Team17 poised to benefit from growth in streaming

Team17 was founded in 1990 and was subject to a management buyout in 2011 and Aim IPO at 165p in May 2018. Recent years have seen a period of expansions, with revenues more than quadrupling from £10.4m to £43.2m between 2015 and 2018. The company has achieved this heady growth by ratcheting up its launch of both internally developed games and partnerships with third-party indie developers, through its Games Label division. In total, 12 games were launched in 2018 and three in the first month of 2019. The Games Label division, which was set up in 2013, acts as a kind of video game incubator. It selects games put forward by small independent development teams that it believes have strong commercial potential, with only about 1.5 per cent making the cut. It then provides developers with financing and development services prior to managing the game's launch and subsequent updates. Revenues are based on royalty agreements. The proportion of revenue from third-party games soared last year from 50 per cent of the total to 74 per cent, and the company sees considerable potential for growth through the Games Label division. One downside was lower gross margins on third-party sales, which caused the overall gross margin to drop from 57 per cent to 46 per cent in 2018.

The company's growth ambitions are being assisted by the digitisation of video game distribution – the trend towards downloading and streaming games. Not only has this helped the launch process, along with improved game developer software it has helped encourage an explosion in indie game developers keen to tap into the know-how of experienced industry players such as Team17. Digital distribution also allows developers to update existing games to prolong their lives – for example, Team17's Worms game, which was launched in 1995, is still going strong with one iteration ranked as the 15th best-selling action game in Apple's app store. Just over half of Team17's turnover in 2018 came from games launched in previous years.

The group has been performing well in the current environment, and could also benefit from the video game market's shift towards a streaming-led model. Meanwhile, given four-fifths of 2018 turnover came from four distribution customers, and anything that increases competition between distributors could potentially improve the bargaining position of Team17 and other developers.

While the company has a strong story, one disappointing aspect of the recent float was that most of the £108m proceeds flowed back to directors and a private equity backer. True, £43m of the proceeds were used to pay off expensive loan notes, but these were held by directors and private equity firm Lloyds Development Capital (LDC). On the plus side, even after their multimillion pound share sales, directors still hold 31 per cent of the shares, including 22.2 per cent held by chief executive Debbie Bestwick, who parted with 16.6m shares at IPO (worth £27m at the float price). Meanwhile, LDC sold another 7.3m slug of shares at 225p in March, leaving it with 14.6m or 11 per cent of the group.