Keywords Studios (KWS:AIM) reported like-for-like revenue growth of 17.3% to €153.2m in the first half to 30 June 2019, and said it was on track to meet full year profit expectations.

Yet shares in the company, which provides creative services to the video games industry, fell 4% to £13.55 as investors worried about the need for profit margins to ramp up in the second half if the company is to hit full year profit expectations.

Company comments that margins are ‘expected to progress incrementally’ appears to lack the confidence in tone that investors might have hoped for.

Yet chief executive Andrew Day remains upbeat, talking up very strong first half growth with ‘increased demand across all of our service lines, and particularly strong performances from Functional Testing and Game Development, as the market accelerates its use of external development and service partners’.



In order to meet this demand the company has expanded capacity and ‘incurred additional costs due to the steep ramp-up in staffing’.

In addition Keywords continued to invest in its early stage technology businesses as well as its sound design, subtitling and dubbing for film and television. An underperforming fixed-price contract associated with a prior acquisition also dragged on resources in the first half.

The costs associated with expanding and scaling-up the group’s operational capacity is expected to pay-off in the second half of the year and continue into 2020. The impact in the first half is lower profitability with gross margins falling 1.3% to 36.1%.

As a result of the investments and extra costs, administrative expenses ballooned to 23.4% of revenues from 22.5% and the company is guiding for them to shrink back to 20% of revenues in 2020.

Adjusted profit before tax increased by 14.3% to €18.4m, while adjusted earnings per share was €0.1836, impacted by a higher tax charge. The dividend was increased by 10% to 0.58p per share.

The company is very acquisitive and in order to fund future purchases it has agreed a new revolving credit facility for an initial €100m over three-years with an option to extend by two-years and an extra €40m. Net debt at the period end was €9m.


Investors should be aware that Keywords makes a number of adjustments to its reported numbers, which totalled €10.3m in the first half.

Some might argue that it is reasonable to exclude €3.5m of amortisation of intangible assets for a technology-led business developing new tools and services that should bolster revenues and profits down the line.

Yet it is more difficult to justify €2.8m of acquisition costs as one-offs for serial business buyer Keywords, or €4m of share option expenses, which many would argue are very real and recurring drains on cash flow.

Broker Numis remains its largely positive view on the investment story despite slicing 9% off its 2019 adjusted pre-tax profit forecast, from €46m to €42m, although this is largely because of what it sees as ‘temporary’ margin pressures.

Numis nudged up its 2020 adjusted pre-tax profit forecast from €51m to €52m.

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Issue Date: 18 Sep 2019