- 2023 profits seen materially below expectations

- 2024 revenue growth forecast slashed to 5%

- Third-party publishing arm under review

Video gaming developer and publisher Frontier Developments (FDEV:AIM) warned on earnings for the full year to May 2023 after seeing lower than expected sales over the festive season, which it said was ‘potentially due in part to increased player price sensitivity related to worsening economic conditions.’

In addition, the firm said it would assess strategic options for its third-party publishing arm, Foundry, after ‘mixed’ financial success since its launch in summer 2019.

The shares cratered 40% to 600p and are now 80% below the peak achieved two years ago when the company was seen as a major beneficiary of lockdown.

WHAT ARE THE FINANCIAL IMPLICATIONS?

Frontier now expects revenue to be at least £100 million compared with consensus market expectations of £135 million, which would represent a drop of around 12% against the record £114 million delivered in 2022.

The board said the full year outcome was dependent on several variables including a ‘conspicuous’ success for one of the upcoming Foundry releases.

Meanwhile, profitability is expected to collapse to £2 million compared with market expectations of £19 million as lower revenues impact margins, illustrating the operational leverage in the business.

The board estimates that were sales to match last year, operating profit would improve to around £10 million representing a margin of 9% compared with 2% with sales at £100 million.

In other words, an extra £14 million of sales would generate roughly £8 million of additional profit.

For 2024, the board now expects sales to increase around 5% which is well below market expectations of around 20% prior to the profit warning.

Chief executive Jonny Watts commented: ‘It is very disappointing to be resetting our financial expectations. I am driving a change in emphasis to increase focus on our core strengths and skills, with particular attention to increasing the return on investment that we achieve from our world-class teams.

‘We intend to grow the number of our development teams to increase the cadence of new releases, whilst continuing to nurture our existing portfolio, to achieve sustainable growth.’

EXPERT VIEWS

Shore Capital analyst Katie Cousins maintained her buy recommendation on the shares despite revising down forecasts.

Cousins said, ‘we believe Frontier Developments has some good quality characteristics, noting the historical success of its launch and nurture strategy, strong balance sheet (£43m cash as of 30 Nov 2022) and its growing portfolio of titles, and we believe the group could return to previous strength due to these.’

AJ Bell investment director Russ Mould commented: ‘A big profit warning from Frontier Developments on the underperformance of key title F1 Manager 2022 has seen an outsized reaction in terms of the share price - reflecting the fact this is not the first misstep for the company in recent times. Its peer Devolver Digital also trimmed guidance after a weak showing for some of its own releases over Christmas.

‘Computer games are not cheap and anyone looking to save money to help pay the bills might see them as something that can wait until another day as there are other priorities for their cash.’

Disclaimer: Financial services company AJ Bell referenced in the article owns Shares magazine. The author of the article (Martin Gamble) and the editor (Ian Conway) own shares in AJ Bell.

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Issue Date: 09 Jan 2023