Team17 Group [LON:TM17] is a leading developer and publisher in the gaming industry, with three primary operating segments: Games Label (Team 17), Working Simulation (Astragon), and Edu-tainment (StoryToys).
The company’s Games Label segment focuses on developing video games for the digital and physical markets, while the Simulation segment specializes in creating working simulations. The Edutainment segment develops educational entertainment apps for children.
With these three sectors, Team 17 generate revenue through game sales, brand licensing, content updates, and paid Downloadable Content (DLCs), leveraging both owned and third-party IPs.
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Gaming sector outlook
The gaming market’s size is expected to reach USD 245.10 billion in 2023 and grow at a CAGR of 8.94% to reach USD 376.08 billion by 2028. The sector has seen exponential growth due to factors like the surge in mobile gaming, the rise of online multiplayer platforms, and the integration of virtual and augmented reality technologies.
Innovations like VR headsets (Oculus Rift, HTC Vive) and AR games (Pokemon Go) are significantly influencing the gaming landscape. The gaming industry is set for further expansion, as new technologies continue to offer fresh aspects for game development and publishing. As we will see in the below division break down, Team17 touches all these potential growth areas within the gaming industry.
The Team17 business model
Team17 develops and publishes across multiple genres and platforms, including PC, console, and mobile streaming. Catering to a broad demographic range from 2 to 60+ years, the company leverages both its own and third-party intellectual properties.
The group has accomplished two acquisitions the prior year, and three more acquisitions in FY 22. The acquisitions from last year contributed £44.2 million, accounting for most of the revenue growth in FY23. We could extrapolate the impact on future revenue of acquisitions closed in this financial year, providing more potential users and hence increase profit in the following years.
StoryToys
StoryToys specializes in bringing popular characters to life through interactive digital experiences like AR. This division has a strong licensing portfolio, partnering with major brands like LEGO, Disney, Pixar, and Marvel to extend their reach into the digital realm, leveraging these IP to reach more young users.
The apps for this division have over 45 million downloads on Android platforms, with about 100 million iOS downloads. The model for this division is to publish games that are free to download, then extract revenue from in-game purchases and subscription models. The games under this division have seen ~70% subscription growth for FY22, reaching more than 300,000 payable subscribers.
‘Your child can have the time of their life playing this game if they’re a big fan of anything Disney and Pixar! Great for kids on their iPads.’ – Disney Colouring World
Team17 Games Label
Team17 is a leading games publisher with a focus on indie games, having launched over 120 games across all major platforms, both developed in-house and in collaboration with independent developers. Team17’s revenue model is multifaceted, relying on a mix of existing games having payable add-ons, new releases, and subscriptions.
The company also emphasizes lifecycle management to optimize revenues at every stage, using a similar strategy of live-service games which provides constant changes to the game, increasing player retention.
In 2022, Team17 expanded its reach by acquiring The Label and establishing Team17 USA, which specializes in mobile subscription titles, riding the mobile gaming wave. They are also publishing VR games, catching the early growth of VR users.
Team17 focuses on expanding their own portfolio of IP, for example via by the recent acquisition of Hell Let Loose (recently hailed as the best WWII game). The company had five new releases in 2022 with Steam user scores above 80%, reflecting their pursuit of high-quality games.
Astragon
Astragon is another prominent player, acquired in the last FY by Team17, specializing in working simulation games. Their portfolio includes well-known IPs like Construction Simulator and Police Simulator. These are designed for a broad audience and offer non-violent, cooperative gameplay across various platforms. Astragon collaborates with major brands like Mercedes-Benz and Volvo for brand-licensing, leveraging on their reach to provide more revenue.
Strong brand recognition
Team 17 has been around for over 31 years and has developed iconic game series like Worms and Overcooked. These award winning (BAFTAs and Golden Joysticks) games will bring more attention to newly released games by Team17 for enhanced brand effect.
Team 17 collaborates with independent developers, and gamers. The user-centric approach and their support for indie developers is likely to raise loyalty from both gamers and developers. They also manage game lifecycles to provide support and enjoyment, further increasing user retention.
Management and insider share holdings
The Board of Directors at Team17 is led by Debbie Bestwick MBE, the CEO, who brings over 25 years of gaming industry experience. She is supported by a team of seasoned professionals with diverse backgrounds in finance, law, and corporate governance.
This strong leadership is reflected in the company’s insider holdings, where Bestwick holds a significant 20.8% stake, indicating her deep investment and confidence in the company. Investment firms like BlackRock, Standard Life Aberdeen, and Liontrust Asset Management also have substantial holdings, ranging from 5% to 6.3%. Some 55.2% of shares are held by institutional investors and insiders, signalling strong confidence in the growth of Team17 among institutions, and the CEO.
Team17 financial and operational performance
Operational highlights
In FY22, Team17 made strategic acquisitions, including StoryToys, Astragon, and Team17 USA (formerly The Label), to expand its portfolio and reach. The Games Label controls over 700 digital revenue lines and has acquired two successful third-party titles in the last two years.
Team17 is focusing on growing its subscription revenue model, particularly in StoryToys, to insulate the business from economic headwinds, providing more stable revenue streams.
Financial highlights
Team17 saw a significant increase in its revenues, which rose by 52% to £137.4 million in 2022, up from £90.5 million in 2021. Acquired brands contributed £44.2 million to this, and £93.2 millon came from the IPs Team17 had before.
The comprehensive income this year increased 33.4% compared to last year, even with the acquired brands causing more COGS and administrative expenses, the strong USD made the company £8 million extra income by foreign exchange.
If we look at the Team17 P&L this year, we can see a slight decrease in profit, caused by higher financing costs from the acquisition and cost of goods sold. This should only be a small concern since the acquisitions are very well positioned in the bigger picture; acquiring a mobile game developer and expanding the overall games offering could lift the profit for Team17 in the next few years.It is worth noting that, Team17 has zero debt, so in this extreme environment of higher for longer (interest rate), the cost of borrowing will not erode Team17’s earning.
The balance sheet also looks very healthy, having more short-term assets than all of its liabilities, which will allow Team17 to continue to expand their existing portfolio.
Team17 is trading now trading at 328p, in the lower end of 52-week range (300GBp – 500GBp), with P/E ratio of 20.06, lower than the industry’s 24.4 P/E. There are 11 analysts currently covering Team17, with the average price target in one year being 571p, lowest being 360p.
The growing popularity of gaming, advancing technology and more affordable devices forms a great tail wind for the gaming industry. The active acquisition activities of Team17 also shows their bullish view on this industry.
The continued expansion of Team17 and its adaptation to the subscription model should be an opportunity for investors. Team17 will report half year results for the six months ended 30 June 2023 on Tuesday, 19 September 2023, The Armchair Trader will continue to update on this company and its outlook after the half year results.
