Video games developer Team17 (TM17:AIM) might need some assistance from one of the characters featured in its firefighter simulation title after revealing a profit warning on Friday.

Shares in the games publisher sank 40% to 185p on heavy volume, which means they are 57% below where they started the year and almost 80% below August 2021 highs.

The fall in the shares is roughly equivalent to the shortfall in expected full year profit according to Shore Capital’s leisure analyst Katie Cousins.

WHAT HAS GONE WRONG?

The company said that despite an overall ‘robust’ performance, certain games titles were not performing as well as expected and the mix of own label to third party games was less favourable. The latter are less profitable because Team17 pays higher royalties.

On top of that the company acknowledges it was too slow to tackle some project ‘overspends’ and initiate cost initiatives at its Team 17 Games label.

Lastly, management is reviewing several titles both in development and already launched to assess their revenue potential in the current market environment.

Team17 is therefore taking a non-cash title impairment charge of £11.5 million for the current financial year to 31 December 2023.

WHAT ARE THE FINANCIAL IMPLICATIONS?

Team17 now expects to deliver full year EBITDA (earnings before interest, depreciation, and amortisation) of at least £28.5 million.

Katie Cousins notes this is 40% below her last published 2023 EBITDA estimate of £48 million.

‘We plan to publish an updated model shortly following this morning’s disappointing update but would expect our FY24F revenue forecast to remain at circa £150 million which implies circa 2% year-on-year growth.

‘However, we plan to rebase our margin expectations, as the group sees impacts from being a bigger group with higher amortisation charges. We now see margins likely to be around circa 30% versus our 34% forecast previously.’

Despite the profit miss and 2024 downgrade, Cousins remains constructive on Team17 and has maintained her buy recommendation on the stock.

Cousins explained: ‘We value the diversified model, which is profitable and supported by cash, as well as the strong brand awareness with consumers.

‘Therefore, and although will likely be reduced with our downgrades, we still expect to see value beyond our fair value vs the current share price.’

LEARN MORE ABOUT TEAM17

---