Keywords Studios' half year results closely mirrored the guidance from last month's trading update. Revenue totalled €383.5m, reflecting organic growth of 10.4%.
Underlying operating profit was up 5.2% to €58.9m, reflecting continued investment in the business.
Underlying free cash flow was €18.5m, but cash conversion is expected to improve in the second half. Keywords finished the period with net debt of €11.4m from a net cash position of €81.8m at the year end, reflecting €91.8m spent on acquisitions.
Full year underlying organic growth is expected to be broadly similar to the first half before the impact of US entertainment strikes. These could impact organic growth by 2.0-2.5% over the year.
An interim dividend of 0.85p was declared.
The shares fell 4.3% following the announcement.
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Our view
The one-stop shop service provider to the video gaming industry comes with an impressive growth record. Sales have more than doubled in the last four years and operating profits have come along for the ride. With organic growth now in low double-digit territory, it's perhaps no surprise that investor enthusiasm has retreated. And now the potential for industrial action in the US to spread from motion picture making into electronic gaming could see growth take another step down in the short-term.
As an outsourced supplier to the gaming industry, Keywords doesn't rely on the success of individual titles. By its nature gaming revenue can be volatile, dependent on key title launches. But Keywords is managing to outperform the industry thanks to a smoother revenue profile, helped by its diversity of services and customers. As the market leader, but with only a 6% share, there are likely more opportunities for organic and acquisitive growth ahead.
Keywords is in the early stages of expanding into adjacent markets. It's also called out Artificial Intelligence (AI) as a key element of its strategy. We certainly think there's growth opportunity here, but until more detail emerges on the plans to generate new revenue streams, we're reserving judgement.
Recently the balance sheet has moved into a net debt position, but at well under 1x for this year's forecasted cash profits we're not too worried for now. We think the challenging industry backdrop could present some attractive acquisition targets and the company is looking to make further investments in technology. That could see net debt rise further, which in itself is not necessarily a bad thing, but with that comes an expectation for these investments to deliver financial results.
Overall, we think Keywords is in a solid position. Its diverse service offering and strong relationships with clients, are enabling it to drive respectable growth even in challenging times.
As growth has slowed the valuation has come under significant pressure and remains below the long-term average. Looking ahead we think structural growth drivers in the video gaming market, such as the emergence of streaming models, and shift to mobile, present Keywords with an opportunity to accelerate growth again.
Whilst there are some glimmers of hope that the market is recovering, Keywords' medium-term guidance hardly shoots the lights out so investors may need to be patient. And with a pretty paltry dividend yield on offer, there's little in the way of cash pay-outs to compensate if the valuation slips further.
Keywords Studios key facts
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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