Frontier Developments Share Discussion Threads

[hpcg] 03/7/2018 13:17

We'll see how behavioural arbitrage works. I have bought more at 1385 but I'm mainly waiting for the end of day weakness. In theory anyone else accumulating will do the same and so I won't get any. Of course sellers should have also adjusted their timing.

I also note that as a day trading vehicle this is superior to and main market listed company. The spread is 5 / 1400 which is 0.357%, when stamp duty comes in at 0.5%. I'm not doing that, but the excellent liquidity means I am sure there will be people engaged in that activity.

[haggishunter] 03/7/2018 12:51

Planet Coaster’s Vintage Pack Coming on the 10th probably £7.99

[nimbo1] 03/7/2018 12:08

I quite like this commentary below from stockopedia - I believe if you wait 2 years to buy you'll be paying a price which reflects well north of a £1 billion M/C. But of course with 5 franchises the risk will be much reduced. Out of interest companies like Ubisoft and Paradox make c.50% of their revenues from the back catalogue - its very important.

Frontier Developments (LON:FDEV)
Share price: 1485p (+9%)
No. of shares: 38.7 million
Market cap: £575 million
Trading Statement

A super update from this video games publisher. Not only is it upgrading expectations again, but it has quantified these expectations with numbers (something that is suprisingly rare!)

The Board's expectations for the current financial year have increased as a result of the initial sales performance of Jurassic World Evolution. Although it's very early in terms of both Frontier's financial year and the life-cycle of Jurassic World Evolution, current Board projections indicate that Frontier could achieve total revenue for the year ending 31 May 2019 towards the upper end of the current market analyst range (of £58 million to £88 million).
Note how wide the range of analyst forecasts was: £58 million - £88 million. That indicates to me a great deal of uncertainty as to how the company might do.

If the company achieves toward the upper end of that range, I would expect a huge increase in the bottom line.

Gross margin is over 70% (the marginal cost of selling an additional video game is low) and the degree of operating leverage remains quite high. This means that additional sales should have a disproportionate impact on profitability.

This stock deserves a high rating, in my view. As I've said many times, I think there are larger and more diversified games publishers who are probably safer bets. But let's not take away from the achievements at Frontier.

Frontier is hoping to become more diversified over time. It currently has three franchises.

CEO comment:

We already have future franchises in different phases of internal development and we will continue to explore other models to accelerate our scale-up.
Activision Blizzard ($ATVI) is currently trading at a forward P/E ratio of 28x, and EV/EBITDA of 26x.

Prior to today's update, Frontier was trading at forecast P/E ratio of 38x, and EV/EBITDA of 37x.

Given the strength of today's update, I wonder if these valuation multiples could possibly reduce for Frontier? Or perhaps the trading momentum is more than fully offset by the share price increase.

I would like to own a video games publisher, as I think the economics of the industry are very favourable to investors.

One of the fund managers I follow, Nick Train, has been a long-term holder of Nintendo (TYO:7974). That's a good example of a stock with unique and precious intellectual property.

I've just run a quick comparison, and found that Nintendo might be offering decent value at the moment, relative to Activision:

5b3b3fb1078cbATVI_NIN.JPG



(These metrics are trailing P/E ratio, EV/EBITDA, Price to Sales and Price to Cashflow.)

Given the strength of Frontier's momentum, it might be able to challenge these two giants on some of these metrics soon.

And when it is more diversified, e.g. with 5+ strong franchises, then it could feel safe enough for me to buy.

The StockRank summarises:

[panic investor] 03/7/2018 12:08

All trades on Advfn are indicative - never take notice of them

[villarich] 03/7/2018 12:00

And after the share price has just dropped 20% in a month

[nimbo1] 03/7/2018 11:57

Anyone ever seen a company increase their FY expectations, 6 weeks into the new year and go 2% up on the day? The market is a funny place.

Phowdo I would think the likelihood of FDEV paying Universal anything upfront for JWE is almost 0...Universal approached FDEV...

[endion] 03/7/2018 11:53

In relation to the "franchises" comment, it has already been announced that the fourth franchise is in full production, and fifth is in pre-production. I would imagine this is what he is referring to.

Also, there are no big sell trades coming up, unless they are reported wrong. I wonder why the pull back when there are only really buys?

Nevermind, watching level 2 at the moment and it's highly volatile. But very liquid, which is good!

[phowdo] 03/7/2018 11:49

On console there is also the 10-15% royalty to console manufacturer.

Distribution/wholesale was always about 30%. The advantage with digital is no physical inventory and associated costs. Also one company can distribute world-wide whereas it used to be many tiny deals for all the minor territories.

Movie license. 10% is about right but at that rate usually there is also a big upfront advance too alongside marketing commitments. There are myriads of ways to structure license contracts (sliding scales, recoup schedules etc etc) and will be confidential.

[alphabeta4] 03/7/2018 11:39

Last post, don't want to fill up the board.

I don't know where Liberum have got this from (presumably management as they're a corporate broker) but in today's note:

'It is clear that game downloads (at full price including good demand
for the £45 deluxe version) in the first few weeks have been very encouraging with strong demand from the USA and China in particular'.

I'm presuming the China bit is not from Steam so there could be a bit of a risk on over relying on Steamspy.

They up expected sales from 1m to 1.8m. Their target price has gone £14.80, under review, today upped to £18.

[nimbo1] 03/7/2018 11:18

Digital margins are better for FDEV than Physical disk.

Its why in interim results for H1 reported in feb the gross margins dropped from c.71 to 69 from memory, because of the release of Elite Dangerous on PS4 in the period.

[shanklin] 03/7/2018 11:12

Will other routes to market also cost the 30% quoted for Steam?

[alphabeta4] 03/7/2018 11:07

Hi Mark - I've reviewed loads of stuff so don't want to wade through all of it but I'm sure I've seen lots of references to the 10% but for example it can be extracted from Liberum's 12/6 note on Research Tree - gross margin 60%, Steam is 30%, (they have a sensitivity table with 1m, 2m, 3m unit sales with other costs up c10% for each extra 1m units sold which is where the 50% comes from). I think I may have got the year 2 royalty rate from a post on this board that made reference to the 10% year 1 also (so make of that what you will).

[staverly] 03/7/2018 10:24

Pity the fool who is/was short

[mark4231] 03/7/2018 09:58

Where did the 10% year 1, 15% year 2 onwards royalty information come from? Any idea why it would increase for year 2 onwards?

[alphabeta4] 03/7/2018 09:56

makw - I can't remember all the things in their 50% margin off the top of my head but don't forget the Universal royalty - 10% yr1, 15% yr2 onwards from memory?

[nimbo1] 03/7/2018 09:48

I've just left this review on amazon US site - its probably worth other investor players doing the same - its the first review there.

'The dinosaurs are fantastic - its an immersive experience and great fun.'

[shanklin] 03/7/2018 09:36

Thank you for the feedback. I agree it seems likely that this is the first of several upgrades for the current year.

In the circumstances, today's share price reaction seems very muted.

P.S. A shame I bought more above £15 today but unlike whoever is selling, I feel its reasonable to extrapolate annual sales to well above £88m.

[endion] 03/7/2018 09:35

I cant remember the source but David said before that any future aquisitions would be in line with company values and "theme" for lack of a better word.

Expect a bit of profit taking from day traders today.

[makw61] 03/7/2018 09:30

If £88m is before steam charges etc (i.e. steam charges are treated as a cost of sale), then £88m x 70% gives £62m. Assume salaries and overheads of £40m gives £22m less 20% corp tax gives around £18m of earnings, which is around 47p eps. I assume that's how the broker calc goes.

The important thing is that imo we are only at the start of the upgrade cycle, so the exact numbers are not that important at this stage. Lots of good news to come.

I get the impression that the other model they are looking at is publishing for third parties. Seems like an attractive, low-risk model. Personally i don't like acquisitive companies and i don't really see David as going down that route either. Acqui-hires are popular with big tech but it seems often to be about dealing with threats as much as expansion, all imho ofc!

[nimbo1] 03/7/2018 09:29

Endion shorting should largely be ignored in most cases - there will always be market participants who believe stocks get expensive at various different points in a companies lifecycle. In my experience it only becomes relevant if it reaches 10% +, as it means many market participants believe there is something actually wrong i.e. accounting or market problems etc. In this case someone probably just thought it looked expensive at £18, and at that point you could have argued it either way.

Hastings - many thanks - Look forward to your comments. Can you please ask him about china?! They were going to launch on tencent's platform as we understood it but we've heard nothing...

Also once the churn is out the way I am hoping we start to get more institutions involved - as highlighted by HPGC this story should prove attractive to them, especially after todays news...but they also take time to mobilise.

[adamb1978] 03/7/2018 09:27

Shanklin

£88m sales implies £62m gross profit @ 70% margin (around historic levels)


Opex was around £10m in H1 in the year just finished, and will have been around £12m in H2 based on their recent guidance. Assume that it keeps ramping to £14m in H1 this year and £16m in H2 (meaning £30m opex in Fy19 vs £22m in Fy18)

That gives £31.6m PBT asssuming no interest.

Tax it at 15% (likely conservative given they will have R&D credits) and you get 71p EPS or 74p if you strip out share based comp

[alphabeta4] 03/7/2018 09:25

Hi Shanklin - there was a £61m forecast with £12.56m earnings, Liberum flag c50% to PBT on their sensitivity forecasts within their previous note (Fdev had 43% on their previous finals so this chimes with some op gearing off the higher revenue). I'd noted Fdev had minimal tax on the interims and previous finals. So £80m becomes £22.06m. 38.7m shares in issue, eps 57.0p.

Edit: I've done £80m as they highlight 'upper end' of range £58m - £88m. Pretty easy to work out other numbers if required.

[endion] 03/7/2018 09:22

Adding together the larger buy trades, i get around 73,000 volume. The short was 193,300. If thats them then they are half way bought back. If not, then theyve still got a long way to go!

[mark4231] 03/7/2018 09:16

I really wasn't expecting a trading update so soon after launch of JWE (and when the physical disc launch is only today) so its great news that they felt the need to do so. I'm feeling very optimistic that this is just the beginning.

[hastings] 03/7/2018 09:15

42p according to the broker, but personally think that will be beaten.Anyway, speaking David and Alex this morning and will pen something later.