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Keywords Studios’ “respectable” results reveal it is back on track

Published: 10:25 08 Apr 2014 EDT

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Keywords Studios (LON:KWS), the contractor to the video games industry, is back on track according to chief executive Andrew Day.

Financial results for 2013 revealed revenue growth of 14% to €16.4mln, but as flagged previously profits dipped to €2.5mln as game developers focussed on a handful of launch titles.

Speaking to Proactive Investors, Day described the figures as “respectable” and marginally ahead of expectations – albeit expectations that were ‘reset’ back in September.

“Given the transition year we’ve gone through, and to some extent are still going through, it was a pretty respectable performance.” 

“We feel good about where we ended up for 2013 and we’re looking forward to a good, solid period of growth in 2014.”

Keywords Studios is a contractor to video games developers, providing services such as translation, localisation and games testing.

It has already added three new legs to the business through acquisitions Liquid Violet and Babel and a new operation in Singapore to provide outsourcing for gaming giant EA.

That US$800,000 of overheads has already been stripped out of the Babel business since January’s acquisition highlights the kind of quick improvements the company is aiming for.

Day also revealed that investors should expect more activity on the M&A front, with plans for further selective acquisitions in the current financial year.

House broker Numis is forecasting 2014 revenues growth of about 15%, excluding contributions from newly acquired business units, and expects profitability to improve by around 3-4%.

Analyst Will Wallis said: “The group has an excellent opportunity to strengthen its global leadership position in the video game localisation market, with potential for additional services in the longer term.”

This will be reflected in the company’s stock market valuation as confidence grows the group can take advantage of this opportunity.

Investor confidence, or the lack of it, is particularly significant for Keywords because of an ill-timed profit warning in September, just two months after the group’s AIM debut.

Keywords Studios was among the first wave of new tech entrants on AIM.  

It raised £28mln, to value the firm at just under £60mln, and at the time was the junior market’s largest IPO of the year.

The shares lost most of that initial goodwill after the profit warning with around 45% of the value shed in the fourth quarter.

Nevertheless, the company ended up working on more than half of all the titles launched for the new consoles. And the shares have recaptured much of the lost ground. 

Currently trading at 152.5p per share Keywords Studios is back above July’s IPO price of 123p.

Today the company said that it expected 2014 to be a year of “healthy activity” in the video games industry, as it supports the fast growing market created by the new generation of games consoles.

Day explains, however, that the lure of high profile new game launches will be needed to help increase the number of gamers upgrading to the new generation of consoles.

“As far as the console market is concerned there is still a bit of a transition,” he said. 

“We’re seeing slightly more focus [from developers] on the existing - or old generation - consoles this year, mainly because of the larger ‘installed user base’, and perhaps a little bit less emphasis on games for the new consoles.

 “The installed base is not there yet. It is going to take another Titanfall-type release to drive console sales to a point where there’ll be enough of them out there to justify the costs of developing games specifically for them.

“Having said that, Watchdogs - the major title from Ubisoft, that was delayed last year - is coming up fairly soon.

“That will definitely do good things for the size of the installed user base [for next generation consoles], as will Microsoft’s decision to extend the Xbox One launch to a further 23 new territories come September.”

The extended Xbox One roll-out will have particular significance for Keywords’ language services businesses, he explains, as none of the 23 new territories have English as a first language. As such it effectively opens-up greater demand for the group’s services for next-gen titles.

Indeed, the phased geographic roll-out, with the initial emphasis on the US and Europe, was one of the contributing factors cited by the company for its profit warning in September.

“It is something that held us back last year, and so it [the extended launch] is something we now hope to benefit from this year.”

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