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 Argonaut (AGT)

News
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4/05/00 Argonaut reveals interim results

P/L Account

6mths to 31/01/00

6mths to 31/01/99

Sales

£2.5m

£0.8m

Operating loss

(£0.2m)

(£3.3m)

PBT

(£0.2m)

(£1.6m)

Argonaut revealed much improved interims with a 210% increase in revenue and a sharp reduction in losses over the corresponding period last year. Of that revenue, £1.2m was attributable to royalty advances from publishing partners and the remaining £1.3m was split between royalties for Croc 2 (£1.1m) and royalties for Croc 1 (£0.2m). It is testament to the longevity of the original Croc title that Argonaut is still receiving royalties 3 years after its launch. The Company will continue to generate revenues from publisher funded development but will increasingly self-fund its development to maximise its royalty rates (typically between 25-30% as a result) whilst retaining the intellectual property rights to the products.

17/07/00 Argonaut invests in developer and warns on FY00 figures
Argonaut has made a £300,000 investment in UK-base LTStudios a start-up games development company that specialises in offline and online multiplayer games. The deal sees Argonaut take a 30% stake and a convertible bond that would add a further 9.5% is converted into equity (as opposed to cash). Just in case LTStudios does turn out to be a winner, Argonaut has also been granted a deferred option to buy the remaining share capital at market value (essentially a right of first refusal on sale of the outstanding shares).
The Company has also revealed that due to the later than anticipated shipping of Alien Resurrection and the transfer of a PSX title to PSXII, its FY2000 figures will be adversely affected to the tune of £0.65m. Whilst this sum will principally come off the top line forecasts for FY00, a proportion of it will filter through to the PBT line and thus Argonaut looks likely to report marginally worse than expected results for this year. The good news, though, is that with Alien Resurrection slipping and with Malice being pre-sold to publishers as a higher-value next-generation title (X-Box, PSXII), the Company stands to benefit considerably more in FY01.

10/10/00 Argonaut reveals FY2000 Prelims
Argonaut reported much improved figures over FY99 with revenues almost doubling from £2.3m to £4.4m and LBT improving from a loss of £2.4m last year to a loss of £0.6m in FY00.
A closer look at the figures reveals that during the course of the year, the Company increasingly began to focus on developing and signing up titles for third party publishers as the strongest growth came in royalty advances (increasing from £1.3m turnover to £2.8m in FY00). However, as evidence of the Company's continuing ability to create hit titles (something of a rarity in the games industry), post-advance royalty income -which has no cost of sales associated with it and thus acts as a direct contribution to overheads- increased from £1m to £1.6m in FY00.
The Company also revealed that it currently has 9 titles in development with three titles expected for the 2000 Christmas period. With the Company expected to move into profitability during FY01, a good flow of product expected over the next three years and a healthy balance sheet (with around £17m in cash and short-term investments), the Company's future certainly looks very bright.

23/10/00 Argonaut buys start-up developer
Argonaut has acquired start-up games development company Just Add Monsters in a deal worth up to around £700,000 depending on performance targets being met within the next year or so. JAM was founded by three developers who were formerly employed at the Sony development studios responsible for producing several hits including Medieval and Frogger. JAM had already begun to work on a PlayStation 2 title and will make use of Argonaut's latest game engine technology.

01/03/01 Argonaut announces interims

P/L Account

6mths to 31/01/01

6mths to 31/01/00

Sales

£1.5m

£2.5m

Operating loss

(£2m)

(£0.2m)

PBT

(£1.6m)

(£0.2m)

Argonaut attributes the downturn in trading to reduced royalties from the sale of catalogue titles, in particular the Croc titles. Argonaut released a number of titles during the period, all of which failed to sell in the sort of volumes originally anticipated and thus  royalties over and above the advances are expected to be limited. At the same time, the Company has increased its cost base as it increased the number of products in development.
However, the Company has £14m in the bank and has some extremely promising titles in development including the as yet unsigned Malice (which was demo'ed for the Xbox launch) and the PS version of Harry Potter due for release in time for the film later this year. Argonaut are likely to achieve an excellent deal on Malice (one of the most eagerly anticipated Xbox titles) both on royalties and on advances. The Harry Potter development deal with Electronic Arts was secured on an escalating royalty basis (where the royalty rate varies depending on the volume of sales achieved) with a peak royalty rate at the upper end of the usual license development deal (typically 5%-15%). As a result of these and other releases due before the end of the calendar year, the Company is forecast to return healthily to profitability during its FY02.

07/08/01 Argonaut issues profits warning
Echoing developments at most other listed games companies, Argonaut issued a trading update stating that the Company had not hit its FY01 forecasts. There were two significant factors behind this. Firstly, and as warned at the interim stage, the Argonaut titles released during the year had failed to sell in the sorts of volume originally anticipated. Secondly, the Company had failed to sign during the period a number of products (Kleaners, Malice and Orchid) that it had in development. Since development costs are written off as incurred (and development continues on these products), these costs have been expensed in FY01 with no associated revenue.
As Argonaut has sufficient cash reserves to cover these development costs, the Company's position is, ironically, potentially strengthened as it  allows it to seek a better deal from a publisher due to the reduced funding risk that the publisher would have had to incur themselves. Furthermore, with "detailed discussions with several major international publishers"  on Kleaners and Orchid likely to lead to publishing deals and with the publishing rights to an additional title, Cash On Demand, negotiated back from Hasbro Interactive (and thus available to be re-sold to another publisher), Argonaut is well positioned to benefit from the resulting revenue boosts that these deals will likely bring.
The Company also chose the trading update to reveal that it had finally signed its eagerly awaited Malice Xbox title to Vivendi Universal Interactive and an additional Xbox title, Kung-Fu Party to Microsoft. Deal terms were not revealed but are expected, for the former product, to be highly advantageous to Argonaut.
The delays in the signing of Cash on Demand, Kleaners and Orchid have certainly damaged the Company's FY01 results but should considerably benefit the Company's FY02 results and Argonaut is now forecast to achieve record turnover and profits this year as a result.

03/09/01 Kleaners publishing deal signed, acquisition of LTStudios completed
Just over a month after Argonaut issued a profits warning following their failure to sign some key products before their year-end, the Company has revealed that it has now successfully concluded a publishing agreement with Vivendi Universal Interactive Publishing for Kleaners. The deal, a standard publishing deal in which Argonaut receives advanced royalty payments to cover the cost of development, covers the Xbox and PS2 versions of the game.
The Company also revealed that it had bought for a nominal sum the remaining 70% of developer LTStudios and that the new subsidiary would work on the PS2 version of key title Malice.

11/10/01 Argonaut prelims
With a profits warning issued a month earlier (and after the year-end), there were few surprises in the Company's FY01 prelims. Revenues were pretty much in line with the previous year (although the mix of royalties to advances shifted as receipts from the now 3 year old Croc and Croc2 waned). As warned in the August trading update, the Company's cost base had grown through the year as more projects were undertaken and this was not matched by sales as a number of  publishing deals had not been finalised before the year-end. Argonaut, not surprisingly, took the opportunity to reinforce their optimism for the future. Other deals have either been signed since the year end or are expected to be signed in the short term and with the PSX version of Harry Potter expected to be completed and launched in time for the film's release we would have to concur with the Company's optimism.

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17/01/02 Acquisition and trading update
Argonaut has acquired
Particle Systems, a Sheffield-based 2 team development company, in a deal worth around £4.1m. The consideration comprises £0.2m in cash, £0.8m in loan notes, the assumption of £0.6m of debt plus 2m Argonaut shares (£1.2m @ 49p/share). There is an additional earn-out of £0.8m in cash plus 1.5m Argonaut shares (£0.7m @ 49p/share). Particle is reaching the end of a long-term contract with Infogrames and currently has 2 titles in development. Exo (Infogrames to publish) is a highly anticipated action-strategy game for PlayStation2 whilst Particle is reported to be close to signing a publisher for the second, unnamed, title. Particle brings £0.8m in net liabilities, and we estimate it will contribute over £2m in sales and £0.2m in EBITDA during FY03. Particle has a history of technically innovative Sci-Fi titles that have sold moderately well. Exo (release due Autumn 02), however, marks a potential turning point for the company. Pre-release publicity has been very favourable and both sales and sequel potential are high. Furthermore, Particle's advanced PS2 technology and PS2 focus will help spread Argonaut's focus away from Xbox.
Argonaut also revealed two new contracts:
Second
Harry Potter deal. Argonaut has won a follow-up contract with EA for a further Harry Potter title. We believe that the deal is once again for a PSX version only, is along similar lines to the original Harry Potter deal and its release will coincide with the expected release of the second film, Harry Potter and the Chamber of Secrets, due in November 2002. Whilst the active base of PSX players will have diminished by this point, we expect this new deal to contribute significantly to AGT's FY03 profits. 
Lego Bionicle. Argonaut has also secured a 3 SKU deal with Lego to develop a PC, PS2 and GBA title based around Lego's best-selling Bionicle range. The usual royalty advance model applies.

18/02/02 Argonaut reveals stunning Harry Potter royalties
Argonaut have revealed that Harry Potter PSX sales (to 31/12/01) have exceeded all expectations with £5.3m of net income booked for the first 6 weeks of sales, compared to original management forecasts of £1.5m for the full year to 31/07/02. The key reasons include higher than expected sales volumes and per-unit royalty income that considerably exceeded industry averages - testament to both the sales power of the Harry Potter brand and the publishers EA.
We estimate that around 3m PSX units were shipped during the first half of the year. Although the title remained at the top of the sales charts during January and part of February, absolute sales have been falling. With the sequel due to come out in November 02, EA will likely start to clear its lines (to prevent cannibalisation of sequel sales) around July/August so FY03 sales of the first HP game could well drop off considerably. Argonaut is, though, developing the second HP PSX title.  However, as noted in previous news, we do not believe the sequel will outsell the original HP title, due to the smaller anticipated active PSX market and increased competition - from other HP2 SKUs and competing products.
We believe that Argonaut has failed to sign one key product, Orchid, before the end of January although we expect the product to be signed by the end of the financial year. This will negatively impact 1H 02 but will increase 2H 02 figures.

12/03/02 Interims

P/L Account

6mths to 31/01/02

6mths to 31/01/01

Sales

£9.3m

£0.8m

Operating Profit

£3.8m

(£3.3m)

PBT

£4.0

(£1.6m)

Following its mid-February trading update, Argonaut revealed unsurprisingly good interim figures. The 500% increase in turnover owed much to the £5.4m (£0.2m) post-advance royalty level although the Company also managed to grow publisher contract revenue (i.e. advances) by an impressive 300% to £3.9m. Compared to last year, Argonaut has significantly grown its development resource and is winning larger publishing contracts, earlier in games' development.
Although Harry Potter continues to feature in the top 5 PSOne charts in the UK and USA, sales volumes are at a considerably reduced level and wholesale/retail prices are lower compared to the pre-Christmas period. The earliest investors are likely to get a glimpse of 2H02 Harry Potter sales will be early/mid May when EA next report quarterly earnings figures. Investors should remember that due to EA's royalty reporting timetable, Argonaut's 2H02 figures will comprise sales from Jan 1 to June 30). The company is not expecting net royalties to improve during 2H02 (compared to 1H02) although advances should show marginal improvement.
The more analytical of investors might have noticed that the Company ended the interim period with debtors of £10.9m, greater than its cash and cash equivalents of £9.8m. However, this included the £5.3m of HP royalties which have since been paid to the Company so cash levels are back to around £15m. A  dividend has been ruled out for now but the Company might revise this if it enjoys a similar HP-sized success with any of its other non HP properties.

11/07/02 Orchid signing questions
Fears that Argonaut may not be able to sign Orchid, its long-running internally funded development project appears to be the principal reason behind the Company's collapse in share price. The question though is likely to be one of "when" rather than "if". Should the deal be signed in 2002 forecast results will remain unchanged. Should it be delayed until 2003, the Company would be forced to issue a profits warning for its FY02 (the deal, estimated to be worth over £2m,  is currently assumed to be part of FY02 figures). The situation is similar to that of last year when delayed signings forced a profits warning at the end of the year. The upside of the delayed signing is that FY03 forecasts are likely to be boosted by £2m+ (assuming that the deal is eventually signed!).

01/08/02 Orchid delay forces new profits warning
Argonaut's historic problems meeting product placement targets has struck again with Orchid failing to make it in time for the year-end. As warned on 11/07/02, although publishers are understood to still be bidding for the product, a deal was not reached before July 31st and hence around £2m of advances originally booked into FY02 have been moved out. There was no indication that the Company's confidence in a deal being eventually signed had diminished although it intends to factor in a greater duration for other publishing contract negotiations as a result. Assuming that the deal is signed soon, the advances would be booked in the current year although, with over 7 full development teams to fund, investors would be excused for becoming a little worried about the lack of product placement announcements over the last 6 months. Whilst Argonaut can certainly afford to take a number of products to completion (and would benefit from the higher royalty rate that it should be able to secure for such completed product), it is a considerably higher risk  model than the one Argonaut would like to pursue and would dramatically alter the dynamics of its business. 
To compound matters, Argonaut also announced the cancellation of its untitled Microsoft project, supposedly because of irreconcilable design differences. The cancellation has limited material impact on FY02 but more substantial impact on FY03 where, again, advance sales will have to be reduced. However, the IP and publishing rights return to Argonaut and there is potential for the Company to sign the product to another publisher during the year.
To complete the announcement, the Company also revealed that it had acquired UK mobile games developer, Morpheme in a transaction worth up to £1.8m in cash and shares, depending on Morpheme's performance. Morpheme specialises in developing product for SMS, WAP, Java and other 2.5/3G phones and networks. Morpheme is not expected to become profitable until Argonaut's FY04 and will, as a result, further depress FY03 earnings forecasts.

15/10/02 Prelims
Following a roller-coaster of a ride throughout the year, Argonaut revealed the net effects of its success with the PlayStation version of Harry Potter and the delayed product signings. Sales trebled to £14.2m with PBT hitting £2.8m versus a loss of £3.1m in the previous year. Post-advance royalties from the Harry Potter game alone accounted for some 42% of sales and since the bulk of the cost of developing the game were written off in  the previous financial year, this profit has been used to cover up  the more unimpressive performance of the rest of the business. Argonaut's failure to secure a publishing deal for Orchid in particular contributed to this as the Company spent the year incurring losses on developing the product and had guided analysts to assume it would have been signed by the year-end.
Partly allaying concerns about its longer-term ability to secure publisher funding, Argonaut revealed as a post year-end development that it had signed both Orchid and new title I-Ninja to Japanese publisher Namco. Namco is a top 10 global games publisher and is well suited to the game style of both titles. More worrying, though is the fact that Argonaut appears to have struggled to get a number of near-complete games signed up with canceled Microsoft project, Swerve  and acquisition Particle System's once-acclaimed Exo both at very late stages of development but seemingly unable to attract the interests of a publisher. Indeed, Argonaut appears to have abandoned Exo, despite it being a key component in the acquisition of Particle Systems in January and it being 95% complete.
Argonaut will need to re-focus its attention on quality over quantity of releases as the increasingly hits-driven nature of the market rewards better products disproportionately.

Copyright 2005 Games Investor Consulting Ltd. All rights reserved