Sumo has delivered a solid set of interim results this morning, achieving revenue growth of 6.1% YoY while gross profit increased 13.6% YoY as the gross margin expanded from 43.6% to 46.3%. We tweak our forecasts, adjusting our revenue mix, assuming higher development fees through the forecast period, headline adj. EBITDA forecasts are unchanged. We remain positive on Sumo’s investment case with the Group continuing to see good levels of demand with earnings visibility for FY20 already at 41%. At last nights close Sumo trades on an FY19 PE of 24.0x falling to 21.0x in FY20 which represents a discount of c.19% to its peer group average.
- Interim results: The group has delivered results in line with expectations for the first half. Revenue was up 6.1% YoY, primarily driven by a 7.6% increase in core development fee revenue to £20.4m. Gross profit increased 13.6% YoY as the gross margin expanded from 43.6% to 46.3%. Results reflect the significant weighting in 2019E towards H2 revenue and profits as a result of the transition to more own-IP projects and royalty income. The group increased headcount by 15% during the period including 27 people who join as part of the Red Kite acquisition, taking total employee numbers to 679 at 30 June 2019, meaning the group has necessary resources to meet H2 revenue and profit expectations. The group opened its new Leamington Spa studio which will focus exclusively on the fast-growing mobile games segment. The client base has also expanded, with a new partnership with publisher 2K and projects underway with both Apple and Focus Home Interactive.
- Investment case: We remain positive on the Sumo investment case, the group is well positioned to capitalise on positive market trends, with high forecast growth and a continued trend to outsourcing. Sumo has an enviable position in the market as a result of its ability to work across platforms and genres, utilising either its own proprietary systems or 3rd party software to create high quality content for some of world’s largest publishers including Sony, Microsoft, Apple and Sega. Sumo is well positioned to act as a consolidator in a highly fragmented market to further supplement its organic growth opportunity.
- Forecasts: We tweak our revenue forecasts, assuming higher levels of development revenue through the forecast period offset by a slower phasing of royalty revenue. Headline adjusted EBITDA forecasts are unchanged, but we increase our depreciation and update our assumptions on net interest. We also incorporate some additional capital expenditure in 2019E, reflecting the decision to move the recently acquired Red Kite games to a new site and capex relating to an audio studio. As a result of these changes we now expect net cash at the end of 2019E of £14.0m.
- Valuation: At last night’s close Sumo trades on an FY19 PE of 24.0x falling to 21.0x in FY20 which represents a discount of c.9% to its peer group average.
