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Frontier Developments closes Foundry to concentrate on its own IP


Frontier Developments AIM:FDEV, the Cambridge-based video game developer has decided to cease exploration of the multiverse of third-party titles through its Frontier Foundry subsidiary, and reorientate to concentrate on its own universe of curated games.

The decision to shutter the Foundry came on the back of “disappointing financial performance and increased competition amongst third-party publishers,” said the company. The AIM-listed games publisher will take a GBP13m amortisation hit as a result.

Frontier did launch seven titles through the Foundry since it opened the subsidiary four years ago, but, “…financial performance across the Foundry portfolio has been disappointing, and overall, the business has not delivered Frontier’s expectations of a positive return on investment within the first year of each title,” said the company.

The refocus on its own IP, which includes the long-running Elite series, Jurassic World Evolution, Planet Zoo and F1 Manager, is a sensible option, as those titles have a loyal fanbase and have been the primary contributor to revenues, accounting for 72% of the GBP104m revenue the company took in this year.

Strong sales

The strongest performer in the catalogue was Jurassic World Evolution 2, created in collaboration with Universal Products & Experiences, with revenue in its first 18 months exceeding the performance of the first Jurassic World Evolution game during its first 18 months. A notable mention was made to F1 Manager 2022, which flew off the shelves like a McLaren out of a pit lane, selling over 800,000 copies within nine months of launch.

Analyst, Katie Cousins, from Shore Capital, which has Frontier Developments under coverage said: “Revenue for FY23 is expected to be GBP104m, 2% below our GBP106m forecast but within management guidance of GBP100m to GBP114m.  Operating profit, prior to a one-off amortisation adjustment relating to Foundry of GBP13m, is expected to be around GBP2m, versus our GBP4m forecast and at the lower end of guidance [in the] range [of] GBP2m to GBP10m.”

Cousins continued: “Adjusted EBITDA has been impacted by development investment, as expected, and is indicated to be at a loss of around GBP5m for FY23F, a more favourable outcome than our loss of GBP6.6m forecast. Finally, the group ended the period with around GBP28m of cash on its balance sheet and no debt. Note: Cash includes the acquisition of Complex for GBP11m in November 2022 and a GBP3m spend into the EBT”

Shore Capital lowered its recommendation from ‘Buy’ to ‘Hold’ with a target price of 600p.

Game development is not a cheap business, and Frontier is committed to delivering two new game releases a year from FY24 onwards. This reflects in the inward investment that the company is making year-on-year. The company will undoubtedly cherry-pick the best developers from the Foundry to come and work on its main titles.

A lot of expectation is being built up towards the release of FDEV’s newest title: Warhammer Age of Sigmar: Realms of Ruin, a major real-time strategy game “coming soon” to PlayStation 5, Xbox, and PC via Steam and Epic Games Store, in partnership with Games Workshop LON:GAW, which itself recently reiterated the desire to monetise its own IP through licencing to other platforms away from its traditional tabletop setting.

Frontier is also hoping for continued strong sales of its F1 Manager series, unveiling the latest incarnation, F1 Manager 2023 last month. Frontier promises: “deeper management systems, more dramatic racing, and an even greater commitment to authenticity,” from the latest release.

Renewed Focus

Jonny Watts, Frontier’s chief executive said in a statement last week: “Our renewed focus is to select, develop, launch and nurture genre-leading games which delight our players and deliver strong financial performance for our investors. I am confident that we will return to growth and profitability through the achievements of our world class team, the performance of our existing game portfolio and the delivery of our exciting pipeline of future releases.”

Overall, management is confident that the Frontier can return to attractive levels of financial performance over the medium term, after a shaky few years, based on the strength of its existing portfolio and planned new releases. An update on trading for FY24 will be provided alongside the final FY23 financial results announcement in September 2023.

Frontier opened trading today (19th June) at 552p. The games developer has offered a -41.7% year-to-date return, a -59.2% one-year return with its shares have ranging between 415.5p and 1,648p over a 52-week period. The AIM-listed company has a market capitalisation of GBP219m.

Bridgewise rates Frontier as a ‘Hold’. The analyst commented: “Looking at Frontier Developments’ financials of Q4 reflected decent results. We do believe, though, that macro-related market conditions will influence its performance more significantly than its individual results. Bottom line, Frontier Developments’ financials indicate solid performance in terms of growth, value, and income, which leads us to believe that they may become interesting again in the next few months. But for right now, we gave the company an overall grade of 74 and a HOLD recommendation.”

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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