Next Games

Next Games Corp.: Change in Accounting Policy Related to Publishing and Product Development Functions

Next Games Corporation Company Release February 28, 2020 at 07:58 a.m. EET

Next Games is applying a change to its accounting policy relating to its research and development, sales and marketing as well as administrative functions. With the change, the company aims to improve its financial communication by providing investors more understandable, comprehensible and better structured financial information regarding the company’s product development and publishing operations in its financial reporting.

The accounting policy change relates to the classification of development costs for published products. Previously all game development costs, both for published and unpublished games, were reported under the Research and Development function. In the future development activities relating to published games are reported as part of the group’s Marketing and Sales function, and only costs related to unpublished games will be reported under the Research and Development function. The accounting policy change does not affect group-level revenues, EBIT, gross profit or balance sheet reporting.

In addition, a new Alternative Performance Metric, “Publishing Operations’ Profitability'' will be introduced as supplemental information in Next Games financial reporting. The aim of the new alternative performance metric is to provide investors with meaningful insight into the profitability of the company’s publishing operations. Publishing Operations’ Profitability metric is defined as revenues generated by the company’s published games, adjusted by the costs and investments related to game’s maintenance, further development, marketing and customer support.

Both, 2018 financials and interim report Jan 1 - Jun 30, 2019 have been adjusted to reflect the changes in accounting policy. Detailed information regarding the change is listed below and adjusted figures presented in the attached tables.

Key changes in classifications of cost under the new accounting policy

Due to the nature of the free-to-play business model, Next Games will group together costs relating to its publishing operations and classify costs related to the continued development of running published games as a service as maintenance, rather than as Research and Development activities. These costs, relating to maintaining and improving published games are not capitalized. The change in accounting policy will improve predictability and comparability of the group’s profitability between periods, independent of which development phase games are in, and whether or not related research and development costs are capitalized.

Previously all game development costs, both for published and unpublished games, were reported under Next Games’ Research and Development function. Going forward, only costs related to unpublished games and technology development will be reported under the research and development function, this includes but is not limited to:

  • Personnel expenses relating to development activities, incl. Salaries, side costs, pensions, as well as an allocation of IFRS 2 share-based payments
  • Purchased services and outsourced development expenses
  • Testing activities related to research and development and other research-related costs
  • A general cost allocation factor based on the number of personnel in relation to the Group’s total headcount
  • Capitalization and depreciation related to Research and Development, as well as other tangible and intangible depreciations allocated via the general cost allocation factor, including those related to IFRS 16

Previously only costs related to marketing and personnel working in marketing were allocated under the Sales and Marketing function. Going forward, in addition to marketing activities, Next Games’ sales and marketing function will include all costs related to maintenance and continued development of published games. This includes but is not limited to:

  • Personnel expenses related to continued development and marketing of published games incl. salaries, side costs, pensions, as well as an allocation of IFRS 2 share-based payments
  • Purchased services, such as customer support
  • Direct marketing purchases such as player acquisition and other marketing expenses
  • A general cost allocation factor based on the number of personnel in relation to the Group’s total headcount
  • Capitalization and depreciation related to the marketing and sales function, as well as other tangible and intangible depreciations allocated via the general cost allocation factor, including those related to IFRS 16

Previously all costs related to the Group’s finance and legal department, general administration i.e. executive management as well as human resources were allocated under its administrative function. This also includes any expenses related to the company’s initial public offering and general financial services, such as auditing services. Going forward, the function will also include investor relations and the company’s corporate communications costs. This includes but is not limited to:

  • Personnel expenses of those working in administration incl. salaries, side costs, pensions, as well as an allocation of IFRS 2 share-based payments
  • Purchased administrative services and temporary administrative workforce
  • A general cost allocation factor based on the number of personnel in relation to the Group’s total headcount
  • Other corporate communication; the company’s corporate communication, investor relations and public relations costs
  • Capitalizations and depreciations related to the function as well as well as other tangible and intangible depreciations allocated via the general cost allocation factor, including those related to IFRS 16

Key impact from the accounting policy change for 2018

  • Research and development costs decreased EUR 2.8 million in 2018
  • Sales and marketing costs increased EUR 3.1 million in 2018
  • Administration costs decreased EUR 0.3 million in 2018
  • Net effect on the result for the financial year 2018 was EUR 0

Key impact from the accounting policy change for Jan 1 - Jun 31, 2019

  • Financial statement Jul 1 - Dec 31, 2019has been drafted according to the new policy
  • Research and development costs decreased EUR 1.4 million in Jan 1 - Jun 31, 2019
  • Sales and marketing costs increased EUR 1.4 million in Jan 1 - Jun 31, 2019
  • Administration costs decreased EUR 0.03 million in Jan 1 - Jun 31, 2019
  • Net effect on the result was EUR 0 Jan 1 - Jun 31, 2019

TABLES 2018

 Adjusted  
EUR thousandJan-Dec 2018Jan-Dec 2018Change
    
Revenue35,24535,2450
Cost of Revenues-13,952-13,9520
Gross Profit21,29421,2940
Other Operating Income71710
Research and Development-7,541-10,4182,877
Sales and Marketing-26,776-23,643-3,133
Administrative-3,963-4,218255
Operating Profit (EBIT)-16,914-16,9140


 Adjusted  Adjusted  
EUR thousandJan-Jun 2018Jan-Jun 2018ChangeJul-Dec 2018Jul-Dec 2018Change
Revenue10,47710,477024,76924,7690
Cost of Revenues-4,443-4,4430-9,509-9,5090
Gross Profit6,0346,034015,26015,2600
Other Operating Income4545027270
Research and Development-3,481-3,55574-4,060-6,8632,803
Sales and Marketing-5,564-5,405-159-21,212-18,238-2,974
Administrative-1,987-2,07386-1,975-2,146171
Operating Profit (EBIT)-4,954-4,9540-11,961-11,9610

TABLES 2019

 Adjusted  
EUR thousandJan-Jun 2019Jan-Jun 2019Change
Revenue19,22419,2240
Cost of Revenues-7,974-7,9740
Gross Profit11,25011,2500
Other Operating Income990
Research and Development-3,284-4,6791,395
Sales and Marketing-9,838-8,414-1,424
Administrative-1,632-1,66129
Operating Profit (EBIT)-3,495-3,4950

Publishing Profitability 2018 and 2019

EUR thousandJan-Jun 2018Jul-Dec 2018Jan-Dec 2018
Revenue10,47724,76935,245
Gross Profit6,03415,26021,294
Sales & Marketing Cost-5,564-21,212-26,776
Publishing Operations EBIT470-5,952-5,482
Depreciations of the Publishing Operation699611,030
Publishing Operations EBITDA538-4,991-4,452


EUR thousandJan-Jun 2019Jul-Dec 2019Jan-Dec 2019
Revenue19,22415,47734,701
Gross Profit11,2508,41819,668
Sales & Marketing Cost-9,838-7,756-17,594
Publishing Operations EBIT1,4126622,074
Depreciations of the Publishing Operation8478461,693
Publishing Operations EBITDA2,2591,5083,767

Additional information:

Annina Salvén, CFO,  +358 (0) 40 588 3167
investors@nextgames.com


Certified Adviser: Danske Bank A/S, Finland branch, tel. +358 10 546 7938

About Next Games

Next Games (Helsinki Nasdaq First North: NXTGMS) is the first publicly listed mobile game developer and publisher in Finland, specializing in games based on entertainment franchises, such as movies, TV series or books. The developers of the critically acclaimed The Walking Dead games redefines the way franchise entertainment transforms into highly engaging service-based mobile games. In summer 2018, Next Games launched The Walking Dead: Our World, which utilizes cutting edge AR technology and is powered by Google Maps. Currently Next Games is working on multiple new games based on popular entertainment franchises including, Blade Runner Nexus, for the popular Blade Runner franchise and a mobile game based on Netflix’s Stranger Things. For more information head to www.nextgames.com