Keywords Studios Share Discussion Threads

[bigbigdave] 08/2/2017 20:00

Keywords beats expectations once again in 2016

11:10 08 Feb 2017
Keywords smashed forecasts last summer with its interims and it has done the same again with its full-year results
Keywords Studios PLC (LON:KWS) told investors back in November it expected to beat forecasts and post a full-year profit before tax of at least €14mln, and the early signs suggest it will be even better.

The company – which provides services to the video games industry – has announced a preliminary, unaudited adjusted pre-tax profit of €14.8mln for the year ended 31 December 2016, on revenues of €96.6mln (also unaudited).

Given that analysts expected a pre-tax profit of around €13.1mln before November’s statement and still only €14.2mln afterwards, today’s figures make for good reading for Keywords investors.

The Dublin-based firm said organic growth as well recent acquisitions all contributed to the strong growth, although the star performer was new addition, Synthesis.

Keywords bought the audio and localisation business back in April in a deal which could be worth up to €18mln – its biggest purchase so far.

Synthesis was largely responsible for the forecast-beating interim results last year and the strong trading performance continued into the second half.

“Our group continues to grow revenues and profits whilst also growing a talent pool that is increasingly recognised as a resource that enables clients around the world to reduce complexity and focus on their core business of designing and publishing great video games,” said chief executive Andrew Day.

“The development of new Virtual and Augmented Reality platforms only adds to that complexity and, whilst we have not assumed stronger demand for our services in this area in 2017 compared to 2016, it's an exciting new form of content delivery that brings greater interactivity to many content types and requires the skills and services that we have developed over many years.”

WATCH: Keywords boss discusses 2016 progress

Aside from Synthesis, Keywords acquired six other businesses in 2016 – Ankama, Mindwalk, Volta, Player Research, Enzyme and Sonox – which it said all had a positive impact. It also bought the remaining 50% of Kite Team it didn’t already own.

The company paid out €20.7mln in cash for these new additions. At the end of the year, Keywords still had €17mln in the bank and had used €8mln of its €15mln rolling credit facility.

The strong cash generation and the available debt facilities, means the group has the headroom required to make further purchases and it already has a few ideas in mind, Day added.

Big business

If you needed proof that computer games are very big business just look at global sales, which are expected to be around US$115bn by 2018.

Keywords Studios services are used by 21 of the top 25 games developers.

Established in 1998 and headquartered in Dublin, it operates across Europe and Asia, as well as from studios in Canada, US and Brazil.

There are 120 permanent staff members flexing to over 1,000 at peak times.

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.

Keywords specialises in these localisation services; the translation and cultural adaptation of video games across different platforms for international distribution.

Its regional studios provide voiceover recordings, script translation and actor selection in more than 15 countries and 30 languages.

It also provides localisation testing to ensure the adapted content fits the context of the game as well as functionality testing for in-game defects and console specifications compliance.

Its current model involves native language testers playing through localised versions of the games, covering cultural, linguistic and functionality aspects simultaneously.

Following a number of strategic acquisitions, Keywords has also branched out into artwork creation for video games, such as concept art and character animation.

As Day highlighted, virtual reality (VR) and augmented reality (AR) are expected to play a big part in the evolution of gaming in the coming years and this is another aspect of the industry that Keywords is targeting.

The potential for this type of technology has already been highlighted by last year’s smash hit gaming app Pokémon Go, while VR headsets seem to be gaining traction among consumers.

Biggest deal and the star performer

The group's acquisition of Synthesis last April was its largest deal to date and also took out its main rival.

Keywords paid €18mln for the firm, split €10m in cash at the time of purchase, €1mln in cash due this year based on 2016 revenues, and €7mln in equity over one and two years.

The studio's primary operations are in audio and localisation, alongside modest-sized localisation testing.

It has a strong customer base and an impressive list of games to its name, including Call of Duty, Grand Theft Auto, World of Warcraft and Assassins Creed.

The acquisition was seen by analysts as a significant consolidation move, as Synthesis was the group's closest competitor and it gives the group a 15% of the global outsourced localisation market.

Obviously it hasn’t completed a full year in the Keywords stable so we’ll have to wait a little while for its first year figures, although in 2015 it reported pro forma revenue of €16.9m and profit before tax of €2.0mln.

Given the numerous positve updates from management regarding its performance, it wouldn’t be a surprise to see it blow these numbers out of the water in 2017.

Outlook for the coming year

Keywords has made great strides over the past year or two and it and it has put in place several measures to make sure this growth continues.

It has increased its global sales and sales support team by 50% over the past few months which it hopes will help it to keep on delivering organic growth.

As mentioned at the top, there’s plenty of cash and accessible funds knocking around Keywords’ coffers, paving the way for more earnings enhancing acquisitions.

“We remain well-funded and continue to review a healthy pipeline of complementary acquisition opportunities, which will add to the talent pool, range of services, production capacity and the choice we can offer our clients,” says Day.

“Although it's early in 2017, we are confident of making continued progress in the year ahead.”

What the brokers are saying

“Today's year-end update is comfortably ahead of revised guidance and confirms an extremely strong 2016, driven by both organic and acquired growth,” said finnCap analyst Harold Evans.

“Thanks to the company's aggressive consolidation strategy, Keywords is now uniquely positioned to capitalise on key trends, namely industry growth, the push to outsource and consolidation of suppliers.”

Evans – who has the stock as a buy – added he was confident that the growth will continue and upgraded his adjusted profit before tax forecast for the current financial year to €20.6mln on revenues of €126.1mln.

What is it worth?

As you’d expect, after the forecast-busting prelims were announced shares gained 3% to change hands for 610p a pop.

That’s an all-time high and values Keywords at around £326mln, or just under four times sales.

Despite its rapid rise – the stock has almost tripled in the past year – finnCap’s Evans reckons there’s still more headroom for price growth though, and upped his price target to 692p.

[bamboo2] 08/2/2017 17:52

Took profit this afternoon as felt disappointed by the price action intraday.

Think that we could see a longer consolidation period

[nurdin] 08/2/2017 17:33

Thanks Tomps.

[tomps2] 08/2/2017 17:15

Edison note here

[bigbigdave] 08/2/2017 16:44

[...] I see advfn deleted this post!!!

[bigbigdave] 08/2/2017 16:27

Seller holding this back today, need him to clear off before going higher.

[nurdin] 08/2/2017 15:46

Yes Finncap are forecasting circa euro 20m PBT for the current year but I felt,reading the note ,that the forecast was made with not too much conviction. But I bow to their superior knowledge about the business.

I wonder if KWS have any IP that they use to expedite the process of translation or localisation?If they do then that would put an entirely different complexion on the business for me.

[mw8156] 08/2/2017 13:50

Guess they could continue to do well and agree with Paul Scott the main hazard is integrating all the acquisitions from all around the world; looks as though Synthesis bears some resemblance to what RWS does technical translations in multiple languages.

[nurdin] 08/2/2017 13:31

Thanks cfro,does the broker give any forecasts for the current year please? cheers

[cfro] 08/2/2017 13:25

Have been reading a broker note today (sorry cant share it) and the broker states that KWS still only have 0.5% of the total addressable market and that the overall outsourcing industry for the games market is still "very immature" with no "larger companies" operating within.

KWS are clearly in a very unique position being one of the leading players and could, feasibly, still have years of high growth ahead of it.

[tomps2] 08/2/2017 12:25

Hedley - Research Tree is great, where you can get the broker notes as they're released, but you have to pay a subscription. And to date, not all brokers are registered with them.

hxxps://www.research-tree.com/

This link gives a 10% discount:

I've found it well worth it, but I guess depends on capital invested and no. of positions. Hence % of capital, and no. of searches you use it for.

[hedley03] 08/2/2017 12:06

Anyone come across a decent site for up-to-date broker notes?

[panic investor] 08/2/2017 11:45

All acquisitions I believe were earnings enhancing and I expect further are already close to completion

[alphabeta4] 08/2/2017 11:41

Could be due to acquisitions since the last estimates and 'ahead' statements? Even today's €14.8m is €0.8m more than their 'at least €14m' previous statement.

[nurdin] 08/2/2017 11:10

Agreed.However I am somewhat surprised at the jump in forecast profits for 2017.

That estimate represents about 29% jump in forecasts profits compared to the previous estimates...hard to believe.

[alphabeta4] 08/2/2017 10:58

So by my calculations if Finncap are right:

If 2016 PBT advised this morning is €14.8m then forecast of €20.6m is a 39% increase. At an exchange of 1.17 gives £17.6m. If effective tax rate 21.4% (from 13/9 half year RNS) then post tax profit £13.84m.

At £6.10 mcap of £332m, current PE of 23.98. That's pretty cheap IMO for the level of growth we're getting here which at half year was running at 30% like for like.

[martinthebrave] 08/2/2017 09:51

#KWS report in Euros.

[nurdin] 08/2/2017 09:44

ah..thanks

[gr1982] 08/2/2017 09:41

@mginvestor has just corrected his tweet. His mistake. Should have been in Euros.

I've edited my previous post :-)

[nurdin] 08/2/2017 09:34

Wish these brokers would use a common currency base!

[gr1982] 08/2/2017 09:30

Just saw this on twitter. Seems like a hefty increase in target price and more impo in adj PBT going forward:

MG - investor ‏@MGinvestor

Finncap revised its forecasts for Keywords Studios significantly - TP up from 500p to 692p. Rev & adj PBT for 2017E e126.1m & e20.6m - KWS

[cfro] 08/2/2017 08:50

Fabulous update. Investors couldnt ask for more.

[rivaldo] 08/2/2017 08:45

Finncap say Buy today and have increased their target price to 692p (from 500p).

Not quite Berenberg's 760p target, but getting there.

[alphabeta4] 08/2/2017 08:35

I get Morningstar reports as part of TD Direct albeit they report in pounds so here I'm left guessing at the conversion rate. They're not perfect but the best I've come across (they give expected rev, EBITDA, EBIT, PBT, norm EPS and expected DPS).

[martinthebrave] 08/2/2017 08:28

Nursing hedley03 I use both because Stockopedia doesn't show Pre Tax profit which they need to sort out. Anybody know of a site that does show up to date PBT consensus?