US-based video game publisher Devolver Digital Inc (LON: DEVO) has severely disappointed investors little more than seven months after joining AIM. The shares were already below their initial placing price of 157p at 136.5p and they have fallen a further 50p to 86.5p on the news that it has lowered its guidance on revenues to between $130m and $140m.
Sales of new releases, such as Shadow Warrior 3 and Weird West, have been lower than anticipated. It appears that other games were more popular with new Devolver Digital games getting lower Metacritic ratings and reviews than the ones they released in 2021. Corporate costs were also higher than expected.
Shadow Warrior is a game that was published for a third party and Devolver Digital subsequently acquired the IP. Higher margins were expected for Shadow Warrior 3 because it was the company’s own IP. There was also a lot of investment in other games.
Devolver Digital believes that remote working has hampered the coordination of development and the quality of games. Quality assurance will be improved.
Operational gearing
The operational gearing of the business is indicated by the fact that house broker Zeus Capital has reduced its forecast 2022 revenues by 5.5% to $135m and its earnings forecast from 7.2 cents a share to 6 cents a share. Revenues and profit are still going to be higher than 2021.
The balance sheet remains strong with net cash of $94.8m expected at the end of 2022, compared with the previous figure of $117.6m.
This year’s figures will be more second half weighted than in the past. New games Monkey Island and Cult of the Lamb will be launched in the second half. The shares are trading on 17 times prospective 2022 earnings. Earnings expectations for 2023 have been cut by one-third, even though profit should be higher, due to the likely exercise of options and prospective 2023 multiple increases to around 20.