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April 14, 2015

Keywords Studios is mobilising

Computer gaming services provider Keywords Studios’ (LON:KWS) kept its focus on the core business last year, even as it integrated new acquisitions.

Organic growth of more than 20% was augmented by contributions from a clutch of acquired companies in 2014.

The top line grew by 130% to €37.3mln from €16.2mln in 2013, while adjusted profit before tax doubled to €5.1mln from €2.5mln.

Revenue was ahead of house broker Numis Securities’ estimate of €35.5mln, while profits were bang in line.

Speaking to Proactive Investors, chief executive Andrew Day said the underlying growth rate is higher still, as the results do not factor in a full-year’s contribution from recently acquired companies.

The group, which provides language, testing and localisation services to some of the game industry’s top developers, including Ubisoft, Zynga, Electronic Arts and Konami, has made “a good start to the current year,” Day told investors, and is well-placed to delivery on the potential for high margin growth that it sees in its expanding markets.

The company may be operating in a specialised niche, but the market it services is already bigger than the US film industry, and is growing at 8% per annum, while the content side – which is the part Keywords services – is growing even faster than that, Day observed. Numis suggested the group’s market is growing at 10% a year.

“We expect to benefit in 2015 from a more settled console games market, the full year effects of acquisitions made during 2014 and continued growth both organically and through additional selective acquisitions, as we further consolidate our market leadership,” Day said in the results statement.

The group is growing its share in the fast-expanding mobile and social media gaming space, and according to Day it counts seven of the top 10 mobile gaming companies on its customer list.

With the increased popularity of smartphones over the last couple of years, especially in Asia, mobile gaming is really taking off and the games are becoming more polished, which is increasing demand for Keywords’ services, Day asserted.

“Increasingly, we are becoming to the go-to company for this sort of work, as the development cycle quickens and higher resolution art gets incorporated into these sorts of games,” Day explained, adding that around 30% of the company’s business comes from the mobile and social media space.

The group ended the year with net cash of €11.0mln, down from €15.3mln at the end of 2014, after spending €8.9mln (net) on acquisitions and receiving €3.7mln (net) from a share placing.

"Those acquisitions are integrating well and we feel confident that the synergies already experienced between the business units will continue to build through 2015 and beyond, as we continue to identify and convert cross selling opportunities and leverage the expanded pool of talent across the group,” Day revealed.

Asked by Proactive Investors what the company looks for in its acquisition target, Day stressed the importance of cultural fit.

“We seek companies that look and behave like Keywords people. A solid economic performance is important, or maybe the opportunity to turn a business around.

“Mainly it is about extension, whether it be extending the skill base of the geographical presence.”

Day added that the artwork business is probably one of the most fragmented sectors in which the company operates, and it would probably look at making more acquisitions in this area.

Broker Cantor Fitzgerald called the update “confident full year results”.

“The games market has gone through a transitional period over the past two years, but with the installed base for the new generation of consoles having reached what many believe to be the tipping point following the 2014 holiday season, 2015 is expected to be the first solid, post transition year in the console game sector,” the broker said.

House broker made modest upgrades to its forecasts in the wake of the results, nudging up its current year earnings per share (EPS) forecast to 12.2 cents from 12 cents.

“We expect the group to continue to look for acquisitions, and to the extent that the group uses cash, these would be likely to be very EPS accretive,” Numis said.

The full-year dividend has been bumped up by 10% to 1.10p.

Shares were up 1.7% at 10p in late afternoon trading. @MasterMetals MasterMetals Blog

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