5 April 2016

Keywords Studios plc ("Keywords Studios", "the Group")

Full year results for the year to 31 December 2015

Continued organic and acquisitive growth

Keywords Studios, the international technical services provider to the global video games industry, today provides its full year results for the year to 31 December 2015.

Financial highlights:

A strong financial performance driven by like for like and acquisitive growth

·     Group revenue (including effect of acquisitions) increased by 55% to €58.0m (2014: €37.3m)

·     Gross margins increased to 37.6% (2014: 34.0%)

·     Adjusted profit before tax* increased by 57% to €8.0m (2014: €5.1m)

·     Adjusted basic earnings per share* up by 49% to 12.71c (2014: 8.54c)

·     Net cash** of €17.3m (2014: €11.0m)

·     10% increase in total dividend to 1.21p per share (2014: 1.10p)

*before acquisition and integration expenses of €1.1m (2014: €1.5m), share option charges of €0.4m (2014: €0.2m), amortisation of intangibles of €0.9m (2014: €0.5m), and foreign currency loss of €0.5m (2014: gain of €0.5m)

**after €7.4m net cash consideration for acquisitions (2014:  €8.9m and €3.0m repayment in Babel Media borrowings), €1.1m costs of acquisitions and integration expenses (2014:  €1.5m), bank borrowings of €1.1m to fund 2013 MMTC claim, borrowings acquired in Kite Team of €0.6m and €14.2m (net of expenses) raised in an equity placing (2014: €7.3m)

Operational highlights:

Further reinforced our market leading position

·     Strong like for like* growth of 20%

·     70% increase in number of clients using three or more Group services

·     New client wins have included Oculus VR, Amazon, Gearbox, Fincon, Net Marble and Obsidian Entertainment

·     Significantly extended service capabilities and geographical reach through four acquisitions:

o  Alchemic Dream, provided entry into customer support services

o  Rio de Janeiro based localisation and audio firm, Reverb, provided first office in the fast growing South American market

o  Madrid and Mexico City audio and localisation firm, Kite Team, provided further penetration of South America

o  Portland, Oregon based Liquid Development increased scale in the buoyant art creation market

* calculated on the basis of revenues being included for 2015 acquisitions from the date of acquisition and for the same period in the prior year

Post period end / current trading:

·     Strategic Outsourcing deal with Ankama SAS provides a platform in Manila from which to further develop our Customer Services business with the benefit of a four year contract with Ankama.

·     Acquisition of Mindwalk Studios, Beijing, increases art creation capacity by 30% and provides a platform for growth in China

·     Trading in the first [two] months of the current financial year has been in line with the Board's expectations

Andrew Day, Chief Executive of Keywords Studios, commented:

"2015 has been another year of strong progress in delivering against the ambitious strategy we set out at the time of the Group's flotation in 2013, both organically and by acquisition.

"The current year has started well with the Group trading in line with the Board's expectations and the recent acquisitions of Ankama and Mindwalk have both strengthened our customer service and art creation services and brought a strong presence in the Philippines and China, respectively.

"The video games market continues to grow strongly, at around 8%* per annum. The complexity of taking ever more sophisticated games to market in multiple geographies and on multiple platforms, means developers and producers are increasingly seeking to outsource elements of their game production and live operations support. Keywords is well placed to take advantage of these trends without dependence on any individual game."

"We expect to make further progress during 2016 with continued organic momentum in the business, as well as realising further synergies, benefiting from the full year effect of our 2015 acquisitions and from the acquisitions of Ankama and Mindwalk in 2016. We are also actively reviewing a number of acquisitions with the potential to further complement our continued strong organic growth.  We, therefore, look forward to 2016 with confidence."

*Source: NewZoo, June 2015

For further information, please contact:

About Keywords Studios (www.keywordsstudios.com)

Keywords Studios is an international technical services provider to the global video games industry. Established in 1998, and now with facilities in Dublin, Rio de Janeiro, Montreal, Portland, Mexico City, Los Angeles, Seattle, Tokyo, Singapore, New Delhi, Pune, Rome, Milan, Barcelona, Madrid, Shanghai, Beijing, Manila and London, it provides integrated art creation, localisation, testing, audio and customer care services across 50 languages and 14 games platforms to a blue chip client base in more than 15 countries.  It has a strong market position, providing services to 20 of the top 25 most prominent games companies, including Microsoft, Supercell, King, Namco Bandai, Sony, Konami, Electronic Arts, 2K, and Square Enix. Recent titles worked on include Tom Clancy's The Division, Halo 5: Guardians, Batman: Arkham Knight, Street Fighter V, Rise of the Tomb Raider, Clash Royale, Mobile Strike. Keywords is listed on AIM, the London Stock Exchange regulated market (KWS.L). 

Chairman's Statement

2015 has been another year of strong progress in delivering against the ambitious strategy we set out at the time of the Group's flotation in 2013, both organically and by acquisition.

As a result, the Group's revenues have grown from €16.2m in 2013 to €37.3m in 2014 and €58.0m in 2015.   Like for like growth has been strong at over 20% in each of the past two years, with stable net adjusted operating margins of approximately 14% in 2015. 

During this two year period Keywords has firmly established itself as the leading services provider to the global games market, with an impressive range of services and a reputation for high quality, secure and timely delivery of those services. In addition to the Group's traditional service lines, of localisation and localisation testing, we now hold strong positions in functional testing, art outsourcing and audio and a growing capability in customer support.

Managing growth

As Keywords has continued to expand at a pace, we are making good progress in developing our infrastructure, including sales, marketing and management processes and information, including putting in place a structure to manage the business along both service lines and by geography. A key focus for 2016 will be IT and finance.

We continue to successfully embed the Keywords culture across our new operations, under the strong leadership from our senior executives nearly half of whom joined Keywords through the acquisitions made in 2014 and 2015.

The business model 

Although the core elements of the business model are described elsewhere I believe its attributes deserve to be recognised as an important feature of the business and its evolution. Keywords largely charges for its services on a time basis, without the risk associated with fixed price contracts, and it is able to flexibly meet client demand by using well developed pools of contractors to supplement its permanent staff as required. Most of its assignments are repeat in nature, with services to existing customers typically accounting for around 80% of revenues. Customers pay monthly for work undertaken in the previous month and the Group's capital expenditure requirements are low, leading to a strong profit to cash conversion rate.  Keywords must deliver good quality service to a demanding set of customers against set deadlines; our track record shows a high level of customer satisfaction, which is testimony to the skill and commitment of the Keywords' operatives.

People and culture

I have already touched on the qualities required, and in evidence, by the top team at Keywords all of whom display a commitment and belief that Keywords will succeed in its strategy to become the clear market leader in its field. On behalf of the Board and the shareholders, I'd like to thank everyone who works for us for all their individual contributions to our past and future success.

Shareholders and dividend

In November 2015, shareholders supported us with a successful placing in which £10.5 million was raised to fund continued value-enhancing acquisitions by the Company. Through the placing, we were able to welcome several new institutional shareholders and we would like to thank all of our shareholders for their support. We look forward to continuing to deliver shareholder value, building on the share price progression we have seen in line with our underlying trading performance over the last couple of years.

In line with its progressive dividend policy, and allowing for the need to retain resources to fund future growth of the Group's business and its strategic aims, the Board is pleased to recommend a final dividend of 0.81p per share which, following the interim dividend payment of 0.4p per share, will make the total dividend for the year ending December 31, 2015 1.21p per share, an increase of 10% on 2014.  Subject to shareholder approval at the Annual General meeting, the final dividend will be paid on June 23, 2016 to all shareholders on the register at June 3, 2016.

Current trading, prospects and outlook

The current year has started well with the Group trading in line with our expectations and the recent acquisitions of Ankama and Mindwalk have both strengthened our customer service and art creation services and brought a strong presence in the Philippines and China, respectively.

The video games market continues to grow strongly, at around 8%* per annum. The complexity of taking ever more sophisticated games to market in multiple geographies and on multiple platforms, means developers and producers are increasingly seeking to outsource elements of their game production and live operations support. Keywords is well placed to take advantage of these trends without dependence on any individual game.

We expect to make further progress during 2016 with continued organic momentum in the business, as well as realising further synergies, benefiting from the full year effect of our 2015 acquisitions and from the acquisitions of Ankama and Mindwalk in 2016. We are also actively reviewing a number of acquisitions with the potential to further complement our continued strong organic growth.  We, therefore, look forward to 2016 with confidence.

Ross K Graham, Chairman

*NewZoo, June 2015

Chief Executive's Review

2015 saw another year of good progress for Keywords, in which the Group delivered healthy like for like growth, supplemented by selective acquisitions which have further expanded our range of services and extended our geographical reach.

Strong like for like growth of 20% was driven by our art creation, localisation and audio service lines in particular.  In addition, we continued to deliver on our industry consolidation strategy by acquiring four companies during 2015 and a further two since the year end. These acquisitions have expanded our service offering into player support and community management services to support games in live operations and have extended our reach geographically to Mexico and the Philippines.  Additionally, our acquisitions of Liquid Development and Mindwalk added further scale to our activities in the buoyant art creation market which we entered in 2014 with the acquisition of Lakshya.

We have also made good progress on the integration of the acquisitions we made in 2014 and in 2015.  We have put in place a management structure which combines global management to drive and coordinate the six service lines that now make up Keywords Studios with regional and country management to ensure the appropriate local support is in place.

Results overview

Including the effect of acquisitions, the Group's revenues increased by 55% to €58.0m (2014: €37.3m) during the period, reflecting growth across all lines of business as outlined in the Operational Review section, below.  In order to provide a better measure of organic revenue growth in the businesses that Keywords now owns, we are also providing like for like revenue growth, which provides a 2014 comparative as if all of the 2015 acquisitions had been owned for the same period in 2014 as they have been in 2015.  On this measure, organic growth was approximately 20% in 2015.

Gross profit margins increased to 37.6% (2014: 34.0%) reflecting a combination of the increase in our higher margin art creation services as a proportion of the revenue mix, and the maintenance or increase of our margins in the other service lines.

The Group reported adjusted profit before tax (before share option charges, amortisation of intangible assets, costs of acquisition and integration, and foreign currency movements) for 2015 of €8.0m (2014: €5.1m).  Statutory profit before tax for the period was €5.1m (2014: €3.4m). 

The Group's effective tax rate has decreased as we make better use of our brands, operating models and tools from our Dublin operational headquarters in support of our business around the world, much of which is in higher tax rate jurisdictions including Canada, US, Japan, India and Italy. The Group's effective tax rate based on the KWS measure of profit before taxation in the period (as set out on page 14) was 22.9% (2014: 24.0%)

Basic earnings per share for the year, before one-time costs of acquisitions and integration, share option charges, amortisation of intangibles, and foreign exchange movements, was 12.71c compared with 8.54c for 2014. After these items, the basic earnings per share from continuing operations was 6.98c (2014: 4.94c).

Operational review

Having acquired Alchemic Dream in January 2015 we effectively began the year with six service lines - two more than at the start of 2014.  All six service lines grew like for like sales during the year and four were positively impacted by acquisitions.  A segmentation of the Group's revenues by service line is provided in the Financial and Operating Review.

Art Creation

Our higher margin, art creation services revenue grew to €8.2m (2014: €0.6m), reflecting a full year contribution from Lakshya in 2015 which had been acquired in October 2014, and Liquid Development's contribution following its acquisition in August 2015. Importantly, the combined art creation businesses have delivered like for like growth of approximately 70% year on year, reflecting the high market demand for art services and our investment in talent to respond to this opportunity. This investment helped Lakshya to almost double its revenues year on year supported by the opening of a production studio in Seattle in May 2015 and the expansion of its art team in India by over 100 artists during 2015.

The acquisition of Liquid Development in August 2015 gave the Group further scale,  bringing with it additional capabilities in video game art production as it works for game developers involved in producing console, online, PC, mobile and console games as well as interactive experiences for theme parks. Liquid Development and Lakshya are starting to work well together and we remain encouraged by their performance and growth plans.

The objective for our art creation services line is to grow capacity to meet demand, whilst maintaining our reputation for quality and reliability of delivery to our customers' timescales. In addition, we aim to extend our capabilities to areas such as concept art (taking us right to the very start of the game development cycle) and visual special effects. 

The acquisition of Mindwalk Studios in Beijing which was announced after the year end and is dependent on the fulfilment of certain acquisition related conditions, will add further capacity both in its existing 150 artists and in its access to the wider talent pool of game artists in China.

Localisation

Localisation activities, including contributions from Reverb, Alchemic Dream and Kite Team which were acquired in the year increased revenues by approximately 43%, to €17.1m (2014: €12.0m) and accounted for approximately 30% of Group revenue. 

With an output of some 90 million translated words in 2015, our games localisation business is now the largest specialist games business in the world and we continue to pursue growth opportunities in what remains a highly fragmented market.  A resolute focus on quality, on-time delivery and cost effectiveness helped see this service grow its like for like revenues by approximately 26% aided by strong volume growth of existing clients and new clients wins.

Functional Testing

Our functional testing service, which accounted for approximately 11% of Group revenue in 2015, increased revenues by approximately 30% to €6.5m (2014: €5.0m).  On a like for like basis, revenues grew by approximately 17%.

Gross margins also improved, a testament to Keywords' ability to manage large multi-month testing projects alongside projects of only a few days, whilst ensuring high levels of staff utilisation through its flexible staffing model.

Localisation Testing

Our localisation testing operations, which accounted for 26% of Group revenue in 2015, grew by a relatively modest 1% to €15.0m (2014: €14.7m). 

The performance of localisation testing reflects the phasing of activity from certain key clients which had fewer titles in 2015 compared to 2014. Those clients are expected to return to higher levels of activity in 2016 as they increase their pipeline of titles to be released this year.

Audio

Our Audio business increased revenues by approximately 41% to €7.2m (2014: €5.1m), including contributions from Reverb and Kite Team which were acquired in January and July respectively.  On a like for like basis, revenues in our Audio service line grew by approximately 23%.

Providing single language Brazilian Portuguese, Latin American Spanish and Iberian Spanish audio recording and production services, Reverb and Kite Team have won tenders from game publishers who source each language separately. Publishers who adopt a multi lingual approach use the services of our Binari Sonori business which has proven expertise gained over many years in managing simultaneous production of audio voiceover recordings in 20 or more languages.

Customer Support

In January 2015 we acquired Alchemic Dream which provided us with an entry point to providing customer support services. This new customer support business achieved revenues of €3.9m (2014: €nil), accounting for approximately 7% of Group revenues and a 10% increase on a like for like basis.

Alchemic Dream uses a network of multi lingual agents working remotely but connected through technology platforms to deliver its customer support services.  We have begun to build upon this capability by utilising our existing international production facilities and talent pool of over 1,000 employees, enabling us to provide customer support and community management teams out of our studios in Tokyo, Singapore, India, Dublin and Montreal.  We believe it will be an advantage to both clients and users for Keywords' teams, who have already garnered deep knowledge of all aspects of the game through their involvement in the production and launch phases of a game, to provide ongoing live operational support to those games.  We anticipate that this approach will support good, profitable growth in this service line in future years.

Delivering our strategy

We have made strong progress in delivering on our strategy to grow Keywords Studios both organically and by acquisition to extend the Group's client base, service lines and geographical penetration, where the Group can use its existing expertise, multi-service platform, scale and global reach to generate synergies in a highly fragmented games services industry.  We are particularly pleased to have both established a substantial capability in the higher margin, art creation services, which means that we are now working with clients at an earlier stage in the game development cycle, and that we now have a better balanced business across the six service lines.  The Board believes that there is a clear opportunity for Keywords to extend its existing relationships with many of the major games companies both through providing additional services to existing customers and through providing dedicated outsourced services.

In addition, we believe that content in its many forms is becoming more interactive and, as highlighted at the time of the IPO, we continue to maintain a watching brief on some closely adjacent markets to that of video games in the expectation that at some point our expertise in what is the most interactive form of content, video games, will become highly relevant to other industries such as e-learning, film and television and online gambling.

Developing Customer Relationships and Outsourcing

Year on year we have expanded the number of services we provide to each of our clients.  The number of clients now using three or more services grew by 70% to 51 clients in 2015.

In 2015 we expanded our relationship with two existing clients adding dedicated, managed services teams for localisation, localisation testing and community management tasks both based out of our Dublin studio.  One of the clients is a leading mobile games developer/publisher and the other develops and operates one of the world's leading online games.  We are seeing increased opportunities for such managed services and single sourced arrangement given our financial solidity, our operational robustness thanks to multi-site, multi-country duplication of capabilities, and being seen as a having some of the best talent in the industry.

In March 2016, we took over the live operations support team from French publisher, Ankama SAS.  Based in the Philippines, this team provides a range of support services including fraud management, customer support, testing, "bot hunting" (seeking out and neutralising automated programs that have been introduced into the game against the rules), and promotions management for Ankama's games including Dofus, Wakfu and Tactile Wars in English. We are investing in new, larger premises in Manila and will be expanding this team to provide similar services to additional game clients.

Geographic Development

In order to best serve its video game developer and publisher clients and to access specific talent pools, the Group has continued to expand geographically and now has 19 (2014: 14) offices in four continents providing full, integrated video games services to both local and global clients.

Keywords' studios are strategically located to provide services to key gaming clusters in locations such as Tokyo, Singapore, Montreal, Seattle, Los Angeles and London.  Since the beginning of 2015 we have expanded into new locations including Mexico City, Beijing, Shanghai, Manila and Madrid.

We have also leveraged our studio locations by housing both a newly established art creation operation for Lakshya together with our existing localisation testing operations in Seattle in a new facility.  Separately we have seeded our customer support operations into our studios in Rio de Janeiro, Tokyo, Montreal, Singapore, Dublin and New Delhi.

Having added Manila to our network of studios in March this year we intend to expand our operations in the Philippines during 2016, as it is an important, low cost, English proficient, location ideally suited to services such as customer support and games operations management.

China continues to present an exciting opportunity for the Group. It is thought to have surpassed the US as the largest market for games and is slowly liberalising.  In addition to the acquisition of Mindwalk described below, we established a wholly owned foreign enterprise and an initial presence in Shanghai during the year which, in addition to undertaking business development and corporate development activities for the group, is now starting to deliver localisation services directly from Shanghai.

Acquisitions

While we are particularly pleased with our organic growth, Keywords has continued to take advantage of the highly fragmented markets for video games services. We have acquired a further six businesses since the beginning of 2015 to take the total to ten acquisitions since listing on AIM in July 2013, and we are encouraged by the way in which the acquired businesses have been welcomed into the Group and integrated through the adoption of common systems, reporting formats, sales and marketing. The globally managed service line based organisation structure implemented in 2015 further facilitates this integration process and provides management bandwidth for conducting and integrating further acquisitions.

In January 2015, Alchemic Dream, which provided us with an entry point into customer support and community management services, and Reverb, which provides localisation and audio for Brazilian Portuguese, were welcomed into the Group. In July we acquired 50% of Kite Team (localisation and audio for Spanish, Latin American Spanish and Brazilian Portuguese) and, in August, Portland, Oregon art creation services business, Liquid Development joined the stable.

We have been pleased with the progress made with integrating the acquired businesses. The businesses have performed well as part of the Group and we have been very encouraged by the positive responses from customers to the acquisitions.

Since the year end we have acquired Ankama Asia Pte Ltd in a strategic outsourcing deal which provides the Group with a platform in Manila from which to further develop our customer services business with the benefit of a four year contract with Ankama SAS.  In addition, we have acquired Mindwalk Studios, for a total consideration of $5.5 million, which provides outsourced art creation services to the video games industry internationally from its base in Beijing, giving us both additional art creation capacity and a strong platform from which to grow in China.  

We expect acquisition activity to be a feature of the business for the foreseeable future as the company takes advantage of its leadership position in the market and continues to consolidate carefully selected, earnings accretive businesses.  We continue to review a healthy pipeline of acquisition opportunities which fall within our stated strategic goals and could provide the Group with complementary services, increased scale in our existing activities or further geographic penetration.

People

Increasingly, we see evidence of the Group becoming a home for top talent in our industry.  Rather than chase the production of game after game from development studio to development studio, talented artists, producers, project managers and testers can work at Keywords where the games come to them. In addition to externally recruited management and production talent, we continue to develop our people internally across all our businesses and we have benefitted greatly from some strong additions to our senior leadership team following the acquisitions we have made.  The Group employed an average of 1,273 people in 2015 (2014: 978).

Outlook 

Trading in the first two months of the current financial year has been in line with the Board's expectations.  As expected, 2015 was the first, solid, post transition year following the launch of the new Xbox and PlayStation platforms in November 2013. With 2016 being the year in which Virtual Reality is launched by a number of headset providers including Oculus, Sony and Valve, we anticipate that 2016 will bring further strength in the console sector while our mobile, social and online games content related business should continue to perform strongly.

High demand for our art outsourcing services at Liquid Development, Lakshya and now Mindwalk is expected in 2016 and like 2015, we anticipate good organic growth from this service line which we plan to build upon through further selective acquisition opportunities.  The establishment of an art studio in Seattle in 2015 is starting to bear fruit as we benefit from proximity to a number of clients in the area, proving the model of having lead artists and art managers close to the client while undertaking the majority of the production in our studios in India.

Our Audio service line, which is currently under-weight compared to the other services in the Group, is targeted for expansion.  In particular, we are promoting our single language capabilities for Italian, Spanish, Latin American Spanish and Brazilian Portuguese, where we have in territory recording studios, and for Arabic, where we have become a go to provider for this complex but fast growing language. We also have a pipeline of potential acquisitions in this area.

We expect to make continued good progress during 2016, as we realise the full year benefits of our 2015 acquisitions and as they are integrated further. By capitalising on the synergies across the group, from sharing access to our talented people and production facilities, to leveraging our established client relationships, global sales force and marketing spend across all service lines, we anticipate driving continued strong organic growth, complemented by further selective acquisitions.

Andrew Day, Chief Executive

Financial and Operating Review

Group Performance

2015 saw continued good, profitable growth and expansion of the Group. The organic growth rate of the existing Keywords operations continued at a similar rate experienced in the last two years while the acquisitions made in both 2014 and 2015 have contributed strongly to the overall result.     

The testing, localisation and audio service lines continued to grow strongly and were further strengthened by the acquisition of Reverb and a 50% share in Kite Team.

One notable feature of the results has been the rapid growth of Art within the service line portfolio. This has been driven by the significant growth of Laskhya Digital which only contributed in the last three months of the 2014 results, and the acquisition of Liquid Development in August 2015.

In addition, the Group further diversified into the customer care market with the acquisition of Alchemic Dream in January 2015.

Keywords' geographic reach continued through the opening of the Barcelona studio and acquisitions in Rio de Janeiro, Portland, Madrid and Mexico City. 

Revenue

Revenue for 2015 was up 55% at €58.0m (2014: €37.3m) due to both organic growth and acquisitions. The like for like revenue growth rate, which provides a 2014 comparative as if all of the 2015 acquisitions had been owned for the same period in 2014 as they have been in 2015, was 20% for the year which was the same as the 2014 organic growth and demonstrates the strong momentum the studios have managed to maintain throughout the year.

Revenue Mix

Revenues increased across all lines of business in 2015 compared with 2014, resulting in our six service lines accounting for the following proportion of Group Sales in the year:

*Pro forma includes the annualised sales of all acquisitions made in 2015 in order to give a better overview of the balance of the business as we entered 2016.

The proportion of sales in Asia has significantly increased during the year due mainly to the acquisition of Lakshya in October 2014 which has grown rapidly. The sales mix by region based on the Group's operational jurisdictions are as follows:-

Gross Margin

Gross profit for the year was €21.8m (2014: €12.7m).  The gross margin percentage increased to 37.6% (2014: 34.1%).  The most significant impact on the gross margin in 2015 was the increase in the sales of Art services, which achieves the highest gross margin within the Group's service portfolio. This is partially offset by the introduction of customer services which commands a lower gross margin than the Group's other services.

Operating Profit ("EBITDA")

Adjusted EBITDA is a measure of operating profit used by the Board, which excludes depreciation, amortisation, share option expenses and one-time costs related to acquisitions.  For 2015, adjusted EBITDA increased 59% to €9.6m, compared with €6.0m for 2014.  As a percentage of revenue, adjusted EBITDA has increased from 16.1% to 16.2%, reflecting the improvement in the Group's gross margin partially offset by an increase in operating expense as described below.

Operating expenses excluding depreciation, increased by €5.6m to €12.3m (2014: €6.7m) mainly due to the new acquisitions, the full year impact of 2014 acquisitions and the opening of the Barcelona studio. These costs increased from 18.0% to 21.3% of revenue mainly due to the operating costs ratios within a number of the acquired companies which were higher than the ratio for the core Keywords studios. Additional investment was also made in strengthening Keywords management to successfully manage the growth of the group.  We expect the operating costs as a percentage of revenue to trend towards 20% as we manage additional volume from organic and acquisition led growth within the established framework of the Group.

Net Finance Costs

During 2015 there was net finance cost of €0.74m compared to a gain of €0.36m in 2014 primarily due to the impact of foreign exchange losses. Foreign exchange losses of €0.5m (2014: gain of €0.5m) were created mainly due to the weakening of sterling against the euro on the cash raised in the placing and negative impacts of movements of the US dollar against the India Rupee which was offset by the weakening of the Euro against the US Dollar and, within Babel Media, the Canadian dollar against the US Dollar. The increase in interest expense to €0.12m (2014: €0.06m) is largely due to the interest on a €1.1m loan to fund the MMTC receivable for 2013 in Canada and €0.6m of loans which we acquired with the Kite Team acquisition.

Adjusted Profit before Tax

Adjusted Profit before Tax is used by the Board to measure the more meaningful underlying profit generation of the Group.  This measure excludes one-time expenses, such as acquisition and integration costs, share option expenses, foreign currency gains or losses and amortisation of intangibles.  Adjusted profit before tax for 2015 increased by 59% to €8.01m compared with €5.05m in 2014.

Taxation

The Group's effective tax rate reduced to 22.9% (2014: 24%) as the Group looked to make better use of its global operating headquarters in Ireland in the year. This will continue during the next year and we would anticipate a further reduction in the effective tax rate.

Basic Earnings per share

Basic earnings per share for the year, before one-time costs of acquisitions and integration, share option charges, amortisation of intangibles, and foreign exchange movements, increased by 49% to 12.71c compared with 8.54c for 2014.  Basic earnings per share based on the statutory profit after tax was 6.98c (2014: 4.94c).

Cash flow and debt

The Group generated operating cash of €3.4m for the year, compared with €1.9m for 2014. However, during the year, the Group also accumulated multimedia tax credits in Quebec of €1.3m in 2015 (2014: €1.4m) which will be claimed during 2016. Therefore, and in order to mitigate against the effect of the delay in receiving the multimedia tax credits from the Canadian authorities, the Group took out financing debt of €1.1m.  The total multimedia tax credit accrual as at December 31, 2015 amounted to €3.9m (2014: €3.0m).

The Group anticipates that, in general, it will convert the net profit after tax to cash less the amount which is needed to fund an increased level of working capital required due to the continuing rapid growth of the business. In 2015 the delay in receiving the multi-media tax credits has reduced the cash collection below the level which would normally be anticipated. This will not be the case in 2016.   

The Group made four acquisitions to strengthen the business during the year with a net cash outflow on consideration payments of €7.4m, and an additional €1.1m in acquisition expenses and integration expenses. At the date of acquisition of Kite Team, the company had €0.6m of loans in place which remained in place at December 31, 2015 and formed part of the Group financial statements.   Investment in fixed assets amounted to €1.6m (2014: €1.3m) reflecting the cost of expanding the Lakshya Digital operation in India, moving office in Seattle to include a new Art studio, further expansion within the Montreal studio and fitting out the Barcelona office. Additionally, there were ongoing purchases of games testing equipment.  A further €0.8m was spent on purchasing 400,000 Keywords Studios PLC shares for the Group's Employee Benefit Trust.

In 2015, the issue of new shares at 190p via a Placing in November generated net proceeds of €14.2m.  In 2014 the issue of new shares at 1.50p via a Placing in May generated net proceeds of €7.3m.

Cash and cash equivalents increased to €19.0m from €11.0m excluding accrued multimedia tax credits of €3.9m (2014: €3.0m). The Loans and borrowings were €1.7m at December 31, 2015 (2014: Nil).

Foreign Exchange

Keywords does not hedge foreign currency profit and loss translation exposures. The effect on the Group's results of movements in exchange rates and the foreign gains and losses incurred during the year are set out in the net finance costs section above.

Dividend

The Company has a progressive dividend policy, subject to the retention of funds needed to fund future growth of the Group's business and its strategic aims.

Following the interim dividend payment of 0.40p per share on October 23, 2015, the Board has recommended a final dividend of 0.81p per share, which will make the total dividend for the year ending December 31, 2015 1.21p per share, a 10% increase over 2014.  Subject to shareholder approval at the Annual General meeting, the final dividend will be paid on June 23, 2016 to all shareholders on the register at June 3, 2016.  The cash cost of the final proposed dividend will be an estimated €0.6m.

Events after the reporting period

On March 22, 2016 the Group acquired the entire share capital of Ankama Asia Pte Ltd, a company registered in Singapore, which provides services to support the live operations of the games of Ankama.  Under the terms of the agreement, which will be immediately earnings enhancing, a total consideration of €0.25m will be paid to the sellers.

On April 1, 2016, the Group announced that has entered into an agreement to acquire the business and assets of Mindwalk Studios Inc, a company registered in China, and Mindwalk Studios Ltd, a company registered in the British Virgin Islands. Under the terms of the agreement, which is anticipated to be immediately earnings enhancing and is scheduled to complete before June 30, 2016 subject to certain conditions being fulfilled, a total consideration of $5.5m will be paid. This will be satisfied by the payment of US$3.9m in cash and the issue of US$1.6m of Keywords Studios plc shares.

Key performance Indicators

We monitor our financial performance against a number of different benchmarks.  These are set in agreement with the Board and used to evaluate progress against our strategy.

Financial Performance is measured by

-    Revenue growth

Revenue Growth is measured by line of business and overall against the Board's strategic goal to grow organically and by acquisition.

-    Gross Profit

Gross Profit is a key measure by service line of the Group's pricing strategies, use of resources and its ability to optimise resource utilisation.

-    Overhead costs by location

The Board monitors the overheads to ensure the costs in each location are in line with the level of business being generated.

-    Adjusted EBITDA Margin

The Board uses an adjusted measure of EBITDA to monitor the performance of the Group.  This measure excludes foreign exchange gains or losses, any one-time expenses and the cost of employee share option awards.

-    Adjusted Operating Profit Margin

The Board also uses an adjusted measure of operating profit to monitor the performance of the Group.  This measure similarly excludes foreign exchange gains or losses, any one time expenses, and the cost of employee share option awards.

Non-Financial Performance is measured by

-    Resource deployment

The Board reviews the efficiency at which the Group is utilising its staff resources to ensure optimum staffing strategies are deployed and to maximise utilisation rates.

-    Business won/lost

The Board reviews the levels of new business won and lost, and monitors the reasons for both, to ensure that the services being offered to the market are appropriately priced and relevant.

-    Customer satisfaction and quality of service delivery

The Board monitors the quality and timeliness of service delivery on an ongoing basis and reviews the level of repeat revenue from existing customers, typically around 80%, as a key measure of customer satisfaction.

Andrew Lawton, Group Finance Director

Financial Statements

Consolidated Statement of comprehensive income

The notes on pages 23 to 71 form an integral part of these consolidated financial statements.

On Behalf of the Board

Andrew Day                                                                            Andrew Lawton

Director                                                                                   Director

Consolidated Statement of financial position