‘We’re in a great place’: Frontier Developments charts robust growth despite release hiatus
Shares in Frontier Developments rose this morning after the video game publisher hit its target full-year sales despite no new releases and the board projected strong 2022 growth due to its “strongest ever” games roadmap.
The AIM-listed firm reported a pre-tax profit of £19.2m in the year to the end of May, up 20 per cent from £16.2m in the same period last year, and slightly ahead of analysts’ expectations.
Although revenue rose to a company record of £90.7m, up 19 per cent from £76.1m a year earlier, this was at the lower end of its range, after the company started the year predicting it was on track to deliver revenues at the top end of analysts’ original estimates of up to £95m.
Frontier changed its tack in a trading update in June, when it released a £91m revenue guidance alongside announcing that it would not release its new F1 management game in FY2021, as originally expected.
But despite this pushback, the game developer maintained a robust operating profit margin of 22 per cent, consistent with the previous two years.
And all eyes were on the future today, as the board described its upcoming game releases as its “strongest ever” roadmap. Frontier projects revenue will hit between £130m and £150m in 2022, implying an annual growth rate of 43 to 65 per cent above this year’s results.
Much of this pins on its release of “Jurassic World Evolution 2” on 9 November this year, a hotly-anticipated sequel to its first iteration of the game released in 2018.
The original “Jurassic World Evolution” earned Frontier over £70m in its first year, and analysts expect the second to rake in around £40m.
While Frontier’s revenue has tended to fluctuate depending on where release dates fall in the financial year, chief executive David Braben told City PM that today’s results prove it has solid foundations.
“Considering we’ve had no new franchise releases, it shows the ongoing success of our existing titles gives us a long, long tail of really reliable revenue stream,” Braben said.
Growing pains
Frontier’s shares have fluctuated this year, reflecting the game publisher’s rocky road.
Braben apologised to gamers in May after its new game “Elite Dangerous: Odyssey” suffered technical glitches, and then a month later, the firm pushed the release of its F1 game back to the next financial year due to its developers struggling to work from home.
But these challenges are “mostly turned around now,” said Braben, who cited these issues as the reason why “things are slightly lower than expected, but still pretty good.”
Looking ahead, Frontier has erred on the side of caution with its full-year projections for 2022, which have come in slightly shy of analysts’ expectations of £133m to £153m.
Pressed on whether this was a buffer for further possible delays, Braben said: “We are absolutely confident on the Jurassic date.”
Instead, Frontier has timed the release of its new Formula One game to correspond with the 2022 F1 season next summer – which will be its FY23.
“In an abundance of caution, we excluded the revenue from the Formula One game from this financial year, whereas a number of analysts had it in,” Braben said.
With this adjusted guidance in mind, Frontier’s strategy represents “a very low risk, high return model,” CFO Alex Bevis told City PM.
“We’re being a a bit cautious here, but we are expecting a very big performance from Jurassic Evolution 2 just before Thanksgiving and Christmas,” Bevis said.
“By the time we get through the holidays, we’ll have a much better idea of where we’re going to land in terms of this year’s performance,” he added.
A booming industry
Video gaming has grown to become a multibillion-pound industry, booming during the pandemic as people were forced to stay inside and avoid socialising.
This coincided with massive recent console releases from industry giants Microsoft and Sony, attracting both newbies and seasoned gamers who snapped up their new models of the Xbox Series X and Series S and the PlayStation 5.
The video games market in the UK alone grew to £7bn in 2020, an unprecedented 30 per cent increase on the year earlier, according to data from UK games industry body Ukie.
And according to analysts, investors have reason to be confident in Frontier as a leader of the British gaming pack.
Analysts at Investec were optimistic about Frontier’s potential for growth, and said: “This is a reassuring update post the Odyssey and game delay news – we believe these issues are growing pains more than anything else and continue to believe investors are presented with a compelling opportunity to access this long-term growth story.”
The trailers for Jurassic World Evolution 2 received a strong reception online, racking up 1.3m views on Youtube and 39k likes, leading analysts at Jefferies to point towards a potential upside on release.
“While we caution against raising estimates for this title pending launch, we believe the good reception should help substantially alleviate investor concerns on JWE2 not launching in conjunction with a JW movie,” Jefferies said in an analysts note.
And while time spent gaming may have sunk slightly from its pandemic lockdown peak, Braben believes the video game trend will persist at levels higher than pre-Covid, as people seek connection online.
“We’ve seen an accelerated transition to a trend that was already happening pre Covid, and that’s the movement towards a different kind of game that people are playing,” said Braben.
“It’s more social, exactly like the games we’ve been making. The first thing we do when we release a game is we start building a community around it.”
“I think we’re in a good place.”