Keywords Studios operates in the highly fragmented world of ancillary services for computer games makers and is rapidly becoming the 800lb gorilla of that sector.
The company is trusted and relied upon as a partner by many of the world’s leading video game companies during the concept, development and post-publication phases of new content.
Localisation is the core of the business. Essentially this means translation into local language and ensuring the audio quality, player support and so on is up to scratch.
Growth recently has been rapid and global with facilities now in multiple locations across four continents.
Growing industry: Keywords Studios offers ancillary services to computer games makers
Andrew Day chief executive said: ‘We entered 2018 with pro forma revenues of €225million, across seven service lines and 42 studios in four continents, compared to just over €16million derived from four service lines and five studios in 2013 – the year of our IPO’.
By its own admission, Keywords has a big 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 $66million last October, financed by an underwritten share placing.
The new shares were sold through a book-build exercise and snapped up in about two hours, which underlines how highly regarded is the video games services group at present.
Shares over the last three years have rocketed from 153p to 1,746p as the carefully built portfolio, which ranges from translation services through to augmented and virtual reality services, 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 $57.4million and underlying profits an annualised $6.4million.
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 has been a fundamental plank of the strategy and 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.
Crucially, it has made its first inroads into the eSports market, mostly through the provision of its services for game development and in-game support, but also via marketing.
ESports – football, rugby, Formula One to name three – are played electronically by teams with increasingly large numbers of people watching.
By 2020, the market is tipped to be generating £1billion annually in revenues and, like video games, there is a requirement for localisation and consistent quality.
ESports – football, rugby, Formula One to name three – are played electronically by teams with increasingly large numbers of people watching
Keywords highlights that it is continuing to seek out ways to ‘leverage the growth in eSports further,’ Berenberg observed.
The most recent acquisitions have focused on adding extra music and audio services to the group’s offering.
Cord Worldwide and Laced Music were acquired from the Cutting Edge Group for £4.5million and Maximal Studio from its owners for up to €500,000.
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.
Results for 2017 further underlined the rapid progress. Group revenue rose 57 per cent to €151.4million while adjusted profit before tax jumped 55 per cent to €23million. There was a dividend of 1.46p, up from 1.33p in 2016, but this not an income stock, far from it.
The share price of 1,685p points to an earnings multiple of 35 this year.
Like the well-backed share placing, this rating suggests the market has more than a degree of confidence that growth will continue.
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.
Forecasts in the market point to sales nudging $250million and profits €37million, again, both substantial increases.
True, the current rating allows little margin for error but so far there has been little evidence of Keywords missing its footing and in markets growing so rapidly that still looks to be an opportunity.