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Team17 sees improved revenues as it integrates new acquisitions

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Team17 [AIM:TM17], the British video games publisher and developer, published its half-year results on 13th September. During the period, its revenues grew by 33% to GBP53.2m from GBP40.1m in the same period of 2021. Adjusted EBITDA was also up by 10% to GBP18.2m from GBP16.5m. Adjusted earnings per share increased to 10.4p from 10.1p. Team17’s net cash was lower in the most recent half year, at GBP51.3m compared to GBP66.6m in half-year 2021.

Team17 showed impressive revenue growth from the previous half-year in its recent report. This is partially because of good performance from its back catalogue of games. Team17 owns and manages multiple games titles, including their most well-known, award-winning Worms franchise, which was originally released in 1995. This positive performance was combined with the success of additional new releases and content, with one new title launch and twenty updates for already released games during the period.

However, Team17’s revenue growth in half-year 2022 was mostly derived from two recent acquisitions, which accounted for 27% of its revenue growth. Its first acquisition was Storytoys, a developer and publisher of educational entertainment apps for children that works with several well-known brands, such as Disney and LEGO, to create its content. The Irish games publisher was acquired for an initial USD26.5m (GBP23m) in July 2021.

The second was German game publisher, Astragon, which was acquired for around GBP83m in January 2022. Astragon is a developer, publisher and distributor of ‘working’ simulation games, which includes farming simulators, firefighting simulators, police simulators and construction simulators.

During the period, Storytoys generated revenues of GBP4.6m, with the platform now attracting over 250,000 subscribers, up from 130,000 in the comparable half year, and Astragon generated revenues of GBP7.8m.

Business structure

Team17 has changed considerably since 1H21. As a result of the two recent acquisitions the business is now split into three divisions: its Team17 games label, Storytoys and Astragon. This has brought considerable revenue growth for the group but has also brought increased cost. Team17 has incurred higher administrative costs since these acquisitions, rising to GBP13.6m from GBP6.2m in 1H21, with headcount rising to 345 from 265.

However, both acquisitions meant that Team17 owned more intellectual property (IP), a metric that is incredibly important to Team17’s success – as the greater the owned IP, the higher the profitability of the company through content ownership. In 1H22, the company’s revenues were from 38.3% owned IP, compared to 28.2% in 2021. This increase in IP is set to have a significant effect on profitability for Team17 at its year-end.

Are these acquisitions sustainable?

Since Team17’s IPO in 2018, the company has pursued selective acquisitions to boost its growth prospects. The company has on occasion issued equity to fund its acquisitions, with the largest placing of shares in 2022 to fund the recent acquisition of Astragon. This placing was equivalent to approximately 8% of share capital.

There are good reasons for investors to favour Team17’s acquisitive growth strategy. Since 2018, the business has diversified away from sole reliance on the Worms gaming franchise, as its high exposure to a small subset of the gaming industry left the company exposed to the risk of engagement decline. Acquisitions have now helped the company achieve a milestone of over 600 unique revenue lines, with a range of customer types, game themes and platforms, giving stability to the business.

Most importantly, as showcased in the graph below, acquisitions have not only improved growth prospects for the business, but Team17 has improved profitability in doing so. Since 2018, Team17’s return on capital employed, a measure of how well a company generates profits from invested capital, has significantly improved from 15% to over 20% as of 2021.

Team17 outlook

For the rest of 2022, Team17 are focusing on further integrating their recent acquisitions while also extending their current catalogue of games. The company has released two games in the second half, with one of these achieving number one global game on Steam, the popular gaming platform, and Team17 plans to launch seven new titles in total in the second half of 2022. Storytoys plans to deliver updates across its portfolio and Astragon will predominantly be driven by its latest version of its construction simulator, which is due to launch in September.

Team17 has stated that although it is aware of the potential effects of ongoing macro-economic uncertainty and inflationary pressures on its business, it remains confident that it will trade in line with its expectations in its full-year report.

Team17 valuation and thoughts

Results for Team17 showcase resilience, despite a gloomy overall outlook for the general economy. Fears of a slowdown in video gaming have also been avoided, as the company has focused on new updates to its portfolio of games and adding to the business through acquisitions.

The market has given Team17 a hard time of late, forcing the shares to decline 55% from highs seen in 2021, driving a de-rating for the company. This de-rating has seen Team17 change from a valuation of over 40x earnings to a much more reasonable P/E of 21x earnings in 2022.

For such a well-run, highly profitable business with significant director ownership, Team17 has an undemanding valuation. Should the business continue to execute as it has been since its IPO, investors should be handsomely rewarded from today’s prices.

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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