Sumo Group plc (LON:SUMO), the award-winning provider of creative and development services to the video games and entertainment industries, has announced its final results for the year ended 31st December 2020, which show substantial growth in revenue and Adjusted EBITDA and further outperform consensus market expectations for FY20, which were upgraded in January 2021 following the Group’s positive trading update.
Financials
| Reported results | 2020 | 2019 | Change |
| Revenue | £68.9m | £49.0m | + 40.7% |
| Gross profit | £31.5m | £23.9m | + 31.5% |
| Gross margin | 45.7% | 48.9% | |
| Profit before taxation1 | £0.9m | £7.4m | |
| Cash flow from operations | £13.0m | £14.4m | |
| Net cash | £6.8m | £12.9m | |
| Basic earnings per share | 1.08p | 5.19p | |
| Diluted earnings per share | 1.01p | 5.07p |
| Underlying results | 2020 | 2019 | Change |
| Adjusted gross profit2 | £31.7m | £25.2m | + 25.8% |
| Adjusted gross margin3 | 41.8% | 44.8% | |
| Adjusted EBITDA4 | £16.5m | £14.1m | + 17.1% |
| 1 | The statutory profit before taxation of £0.9m in 2020 is stated after charging an amount of £7.3m arising on the acquisition of Pipeworks consisting of the £2.7m fair value loss on contingent consideration, £1.7m of amortisation of customer contracts and customer relationships and £2.9m of transactions costs on that acquisition. In addition, the statutory profit before taxation is stated after charging exceptional items other than the costs incurred on the acquisition of Pipeworks of £1.2m (2019: £0.5m) and the share-based payment charge of £5.0m (2019: £2.7m) and the unrealised gain on foreign currency derivative contracts of £1.0m. |
| 2 | Adjusted gross profit is a non-GAAP metric used by management and is not an IFRS disclosure. It is stated after adding back £0.2m (2019: £1.3m) investment in co-funded games expensed. |
| 3 | Adjusted gross margin is a non-GAAP metric used by management and is not an IFRS disclosure. It is stated after adding back to gross profit the investment in co-funded games expensed and, for Sumo Digital, adding to revenue amounts in respect of Video Games Tax Relief (“VGTR”) and with no adjustment to either revenue or gross profit in respect of royalty income. It should be noted the definition of adjusted gross margin has changed this year following the acquisition of Pipeworks. |
| 4 | Adjusted EBITDA is a non-GAAP metric used by management and is not an IFRS disclosure. It is defined as statutory operating profit adding back amortisation, depreciation, share-based payment charge, investment in co-funded games expensed, exceptional items, the fair value loss on contingent consideration less the operating lease costs capitalised under IFRS 16 and foreign currency derivative contracts. |
2020 highlights
| · | Revenue growth of over 40%, comprising of 24% organic and 16% acquisitive growth, delivered in a year impacted by the COVID-19 pandemic |
| · | Adjusted EBITDA growth of 17.1% |
| · | Adjusted gross margin of 41.8% (2019: 44.8%), using a new definition following the acquisition of Pipeworks and the evolution of the royalty model. The underlying adjusted gross margin remains strong at 43.2%. The gross margin was impacted by two specific matters both of which were flagged at the half year being the cost expensed on Snake Pass 2 and the higher than usual holiday pay accrual as a result of the pandemic |
| · | 279 milestones delivered and 12 games launched or announced during the year including five Own-IP games |
| · | First major acquisition completed in October 2020 – Pipeworks Inc (“Pipeworks”), an innovative and well-established West Coast US games developer, for an enterprise value, calculated at the time of acquisition, of up to $99.5m |
| · | Lab42, a cross-platform work for hire studio in Leamington Spa, acquired in May 2020, performing ahead of expectations |
| · | Total headcount increased to 1,043 at the year end (31 Dec 2019: 766), despite pandemic restrictions, including an aggregate of 163 people who joined through the acquisition of Lab42 and Pipeworks |
| · | Net cash at 31 December 2020 ahead of management expectations at £6.8m due to a number of timing effects |
Post year end activity
| · | Strategic acquisition of PixelAnt Games in Wroclaw, Poland, completed in January 2021, providing an established, low-risk base for growth in a video games talent hot-spot |
| · | 3 Star Accreditation achieved in the Best Companies Survey |
| · | Two BAFTA wins for Sackboy A Big Adventure in March 2021 and two further nominations |
| · | Increasing emphasis on ESG, to ensure the business continues to grow and flourish in a sustainable way |
| · | Launch of Secret Mode, the Group’s new publishing division, focused on bringing fresh, smaller games, developed either internally or by independent developers, to market |
| · | Now working on more than 40 projects with 28 different clients up from 21 projects with 12 different clients at April 2020 |
Outlook
| · | Advancing technology and new platforms fuelling market trends, bolstering publisher confidence to increase the scope and spend on games and underpinning the Group’s long-term growth |
| · | Global demand for quality premium content is constrained only by industry capacity |
| · | Ongoing Group focus on increasing headcount organically and via acquisition |
| · | Strong acquisition pipeline with a number of targets being actively pursued |
| · | Very strong pipeline of business development opportunities on major new projects, with both existing and new clients |
| · | A number of interesting Own-IP concepts being explored |
| · | Investment in the development of Secret Mode for its mid to long-term success |
| · | Strong visibility with 85% of Sumo Digital’s budgeted development fees for FY21 contracted or near-contracted5 at end February 2021 (FY20: 73% at 31 March 2020) and, on a broadly comparable basis, Pipeworks is at 50%, similar level as the prior year |
| · | The Board views the opportunities for the Group in the year ahead and beyond extremely positively |
| 5 | Revenue is referred to as near contracted when management has a high degree of confidence in a project’s size, scope, and timing. Typically, this would be when the key commercial terms have been agreed in principle and reflected in a draft contract which has undergone a legal review and does not contain any terms that are unacceptable to the Company. |
Carl Cavers, Chief Executive Officer of Sumo Group, said:
“2020 has been an extraordinary year for us in so many ways. Our people have responded brilliantly to the pandemic restrictions, delivering many fantastic games and winning some incredible awards, including two BAFTAs. We also completed a major acquisition in the US and generated financial results ahead of everyone’s expectations.
“Achieving 3 Star Accreditation in the Best Companies Survey, announced in February 2021, was a massive achievement for the Group but we won’t rest on our laurels. Attracting and retaining the best talent lie at the heart of our future growth plans and we will continue adapting and improving to make Sumo Group the best place to work in video games.
“The year ahead is packed with even more exciting opportunities for our talent to shine, and we are excited about the launch of Secret Mode, our new publishing business, announced earlier this month. Our focus remains on delivering further strong growth organically and by acquisition, and the pipeline of opportunities remains strong. We have an enviable level of visibility on development fees in 2021 and, with our markets continuing to perform strongly, are increasingly confident about the future of the business.”
CHAIRMAN’S STATEMENT
In my statement last year, I referred to the uncertainty caused by the COVID-19 pandemic, not anticipating that this would persist into 2021. The fact that I am able to report such a strong set of results, which outperformed market expectations, and introduce this statement so positively, is a testament to the people who make up Sumo Group. It is their dedication, creativity and skill that have made this possible and I am very proud of each and every one.
Aside from very small numbers of team members working in our studios in COVID-secure bubbles, where essential, we continued to work from home throughout the year. Our IT colleagues responded brilliantly to enable this, and our teams diligently and successfully continued to deliver the high-quality services our clients expect, and to create and launch wonderful Own-IP games. The games we create are winning some outstanding awards. In particular, Sackboy A Big Adventure winning two BAFTAs earlier this month with two further nominations was a tremendous endorsement of our creative talent and recognition for our great people.
The Group has done everything in its power to support our people in these unusual circumstances, providing suitable office equipment to their homes; delivering care packages; and encouraging those suffering mental health challenges to access the internal or external assistance offered. We also worked hard to maintain some of our annual social events, hosting virtual summer and Christmas parties.
Talent is the Group’s most important asset and key to our growth plans. The high value we place on our people has been demonstrated this year not only by the Group’s response to COVID-19 but also by a major review of our employee benefits package. Our aim is to ensure that Sumo’s offer is at least as good as any offered elsewhere in the industry, and that it provides flexibility, enabling our people to choose the benefits that are most important to them and their families. This new flexible package will be fully implemented during 2021.
We were absolutely delighted to be awarded 3 Star Accreditation in the Best Companies Survey in February 2021, up from 1 Star in 2020. This amazing achievement reflects our commitment to listening to our people and reacting to their feedback, particularly important during a lengthy period of working from home, ensuring that Sumo is known across the industry as a great place to work. We will not rest on our laurels, however. We will work hard to improve further and to cement our reputation in the talent market, which is so crucial to our success.
As our financial results show, 2020 was another year of significant growth for Sumo Group. Sumo Digital ended the year with eight studios in the UK and one in India, adding a new studio in the talent hot-spot of Poland in January 2021, with the acquisition of PixelAnt Games. Atomhawk also expanded during the year, adding to its teams in the UK and Canada. In October, we were delighted to welcome Oregon-based studio, Pipeworks Inc, to the Sumo family. I am pleased to report that, despite recruitment challenges imposed by the COVID-19 restrictions, the Group ended the year with over 1,000 colleagues.
The Group delivered an excellent financial performance, both in terms of its profitability and liquidity, continuing to operate successfully throughout the year without accessing emergency Government funding or the need to furlough any of our people.
While continuing to make innovative games for the most prestigious publishers in the world, we have an increasing number of titles based on our original Own-IP concepts. Spyder and Little Orpheus were both launched on Apple Arcade during the year, receiving extremely positive reviews and winning a number of awards. We intend to build on these successes and to capitalise further on the opportunities generated by our highly creative people. On 11 March 2021, we launched Secret Mode, our new publishing division, led by a highly experienced management team. Secret Mode will focus on bringing fresh, smaller games, developed either internally or by independent developers, to market and provide a great platform for our talented people to demonstrate their creativity further. In line with the Group’s overall strategy on risk, we are taking a very measured approach on this venture, carefully matching the opportunity of bringing games directly to market within a managed risk framework. We believe that having complete responsibility for a small number of carefully selected titles will allow the Group to benefit from the continuing rapid growth of the video games market. Online multiplayer games have increasingly become a location for social networking, accelerated by COVID-19, with the World Health Organisation supporting the industry initiative “play apart together”.
As Chairman, I want to ensure that the Board’s time and expertise is utilised to support the strategic development of the Group. With that in mind, the Board has received regular demonstrations of games in development and updates on industry developments and market trends. The Board also spent time across two days in a “virtual” strategy review. As we are all now well aware, long meetings by video conference can be productive, but present their own challenges. I would like to thank all of my Board colleagues for their flexibility and contribution throughout the year.
The Board takes its governance responsibilities very seriously and this Annual Report details the structures and processes that we have in place. As I mentioned in my statement last year, we are placing increasing emphasis on Environmental, Social and Governance (ESG) matters, to ensure that we have the right framework in place to enable our business and talent to continue to grow and flourish in a sustainable way. More detail is provided in the ESG section of this Report.
2020 was a very productive and successful year for the Group and, on behalf of the Board, I thank everyone who contributed to that success. While we continue to face uncertainty as a result of this pandemic, our performance in 2020 and the very strong level of visibility we have on 2021 revenues, give me and the rest of the Board great confidence for the future.
Ian Livingstone
Chairman
CHIEF EXECUTIVE’S REPORT
Introduction
For many reasons 2020 was an extraordinary year. We delivered 279 project milestones and launched or announced a total of 12 games, a record for Sumo, including five Own-IP, as well as completing our first major acquisition, facing the challenges of the pandemic restrictions head on. The incredible commitment of our people, virtually all of whom are continuing to work remotely, never ceases to impress me. I am grateful to everyone for their individual efforts under such challenging circumstances. Our operational performance in these extraordinary circumstances is testament to our collective talent, flexibility, and dedication throughout the Company.
In January 2021, we announced that FY20 revenue and Adjusted EBITDA were expected to be ahead of consensus market expectations with Adjusted EBITDA of at least £16.0m. I am pleased to report that revenue increased by more than 40% to £68.9m (2019: £49.0m) and Adjusted EBITDA by 17.1% to £16.5m (2019: £14.1m), driven primarily by strong organic growth and the contribution from our recent acquisitions. The statutory profit before taxation of £0.9m (2019: £7.4m) is stated after charging an amount of £7.3m arising on the acquisition of Pipeworks, and after charging exceptional items, other than the costs incurred on that acquisition, of £1.2m (2019: £0.5m), and the share-based payment charge of £5.0m (2019: £2.7m) and an unrealised gain on foreign currency derivative contracts of £1.0m (2019: zero).
We made significant progress on the M&A element of our growth strategy, with the acquisition of a further studio in the UK, Lab42, in May 2020, followed by the purchase of a stand-alone US-based studio, Pipeworks, in October. Both these businesses are performing well. We were also pleased to add another studio to Sumo Digital’s growing portfolio, when we acquired PixelAnt Games, in Poland in January 2021. We now total 13 studios in five countries.
Despite the previously indicated challenges in recruitment which have resulted from the COVID 19 disruption, Group headcount increased by 277 to 1,043 at 31 December 2020, including an aggregate of 163 people who joined through the acquisitions of Lab42 and Pipeworks.
Our market continues to grow apace, with increasing demand for high quality, interactive content, driven by advancing technology and new platforms and boosted by a material increase in the numbers of video gamers globally during the pandemic. Our very strong pipeline of business development opportunities on major new projects, with both existing and new clients, reflects confidence in our capabilities and we continue to sign significant contracts. In addition, we are exploring a number of interesting Own-IP concepts and the delayed contract execution to which we referred in our half-year results has now been signed.
We continue to develop great games, both Client-IP and Own-IP, and successfully recruit talent, which lies at the heart of our growth ambitions. The Board is delighted with the achievements of the business under difficult circumstances.
Games launched or announced in 2020
We launched or announced an unusually large number of both Client-IP and Own-IP games in 2020.
Client-IP games included:
| ● | Two Point Hospital, a simulation game ported to new platforms by Red Kite Games and published by Sega for PlayStation 4, Xbox One and Nintendo Switch, was released in February 2020; |
| ● | Sackboy A Big Adventure, a turnkey project developed by our Sheffield studio for Sony, was announced at the PlayStation 5 reveal event in June 2020 and launched with this new console and PlayStation 4 in November 2020; |
| ● | Hotshot Racing, an arcade-style racing game developed in our Nottingham studio and published by Curve Digital was released on Xbox One, PlayStation 4, Nintendo Switch and PC; |
| ● | Rival Peak, an exclusive title for Facebook Watch utilising Genvid’s cloud gaming platform, developed by Pipeworks with Genvid Technologies was released in December; and |
| ● | Football Manager 2021, the latest in the series from Sega that involved some development from our Warrington studio alongside Sports Interactive. |
Own-IP games were:
| ● | Spyder and Little Orpheus, developed in our Sheffield studio and The Chinese Room in Brighton respectively, were launched on Apple Arcade; |
| ● | WST Snooker, the official video game of the World Snooker Tour developed by Lab42 was launched in July for iOS, tvOS and Android mobile devices; |
| ● | Hood, a dark re-imagining of the Robin Hood legend, developed in our Newcastle studio and to be published by Focus Home Interactive, was announced in August; and |
| ● | Pass the Punch launched in December 2020. |
Our strategy and Own-IP
Our stated strategic objectives are to expand; to win new clients; to develop complementary new revenue streams; and to develop our own IP – both self-funded and co-funded. We achieve this by making more great games both Client-IP and Own-IP; through acquisitions that add services, new geographies, and clients and through continued organic growth, adding people and studios.
We remain firmly committed to our relatively low risk, high visibility business model, which generates both cash and sustainable profit margins with royalty opportunities. Our creative talent continues to make great content and our work is respected globally. The Group is rarely directly exposed to the commercial success of Client-IP games but can benefit from upside where royalty agreements are in place.
Our primary focus remains developing Client-IP. However, as the Group expands, we expect to work increasingly on Own-IP, without taking undue risk, to generate greater financial returns and to provide a creative outlet for our highly talented people. Our plan is to accelerate the Group’s growth, through the development of Own-IP games, either self-funded, co-funded or fully-funded, and through acquisition. We are gradually building a catalogue of valuable Own-IP titles and have, as previously announced, appointed a very experienced Director of Publishing, who joined us in November 2020, and we have announced the launch of Secret Mode.
Concepts are created predominately by our concept team and development studios, but also from Game Jams, which we are now running remotely.
Visibility
We have invested in our business development capability by increasing the size of the team and investing in systems, and this has contributed to an increase in our win percentage. Despite the restrictions on travel and trade events, we are continuing to see business development opportunities on major new projects with both existing and new clients. Our pipeline of opportunities at the end of February 2021 comprised a total contract value of £429m and we are seeing a pronounced upward trend in the number of new opportunities each month. In 2020, we saw the highest volume of project opportunities for the past four years. During the year, we fully executed 49 development agreements in Sumo Digital, of which 34 were in the second half of the year.
One of the great strengths of Sumo is the high visibility of our development fees from our long-term contracted business model. We have, in the past, disclosed the contracted or near-contracted visibility of budgeted development fees for Sumo Digital. At 28 February 2021, this figure stood at 85% of Sumo Digital’s budgeted development fees for FY21, up from the 73% we had secured by 31 March 2020 for FY20. On a broadly comparable basis, Pipeworks has 50% visibility of its budgeted development fees for 2021, the same level as the prior year. Sumo Digital and Pipeworks are now working on more than 40 projects with 28 clients, of which eight games or publisher partnerships have been announced.
These figures bear testament to the strength of the underlying market for high quality creative content and underpin the Board’s confidence in the out turn for 2021.
Acquisitions
Lab42
Lab42 is a cross-platform work for hire studio, providing co-development and full game development services and was acquired for a total cash consideration of $0.6m in May 2020. The studio has integrated well and is performing strongly and ahead of expectations. Having hired 11 people since the acquisition, the team now totals 40.
Pipeworks
Pipeworks is an innovative, well-established, and respected West Coast US games developer, acquired by the Group for an original deal value of up to $99.5m in October 2020. Further details on the fair value of the consideration are set out later in this document. We have known the team for many years and are very pleased with the cultural alignment. Pipeworks operates as a standalone business under its own management team. We have made good progress with the integration of the IT support and finance functions. Pipeworks performed strongly in the period post-acquisition to the year end.
PixelAnt Games
Post the year end, we announced the strategic acquisition of PixelAnt Games, based in Wroclaw in Poland. The team at PixelAnt is presently working entirely on Sumo Digital projects. The intention is to expand the studio’s headcount, accessing the growing pool of high-quality developers in the Polish market and focus on winning third party contracts, while continuing to work on Sumo Digital projects. The PixelAnt team will also work on Own-IP opportunities. We are encouraged by the performance of PixelAnt in the short period it has been part of Sumo Group.
Results
We grew rapidly in 2020. Revenue rose by 40.7% to £68.9m (2019: £49.0m). Since 2017, we have achieved a revenue CAGR of more than 34%. The increase in revenue was driven by continuing strong organic growth together with the acquisitions of Pipeworks and Lab42, which generated post-acquisition revenue in 2020 of £6.1m and £2.2m respectively. Excluding Pipeworks and Lab42, the Group’s revenue increased by 24%. Utilisation across the group was 92.6% (2019: 95.8%).
The Group reported a statutory profit before taxation of £0.9m (2019: £7.4m) and achieved Adjusted EBITDA of £16.5m in 2020, an increase of 17.1% on the figure of £14.1m in 2019.
Further details of the financial results are set out in the Chief Financial Officer’s Review.
Operational review
Sumo Digital – representing 87% of Group revenue
Sumo Digital ended the year with nine studios, eight in the UK and one in India, with the acquisition of PixelAnt post year end taking the total to ten. How and when we return to working from our studios is currently under consideration, but we expect to combine it with flexible and remote working, subject to client consent. In anticipation of this we are managing our portfolio of premises. Sumo Digital’s Newcastle studio has moved to the newly built facility in Gateshead, alongside Atomhawk. The Chinese Room has moved to a new and larger studio in central Brighton. In Sheffield, we have completed a new audio suite, which has three edit studios, a Foley studio, for creating everyday sounds, and a mixing room.
During the year, we appointed a new Studio Director in Pune and recruited 25 people, taking the team to 137.
The utilisation rate across the UK studios in the year was 95.7% (2019: 96.9%). In Pune, the rate was 79.3% (2019: 91.3%), which is comparable with historical levels of utilisation. The utilisation for Sumo Digital overall was 92.8% (2019: 95.9%).
As usual, we are constrained in disclosing all of our clients, but we are able to say that we worked with 2K, Apple, Aspyr, Codemasters, Curve Digital, Dovetail, Focus Home Interactive, Rare, SEGA, Sony, and Sports Interactive (also part of SEGA) in 2020.
We were delighted with the award nominations and wins achieved across the Group in 2020. Sumo Leamington won The Diversity Award in the GI.biz Awards 2020 and Red Kite Games secured Best Small Company. Both these studios, along with Lab42, achieved a “Best Places to Work” award. Sumo Digital was awarded Best External Development Partner of the Year at the MCV/Develop Awards 2020. The Chinese Room’s Little Orpheus won a TIGA Award for Best Casual Game. More recently, Little Orpheus has been selected as a finalist for the 24th Annual D.I.C.E. Awards in the Mobile Game of the Year and Outstanding Achievement in Original Music Composition categories.
Sackboy A Big Adventure won two BAFTAs earlier this month, Best British Game and Best Family Game, and two further nominations, and is in contention for Outstanding Achievement in Audio Design and Family Game of the Year at next month’s Annual D.I.C.E Awards.
Pipeworks – representing 9% of Group revenue in the ten weeks post acquisition
Pipeworks has strong client relationships and, prior to the acquisition, co-developed Madden NFL 21 with EA Sports, launched Terraria 1.3.5 for Switch, Xbox One and PlayStation 4 with Relogic and 505 Games and relaunched Superfight as a free-to-play game. As part of the acquisition, Pipeworks reacquired the rights to Prominence Poker, the poker simulation game, from 505 Games and subsequently Rival Peak was launched with Genvid, Facebook and DJ2 Entertainment. This game has received a lot of positive press comments for its ground-breaking AI.
Pipeworks is developing Magic the Gathering: Spellslingers for Wizards of the Coast and is working on two Own-IP games among other projects. Other clients include 505 Games, Age of Learning, Carnival Corporation, EA Sports, Genvid/Facebook, Google, and NASA.
During the year, Pipeworks recruited 34 people and there were a number of internal promotions. The team achieved the accolade of Best Tech Company in the Best of Eugene Awards.
In the year ahead, we plan to renovate the 45,000 sq ft studio in Eugene.
Atomhawk – representing 4% of Group revenue
Atomhawk worked on more than 50 projects in 2020, the large majority of which are as yet unannounced AAA titles and franchises. We are able to report, however, that Atomhawk provided visual development for FIFA ’21 (for EA), Puzzle Combat (Small Giant Games / Zynga), XCOM: Chimera Squad (2K), PlayerUnknown’s Battlegrounds (PUBG Corp.) and Call of Duty: Black Ops – Cold War (Activision Treyarch) all of which were launched or received content updates in 2020. Clients include 2K, Activision, EA, Games Workshop, Hasbro, WB Interactive Entertainment, XBOX Game Studios, and Zenimax Online. Atomhawk has worked on multiple collaborations with Sumo Digital including Spyder, Little Orpheus and Hood, as well as other unannounced games.
In anticipation of, and to facilitate further growth, Atomhawk moved both the UK and Canada studios in the autumn to new, larger, state-of-the-art custom locations in Gateshead, near Newcastle, and Vancouver respectively. Darren Yeomans was appointed as UK Studio Director during the year, bringing extensive experience from previous roles at Ubisoft, Codemasters and Starbreeze.
Atomhawk was shortlisted for four TIGA awards in 2020 and Tim Wilson, Managing Director of Atomhawk, won an External Development Summit (XDS) award and was invited to join BAFTA’s 2021 membership intake.
To mark its 10-year anniversary in 2019, Atomhawk sponsored the exhibition Other Worlds: The Art of Atomhawk at Great North Museum: Hancock. This installation provides an insight into the processes used by digital artists, along with examples from the studio’s first decade. The exhibition has a comprehensive local engagement programme, working with local schools and communities to provide education on creative and digital skills on offer in the North East economy. This engagement programme went digital as a result of the COVID-19 restrictions, which will remain so until mid-June 2021 at the earliest.
People
Our continuing growth and success are entirely dependent on recruiting and retaining talented people. Total Group headcount increased from 766 at 31 December 2019 and 853 at 31 August 2020 to 1,043 at 31 December 2020. Direct headcount at 31 December 2020 was 869 (31 December 2019: 634).
Staff attrition rates in the UK and India ran at 9.3% and 8.3% respectively (2019: 8.6% and 11.5% respectively). We continue to work with valued and proven contractor colleagues alongside our own people.
While it is our expectation and intention to return to some form of studio-based working and expand our studios both in size and number of locations, the expedited move to working from home brought about by COVID-19 has opened up a new raft of possibilities. Flexible working potentially widens the pool of talent from which we are able to recruit. Employee location to the studio will become less relevant, as they may not need to be studio based every day. This is an exciting opportunity for us as a business to attract a more diverse pool of talent into the industry.
Sumo is a people business and, while the Group has enjoyed considerable success during these challenging times, we appreciate the tremendous strain the pandemic has placed on some of our stakeholders and employees. Once again, I would like to give my heartfelt thanks to everyone at Sumo for their creativity, passion, and commitment and for their support and resilience in the face of the COVID-19 situation.
The award of 3 Star Accreditation in the Best Companies Survey 2021 was a fantastic achievement for the Group, especially under such challenging circumstances. Employee engagement in the survey was higher than it has ever been, with 88% of our people contributing. We will continue listening to our people and adapting to meet their needs, as we strive to make Sumo the best place to work in video games.
The Group has not used, and does not expect to use, any furloughing arrangements or other government COVID-19 support measures.
Environmental, Social and Governance (“ESG”)
ESG is increasingly important to all our stakeholders and is at the heart of our business. The Board has reviewed and refined its approach to ESG, obtaining feedback from colleagues and investors. This has emphasised the areas of greatest importance to Sumo and where the organisation can have the greatest impact. As a people business, this is in the “social” element. The result is a set of clear targets for the year ahead that will be set out in the ESG section of the Annual Report and Accounts and on the Group website. We will regularly report on progress against these and will review them again towards the end of 2021 to ensure they remain relevant.
We have carefully considered whether there is a single, overarching third party accreditation that would be suitable. Our conclusion was that there is currently a myriad of standards, none having universal recognition amongst our stakeholders, and we have therefore decided to set our own framework at this stage.
The 2020 Annual Report and Accounts will include our first Streamlined Energy and Carbon Report (“SECR”).
On 9 September 2020, we announced the launch of the Sumo Digital Academy, a training scheme to bring new talent into the games industry by recruiting from outside of traditional education channels. The first five programmer trainees have joined the scheme and are helping to shape the Academy programme in advance of plans for a formal apprenticeship scheme. We plan for trainees from the Academy to work on developing games at Secret Mode, our newly announced publishing division.
The market
The pandemic has undoubtedly accelerated the already strong growth in the global video games market. In November 2020, Newzoo increased its revenue projections for 2020 from $159.3bn to $174.9bn and forecast that this will grow to $217.9bn in 2023, representing a CAGR of 7.6%. There are estimated to be more than two billion people playing video games globally, and the evidence suggests that more people are playing games and consumers are spending more time playing and more money buying video games than ever before.
The trend towards digitalization and the proliferation of new platforms is making video gaming ever more accessible and the technological progress has improved the gaming experience. The year was notable for the launch of the next generation of the PlayStation and Xbox consoles. In February 2021, Sony revealed that 4.5 million PlayStation 5 units had been sold in just under two months, following the new console’s launch in November 2020, with the PlayStation 4 also enjoying 1.4 million unit sales in the same period. Microsoft reported that the Xbox Series X/S saw the largest sales on the launch day of any console in the company’s history. Meanwhile the Nintendo Switch went from strength to strength, selling 23.5 million units in 2020, taking total unit sales to c.80 million since launch. Connection quality is improving and bandwidth increasing. The new subscription models and additional new platforms have significantly driven the demand for premium content and strengthened the position of the video game developers. It is notable that during a period of sustained and wide-ranging restrictions on physical movement, gaming has become even more important as a means of providing social contact and interaction. The model continues to move away from being hit driven and the relationship between developers, publishers and players is evolving, creating more opportunities.
We expect the strong underlying growth in the video games market, demonstrated in the years prior to the pandemic, to be sustained in the long term, driven by these fundamental factors.
There continues to be a significant amount of acquisition activity in the video games sector, as investors target strong growth opportunities. The industry, however, remains highly fragmented, presenting further opportunities for the Group.
Outlook
The advancement of technology and new platforms are fuelling market trends. On the back of this, game publishers’ confidence to increase the scope and spend on games continues to grow, underpinning the long-term growth of the Group, as global demand for reliable providers of premium content with a proven reputation for quality remains constrained only by capacity.
Our new publishing division, Secret Mode, has been established to enable the Group to capitalise further on the insatiable demand for fresh and innovative games. We look forward to updating our shareholders on its progress in the year ahead, as we invest in the mid to long-term success of this venture.
Our acquisition pipeline is strong, and we are actively pursuing a number of targets. We are keen to acquire owner-managed businesses, where the vendors and key people remain with the business post acquisition and where we can use our listed shares to provide attractive ongoing incentive arrangements.
While the pandemic has undoubtedly turbo charged the video games market, the foundation of our increasing confidence is based on underlying market growth trends that show no sign of abating. We have a very strong pipeline of opportunities and excellent levels of visibility. Accordingly, the Board views the prospects for the Group in the year ahead and beyond extremely positively.
Carl Cavers
Chief Executive Officer
