Video games developer Sumo (SUMO:AIM) delivered better than expected growth in sales and profits for the year to 31 December 2020.

However, the shares dropped 2% to 354.9p after more than doubling over the last year and reflecting a shift in investors’ focus from lockdown winners to reopening beneficiaries.

Revenues grew 40.7% to £68.9 million last year, of which roughly a quarter was generated organically and 16% by acquisition. The number of projects that the company is working on has nearly doubled to 40, across 28 clients compared with 21 projects across 12 clients last year.

Despite the challenges presented by the pandemic, the Sumo headcount increased by 36% to 1,043 including 163 staff who joined through the acquisitions of Lab42 and Pipeworks.

Earnings before interest, taxes, amortisation, and depreciation grew 17.1% to £16.5 million.

STRONG VISIBILITY

Sumo insisted that visibility of revenues remains strong with 85% of budgeted development fees for 2021 contracted or near contracted at the end of February, up from 73% at the end of March 2020.

The company noted that the industry backdrop is very positive with global demand for quality premium content constrained only by industry capacity.

The acquisition pipeline is said to be strong with several targets actively being pursued. Intriguingly the company said it is exploring several ‘interesting own-IP concepts’.

Sumo has launched a new publishing business called Secret Mode which will support smaller games developed internally or by independent developers.

STRONG CULTURE

Chief executive Carl Cavers told Shares that one of the most pleasing aspects over the last year was the independently assessed three-star accreditation that Sumo achieved as one of the best companies to work for, especially considering the challenges of the pandemic.

Having a strong culture is an important competitive advantage for the group. It is also key to producing great games, and this was recognised after the company received two BAFTA wins for Sackboy A Big Adventure and two further nominations in March.

ANALYST UPGRADES

Following the earnings beat and given the positive outlook, analysts intend to raise their earnings forecasts for Sumo.

Katie Cousins at Shore Capital plans ‘to upgrade our EBITDA forecasts from £23.1 million to £23.5 million and from £27.6 million in FY22 to £28.5 million’, while Casper Erskine at N-1 Singer commented, ‘upgrades coming, a clear gaming winner’.

Stifel commented: ‘Given the proportion of revenues already contracted, we have confidence in the deliverability of forecasts and see the potential for further upgrades, which is likely to be supplemented by further M&A.’

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Issue Date: 31 Mar 2021