18 September 2018

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

Half year results for the six months to 30 June 2018

An excellent performance and a strengthened services platform

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 2018.

Financial overview:

·     Revenue, including contribution from acquisitions, increased by 72% to €110.0m (H1 2017: €63.8m)

o  On a constant currency basis, revenue would have been up by 84% to €117.5m

·     2% increase in like for like** revenue; 8.6% increase on a like for like constant currency basis

·     Gross profit margin increased to 37.4% (H1 2017: 35.6%)

·     Adjusted profit before tax* was up 67% to €16.0m (H1 2017: €9.6m)

·     Adjusted earnings per share* were up 53% to 20.1c (H1 2017: 13.2c)

·     Net cash of €0.1m (H1 2017: €1.1m; FY 2017: €11.1m) after €10.6m of net cash outlay on acquisitions

·     10% increase in interim dividend to 0.53p per share (H1 2017: 0.48p)

Operational overview:

o  VMC has been successfully integrated with our margin improvement plan ahead of schedule

o  Continued to invest in the development of the Group:

o  Expansion of studios in response to demand including investing €3.8m in new or expanded facilities in Montreal, Dublin, London, Liverpool, Madrid, Katowice, New Delhi, Chengdu, Manila and Tokyo, providing a total of 660 additional workstations

o  Acquisition of Maximal, adding further scale to our Audio capabilities in South American markets, in March

o  Acquisition of Cord and Laced, which extended our Audio offering in to the provision of composed or licenced music for use in games and other media, in April

o  Acquisition of Fire Without Smoke, which provides a suite of marketing services to game publishers and developers, in May

o  Acquisition of Blindlight, which provides Hollywood based talent resources and services, in June

o  Launch of Keywords Ventures, to invest in innovative technologies and services that can leverage Keywords' reach in the games market and that will benefit clients; first investment in automated app testing solution for GDPR compliance, AppSec Test, in June

o  New revolving credit facility secured for up to €105m

o  Further cross selling progression with 19% increase in clients using three or more services to 100 (H1 2017: 84)

Post period end, current trading and outlook:

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

·     Announced separately today:

o  Acquisition of TrailerFarm, a Brighton, UK based creator of video game trailers for a total consideration of up to £2m

o. Hiring of a leading Hollywood based sound effects team of 7 people, SoundLab, bringing world-class audio design and production services for games, film and TV to our Audio service line

·     Acquisition of Studio Gobo and Electric Square, both in Brighton, UK, enhancing our game development services in both scale and expertise, in August

·     Acquisition of Tokyo, Japan based Yokozuna Data, developer of machine learning and AI technology bringing industry leading capabilities in video game analytics for live operations, in July 

·     Acquisition of Snowed In, in July adding strength to our Engineering service line and access to talent in Ottawa, Canada.

·     Further strengthened the senior management team with the appointment of a Chief Commercial Officer, Chief Marketing Officer, Global Operations Director and Engineering Service Line Director, all newly created positions

Outlook

·     Selectively reviewing a strong acquisition pipeline

·     Trading in the second half has been good and we expect to meet market expectations for the full year before the positive impact of any additional acquisitions

*    before acquisition and integration expenses of €2m (H1 2017: €0.5m), share option charges of €0.8m (H1 2017: €0.4m), amortisation of intangibles of €3.1m (H1 2017: €1.2m) and foreign currency gain/(loss) of €0.8m (H1 2017: (€1.96m))

** calculated on the basis that the H1 2017 comparative includes all of the 2017 and 2018 acquisitions as if they had been owned for the same period in 2017 as they have been in 2018.

Andrew Day, Chief Executive of Keywords Studios, commented:             

"In a period in which the gaming phenomenon, Fortnite, had a significant impact on the games market and in which the US dollar which represented 54% of our revenues declined by 12% compared to the same period in 2017, we have none the less delivered yet another strong set of results for the first six months of 2018 as we continue to deepen and broaden the business for the future.

"Our continued organic investment and acquisitions have extended our geographical reach, added further scale to our existing service lines, and broadened the range of capabilities we can offer our clients to include co-development, analytics, music, marketing services and sound effects.

"We are particularly pleased with our performance in respect of acquisitions and their subsequent integration. Our largest acquisition to date, VMC, which was absorbed into the Group with a track record of reducing revenues and an operating margin of 9.1% in October 2017, has been fully integrated and the resulting synergies are already significantly enhancing operating margins as can be seen by the overall group profit margin of 14.5%.   We are confident of being able to return it to revenue growth in the near to medium term.

"The games market is starting to focus on the prospect of games being streamed and played live across all connected devices. Advances in technology and increases in internet bandwidth including the forthcoming 5G mobile networks and the resultant reduction in latency of communications could enable streaming of games for the first time which we believe will drive record demand for gaming content.   We are excited by the prospect of assisting the industry in creating and repurposing content for this new medium over the coming years and Keywords is already working on interactive streaming content and porting games to upcoming streaming platforms.

"Our focus on organic and acquisition led growth is being maintained and we continue to invest in additional talent and better facilities as well as in acquisitions of synergistic businesses as we build our global games services platform and 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.  There will also be a live, listen only webcast of the presentation and a recording will be made available via www.keywordsstudios.com.  To register for access, please contact Charles Hirst at MHP Communications on +44 20 3128 8193 or email keywords@mhpc.com.

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 50 facilities in 20 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 of approximately 650 clients across the globe.  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, Epic Games, Konami, Riot Games, Sony, Square Enix, Supercell, TakeTwo and Ubisoft. Recent titles worked on include Uncharted 4: A Thief's End, Call of Duty: WWII, Mortal Combat X, Assassin's Creed Origins, Battlefield 1, League of Legends, Fortnite, Clash Royale and Rainbow Six-Siege. Keywords Studios is listed on AIM, the London Stock Exchange regulated market (KWS.L). 

Introduction

An excellent performance and a strengthened services platform

The first half of the financial year has seen the Group deliver another period of strong growth. We have made investments in expanding our existing businesses, as well as further acquisitions that have extended the Group's service offering and geographic reach, positioning the business well to face the increasing demand for outsourced services within the video games industry. 

Delivering on Our Strategy

We continue to execute well in pursuit of our strategy to build the world's leading technical services platform focused on the most complex of interactive content - video games.  

We operate in a service provision market which remains highly fragmented despite the scale and global nature of the major video games publishers and developers. There is a clear trend towards those clients outsourcing a greater proportion of their games development, and in-game support, in order to manage the demands for increasingly sophisticated content whilst limiting their fixed costs. 

The key pillars of our strategy are to grow organically and by acquisition to extend the Group's service capacity, capabilities and geographical reach - where we seek to gain access to markets for the best talent or to be close to our clients.  By generating synergies across our expanding multi-service global platform, we are increasingly becoming a strategically relevant partner to our customers. 

In line with our strategy, we continued to invest in the business in the first half with four acquisitions, of Maximal, Cord and Laced, Fire Without Smoke and Blindlight. These have added further scale to our audio capabilities in the South American markets; provided a first step into the market for music services; added a range of marketing services; an d increased our services to include Hollywood based voice over and script writing services. All have served to further position the Group as the leading global player in the outsourced services market by strengthening our capacity and the breadth of the value-added services we are able to offer our clients.   

We have also made good progress with integrating prior period acquisitions, all of which are making good contributions to the Group. The Group's largest acquisition to date, VMC, completed on 27 October 2017 and has been well integrated with the rest of the Group, and cost synergies are leading to improved operating margins ahead of our original plans.

Since the period end, we have further enhanced our services platform through the acquisitions of Snowed In, Yokozuna Data, Studio Gobo and Electric Square, and TrailerFarm. These have, respectively, added strength and scale to our Engineering service line; brought industry leading technology and capabilities in video game analytics, enhanced our game development services in both scale and expertise, and extended our presence in marketing services and video game trailer production. 

Organic Growth and Investment

In the seasonally weaker first half of the year, like for like revenues were up by 8.6% after adjusting for currency movements.

We have continued to invest in both expanding our operational capacity and enhancing the Group's infrastructure to support growth in future periods and respond to customer demand.  We have invested in people, systems and marketing including strengthening the senior management team with the hiring of a Chief Marketing Officer, and the appointments of an Engineering Service Line Director, Global Operations Director and a Chief Commercial Officer - all newly created positions. We continue to develop our IT and finance functions as well as enhancing our branding. The second half of 2017 and the first half of 2018 also saw us invest substantially in the expansion of the Group's facilities in Montreal, Dublin, London, Liverpool, Madrid, Katowice, New Delhi, Chengdu, Manila and Tokyo, which are now providing additional capacity to support the higher levels of activity we were expecting and are now experiencing in the second half.

The acquisitions and organic investments made to date leave us better placed than ever to support our video game developers and publishers from the very early concept stages of game design through to launch and live operations phases.

We are seeing growing demand for co-development and full game development services as well as the continued trend towards outsourcing more broadly and we look forward to a strong second half to the year and to the opportunities this demand presents in the longer term.

Financial overview

The Group has continued to demonstrate its ability to execute and integrate acquisitions well. A very strong performance in this aspect of the Group's strategy has led to Group revenues increasing by 72% to €110.0m (H1 2017: €63.8m).

The gross profit margin of 37.4% (H1 2017: 35.6%) was stronger than the comparative period and prior year (FY 2017: 36.4%).

Operating expenses increased in the first half of the year to €24.7m (H1 2017: €12.8m) reflecting the costs of the acquired entities and investments made in existing and new facilities and in strengthened management and support personnel. However, cost management remains a point of focus across the Group's activities as we drive synergies across the enlarged group.

One-off costs of acquiring and integrating the newly acquired companies of €2.0m (H1 2017: €0.5m) were incurred in the period.  Included in net finance costs is a translational foreign exchange gain of €0.8m (H1 2017: €1.96m loss) in the first half of the current year which is primarily due to the effect of translating net current assets held in foreign 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 €16.0m (H1 2017: €9.6m).  After these items, the Group reported a profit before tax for the period of €10.8m (H1 2017: €5.5m). 

The estimated tax charge in the period is €3.0m (H1 2017: €2.0m), representing an effective tax rate on the adjusted profit of 19.3% which is a reduction on the rate for 2017 (FY 2017: 20.5%, H1 2017: 21.1%).

Adjusted earnings per share (before tax and acquisition-related costs, share option charges, amortisation of intangibles and foreign currency movements) were up 53% to €20.1c (H1 2017: €13.2c) following an increase in the average number of shares in issue.  Basic earnings per share were up 99% to €12.1c (H1 2017: €6.08c). The denominator used for these calculations includes the shares which will be issued to the sellers of Red Hot, Around the Word, Sperasoft, Cord and Laced, Fire Without Smoke and Blindlight.

In spite of 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, the Group generated a net inflow of cash from operations of €4.0m (H1 2017: €2.3m). In the period, the Group completed five acquisitions with a net cash outflow on consideration of €10.6m (H1 2017: €6.7m). To help fund acquisitions and general working capital requirements the Group successfully secured a syndicated credit facility, with Barclays Bank plc, HSBC Bank plc and Lloyds Banking Group plc for up to €105m. Investment in fixed assets amounted to €3.8m (H1 2017: €1.8m), reflecting 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 continues to diversify geographically with a well balanced portfolio of services: Art Creation services represented 16% of group revenues, Audio services represented 12%, Localisation services represented 20%, Functional Testing represented 21%, Localisation Testing represented 9%, Player Support (formerly called Customer Support) services represented 14% and the relatively new Engineering service line represented 8% in the first half.

In assessing the like for like performances of these service lines, it should be noted that currency movements had a material impact in the first half, in particular the weakening of the US dollar, in which approximately 54% of the Group's revenues were denominated, by 12% against the Euro between H1 2017 and H1 2018. To provide a picture of the underlying performance of the business during the period, the Group also assessed the like for like growth on the service lines excluding foreign exchange impacts on revenues.

Art Creation (16% of group revenues in H1 2018)

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 47% to €18.1m (H1 2017: €12.4m) with the benefit of contributions from 2017 Acquisitions, Spov, Red Hot and Sperasoft, and Fire Without Smoke, acquired in 2018.  On a like for like basis, Art Creation revenues were 3% less than H1 2017 (Foreign exchange adjusted; +4.0% growth).

Following the acquisition of Sperasoft in December 2017, we finished the first half with 1,199 artists on our payroll (H1 2017: 927) of which 1,081 are in India, China, and Russia based in our studios in Lakshya, Mindwalk, Red Hot and Sperasoft. Through Liquid Development, Volta, SPOV and Fire Without Smoke, we manage further pools of freelance artists.  These acquisitions and our talent base make Keywords the leading global player in the outsourced art services market, in terms of capacity as well as breadth and depth of service.

Audio Services (12% of group revenues in H1 2018)

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

Audio revenues rose by 61% in the period to €13.6m (H1 2017: €8.4m), with the benefit of contributions from the recent acquisitions of Cord, Laced and Blindlight in 2018, and the French acquisitions, La Marque Rose, Asrec, Around the Word and Dune Sound in 2017.  On a like for like basis revenues were down 2% year on year (foreign exchange adjusted, +2%) as larger audio projects fell into H2 2018.

The acquisitions of Cord and Laced in the UK expanded our Audio services offering into music focused branding and strategic consulting services and, together with Blindlight's expertise in Hollywood production, further enhance our reputation as the leading provider of services to the global video games industry.

The acquisition of Maximal adds further scale to our audio capabilities in the South American markets, providing us with our first recording studio in Sao Paulo to complement our established business in Rio de Janeiro

The focus in H1 2018 was to consolidate the Audio offering in France and expand the Audio offering through the acquisitions of Blindlight, Cord and Laced as we prepare for this year's high season for voice over recording between July and November.

Localisation (20% of group revenues in H1 2018)

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

Localisation revenues grew by 13% to €21.4m (H1 2017: €19.0m) with the benefit of contributions from entities acquired in 2017, including the French acquisitions, VMC and XLOC.

On a like for like basis, Localisation revenues have grown by 5% (foreign exchange adjusted 9%) as this service line delivered sustained growth as it benefits from the trend towards continuous content generation in the games industry.

Functional Testing (21% of group revenues in H1 2018)

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

The acquisition of VMC in late October 2017 has had a significant impact on revenues from this service line.  Functional testing revenues increased accordingly by 110% to €23.0m (H1 2017: €11.0m). Like for like revenues were flat year on year (foreign exchange adjusted; increased by 7%).

Localisation Testing (9% of group revenues in H1 2018)

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

Localisation Testing revenue increased by 10% to €9.6m (H1 2017: €8.7m), with the benefit of a contribution from the acquisition of VMC.  On a like for like basis, Localisation Testing was 6% lower compared to H1 2017 (foreign exchange adjusted; was down 1%). 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.

Player Support (14% of group revenues in H1 2018)

Our Player Support service line (formerly called Customer Support) 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.

As with Functional Testing, the acquisition of VMC in late October 2017 has had a significant impact on revenues from this service line.  Player Support sales increased accordingly by 302% to €15.3m in the first half (H1 2017: €3.8m). Like for like revenue was up 15% year on year (foreign exchange adjusted was 26%).

The focus in 2018 to date has been to stabilise VMC revenue flows in this significant addition to Keywords business, and to achieve our margin expectations. To date, the Group has delivered on these goals.

Engineering (8% of group revenues in H1 2018)

Our Engineering service line provides outsourced software engineering and game development services to publishers and developers. The Group continues to grow the Engineering service line organically and through acquisition.

There was significant growth from a relatively low base in the Engineering service line to €8.8m for the half year (H1 2017: €0.5m), as the Group benefitted from the acquisitions of Engineering and Co-Development Studios, including GameSim, d3t and Sperasoft, in 2017, and since the H1 2018 period end, Yokozuna Data, Snowed In, Studio Gobo and Electric Square.  Like for like revenue increased 5% year on year (foreign exchange adjusted +16%).

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 0.53p per share will be paid on 26 October 2018 to shareholders on the register on 5 October 2018 and will go ex-dividend on 4 October 2018. The interim dividend payment will absorb approximately €0.4m of cash resources. 

People

In July, we further strengthened our senior management team structure in support of our continued growth. 

Igor Efremov, formerly CEO of Sperasoft was appointed to the new role of Chief Commercial Officer.  In this new position, Igor leads the seven global Service Lines of Keywords and global Business Development.  He is responsible for execution and implementation of the Group's growth strategy, production efficiency and quality of services.

Giacomo Duranti, our Chief Operations Officer, retains responsibility for global operations, IT, Legal and M&A execution and has now taken on the additional leadership of Human Resources and the Regional, Country and Studio Management organisation.  Giacomo's team will be enhanced with the support of Mark Rizzo's appointment to the new role of Global Operations Director to help implement our strategy for support and growth across the entire Keywords group. As part of his new role, Mark has taken on the leadership of Group IT.

Andrew Brown was appointed to the newly created role of Chief Marketing Officer. In this role he brings together Corporate Marketing and PR across the Group, advising on pricing and branding strategies. He also now leads our Keywords Ventures business alongside an investment committee, comprised of senior members of the Keywords executive team, many of whom have started and run their own businesses and have technical backgrounds.

Finally, Jamie Campbell, who joined the Group through the acquisition of d3t Ltd in October 2017, has been appointed to the role of Service Line Director for Engineering.

These changes and additions to our leadership team add capability and capacity as we continue to develop our global video games services platform.  Welcoming companies into the Keywords family and ensuring they have the opportunity to influence our continued growth is an important part of our success. This is something we pride ourselves on and it is pleasing to see this being reflected so strongly in these changes.

The average number of employees across the Group has grown to 4,934 (H1 2017: c. 2730) 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 would like to thank everyone involved for their valuable contribution to the continued success of the Group.

Current trading and outlook

Our progress so far in the second half has been very encouraging, with increased activity levels in the period to date in line with the Board's expectations.  

We have made significant investments in enlarged and improved facilities, which are now providing additional capacity to support the higher levels of activity in the second half in response to the seasonal and structural increases in the demand we are seeing from our customers.

We have also invested in senior and mid-level management to support our organic growth in the second half and beyond and we have continued to make selective acquisitions which have added to the breadth of our service capabilities for our clients.

With the benefits of a full six months contribution from first half acquisitions, a healthy pipeline of activity and expanded capacity to deliver it, and a strengthening US dollar, we anticipate a strong second half performance in line with current market expectations for the full year.

Overall, we believe 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 we continue to review selective acquisitions opportunities that could add capacity and further extend our service offering or geographical penetration. 

Interim consolidated statement of comprehensive income

The notes on pages 15 to 38 form an integral part of these consolidated financial statements.

Interim consolidated statement of financial position

The notes on pages 15 to 38 form an integral part of these consolidated financial statement