Keywords Studios PLC – KWS – Half-year Results

Keywords Studios, the international technical and creative services provider to the global video games industry, today announces its half year results for the six months to 30 June 2020.

Financial overview:

Highlights:

Robust H1 revenue growth (+13.3% to €173.5m) despite COVID-19 disruptions

·    8.0% Organic Revenue growth (H1 2019: 17.3%) supported by growth across all service lines with the exception of Localization. Particularly strong growth in the Group’s largest service line, Game Development

·    Strong demand for most of our services throughout the period, albeit certain services were held back by COVID-19 related supply side constraints, particularly in Testing and Audio, while Localization suffered from postponements on the demand side

·    By May, we had transitioned the majority of our people to remote working, following some short-term disruption

·    Since June, we have been able to reopen most of our Audio studios and are performing certain tasks from our Testing studios

Increased margins despite revenue being held back by COVID-19

·    Increase in Adjusted EBITDA of 19.3% to €30.8m, represented a 0.9% pts increase in margin to 17.8% (H1 2019: 16.9%)

Good cash generation

·    Increase in Adjusted Free Cash Flow⁶ of €5.4m to €10.9m (H1 2019: €5.5m)

·    Improvement in adjusted cash flow conversion rate to 50.2% (H1 2019: 30%, FY 2019: 80.2.%) for the seasonally lighter first half

·    Driven by the timing of MMTC/VGTR receipts, a reduction in tax payments and a small reduction in capex as a result of lower equipment purchases due to the COVID-19 disruption and reduced levels of expansionary capex

Robust balance sheet and liquidity

·    Robust balance sheet with net cash of €101.0m (H1 2019: net debt €9.0m), strengthened by our well supported placing in May that raised net proceeds of €110m

·    €100m of further funds available from undrawn committed facilities under the Group’s Revolving Credit Facility (RCF)

Delivering on our acquisition strategy

·    Completed the acquisition of Coconut Lizard in June, strengthening Game Development with a high quality Unreal Engine development specialist

·    Maverick Media, acquired in August, adding scale and a sixth studio to our Marketing services business, with one of the longest established video game creative agencies in Europe

·    Announced separately today, the acquisition of Heavy Iron, further enlarging and bringing a new base on the West Coast for our Game Development services

Current trading, COVID-19 update and outlook

·    Trading in the second half has started well with continued growth across all service lines, despite ongoing headwinds from the disruption caused by COVID-19

·    Anticipate continued strong demand for our services, aided by the upcoming new console launches, increased game play and further development of new streaming platforms driving content demand

·    Expect good revenue growth in the second half despite some COVID-related hiring constraints in our Testing businesses in the Americas, restricted use of our studios, stronger comparatives in the second half and the impact of the recent weakening of the US dollar

·    Anticipate maintaining effective remote working model in the majority of locations for the rest of the year, with a focus on certain priority activities taking place in studios

·    Expect to continue to drive incremental margin increases in the second half and beyond towards historic norms by the end of 2021

·    Well-funded to deliver on our value accretive acquisition strategy and we are actively engaging with selected targets from an expanded pipeline of opportunities

·    The Board remains committed to resuming its progressive dividend policy in 2021

Andrew Day, Chief Executive of Keywords Studios, commented:

“The resilience of our business continues to shine through as we delivered growth despite the restricted use of our 60+ studios around the world, recruiting and training challenges, and some short term disruption to content flowing into the business. The resolve, continued passion and professionalism of Keywordians around the globe to do the best we can for each and every project entrusted to us helps ensure we are the global supplier of choice to the industry. We are incredibly proud of the contribution we make to creating, adapting and supporting the majority of the world’s leading video games.

We are delighted to announce the acquisition of Heavy Iron today, joining recently added Coconut Lizard in our Game Development service line and to have added Maverick Media to our expanding Marketing services business. Our strong balance sheet and continued good cash generation places us in a strong position to continue our highly successful acquisition strategy as we selectively welcome new companies into the Keywords family.

The growth drivers across our underlying video games market remain intact and we anticipate continued strong demand across all our service lines, including some pent-up demand from our clients as our operating environment continues to normalise. As governments around the world ease support measures for the unemployed or furloughed workers, we expect to be better able to recruit at the entry level positions that fuel growth in our testing and player support businesses. We believe Keywords will be seen as an even more attractive employer, with a hybrid model of remote and socially distanced, in-studio working in a thriving interactive entertainment sector.

While margins were held back by lower volumes compared to our original plans for the year, outweighing the benefits of COVID-19 related cost savings, we expect our margins to move towards our historic norms as we settle into this hybrid working model to serve the strong demand we are seeing from our customers.”

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