Sumo Group plc Material progress across the Group

Sumo Group Plc

Sumo Group plc (LON: SUMO) today announced its Final Results for the financial year ended 31 December 2017, which show material progress across the Group.

These results are the first since Sumo Group’s IPO in December 2017. They cover the period in which the Group transitioned from the previous ownership structure when it was majority owned by funds under the management of Perwyn for more than 11 months of that financial year to the new status as a listed company 10 days before the financial year end. Accordingly, the financial information reflects the leveraged structure in place for most of that year and also the restructuring of the Group in preparation for the IPO together with the significant costs incurred in that process.

Reported results

2017

Audited

2016

Unaudited

pro-forma1

Movement

Revenue

£30.6m

£24.1m

27%

Gross profit

£13.3m

£9.0m

47%

Gross margin

43.3%

37.4%

5.9pps

Loss before tax5

(£28.0m)

(£2.1m)

Cash flow from operations

£3.3m

£3.3m

Net cash / (debt)

£12.4m

(£52.2m)

 

Underlying results

2016

Unaudited

pro-forma1

Movement

Adjusted revenue excluding pass-through2

£28.6m

£20.5m

40%

Gross profit

£13.3m

£9.0m

47%

Adjusted gross margin excluding pass-through2

46.4%

44.0%

2.4pps

Adjusted EBITDA3

£8.4m

£6.0m

38%

Adjusted profit before tax4

£7.5m

£5.3m

42%

 

¹ Unaudited pro forma financial information is set out in note 17 of the Notes to this Final Results statement.

2 The adjustment to revenue is in respect of pass-through revenue on which Sumo does not charge a margin

3Adjusted EBITDA, which is defined as profit before finance costs, tax, depreciation, amortisation, and exceptional items, is a non-GAAP metric used by management and is not an IFRS disclosure.

4Adjusted profit before tax excludes exceptional items £2.7m (unaudited pro forma 2016: £0.9m), net finance costs relating to pre-IPO financial structure £5.4m (unaudited pro forma 2016: £3.0m) and amortisation of customer contracts and relationships and software £27.6m (unaudited pro forma 2016: £3.7m).

5 Includes amortisation of £27.6m (unaudited pro forma 2016: £3.7m), a non-cash and non-recurring charge resulting from a more appropriate approach to the useful economic life of historical intangible assets arising on the September 2016 change of ownership being taken in respect of client contracts from that date post IPO; IPO/transaction costs of £2.7m (unaudited pro forma 2016: transaction and other exceptional items £0.9m); and net finance costs of £5.4m (unaudited pro forma 2016: £3.0m)

Highlights:

· IPO in December 2017, raising £38.45 million for the Company from a total £78.15m fundraise

· Strong start to the current year with full year expectations now slightly ahead of consensus market forecasts

· Acquisition of Atomhawk Design Limited (“Atomhawk”) in June 2017, which delivered H2 results well ahead of the Board’s expectations prior to acquisition

· Sumo Digital successfully launched its first own-IP game, Snake Pass, winning the accolade of Best Arcade Game at the much coveted TIGA Awards

· Atomhawk opened new studio in Vancouver, creating access to new clients and markets

· The Board and management team strengthened for the IPO

· Sumo Digital took on Newcastle Studio of CCP Games post year end

· Strong balance sheet with net cash position of £12.4m (2016: net debt of £52.2m)

Carl Cavers, Chief Executive Officer of Sumo Group Plc, said: “The new financial year ending 31 December 2018 has started strongly. Whilst it is still early in the year, the Board already expects to deliver full year results slightly ahead of market expectations. We are continuing to see strong demand for the Group’s services and are well placed to take advantage of the considerable opportunities. Those of us who were at GDC (Game Developers Conference) in March 2018 saw at first hand the strength of growth in our chosen markets, with the associated opportunities this brings, and the Group’s business development pipeline reflects this.

“We expect to continue our organic growth and are also keen to accelerate this by acquiring suitable, complementary businesses. My Board colleagues and I are confident about the outlook for the Group in the year ahead.”

Zeus Capital commented:

Sumo’s maiden plc results were better than expected with adj revenues and adj EBITDA 1% and 5% ahead of our forecasts. Adj PBT was 4% ahead of our estimates (at a reported level PBT contains pre IPO interest). We increase our FY ’18 adj EBITDA forecasts to £10.3m from £10.0m and believe Q1 ’18 trading has been strong. The growth in the outsourced co-development market from digital offerings and increasing game complexity are continuing to provide an attractive tailwind. Additionally, Sumo is at the forefront of worldwide co-development work which not only offers above average growth even within the game software industry but leads to excellent visibility for 2018. With an PE multiple of 22.2x Vs a sector average of 42x, we believe that the shares remain significantly undervalued

FY 2017 results ahead of expectations. Adj EBITDA at £8.4m benefitted slightly from VGTR timing on one specific contract but even ex this effect it was a c4% beat Vs our estimate of £8.0m. Adj EBITDA margins were maintained at c29% yoy with higher Video Game Tax relief (VGTR) offset somewhat by several co-development royalty contracts originated at slightly lower gross margin but which should enable extremely high royalty margins to be obtained from FY ’19. Organic revenue growth was 33% yoy (net of pass through), with headline growth at 40% including the AtomHawk acquisition.

Adj EBITDA estimates for FY ‘18 increased by 3%, underlying 5%. Although early in the year, general utilisation rates in Q1 ’18 for the (large) co-development business have been lower than the very high rates seen in 2017 but are ahead of our assumptions for FY ’18. Several peers have very recently commented that the specific area of co-development is particularly attractive. With a healthy utilisation and pipeline back-dropped against a robust demand environment generally, we increase our adj EBITDA forecasts by 5% combining a 3% headline upgrade with a now lower (in fact negligible) carry forward from the exceptional contract referred to in our initiation note (see Financials section).

The growth in the games software market remains strong. Larger video games developers/publishers such as Ubisoft, Activision and Take Two all performing ahead of consensus expectations for Q4 ’17 and yoy growth again driven by digital sales. For Sumo, the December 31st 12 month forward order book remains at least in line with historic levels at roughly mid-seventies percent and combined with strong trading ytd provides comfort to our FY ’18 estimates. Sumo has a high visibility compared to the peer group; most of whom operate a different business model.

Cash flow was materially better than our estimates due to a higher working capital inflow; in turn because of accelerated VGTR receipt, a delayed payment to a large customer (paid in January) and December IPO fees paid in January. This resulted in a net cash position of around £12.4m (vs our estimate of £5m). This should mostly reverse in 2018, so we make no changes to our net cash position estimate for December ’18 of around £8m. This and future cash flow provides adequate resource for strategic M&A.

The valuation remains at a material discount to peers. At a PE of 16.5x for 2019 Sumo is at a discount to the UK peer group of 56% and to our global peer group of 26%. With progress made, strong current trading and excellent visibility we believe this discount is completely unjustified.

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