Will FM25's spiralling costs ruin Sports Interactive ?

As you are probably aware by now FM25 has been delayed until March 2025 leading to mass hysteria anger and panic across the community about whether this spells the beginning of the end or a brave new world as step into the unity verse.

Truth be told, nobody really knows for certain but there were a lot of red flags at launch and the fallout has been a tricky path to navigate. But nobody has asked the question, with this level of ambition:

• How much has it cost to develop FM25?

• How much risk is attached to the delay until March 2025?

• Could SI actually post record losses next year?

Today I’m going to try and answer these and many more questions, but first that’s give you some research context about how we have got here. 

Sports Interactive Limited are a limited company established in the UK, and as such are required to submit annual accounts to Companies House. SI’s financial year runs from April to March, and the company has until December of that year to submit reports.

In April 2006, Sports Interactive were acquired by Sega Holdings Europe Limited, and Share Capital of 150,000,000 shares were issued worth £1.5m were registered and as it stands that is still the case in March 2024. 

In the current structure Sports Interactive’s immediate parent company is SEGA Europe Limited but the ultimate parent company SEGA Sammy Holdings Inc, who are registered in Japan.

SI VGDC background

In 2020 Sports Interactive established a subsidiary (think of it like an affiliate club or a reserve team) called SPORTS INTERACTIVE VGDC LIMITED, (Sports Interactive Video Game Development Company). UK tax legislation states that 

The VGDC is the company that actually produces the video game, and be responsible for designing, producing and testing the video game. As well as being  actively engaged in planning and decision-making during the design, production and testing of the video game.

Video Games Tax Relief (VGTR) is available to Video Games Development Companies (VGDCs) conducting a video game trade. There can only be one VGDC for each relevant video game.

It is common industry practice to subcontract third parties to deliver certain elements of a video game. This may be activities such as artwork or sound. Alternatively, it might be for specific parts of a game, such as a particular module requiring a different game engine. Where this is the case, the company is not prevented from being the VGDC for tax purposes.

SI have produced 20 editions of Football Manager since 2005 so lets recap 

2005 to 2009

FM Edition	TURNOVER / SALES (£M)	COST OF SALES (£M)	GROSS PROFIT(£M)	PROFIT AFTER TAX (£M)
2005	2.5	0.6	2.1	-0.26
2006	3.3	0.6	2.7	0.24
2007	4.3	0.6	3.8	-0.47
2008	3.3	0.5	0.5	-0.65
2009	4.5	0.5	4	0.3
Total	17.9	2.8	13.1	-0.84

We can see that Turnover Sales / Revenue over the first 5 editions, has been steadily above £2.5m and Cost of sales stayed steadily around £500k. Gross profit is the sum of how much the company has made selling their products minus how much it cost to make the product. From Gross Profit Administrative Expenses are deducted (such as wages, advertising , utilities premises etc.)

Profit/Loss after tax is the Gross Profit minus administrative expense which is also known as Operating Profit, however we have only included Profit after Tax as when reviewing the Financial Statements, the Company has received Tax Relief or Tax Credits which has offset any losses and resulted in a profit.

FM Edition	TURNOVER / SALES (£M)	COST OF SALES (£M)	GROSS PROFIT(£M)	PROFIT AFTER TAX (£M)
2010	7.8	1.1	6.7	2.05
2011	8.8	1.2	7.6	2.5
2012	11	1.2	9.9	3.7
2013	10	1.5	8.5	1.5
2014	13.2	2	11.2	2.5
Total	50.8	7	43.9	12.25

FM 2010 is probably one of the best received Football Managers and it shows by the large boost in Turnover increasing over a 5 year period from £17.9m to £50.8m and Profits soaring from a loss of less than £1m to a Profit £12.25m over the 5 years

FM Edition	TURNOVER / SALES (£M)	COST OF SALES (£M)	GROSS PROFIT(£M)	PROFIT AFTER TAX (£M)
2015	13.1	3.4	9.6	1.9
2016	7.7	2	5.7	-2.2
2017	12.6	2.8	9.8	0.1
2018	11.1	3.3	7.8	0.1
2019	15.6	3.6	12	1.8
Total	60.1	15.1	44.9	1.7

Whilst there was steady growth in turnover by £10m over FM15-FM19 period. Profit after Tax steadily dropped to less than £2m over 5 years. However we know that during these years significant investments were made to the match day experience etc.

Then Covid came at the end of March 2020, Project Dragonfly had started and the VGDC was formed

FM Edition	TURNOVER	COST OF SALES	GROSS PROFIT	PROFIT AFTER TAX
2020	23.1	6.8	17	5.5
2021	47.7	22	25.7	5.4
2022	48.3	42.75	5.5	0.9
2023	66.6	57.4	9.2	0.2
2024	72.1	65.2	6.85	-2.2
Total	257.8	194.15	64.25	9.8

Sports Interactive have disclosed in their Financial Statements that Research and Development is charged as an Expense or part of the VGDC cost of sales, 

VGDC Performance (Research & Development)

In 2020, within the VGDC its revenue is in respect of games development services provided to Sports Interactive Limited,  these services are provided under terms of Game Development Agreements between VGDC and Sports Interactive. Revenue is recognised as Services performed taking into account milestones under said GDAs. In 2024, it states that the development studio VGDC creates and enhances the game that the Customer Controls as the game is developed. Revenue is recognised over time as Studio satisfies its performance obligations. At the end of March 2024, £4m was owed to VGDC from the group.

VGDC	R&D cost of Sales (£M)	Tax Relief
2020	2	0.4
2021	20	3.8
2022	28.5	5.7
2023	37.1	6.9
2024	41	5.5

Knowing all this what does it mean, well as of 2024, Sports Interactive made a £2.2m loss, at the end of March 2024, this is a surprise due to the 14m players in the FM24 lifecycle, but this is due to the cost of sales in the groups revenue from the Research and Development.

If we adjust sales figures to ignore the Cost of Sales from R&D, we can see that the adjusted figures are still record turnover for Sports Interactive.

VGDC	R&D Cost of Sales	Turnover	Adjusted
2020	2	23.1	21.1
2021	20	47.7	27.7
2022	28.5	48.3	19.8
2023	37.1	66.6	29.5
2024	41	72.1	31.1

As part of the total Equity held by Sports Interactive, the Company had £12.8m in Profit and Loss Account, with £1.5m in share capital. £14.3m in total, any loss will be deducted so the £2.2m loss has reduced the total Equity to £12.1m. Which normally is fine but obviously  FM25 has now been delayed the launch of the games occur half way through the financial year, and with FM25 being delayed until March 2025, it is very likely that this will result in record losses. 

Considering the Cost of Sales were £65.2m in 2024, it is likely to be as high over April 2024 to March 2025, although these losses maybe offset by the £10m held in Equity and the £24m T held under the VGDC waiting for the game completion.

There is a risk that Sports Interactive will require substantial investment from SEGA Sammy Holdings to survive what is likely to be limited pre sales in the final Quarter of 24/25 January to March 2025.

For further information check out our video