Angry Birds Maker Rovio Sinks on ‘Brutal’ First Earnings ReportBy
Investments in attracting new users weigh on profitability
Stock falls more than 20% to lowest level since September IPO
The company behind Angry Birds lost a fifth of its market value on Thursday after investors saw its first set of earnings since an initial public offering just two months ago.
Rovio Entertainment Oyj’s third-quarter earnings report delivered what FIM analysts called a “brutal disappointment,” sending the shares down more than 20 percent.
FIM said the bad performance was “caused by a strong increase in user-acquisition investments and clearly softer revenue than expected.” Rovio spent 22.2 million euros ($26.3 million) in an effort to draw in new users for its games last quarter, or more than four times the amount it invested a year ago. That pushed down profitability, with Ebitda falling 29 percent to 6.1 million euros. Ebitda as a percentage of revenue fell to 8.6 percent from roughly 17 percent.
Thursday’s selloff left one Rovio share costing as little as 9.36 euros. At its Sept. 29 IPO, the shares were priced at 11.50 euros. Trading volume in the stock was more than four times the three-month daily average in Helsinki.
Chief Executive Officer Kati Levoranta said the drop in profitability was predictable and in line with the company’s strategy to expand in games. The payback time from the investments is in about eight to 10 months, she said. Revenue and Ebitda are still seen increasing significantly this year.
Analyst recommendations compiled by Bloomberg suggest the company’s shares will recover. Of the three analysts listed, all are advising clients to buy Rovio shares. And their average price target indicates Rovio shares could rise more than 40 percent over the next 12 months. All three institutions advised on Rovio’s IPO, which valued the company at about $1 billion at the time.
User-acquisition investments exceeded OP Group’s 15 million-euro estimate, and Rovio’s games business expanded less than estimated, according to a client note published by OP, which has the highest price target at 15 euros.
Game studios, such as Rovio, need a steady conveyor belt of ideas to persuade players to spend more on their products. The Finnish firm has already tapped franchises including Star Wars and used heavy metal band Iron Maiden’s mascot, Eddie, in a free-to-play version of its Angry Birds game. It released a feature film last year, which made almost $350 million at the box office, globally, and is planning a sequel in 2019.
But those successes are all linked to Angry Birds, and Rovio has yet to prove it can replicate those achievements with other titles.