Team17's release pipeline impacts earnings

Aim-traded indie video games developer Team17 (TM17) is operating in what outgoing chief executive Debbie Bestwick called “one of the most competitive years for high-quality launches and deep peer discounting than I can remember”. While the company’s robust revenue growth in the half was driven by a £15mn contribution from new releases, the early release pipeline meant a 9 per cent fall in adjusted cash profits to £17mn as marketing and other release costs hit the income statement. It also contributed to the 470 basis points fall in the gross margin to 43 per cent. Management (and analysts) expect profits to be weighted heavily to the second half. 

The results emphasised that product diversification is one of the company’s key attractions. Own intellectual property (IP) revenue rose by a third to £27mn as titles such as Police Simulator put in a solid shift. Third-party IP revenue rose by 30 per cent to £43mn, meanwhile, helped by the performance of new launch Dredge. 

Broker Peel Hunt noted that the games released by Team17 this year have five times more reviews than those put on the market by indie competitors, and the company's releases also have the highest ratings. This bodes well for future growth prospects.

The balance sheet remains reassuring, despite a £6mn fall in net cash. Operating cash conversion rose from 139 per cent to 142 per cent this time around.

Given last month's trading update, the confirmation here that the company still expects to hit market expectations for full-year trading came as no surprise. We like Team17's portfolio, pipeline, and recent acquisition activity (it picked up third-party development partner Independent Arts Software in April). The shares trade at 12 times consensus forward earnings, according to FactSet, well below the five-year average of 28 times. Buy.

Last IC View: Buy, 410p, 28 Mar 2023