Good morning, everybody, and welcome to Team17 Group's interim results presentation. I know most of you in the room, but for those of you that I don't know, my name's Steve Bell. I'm the Group CEO, and I'll be presenting, got the slides today, and Mark Crawford, our CFO, will be presenting the financial presentation.
In terms of the presentation itself, it will last about 25 minutes and it will be in three main sections. So the first section will be an introduction and almost like an operating summary where I'll go through Team17 Games Label, Astragon and StoryToys in a bit of detail to give you some color to the performance in the first six months of the year. Mark will then go through the financials in quite a lot of detail to give you the insight that you need.
I'll then touch on strategic priorities and also the short-term and mid-term view for the business. So that's how the presentation will run. In terms of our first half performance as an executive summary, market-beating organic revenues up 11% from where we were last year, and our Adjusted EBITDA is up 18%.
So a really strong headline financial performance. Really good progress against all of the strategic objectives that I laid out when I presented in April, and I'll go through those later on in more detail within the presentation. But every one of them, there's really good progress, and I wanna talk about that in a bit more detail with you. And probably the most important thing, we're on track to meet full-year market expectations. In terms of the operational highlights, first point is around back catalog.
Our back catalog performance has been fantastically strong, up 30%, and it's driven by life cycle management, and you'll hear us talk a lot about the importance of life cycle management within the Team17 Group. Strong first-party IP performance. I spent quite a lot of time in April talking about the power and the importance of first-party IP, up 25%.
Now, 42% of our revenue is from first-party IP. Six new games were launched, three new apps, 20 DLCs, and 242 app updates. So an awful lot of content is being produced within the group, but we need to be mindful of the fact it's a very challenging new release market out there. So it's not an easy market. There's more and more games being launched in the market.
But the thing that we're very positive about is the reviews that we're getting for the games that we're putting in market, and with our life cycle management skills, we feel really confident that they're gonna generate good revenue for us moving forward.
The whole area of group is something that, again, I spent an awful lot of time talking about in April, and the importance of group and making sure that the whole is greater than the sum of the parts. We have three fantastic businesses in Astragon, StoryToys, and Team17 Games Label, and we're now operating in a far more joined-up way, where we're seeing efficiencies and synergies through process and general day-to-day delivery. And all of this has delivered an Adjusted EBITDA, as I said earlier on, which is up 18% with elevated margins.
I'm just now gonna go through each of the three individual businesses in a bit more detail to add some color to the overall summary that I've just given you there. So Games Label, Team17 Games Label. Excellent back catalog performance in a competitive new release market, so I've touched on the, both of those points already.
Organic revenue up 9%, excellent back catalog sales performance up 54%, and that's been driven by a number of titles that have now gone into the back catalog. So just so everybody's clear, when a title is launched in the calendar year, the next year it is classified as a back catalog title. So titles like Dredge, Blasphemous 2, and Trepang2 are all classified as back catalog titles now.
Overcooked continues to perform for us in a really, really strong way, and there's been some real sales spikes that's been delivered by very strong engagement from a marketing perspective. And again, I'll go on to talk about that in a bit more detail later on. First-party IP is up 33%, with Hell Let Loose, Golf With Your Friends, and Worms all adding to that.
We had a fantastic publisher sale on Steam, and that led almost sort of back-to-back into the Steam summer sale, so some really strong performances on Steam during the summer periods, for all of our titles. Four new titles were released, one existing was released on a new platform, and 15 new DLCs were delivered within the first six months of the year. The revised focus, strategic focus that I've touched on already is very, very evident within the business.
Far tighter cost controls than we had in 2022 and 2023. Lower expense development costs, and Mark will go on to talk about this in a bit more detail. And the new games that we're signing are within the sweet spot that we've chatted about in terms of GBP 1-GBP 1.5 million dev costs. And to be honest with you, a number of the games that we've signed this year already are actually under the GBP 1 million investment that we spoke about.
So it doesn't have to be between GBP 1 and GBP 1.5 million. It can be lower than that. H2, we've got three new titles have launched already, and we've also got Worms Armageddon on console that's launching, and Autopsy Simulator, where there's a new updated version of Autopsy Simulator because we've listened to the community.
So that's Games Label, really strong performance. Astragon, 13% organic revenue growth in the year, and that's fantastic when you look at the fact they've had no major first-party IP that launched in the first six months of the year. First-party IPs increased by 17%, driven by Construction Simulator and Police Simulator.
So those titles continue to do fantastically well for us and continue to deliver in the top 10 titles that we have within the Team17 Group. Three third-party IP titles were launched, ABRISS and Tram Simulator on console, and Howl on mobile and console. So again, we continue to putting third-party titles out in the marketplace as well.
Four new DLCs have launched in the first six months of the year, and in terms of half two, we've got Police Simulator that's launching on Switch, and also Farming Simulator, where we do the physical distribution of that title. The really positive news about both Police Simulator and Farming Simulator, if we're looking at pre-sales data, it's looking very, very positive, so we're really confident about the delivery of those in the second half of the year. Moving on to StoryToys.
Continuing to deliver the growth that they delivered in 2023, so 23% organic revenue growth. They launched three new apps in the first half of the year: Sesame Mecha Builders, Thomas & Friends, and LEGO DUPLO Peppa Pig. As we all know, the apps that StoryToys actually launch, they build over time.
So they start off, they build awareness, talkability, discoverability, and then they begin to build. But what I can say about LEGO DUPLO Peppa Pig, it's literally hit the ground running, so it's done, done fantastically well straight out of launch, which is, which is fantastic to see for us.
242 apps were updated in the first six months of the year, and when you compare that to 327 apps in the whole of 2023, you can see the quality and quantity of app updates that StoryToys are putting out in the marketplace. Because they know that feeding these apps with updates is the way that we can continue to grow the market that we have. Active subscribers continue to grow and are now over 350,000.
Something we're particularly proud of is that StoryToys is in the Sunday Times Best Places to Work list. Again, something where you can see the power of the culture of that business, and that's not just a great PR story, that's a great way of us attracting new talent to the business moving forward.
The focus on half two is around continued high-quality app updates, so there's no new apps that we're launching in half two. It's continuing to feed the apps that we've got in the marketplace at the moment. Hopefully that gives you a flavor of the three businesses. It gives you the executive summary of how we've performed in the first six months of the year. I'm now gonna hand over to Mark, who's gonna go through the numbers in far more detail.
Thanks, Steve. So I kick off on revenues. So as Steve said, first half was strong for us. A hundred percent organic growth through revenues, delivering 11% growth to just a little over GBP 80 million. As Steve has mentioned, Team17 continues to outpace the market growth, and actually, if you go back to since IPO, organic growth for us as a group has outstripped the market by some four times.
So we're really pleased with that consistency. Importantly, I think for us, the splits of revenues across the group demonstrate, I think, the diversification and the strength of that portfolio within the group that we've built, and that continues to grow. So all divisions across the group demonstrated that growth above market level. So Games Label is up 9%. That now represents slightly less of the group at 64%.
Astragon remains at 23% of our group, with strong double-digit growth. And then StoryToys, which is a bigger growth story, we acquired that business early on in its life cycle, is outperforming the mobile market in edutainment really strongly. It now is up from below 10% a couple of years ago we bought it, of the group, to 13% at a very strong 23% growth.
So I think for me, and for Steve, I'm sure, that those two acquisitions demonstrate the success of them demonstrate that the success of those acquisitions we made in 2021 and 2022, and really strengthens and deepens the portfolio within the group in terms of products and revenues. So a little bit more detail on the splits of revenue. So new releases were lower than prior year, delivering GBP 6 million.
Clearly last year, we got the benefit of a standout performance in Dredge, but also this year reflects a much tougher marketplace for new releases, and we've not been immune to that. That tough market conditions continue through this year, through the first half and beyond. While those new releases, I don't think are as strong as we would have liked, we've got confidence in those titles.
Many of those have got very high review scores, and if you combine that with our ability to lifecycle manage across the group, demonstrated what we'll come onto on the back catalog, and those high review scores, we see that there is absolute long-term value in those titles that we, we aim to deliver over time.
Remembering, if you will, that digital life cycles now, although we have a very short amortization period, they actually last between five to ten years and some fifteen years. So it's got room for us and confidence in the long term for us on those new titles. Back catalog clearly is a strong performer. It's a standout for us in the first half and underpins the overall group performance, a 30% growth rate.
Perhaps also reflects consumer behavior, which we see favoring older titles with strength in delivery in the past. So, contributions came from all ages of our back catalog. Quite an important point for me, that we've got titles that are delivering value, that are two years old, three years old, five years old plus. In fact, 2023 titles probably delivered around mid-teens as a percentage of total sales.
There's, as we've always said, this business is not hit-driven. It's about the portfolio, and we're building, continuing to build a very strong, balanced back catalog that contributes to the overall group. We're really pleased with first-party title sales growing 25% to just under GBP 50 million for the group. And I think for us, that demonstrates both alignment to what Steve mentioned in April around building and focusing on first-party, but the strength and depth of those titles across the group.
So Games Label has those titles you're aware of in terms of Hell Let Loose, Golf With Your Friends. And also Worms W.M.D is in the top 10 titles for Games Label this year. But also equally strong are Astragon's titles, including two standouts for me in Police Simulator and Construction Simulator.
Overall, third parties grew about 4%, underpinned with kind of StoryToys is, as you know, we call it third party. It's licensed their own apps under license, which grew strongly, but it's also underpinned, as Steve's mentioned, with, you know, Games Label titles like Dredge, Trepang 2, and Blasphemous 2.
But also, I think I'd mentioned one of our old favorites within Games Label, Overcooked, had a really strong first half, so points back to that balanced portfolio of titles more than one or two years old. So in terms of gross profit, reported gross profit grew 9% to GBP 33 million. And as we've noted in the RNS, you may not have got through it yet, but we have seen another impairment of GBP 4.6 million.
That's across a select number of titles, couple for 2025, and that really reflects over the last six months, the changes we've seen in the marketplace and our realistic view of what's happening in terms of expected sales. It also is us clearing out those historic titles as well that we've seen, and we talked about the back end of last year, that were signed a few years back above our sweet spot, as Steve said.
So, excluding those impairments, though, I think the strength of the gross margin, the underlying gross margin, would be increased up to 46.5%. So some key drivers in the cost of sales are reductions in the underlying development amortization costs.
This really comes mostly from the reclassification we did at the end of last year for Astragon's acquisition-related dev costs. So we've moved those from cost of sales, and they're going into admin as brand amortization. But overall, dev cost amortization remains in line with our expectations, now and for full year.
Royalties as a % of sales remain flat to last year, and that's because partly the mix, so mix with in own IP, and we've talked about this before. Astragon have strong sales, and they've got slightly higher, they've got higher royalties based to their developers, but also the mix on third party with some, you know, associated royalties. Pleasingly, I think for me and for us as a business, we have continued to manage down those expense development costs.
Significantly lower by some GBP 2 million this first half against last year, and that's linked to the studio restructuring we did at the back end of Q4 last year, and the use of more efficient outsource models on QA and other areas, plus that continued internal focus on cost controls, which is all aligned to the strategic pillars that Steve's talked about previously and he'll touch on later.
In terms of the adjusted EBITDA, as a result of those revenue drives, also the cost of sales impact, plus some admin cost controls, which I'll touch on in a second, we've delivered a strong adjusted EBITDA growth. Steve talked about 18% growth, up to 19.4% at a 24, just over 24% margin, 140 basis points up.
Now, if you back out those impairments, that goes up to GBP 24 million. So, you know, it's an impressive level of profit for us, getting back to where we expect to our historic levels of consistent growth. Key for me really is the continued focus on our admin costs below gross margin, which fell by GBP 1 million, but actually that masks a greater reduction with some other increases.
So the increases included the reclassification of Astragon's acquired amortization into the cost of sales as brand amortization. Plus, also, they include the last of what we put in place when we acquired the businesses. We had put in place some management incentive plans to pay out for StoryToys and Astragon.
Last one of those hits this year, set against quite high growth targets, but as you've seen, they are performing well, and so we provided for those. Those increases are offset by reductions that we saw, particularly where the focus was on cost control within Games Label. So marketing costs fell GBP 1 million, more than GBP 1 million this half versus previously.
That was an area of us that really focused when Steve joined the back end of last year, and also reduced staff costs linked to that reorganization within studio and also impact in admin. So we're seeing that reduction through the admin costs, delivering those EBITDA growths. So adjusted EPS has increased in line with those. I think importantly, we're now doing what we need to do, maximizing the interest on the cash, the growing cash reserves that we've got.
That increased by over GBP 500,000 this time versus last year. Also, we, we've got a lower effective tax rate where it normalises, and we intend to keep driving that tax rate through the use of VGTR in the UK, Irish tax credits in Ireland, but also, you know, Germany makes use of government taxes, which more reduce the cost of development for us, but we look to improve that going forwards.
Kind of looking at cap dev costs, which is another key area for us. As I outlined in April and Steve talked about, we've driven that indie games model to reduce to the sweet spot of GBP 1-GBP 1.5 million. That's starting to have an impact in how we reduce our costs.
The cost in the first half of this year is down to GBP 11.6 million, which is down, and you can see the reduction is all driven out of the Games Label, where the focus had been. Some slight increases in Astragon, as we talked about, because they're investing in their own IP, and actually, we've now got something like 10 own IP key development projects in progress, and we'll start to see that spend, the cap dev spend, going forwards, and that's what we talked about in April.
That's our focus on driving that first-party growth as a percentage over time. Those will take two to three years, so they'll start to kick in across 2025, but mostly in 2026 and beyond. The overall net book value of capitalized on the costs on the balance sheet has now reduced slightly to just, it was just about GBP 35 million at the end of last year, and that reflects the reduced spend, the amortization charges, and also those accelerated impairment charges pushed through.
Importantly, we continue to be highly cash generative, and we've had a very strong half year for that in terms of strong cash conversion, and that's delivered us to something like GBP 32 million of net cash from operations in the first half, and as outlined at the beginning of this year, we saw the last of our acquisition related earn-outs to the previous owners. That was GBP 5 billion that went out at the beginning of this year.
We're now back to growing our cash reserves that we've kind of. We did the right deals and structured those deals back in 2021 and 2022, but those are all flowing through. Now we're starting to see the cash grow, and we saw cash up 20% to just a little over GBP 54 million. I think that really strengthens our position in terms of our balance sheet, and gives us a pretty good position in terms of cash going forward, and we see that growing. I'm gonna hand back, I think, to Steve. Yeah.
Thanks, Mark. Final section, strategic priorities, and then the outlook. So, as I said earlier on, I spent quite a lot of time in April talking about the strategic priorities within the business, and I think it's really important that I just give you a very quick, exact summary of how we're progressing against those strategic priorities.
We put the strategic priorities into two different camps. One was accelerating growth, and one was improving margins. So I'm just gonna touch on these to start off with. I've already touched on a number of these areas, as has Mark, so I'm not gonna go through them in huge amounts of detail, but doubling down on indie focus. The word "focus" was such an important word for me when I came into the business because I think there was lack of focus within Games Label.
We were developing games that were far beyond what we should be developing, so that focus is very, very clear and evident throughout the entire business moving forward in terms of the sweet spot and the scale of games that we're signing up to and developing moving forward. Prioritization of evergreen franchises to drive back catalog. The performance is there.
You don't need me to talk about it anymore. We've spoken a lot about back catalog and the importance of that, so that is really, really working well for us. M&A, Mark has touched on cash generation, GBP 54 million worth of cash that we have, and M&A is very much part of our strategy moving forward, but it's the same strategy that we've had before. It has to be the right type of opportunity. We're not gonna rush into something just because it's there for us.
Not surprisingly, we get hit up all the time when it comes to, "Do you wanna buy this IP, or do you wanna buy this studio?" But there's nothing that's attracted us so far. But for Mark and I, as far as twenty 2024 is concerned, it's around focus on the business rather than distractions outside of the business. But M&A is and will be part of our growth strategy moving forward. Innovative publishing models.
We've always been a leader, a disruptor in the publishing marketplace, and we've got to continue with that. There's an awful lot of work that's going on, and we've hired some people, and I can't go into any more detail, but I will do moving forward to talk about what we mean by innovative publishing models.
It's something that I'm really excited about, the board and Mark are really excited about, where we can start really being the progressive publisher that we need to and should be in the marketplace. The final point is around progressive participation marketing. As most of you know in this room, I spent the last twenty, 2025 years of my career working in marketing.
What I can say, there's an awful lot of people that talk a good game in marketing. But for me, I think it's important that we just show all of you what we mean by progressive participation marketing, because otherwise it just sounds like a buzzword.
And then the second area of the strategic priorities that, again, I spoke about in April, was around improving profitability, and Mark has spoken about this in a lot of detail, so I'm not gonna go through it, but increasing the sales mix of first-party IP. 42% of our revenue in the first six months of the year was from first-party IP.
Games Label investment limits, making sure we've got the checks and balances to be signing the right scale and size of games, tightened cost controls that we have throughout the business now, and also a far sharpened greenlight process, so we can make the right decisions in the right time by getting the right people in the room, so we're not missing opportunities because it's taken too long for us to sign that.
So as you can see from the nine strategic priorities I chatted about in April, very strong progress against every single one of them. But if we look at the outlook, so what is the outlook for 2024 and in the midterm? 2024 half two trading is in line with expectations. We've got confidence that we're gonna deliver against what we said we were gonna deliver.
Three new titles have already launched. Further launches are expected. A more balanced, Adjusted EBITDA between half one and half two than previous years, and continued cost and capital allocation discipline. So it is the word focus and making sure that we deliver against what we said we were going to deliver. In terms of the midterm, strong pipeline of third-party games, so making sure we are bringing in, attracting, and working with the best developers in the marketplace.
Ongoing focus on first-party IP. Mark's already mentioned the fact that we've got 10 first-party IP development programs in place at the moment that are gonna be launched 2025, 2026, and 2027. And these are titles that are loved in the marketplace already, so a fantastic opportunity for us to really focus and double down on first-party IP. Solid back catalog performance.
The back catalog is the foundation of the business, and it's proven that within the first six months of the year. Centralized group services to drive profitability and synergies. So again, I'm really proud of the fact that we are bringing in the right talent centrally to make sense of the group that we have created over the last two or three years. Further increase in cash generation and select M&A with an indie focus.
As I said, confident of delivering the full year FY 2024 results in line with market expectations. So the final summary slide that I'm going to talk you through is in our mind, it's the investment case. It's why we feel as though we're a really attractive investment case. First point is around IP and talent in place to deliver accelerated growth. So the IP, 42%, as I've said, of our revenues are from first party IP.
Diversified portfolio, we've got over 140 active titles that are delivering revenue on a daily basis for the group. There's not many businesses out there that have the breadth of offering that we have from a portfolio perspective. Proven franchise creation and the lifecycle management skills that we continually talk about, we don't take them for granted because not many businesses have them.
12 franchises that we have within our group that have delivered sales of over $20 million. So again, we're not dealing with small titles. When people talk about indie, they think it's a few hundred thousand here or there. We're talking about titles that are delivering tens of millions of, of dollars. Dependable back catalog providing midterm visibility, so 74% from 2018 to 2023 of our revenue has come from back catalog. So again, that really shows the power and the strength of, of that.
Mark's already touched on this, consistent track record of market-beating growth. So again, between 2018 and 2023, our growth has been... Our organic growth has been at 23%, compared to the market, which is at 6%. So again, something that we're really proud of and will continue moving forward.
We've got a very strong balance sheet and cash generation to support M&A optionality moving forward with GBP 54 million in cash reserves. So that's all we had to say. So there's an awful lot in there. I know there's an awful lot in the RNS as well. I'm sure there will be a number of questions, but thanks ever so much for listening, and we'll open up for any questions.
James? I'm sure we can hear it.
Oh, yeah.
Hi, yes, it's James Lockyer from Peel Hunt. I have three questions, please. On those 10 dev projects you're working on, Steve, you said that they're already loved in the market. Is it fair to assume that they're all existing games that you're doing updates to? Put some more color on that.
And if they are existing, how are you leveraging the community to ensure you deliver exactly what they want, balanced with the commercial game success? And then secondly, on StoryToys, as you release more apps and updates, how are you leveraging the audience you're growing with respect to cross-selling, in-app say, while ensuring you don't annoy them or spoil the gameplay?
And then finally, as we look five years' time, notwithstanding, where do you think those three existing segments could be in terms of revenue and EBITDA split? Thanks.
Great. I'll touch on the first bit and then probably hand over to Steve. In terms of-
I'll touch on the first bit. It's an easier question.
Cap Dev, you're right, the majority is existing titles. As we've talked about before, Astragon have a reputation and a history, and one of the reasons we were attracted to acquiring them was they had created new IP out of working simulation titles. They've got a couple of titles in development that are brand new, and we obviously hope that they'll be as successful as Bus Sim, Fire Sim, and Construction and Police Sim.
The rest are all those existing titles within Astragon, because they bring out sequels every three to four years. Plus, then it's around refocusing, as Steve mentioned, in the Games label on important franchises like Escapists, like Golf with your Friends and Hell Let Loose. So I think we believe that takes the risk out of it, but it's also helping us broaden that first-party portfolio going forward. I think there's... Anything else you want to add on an IP, Steve?
Yeah, the only thing I would say, because one of the questions was around, how can we ensure that we're involving the communities within that. And you're right, the titles are loved. Some of them have been around for a number of years. The interesting thing that we're finding is you need to involve the players in the evolution of these games.
Because if you don't, and we've seen it so many times in the marketplace, where suddenly graphics are improved and you can use certain technologies to improve, but you lose the beauty of the game. And the beauty of the game is not necessarily to have the most polished graphics, because indie players like to play indie games. They sometimes like the fact that it's a bit pixelated, the fact that it's not quite in three dimensions. It might be a two-dimensional graphic representation of a character.
So what we do on every single first-party IP that we will continue to create is we run focus groups, a number of focus groups, where we'll really get under the skin. We'll have the seed of an idea, and then we will involve the players within that to truly understand, what is it that you like? What is it that you don't like?
How do you feel about this iteration of the game that you love? So that's a really, really important thing that we're gonna continue to do. It's part of the planning. We build it into the framework, and we listen, and then we play back, but we will involve the community throughout. So that's hopefully answered that part of it.
Do you wanna do StoryToys, and I'll do the three, the five-year stuff?
Yeah, the StoryToys. The sophistication in StoryToys and the data that they have around the way they market their games, and it is incredible. What we do know, and again, I won't be sharing the statistics with everybody today because it is confidential, is that somebody who buys into the whole creation of children's edutainment apps, and they subscribe for their child, they are far more likely to be able to be cross-sold another title.
So suddenly, if I'm into Peppa Pig, and we market another title to you, we know that there's a very high percentage chance that you will subscribe because you buy into the concept, the gameplay, the safety, the fact that you're not being sold to.
More and more of what we do is trying to find those data pockets of people who are buying it, and because we've got a growing subscriber sort of number anyway, it's becoming easier for us to actually find similar groups and using clustering techniques to be able to actually move that in the right direction. So you're right, it's a great marketing technique for us.
We've got to make sure that when you're talking about kids' apps, the minute it feels like marketing is the minute you fail, and that's why the team in StoryToys is so careful that the actual gameplay itself and how it feels to be marketed to as a parent, doesn't feel as though you're marketed to.
That's not trying to do the dark art of, "Look into my eyes, look into my eyes." It's, it's just trying to make sure that people understand this is safe. These are fantastic licensed properties that we're working with, and the quality of gameplay and the updates make it hugely valuable for you to subscribe to. So, so it's a good insight that you said. You're absolutely right. People that already are into StoryToys apps are far more likely to buy into other apps as we move down the line.
Directionally, look, I'm not gonna give out forecasts for five years and splits, but it. Directionally, we are very proud, as we've said through this presentation, of our consistent growth and outpacing the market, and we expect to see that continue. I think you should expect to see there be some mix changes.
So StoryToys we acquired because it was an early-stage growth acquisition from a business point of view. They're doing tremendously well, outstripping their own market really well. And then, as we said before, their apps grow over time. As Steve has pointed out, the parents and players get used to those, the profile of those apps. So expect to see that grow as a percentage.
With Astragon, broadening their own IP portfolio will, as we said at the acquisition time, take on as a larger proportion of their own divisional sales as own IP versus physical, so that will drive up margin improvements. And then, that program of investment in own IP within Games Label and Astragon shows that we pointed our direction for own IP as a percentage will be going upwards.
It will vary at different trading periods because when own IP titles are launched, but overall, we expect that to grow. So from our point of view, we've got a very strong five-year outlook in terms of continuing the historical progression in beating the marketplace, and then focusing on driving margin improvements through both own IP, but also those ongoing cost controls. Will?
Thanks. Will Larwood from Berenberg. Just three from me, firstly. On new releases, how much of, sort of to meet market expectations, are you assuming to come from new releases? Obviously, it's a very sort of tough new release market.
Secondly, just on impairments as well, how much actually relate to the FY 2024 titles that you've already released, and how much into the FY 2025? And then finally, just in terms of gross margins, what can we expect for those in the second half, particularly given Farming Simulator?
I think this looks like you, Lloyd.
Why don't you take all three? Yeah, why not?
Thanks, Will. So, new releases. In the second half, they are. We've talked about the much-anticipated launch of Farming Sim. So when we acquired the Astragon business, they have agreements with third parties to launch the boxed physical product, and they've got one of those with Giants, which is Farming Sim, which is in the top five working simulation or simulation titles.
So, you know, to give you some idea, first half physical sales for us were around about 5%. We expect to see those go up to around about 15% of total sales. So they're gonna be a big part of the second half releases, alongside the three that we've already launched and a couple of others coming. So, you know, we expect to see new releases increasing in the second half.
In terms of the impairments, it's a select number of titles. Majority are 2024 release titles. I've mentioned, I think, on my piece, a couple of those relate to 2025 titles, where we've had to... We've taken a... And look, if you bear in mind, when we sign those titles greenlight, it could be a year, two years, before they get launched, and so the market conditions have meant we've taken a very clear look at that. And so, but most are 2024 titles, and as I mentioned, that's us getting through the majority of those historic titles that were signed above the sort of our sweet spot in terms of spend.
In terms of gross margin, bear in mind that Farming Sim, that I talked about, the physical boxed product has a lower margin than the digital, obviously, for obvious reasons. And we expect overall margins, gross margins at the back end of this year to be in line with consensus, which is around 42%. Katie?
Thanks. It's just kind of a couple of follow-on questions, actually. Sorry, Katie Cousins from Shore Capital. So, in terms of the EBITDA contribution, did all divisions contribute positively in this period? And then secondly, on the impairments again, because the RNS talks about the greenlight process and sharpening the process, and actually you're now seeing a higher number signed through that process, was those actions taken before some of the games that you've now impaired?
And then, sorry, finally, how much variability should we expect in terms of operational costs over the next few years? Are those reductions and reorganizational actions now fixed, or should we see variation. Thank you.
Yeah, so, firstly, yeah, all three divisions were positive in terms of their EBITDA contributions, so we were very, very pleased with the performance, and that comes back to the same point that I mentioned on my piece around that diversification strength of the whole portfolio, so really pleased with the businesses.
In terms of the impairments, and the link to greenlight, those were historic titles that we've had to deal with. We had a different view at the end of the last year that they were still gonna be viable in terms of the marketplace. They are still viable products. We're not, we've not written them off, we've just taken the view that the forecast for those in the marketplace is lower than we had when we signed them.
So the changes we've made to the indie focus on Sweet Spot are what you're starting to see coming through into the captive spend. So we kind of flagged that a little bit at the back end of last year, there were still some of those titles left in there. So yeah, nothing that we've had to impair has been recently signed.
I think the thing about the greenlight process that's important that we understand is the problem with the greenlight process. When we looked at it about nine months ago, it was taking too long. It was taking too long from the time a dev came in and pitched their idea to us, to the time that we were willing to put an offer on the table, to the time we were willing to sign it, to the time that we could start the development of that game.
Good game developers have choice in the marketplace. We needed to change our process. We needed to make sure that we had the right checks and balances in place, because we're not suddenly gonna start signing games just because we like the look of them.
You've got to do the product due diligence, you've got to do the commercial due diligence, you've got to do the comparisons to the right sort of titles in the marketplace. Because it's very easy to compare a title to the outlier in the market, the one that sold $25 million worth, but what's the point in doing that? You've got to make sure you've got accurate greenlight process.
So what we have now is we have a far tighter process. We have fewer people involved in that process, but more senior people involved in the process, so we can make the right decisions within the right time frames. We've brought in a legal director to Team17 Group, first time we've ever had one, because what was taking time was contracts going outside to a legal firm, getting them to draft contracts.
It was just, we were losing opportunities because we didn't... We weren't set up in the right way to be able to speed those processes up. So we've got a really slick process now, that means that we can make decisions quickly.
Devs have to react quickly to offers that we put on the table for them, and then we can make sure we're signing the best games in the market. But that will start to come through in 2025, because obviously, the process that only started this year tends to be 12-18 months' worth of dev spend, and time, in terms of the creation of the games.
In terms of your operational cost question, the market's continually moving and changing, and therefore, we have, what we've learnt from the last twelve months or so, is we have to constantly keep an eye on that marketplace and constantly look at our model to make sure that whether it's in Astragon, StoryToys, or Games Label, that it's matched properly to the evolving. It's probably a revolutionary market, really.
It's not evolving, because that infers slow pace. So the lessons we've learnt are built into both the changes we made in the reorganization, but also that ongoing focus on cost control. I believe we are fully involved in that on a regular, weekly, monthly, half-yearly process, and that's part of our strat plans, it's part of our budget plans, and it's they were tough lessons learned, but they are ingrained in what we do now, and that rigor will continue.
It means we will have to always look at that model, I believe, and think about, is it best placed to meet the market that we sit in today? 'Cause the Games label, the games market, it changes quite phenomenally. It's a really fast pace, as you can imagine. Jasmine.
Hi, Jasmine, Deutsche Numis. Is this working? Yeah. I have a couple of areas of questions. So firstly, just on the market, you talked about kind of ongoing challenges, but can you elaborate a bit more specifically? Is that kind of changes in consumer preferences?
Is it the competition in the marketplace, or have we seen any kind of particular genres and monetization models that have been more successful in kind of the post-COVID environment? And are you seeing differences in, say, Europe versus the US? I think in terms of total sort of video game spend, the US has looked a bit stronger. Has that been reflected in the indie market, or is, you know, that really driven by the Triple-As?
And then, sorry, a few questions, but finally on that, you know, engagement metrics look to have been relatively strong, but potentially kind of the revenue performance of the industry has been worse. So are you seeing ongoing pressure on pricing or pressure to discount your titles, and what have your competitors been doing, in response to that?
Then the second question kind of ties on with everyone else's questions around IPs and their own IP pipeline. How do you adapt your greenlighting model from the third-party part of the business, and also even when considering, opportunities that are sort of sequels or within an existing franchises, versus when you are coming up with an entirely new IP, and potentially some of the biases that your development teams might have around that? Yeah, that's all of them. Thanks.
Gonna let Steve do some talking on the market, and then I'll try and touch your IP bit, and Steve can add to that.
Yeah, so you're right that the market is super, super competitive. I remember standing here in April talking about 2023, with 14,500 launches on Steam in 2023. And I think everybody is saying there's probably gonna be closer to 17,000-18,000 launches in 2024.
So it's not, it's not slowing up. I think 2025, I don't think we're gonna have anywhere near the number of launches that are actually happening in 2024, 'cause I think a lot of the, the COVID monies that are still floating around in the marketplace in terms of development projects will come to an end in 2024 into 2025. So, so there's no doubt there is an awful lot of competition in, in the marketplace at the moment.
When I look at the indie market, I feel really positive about the indie market, because if I look at indie and Triple-A , when I came into the industry, and again, I haven't been in the industry for a huge amount of time, I thought, "Well, actually, we're competing against each other," and you could argue that we are in terms of the amount of money that people have to spend on games and the amount of time that they're willing to play games.
But the reality is, the Triple-A games very rarely get finished because there's hundreds and hundreds of hours of gameplay, whereas an indie game provides you with that five, 10, 15 hours worth of gameplay, where you really can get into it, and you can feel as though you actually complete something, you can finish something.
We call indie almost like snackable content compared to Triple-As, where you're constantly chasing it down, and you never... most people never, ever get to finish a Triple-A. We feel as though there's a really good opportunity for us to sit alongside Triple-As, and people will say, "Right, I'm gonna buy one Triple-A every six months, and I'll buy two or three indies." We feel as though that's a big opportunity.
I think the Double-A market is the one where there's the biggest challenge, because Triple-As are discounting pretty quickly now, so suddenly there's not a great price differential between a Double-A and a Triple-A, and therefore, I would rather go for a Triple-A, rather than have a Double-A that's not quite as good, not quite as deep.
But indie sort of sits slightly separately to that. I think the final thing that I'd say on this is if you look at Steam, and if you look at the top 20 titles over the first six months of the year, seven of those titles, on average, it varies between six and nine, but on average, sort of seven-ish, are indie games.
So what you're looking at there is indie are, I would say, out-punching their weight when it comes to the sales of indie titles in the first six months of the year. It's bloody tough because there are so many of them. There are thousands and thousands and thousands of indie titles that are being launched.
But I feel positive about indie, and I'm not just saying that because I'm sitting here as the group CEO of an indie publisher, but I feel as though it knows its place in the market. It's not trying to be something that it's not, and players really buy into that because it provides... It's GBP 19.99. I can finish it. It's exciting. It's different.
I feel as though it's mine. So, it probably doesn't answer all of your questions, because I could probably be here for the next half an hour talking about all the different things, but hopefully it gives you a flavor in terms of high competition, how we position indie versus Double- A and Triple- A, and also the fact that there are some successful titles from indie out there in the market. Do you want to take the second?
In terms of IP, our greenlight process doesn't specifically bias first party versus third party. Clearly, lessons learned means that if you're an indie is about taking some risks on titles, but clearly, we took our eye off the ball, and we were taking too big a risks in some of those indie titles that were signed well above our sweet spot.
So we're managing down that third-party risk by managing the investment levels. Equally, we've got a much more rigorous process that involves Steve and I through everything, plus some key members on our board, and I don't just mean Debbie and Frank with years of experience. I mean Peter Whiting and Penny with their experience to review the bigger titles.
We manage that risk on third party, but as you've seen, and as we talked about, and kind of highlighted by, you know, circa ten projects of first-party titles in development, we've put the focus back on driving first-party investment in through new game titles.
They are, apart from a couple that are in Astragon, which are new working simulation, which is part of the strategy of broadening their portfolio across more working simulation titles, the rest are on tried and trusted, favored titles in the marketplace, as we said, like Escapists, like Worms, like Golf With Your Friends, Police Sim, Bus Sim, Fire Sim, et cetera. We are building on the reputation of those titles.
Equally, if you look at third-party titles, sequels like Blasphemous 2 are a good indication of how we can build off the success of the first title, and with our lifecycle management, continue to grow that franchise, because Blasphemous 1 grew as a result of launching the sequel. So Moving Out 2 was another example.
So where we can, but we don't bias it. We'll put all of those titles through. We've just learned some tough lessons around taking risks too far with the level of investment in some of those third-party titles.
I f I c ould ask a couple of questions from the webcast. So firstly, just on capitalized dev costs, where should we think about them moving for the full year following H1?
Yeah, so as I mentioned, we've spent GBP 11.6 million in the first half. We do see that growing in the second half, because we've talked about it a lot now already, that investment in our own first-party IP program development projects.
So we'll see that increasing in the second half. It's in line with our expectations. And we know that those investments will be for development programs over a couple of years, leading to launching titles through 2025 and 2026 and 2027. So it is gonna increase in the second half, in line with what we've briefed the market.
Thank you. And then a question on the number of titles that we're seeing coming through the Greenlight process at the moment, and any bias to any particular genres?
No, there's no bias to any genres at all when I sit in the greenlight meetings. So the beauty of them is they are so varied, and as a business, we need to make sure that we're not putting all of our eggs into one particular genre, because otherwise we just turn into a first-person shooter publisher or a cozy family game studio or a genre game.
So no, there's no particular bias towards any genre at the moment. And we're actually getting more and more opportunities, not surprisingly, because a lot of devs in the market are finding things really tough. A lot of devs may have said, "We're gonna self-publish or we're gonna fund it ourself," and there's not as much money floating around the gaming marketplace when it comes to devs picking up those funds.
We're getting more and more opportunities. We're more selective than we've ever been, because we have to be, because if we wanna sign the best games within the sweet spot of around GBP 1-GBP 1.5 million, we've gotta make sure we really get under the skin and find something that's gonna take off, and that's what we're doing.
Thanks, Steve. A question on M&A and the cash balance. Any preferences for priorities of where you'd spend the cash in terms of Astragon, Games Label, StoryToys?
No. The short answer is no. There's no preference as to where we spend that money. And the other thing is, if there's nothing good in the market, we're not gonna be rushed into it, and I think history shows that we didn't jump to acquire things three, four years ago. It took us time to find Astragon, for us to find StoryToys.
So, yeah, we're getting opportunities pretty much every week, and that's not an exaggeration. Sometimes it's IP, sometimes it's studios, sometimes it's publishers, but it has to feel right. It has to feel as though it fits with our overriding strategy, otherwise we're just gonna be buying bolt-ons, and that's not what this business is all about.
That there is a very clear strategic view of the type of business we want to be, and the acquisition has to add value to that, rather than just be buying it for a commercial reason solely.
Thank you. And then, Mark, one for you on impairments, just on the outlook for impairments going forward, following what we've taken in the last two halves.
Yeah, it's a good question. Look, I think what I previously talked about in my section was, we've pretty much cleared out the historic titles that were signed at well above the sort of that sweet spot. I've mentioned there are a couple left, but we've got confidence in those titles. So I believe we've, you know, whilst we'll never say that we can't have any impairments, because we can't predict the future in the marketplace.
I believe we're now back into the mode that we were in historically, where we've got much tighter control on what we're signing, much tighter control and rigor around the development process and milestone reviews, and commercial reviews throughout that development process, and making sure that we bring those titles to market in the right quality and the right form.
But we can never predict what the market is, but I do believe we've got ourselves back into the position that we were in a couple of years back, and expect that to continue moving forward. But as I say, we can. We can't predict the market, but I think we're in a much stronger position.
Thank you. Then a question on license deals. I mean, we'd mentioned in the press release that H1 benefited from some phasing of license deals. Are we reliant on license deals in H2 or in future years going forward?
No, in fact, if you look at our license deals, the percentage of sales have been dropping, and we've deliberately taken away the reliance on subscription deals for us, we call license deals. In fact, the phasing one, which was within Astragon, and they don't have a history of signing subscription deals of any real materiality.
I think that points to us as a group leveraging our experience and knowledge within Games Label and helping Astragon secure a great deal, and that brought what we'd expected might happen in H2 into H1, which is why that's some of that phasing point. That said, we are...
We're not, and we never do forecast and rely on license deals, subscription deals, but if they do come in, we'll make sure that we maximize them, and we'll secure the best possible advantage. And it, and that's then as a, as an out-and-out commercial decision around the value up front, versus what we could, what it might do to the market if you don't get any, you know, other. It has any other impact on digital sales. So we'll continue to do that, but no, not a material reliance on subscription license deals for us.
Thank you. And then, just in terms of, you know, the new release market, or new releases generally, do we see an improvement in the climate to deliver growth in 2025?
Growth from new releases, is that the que-
I think-
Revenue growth.
I think they're talking about overall revenue growth in 2025.
I'd in my mind, the market is super competitive. But as I said earlier, I'm not expecting there to be the quantity of new releases in 2025 that there have been in 2024. And ultimately, it comes down to making sure we are signing and working with the best devs to create the best games, that our first-party IP is continuing to be developed and launched, and marketed in the way that I chatted about earlier on. So no, I'm positive about that.
If I can add, the point I made actually is that what we built as a business from day one, pre-IPO and from IPO onwards, is a portfolio with a breadth of titles, new and a strong back catalog that is enviable. I don't know any other business that's got the strength in their back catalog as we've got.
The growth you've seen is strong because of great titles in it, and titles that are one-year-old, two-year-old, three and five-years-plus, all contributing from a balanced point of view. We are not thrown out by one year's worth of new releases.
It's great if we can get Dredges and titles like that coming through, but actually, it's all about bringing great titles to market and then extending the life, and the value from those titles over the life cycle, which, as we said, although we have a very prudent amortization policy over two years... those digital life cycles can be five, 10, even 15 years. So, I think we're confident of growth going forwards.
And final question from the webcast, is there anything we can say about the development plans for Hell Let Loose?
No. It's a fantastic title. It's a first-party title. It is our biggest revenue generator in 2024 so far. It has a community that demands the best because it's such a fantastic game. We've got really exciting plans over 2025, 2026, 2027, and 2028 for Hell Let Loose. Obviously, I can't go into detail in this session, but that there is a very clear roadmap that will excite players and the community moving forward. But that's as much as I can say on that.
The only thing I'd add, Steve, is what we've done differently now is we've recruited an industry veteran to lead that franchise, one of these franchise directors that I think you pointed to in April, Steve, and that person's on board taking full P&L commercial responsibility for that brand and franchise, 'cause we see it as a long-term, you know, part of our portfolio, and that will extend, I think, to other titles going forward. So you know, as Steve says, it's a key part of our business and really passionately enjoy that title, and we see value in that going forwards.
It is a good point that we have. One of the greatest strengths of Team17 Games Label is its breadth of offering. We've got games like Overcooked, like Hell Let Loose, like Trepang, and that is fantastic. If you look at StoryToys, their focus is 100% on edutainment. That is what they do. If you look at Astragon, working simulations is what they do.
Team17 Games Label, a real breadth of offering, so what we need to make sure, and what we've done over the first six or seven months of this year, is make sure we're bringing people in who are experts in certain genres. So this franchise director, for example, in Hell Let Loose, is just one of many recruits that we've made where people can focus on the things they are most passionate about.
If you're an expert when it comes to family or cozy games, then we need to make sure we're putting you on the games that we have within our business, so making sure the structure of our business is aligned to the individuals that we have.
Because if we suddenly have loads of generalists working on specialist product, we're not gonna generate the success that we deserve within the IPs that we have. So again, that's a further structural thing that is happening within the business, where we can make sure we've got the right talent working on the right titles.
Okay.
Any more in the room or not?
Any other questions in the room?
Thank you very much, everyone.
Thank you. Appreciate you all coming.
Nice to see you all again face to face.