Frontier Developments Share Discussion Threads

[p1nkfish] 13/12/2016 17:27

And close to Brexit fall-out immune.
VR headset adoption also a big positive.

[culford] 13/12/2016 13:19

Market seems to be waking up to the upside of this company.

Short term we should have three things happen in the next 6 months:
1. A trading update confirming the successful launch of PC and the step change up to a new level of revenues and profits with two games out in the market. As set out before, this is moving from revenues of £20m and broadly break even to revenues of £40m-60m and profits £10-20m.
2. An announcement on the third game to be self published by FDEV. On the basis of their success over many years and their ability to choose just one game from many ideas one can expect this to be of interest.
3. The launch of ED on PS4 in Q2 next year. This will be a combined ED& Horizons title and should thus be priced at c£40. If it is as successful as ED has been on Steam (remember there are 4x as many PS4 users as Steam users), or No Mans Sky was on PS4 this year, one can expect this to sell >1m copies and thus take sales up another step.

Longer term, over the next 5 years, FDEV has written about its wish to follow Activision and Electronic Arts. These two US giants are valued at $25-30bn and trade on 20x-25x forecast earnings. That is some way ahead but illustrates the potential of FDEV which is valued at less than £100m and which is probably trading at less than 5x 2017 earnings. It has £8m cash in the bank, 30 years of successful production history, a unique development software system that others in the industry wish to licence and a clear strategy to deliver great games and considerable shareholder value.

[hastings] 13/12/2016 08:43

Cheers Culford and some very interesting thoughts on numbers from you.

Regarding recruitment, there appears to be plenty of ongoing activity which is good to see.
FDEV was difficult to value on a number of fronts when it first came to market, particularly moving to that pure self-publishing model.

Much of that mist appears to be dissipating though and as things progress further the shares should surely attract a greater interest.

Looking forward to the update next month which should provide us with some further flesh on the bones, whilst I am now in the process of fixing up another visit to the main site in Cambridge.

[culford] 12/12/2016 12:27

Good article hastings

It would be interesting to know what assumptions Numos made for PC in those forecasts
The game is much more mainstream than ED and the actual sales seem to be tracking the alpha and beta signals by being 2-3x greater than ED. The price, however, is £30 rather than £40 and, the bulk of sales are through Steam rather than direct, taking net to 70% of £30 = £21. Thus if volumes are 2.5 x higher but net contribution is 1/2 than overall the benefit is c25% higher gross contribution. This would be a gross contribution for y/e May 2017 of £26m (in launch year ED generated £21m). Assuming existing one game sales and costs were c£20m and thus breakeven, it is hard to see there not being a significant upgrade in January on the £3.4m Numis pre tax forecast......

plus in Q2 2017 we have ED launching on PS4 which could easily double the size of that franchise (currently c2m units sold)......

plus in Q1 FDEV will also announce the 3rd game to be developed.....

hopefully the recruitment in Cambridge carries on for a good while yet

[culford] 12/12/2016 09:52

Directors buying is very encouraging albeit surprising. This is after period end and before a trading statement! To those of us following closely it looks as it revenues have moved up to another level with release of PC, which has a dramatic effect on profitability.

[hastings] 12/12/2016 09:36

Hi Culford, yes I caught up with David Walsh on Friday (David Braben unavailable) and have penned a piece which I will post when it goes up on the Cambridge News website.

Suffice to say, there really wasn't too much he could say,(understandable given the time)but hopefully, the piece will be of some relevance and contain a few interesting points.

I have been invited to go back for another visit in the New Year, which I will be taking up and I will most likely pen a much more in-depth article.

[culford] 12/12/2016 08:33

Did you get any update hastings?

The game is still 3rd in Global Top Sellers this morning and the top game not on sale. It has now been the top selling non discounted game over the past month which is 2nd busiest time of year, with coming month the busiest. SteamSpy is estimating that it has sold 350k games which is £10m through its biggest distribution channel in a month. Shares moving up now....

[culford] 09/12/2016 21:10

let us know hastings - interesting times for FDEV

[hastings] 09/12/2016 10:50

Catching up with management later today so will be penning something for next week.

[makw61] 09/12/2016 10:28

Hadn't seen the Numis forecasts so thanks for the post. Agree they look pretty achievable. £14m cash is roughly 40p per share, so stripping that out implies a forward PE of around 12.7, well below the market average never mind the average for similar companies. Can't see a lot of downside at this level and hence as p1nkfish says there are a range of possible upsides, some of which are quite sizeable.

I've some cash due in next week from the Lifeline Scientific takeover so I am tempted to pick up a few more of these. Just need the announcement of the next franchise now to complete a year of significant progress for FDEV.

GLA

[hastings] 09/12/2016 08:24

Numis forecast of 7.5p for next year followed by 13.4p doesn't look that aggressive given the progress and potential. And if 2018 expected net cash of £14m is also near the mark the shares should at last attract some wider attention.

[p1nkfish] 09/12/2016 08:00

Well rns released concerning ps4.

Future is an unknown but probabilistic outcomes suggest this is very undervalued if the expected plays out.

Pleased to say my average price is very reasonable and I wish all holders good luck.

[culford] 09/12/2016 01:46

Getting a bit carried away but No Man's Sky, which launched on PS4 and PC in August 2016, was estimated to have generated sales of $78m in that month!! It is now well behind ED in terms of users on Steam and SteamSpy suggests that it has sold slightly fewer games. It is widely regarded to have been over hyped. It does, however, show the sales potential of ED on PS4. With Planet Coaster selling well, and the PS4 launch for ED planned for Q2 2017, it is possible FDEV sales could hit £100m over next 12 months.......

[culford] 09/12/2016 00:04

Hastings
that is very significant news.

PS4 has sold 50m handsets and is on target to reach 60m by March 2017
To date, excluding Arena and Horizons, ED has sold 900,000 copies on Steam which has 12m users. That is a penetration rate of 7.5%

If it reached a similar penetration rate on PS4, i.e. 7.5%, it would sell 4.5m copes from Q2 next year. Assuming that the game sells at £40 (Horizons + Elite combined) and that ED receives 70% as is typical, it will receive 4.5m x £40 x 70% = £126m.

The Steam sales were achieved over 2 years, which would be a profit contribution of £63m per annum, almost the current market cap of FDEV. Coming on top of the success of Planet Coaster, this could be the cheapest stock on Aim right now!! It could be trading on 1x forecast earnings.

[m4ybe] 07/12/2016 13:18

I get position 3 too, so it must be sorted by general rank as you say. Breakout hopefully, appropriate chart for the developer of a rollercoaster game.

[culford] 07/12/2016 12:27

Found the global top sellers list where PC currently 3rd and top of non sale games.



Has now been in or near top for a month so bodes well for immediate and longer term results. Negative feedback (less than 10% of reviews) focuses on high spec, which requires top end computers which will prevent it being a global blockbuster. They also focus on relatively weak management aspect of game, compared with creative building, which should be improved over time.

Share price suggests market beginning to wake up....

[culford] 06/12/2016 12:24

Makw61
Agree on the leverage point. FDEV management has been building games for games companies for 30 years and has spent considerable sums building its own software system, Cobra. They talk about this all the time as it enables them to be much more efficient/effective versus their competitors - e.g. ED was launched at end 2014 and its major competitor, Star Citizen, has still not launched. It enables them to develop games for multiple platforms (PC windows, Apple, Xbox, PS4 (when is that happening...)and they have licensed this capability to a customer in the past year. They are also largely based in one location; Cambridge. They have still a lot to learn on marketing and selling, having only recently gone from B2B to B2C. It will be interesting to find out what cost they will need to add to assist on marketing/sales and to add a further game.

A major European competitor is Ubisoft, which has grown using acquisitions. This may come later for FDEV but I like their focused organic strategy of developing one new franchise game at a time - they must have a lot of ideas put to them and can just focus on the best one, whilst continuing to develop and grow their existing ones.

[makw61] 06/12/2016 10:34

I've been tracking steamspy sales daily since mid-Sept and they seem fairly sensible (e.g. higher sales at weekends). There was an article on the site a little while back to the extent that the feedback from Valve employees was that steamspy actually undercooked sales by around 5% and I believe the algo has been recalibrated to that effect. The thrillseeker edition sold well so 89k doesn't seem unreasonable.
The daily movements are of course very iffy as the margin of error is typically greater than one day's sales e.g. I'm showing a -71 move from yesterday which is complete nonsense.
Culford, you're probably right as I tend to be far too cautious in my estimates! Your figures do look a little high to me though - I think you would need to take c.20% off your £30 unit figure for VAT which is not Frontier's revenue. VAT rates are similar across the EU, not sure how sales in US are treated. £25 might be a safer figure overall, I don't know for sure. Looking forward to seeing some more numbers so I can refine my model!
For me, the great thing about Frontier is how they achieve so much with relatively few people. The salary bill is only around £12m which seems amazingly low. Profits should absolutely motor in H2 once all the fixed costs are covered.
They also spend relatively little on marketing, although I've noticed the ED trailer a few times on Youtube recently. Bit of a waste as I own the game of course...reminds me of the old adage "we know that half of our marketing spend is wasted but we don't know which half". I would think Youtube is a relatively cost effective medium though and measurable of course. The target market seems right as well so hopefully this is Frontier investing a little of the PC revenue to boost ED? Would love to see that PS4 port....
Anyway seems to be a bit more volume in the stock recently - just need that stock overhang to clear for the shares to rise.
GLA

[phowdo] 06/12/2016 10:02

Seems theres a bit of stock available at this level.
Ive added to my position over the last few days as the transition to having multiple products available as well as in development should see good bottom line growth now.

Tracking online sales not as simple as the old days where subscribers to NPD could get ahead of the market.

Planetcoaster system specs are a little high to truly enter blockbuster PC sim sales territory but should have a extended shelflife and not need discounting to maintain sales.

[culford] 06/12/2016 09:49

The Beta release was on 9th November and PC was top of charts through the Beta period so the 89k may not be far out. Not sure how they clock those that buy direct from Frontier and get a Steam key for free? Overall as you say both games going well and H1 will have both sets of sales on for first time. Even though this is only for 2 weeks it was through launch and the Steam sale and it looks as if sales were very strong...

[m4ybe] 06/12/2016 05:02

The SteamSpy data is a bit iffy as on the 16th before release it says 89k owners. But I think it'll give the general picture, and probably scaled a bit wrongly one way or the other.
Long term internet trends I'm seeing are that the interest in both games put together is a decent uptrend over the months and years.

[m4ybe] 06/12/2016 04:46

culford I noticed the top sellers list is sorted by "relevance" which could be any algorithm. It's top position now in Thailand for some reason, and number 3 in UK. US version could be viewed using a proxy website for the States. I guess just being on this page is the good news.

The SteamSpy data, although a bit risky to rely on, is what's convincing me at the moment that things are very good. Even assuming they just get £20 per sale after various sales costs and corporation tax because it's profit - that's a tenth of market cap coming in potentially as profit per month!

[culford] 05/12/2016 22:37

M4ybe - hadn't realised that position could be different by country - as you say would be good to know how to look at US store from here.

Makw61 - Disagree with you on H1 sales. H1 2015/6 had sales of £10.9m, with sales of £10.5m in H2. There were more units sold in H1 but at a lower price as there was discounting during the black friday sale.

In early September 2016 we were told that trading in Q1 2016/7 was better than expected, albeit this is a low period. It looks like for H1 2016/7 c350k PC games sold at c£30 - c£10.5m and probably 300-500k units of ED at c£20 or £6m to £10m. That suggests revenues up 50% to 90%. As business was break even (made £400k in H1 2015/6) the increase in net revenues should flow through to bottom line i.e. 70% of incremental sales to bottom line, or £4m to £7m. Agree that H2 will be even more significant with 6 months not 2 weeks of PC sales and including Christmas trading then winter sale for 2 games. However H1 profits could be materially higher and thus require a trading update this month.


SteamSpy has estimates of sales data on it which suggests almost 300k PC sales by end November. This, plus >50k direct sales on Frontier website leads me to estimate H1 sales of c350k above.