Frontier Development (LON: FDEV) develops and publishes video games. The company uses its proprietary cross-platform technology ‘COBRA’ to create games for video game consoles and personal computers. The AIM-listed company’s three major self-published franchises include Elite Dangerous, Planet Coaster, and Jurassic World Evolution.
Financial highlights
Frontier reported revenue of £34.2m in 2018, down 9% compared to a revenue of £37.4m reported in 2017. Operating profit for 2018 was lower by 64% at £2.8m versus a profit of £7.8m reported in 2017. Lower revenue, lower gross profit margin and a higher level of operating costs resulted in the reduction in operating profit. Gross profit was £24.1m in the year (FY201717: £27.4m) with gross margin at 70.5% (FY2017: 73.2%).
EBITDA (earnings before interest, tax, depreciation, and amortization) for the year fell to £9.4m (FY2017: £12.7m). In its annual report, Frontier noted that it’s “comfortable with the current range of analyst revenue projections of £75m to £88m for FY19, a substantial increase over the £34m achieved in FY18” despite it being “early in terms of both Frontier’s financial year and the life-cycle of Jurassic World Evolution.”
According to CEO David Braben, Jurassic World Evolution is the company’s largest launch to date with substantial digital sales across all three platforms, (PC, PlayStation 4 and Xbox One). On 19 July 2018, Frontier announced that cumulative sales on all formats had passed 1 million units, just 5 weeks after the digital launch on 12 June 2018.
The company’s fourth franchise - which it is calling “Franchise four” - is targeted for release in 2020 and is now in full development. The company has two more new franchises in earlier stages of development.
Are you “game” for FDEV?
According to Frontier, the games market has become the primary form of entertainment worldwide and is worth over $100bn per year within the $300bn entertainment industry. This is larger than each of the film, TV or music industries. According to Frontier, the games sector increased by around 10% last year, while other entertainment sectors, such as TV, saw declines.
With stunning graphics and improved quality of games, the market seems to have shifted to digital downloads from purchases of packaged software. Frontier noted that the market is moving rapidly towards digital download as the primary delivery model.
Mobile and PC are now almost 100% digital, and the console audience is rapidly adopting digital downloads as well. This shift is likely to boost the profitability of video game companies, such as Frontier, making it easier for them to expand internationally.
Conclusion: Frontier’s market cap at the time of writing was £424m while its shares are down 37% year-over-year. For those wanting to plug-in their portfolio to the booming industry attached to Frontier, now might be the right time to buy, given that the stock is relatively cheaper than it was a year ago. Bear in mind, the upcoming “Franchise 4” could be instrumental in moving the share prices higher.
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Kshitija B.