Team17 Group plc (OTCPK:TSVNF) Q4 2023 Resulst Conference Call April 19, 2024 8:00 AM ET
Company Participants
Steve Bell – Group Chief Executive Officer
Mark Crawford – Group Chief Financial Officer
Operator
[Call Starts Abruptly] presentation, investors will be in a listen-only mode. [Operator Instructions] Before we begin, I’d like to submit the following poll.
I’d now like to hand up to Steve Bell, CEO. Good afternoon to you, sir.
Steve Bell
Good afternoon, and thanks very much. Good afternoon everybody, and welcome to our 2023 full year results presentation. There’s a number of you on the call, who I will have met over the last three or four months. I’ve been within the business, but there’s no one that I won’t have met. I just wanted to introduce myself very, very quickly.
My name is Steve. Bell as I’ve said, I took over from Debbie Besswick who I know, a number of you will know on the 1st January 2024. Prior to that I worked alongside Debbie for a few months in 2023. My background is in the world of advertising, marketing, digital media. And a number of people asked me the question when I announced that I was joining Team17 as the Group CEO, as to why I decided to take the jump from the world of marketing, communications and digital media into the world of computer games.
The truthful answer is, as soon as I met Debbie and as soon as I started looking into the world of Team17, it really, really fascinated me, really excited me. Just the way that the organization looks at IP and brands and the lifetime value of those brands made me think that, it was something that I could add real value to in terms of my marketing communications background. It is an incredible business and although 2023 was challenging, I feel really excited about the future within the business, and I feel as though I can have real value when it comes to the growth the business will deliver moving forward.
But before we start getting involved in the actual performance of 2023, I thought it was worthwhile just talking a little bit about my perspective of the business having been in position for some time now. First thing I would say is, how competitive, fast paced and dynamic the industry is. Obviously, 2023 was a really unusual year in the world of gaming, just in terms of the quantity and the quality of titles that were launched. But the thing that I have seen and the thing that I think is very, very important is the fact that Indie and Indie games is a fantastic space for us to play and it’s a place where I feel as though we really can lead the market. We’ve got fantastic businesses within the Team17 group, including Astragon and Storytoys and, obviously, Team17 games label.
I feel as though we’ve got underappreciated IP, and we’re going to talk about that in terms of the stature and scale of some of the IP that we actually have. We’ve got exceptionally talented people throughout the business. It was one of the things that, I knew as soon as I started meeting Debbie and the Board and the leaders of those businesses, how experienced they are, but more importantly, how passionate they are in terms of what they do.
We talk a lot about life cycle management skills, and for me, that’s one of the things that impressed me the most when I joined Team17. It’s a case of looking after a brand. It’s not just a case of launching a game and then suddenly allowing that game to just peter off in terms of sales. It’s looking at the sales value over a period of one year, three years, five years, 10 years. The way that we manage our back catalog is something that is super, super impressive.
But there are obviously opportunities to improve. And I think coming in from a background where I ran 14 different businesses with a 1,000 people in the world of marketing, I feel as though there’s a huge amount that can be done in terms of the collaboration between the teams and the divisions that we have within the Team17 group. I think the other thing that I’ve noticed is that discoverability of games is one of the most important things. If you look at Steam in 2023, over 14,000 games were launched on Steam last year. That’s almost 40 titles every single day are launching on Steam and discoverability, and in effect, marketing and how your title can be seen, can be heard, and more importantly can be purchased is critical. And I feel as though my experience in the world of marketing communication is really going to help the business moving forward in terms of fighting that battle against all the other games that are launching within a short period of time.
There’s no two ways about it. Parts of our business underachieved in 2023, but we’ve learned from the mistakes that we’ve made, and I can assure you we won’t be making the same mistakes again. And we’re back on track in 2024 with a very clear plan for delivering growth. And we’ll go into that into more detail during the presentation.
But if we look at the world of Indie, and again, we talk a lot about indie and we can’t just presume that everybody knows what in and Indie game actually is. When I joined the business, it was something that I spent a lot of time talking to people within the industry talking to Xbox and PlayStation and Steam and developers and everybody else. And obviously everybody’s got a slightly different view as to what Indie actually means.
Some people are very philosophical and say, it’s a state of mind. And that doesn’t really help in terms of what we actually mean in the definition of Indie. But probably the best way that I would explain what an Indie game is all about is, it’s a game where the investment in that game is lower than AA or AAA title. But more importantly, the actual gameplay in the game itself is very innovative. It’s very dynamic. It’s bringing together things that have never been done before. And suddenly, if you’re coupling with a lower budget, when it comes to development, coupled with the innovative nature of the game, that’s how I would capture what the Indie market is all about.
If you look at 2023, though, it is highly competitive. The market is backing growth, the gaming market is backing growth. And the interesting thing is that sales are dominated by a back catalog title. If you look at Steam, 90% of the games played on Steam in 2023, well, what will be classified as back catalog or games that are 12 years, 12 months or older? So, what that does show is the importance of that catalog, and it’s something that we spend a lot of time looking at within Team17.
The Indie market is huge. From our calculations, it’s north of $8 billion. So you can suddenly see the scale of that market and the opportunity that we feel as though we have as Team17 Group, innovative titles within the Indie world do incredibly well. If you look at the visual on the left-hand side of this slide is a title called Dredge that we obviously launched in 2023, a real standout title, but the innovative nature of that game, the fact we’re talking about a fishing game and a horror game and a storytelling game all brought together suddenly create real excitement in the marketplace. And that’s why that game just took off, because of the innovative nature of it.
Indie games are also very differentiated from AA and AAA titles, and we call Indie games almost like snackable content because if you look at AAA title, the AAA title will almost take hundreds and hundreds of hours to complete. Most AAA titles never get completed because the player either runs out of time or energy to keep on getting stuck into to that particular game. But an Indie game almost sits alongside that. So an Indie game can be finished in 10 hours, 15 hours, 20 hours. And gameplay aren’t just playing AAAs or just playing Indie, they’re playing both. And what we need to do is understand the relationship that we have with AAA titles and making sure that people understand the fact they can complete our games and feel really excited about them moving forward.
Indie titles are growing in terms of the number of them on Steam. And from our perspective, if you get the model right, it’s a far lower risk return on investment than AA or AAA. But why, as Team17 Group, why do we feel as though we’re well positioned to become the Indie powerhouse? And that sounds like quite a lofty ambition and it is. There’s no two ways about it, but it’s something that we spend a lot of time talking about internally and it’s one of the internal main objectives that we have and the vision about being an Indie powerhouse. So why do we feel as though we’re well placed to deliver against that objective that we’re setting?
The first point is around the global nature of our business. 90% of our sales in 2023 were outside of the UK. Again, it shows, although we may be perceived as a UK publisher, we’re absolutely not. We’ve got global reach when it comes to the games that are being played. When you look at our IP, 35% of sales in 2023 were from first-party IP. And we’ll go on to talk about that in more detail as far as why that’s important and the direction of travel that we go in. When it comes to first-party IP.
We had over a hundred titles generating our sales in 2023 and 15 of our franchises generated north or have generated lifetime sales north of GBP10 million. Four of our titles have generated sales north of 45 million, and one of our titles generated sales north of a hundred million. So that just shows the scale and the stature of the IP that we are dealing with on a day-to-day basis, we’ve got an exceptional back catalog. 71% of our sales are back catalog, and that’s growing 10% on the previous year. And that back catalog is constantly being fed by new releases.
Our diversified portfolio is something that I’m really, really proud of. We talk to hardcore gamers, casual gamers, enthusiasts, and we talk a lot within the business about having a lifetime of play. So we’ve got children at the ages of two playing the games that story toys and the apps that story toys develop from an edutainment perspective all the way up to people in their sixties and seventies playing some of the titles from games label and also in simulation titles from astragon. And No Game Within our portfolio is north of 15% of our revenues. So that shows that we’re not overly reliant on one particular game, which is a really important point.
We’ve got a really compelling proposition for developers. We need to make sure that we are the top of the list when it comes to a developer wanting to publish their particular title. And that’s because we’ve got multi-platform reach. We talk to all of the platforms on a day-to-day basis. We’ve also got access to insight and data, and that data is worth its weight in gold because we’ve got the experience over the last few decades when it comes to understanding the sales profile, what promotion’s going to do, how marketing’s going to work within that? That can’t be said from any other publishers. And also we’ve got the financial resources to be able to invest in those titles that we feel as though we’re right. We’ve also got a very strong balance sheet and that can enhance our own IP and it can grow and scale through M&A. And again, we’ll talk about that later on.
But what’s the plan? That’s all well and good saying Indie is a really interesting market. It’s a big market and we feel as though we’ve got the foundations to be able to deliver against our ambition about being an Indie powerhouse. But the plan is based on these two areas here. So accelerating our growth. So the first point is around doubling down on our Indie focus. It’s making sure that we understand that we are an Indie publisher, we don’t want to drift into the world of AA, and in turn, we want to make sure that we are clear in terms of the investment levels that we have around our titles. And in 2023, it was one of the mistakes within games label that we invested in titles that were taking us into an area outside of that Indie focus, and we’ll go on to talk about that in more detail.
We want to make sure we’re prioritizing our evergreen franchises. Those franchises that have huge amounts of potential value over a period of time. That evergreen franchise can make sure we’re delivering sales and profit three years, five years, and beyond that. Progressive participation marketing, which is a bit of a mouthful, but what I mean by that is the way that we market our products and our IP. We’ve got to really disrupt the marketplace. It’s obviously my background. One of the things that I’ve seen from my time within Team17 and talking to other developers and publishers is, there seems to be a bit of a playbook, bit of a cookie cutter approach when it comes to the way that marketing is used to launch titles.
We want to make sure, we’re disrupting the marketplace. We’re doing things in a different way. And you will see as we move forward in time, the new releases that we have, a lot of those will have a very different approach to marketing. It won’t just be you produce a big trailer, you spend some money on advertising, you do a bit of work in social media and you might do some influencer. It is using a slightly different way of doing that to really disrupt to make sure we’re getting greater bang for our buck, when it comes to marketing spend.
We’ve also got to make sure that our publishing models are innovative, that we’re listening to what developers want and what developers need. We’ve got to make sure that, we are truly flexing the way that we’re operating because we want to be the publisher that every developer wants to work with. The way we will do that is by providing high-added-value strategic areas of the business that they just can’t do. Sales, life cycle management, data and analytics, marketing, studio support, all of those things are critical and things that publishers or sorry developers cannot do themselves.
And M&A, M&A is something that we’ve invested in historically, both from an IP and from a business perspective when it comes to Astragon and Storytoys and we want to make sure that M&A is part of our business plan moving forward. We’re not going to rush it. The focus in the business is making sure that we deliver in 2024 and deliver the results that we’ve said, but M&A is and should be part of our plan moving forward in the mid-term.
When it comes to improving profitability and return on investment, we need to increase the sales mix of our first-party IP. If you look at the graph on the right-hand side what you can see is, in 2019, 17% of our revenues came from first-party titles. In 2023 that grew to 35%. That’s a really important direction of travel. There will be some years that it’s higher, some years that it’s lower, but overall, we want to make sure that we’re trending in that basis because what this slide underneath or the area underneath in terms of the graph shows is that, obviously our internal first-party IP generates a higher margin for us. That’s really important that, we make sure that, we’re looking at our first-party IP and that we’re investing in it and we’re generating the return on that investment that is so important for the business moving forward.
We also have to and we have sharpened up our green light process. And that doesn’t mean that we’re cutting any corners. It means that we’re going through the same due diligence from a product and a commercial and a benchmarking process. But we get the entire business and the entire key elements of the business working together to make sure that, we are speeding up the process when it comes to a developer coming into us and making sure that, we can sign that title with the right commercial terms for ourself in the short-term.
That is really, really important. We still get thousands and thousands of titles every year that pitch to us and we sign a very, very low percentage of those. That’s really important because that means, we can sign titles like Dredge, some of the most exciting innovative titles in the world. We also have new games label investment limits. We’re not going to be doing what we did in 2022 and 2023 and go to bigger titles. We have those investment limits, we make sure we stick to them and that we make sure we work really, really hard to get the return on investment from those. And linked to that, we make need to make sure, and we have made sure over the last four or five months, that we’ve got far tighter cost controls within the business. So the mistakes that were made in the previous year are not made again.
So in terms of operational highlights for 2023, so although there was a disappointment within the games label, the other parts of the business have done fantastically well in terms of Astrogon and StoryToys. And overall, our revenue grew at 12% and that’s all organic in a relatively flat market. Our adjusted EBITDA pre-impairments was £41 million. And Mark will talk about impairments later on in the presentation because it’s important that we do talk about what happened from an impairment perspective. 17 new games were launched, 45 DLCs and 327 app updates.
So, you can see that we’re constantly feeding the market with new games and updates on our existing games. We won 14 awards. Most of those awards are international awards and in some industries awards are a bit of a vanity statement, but in gaming that is not the case at all. An award will be seen by the gaming community as a fantastic badge of success and therefore the sales that are triggered because of that award are very, very clear to see.
Winning awards has a major effect in terms of sell-through, the strategic reviewing games label was a significant thing that we had to go through and that we went through at the back end of last year. And we’ve got hugely improved operational controls, and we’ve also strengthened our leadership team and our board. Our board is an incredible board of business experts, but just as importantly, gaming experts in terms of Frank Sagnier, who was the CEO of Codemasters of [Indiscernible] EA, and also Debbie Bestwick, our founder who understands the business, who sits on the board. And now we’ve got a board that can challenge in the right way, can add value in the right way. And I feel really, really blessed to have those individuals working on the board.
I just want to spend a couple of minutes now before I hand over to Mark just talking about Team17 games label Astrogon and StoryToys. Just to give you a bit of an insight into the year of 2023 within those businesses. So games label, and I’ve already touched on this, the strategic realignment within that business was absolutely critical. But the business did grow from a revenue perspective at 12% and launched 11 new titles in the year of 2023.
Our five bestselling titles in 2023 had steam user scores of 91%. And again, that is absolutely critical. It shows that we are really, really good at signing great titles, because if you don’t get a positive user score on Steam, then your game is not going to sell. And I can guarantee that to be the case. So the fact that we are getting scores of 91% across those titles shows that we’re very, very rigorous in a green lighting process and we sign the absolute best dealers in the marketplace. We had popular sequels to titles like Blasphemous and moving out in Blasphemous 2 and moving out too.
And again, that’s really important to look at the lifecycle value that is generated through that. I’ve mentioned awards already, but Dredge, Blasphemous and moving out did really well from an awards perspective. But the most important thing is the word focus and refocus on proven historical Indie games investment models. So we know the scale and the size of investment that we want to make around those titles. And we need to make sure, and we have made sure that we don’t go above that. A number of titles we’ve signed over the last four months or five months have actually been below the investment model limits that we set ourself. And that’s absolutely fine, just because you are investing a lower amount in a game doesn’t mean that game is not going to take off and fly in the way that it needs to and Dredge is a brilliant example of that.
And we’ve also got normalized marketing levels now. So we’ve got our marketing levels to a place where I feel very comfortable that they’re at, but also we’re not spending in the way that AA publishers will spend. We’ve got the right levels of investment around marketing for what we are, which has been an Indie publisher.
If you look at Astragon, a year of franchise growth, so 5% organic revenue growth and that’s against a very tough comparative in 2022 where Astragon launched four major first-party IP. So to beat the figure from 2022 where four first-party IP were released is an incredible performance. And if you were to exclude the boxed sales or the physical sales as they’re called, total digital sales grew for Astragon by 10% in a relatively flat market. They launched two new third-party publishing titles, 16 paid DLCs. And the paid DLCs are so important within the world of working simulations because you play the game and you fall in love with the game. And then you want things that are updating that game on an ongoing basis. Again, we’re investing in the right amount of time, effort, and money in terms of DLCs against our existing IPs.
Police Simulator is firmly established as a key franchise for the business and that’s really, really good to see. And we did market and physically distribute 45 separate third-party releases. So even though that type of business is lower margin for Astragon, it’s a really, really important part in the fact that we are distributing 45 titles shows that we are held in very high regard when it comes to our physical distribution strategies. We also completed the acquisition of Independence, our soft art software in April, adding 45 heads to the business and they are working on first-party IP development for Astragon simulation titles.
And finally story toys. What an incredible acquisition, another year of significant growth, 26% organic revenue growth against a declining mobile market. And the thing that fills me with most confidence and joy about StoryToys is the fact that they’re expanding and developing even deeper relationships with those licensed partners. And obviously StoryToys, apps are targeting two to six year olds. And what we do know about that target audience is parents have a huge amounts of trust for the likes of Lego, Walt Disney, Marvel, Mattel, Sesame Workshop, all of the licensed partners that we work with provide that trust. Therefore, parents are far more likely to subscribe over a period of time when it comes to our apps and the updates against our apps.
And when you look at the updates, we updated 327 app updates in 2023, so it’s almost one a day. And that’s really important in a subscription model. You need to be feeding those subscription or those subscribers with new areas of the apps that’s actually being developed.
So a really strong business in great growth with fantastic licensed partners, but it’s all well in good talking about that. I’m a big fan in actually showing what we do. It’s good for me to talk about it, but what we’ve done is pull together a very short show reel that just brings to life the games that we launched in 2023. And so I’m going to play that very quickly and then Mark is going to present the numbers and the impairment figures and the capitalized development costs and a lot of the things that you guys will be rightly so, very interested.
[Audio video presentation]
Mark Crawford
Thanks, Steve, and welcome everybody to our roadshow presentation, second time, we’ve done. This is a webcast. It’s important that, we do get the chance to share the messages with all of you guys. That showreel, I think, does demonstrate, as Steve says and brings to life what we do as a business, which is creating brilliant games. Some of those you’ll have seen are part of the messages of the story behind the financials for the year. Overall, look, the Group has consistently always delivered growth and we’re very proud of that record. 2023 was no exception. Really pleased as Steve’s talked about to see 12% growth overall for the Group and that’s against the market, a games market that had a growth rate sub 3%, according to NewZoo.
What we are doing in those revenues, just as an aside is, we’re having to accept and acknowledge mobile digital sales that go through the Apple and Google platforms on a gross basis. Normally, all of our sales and in the past have all been at net and that’s net of the platform fees. But now because Apple and Google, their contracts relate to them being the agent in the process, we’re reflecting those sales through their platform as gross. That only really affects StoryToys. We’ve adjusted the prior year, so there’s no difference in comparing year-on-year in terms of growth. But it does add £6 million to the revenue figure for StoryToys.
What you’ll notice though through the P&L is because of that, it doesn’t change any of the statutory numbers in terms of value, but it does have an impact on margins. But I’d say, it’s been adjusted for prior year as well. The good message from our side is that, that growth picture is spread across all divisions and I think that shows the breadth and the balance of our broadening portfolio and the strength of that as our business model, which is what we’re all about is building out that portfolio. StoryToys led the way, with a 26% growth rate. Steve talked about how they’ve been broadening their license, partnerships. And then games label was behind that at 12%. Astragon delivered 5% growth, which actually is a very good performance against a very tough comparative year in 2022, in a year in which they launched all of their own IP simulation titles, as new updates and new releases.
Just going into a little bit more detail, through the revenue side. Although there were no major IP launches in 2023, the own IP has helped firm. In fact, four of the top 10 selling titles by revenue are our own IP and they’re spread evenly across, the games label and Astragon led by two titles, I guess, Hell Let Loose, which we acquired from our own third-party titles to become own IP back in 2022, and Police Sim which is the one of the Astrogon’s own IP simulation titles, which we launched out of full release only at the back backend of 2022. And it’s now their lead-selling simulation title.
I guess, the real story on growth is the third-party titles and that grew at 20%. And standout performance was Dredge, and Steve talked about the accolades and awards that that title has received that also helped drive new releases. But new releases benefited from strong games label growth on new titles, not only Dredge, but also Blasphemous 2 as a really good performer as a sequel to Blasphemous, which was launched a couple of years ago.
And then also Trepang 2, oddly called Trepang 2. It’s not actually a sequel. But for some reason they decided, the developers decided to call it Trepang 2. I guess for us, underlying business on the revenue side for titles is the balance portfolio. That meant we delivered a 10% growth in that back catalog, and that back catalog continues to grow. It’s now up to 114 million in revenue terms. And as Steve talked about earlier, it represents 71% of revenues. And I think that’s an enviable part of our business that most other companies in the gaming sector would love to be able to have is such a strong back catalog. And as I think, some of you will know, we define the back catalog as those titles we would launched in the prior financial year or earlier. So we keep topping up the back catalog each year with those new releases. And then it’s all about those strength in lifecycle management across both our marketing and sales teams to extend the lifecycle of key titles in the back catalog.
So just going into a bit of detail on the gross margins, because despite the top-line growth, we saw gross profit fall and it fell to £58 million at a 36% margin. If we pulled out the impact of those impairments on titles, then obviously that margin would get back up to about 41%, but still below the prior year. The significant impact on margins came from those one-off non-cash impairments of titles. And we identified this and talked about this in, in our update the backend of last year in November. And as you expect, we’ve been through a very detailed review of all of our titles, and not just those that are already launched, but titles that are in development for future launch. And a number of titles were affected here. It’s not just one or two. The vast majority were 2022 and ‘23 titles.
Steve alluded to this earlier in terms of that’s where there’s been a bit of drift into titles that have underperformed or had a higher level of investment. And equally, there were a couple of titles that were for 2024, and what that’s about for us is looking forward at the carry, at the potential that those titles have in future in terms of cashflow and matching that and assessing that against the carrying value. We had to take the view of impairing those titles to the tune of just over £11.1 million. We’re confident though that that’s been a very detailed review and it’s a one-off adjustment. We don’t expect the surprises that we saw in 2023.
In fact, terms of the other driver on gross margin was the mix effect, and this will vary year-on-year. The mix effect had an impact on margins. Firstly, I’ve talked about already the third party titles were higher in terms of sales mix than we had anticipated, and that’s to do with the success of some of those titles that I’ve already talked about. Equally, within those third parties, we have some titles with some slightly higher royalties, and look, we as a business, we take several dredged titles with a slightly higher royalty payment to the development partner for the success that that title had.
And then, if you look at own IP, the mix of Astragon’s own IPs in terms of revenue was slightly higher than it had been as compared to games, labels, own IP titles. And actually what the difference that makes is, and Steve had the bubble chart, that’s the second chart to the right-hand side. Astragon have dedicated third party developers as partners and they pay royalties to those partners. They’re incredibly strong titles but they do have a royalty aspect to those.
Overall royalties for the year, this year as a percentage of sales 2023 were up to 30% compared with 26% in the prior year. So that has an impact on overall profitability. In addition, expense development costs and these are all of the costs within the studio that are attributed post-launch and in particular for developing free DLC content. Overall, we had a 45 DLC updates during the year, and as you’ve heard, over 300 app updates for story toys. But in addition, we supported more live titles such as Hell Let Loose, and that’s had an impact on the amount of costs that our expense through the P&L.
In addition, Steve talked about the restructuring that took place in games label in the UK and the majority of that impacted the studio. And so of the £1.2 million of restructuring costs, £1 million were allocated into the studio and they were taken through the expense development line, so they won’t be repeated going forwards. And that meant overall that expense development costs were up at 10% as a proportion of sales compared with the prior year at 7%. So you can see the impact of those small changes.
Finally, the other driver within cost of sales is capitalized development amortization costs. This is where we’re charging back all of the costs that we’ve incurred in the development up to the point of launch and they charge back post-launch. Just as a reminder, we’re fairly prudent here and for the games label, we amortize that back over two years with 70% in the first year. And for Astragon and story toys, actually it’s 50% in the first year and then it’s spread over three years. It’s 25% in each of the second and third year. It’s quite an impact in the first year of launch.
And what we have seen is that’s elevated because of the ongoing impact of some higher level of investment in titles within the games label over the last two years. And as you heard, that’s been reviewed as part of that reorganizing restructuring process, so that we will start to see that fall over time as the investment in capitalized development costs reduces. But we’re seeing that flow through into, we saw it flow into ‘23 and we’ll see it flow through slightly into 2024.
The other block, the other cost block within the cost of sales relates to physical goods, cost of goods sold. And that’s predominantly within Astrogen and we will see that fluctuate as they get their third party retail partners selling into retail box products. And as they launch new titles, then that tends to fluctuate across the years.
Looking at adjusted EBITDA. So, given the above mentioned impacts on overall performance, we’ve seen adjusted EBITDA fall and it fell to a level of £30 million. As Steve mentioned earlier, if you add back the title impairments, that comes back up to £41 million. I guess the most significant impact, or within admin costs is the impairment on the label.
Operator
I think we’ve momentarily lost Mark there. Ladies and gentlemen, please do bear with us. We’ll just bring Mark back through. Hi, Mark. Can you hear us?
Ladies and gentlemen, just bear with us while we just bring Mark back in. Thank you.
Thank you, Mark. If you just, click accept there. We’ll connect your microphone and get you back involved. Thank you. Just connect your microphone there, Mark. That would be great. Mark, can you hear us okay?
Mark Crawford
Yeah. I can.
Operator
You’re back in the room, sir.
Mark Crawford
Alright. That’s technical challenges with connection from the Internet. I think I was talking about the internal challenges we had with the label in terms of a strategic focus for pace for delivery of that business post-acquisition. But, there are also some fairly important external factors. So the the years prior to the acquisition, mobile had been growing at double-digit growth rates and still do, by the way, as an opportunity to engage in the mobile sector through subscription business. But, actually, in 2022, with changes to advertising and in app even though subscription isn’t impacted by that, the mobile market declined 7% and it declined again last year in by 1.5%.
That meant that, there was more competition on that on the mobile platform and less funds available to support new development. Our ongoing revenue streams from performance bonus payments reduced quite markedly. And then Apple reduced their investment to bring new titles onto their platform and that had an impact on our overall development pipeline and that’s dramatically reduced income flows and performance of that business compared with our acquisition.
We do still see it as a viable platform for growth in the future. In fact put the first of our own back catalog titles within games label into development with Team17 USA. We expect to see that, it takes around about a year to get that through development cycle. Most likely, that will start flow through into early part of 2025. There is a opportunity for us to put more of that back catalog of the games label, but there’s also a much tighter strategic focus on the business to be able to drive the business development pipeline. That’s a big factor in the admin cost. Of course, again, as a one off not impairment cost, it’s not cash related, but it had an impact on all of our statutory measures.
As discussed, Steve has mentioned there were some other cost pressures and in marketing particularly we’ve seen over the last two years the increase of marketing spend on trailers and investment in marketing against some of those larger invested titles. And we’ve addressed this already and we were able to reduce the overruns, if you like, on marketing spend after the first half. And we limited it to about an increase of just under a million pounds versus the prior year by year-end. What we saw over the last two years is as a percentage of sales, the marketing spend had almost doubled as a percent of sales. And actually, we’ve reduced that back down to historic levels going forward.
So we’re already going to see a reduction in that going forward into 2024. Staff costs were actually lower, than the prior year, but that doesn’t reflect the reductions that reflects, because the reorganization process took place right at the end of the year. It reflects the performance of that business and therefore no bonuses were paid in particular in the games label and the group level. The administrative costs of the reorganization with admin. The non-studio side accounted for about 200,000 pounds at that £1.2 million. The flow through of the savings from headcount set reductions within the commercial teams that impact admin costs will deliver around 700,000 pounds of future savings in 2024. And that’s around 10% of staff costs. So overall there is an increase in admin costs because of the impairment charge.
There’s also some just under £10 million, £9.2 million of acquisition-related costs. And that’s had a significant impact on all of our statutory measures. But if you back out the one-off non-cash charges of £32 million, you get back to an adjusted EPS of around 17.6%. So down on the prior year because of the other impacts that we’ve talked about. But we see the changes that we’ve made and the backing out of those one-off impairments will not have the same impact as they have had in in prior years.
So we’ve learned a lot of lessons in and tough lessons in the backend of last year around the cost controls. We’ve got tighter control limits. We’ve got a board as Steve mentioned that’s got lots of gaming experience and more focus on holding us to account as an exec team and our senior team. And we’ve got more rigor around the sort of controls and the review processes. I think that’s put us into a stronger position going forwards than we have been in the past.
Kind of key movements on the balance sheet really are all about that goodwill and intangible that they’ve dropped as a result of those impairment charges. Capitalized development costs have continued to rise and that’s an effect of investments and the decisions around as Steve has talked about, slightly enlarged investment decisions on larger titles and it increased to £32 million in a year. But that increases slowing down, and actually, because of the recentering of the games label approach to lower investment levels, it doesn’t mean the smaller titles necessarily. It means we’re managing that to a tighter level at between £1 million and £1.5 million. Quite a few of the recent sign titles are below a million pounds, so it doesn’t mean they will all be in that level.
We’re going to start to see that having an impact to reduce the investment levels and capitalize on the costs within the games label. That will be offset by increases in Astrogen and StoryToys and particularly Astrogen, where we’re seeing the value of their own IP simulation titles. And they are broadening that out. They have got four currently, that are out-launched on sale. They’ve so got two more new own IP simulation titles in development.
So we’ll see it increase slightly in ‘24, but actually the direction is to be reducing as a percentage of sales going forwards. In terms of the rest of the balance sheet, look, we remain very cash generative, highly cash generative. We are retaining our clean balance sheet and conservative approach to charging back, capitalizing on the costs over the sort of two year to three year period. We’re seeing the final of the earnouts being paid in 2024, so they go out in Q2 so that generation of cash from operations will start to in increase and improve our cash reserves towards year-end subject of course, to any further M&A activity. Overall, it means we retain a really strong balance sheet and that gives us in a position with the improving cash reserves to support investment both in our development projects and titles as well as any future M&A.
So I think I’m handing back over to Steve.
Steve Bell
Thanks very much, Mark. Just got two more slides to present, and I’m conscious of time because I know there are some questions that have been sent through that we want to get stuck into.
The first thing I just wanted to touch on is the investment case for Team17 Group and why not surprisingly, we think it’s a really attractive investment case. And the points that I want to raise here are the points that I think are absolutely fundamental to the business. And the first is around IP and talent. We absolutely have the IP, the first-party IP that I feel as though is super strong and we’ve got really exciting plans for that moving forward. And just as importantly, we’ve got the talent, we’ve got the breadth and the depth of talent within the individual parts of the business to make sure we are geared up for success and growth moving forward.
The proven franchise creation and lifecycle management skills, I touched on this quite a lot during the presentation. We shouldn’t underestimate the importance of it. When I talk to Xbox or PlayStation or Steam, they say we’re two or three years ahead of anybody else in the market when it comes to our ability to be able to realize value in the medium to long term when we are looking at our IP. The importance of back catalog and how dependable and strong our back catalog actually is, and a track record for market beating growth. And again, Mark’s spoken about that in a bit of detail and yet disappointing from an EBITDA perspective, but from a revenue perspective, 2023, even though it was a tough year, showed market beating growth. A strong balance sheet, cash generation and M&A optionality, again, which is a really important point in a market that I think there are big opportunities moving forward when it comes to to M&A.
But if we look at the outlook, and if you look at 2024 as a specific, the actions are absolutely in place to accelerate revenue and profit growth. We expect to launch at least 10 games throughout the group during 2024. And the mix in 2024 is skewed to third party IP. That will change as we move forward. But 2024 is very much about that. Continued cost discipline. Mark’s focus and my focus is very much on the running of the business, making sure we learn from the mistakes that were made in 2023. Don’t make the mistakes again and set the foundations to make sure 2024 and beyond are really successful years for us. And we’ve had a good start to the year and our underlying trading performances in line with market expectations, which is positive for us to say.
But if you look at the midterm, higher weighting of the first party IP, very clear plans against that first party IP. What we’re going to do? When we’re going to launch? And the areas around those. More flexible publishing models, making sure we are listening to what developers need and want. And that goes back to the point I raised earlier about the high-added value strategic parts of our business rather than the parts of our business that are less value add.
Marketing innovation, marketing disruption, making sure our marketing is that much better than it’s been and making sure that, we are delivering truly disruptive experiences. Greater realization of Group synergies, making sure that the Group, as in the parts of our Group, the whole is greater than the sum of the parts that we’re sharing skills and resources and we feel like a Group rather than individual businesses. Rising cash generation and active M&A strategy. That active M&A strategy is very much in the mid-term box because 2024 has to be around focus on the business and making sure that we deliver against what we said we’re going to deliver.
The final thing is just one more show real, it just shows the games that we’re launching in 2024 and beyond. If any of you have eaten lunch, there’s one of the titles that if you’re quite squeamish, you might want to look away. It’s called Autopsy SIM. The clue is in the title of the game. But if we could play the video and then we’ll open for questions for for Mark and myself.
[Audio-Video Presentation]
Operator
Perfect. Steve, Mark, I might jump in there, and thank you very much for your presentation. [Operator Instructions]. As you can see, we have received a number of questions throughout today’s presentation. James, if I could hand over to you at this point to chair the Q&A, that’d be great. And then I’ll pick up from you at the end.
Question-and-Answer Session
A – Unidentified Company Representative
Great. Thank you very much. Thank you all for your questions you’ve submitted during the presentation. I’ll kick off with one, for Steve. What strategies are in place to attract and retain top talent within the industry?
Steve Bell
Obviously, attracting and retaining the best possible people in the marketplace is going to be critical for us moving forward. I think making sure that, we have an opportunity for the leaders within the businesses and also the talent that has the potential to grow into bigger roles. I think the fact that, we’re acting and thinking more like a Group now than individual businesses, gives the leaders of Astragon, StoryToys and Team17 Games Label an opportunity to get involved and share some of the skills they have in other parts of the business. Suddenly, they’re playing on a bigger playing field, while still leading the charge when it comes to the areas of specialism they have within the business. Just to be very clear on that, there’s no intent on bringing all of those businesses together to create one super business, that is not the plan at all. But what we are doing is looking at the areas of specialism and the career aspirations that our leaders have to be able to allow them to influence and impact things outside of the day-to-day of their running.
I feel as though we’ve got a really clear plan. I’ve had good detailed sessions with all of the individual leaders within the business to work out what it is that they want to do, what they are excited about and the vision that we’ve spoken about and the strategy that we’ve spoken about within this presentation is something that we’re all aligned on and people are very, very excited about where that’s going to take their individual careers moving forward.
Unidentified Company Representative
Thanks, Steve. One for Mark. Can you please highlight some specific actions taken to prevent the cost overruns in 2023 occurring again?
Mark Crawford
Yes, I think, we have touched on this through the presentation in some points. Firstly, I think it’s about setting a clear focus on what we see as the range of investments within levels within Team17 games level for third party developments partners. So to £1 million to £1.5 million and that means that that’s not the complete. So we’ve signed some titles that are below that level below a million, and we may still sign some that are higher, but actually as a focal point for the game scouting team, it’s really clear that’s reducing the investment. It doesn’t mean to say, as I said that’s necessarily smaller titles in terms of their delivery. Dredge is an example delivered, became our number one selling title for 2023, and that our investment on that was less than a million.
But I think what that does is that helps us manage games that are signed and manage the investment levels going into those games. I think it de-risks the chances of the higher-level investment games not making the return. It’s a way for us to manage that process. Then we put in place more rigor around the development, the review of development costs through the development cycle, more frequently, more visibility of them at a higher level. And also, that brings it up to both group level with Steve and myself, with individual businesses, but also at a board level. There’s got a lot of visibility on it. We’ve talked about marketing costs. That was an area that overran, and in truth, the controls should have been tighter to avoid the business in the UK being able to invest more money in marketing.
But I think that was aligned to those larger titles, but we have actually put the limits back to put marketing and spend as a percentage of sales back to the lower levels that they were prior to the last two years. That will have an impact on managing those costs. But overall, there’s been a reduction of the authority levels across the business and not just in the UK. We’ve spread this across the group and we’ve got delegation levels that now mean that there’s more of the larger investment type decisions are going to board level as well. There’s a raft of those kind of controls, and our 100% focus from Steve and I and certainly myself and the team in the finance side is on commercial discipline and rigor about that through the year.
Unidentified Company Representative
Thanks, Mark. Maybe this one for Steve, and your M&A priorities and what sort of acquisitions might complement the existing portfolio?
Steve Bell
Yes. The M&A marketplace is pretty active at the moment, not surprisingly because a lot of developers, a lot of studios are looking at what’s next for them. We’re not short of opportunities that are coming our way. I think we have proven over the years that we are very, very selective in terms of what we acquire. And that’s why you can see some of the acquisitions that have been made have been super successful when it comes to the business, as I said, with Frank Sagnier as our Chairman, and Debbie Bestwick on the board as well. We’ve got two people who are very connected within the world of gaming and also are contacted on a regular basis when it comes to the potential M&A opportunities that can be brought into the business.
Obviously, when you look at M&A, you could look at a number of different areas. One area could be IP, so Hell Let Loose is a good example of IP that we have acquired within the business that we have continued to grow to realize really positive value. The benefits of that is there’s no major cultural integration because you’re not actually integrating people within the Team17 Group. You can see how there could be a benefit when it comes to first-party IP, but there are also a number of studios and publishers and developers in the marketplace who are very interesting to us as well.
But as I said earlier on, our focus absolutely in terms of the executive team of Mark and myself is very much on the day-to-day delivery, cost, discipline, making sure that the operational controls are firmly in place, and then when M&A opportunity does come through. We will look at it, but the board will have looked at it and made sure that we’ve developing the right amount of or the right balance around what we want to be doing moving forward. So it’s not a short-term priority, but it’s definitely something that will happen in the midterm.
Unidentified Company Representative
Thanks, Steve. Mark, do we expect to deliver revenue growth in 2024, which current consensus doesn’t imply? And what is the midterm revenue growth outlook for revenue yet?
Mark Crawford
I think this is probably linked with not all of the analysts in the marketplace have adjusted their numbers yet. I mentioned on my piece around the revenue side that we have this year had gone through the process of taking the policy of accepting the digital mobile sales through Apple and Google at a gross level. I think the numbers in the marketplace are yet to be adjusted. It looks like they’re going backwards, so when they get adjusted, you’ll see a growth. What we’ve typically, we are cautious and careful in our guidance to market. We’re looking at sort of low single-digit growth rates in 2024, and that’s probably fairly well aligned to NewZoo and games market estimates for growth picking up from the levels they were lower in the last few years to low single-digit growth in 2024.
So we’re cautious we’re kind of confident that we can deliver that. And as Steve says, our focus is on getting back to the sort of delivery and consistent delivery that you’re seeing from Team17 as a group since IPO and moving on from the challenges we had last year. But it does include some level of growth and as we get through the year, we will if there’s anything to update on that, we’ll update the market. We’ve had a pleasing start to the year, but the year is still challenging with competition and discounts in the first quarter. And we do still have, as we have had for the last two years, a more heavily weighted H2 for new releases. But so all that taking into account, we are still guiding to some growth in 2024.
Unidentified Company Representative
And then Mark, as we have you just a question about why we present adjusted earnings measures as well as statutory reported earnings.
Mark Crawford
I saw that point and look, we feel that the adjusted measures are appropriate to show the underlying trading. Clearly, this year, some of the impairments are adjusted. When we adjust out all the acquisition-related payments on adjusted EBITDA, then the label impairment does get taken out of there. But the title impairments don’t because they’re equivalent to effectively accelerating your amortization charge. I think one of the points on the note I read the question was, it looks like you’re presenting an adjusted, adjusted measure, and that that would be the case.
But we’re not hiding behind the fact that the adjusted measure for EBITDA is £30 million. We’re just making the point that it’s a one off non-cash adjustment. But actually, our adjusted measure is £30 million. The statutory measure is a loss, but they do include a £1.1 million loss. They do include £32 million of non-cash, one off impairment charges. You’re absolutely right. The intention is not to try and create an adjusted measure of an adjusted measure and be really clear about it. We tried to not argue on that. But we was just making the point that they do get backed out and you won’t expect to see those repeated next year.
Unidentified Company Representative
Thanks, Mark. We’re almost out of time. Just maybe one final one for Steve. How is the employee sentiment and engagement in Games Label at the moment and how are we adjusting this, through, employee engagement this year?
Steve Bell
Yeah. It’s a good question and something we spend a lot of time looking at. Obviously, when you go through any form of restructure as we’ve had to in Q4 2023, it does send a message to the business that needs to be picked up on an ongoing basis. What we need to do there and what we’ve done over the last four months or five months is, almost over communicate, making sure they understand absolutely what our strategy and what our vision is for the business, because the problem we had before is because we were sort of zigzagging into bigger titles, then we go back to Indie and then we were going back to bigger titles.
There was no real clarity around the type of business that Team17 Games Label actually wants to be moving forward. We have that clarity. We’ve got everybody within the business together face-to-face, third week of January and we’re continuing to do that. We have town halls on a monthly basis. Whenever I’m in either Wakefield or Manchester, I have what I call sort of deep-dive focused groups with up to 10 individuals each time to get a real feeling of how people genuinely feel about the business.
Obviously, there’s been disappointments because friends and colleagues have unfortunately left the business because of our restructure. But I genuinely feel that Q1, we’re in a much better place. Our attrition rates are lower in Q1 than they were in Q4 and the general feeling of positivity within the business is there to be seen. If I’m being honest, I think it’s going to take us another six months to get to the place where I would really like it to be, when it comes to the pride, trust and camaraderie that you need within a business like Team 17 Games Label. But we are definitely on the right path when it comes to that.
Unidentified Company Representative
Great. Thank you. That’s all the questions we have for now.
Operator
Perfect. I might jump in there. Before redirecting investors to provide you with their feedback, which is particularly important to you all. Steve, could I just ask you for a few closing comments?
Steve Bell
Yes, of course. The first thing I’d like to say is, thank you all for giving up your time to listen to Mark and myself and actually pose the questions that you have done. Obviously, 2023 was a challenging year, a really challenging year. The lessons that have been learned are there very clearly for us to share with you all today. But more importantly, for Mark and I to make sure that sort of they never happen again within the within the business. It’s painful. It wasn’t the year that we would have wanted in 2023. I’ve come into a business that I’m still very, very proud of.
I think we’ve got some fantastic people, some great foundations, some great games, some great acquisitions have been made. I genuinely feel very positive about 2024 and beyond. I’m hoping that people feel that the transparency and the openness in terms of this presentation and our strategic vision that we have as a business is going to help them understand what we want to be moving forward rather than what we are today.
So that’s all I wanted to say. Just thank you very much for your time, effort, and believing in the business. So thanks very much.
Operator
Perfect. Steve, Mark, James, thank you once again for updating investors today. Could I please ask investors not to close this session? As you now be automatically redirected, provide your feedback in order that the management team can better understand your views and expectations. This does take a few moments to complete, I’m sure we correctly value by the company.
On behalf of the management team of Team17 Group PLC, we’d like to thank you for attending today’s presentation and afternoon.
