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Keywords Studios has the firepower to continue its impressive growth rate

Most video games are developed in English, but sales are global and that has created a business in translating games into local languages and cultures.
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Keywords Studios PLC (LON:KWS) operates in a highly fragmented sector and is rapidly becoming the 800 lb gorilla of that sector.

It is doing so partly by growing its business organically but mainly by buying out smaller operators that do similar things to what it does: provide technical services to computer games developers and publishers.

The company is trusted and relied upon by many of the world’s leading video game companies to work alongside them during the concept, development and post-publication phases.

A laundry list of the services it provides includes: art services; software engineering; audio services; functionality quality assurance (QA); localisation (enabling games to be published in several languages); localisation QA; player support.

Established in 1998 it now has delivery facilities in more than 42 locations in 20 countries across four continents.

Its buy-and-build strategy means that most likely, by the time you read this, the article will need updating, such is Keywords’ appetite for acquisitions.

Management likes to make six small bolt-on acquisitions each year and one or two larger purchases.

Examples of “larger purchases” include North America-focused VMC Consulting, which it bought for US$66mln, financed by an underwritten share placing that sold out within hours.

Investors are keen to get their hands on the shares

The fact that the new shares sold through a book-build exercise in about two hours underlines how highly regarded is the video games services group at present.

Shares over the last three years have risen from 153p to 1,746p as the carefully built portfolio that ranges from translation services through to augmented and virtual reality has driven large rises in sales and earnings.

VMC looks to be more of the same. Keywords expects the latest addition to be ‘significantly earnings enhancing’ almost immediately.

Adjusted revenue of the US group in the year to October was US$57.4mln and underlying profits [adjusted EBITDA] an annualised US$6.4mln.

The purchase will more than double Keywords' customer support operation in the North American market as well as growing market share and footprint.

Cross–selling strategy is bearing fruit​

The number of clients using three or more of Keywords’ services increased to 93 in 2017 from 64 in 2016 and 51 in 2015.

German bank Berenberg, which rates the shares a ‘buy’ and has a price target of 2,060p, sees this trend as evidence that computer games publishers and developers are moving away from “tactical outsourcing” towards strategic arrangements with trusted partners.

“Keywords also indicated it is seeing some benefits from the rapidly growing eSports market, mostly through the provision of its services for game development and in-game support, but also via marketing and communications management of the events themselves. Keywords highlights that it is continuing to seek out ways to leverage the growth in eSports further,” Berenberg observed.

Beefing up the audio services product line

The most recent acquisitions have focused on adding extra music and audio services to the group’s offering.

The company acquired Cord Worldwide and Laced Music from the Cutting Edge Group for £4.5mln and Maximal Studio from its owners for up to €500,000, putting this pair firmly into the ‘bolt-on’ acquisition basket.

Based in London, Cord provides a range of music-focused branding and strategic consulting services to large businesses including Shell, Lego and BT; Laced is a music services company and record label specialising within the video games industry.

Being able to offer music services to clients will further enhance its reputation as the leading provider of services to the global video games industry, Keywords said.

Cord and Laced generated combined revenue of £6.5mln and underlying earnings (Ebitda) of £675,000 in the year ended 30 June 2017.

Under the terms of the acquisition, Keywords paid a cash consideration of £3.375mln on completion and will issue 73,744 in shares two years after the acquisition.

Chief executive Andrew Day sees a clear opportunity to bring the group’s localisation, voice over and trailer creation capabilities to Cord’s broader client base of leading brands.

Maximal Studio is an audio studio based in Sao Paulo, Brazil, that provides voice-over recording for the video games and learning industries.

The initial consideration is €300,000 but this could rise to €500,000 depending on how the studio performs.

The acquisition adds further scale to the group’s audio capabilities in the South American markets, providing it with its first recording studio in Sao Paulo to complement its localisation business in Rio.

Full-year results were ahead of market expectations

The acquisitions were announced on the same day as the company’s results for 2017, although the company had largely let the cat out of the bag regarding last year’s performance with a trading update released in February.

Group revenue rose 57% to €151.4mln from €96.6mln in 2016. Adjusted underlying earnings (Ebitda) was also up 57%, to €26.3mln from €16.7mln the year before while adjusted profit before tax jumped 55% to €23.0mln from €14.9mln the previous year.

A final dividend of 0.98p has been declared, taking the full-year dividend to 1.46p, up from 1.33p in 2016.

As for current trading, Keywords noted that the first quarter is traditionally one where the video games industry takes a breather and that activity levels are currently in line with expectations.

"The group has delivered another strong performance with good organic growth supplemented by a number of acquisitions including two of our largest acquisitions to date,” noted Day.

"We entered 2018 with pro forma revenues of €225mln, across seven service lines and 42 studios in four continents, compared to just over €16mln derived from four service lines and five studios in 2013 - the year of our IPO,” Day said.

"We expect to make continued strong progress as we realise the full benefits of our enhanced services platform and with the financing in place to support further organic and acquisitive growth in 2018," Day concluded.

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