News
13/01/03 Trading Update
SCi's trading announcement, although positive in sentiment, adds little which is not already in the public domain. Sales of Conflict: Desert Storm in the North American markets have exceeded the guarantee provided by Take 2 (but booked during FY02) and continue to generate royalties. SCi also took the opportunity to confirm that, like most publishers, it has not been affected by the recent price competition amongst British retailers. Such price wars (which this time led to a catastrophically received profits warning from specialist games retailer Game Group) tend to be fought using retailer margins and publishers rarely, if ever, feel any pressure on their own wholesale prices.
Although the Company is in a cash-positive position, it has also secured a £1.5m working capital facility from new bankers Barclays and is busy signing additional products for FY04 and FY05. Finally, followers of Warthog will not be surprised to learn that the next installment in SCi's Rally Championship series, Richard Burns Rally, is being pushed into FY04 to give the developers time to create a product that can compete more effectively with Codemasters' Colin McRae and Sony's World Rally Championship series. However, the continuing strength of C:DS sales and the anticipated strength of the launch of the next Conflict product in September means that forecasts for SCi's FY03 remain unchanged.

07/03/03 AGM announcements
SCi used its AGM to reiterate its forecasts for continued growth in FY03 and announce 2 new deals. Continuing the Company's focus on acquiring low-cost, high potential licenses, SCi have signed the games rights to the Quentin Tarantino cult movie Resevoir Dogs. The choice of licence, given the current trend towards adult-oriented voilent crime simulations, appears intelligent although success for the games product will, as always, largely rest on the quality of the title. SCi also announced that it had started development, with Hungarian developers Mithis, on a new product for FY04 called Midway.

 09/06/03 Interim results

SCi's interim results came in better than expected despite reporting a return to interim pre-tax loss. The continued success of 1.5m unit-selling Conflict:Desert Storm, released at the end of FY02, was the principal contributor to SCi's 22% sales increase over the equivalent period last year but it was not enough to off-set the 70% higher admin costs (from £3.6m to £6.1m) driven by the Company's considerably increased development spend. The loss was exacerbated by the absence of any major new releases during the period. As it did last year, the Company intends to launch all of its major new products in the second half of the year and the Company has the sequel to Conflict Desert Storm due for release in September, accompanied by The Great Escape and Futurama. SCi ended the interim period with £2.8m cash and although it remains on course for full-year profit growth over FY02, it is likely to make use of its banking facility to fund the up-front costs (marketing and manufacturing) of Conflict: Desert Storm 2 and may well end the year with a lower cash balance than at the end of March.

29/09/03 Pivotal acquisition
As anticipated, SCi has acquired its most important third party developer from the ashes of the Kaboom Studios liquidation. Kaboom Studios, which comprised a number of different development companies went into liquidation in August 2003 and although Pivotal Games continued to trade profitably during the liquidation of its parent, its sale (to raise money to pay back Kaboom Studios' creditors) to SCi was never really in doubt. SCi, which had owned 10% of Pivotal, also had a long-term publishing contract which any new owners would have found difficult to re-negotiate given the success of Conflict: Desert Storm 1 and 2 as well as The Great Escape for SCi. The consideration of £2.36m cash, which was paid up-front, would likely have reflected the one-horse-race nature of the sale and should be recouped from royalty outflow savings within as short a period as the first twelve months. Since the acquisition goes against the previously espoused strategy of external developers only, SCi intend to hold Pivotal at arms length with milestone payments still based on performance. However it will allow the current expansion at the studio (to create two large 35-40 man teams) to continue. The potential negative P&L and balance sheet effect of the acquisition is negligible therefore as the Company was already intending to fund all of Pivotal's development over the next few years and goodwill is to be written off over a 10 year period. The £2.4m cash outlay has made SCi's use of a short-term facility a necessity but the Company should restore its positive cash balance within a few weeks of the start of FY04.

08/10/03 Positive trading update
SCi's good news continued with the announcement that the Company expects to exceed market forecasts by over 20% (see here for adjusted forecasts) for the year to 30/09/03. The Company attributed the success to the strong performance of Conflict: Desert Storm 2 in Europe and The Great Escape. C:DS2 is launched in North America on the 9th Oct and with its more topical game subject matter, strong promotional support and distribution (through Take 2) is expected to exceed the 750,000 units achieved with the first product. Although the N. American release of C:DS2 falls in FY04, SCi will book the guarantees from Take 2 during FY03 (on the basis that the Company had met its contractual obligations, i.e. the delivery of the NTSC gold master to Take 2, to trigger the guarantee payment before the end of its FY03). However, we estimate that this only represents around 200k-300k units-worth of sales, leaving the majority of anticipated sales to fall in the first half of FY04. SCi also stated that they expect a strong 1H04 (no doubt driven by the day-one shipment volume of C:DS2 in North America and ongoing sales of the product in other territories) and the Company will certainly begin to feel the margin benefit of the Pivotal acquisition. Tempering this will be the undecided release date of Richard Burns Rally (a possible 2H04 release) and SCi's understandable desire to manage its growth profile by using its augmented net cashflow to invest in new development properties and licenses.

08/12/03 FY03 results
SCi's impressive growth continued with the announcement of record sales and profits for the year to 30/09/03. The figures proved to be ahead of  even the revised forecasts following the Company's positive trading update in October.  SCi have also begun moves towards the payment of dividends announcing a capital reduction exercise to clear barrier to this. The strong FY03 performance was driven by three titles, the two Conflict: Desert Storm products and The Great Escape. C:DS has now sold in excess of 2m units to date and was the principal contributor to SCi's record back catalogue sales of £6.5m during the period. C:DS2 is already up to 1.2m units (it generated £11.3m in sales during the year with the US release falling in FY04) and is on course to surpass the original title. The Great Escape hit 500,000 units (£7.1m in sales) during the period. The Company also finished the period with a much improved balance sheet notable from which are cash level (£1.8m vs £0.3m last year) and trade debtors: trade creditors ratio (£14.9m:£8.8m vs £8.4m:£9.1m). The Company did report a £0.6m long-term creditor (relating to the acquisition of Pivotal). Interestingly, the value of outgoing Pivotal royalty payments relating to the C:DS games was £1.8m (of the £8.2m spent on development). This highlights the excellent value of the £2.4m deal and reinforces our belief that the Company will recoup its cash outlay within 12 months, if not considerably sooner.
SCi also announced that it had picked up the publishing rights to Galleon from the troubled French publisher Titus. Galleon has been in development for over 4 years but is understood to be nearing completion. Its release is anticipated during the second half of FY04. SCi have axed all but the Xbox SKU and although sales are not expected to approach those of even The Great Escape, the Company acquired the publishing rights for only a modest fee and should recoup on it comfortably barring further development problems
FY04 looks promising with C:DS2 US sales (post-guarantee, that was recognised in FY03), Galleon and Richard Burns Rally joining Conflict: Vietnam within the release schedule. Richard Burns Rally has been garnering some favourable pre-release publicity and has been held back once already to ensure a high product quality (now that SCi's fundamental financial strength allows it take such decisions) and should comfortably exceed the performance of the last Rally Championship title (despite being developed by the same team). Conflict: Vietnam represents a more difficult one to call. As with the first two products in the series, C:V will have a European release before the end of FY04 and the Company will recognise its North American guarantees during the period although it will probably not launch there until FY05. We believe that C:V could struggle to outsell C:DS2 due to SCi's decision to move the game world from the currently topical Middle East to what will this year become a very crowded Vietnam market. Growth for this year is therefore expected to be more modest than in the previous few years. The Company also revealed that it intends to resurrect its Carmageddon brand and expects a multi-platform product to be ready for FY05.  

16/02/04 New Take 2 North American distribution deal announced
SCi have signed the North American distribution rights for Conflict: Vietnam to Take 2, who successfully handled both Conflict: Desert Storm and C:DS2. The deal is understood to be similar to the previous ones in comprising a sales guarantee and advance, and an ongoing royalty stream once Take 2 has recouped the advance. SCi will launch the product in Europe before its September 30th year-end and will recognise the advance from Take 2 during the period as it expects to have fulfilled the obligations necessary to trigger the advance by the end of the year (even if the North American launch will not have taken place by that date).

30/04/04 Positive trading update
The greater than expected sales longevity of the Conflict: Desert Storm products as well as a strong contribution from other back catalogue products has precipitated SCi to issue a trading update and new guidance. The £4m loss originally expected is expected to be reduced to less than £1m (first half losses are not an unusual occurrence for SCi given their predominantly second-half weighted release schedule) although it will probably be greater than last year. Investors should remember that SCi's accounting policy is to write off all development costs as incurred. Given the increased development investment expected this year, the Company's first half performance is admirable and should be reflected in a better full-year performance overall.

01/06/04 Interims

As indicated a month ago, SCi's half-year results were ahead of original expectations and the previous year. The Company still posted a first-half loss but also reported increased development spend (ex-royalty payments) of £3.3m (£2.8m) and admin/depreciation costs of £2.7m (£2.1m). SCi was cash generative in the first half and expects to remain so for the full year. This has led to a welcome strengthening of the balance sheet with the cash position increasing to £5.7m from £1.8m at the end of the last financial year (30/09/03). The Company is still maintaining the loan used to finance the Pivotal Studios purchase (presumably because of the favourable interest rate secured for it) so the net cash position would have been £4.6m as at 31/03. The second half of the year sees the release of two major products, Richard Burns Rally (July), and Conflict: Vietnam (in September). Both are understood to be progressing well and have received favourable pre-release publicity. One other product is due during the remainder of the current financial year, Galleon. Over 5 years in the making Galleon is an Xbox only title that was picked up by SCi for a song from embattled French publisher Titus earlier this year. SCi paid a lump sum to Titus so would gain the full benefit if it did sell in excess of the minimal forecast unit volume. Reviews have been mixed and the US publisher Atlus USA lacks the distribution strength of SCi's usual US partner, Take 2 so sales above 200,000 units should be regarded as a success.

11/10/04 Positive trading update
In contrast to most other UK listed games companies, the good news has continued for SCi with the announcement of a major new publishing deal, new licensing deals and the expectation that market expectations for the Company's FY04 will be exceeded. SCi's second half releases, Galleon, Richard Burns Rally and Conflict: Vietnam are reported to have performed strongly although the majority of sales will have come from the European release of the latest Conflict title (the US launch is in October and as a result falls in FY05). Indeed, despite receiving generally average review scores, Conflict: Vietnam topped the UK charts and the total sales of the series has now reached 4.5m. Despite this, we still believe that C:V will not sell in as great a quantity overall as the previous two products, due principally to the greater volume of direct competition. Fortunately this will be easily compensated for by the larger product release portfolio the earlier successes have allowed the Company to build up. SCi also disclosed that they had spent over £9m on new product development during FY04 (FY03 £8.2m) and also paid off the £2.3m loan used to acquire Pivotal. The Company expects to beat its broker's pre-tax earnings forecast by 7.5% (i.e. around £4.5m) and as at 30/09/04, SCi was debt-free and had £2.5m in the bank.
The Company also announced that it had signed a number of new deals, the most important of which is a North American distribution agreement for next year's Conflct title (4th in the series), the new Carmageddon game and Resevoir Dogs. The three titles. due in 2005 and 2006, will be published by an as yet unnamed US publisher and will deliver both advances and sales guarantees for the Company. SCi also announced that it had signed mobile and Gizmondo (a new handheld games device) licensing deals. The deals grant permission for the third parties to develop and sell titles based around SCi IP and amply demonstrate the corollary benefits of successful games IP development and ownership. SCi incurs no risk or cost itself and receives minimum royalty guarantees whilst also gaining from the broader marketing coverage its IP will receive from the third parties. The outlook continues to look bright for SCi.

23/11/04 North American deals signed
SCi has sold the North American publishing rights to Constantine and Battlestations: Midway to THQ. Both games are multi-platform and due in early to mid calendar 2005. Both deals comprise advances and guarantees and investors should be cheered by the Company's continued ability to sign major North American publishers for its new titles. 

06/12/04 Full-year results
Following the indications given in the Company's positive trading update in October, SCi unveiled record results for its year to 30/09/04. Whilst sales grew 8% compared to the previous year, EBITDA leapt 32.6% to £5.7m and PBT was up 29% to £4.5m. Cash flow from operating activities grew even more strongly, rising to £4.4m from £2.2m the previous year although this has more to do with product release timing (Conflict: Vietnam was released in Europe earlier in Autumn than Conflict: Desert Storm 2 was last year). The Company ended the year with £3.5m in cash, no debt and net current assets of £13.4m. A significant proportion of its high debtor level (£14.9m) will have been converted into cash  by now although the SCi's increasing development expenditure will continue to eat into most of this as the Company seeks to broaden its future release portfolio. Whilst new products contributed £21m of the £31m FY04 sales, the SCi management will be pleased with the increasing contribution from its back catalogue sales (£9.2m), a welcome corollary benefit of its product release successes over the last 3 years and continued vindication of its current "quality over quantity" publishing strategy.
The prospects for FY05 look excellent. Conflict Vietnam outperformed expectations, achieving 1.2m sales  to date (faster than the first Conflict title, but, as predicted earlier in the year, slower than the second) despite average review scores and intense competition within the genre from larger publishers. Conflict series developers Pivotal will use a new game engine for the fourth product in the series, Conflict: Global Terror, and the quality of this engine (albeit based on an early stage viewing) combined with the series' return to a more contemporary setting could well return sales to C:DS2 levels. C:GT will be joined by at least three other products: Constantine, Battlestations: Midway and the newly announced Overdose. One or two other products are due to be completed near the year-end but may slip into FY06. Constantine will be launched in line with the film's launch and as a result should benefit from the $40m marketing budget Warner Bros is said to have set aside for the movie. Battlestations: Midway continues to attract positive pre-release publicity and is clearly being prepared as the first in new war series (indeed, the Company is already planning a sequel for FY06). The game, which has some innovative gameplay features and strong multi-player appeal (at a time when multi-player functionality is proving a major sales draw) , is being developed in Hungary for half the price of a UK-based project. Finally, Overdose, a product from Swedish developers Deadline Games, is a Mexican action adventure title in the mould of the GTA series. SCi will be hoping its high level of violence and its humour content will attract the same sort of audience although new IPs have traditionally struggled for visibility amongst the sea of sequels and third party brands that tend to dominate the latter stage of the games cycle. Assuming C:GT is finished on time, FY05 should see marked growth over FY04 and include the rarity of a strong first half of the year.

News
17/01/05 SCi gains developer stake
SCi has successfully resurrected Roll Call, a title originally signed to Argonaut and one which was feared irredeemably lost following Argonaut's liquidation in October last year. Although SCi's financial exposure to the product had been minimal (only two months' funding), the Company had clearly wanted work to continue on it and had funded, via a £250k loan, the creation of Rocksteady Studios. Since Rocksteady Studios is largely (but not exclusively) formed from ex-Argonaut employees, development on the title is said to have resumed with few problems. As part of the new funding and publishing deal, SCi have also secured a 25.1% stake in Rocksteady Studios and first refusal (publishing) rights over all future Rocksteady products. Observers will note that this is very similar to the original deal struck with Pivotal Studios.

10/02/05 AGM trading update, new Take 2 distribution deal announced
At its AGM, SCi confirmed that trading during the first 4 months of its FY05 was in line with market expectations. All four of its major releases for the year are on schedule and its FY06 line-up continues to look healthy. SCi also used the AGM to reveal that Take 2 had won the North American publishing rights to the next Conflict title (Global Terror), the new incarnation of Carmageddon and the Resevoir Dogs game. SCi had announced that they had secured North American distribution for these titles in October last year but had not, at that time, announced who had won the deal. The SCi titles are to be published under Take 2's newly established 2K label. 2K sits along side Rockstar Games (Take 2's original and wholly-owned IP publishing division) and Global Star Software (Take 2's value and budget publishing label) and handles third party licensed titles and internally-developed titles based around third party brands. Given that the last Conflict title (Vietnam) was published by Global Star Software, this could be seen as a step-up for SCi and an endorsement of the quality of the three products.

22/03/05 SCi makes acquisition offer for Eidos
SCi today announced a surprise £76m offer for its listed UK publishing rival SCi. The all-share offer is to be supported by a £60m fund-raising which was fully underwritten by the Company's brokers Peel Hunt. The SCi offer came just a day after US private equity company Elevation partners put in a £71m cash offer. Despite the board's endorsement and recommendation of the Elevation Partners' offer, the SCi offer has already received the backing of around 20% of the Eidos shareholders and the Company intends to build on this over the next week with a series of institutional presentations and meetings with other key Eidos shareholders. With a higher value offer and strong initial shareholder support the momentum certainly seems to be with SCi. However a number of factors will work in SCi's favour and appear to point to an inevitable SCi victory. Firstly, most Eidos shareholders will not want to crystallise their losses in Eidos (as acceptance of a cash offer would necessitate) but would prefer to gamble on the capital appreciation potential that a stake in the merged entity would offer. Secondly, SCi's steady profit and sales growth over the last 3 years has returned credibility to the Company within the City, a view supported by the fact that the £60 support fund-raising is said to have been considerably oversubscribed. Thirdly, it appears that whilst SCi has worked hard to solicit support from the City for its offer, Elevation Partners made no effort at all to gain shareholder approval in spite of the potential for counter-offers.
SCi, however, are faced with a mammoth task in restructuring the Company. The Company has already identified £14m in annual savings with a £7m one-off charge although this is based on just weeks' due diligence. A further major short-term cost will be the paying back of the RBS loan which could well have reached the £23m limit. Additional hurdles are integrating two different business models (SCi benefits considerably from the use of third party publisher partners in North America whilst Eidos self-publishes there) and improving the development quality and production management within Eidos, both key failings under the last management. SCi, which prides itself on its tightly controlled, slimline and profit-driven operation, certainly has the potential to turn Eidos around although forecasts for the combined company at this stage are too early.

07/04/05 Eidos board recommend SCi offer
The Eidos board has been forced into an embarrassing turn-around, dropping support for the rival offer from Elevation Partners (to which the board members had irrevocably committed their shareholdings) and recommending the SCi offer. It is said that some institutional shareholders had had to threaten the board (with the sack) if they did not fulfil their fiduciary duty to support the higher-valued and better-supported SCi offer. SCi has secured around 41% of the Eidos shareholders' support, effectively blocking the Elevation Partners' deal (which needed 75% approval). In contrast, Elevation Partners with the backing of the 2% shareholding owned by the Eidos board, had failed to gain any further shareholder support.

11/05/05 Offer becomes unconditional
SCi has announced that, despite a tumbling share price,  it has now secured acceptances for its offer from 77.5% of the Eidos shareholders which has made the offer unconditional, pending approval by the SCi shareholders. With approval secured, SCi can formally take control of the company, although it cannot de-list Eidos until it has received acceptances from 90% of the shareholders (at which point it can force the remaining 10% to accept the offer). Until then Eidos will remain majority owned by SCi but separately listed.

17/06/05 Interim results, change of year-end and accounting policy announced

SCi's results for the first 6 months of its original FY05 (to the end of March) were broadly in line with expectation but were notable for the collapse in back catalogue sales that has, for the last few years, underpinned the Company's H1 performances. Back catalogue sales fell from £8.1m to £2.2m, principally because sales of Conflict: Vietnam in North America were disappointing relative to the North American sales of the previous Conflict products. SCi has historically handed over its finished Conflict products to Take 2 (the Company's North American distribution partner for the series) just before the Company's year-end, thus triggering advance payments from Take 2 which are recognised by SCi during that financial period. North American sales of the product subsequent to this point (i.e. in the ensuing financial periods) and after the advance has been recouped generate further payments to SCi and are recorded as "back catalogue" sales as they do not derive from products released during the period. The first two Conflict products sold in significant volume in North America recouping their advances quickly and generating substantial back catalogue sales in subsequent financial periods. Conflict: Vietnam, however, failed to generate anywhere near the same level of sales as the other Conflict products, hence the marked decline in 1H revenues. We had anticipated lower sales of this product (see 2004 news) due to competitive pressure and quality concerns but expect sales of Conflict: Global Terror (due in Sept 05) with its more contemporary theme to reach similar levels to the Conflict: Desert Storm products.
As part of its integration with Eidos, SCi has chosen to adopt Eidos' June year-end and will therefore be presenting 9 month consolidated results to 30/06/05 later in the year. These are expected to show a substantial loss due to the limited number of releases during the period as well as a £7m one-off acquisition and integration charge. SCi also revealed its intention to adopt a different accounting policy for the treatment of development expenditure. In line with many (but not all) US publishers, SCi intends to expense development expenditure during the pre-production stage of a game's development. Once the game has passed this point and is in full production, SCi will capitalise the remaining costs of developing it and will amortise it over the expected revenue generation period (i.e. will only begin to release the costs through the P&L once the game has been released.). Although a more complicated way of accounting for development costs, there is no doubting that it has now become the industry norm and that the Company could benefit competitively from being able to obfuscate the extent of its ongoing development efforts.
SCi is expecting a significant return to profitability during both the first half of its new financial year (to 31/12/05) as well as at the year-end (30/06/06) with house brokers KBC Peel Hunt forecasting £23.1m EBITDA on sales of £180.1m. Both SCi and Eidos already had a strong internal line-up but the addition of £14m in first-year overhead savings underpin the bottom-line expectations. What is not certain is how the two periods will shape up individually as SCi has yet to decide on the exact release timing for the next Hitman and Tomb Raider products. Tomb Raider Legend is now likely to emerge in 2H06 whilst Hitman: Blood Money may also slip into the new year too. Either way, the SCi management is confident of a major turn-around for the Eidos business. 

29/09/05 Prelims
SCi reported its preliminary results for the 9 month period to the end of June 05 (following the change of its year-end as a result of the acquisition of Eidos). The results incorporate 7 weeks' trading by Eidos. The Company beat expectations but still reported substantial losses as a result of the limited trading period for Eidos, the limited product flow for SCi and a number of exceptional costs including £1.9m in development cost write-downs plus £4.7m in restructuring costs. The Company reported its £14m cost-saving plan to be on schedule and revealed that, as part of the process, it had closed its Australian and Japanese offices and begun to centralise its sales and marketing operations.
SCi highlighted the commercial success of Lego Star Wars as a key reason for beating market expectations. Although the 1.5m Lego Star Wars unit sales will undoubtedly assist the US publishing and distribution operation re-establish its market presence, it should be noted that the LSW deal was a co-publishing deal and Eidos/SCi have no sequel rights (they are retained by TT Games).
The Company also revealed that it had begun to use completion-bond finance for some of its product as a short-term alternative to cash. Although SCi had £44.1m on its balance sheet at the year-end, its decision to use this form of third party finance was based on the delivery guarantees provided by the bonding company (in this case Film Finances Inc) combined with what it reported as a highly favourable finance cost. The titles being financed using completion bonds are Rogue Trooper and Zero Tolerance (both third-party developed) and almost all of the cost of their development is being covered by Barclays (the bank providing the finance). Investors should see the publishing section for a description of how completion bonding works.

25/10/05 Approaches revealed
Remarkably, just a matter of months after it concluded its successful acquisition of Eidos, SCi has revealed that it is now the potential target for two others having received informal approaches in "recent months". SCi appears to be on course for turning around the ailing Eidos business an opinion reflected in the strong share price performance of the combined group but the process is far from complete and the Company faces the tricky re-establishment of several key Eidos brands (Tomb Raider, Hitman, Commandos) as well as the completion of its ambitious £14m cost reduction programme. Press speculation has suggested interest from both industry and private equity although the question has to be asked as to whether, in both cases, the suitors believe the valuation premium for the combined entity as it stands today (relative to the valuations of the separate businesses at the time of the acquisition) is justifiable. In other words, has SCi, in the six months since the acquisition, made enough of a difference to justify the approximate £100m appreciation in value that the market has suggested its changes deserve and why didn't these companies try to buy Eidos during the 12 month+ period when it was publicly known to be up for sale? 

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