Keywords saw double digit growth across all service lines to its customer base of video game developers in the six months to June 2022. This drove a 34.5% increase in revenues to €321.1m of which organic growth contributed 21.7%.
Underlying PBT was up 38% to €54.8m reflecting a margin improvement from 16.6% to 17.1%.
The group's announced an interim dividend of 0.77p per share.
The second half has started well with recently upgraded expectations intact, albeit with second half organic growth rates expected to moderate and margins moving back to historical levels of roughly 15%, reflecting increased investment in the business.
The shares were down 2.6% in early trading.
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Our View
As an outsourced supplier to the gaming industry, Keywords doesn't rely on the success of individual titles. Instead, it benefits from overall industry growth.
The long term outlook for games development is strong, although it has paused for breath somewhat in recent months. A strong performance among gaming companies through the 2008 financial crisis led many to believe the industry is "recession proof." However as prices balloon and people make up for lost time outside after the pandemic, the sluggish growth could become more than just a blip on the radar.
By its nature games revenue can be volatile, dependent on key title launches. But Keywords is managing to outperform the industry thanks to a smoother revenue profile, helped by its diversity of services and customers. As the market leader, but with only a 5% share, there are likely more opportunities for organic and acquisitive growth ahead.
Keywords is in the early stages of expanding into adjacent markets such as subscription gaming, media and entertainment and the metaverse. How successful this will be remains to be seen. But the outlook is promising given it should have the skill set and experience to do this without too many teething problems.
Despite several acquisitions, significant free cash flow means the group has a sizeable chunk of cash sitting on the balance sheet. That will no doubt fund future deals, long a key part of the group's strategy to become the go to provider of outsourced services in the industry. However, discipline is still important, and a careless buying spree could be damaging.
Keywords has previously flagged an inability to find highly skilled workers to fill out its Game Development roster. However a proactive approach towards talent retention and development is seeing good levels of satisfaction amongst Keywords employees which we argue are a vital asset for the company. Keywords has a strong focus on nurturing talent in India and this is continuing through a proposed educational programme together with the Indian Government.
Overall, we think Keywords is in a solid position. Its strengths are reflected in a price to earnings ratio of just over 25. That's not unduly demanding, but shows a level of confidence in the group's end market. But an industry wide slowdown could have near-term consequences. Plus, as the Group continues to invest internally and on acquisitions, the next few sets of results could see earnings squeezed. So those looking to invest should take a long term view.
Keywords Studios key facts
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
Half year results to June 2022
Keywords now reports across three service lines - Globalize, Creative and Engage.
Globalize, the largest division, incorporates Audio, Testing and Localization. Revenue grew 31.8% to €141.5m with organic growth (excludes acquisitions) growing 25.7%. The division benefited from an upswing in the games development cycle, and underlying cash profit was up 47.4% to €31.1m.
The Create division, which combines Art Services and Game Development, saw sales growth of 44.5% to €124.3m reflecting a material contribution from acquisitions but also organic growth of 23.3% as strong client demand continued.
A further addition to this division was also announced today via the proposed acquisition of Canadian development Studio 'Smoking Gun' for up to CAD$40m, funded through cash and shares. Smoking Gun is expected to grow strongly over the next 12 months and is expected to deliver cash profit of around CAD$6m against an underlying cash profit of €30.9m (+34.3%) reported for Create as a whole in the first half.
Engage covers Keywords Marketing and Player Experience services and saw revenue growth of 22.1% to €55.3m with more modest organic revenue growth of 9.8%. This was against an exceptional period of growth for marketing services in the comparative period in 2021. Underlying cash profit margins in this division were unchanged at 14.6%.
Cash conversion did not quite keep pace with profits with free cash flow broadly flat at €24.3m including a negative working capital movement of €12.7m. Net cash was up to €121.3m versus €84.1m as at the end of June 2021.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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