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Keywords Studios- 2022 results meet upgraded targets

Keywords saw full year revenue grow by 34.8% to 690.7m euros, in line with recently raised guidance.

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Keywords saw full year revenue grow by 34.8% to €690.7m, in line with recently raised guidance. This reflected strong organic growth, positive changes in exchange rates, and contributions from acquisitions. Keywords also said it's benefitting from a continued trend towards outsourcing.

Underlying operating profit came in at €114.6m, an increase of 29.6%, slightly ahead of management's expectations. Profits rose at a slower rate than revenue because of the exit from the Russian market and costs associated with a return to normal work patterns after lockdowns.

The outlook for 2023 remains unchanged with organic growth expected to moderate but remain above medium-term guidance of over 10%.

Underlying free cash flow was up from €92.3m to €112.1m, but net cash fell €22.8m to €81.8m, reflecting the continued spend on acquisitions.

A final dividend of 1.60p was recommended.

The shares were up down 6.5% in early trading.

See the Keywords Studios share price, charts and how to trade

Our view

Keywords continues to deliver strong growth in sales and profits. All the more impressive in the face of a slowdown in demand for video games, and wider macro-economic difficulties.

A strong performance among gaming companies through the 2008 financial crisis led many to believe the industry is "recession proof." However, as prices balloon and people make up for lost time outside after the pandemic, the sluggish growth in computer games could persist for a little while yet. But with player numbers continuing to rise, we think the underlying market is likely to rebound. As to when this might be, that's a more difficult call to make.

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. The company's strong balance sheet and cash generative business model, leave it well placed to pounce on other targets in its acquisition pipeline.

Keywords is in the early stages of expanding into adjacent markets such as subscription gaming, media and entertainment and the metaverse. How successful this will be remains to be seen. But the outlook is promising given it should have the skill set and experience to do this without too many teething problems.

Overall, we think Keywords is in a solid position. Its strengths, differentiated business model, and continued strong financial performance are reflected in a price to earnings ratio in the high twenties. That's a significant premium to many of its peers and one we think is merited. But a high rating comes with high expectations, and in Keywords case the dividend is not material enough to compensate for any market wobbles. Keep in mind an industry-wide slowdown could have near-term consequences so there could be ups and downs in the short-term.

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.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Derren Nathan
Derren Nathan
Head of Equity Research

Derren leads our Equity Research team with more than 15 years of experience in his field. Thriving in a passionate environment, Derren finds motivation in intellectual challenges and exploring diverse ideas within his writing.

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Article history
Published: 15th March 2023