19 September 2017

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

Half year results for the six months to 30 June 2017

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 2017.

Financial overview:

·     Revenue, including contribution from acquisitions, increased by 50% to €63.8m (H1 2016: €42.4m)

·     Adjusted profit before tax* up 60% to €9.6m (H1 2016: €6.0m)

·     Adjusted earnings per share* up 55% to 13.2c (H1 2016: 8.5c)

·     Net cash of €1.1m (H1 2016: €3.5m) after €6.9m of net cash outlay on acquisitions

·     10% increase in interim dividend to 0.48p per share (2016: 0.44p)

Operational overview:

·     17% increase in like for like** revenue, or 28% when excluding Synthesis in both periods reflects the underlying growth of the group

·     Continued to invest in the development of the Group:

o  Acquisition of Spov, to enhance our Art offering, in February

o  Acquisition of XLOC, bringing a specialist localisation content management system for videogames development to the Group, in May

o  Acquisition of Gamesim, which provides the Group with a first step into software engineering services, in May

o  Acquisition of the Chinese based art group, Red Hot, in May adding further capacity and providing reach to talent pools in second and third tier cities in China

o  Further strengthened the senior management team with the appointment of a Group HR Director, a newly created position

o  Invested in facilities in India and Tokyo, adding up to 150 seats and audio / voice over recording studios respectively in response to demand

·     Five year revolving credit facility of €35m with Barclays Bank Plc secured

·     40% increase in clients using three or more services to 84 (H1 2016: 60)

Post period end, current trading and outlook:

·     Further investment in operational capacity and Group infrastructure to support growth in future periods:

·     Three acquisitions of Paris based audio and localisation service providers in August giving Keywords a market leading position in this key language

·     Strengthened the Board and management team with the appointments of Georges Fornay and Charlotta Ginman as Non-Executive Directors 

·     Expansion plans supported by investment in 8 facilities to add up to 700 seats across Art, Player Support, Functionality Testing, and Localisation Testing in the second half to accommodate organic growth in response to market demands

·     Selectively reviewing a strong acquisition pipeline

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

*    before acquisition and integration expenses of €0.5m (H1 2016: €0.7m), share option charges of €0.4m (H1 2016: €0.3m), amortisation of intangibles of €1.2m (H1 2016: €0.6m) and foreign currency loss of €1.96m (H1 2016: €1.77m)

** calculated on the basis that the H1 2016 comparative includes all of the 2016 and 2017 acquisitions as if they had been owned for the same period in 2016 as they have been in 2017.

Andrew Day, Chief Executive of Keywords Studios, commented:             

"We have delivered another strong set of results for the first six months of the year as we continue to pursue our strategy of organic and acquisition led growth as we build our global games services business." 

"Our success in providing a wider range of services to our existing client base, which is comprised of 23 of the 25 leading video game companies around the world, is evidenced by a 40% increase in the number of clients buying three or more services from us." 

"We continue to invest in larger facilities and additional talent in our existing business in support of organic growth while welcoming new businesses to the group through our active strategy to lead the consolidation of a highly-fragmented market."

A presentation of the half year results will be made to analysts later this morning at MHP's offices.  To register to attend, please contact Nessyah Hart at MHP Communications on 020 3128 8156.  A video of the presentation will be available via Keywords Studios' website later today.

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, and now with 36 facilities in 18 countries strategically located in Asia, the Americas and Europe, it provides integrated art creation, software engineering, testing, localisation, audio and customer care services across more than 50 languages and 16 games platforms to a blue-chip client base in more than 15 countries.  It has a strong market position, providing services to 23 of the top 25 most prominent games companies, including Activision Blizzard, Bandai Namco, Bethesda, Electronic Arts, Konami, Riot Games, Sony, Square Enix, Supercell, TakeTwo, and Ubisoft. Recent titles worked on include Uncharted 4: A Thief's End, Call of Duty: Infinite Warfare, Mortal Combat X, Assassin's Creed Syndicate, Battlefield 1, Overwatch, World of Warcraft: Legion, Hearthstone, Clash Royale, and Mobile Strike. Keywords Studios is listed on AIM, the London Stock Exchange regulated market (KWS.L). 

Introduction

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

Like for like revenues increased by 17%, or 28% when excluding Synthesis in both periods, reflecting continued strong underlying growth of the core business.  

During the first half, we have continued to invest in the business, with four acquisitions of Spov, XLOC, GameSim and Red Hot. These have extended the Group's market position as a leading provider of digital art services; given the Group a content management system which allows it to provide integrated software and services across the full text localisation cycle; provided a first step into the market for video games related software engineering services; and positioned the Group as the leading global player in the outsourced art services market in terms of capacity and breadth and depth of service.

We have also made good progress with integrating prior period acquisitions, all of which are making good contributions to the Group. We have continued to invest in both expanding our operational capacity and enhancing the Group's infrastructure in order to support growth in future periods.  We have invested in people, systems and marketing including the appointment of a Group HR Director, a newly created position. We are developing our IT and finance functions following the previous appointments of IT and finance directors and we are enhancing our branding. Over the course of the full year, we are investing in ten new or expanded facilities which will ultimately provide capacity for up to 700 additional seats across the Group to cater for demand for our services. In addition, since the half year end, we have also strengthened the Board with the appointments of Georges Fornay and Charlotta Ginman as Non-Executive Directors.

Financial overview

Group revenues increased by 50% to €63.8m (H1 2016: €42.4m). The increase was driven by the successful integration and continued progress of the 2016 acquisitions, coupled with strong like for like growth across most of our service lines.

The gross profit margin of 35.6% (H1 2016: 35.1%) was stronger than the comparative period, albeit below the level at the full year (FY 2016: 38%) due to a combination of the change in mix of services and seasonality. 

Operating expenses increased in the first half of the year to €12.8m (H1 2016: €8.8m) reflecting the costs of the acquired entities. However, operating expenses as a proportion of sales reduced to 20.1% (H1 2016: 20.8%).  The decrease is primarily driven by the Group management and central support costs being spread across a larger revenue base, with cost management remaining a point of focus across the Group's studios.

One-off costs of acquiring and integrating the newly acquired companies of €0.5m (H1 2016: €0.7m) were incurred in the period.  Included in net finance costs is a translational foreign exchange loss of €1.96m (H1 2016: €1.77m loss) in the first half of the current year which is primarily due to the strengthening of the Euro against most major global currencies.

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 increased by 60% to €9.6m (H1 2016: €6.0m).  After these items, the Group reported a profit before tax for the period of €5.5m (H1 2016: €2.6m). 

The estimated tax charge in the period is €2.0m (H1 2016: €1.3m), representing an effective tax rate on the adjusted profit of 21.1% which is small reduction on the rate for 2016 (FY 2016: 21.7%, H1 2016: 21.4%).

Adjusted earnings per share (before tax and acquisition-related costs, share option charges, amortisation of intangibles and foreign currency movements) were up 55% to €13.2c (H1 2016: €8.5c).  Basic earnings per share were up 152% to €6.08c (H1 2016: €2.42c). The denominator used for these calculations includes the shares which will be issued to the sellers of Synthesis, Mindwalk and Red Hot.

A combination of the increased 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 €2.3m (H1 2016 €0.6m). In the period, the Group made four acquisitions with a net cash outflow on consideration of €6.6m (H1 2016: €12.0m), the group settled a deferred consideration liability of €0.3m on the 2015 acquisition of Liquid Development, and incurred an additional €0.5m (H1 2017: €0.7m) in acquisition and integration costs. To help fund these and future acquisitions the Group has secured a credit facility with Barclays of up to €35m 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 €13.0m giving the Group plenty of headroom. Investment in fixed assets amounted to €1.8m (H1 2016: €1.3m), reflecting in particular the cost of increasing capacity in several studios and a continued refresh of IT equipment.

Operational review

Following acquisitions during the first half and prior periods, Keywords is a more diversified business geographically with a well balanced portfolio of services; based on recorded revenues rather than pro forma revenues, Art Creation services represented 19% of group revenues, Audio services represented 13%, Localisation services represented 30%, Functional Testing represented 17%, Localisation Testing represented 14%, Customer Support services represented 6% and the new Engineering service line represented 1% in the first half.

Art Creation

Our Art Creation service line creates graphical art assets for inclusion in video games including concept art creation, 2D and 3D art asset production and animation.

Art Creation revenues grew by 85% to €12.4m (H1 2016: €6.7m) with the benefit of contributions from Mindwalk, which was acquired at the end of May 2016, and Red Hot, acquired in May 2017.  On a like for like basis, Art Creation grew sales by 22%, as Keywords continues to expand the range of services and capacity in this area.

Following the acquisitions of Spov and Red Hot, we finished the first half with c.920 artists on our payroll (H1 2016: c.530) of which c.870 are in India and China based in our Lakshya, Mindwalk and Red Hot studios, and, through Liquid Development and Volta, we manage further pools of freelance artists numbering about 230 in total.  We believe these acquisitions and our talent base make Keywords the leading global player in the highly fragmented outsourced art services market in terms of capacity and breadth and depth of service.

Audio Services

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

Audio revenue fell by 8% in the period to €8.4m (H1 2016: €9.1m).  On a like for like basis, revenues fell by 25% reflecting an exceptionally strong performance in the comparatives from Synthesis in 2016, as reported previously.  Excluding Synthesis, like for like revenue declined in Audio by 10% primarily due to the phasing of major titles.

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 36% to €19.0m (H1 2016: €14.0m) with the benefit of contributions from Synthesis, acquired in April 2016, Sonox, acquired in December 2016 and XLOC, acquired in May 2017.

On a like for like basis, Localisation revenues have grown by 23%, against the very strong comparatives driven by the Synthesis acquisition in 2016. Excluding Synthesis, like for like sales grew 36% as this service line continued its very strong growth and continued to benefit from the trend towards continuous content generation in the games industry.

The acquisition of XLOC brings to the Group a proprietary software application that is embedded in to the localisation processes of games developers and enables game developers and publishers to more efficiently manage and automate the complex process of localising games content across multiple languages and platforms for simultaneous global launches and continuous publishing.   We are currently in the process of integrating the software with our existing services, in addition to continuing to offer XLOC as a standalone solution which is relied upon from an earlier stage than Keywords Studios has typically been involved.

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 over 200% to €11.0m (H1 2016: €3.3m), with the benefit of the contributions of the Player Research and Enzyme acquisitions completed in October and November 2016 respectively. On a like for like basis, Functional Testing revenues have still shown an increase of 70%.  This very strong performance is in part related to a significant increase in volume associated with a managed services arrangement with one of the Group's top clients.

We are investing behind this growth with facility expansions underway in Montreal, Tokyo and India to provide additional capacity for this service line. 

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.

The Group's historic reliance on Localisation Testing continued to reduce as planned such that it accounted for 14% (H1 2016: 16%) of Group revenues during the first half, however Keywords remains the largest provider in the market.  Sales increased by 26% to €8.7m (H1 2016: €6.9m), with the benefit of contributions from the acquisitions of Synthesis and Enzyme , acquired in April and November 2016 respectively.  On a like for like basis, Localisation Testing grew by 2.6%, or 6.4% excluding Synthesis.  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 have a good pipeline of activity.

Enzyme has been successfully integrated and we plan to expand our facilities and capacity for Localisation Testing in Dublin, Tokyo and Montreal during the second half. 

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, taking over the operations of Ankama based in Manila in March 2016 extended the offering further, including into live operations support and promotions and fraud management.  Customer Support sales increased by 58% to €3.8m in the first half (H1 2016: €2.4m). On a like for like basis, Customer Support grew by 57%, reflecting good continued development of the business which has expanded successfully in Montreal, Japan and Manila, with investment supporting further expansion planned in Tokyo, Montreal and Madrid in the second half. 

Engineering

Our software Engineering service line provides outsourced software engineering services to game developers.

GameSim was acquired in May 2017, establishing engineering as part of the Group's offering, and has performed in line with our expectation having contributed €0.5m of sales in the first half, which accounted for 1% of Group sales.

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 0.48p per share will be paid on 27th October 2017 to shareholders on the register on 6th October 2017. The interim dividend payment will absorb approximately €0.3m of cash resources.

People

In June, we appointed a Group HR director, a newly created position which further strengthens our management team complementing our recent hires of an IT director and Chief Customer Officer. 

In September, we strengthened our Board with the appointments of Georges Fornay and Charlotta Ginman as Non-Executive Directors with effect from 1 September 2017.  Georges brings over 30 years' experience in the technology and video games sectors and currently sits on the board of France's second largest Independent games publisher, Focus Home Interactive, which is listed on the Alternext. Charlotta brings extensive M&A, TMT sector and PLC experience with her having followed a career in investment banking prior to holding senior roles within Nokia Corporation. She currently sits on the Boards of Pacific Assets Trust plc, Polar Capital Technology Trust plc, Unicorn AIM VCT plc, Motif Bio plc and Consort Medical plc.

The average number of employees across the Group has grown to c.2730 (H1 2016: c.1490) and our continued growth and reputation for consistently delivering good quality service to demanding deadlines is testament to the Keywords culture and the skills and commitment of Keywords' talented and games passionate employees and collaborators. On behalf of the Board and shareholders we'd like to thank everyone involved for their valuable contribution to the continued success of the Group.

Strategy

We have made strong progress in delivering on our strategy to grow Keywords Studios both organically and by selective 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 launched our newest service line, Engineering, through the acquisition of GameSim which has provided an entry point into outsourced software engineering services and is highly complementary to our existing essential services to game developers and publishers around the world. Our intention is to use this as a platform from which to build a market leading engineering services capability for our clients.

In Art Creation we have also created greater scale, particularly in China through the acquisition of RedHot. Its hub and spoke model now gives the company the advantage of broader access to the Chinese pool of video game art talent, which is the largest in the world, while maintaining control and providing international business access through Shanghai. In line with this approach, we are expanding our Chinese Art production capabilities by moving to new premises in Zhengzhou, which has a lower cost base but is ideally located between Beijing and Shanghai, trebling our capacity there from 50 to 150 seats.

Today, we have a better balanced business across the seven 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 phases, 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.

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.  During the first half, we have achieved a 40% increase in clients using three or more services to 84 (H1 2016: 60).  We maintain a strong acquisition pipeline and we continue to review selective acquisitions opportunities that could further extend our service offering or geographical penetration. 

CURRENT TRADING AND OUTLOOK

We are pleased with our progress so far this year, and trading in the first three months of the second half of the year has been in line with the Board's expectations.  

We continue to make good progress with our cross selling initiatives, and with growing our market share. We are regularly seeing the benefits of our wider geographic reach and broader range of services as we introduce additional services to established clients.

The investment in our businesses is continuing as we enlarge our talent pool and facilities and further develop the Group's infrastructure to support growth in future periods. There will be an expected second half weighting to that investment given our plans to invest in eight new or improved facilities in the second half.  

The newest members of our Group are integrating and performing well and we continue to review a pipeline of high quality acquisition candidates.  Overall, we therefore look forward to another full year of strong progress as we continue to gain market share, benefit from the trends towards outsourcing and consolidate services to the growing video games industry.

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