# Sumo Group Q&A with Zeus Capital Technology Analyst Bob Liao (LON:SUMO)

- Link: https://www.directorstalkinterviews.com/sumo-group-qa-with-zeus-capital-technology-analyst-bob-liao-lonsumo/412810001
- Published: 2020-03-26T12:31:03+00:00
- Author: Amilia Stone

**Sumo Group PLC **(LON:SUMO) is the topic of conversation when **Zeus Capital’s**
Technology Analyst Bob Liao caught up with DirectorsTalk for an exclusive interview.

**Q1: I wanted to talk to you today about Sumo Group. In general, ****Intellectual
property (IP) is highly regarded by investors when they value a video game company,
how are they positioned? **

**A1**: We’ve done some analysis of this & we benchmarked the company against a 
number of its video game peers & what that revealed is that the company’s business
is more IP-driven than perceived by many investors.

What we did is we analysed the relationship between gross margin & IP revenue in
the UK video game sector & what our analysis indicates is that video game company
gross margins are directly related with the percentage of IP revenue. Now, that’s
shouldn’t be a surprise, however our analysis also clearly shows that the company
stands out as an outlier in our regression analysis, it’s got high gross margins
yet low perceived IP revenues.

We believe that this indicates that the level of IP in the company is misunderstood
by investors so the company’s high gross margins suggests in our regression that
actual IP levels are probably closer to the higher 20’s to 30% rather than the perception
of about 2-8% IP revenues that most of the market has.

**Q2: What do you believe are the hidden sources of IP in the company?**

**A2**: What we do believe is that the company’s development fees which most investors
assumer to contain no IP is actually partly IP-driven. So, development revenues 
are delivered using technologies that can be reused & leveraged across many contracts&
many customers, very similar to how IP works.

The company’s proprietary systems accelerate build times, they streamline integrations
with external game engines & the libraries that they own of tools & technologies,
they boost the efficiency of projects & processes.

All those things contribute to how those development fees, which make up the bulk
of revenues, are really leveraged much like IP revenues are.

**Q3: What does your analysis imply about Sumo Group’s valuation?**

**A3**: As you said in the beginning, IP revenues are very highly valued by investors&
this analysis concludes that the company is more IP-driven than is perceived by 
the market so we think the shares deserve a re-rating.

Currently, the shares trade at about 17% discount on an EV/EBITDA basis to most 
of the UK video game peers & we believe this is partially dragged down by investor
perception that the company has low IP. I think our analysis indicates the exact
opposite, that it has got some very substantial IP revenues which would then suggest
that the shares should trade at a significant premium to its current multiple.

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