on this loss of earnings and by removing the franchise from Core, Eidos is essentially cutting off its profit pipe-line and thus seriously undermining any settlement claim Heath-Smith might make.

04/09/03 Full-year results
Following the comedy of profit warnings and profit warning reversals, Eidos finally reported the long-expected strong return to profitability for its full-year 2003 results. The return to profitability was driven principally by the outstanding success of Hitman 2 but also by some other key titles such as Timesplitters 2 and Championship Manager 4 hitting or marginally exceeding targets. Tomb Raider weighed in with a substantial contribution following its last minute 500,000 unit shipment before 30th June. Other contributors were The Italian Job, which Eidos rushed to release before the year-end and what is understood to be a considerable contribution from Nokia for N-Gage versions of Eidos products, including Tomb Raider. The Company finished the year with an unusually strong balance sheet, featuring some £58m cash. Although this is £1m lower than at the equivalent juncture last year (when it had just raised new money), it is laudable as the cash drain involved in the launch of Tomb Raider (manufacturing, product promotion etc..) will have been particularly onerous but appears to have been compensated for by the receipt of tax credits during the period.
Two significant new announcements made today were the ending of commercial relationships with developers Sports Interactive and Free Radical. The former, creators of Championship Manager, are contracted for the 03/04 CM season update later this calendar year, but will also be starting a new football management game with an as yet unannounced publisher. Eidos, who retain the CM brand and associated rights, intend to continue developing the  brand in-house (and will thus increase their net margins on future CM products) but will need to produce a product of the highest quality if they are to maintain the CM sales momentum within what will become a considerably more crowded and competitive market. More damagingly, Timesplitters creators Free Radical, who signed a publishing deal with Activision earlier in the year, have not only parted company with Eidos but have taken the Timesplitters franchise with them and will thus deprive Eidos of a guaranteed 1m unit seller in Timesplitters 3.
Despite these contract losses and the fact that the next Tomb Raider title will not ship until FY05, the current financial year holds strong growth potential with Hitman3, Deus Ex2, Commandos 3 and Backyard Wrestling key highlights of a diverse and strong line-up. Eidos will also ironically benefit from the late shipment of Tomb Raider with certain territorial SKUs and ongoing sales of already released SKUs contributing to 1H 04 sales and at some point during the year (most likely 2H) the Company can be expected to launch the Platinum (budget price) version. Sales are understood to have reached around 2.1m to date although the recent drop-off in the US sales in particular has been more marked than expected. 

28/10/03 New media division set up
Eidos has established a dedicated "new media" division to look after the exploitation of its IP within non-core markets such as mobile and online. This represents the formalisation of a division that has existed for many months and has already contributed positively to Eidos' recent results (see 04/09/03 news above). The fact that Ngage is included within this division's responsbility is a clear indication that Eidos consider it a niche opportunity only, especially given that Sony PSP development and publishing will be looked after by the core markets publishing team. Despite this, the division is currently profitable (albeit on advances only and with a minimal overhead) and Eidos' mobile phone products continue to sell well.

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