Fool's Eye View

[ November 28, 2000 ]

Eidos -- The Sales That Weren't

By Stuart Watson (TMFTiger)

Great Titchfield Street, London -- I thought I was familiar with most accounting concepts but Eidos (LSE: EID) introduced me to a new one this morning -- the concept of exceptional turnover. The amount involved was £16.9m, over 30% of its turnover for the last six months.

Now most companies like to pull out part of their costs each year and claim that they aren't really real because they are one-off in nature. In my view if you had to pay for them, they're real enough. There is some justification for highlighting some items in order to better present the underlying trend but most companies seem to treat exceptional costs as a sport, claiming more and more outlandish items year after year.

The reason for Eidos's exceptional turnover was the return of stock. Under its method of accounting goods delivered to the retail channel, which then sells its games to the punters, are treated as actual sales. Eidos then makes an estimate as to how much of these goods will be returned and makes a provision against its profits accordingly. Unfortunately its estimates turned out to be somewhat on the low side, due to wobbles in the market surrounding the launch of PlayStation 2.

E-commerce woes

If the news about returns wasn't bad enough Eidos has also decided to write off its $55m investment in Express.com in its entirety. This venture is an e-commerce site that sells games and associated products and Eidos took a stake in it this time last year. Eidos said that the high growth levels originally forecast hadn't materialised but there were no further details. Obviously it is not expecting to see much of a return. However, there is probably some element of drawing a line in the sand with respect to the old management team. In the past two months Eidos has lost its finance director and parted company with its Chief Executive.

The first half of the year, lacking the Christmas period, is traditionally the quieter period for Eidos. So much so, in fact, that given the fixed nature of its costs it makes a heavy loss. The extra items this time around took that loss to a massive £82m. On the cash front Eidos has net debt of £8.6m. It has bank facilities of £50m so it still has some leeway. However it's an area that investors should keep monitoring closely.

Will Eidos recover?

So what does the future hold for Eidos? Has it turned the corner or is there worse to come? It claims that it grabbed the number one spot in the UK market for the first time this October, with 14% of total sales. As usual it has a healthy release schedule for its games, but it made exactly the same claim last year. The UK market is expected to grow by 20% a year for the next five years, although that is unlikely to be a smooth growth path if recent events are anything to go by.

The introduction of a new console, even one as major as PlayStation 2, is a fairly regular event. It had an enormous impact on Eidos's profits and whether the recent chain of events will be repeated a few years down the line is a major concern. Eidos is not expecting to be profitable again until the year ending March 2002 and it has it all to prove. Although the shares have fallen a long way, down to its current market value of £200m, I suspect investors won't have any hesitation marking it down still further if the news coming from the company is even marginally disappointing.

Where Next?

Eidos discussion board