Eidos  (EID)

 20/01/04 Trading update
 Eidos have warned that its first half performance would be below expectation due to the underperformance of  two products: Commandos 3 and Legacy of Kain: Defiance and the adverse movement of sterling to the dollar. However, despite this, the Company expects to hit full-year estimates thanks to a strong second half line-up that includes the third Hitman product, Hitman: Contracts. To reinforce their optimism, the Company revealed that Hitman 2 had now exceeded 3m unit sales and still continues to sell. Legacy of Kain: Defiance was only released in the US during the period but traditionally the series has achieved the vast majority of its sales in North America rather than in Europe where its appeal is limited. The product had reviewed well but clearly got lost within what is now becoming a perennially oversupplied winter selling period. The underperformance of Commandos 3 (in contrast more of a European product than North American) is perhaps less of a surprise as the franchise was seen by many reviewers as having failed to innovate sufficiently (a similar criticism for the second product) and Eidos intends to re-work the franchise into a radically different console product instead.

 04/03/04 Interims and Acquisition of IO Interactive

Eidos' interims represented an excellent demonstration of the buoyancy of the games software market at what is traditionally the start of the strongest stage of the video games software cycle. Although incremental hardware sales growth slowed for many territories during calendar 03 (due principally to the maintenance of higher price points compared to the last cycle) , hardware units continued to sell and both the installed base of hardware and more importantly the base of active video gamers continued to climb. We expect the latter will continue to do so during calendar 04 and at least into the first half of calendar 05. The current size of the active user base ensures that "average"  titles can still make a profitable contribution (in contrast to the start and end of a cycle when average unit sales are at their lowest). This is evidenced by the contribution that Tomb Raider: The Angel of Darkness made during its second period since launch. TR:TAOD has now managed 2.3m unit sales (despite its more or less universal critical panning) of which around 1m fell in 1H04 representing around £20m in sales and over £12m in net contribution. Both this and the higher than normal proportion of PC and internally-developed product sales led to a leap in gross margin from 51% to 62%. Eidos also quantified the foreign exchange loss warned about in January, revealing a negative £2.7m movement. Also contributing to its PAT improvement (£6.2m vs £4.4m) was a lower tax charge of 20% (£1.6m) versus 34% (£2.3m) in the equivalent period last year. The Company's balance sheet looked healthy: cash fell marginally to £58m (from £60m) but receivables increased to £36m from £30m and creditors fell to £27m from £42m.
Persistent questions from the City about how Eidos would use its substantial cash reserves were partially answered with the announcement that the Company had acquired its most important independent development partner, IO Interactive. The deal, comprising £21m in cash, approximately £2m in shares and a further £5m in performance-related earn-out, delivers to Eidos 134 people comprising 2/3 development teams (Hitman 2 had over 80 people working on it at one stage). Eidos already owned the Hitman franchise but clearly did not want the development team behind it to wander off with another publisher. In addition the acquisition brings Eidos the Freedom Fighter brand (the first product has sold nearly 1m units through EA) and game development technology which Eidos intends to use within its other studios for next-gen development. At first glance the valuation probably seems high but Eidos are extremely confident that it will make meaningful profit contributions over the next 4-5 years. However IO's FY05 contribution is likely to be modest given the substantial investment made to ensure Hitman 2 is released during the period and reaches a high enough quality level. Such is the confidence of both parties, the £5m earn-out is triggered only if sales reach 2.1m units per annum .
So with Hitman 3 due in the second half of the year along side Thief 3, Shellshock: Nam 67 and the European release of several products launched in North America in the first half of the year, Eidos remain confident of hitting its full-year targets. FY05's line-up is bolstered by the announcement of a 4th Hitman product to complement a number of sequels including Tomb Raider 7 and Championship Manager 5, and two new IPs Crash and Burn and 25 to Life (both described as online oriented console products).

20/05/04 Slow Hitman sales causes profits warning
As it did last year, Eidos has had to issue a profits warning due to the reduced full-year sales expectations of its key summer release. Whilst last year it was Tomb Raider, this year it is Hitman 3 which is expected to be around 700,000 units shy of the base analyst forecast of 2.2m units by the end of June. Although the initial ship-out (of 1.5m units) was high, sell-through rates have been much slower than anticipated and the Company is clearly not now anticipating any substantive re-orders before the next financial year. As was demonstrated last year with the pre-year-end Tomb Raider trading update, Eidos books ship-out revenue not sell-through revenue so if the sell-through curve has a longer tail than normal, there is a small chance that Eidos will receive re-orders before the end of the financial year. The Company blames a "soft" US market although the market is thus far up on last year (albeit by only 5%) and a more likely explanation is the similarity between Hitman 2 and 3 and the unexceptional consensus reviews (averaging around 80% according to Gamerankings.com). The result has been a halving of forecast FY04 earnings estimates to around £7.5m. A further risk to the new forecasts is the slippage of ShellShock: Nam '67, due in the last week of June. Eidos also tried to put to rest the rumours that it is the target of a potential acquisition bid saying that it had not received any offers nor was in discussion with any publishers. However a number of publishers are known to have explored the potential of an acquisition over the last few years and although rare in the games sector a hostile bid (given the limited shareholdings of the Eidos management) remains a possibility.

17/06/04 Further profits warning and strategic review announced
Eidos has decided to delay the release of its multi-platform Nam '67 action title until September citing "soft" market conditions (on which it also blamed the underperformance of Hitman 3). The title was finished and more or less ready for release at the end of June but had not picked up particularly significant pre-release publicity and with the market entering its traditionally quiet summer period, the prospects did not look good. The delay therefore allows the Company time to build more hype but is a somewhat risky move as it puts it in what is expected to be an extremely busy month for releases. It will also put it head to head with direct competitor Conflict: Vietnam, the third in SCi's 3m unit-selling Conflict series. The net effect is to reduce the Company's current financial year forecasts to break-even or a small loss, a far cry from its £15m profit expectations of only a month ago.
Of potential greater significance is the announcement that the Company is to conduct an immediate strategic review to determine the best option for the business as it enters the next industry cycle. With the leap in development costs expected for next-generation consoles likely to be pronounced and with a heavy R&D investment in tools and technologies needed at the outset, Eidos recognises the benefits of scale within games publishing. In most circumstances a" review of strategic options"  is tantamount to sticking a for sale sign up and there are likely to be no shortage of suitors with the cash-rich EA and Activision as well as the ambitious Ubi Soft lead contenders. Eidos has a strong portfolio of games IP almost all of which is wholly-owned and which a stronger publisher might be able to derive greater benefit from. However a disposal of the Company is not the only option (even if it is the most likely). A merger with similar sized publisher would add scale to the business' IP portfolio and release schedule and the Company could also conclude that it has sufficient cash and release momentum to see it return to profitability next (financial) year - at which point it could conduct another review.

03/08/04 Strategic review update
Eidos has confirmed that it is discussion with a small number of companies about a potential merger or, more likely, disposal. It intends to present the results of the strategic review that precipitated these discussions in mid September when it reveals its full-year results. Eidos has not revealed the names of the interested parties but an outright cash acquisition is within the domain of only a small number of existing publishers: the console manufacturers, EA, Activision, Take 2, THQ and the Sumner Redstone owned Midway. Given the broad shareholder base, an equity-based acquisition is less likely to find acceptance so the number of potential acquirers is likely to remain limited. We believe that Eidos is an attractive target and expect price to be the largest obstacle to a deal being agreed.

15/09/04 FY04 results
Eidos' results were broadly in line with expectation following the Company's profits warning in June. Sales excluding the Company's share of its joint ventures' turnover (i.e. the Spanish distribution company Proein in which Eidos has a 75% stake) fell 12% from £152m in FY03 to £134m. The Company dipped back into the red (LBT of £2m versus a PBT of £17m) despite a solid improvement in gross margin from 59% to 62.8%  The Company shipped the same number of units as in FY03, 12.5m, but the higher proportion of PC titles relative to console titles resulted in both the lower sales figure as well as the higher gross margin percentage. Contributing to the operating loss was a £6.6m increase in development costs during the year (to £39.2m) and a £2m hike in Admin costs (to £22.2m).
Eidos attributed its bad top-line performance to poor sales of key products (citing Hitman: Contracts, Commandos 3, Legacy of Kain: Defiance and Whiplash as products that failed to meet management's expectations) and the postponed release of Nam '67 to the first half of FY05. Disappointingly, Eidos chose to blame weak market conditions for the underperformance rather than poor product quality citing a 17% drop in year-to year US sales in May. May 2003 saw the release of Enter the Matrix whose phenomenal sales success resulted in an unusually strong month. With no major release in May 04, the market was bound to show a YOY decline. Eidos' comments are misleading. June saw a 55% MOM rise in US sales and the US market overall is up 4% YOY to date with the final figure expected to rise further with the release of several blockbuster titles. So what is really to blame?
Eidos is no doubt a sub-scale publisher that cannot compete for the major 3rd party global licenses and will struggle in a fight for retail shelf space with the likes of EA and Activision. It therefore relies upon the consistent release of good quality product. However this is something that it appears to have lost its touch at achieving. Hitman Contracts, despite managing 1.7m units, achieved average review scores of between 75% and 79%. In contrast, Hitman 2 was a more acceptable 5%-10% higher. Indeed all of its underperforming FY04 titles achieved mediocre average scores and in the absence of the major cross-media marketing that licensed titles receive, this will only undermine sales .
Eidos' problems will worsen with the advent of next-gen platforms as the 500,000 to 1m unit selling "successes" that it reported this year will become the break-even points for next-gen titles. Eidos recognises this and its strategic review, which is still ongoing, is seeking solutions to this problem of scale.  However Eidos will need to concentrate just as much on the quality issue if it is to convince an acquirer of its worth let alone return to profitability in FY05.

18/10/04 Product slippage and strategic review update
Eidos revealed that one of its key Christmas period releases, Championship Manager, has slipped from its originally anticipated October launch. The Company is now targeting a launch just before Christmas but warns that it could slip to 2005. This is a major blow for the Championship Manager brand as not only does the Company miss the bulk of (and the potentially the whole of) the key holiday and sales season but it hands the market initiative to its principal rival, Sega's Football Manager, which is developed by former Championship Manager developers Sports Interactive. Football Manager is on course for its early November release and reviews have been strong. The slippage, almost certainly done to polish the title's gameplay, is the latest in a long line of production problems at Eidos. Eidos will now need to produce a game of the highest calibre if it is to recapture the sales levels traditionally enjoyed by the Championship Manager series and prevent a long-term player transition to Football Manager. Eidos also announced that its strategic review is ongoing with potential disposal discussions still taking place.

25/11/04 Trading and strategic review update
Eidos has reported strong sell-through of its Shellshock: Nam 67, despite the critically lukewarm reaction received in the trade press. The 800,000 units sold to date are well above analysts' and management's estimates and have triggered the development of a sequel and possibly the start of a new franchise. Despite being developed by a third party developer, Guerrilla Games, the Shellshock brand is wholly owned by Eidos. Tempering this good news is the somewhat predictable announcement that Championship Manager 5 will now not be released until next year and probably closer to the expected spring launch of the console versions. Whilst this clearly allows Eidos to increase the efficiency of its marketing efforts for all three SKUs, the Company has ceded more ground to Sega's Football Manager. The delay also gives Eidos a busy second half of the year with other major releases during the period including the next Tomb Raider and Hitman titles. 
Eidos also reported on the progress of its ongoing strategic review explaining that detailed discussions continue to take place with a small number of potential acquirers. Although today's press release featured some truly bizarre grammar, it was interesting to note that the Company had altered the wording of its expectations for the strategic review results. It stated that the outlook for the Company " as a listed company" remain challenging and reinforces recent speculation that, as opposed to a sale of the business to a larger rival (all of whom are listed), it might be the subject of a private equity-backed MBO or MBI (management buy-out/in) which would obviously seek to take the Company private. A variety of private equity firms are known to have looked at acquiring Vivendi Universal Games from its larger media parents and a number of newer media and other funds, such as Elevation Partners have recently turned their attention to the games market.

10/03/05 Interims, current trading and strategic review update    

Eidos reached a new low today with the announcement of not just dire results but also dire news. Whilst yet more product slippage and widespread product underperformance resulted in sales plummeting by 60%  and losses before tax and goodwill of £26.5m, the Company also revealed that its future was now largely in the hands of its bank and its potential acquirer. Eidos confirmed that the last suitor left at the table was preparing to make an offer at 53p per share. However, the offer would not materialise if a certain condition (unspecified at this stage) was not met. Adding to the woes, Eidos also revealed that RBS (with whom it had recently established a £23m short-term lending facility), had the right to force the repayment of all monies loaned to it under the facility if the acquisition offer did not materialise. In such a scenario, Eidos would need to start selling its assets to finance the repayment and this could well result in the sale of some of its largest games brands (a move both Infogrames and the now defunct Titus were forced into over the last few years). Interestingly, Eidos announced the potential bid price without the permission of the suitor and one might speculate that it did so to highlight to former suitors and possibly new potential acquirers the price it is willing to accept. At 53p (£75m), it is difficult to envisage certain mid-sized and larger publishers who are known to be looking to bulk up their portfolio (Ubi soft, Take 2, THQ) not being interested. However, acting in the time-frame  allowed will be difficult and they may simply risk waiting to see whether the current bid fails before bidding for individual games assets.
Eidos' predicament has come about because of consistent development, production and management failings. Product slippages, now a regular feature of Eidos' results, were partly to blame for the collapse in first half trading although the underperformance of a number of titles released during the period could also be pointed to. Unfortunately the second half may not be much better following management's decision to move its two key releases (the next iterations of Tomb Raider and Hitman) into FY06. There are only 2 other major H2 releases, Championship Manager 5 and new IP Project Snowblind and both could be considered risky releases. CM5 is the first title by a new internal team at Eidos, whose quality has yet to be ascertained. Snowblind, on the other hand, has received generally positive reviews but, as yet, has not made it into the sales charts and could easily get lost within the crowd (as many of Eidos' first half releases were). On a brighter note, FY06, with its bolstered release schedule, could easily return the company to profit although the Company clearly has a few hurdles to overcome before then...

22/03/05 Elevation and SCi offers
US media-focused private equity fund Elevation Partners made a 50p per share cash offer for Eidos but was quickly followed by SCi who unveiled a 54p share offer and support fund-raising of £60m. Despite the SCi offer (and their knowledge that an offer was to be forthcoming from SCi), the Eidos board had chosen to recommend the Elevation Partners offer to shareholders and had given irrevocable undertakings in respect of their own personal shareholdings. However, given that this represents just over 2% of the issued share capital of Eidos, the move is token to say the least. The terms of the Elevation Partners offer also included details of a $1m "inducement" fee agreed with Elevation Partners to persuade them to consider making a bid for Eidos. Inducement fees are not uncommon in public company acquisitions where the shareholding is broad enough to make an offer's outcome unpredictable. They are normally set (and indeed are capped by the Takeover Panel) at 1% of the market cap of the target company. The fee would be fully payable if the Elevation Partners offer is unsuccessful.
The SCi offer is certainly a bold move and, given SCi's intention to substantially cut back Eidos' cost base, will almost certainly result in the Eidos board losing their jobs. In contrast, Elevation Partners have indicated their intention to preserve jobs allowing the Company to benefit from an unlisted and out of the spotlight status. Indeed the Elevation Partners deal appears to be a private equity-backed management buy-out in everything but name. However, SCi's share-based bid offers a significant advantage over Elevation Partners' cash bid and is one which may well be the principal determinant of who will emerge the victor. The speed with which the Eidos share price has collapsed over the last 6 months (a process not helped by the board's somewhat curious decision, given their financial straits, to delay the launch of 2 key titles) has left even late-entrant institutional funds nursing major paper losses. Most will not want to crystallise these losses (which is what the acceptance of a cash offer would do) and would prefer the risk of seeing where their stake in a merged entity might go. It is not surprising therefore that SCi also revealed that it had already secured an irrevocable undertaking to support the SCi offer from Eidos' largest shareholder, Schroders, representing around 15% of Eidos.

31/03/05 Offer update
Elevation Partners have launched a scathing attack on the SCi offer and the potential share price risk for shareholders of the merged entity. The principal criticisms have centred around the rapidity with which SCi's share price has risen over the last year and last 3 months in particular and the difference in scale between the two companies. Both are valid points but come across as a futile gesture of frustration two days after SCi had reached 26% in irrevocable undertakings. This is a significant landmark as, under the offer conditions set by Elevation Partners, their deal would only proceed if it secured a minimum of 75% of the shareholders' approval. There is now no chance that this will happen so either Elevation Partners will have to alter the terms of its offer or withdraw. An additional problem is that the SCi share price has continued to rise which in turn has raised the price at which Elevation Partners would have to issue a new offer to remain competitive with the SCi bid. At this stage it looks highly unlikely that Elevation Partners will continue to remain in the race.

07/04/05 SCi offer unanimously recommended
With substantial and evident reluctance, the Eidos board have finally fulfilled their fiduciary duty and unanimously recommended the SCi offer, admitting that no updated offer would be forthcoming from Elevation Partners. The SCi offer, at an equivalent price of around 73p per share, is nearly 50% higher than the Elevation Partners offer and, with the support of over 40% of Eidos shareholders, now has unstoppable momentum. Faced with the prospect of losing their jobs under SCi control, the Eidos board's reluctance is understandable for personal reasons but their reluctance to endorse the more favourable shareholder terms of the SCi offer for such a long time is, for many, inexcusable. Despite the unanimity of their acceptance of the offer, the board chose to use the majority of their offer acceptance statement to mirror Elevation Partners' criticism of the SCi offer (the integration risks for two companies of different sizes and the volatility of the SCi share price).         

18/05/05 Eidos Directors resign, SCi executive directors appointed
All 8 of Eidos' executive and non-executive directors have resigned as part of SCi's takeover of the Company. It is understood that Ian Livingstone and Jonathan Kemp will be retained on a short-term basis (at least) to help oversee the merger of the two companies' operations and the smooth transition to new management. At the same time SCi's three executive directors have been appointed executive directors at Eidos.

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