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"You just get years where the appetite for certain titles wanes a little" - GAME

CEO Martyn Gibbs and CFO Mark Gifford on the future, Nintendo Switch, eSports and what went wrong at Christmas

The latest numbers are in for GAME, and in not remotely surprising news, profits for the first half of its financial year took a tumble - down 26.5% compared with the same period a year before.

There's other worrying elements in the interim results. GAME's market share in the console space dropped 3%, while the losses attached to its eSports and events business - hailed as the future of the company - increased significantly.

Yet there were positives in there, too. Including growth in its 'new retail markets' (such as VR, PC and digital), its Spanish arm is continuing to be a bit of a saviour to the company's bottom line, while the start of the second half of its financial year is 20% up thanks to Nintendo Switch.

And although I wouldn't suggest the numbers are 'good', they are certainly better than some analysts had estimated. As a result, the share price has improved slightly today.

As the results hit the wires, I had a chance to talk with CEO Martyn Gibbs and CFO Mark Gifford to discuss the state of the industry and GAME's role within it. Here's how it went:

1

Mark Gifford and Martyn Gibbs

You observed that certain games struggled before Christmas - Call of Duty amongst them. You also observed that games since Christmas have performed as expected, or better than expected. So what was different before Christmas that meant so many titles under-performed?

Martyn Gibbs: You'll know this Chris, you just get certain years where the appetite for certain titles wanes a little. Fallout was such a success the year [released November 2015] before - and GAME was such a big part of that - and Call of Duty was a big success the year before, too. If you don't have a replicant Fallout title and one of the other titles doesn't perform to the levels that we'd all like, then you see the issues that we had. It is difficult to pinpoint exactly why that has been the case.

Dorian Block at GfK suggested that Black Friday may have had an impact on some of those launches. Do you think publishers might need to reconsider their Q4 release strategy and distance their products from the Black Friday window?

Gibbs: All publishers should be viewing launch windows based on consumer activities that are happening. So yes, all publishers will be looking at October, November and December and trying to work out what the best dates to launch will be.

Mark Gifford: What's I'd add to that, is Nintendo was really switched on around this. Launching Pokemon Sun and Moon during Black Friday at a full price level, whilst there was so much retail activity going on, was genius. They did it two years ago, too. If you go too close to Black Friday before the event, then it can cost you, but equally there is a way of really targeting this in the most positive way. Some have worked it out better than others.

"Launching Pokemon Sun and Moon during Black Friday at a full price level, whilst there was so much retail activity going on, was genius"

Mark Gifford,GAME

Gibbs: Yeah, that's a good point. If you launch a title during Black Friday week, it won't be discounted.

Speaking of Nintendo, you seem to have high expectations for Nintendo Switch going forwards, which is notable considering the rather poor performance of Wii U. Why do you have such confidence?

Gibbs: The appetite that we have seen for the Switch console has, I think, been driven around the usability and exactly what the console is. You only have to play Zelda on-the-move - as you will have done - and you get it in a nanosecond. For me, it is worth the money just to get that [Zelda] experience in a large-screen mobile version. The concept is very strong and obviously having a launch game with a Metacritic of 97 is wholly helpful. I think the fact that we know what games are coming - we know we have Mario Kart, and then Splatoon 2 and then Super Mario Odyssey - is a good reason why people want to buy the console.

2

GAME launched its Belong brand of experience stores in December last year

You've often celebrated your market share, but that fell in the console space over the 26 weeks. What caused that? Is it a worry?

"You only have to play Zelda on-the-move - as you will have done - and you get Nintendo Switch in a nanosecond

Martyn Gibbs, GAME

Gibbs: When new titles don't perform as well, we suffer more than most. We have a population of gamers that shop with us, so that whenever a title underperforms, we hurt. When a title over-performs, we see the complete opposite. With the likes of Pokemon last year, we performed exceptionally well in both the UK and Spain. There has also been a move to online generally, where our market share is lower.

Gifford: Equally Chris, if you go back a year and compare our first half, then absolutely, our market share in the UK dipped to 29% - without the benefits of our Fallout 4 and Call of Duty: Black Ops III exclusives. If you compare the first seven weeks of our second half of the year, we are back up to over 31% with all the pre-orders of Nintendo Switch. Those figures are really driven by the strength of our exclusive content on brand new releases.

Gibbs: Just to explain that a bit more. We have exclusive versions of almost all AAA new releases. And if that AAA release underperforms, we are hit twice on both the standard version and what we would have achieved on the exclusive version.

Your cost savings at UK retail have been more than made up by your expenditure in eSports, events and the Spanish arm. Does that mean you need to increase your cost savings at UK retail?

Gibbs: We have a real focus on making sure we are operationally efficient. Both within our store estate and our central operations, we will continue to focus on that. Some of that means you will drive towards a better top-line performance, and some of it involves finding cost savings within the business with that rigour. Yes, we think there are opportunities to be more efficient, and we will continue to focus on those area.

You dropped 8 stores last year, do you expect your store estate to decrease this year?

Gibbs: The only reason the answer to that might be yes is because we might be closing two stores and moving into one, like we did with Metro Centre [in Gateshead]. If you asked the team in Metro Centre: 'Do you want to operate two small stores, or one big store that is bigger than the two put together?' They'll go with the latter. It's a real focus for us. We have 240 leases up for renewal over the next 24 months, and we want to make sure that we have the opportunity to appropriately position ourselves within all of those centres. What we did at Milton Keynes is a great example. We took more cost. We closed a really small store and went next door, put in a big Belong arena and gave that community a far better retail and competitive gaming experience.

Gifford: Across all of the UK, all stores bar one are profitable stores. This is around driving efficiencies as we go through the industry's down cycle in the bottom end of the stores, and equally opening new and exciting stores with the Belong arena inside them - a proposition that is much less prone to the cycles. There is no need to close a whole raft of profitable stores.

"Across all of the UK, all stores bar one are profitable stores. There is no need to close a whole raft of profitable stores

Mark Gifford, GAME

Your losses increased in your events, eSports and digital businesses as you continue to invest in them. Isn't it now urgent that you start seeing returns from these areas?

Gibbs: We are going to continue to invest in those areas. They were never a one-year wonder for us. The payback from the likes of Belong is very strong, and Multiplay has multiple different assets that the group is using, as does Ads Reality. The headline question is: 'Do we need to run faster?' And we are already running at breakneck speed on our strategic initiatives. We want to keep up that pace. But we don't want to run so fast that we trip up. We are really pleased with the progress that we are making across Insomnia, we have taken on-board [LEGO event] Brick Live this year - that we are really excited about. We obviously have Minecon. The Multiplay digital division has seen significant growth based on the portfolio of titles that we are hosting. We feel we are making really good progress in those areas.

Your share price is really struggling. Why is that? What can you do to increase confidence?

Gibbs: That last part is the important question. What do we do to increase confidence? It is to deliver on the strategy, which is to build the most valuable community of gamers. All of our activities within our growth categories - be that at retail level, such as digital, PC, VR, accessories etc, but also how we are delivering in the material transformation points around Belong, around our eSports and events businesses. The confidence will come as we land more and more of those initiatives.

"The headline question is: 'Do we need to run faster?' And we are already running at breakneck speed

Martyn Gibbs, GAME

As a UK company with a Spanish business, how do you feel about Brexit?

Gibbs: Like any company, we are subject to the wider marcoeconomic environment. The longer term impact of Brexit is still unknown. UK confidence has so far held up well, but there are various questions around consumer confidence and import prices etcetera. We just feel it is too early to really understand what direct impact this will have on the business. But it is worth noting that we have a UK and Spanish arm, and they're both run as separate businesses. Because we are geographically focused, with each having their own regional suppliers that are mostly based outside of the EU.

How is your concession trial with WHSmith progressing?

Gibbs: We are pleased with the roll out. The first two units were really just a trial on how we operate, rather than how well we do. It has allowed us to go into two locations that we previously didn't have any representation, in Birmingham Fort and Oxford. We are hoping that might lead to a few more concessions.

PC gaming hardware sales increased by 64.3% to 258m last year. You've seen growth there, too. Is the aim to grow that further?

Gibbs: The Belong arenas have taught us a lot. 21% of the people that are engaging with us in a Belong arena are people we haven't seen before. They are new to our reward card. The key constituent part is that these people are PC gamers, they are both young gamers and eSports enthusiasts that are playing on PC. This has helped us become relevant and credible to PC gamers. Therefore, we have ramped up our activity in this space in those [Belong] locations significantly. If you look at the new approach going into Wardour Street [the first Belong location], and in the other arenas, you will see a lot of space for PC. All elements of PC, so software and digital, but also hardware and accessories.

Are you planning on increasing the marketing for Belong?

Gibbs: We will be, yes. We had seven stores, we now have nine... and what point do we really invest in marketing? It's pretty extraordinary the utilisation numbers that we've got to, with not much more than zero marketing. So yeah, we will, at an appropriate point, fire a starting gun on marketing. That will be a couple of months on, but you'll see a lot more activity on Belong.

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