Video games specialist Frontier Developments (FDEV:AIM) has seen its shares cheapen 2.4% to £10.35 as investors focus on a temporary pullback in annual sales and profits reported today, yet the Cambridge-based publisher potentially has a monster year ahead.
Geared into the growth of a booming global games market moving rapidly towards digital download, Frontier excites by announcing for the first time that its fourth franchise will be based on the company’s own unannounced intellectual property (IP) and is now in development, with a release targeted in full year 2020.
Backed by Chinese internet-to-interactive entertainment heavyweight Tencent, Frontier has successfully completed a shift to self-publishing games over the last five years.
It has launched two successful games franchises, Elite Dangerous and Planet Coaster and, more recently, its third franchise Jurassic World Evolution, in June 2018.
During the financial year to 31 May, the ongoing success of Elite Dangerous and Planet Coaster supported the investment in Jurassic World Evolution, which launched successfully alongside the smash hit Jurassic World: Fallen Kingdom at the cinema.
SALES SET FOR A JURASSIC-SIZED JUMP
Frontier reports annual sales of £34.2m (2017: £37.4m), modestly down as there were no major launches in the financial year, yet holding up well nevertheless and coming in bang in line with Liberum Capital’s forecasts. Encouragingly, adjusted EBITDA of £9.4m (2017: £12.7m) is actually 9% north of the broker’s estimates.
Albeit early in the new financial year and the life-cycle of Jurassic World Evolution, Frontier’s management is comfortable with the current range of analyst revenue projections of £75m to £88m for the year to May 2019, which would represent nothing short of a monster year-on-year increase in sales.
Why are they so confident? Well, the launch of Jurassic World Evolution in June 2018 has led to a record trading performance during the period since year-end.
Digital sales have been substantial across the PC, PlayStation 4 and Xbox One consoles and physical disc sales on PlayStation 4 and Xbox One have also been significant.
And in July, Frontier announced that the new game’s cumulative sales on all formats had passed 1m units, just 5 weeks after the digital launch on 12 June.
FOURTH FRANCHISE EXCITES
Frontier is now aiming to accelerate its games output to achieve one major launch ‘every 12 months or so’.
Founder and CEO David Braben says: ‘Franchise four, which is based on our own un-announced IP, is now in full development and targeted for release in full year 2020, and two more new franchises are in earlier stages of development.’
The company is yet to disclose any details on the franchise, including the type of IP, genre or platforms, says Liberum analyst Andrew Bryant.
‘Given the lack of details, we forecast revenues of £20m from franchise IV in full year 2020, in line with Frontier’s first two franchise releases. However, depending on community reception, build-up to launch and marketing impact, this figure could change considerably,’ he teases.
Investment bank Jefferies has a favourable view of the business on the basis of Frontier’s ‘progress toward a broader base of AAA games, now launching yearly, generating a more diverse and sustainable profit profile over coming years, backed by a strong balance sheet (before Jurassic World Evolution’s proceeds are banked).’
FinnCap analyst Lorne Daniel forecasts a leap in adjusted pre-tax profit from £3.9m to £16.5m for the year to May 2019 from forecast sales of £75.3m. ‘Early in the new full year and Jurassic World Evolution life-cycle, we remain at the conservative end of the revenue range for full year 2019 but leave room for upgrade at the half year results,’ says Daniel.
