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Keywords Studios - double digit growth despite market challenges

Keywords Studios' first half revenue of €383m reflected organic growth of 10%.

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Keywords Studios' first half revenue of €383m reflected organic growth of 10%. There was strong demand for content creation services, but the weaker mobile market has hurt demand for player support services and marketing.

The underlying operating margin was 15% in-line with medium-term guidance.

The group acknowledged the importance of harnessing the rapidly changing AI landscape, and as such has been investing in its product suite. Four acquisitions were completed in the period for a maximum of €130m.

Since the last year end Keywords has moved from net cash of €10m to a net debt position of €82m reflecting the investment in acquisitions.

The shares were down 12.4% in early trading.

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

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.

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 a 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 is now well 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.

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: 1st August 2023