Sumo Group Plc Annual Report & Accounts 2019
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Sumo Group plc Group Sumo Annual Report & Accounts 2019 Report & Accounts Annual Sumo Group plc Annual Report & Accounts 2019 REALISING OUR VISION CREATE STRATEGIC REPORT We aim to create Highlights 1 ground-breaking games Our Vision 2 At a Glance 4 Why invest in Sumo Group 6 Chairman’s Statement 8 Marketplace 10 Business Model 12 Strategy 20 Chief Executive’s Review 22 Group Financial Review 28 Section 172 Statement 32 Risks and Uncertainties 38 GOVERNANCE Introduction to Governance 42 Corporate Governance 43 Board of Directors 48 BUILD Operating Board 50 Audit and Risk Committee Report 52 Directors’ Remuneration Report 54 We aim to build on our Directors’ Report 62 global business Statement of Directors’ responsibilities 64 FINANCIAL STATEMENTS Independent Auditor’s Report 65 Consolidated Income Statement 72 Consolidated Statement of Comprehensive Income 73 Consolidated Balance Sheet 74 Consolidated Statement of Changes in Equity 75 Consolidated Cash Flow Statement 76 Notes to the Group Financial Statements 77 Parent Company Balance Sheet 109 Parent Company Statement of Changes in Equity 110 Notes to the Parent Company Financial Statements 111 MAINTAIN Financial calendar 115 Company information 116 We aim to maintain our strong company culture Strategic Financial Report Governance Statements We are one of the UK’s largest providers of creative and development services to the video games and entertainment industries, delivering end-to-end visual and development solutions from initial concepts to production and development and post- release support. We operate from ten studios around the globe. HIGHLIGHTS REVENUE (2018: £38.7m) £49.0m +26.6% DRIVEN GROSS PROFIT (2018: £18.4m) We are driven by our people £23.9m +30.0% ADJUSTED EBITDA* (2018: £10.2m) £14.1m +37.5% CONTRACTED OR NEAR CONTRACTED REVENUE GROSS MARGIN 73% 48.8% (2018: 88%) (2018: 47.6%) NET CASH (2018: £3.7m) £12.9m * Adjusted EBITDA, which is defined as profit before finance costs, tax, depreciation, amortisation, exceptional items, share based payment charge, the investment in co-funded games expensed and, in 2019, the impact of IFRS 16, is a non-GAAP metric used by management and is not an IFRS disclosure. Sumo Group plc Annual Report & Accounts 2019 1 Our Vision WE CREATE GROUND- BREAKING GAMES We make highly innovative games for the most prestigious publishers in the world, with an increasing number of titles based on original concepts generated by Sumo. We mirror their faith in us by way of co-investment in a number of projects. We aim to build on this over time to include fully-funding some of our own original concepts. Ian Livingstone, Chairman 2 Sumo Group plc Annual Report & Accounts 2019 Strategic Financial Report Governance Statements Sumo Group plc Annual Report & Accounts 2019 3 At a glance WE ARE GAMING We are one of the UK’s largest providers of creative and development services to the video games and entertainment industries. COMPANY STRUCTURE Together, our Sumo Digital and Atomhawk businesses deliver end-to-end visual and development solutions to the video games industry and beyond, from visual concept design and pre-production through to development, user-interface design, marketing and post-release support. We now have ten studios operating in three countries. REVENUE STREAMS Our business model is evolving and, for the first time, we are distinguishing between revenue generated from work on Client-IP and that generated through work on Own-IP. This is explained fully in the Group Financial Review on pages 28 to 31. 2018 2019 (,000) (,000) Total Client IP: £34,768 Total Client IP: £32,623 Total Own IP: £3,928 Total Own IP: £16,364 4 Sumo Group plc Annual Report & Accounts 2019 Strategic Financial Report Governance Statements OUR YEAR IN REVIEW JANUARY 2019 Acquisition of Red Kite Games, a work-for- hire studio focused on engineering and code support services, adding 27 talented colleagues to the business, increasing technical/engineering capacity and providing access to a new talent pool in West Yorkshire. FEBRUARY 2019 Crackdown 3 for Microsoft launched. MARCH 2019 Sumo Digital opened a studio in Leamington Spa, dedicated to the fast-growing mobile OUR RELATIONSHIPS game development market. Apple Arcade contract announced. We have developed deep relationships with some of the world’s APRIL 2019 largest computer games publishers, developers, platform Paul Porter, one of the co-founders of Sumo manufacturers and entertainment brands, including: Digital, was appointed Chief Operating Officer of Sumo Group. Gary Dunn appointed as Managing Director of Sumo Digital. MAY 2019 Team Sonic Racing Launched JULY 2019 Sumo Digital and Red Kite Games announced a new partnership with 2K, a video games publisher managing some of the most creative and respected brands in the market today. Won the highly coveted Develop Star Award for ‘Best Studio’. AUGUST 2019 Pass the Punch planned launch announced, a self-funded Own-IP “beat ’em up” title. HIGHLIGHTS 2019 SEPTEMBER 2019 Launched the much acclaimed Own-IP game Dear Esther on iOS, developed by The Chinese Room. Ian Livingstone, one of the founding fathers of the games industry was appointed INCREASE IN TALENT OWN-IP REVENUE Non-Executive Chairman. OCTOBER 2019 Sumo Digital established in Warrington; Sumo Digital’s seventh UK and eighth global studio 29% £16.4m expanding the Group’s capabilities by focusing from 592 to 766 people 2018: £3.9m on the delivery of high-end engineering and code support services to prestigious clients. Red Kite Games relocates to larger premises STUDIOS in Leeds City centre. NOVEMBER 2019 Tencent acquired c.10% shareholding in Sumo 10 Group. from seven in the year Sumo Digital wins TIGA award for ‘Best independent Studio’. DECEMBER 2019 Headcount reached 766 people. Sumo Group plc Annual Report & Accounts 2019 5 Why invest in Sumo Group WHY INVEST? WHAT WE OFFER GROWTH CAPABILITIES POTENTIAL AND SCALE The video games market is vast and Our competitive advantage lies in fast growing with ever-increasing our scale, management systems, demand for new content. technology and our ability to attract the best creative talent, which The key growth drivers of the industry are considered to be cloud based platforms, Games as a Service (“GaaS”) enable us to offer creative, flexible in-game monetisation, changes in consumer behaviour, co-development and full end-to- free to play and mobile games, esports and the rise of Asia, particularly China. Six of the largest businesses in the end solutions to publishers and world, Amazon, Apple, Facebook, Google, Microsoft and Tencent are actively driving growth. other content developers. Newzoo, the world’s most trusted and quoted source for We benefit creatively, commercially and financially from our games market insights and analytics, expects the global proprietary technologies, which we have developed over market to grow from $152bn in 2019 to $196bn by 2022. many years, and our global talent base of over 750 people in three countries. $152bn 2.5bn 10 766 value of the global gamers worldwide studios in three people market countries See more on page 10 See more on page 4 6 Sumo Group plc Annual Report & Accounts 2019 Strategic Financial Report Governance Statements LOWER RISK STRONG BUSINESS TRACK MODEL RECORD Whilst the Group’s business model Since its IPO in December 2017, is evolving, it continues to be the Group has delivered consistent relatively low risk with high revenue and Adjusted EBITDA* visibility, generating both cash and growth of over 20% year on year. sustainable profit margins through Since 2016 the Group has achieved a revenue CAGR of nearly long-term contracting, typically 34% per annum. The increase in revenue has been driven by with milestone payments, which continuing strong organic growth at Sumo Digital and Atomhawk and the acquisition of Red Kite Games at the end provides the opportunity for of January 2019. The Chinese Room, acquired in August 2018, and Red Kite Games together generated revenue of investors to gain lower risk £5.8m in the year. Excluding The Chinese Room and Red Kite exposure to the attractive video Games, the Group’s revenue increased by 12.5%. games sector. Sumo Group is rarely directly exposed to the commercial success of a game and more often benefits from upside where royalties are in place. Our aim is to accelerate the Group’s growth and increase margins, through the development of Own-IP games, either self-funded, co-funded or fully-funded, and through acquisition. 73% £12.9m 34% 59% Contracted or near- Net Cash December 2019 Revenue CAGR Overall growth in people contracted development since 2016 nearly since IPO (2017) fees for 2020 See more on page 5 See more on pages 22 to 27 * Adjusted EBITDA, which is defined as profit before finance costs, tax, depreciation, amortisation, exceptional items, share based payment charge, the investment in co-funded games expensed and, in 2019, the impact of IFRS 16, is a non-GAAP metric used by management and is not an IFRS disclosure. Sumo Group plc Annual Report & Accounts 2019 7 Chairman’s Statement I am very pleased to introduce Sumo SUMO TEAM Group’s Annual Report and Accounts, our third as a quoted company and my first as Chairman. 766 STUDIOS WORLDWIDE 10 GROSS PROFIT GROWTH 30% I would like to thank Ken Beaty, my predecessor as Chairman, for handing over a company and Board that is in such BUILDING good shape. The strengths of the Group, particularly our relatively low-risk business model and robust liquidity, and the market that we serve seems especially important, A GLOBAL as we all face the uncertainty caused by the COVID-19 pandemic. We responded early to the Governmental BUSINESS advice issued on COVID-19, switching rapidly to “working from home” across all our territories and studios to safeguard our people, their families and our other stakeholders.