Staff Writers

The Venture Capital market in Australia has long been a woeful hindrance to commercialising innovation – the successful game development business has never fared much better.

There could be some opportunities on the horizon soon, however, with a new VC launched to dole out some cash for struggling gaming start-ups.

The Electronic Games Investment Fund [EGIF] will kick off next week thanks to $47,000 kicked in by the Queensland Department of State Development and Innovation. The goal is to raise at least $5 million a year over the next five years to attain $25 million in share capital with a minimum investment of $100,000 initially.

Evelyn Richardson, President of the Game Developers’ Association of Australia [GDAA] welcomed the fund launch saying; “local funding for Australian game development has long been an issue and now we have an opportunity to fundamentally change the face of the industry”.

Richardson called on the investment community to back the fund saying it is a chance for savvy investors to become part of one of the fastest growing industries in the world.

“Globally, the industry is experiencing double-digit growth, with a recent 2005 report by PricewaterhouseCoopers estimating the 2004 market for interactive video game software at $34.5 billion, compared with film takings of $33.2 billion.”

Under the traditional publisher-funded development model, the risk is primarily borne by the publisher as the advance is non-refundable but assigns all future rights over the intellectual property for spin-off games and sequels to the publisher.

EGIF will be headed by a board comprised of Chairman Tom Parkinson, and Directors Stephen Copplin, Jeff Jones and Peter Dowling combining an impressive balance of skills including accounting and commercial strategy, fund raising, software and games development, film and television production, marketing. The Board will be supported by a carefully selected industry advisory panel and an experienced fund manager Ashley Munro Corporate Services.

The fund initially plans to invest in development of games designed for handheld devices such as Playstation Portable, Gameboy Advance and Nintendo DS. The typical development cost for games in this category is $500,000 – $1 million with a 12-18 month development timeframe.

Once a track record has been established and further fundraising completed, EGIF will extend its funding offering to the more expensive and lucrative PC and console games market, which cost as much as $10-15 million and several years to develop.

Tom Parkinson, EGIF Chairman, said with little government financial assistance available, developers have traditionally relied on funding from family or friends or in the form of an advance from publishers, where the publisher’s investment is reimbursed as a priority payment from future royalty streams.

“As a result of EGIF funding, developers will be released from the onerous constraints publishers impose, retain their intellectual property and be able to negotiate higher royalty rates from publishers,” Parkinson said.

“Australian developers will now be in a position to retain their talent pool knowing that potentially funding will be available and this will aid in the growth of the industry in Australia.” 

“EGIF will support the developers in negotiating the distribution agreements prior to committing to funding. Publishers will be supportive of EGIF given that their risks are mitigated through the non-provision of development funding. Their money will not be tied up for the years in development and can be spent on Marketing.

“Through EGIF’s investment, all sides in the Games industry can increase their profits, EGIF will share in the gains and provide franked dividends to its shareholders.” EGIF is a registered Pooled Development Fund. As such, the shareholders will receive generous tax benefits available under the PDF Act.

Parkinson says EGIF will seek a stake of 20% to 80% of project-specific development companies. Upon delivery to the publisher, EGIF will receive a significant payment for the provision of all contracted delivery items, with a balance of its investment and return on investment (IRR of 30-40%) being generally received within the next six months.

Telstra Business Systems has agreed to acquire one of its West Australian partners, Converged Networks Group.

TBS will re-brand the company and take over the day to day management following completion of the sale.

Telstra Business Systems, Managing Director, Malcolm Flanagan, said the acquisition of Converged Networks highlighted the importance that the company placed on the enterprise and SME markets in Western Australia.

“The partnership with Converged Networks has enabled us to enjoy success in WA through an experienced local partner,” he said. “We believe it was a natural progression to bring these companies together to build on the foundations we have so carefully established.

“As more organisations in WA adopt convergence and IP as the basis of their communications platform, Telstra Business Systems looks forward to working closely with them to deliver intelligent solutions which seamlessly integrate their communications.”

Converged Networks, Managing Director, Phil Zappara said large corporate and government customers would benefit greatly by the joining of the companies simply by the scope of services they now had to offer.

Volante reached the revised earning forecasts it made in November last year which precipitated a free fall in share price and its ultimate takeover by Commander Communications.

The merged entity formed when Volante and system builder Ipex joined forces in early 2004 lasted only two years as it raced to restructure its business in the face of diminishing hardware margins.

Erstwhile Compaq country manager and now head of Volante, Ian Penman tried hard to cut costs and gain a bigger share of the corporate and Government market for systems supply and maintenance, but the company’s shift to a services focus was just not fast enough to appease a market tempted when the unwelcome suitor came knocking.

Commander Communications acquired its first tranche of Volante shares yesterday after the Volante board gave in to an improved offer for the company’s shares.

With time ticking before the company would have to reveal the extent of its 2005 woes, Commander increased the pressure on Volante Board members seeking to force the company to reveal more detail about future contract business, but theASX Takeover’s board sided with Volante saying thecommercially sensitive information should remain secret.

In response, Commander increased its offer and the Volante Board accepted the better deal nad told its shareholders to do the same.

Now as the off-market acquisition progresses, Volante has revealed its profit for the second half of 2005 fell by nearly 70 per cent as the margin squeeze on hardware took bite and the company tried to stem loses by cutting costs. Earnings for the first half of this fiscal year came in at $12.6 million (EBITDA) down on 2004’s result of $17.0 million for the same period.

Restructuring costs came to $1.9 million, but a loss in revenue for the period down from $203.8 million the year before to just $194.4 million didn’t help.

The results clearly indicate the sense in what Volante was trying to do as it shifted from product to services. Product revenue were $139.1 million realising a $4.6 million profit, while the company’s services arm made $55.3 million in revenues with a profit of $7.9 million.

Overall the company’s After Tax Profit came in at only $2.0 million for the six months to 31 December 2005 compared to $5.5 million the year before. The directors have declared an interim dividend of 2.0 cents fully franked (2004: 4.0 cents), payable on 7 April 2006 to shareholders on the register at 24 March 2006.

Ian Penman, group managing director, said: `While within previous guidance, the results reflect the significant challenges we faced in taking tough actions to realign the company, and position ourselves for future growth. The first half was negatively impacted by one-off restructuring costs of $1.9 million, tendering costs of $1 million, lower-than-anticipated revenue from Product sales and a higher than acceptable cost structure.”

Despite posting a wider loss that the prior period, Voice over Internet service provider engin is “pleased” with its results thanks to some benchmarks indicating it’s on its way to profitable trading.

Compared to the first half of 2005, the period ending December 31, 2005 showed that subscriber growth is accelerating with new sign-ups in the first two months of this year showing even more promise.

In the middle of last year, engin had achieved only 5,800 sign-ups but by the end of the calendar year, that number had grown to 18,100 subscribers. Already, this year, by the end of February more than 24,000 customers had signed up to engin’s service, a 30 per cent increase in only two months.

Revenues were looking healthier too. A 143 per cent increase from $1.25 million in the first half of calendar 2005 to $3.03 million for the July to December half, however failed to help the company reach breakeven.

The half year loss after tax of $3.75 million (EBITDA loss $5.13 million) was in fact higher than the half year ended June 2005 when the company lost only $3.41 million (EBITDA loss $3.79 million).

However, CEO Ilka Tales is confident the company has sufficient cash reserves to see it through to break even thanks to a capital raising last August which saw 29.5 million add more than $4million to the company’s balance sheet. The company’s cash reserves now stand at $5.70 million.

Higher subscriber numbers pushed the number of voice minutes carried to 6,600,000 minutes for the month of December, but with infrastructure in place operational costs will not grow as fast.

CEO Tales said: “We are pleased with our progress, all our business drivers indicate we are on target to meet our business goals. The results show that our growth has been significant and we have balanced this growth with operational effectiveness. We look forward to making even greater strides in 2006 and delivering further savings to Australian consumers and businesses using broadband telephony”.

Tales points out that metric such as number of subscribers per employee and customers acquisition costs will ultimately drive efficiency into the organisation.

Marketing cost per new subscriber line fell from $245 in the first half of last year to just $95 by the second half. Similarly, the number of paying subscriber lines per employee rose from 111 to 241 between the two periods.

www.engin.com.au