Team17 is one of those rare things — a homegrown British technology company that somehow has not been swept up by an overseas rival. The video games developer is best known for the breakthrough success of its Worms franchise, but its growth is thanks in part to a few acquisitions. Most of these have been successful, adding new specialisms and titles, but the $24 million purchase in 2022 of The Label, the mobile games publisher, has proven difficult.
In full-year results, the Wakefield-based, Aim-listed company suffered a one-off £11.1 million cost impairment charge and a £20.9 million goodwill impairment charge relating to the “Games Label” division. This means Team17 paid above book value for the company and that it has declined since then. It blamed certain titles within the division that had not met internal expectations, forcing it to rely more heavily on third-party titles instead of its own higher-margin, original intellectual property.
This isn’t a misstep the company can afford. Last year it made £28.7 million in pre-tax profits; this year, total impairment charges of £32 million have pushed it to a £1.1 million statutory loss. In fact, even when stripping out the impairments, adjusted pre-tax profits fell by 39 per cent to £28.7 million. Gross profits dropped by 17 per cent to £57.5 million. Meanwhile, development cost amortisation charges rose by 36 per cent to £12.7 million, mostly because of a rise in capitalised development costs within its Astragon studio, as well as an increase in development budgets for some larger third-party games within Games Label.
There were a few bright spots. The top line grew by 12 per cent to £159 million, thanks to 17 new game releases in the year. Meanwhile, revenue from its formidable portfolio of games already on the market increased by a tenth.
A sharper focus on own IP will be crucial in future. Just over a third of Team17’s revenue comes from its own intellectual property and about 70 per cent of its revenue comes from its back catalogue, so even during quiet periods older games continue to provide a steady stream of cash. It expects to launch at least ten new games and apps in 2024, although this is skewed to lower-margin, third-party IP.
Investors should beware of a wider malaise that is settling across the video game industry. The market has struggled to regain its 2020 highs, when the release of multiple next-generation consoles coincided with the first series of pandemic lockdowns. Hardware sales are slowing, consumer spending on mobile gaming has wobbled and developers have laid off thousands of staff. Competition is emerging, too, from Hollywood as well as from Silicon Valley. Disney made a $1.5 billion investment in Fortnite’s creator Epic Games this year, for example.
Debbie Bestwick, who helped to found the Team17 business in the 1990s, has stepped down as its boss and is now a non-executive director. Steve Bell took up the chief executive role late last year and, although he does not come from a gaming background, he joins from a marketing agency that specialises in brand and digital strategy.
Team17’s stock is far off its pandemic-era high, when the shares hit 870p. That compares with their present figure of 250p or so. But there is much to like at the core of the gaming business, not least an impressive IP portfolio and loyal fan base. The shares trade at a reasonable forward price-to-earnings multiple of 12 and the one-off impairment charges should draw a line under the Label debacle. Nevertheless, with so much uncertainty hovering around the sector, investors should tread cautiously.
Advice Hold
Why Shares reasonably priced for impressive game portfolio but sector is suffering
Next 15
Yesterday was even more of a numbers game than usual. Hard on the heels of Team17, Next 15 reported record revenues of £734.7 million for its 2023-24 financial year. Adjusted operating profits rose by 6 per cent to £121.1 million and its underlying profit margin improved by 80 basis points to 21 per cent.
The marketing and data specialist, which has evolved from a PR firm into a digital “growth consultancy”, counts the likes of Amazon, Microsoft and Google among its clients. However, spending among technology customers dropped by 17 per cent in the period. This was offset by the rest of its clients, which increased their spending by 11 per cent.
Its “business transformation” division achieved the strongest organic growth, at 9 per cent, thanks to a large contract in its Mach49 unit, which was first disclosed in 2022 as a five-year “strategic alliance” with an unnamed global technology company. The weak link was “customer engage”, a business that dropped by 6 per cent.
An improvement in net debt was a pleasant surprise, standing at £1.4 million as of the end of January. With net assets of £156 million, the company’s balance sheet is in improving health. It may well step up deal activity this year, especially if rivals begin to trade cheaply.
Next 15 said that so far this year it s performance was in line with expectations and that recent new client wins had put it on good footing for growth. The company has returned about £4.5 million to shareholders via a buyback programme as of January 24 and it wants to buy up to a further £10 million of shares by the end of July.
Those shares trade at a forward price to earnings multiple of 10.2, lower than its five-year average of 14 and at about the same level as M&C Saatchi, at 10.1, and S4 Capital, at 9.7. True, Next 15 faces a tough environment that can be especially difficult for businesses that rely on corporate marketing budgets, but, with a well-supported balance sheet, a robust client base and an edge in data specialism, at this value it is hard to ignore.
Advice Buy
Why Shares inexpensive, given growth and client base
