13 September 2016

http://www.rns-pdf.londonstockexchange.com/rns/6268J_1-2016-9-12.pdf 

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

Half year results for the six months to 30 June 2016

Keywords Studios, the international technical services provider to the global video games industry, today provides its half year results for the six months to 30 June 2016.

Financial overview:

·     Revenue, including contribution from acquisitions, increased by 77% to €42.4m (H1 2015: €23.9m)

·     Adjusted profit before tax* up 177% to €6.0m (H1 2015: €2.2m)

·     Adjusted earnings per share* up 99% to 8.55c (H1 2015: 4.29c)

·     Net cash of €3.5m (H1 2015: €6.1m) after €13.7m of acquisition cash consideration and costs

·     10% increase in interim dividend to 0.44p per share (2015: 0.40p)

* before acquisition and integration expenses of €0.7m (H1 2015: €0.7m), share option charges of €0.3m (H1 2015: €0.1m), amortisation of intangibles of €0.6m (H1 2015: €0.4m) and foreign currency loss of €1.8m (H1 2015: €0.6m gain)

Operational overview:

·     30% increase in like for like** revenue includes exceptional second quarter performance by Synthesis

·     Continued to invest in the development of the Group:

o  Acquisition of leading localisation, audio and localisation testing business, Synthesis, in April

o  Acquisition of China-based outsourced art creation firm Mindwalk completed in May

o  Acquisition of Philippines-based customer support team from Ankama in March

o  Acquisition of remaining 50% in Spanish and Latin American audio and localisation firm, Kite Team in April

o  Further strengthened senior management team with three key appointments

·     Five year revolving credit facility of up to €15m with Barclays Bank Plc secured

·     18% increase in clients using three or more services from 51 to 60***

** calculated on the basis of revenues being included for 2016 acquisitions from the date of acquisition and for the equivalent period in the prior year.

*** measured on a rolling 12-month basis, comparing 12 months ended June 2016 to the 12 months ended June 2015.

Current trading and outlook:

·     Acquisition of Quebec City-based Volta in July 2016, has extended Group services into Concept Art

·     Trading in the first two months of the second half has been in line with the Board's expectations. The particularly strong first half leaves the Board confident in delivering market expectations for the full year

·     Selectively reviewing a strong acquisition pipeline

Andrew Day, Chief Executive of Keywords Studios, commented:

"The Group has delivered a first half performance comfortably ahead of our expectations, driven by good organic growth, but also substantially complemented by acquisitions which have further extended our service offering, market penetration and geographic reach.

"The Group's strong trading in the first eight months of the year means that we do not expect this year to be characterised by the typical weighting towards the second half. This performance gives us increased confidence in delivering against our expectations for the full year.

"We look forward to continuing to develop the business both organically, by extending relationships with many of our existing major games clients, and by acquisition, as we continue to review selective opportunities that could further extend our service offering or market penetration."

A presentation of the half rear results will be made to analysts later this morning at MHP's offices.  To register to attend, please contact Ollie Hoare at MHP Communications on 020 3128 8771.

For further information, please contact:

Notes to Editors

Keywords Studios is an international technical services provider to the global video games industry. Established in 1998, it provides integrated art creation, audio, testing, localisation, testing, and customer support services across the games lifecycle in over 50 languages and all games platforms to a blue chip client base in more than 15 countries. Keywords Studios now has 23 facilities across Europe, North and South America and Asia.  It has a strong market position, providing services to 21 of the top 25 games companies by revenue including Microsoft, Namco Bandai, Sony, Konami, Electronic Arts, Nintendo and Square Enix) and 7 of the top 10 mobile game companies by revenue (including Supercell, King and Machine Zone).  Keywords Studios is listed on AIM, the London Stock Exchange regulated market (KWS.L).  For further information, please visit: www.keywordsstudios.com 

Introduction

The first half of the financial year has seen the Group deliver another period of good organic growth, substantially complemented by acquisitions which have further extended its service offering, market penetration and geographic reach. 

Like for like revenues increased by 30% including a strong second quarter performance at newly acquired Synthesis due in large part to a phasing of revenues favouring the first half of the year. Excluding Synthesis, like for like revenue growth in the period was 21%.  

During the first half, we have continued to invest in the business having expanded our customer support offering with the acquisition of a Philippines-based team from Ankama; consolidated our Spanish and Latin American presence by acquiring the remaining 50% of audio and localisation firm, Kite Team; established the group as the global leader in localisation and voice-over recording through the acquisition of Synthesis; and  acquired China-based firm, Mindwalk, which significantly enlarged the scale of our art services business line. 

We have also made good progress integrating prior period acquisitions, all of which are making good contributions to the Group. We have continued to invest in our management structure in order to support future growth, with the appointment of senior managers to lead our art services and strategic outsourcing offerings as well as a Group IT Director.  

With Virtual and Augmented Reality gaming debuting in 2016, we have been working across all the VR platforms providing art, audio, QA, and localisation services for a range of the early concept VR game releases as well as for Augmented Reality.  Goldman Sachs released a market forecast of the VR and AR software market covering games and non-games sectors indicating the total market will grow to $35bn by 2025 (Source: Goldman Sachs' Virtual and Augmented Reality research note, January 2016).

Financial overview

Group revenues increased by 77% to €42.4m (H1 2015: €23.9m). The increase was driven by an exceptional second quarter from the newly acquired Synthesis, coupled with the addition of Mindwalk and Ankama and strong like for like growth across most of our service lines. The period has been particularly strong as the number of major projects which have fallen in the first half of the year has been greater than in previous years, which we anticipate will result in the Group as a whole having a different seasonality profile this year from previous years.

The gross profit margin of 35.1% (H1 2015: 34.4%) was up on last year driven by high levels of activity across the Group, particularly in Synthesis in the second quarter.

Operating expenses increased in the first half of the year to €8.8m (H1 2015: €6.0m) reflecting the costs of the acquired entities. As a proportion of sales, operating expenses decreased to 20.8% (H1 2015: 24.9%), with the benefit of group management and support costs being spread across a larger revenue base. Cost controls remain strong across the Group's studios.

One-off costs of acquiring and integrating the newly acquired companies of €0.7m (H1 2015: €0.7m) were incurred in the period.  Included in net finance costs is a foreign exchange loss of €1.8m (H1 2015: €0.6m gain) in the first half of the current year which is largely due to exchange rate losses on cash deposits and inter-company loans.

Adjusted profit before tax and acquisition-related costs, share option charges, amortisation of intangibles and foreign currency movements for the first half of the current financial year was €6.0m (H1 2015: €2.2m).  After these items, the Group reported a profit before tax for the period of €2.6m (H1 2015: €1.6m). 

The estimated tax charge in the period is €1.3m (H1 2015: €0.1m) which represents an effective tax rate of 21.4% which is a small reduction on the rate for 2015 (FY 2015: 22.9%).

Adjusted basic earnings per share (before tax and acquisition-related costs, share option charges, amortisation of intangibles and foreign currency movements) were 8.55c (H1 2015: 4.29c).  Basic earnings per share from continuing operations were 2.42c (H1 2015: 3.02c), primarily reflecting a €2.4m negative movement in foreign exchange.

A combination of the exceptional trading in the second quarter and the Group entering a traditionally busy third quarter, where the Group has its maximum cash requirement for the year, has led to a net inflow of cash from operations of €0.6m (H1 2015: outflow of €0.6m). In the period, the Group made three acquisitions and acquired the remaining 50% of the share capital of Kite Team which led to a net cash outflow on consideration of €13.0m (H1 2015: €1.0m) and an additional €0.7m (H1 2015: €0.7m) in acquisition and integration costs. To help fund these and future acquisitions the Group agreed a secured credit facility with Barclays of up to €15m over a five-year period. The facility can also be used to fund working capital and at the end of the period the amount drawn down was €4m. All loans in place at the end of 2015, a total of €1.7m, were repaid in the period. Investment in fixed assets amounted to €1.3m (H1 2015: €0.8m) reflecting in particular the cost of increasing capacity of the Montreal Studio and a continued refresh of IT equipment.

Operational review

Following acquisitions during the first half and prior periods, Keywords is a geographically diversified business with a well balanced portfolio of services. As at 30 June 2016 Art Creation services represented 16% of group revenues, Audio Services represented 22%, Localisation services represented 33%, Functional Testing represented 8%, Localisation Testing represented 16% and Customer Support services represented 6% of group revenues.

Art Creation

Our Art Creation service line produces graphical art assets for inclusion in video games including 2D and 3D art asset production and animation, as well as concept art following the acquisition of Volta in July 2016.

Art Creation revenues grew by 140% to €6.7m (H1 2015: €2.8m) with the benefit of contributions from Liquid Development, which was acquired in August 2015, and Mindwalk, which was acquired at the end of May 2016.  On a like for like basis, Art Creation grew sales by 5% on very strong comparatives, with a higher proportion of our activity made up of smaller, earlier stage or proof of concept projects during the period including a number of Virtual Reality projects.

Audio Services

Our Audio service line provides multi language voice-over, original language voice recording and related services.

Audio revenue grew by 297% in the period to €9.1m (H1 2015: €2.3m) significantly driven by the acquisition of Synthesis in April 2016 which positioned the Group as global leader in Audio services.  On a like for like basis, revenues grew by 98% reflecting an exceptionally strong performance from Synthesis which, in addition to delivering its normal flow of audio projects, managed some very large new audio projects in the second quarter leading to a peak production period earlier in the year than is typical. Excluding Synthesis, like for like revenue growth in Audio was 79% reflecting the favourable H1 2015 comparator as well as good underlying growth.

Localisation

Our Localisation service line provides translation of in-game text, audio scripts, cultural, and local adaptation, accreditation, packaging and marketing materials.

The Localisation activities have had a strong first half, growing revenues by 79% to €14.0m (H1 2015: €7.8m) reflecting the contributions from the acquisitions of Kite Team in July 2015 and Synthesis, in April 2016.  On a like for like basis, Localisation revenues have grown by 42% driven by greater demand for more languages for mobile games and a strong performance from Synthesis. Excluding Synthesis, like for like sales grew by 38% as this service line continued its very strong growth.

Functional Testing

Our Functional Testing service line provides quality assurance including the discovery and documentation of game defects and testing to verify the game's compliance with console manufacturers' specifications.

Functional testing revenues increased by 30% to €3.2m (H1 2015: €2.5m). This strong performance reflects good demand from existing customers including Oculus, some new client wins to this service such as Ubisoft, and improved levels of demand for our Indian studio. With the majority of Functional Testing still performed in-house by our clients we continue to explore ways to increase the weighting of this service within the overall portfolio of services through outsourcing arrangements and acquisitions.

Localisation Testing

Our Localisation Testing service line identifies out of context translations, truncations, overlaps, spelling, grammar, age rating issues, cultural issues and tests for console manufacturer compliance requirements in over 30 languages using native speakers.

As planned, the Group's historic reliance on Localisation Testing continued to reduce such that it accounted for only 16% (H1 2015: 29%) of Group revenues during the first half, albeit Keywords remains the largest provider in the market.  Sales increased by 2% to €6.9m (H1 2015: €6.8m), which included a small contribution from Synthesis.  On a like for like basis this represented a 4% decline due to strong comparatives in the first half of 2015 when we reported higher than normal levels of activity in the first quarter.  Excluding Synthesis, revenues declined by 8%.  We typically expect localisation testing to see a higher level of activity in the second half of the year and are encouraged by current volumes and a good pipeline of activity.

Customer Support

Our Customer Support service line provides multi-lingual, cost effective and flexible customer care services including managing communities of gamers across all forms of social media, within the games themselves and on the official game forums.

Initially established through the acquisition of Alchemic Dream in January 2015, the outsourcing agreement with Ankama in March 2016 extended the offering further, including into live operations support, promotions and fraud management.  Customer Support sales increased by 41% to €2.4m in the first half (H1 2015: €1.7m) including the contribution of Ankama.  On a like for like basis, Customer Support grew by 16%, reflecting good development of the business despite this being a transitional year in which we focused on strengthening the service line through a combination of using existing studios and resources and investing in growth.  For instance, the Manila based customer support team acquired from Ankama is moving to larger, newly fitted out offices and is expanding to deliver services to additional clients. We anticipate good growth in Customer Support services as the model evolves to replicate the successes we are seeing in certain geographies such as Japan, and we are using existing recruitment channels to find extra resource to meet anticipated demand.

Dividends

The Board is pleased to announce a 10% increase in its interim dividend payment, in line with its progressive dividend policy.  The interim dividend of 0.44p per share will be paid on 28 October 2016 to shareholders on the register on 7 October 2016, with an ex-dividend date of 6 October 2016. The interim dividend payment will absorb approximately €0.3m of cash resources.

Strategy

We have made strong progress in delivering on our strategy to grow Keywords Studios both organically and by selective acquisition in order 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 further developed our newer, Art Creation and Customer Support service lines and to have achieved greater scale in Audio Service, which is now a global leader in its field. 

Today, we have a better balanced business across the six service lines and are able to support video game developers and publishers from the very early concept stages through to the post launch, live operations phase, which is in line with our aim to be the leading scale provider of services at all stages in the games lifecycle to our global customer base.

Recent investments in senior management with the appointment of a Group IT Director, a Chief Customer Officer and the promotion to lead our Art services business, have further strengthened the management team to facilitate integration efforts and support continued organic and acquisition led growth.

The Board believes that there is a clear opportunity for Keywords to continue 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.  We maintain a strong acquisition pipeline and continue to review selective acquisitions opportunities that could further extend our service offering or market penetration.

Current trading and outlook

Trading in the first two months of the second half has been in line with the Board's expectations.  

2016 has been marked by the anticipated arrival of Virtual Reality and Augmented Reality with much work being conducted in the games industry on early stage content for the VR devices that have already launched and are to be launched this year. Already providing art, audio, translation, functional and localisation testing for multiple VR and AR games, we fully expect demand driven from VR and AR to grow strongly over time as this form of entertainment and learning gains traction globally.

We are also seeing a rapid progression in mobile games both in terms of richer content - larger scale games, increased use of audio within the games and higher production value art with 3D graphics in particular - and games being launched into a wider number of territories, requiring more languages and, therefore, localisation. These trends play to our strength in HD games and managing multiple-language launches, traditionally for console and PC platforms.

There has been a noticeable increase in demand in the second half of 2016 for our art businesses, which we are expecting to finish the year strongly. Furthermore, the inclusion of concept art within our portfolio of art services is already bearing fruit as, following the acquisition of Volta in August we are already seeing earlier stage opportunities to engage with clients for art asset production from our Lakshya, Liquid Development, and Mindwalk studios following the provision of concept art by Volta.

Our Audio service line, which was previously flagged as being underweight in our portfolio has been transformed with the acquisition of Synthesis and is now a world leader.  We continue to see opportunities for further development of this service by strengthening our position in certain key territories and building upon our original language audio voice production capabilities. Longer term, we expect demand for audio to grow with VR games making greater use of audio to guide players in the game - something that in non VR based games is typically done through the use of text prompts.

Thanks to the global nature of the business' earnings, and the fact that only 3% of revenues are denominated in sterling, the Group has not seen and does not expect any operational impact following the UK referendum vote. 

Having delivered a first half performance substantially ahead of our expectations due the phasing of revenues favouring the first half, we do not expect this year to be characterised by the typical weighting towards the second half.   Nevertheless, the Group's strong performance in the first eight months of the year gives us confidence in delivering against our expectations for the full year.

Interim consolidated statement of comprehensive income

The notes on pages 12 to 32 form an integral part of these consolidated financial statements.

Interim consolidated statement of financial position

The notes on pages 12 to 32 form an integral part of these consolidated financial statement