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Keywords Studios - full year guidance raised again

Keyword Studios has upgraded its full-year revenue guidance from €675m to €690m.

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Keywords Studios has upgraded its full-year revenue guidance from €675m to €690m. Underlying profit before tax guidance has also been upgraded slightly from €110m to €112m. Both upgrades reflect high levels of demand for the group's services, as well as strong organic revenue growth of roughly 22% in the second half of 2022. Keywords highlighted it's benefitting from the gaming industry's "focus on new content creation and the increasing complexity of games".

In December, the group announced the acquisition of Helpshift for up to $75m. This brings Keyword's total consideration for its five acquisitions last year up to around €140m.

At the end of the 2022, after taking into account deferred acquisition spending, the group had net cash of around €80m.

Looking forward, organic growth is expected to moderate in 2023 but still remain above medium-term guidance of above 10%. Underlying profit before tax margins are also expected to move to historical levels of around 15%.

The shares rose 3.4% following the announcement.

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

Our View

Keywords' latest trading update displayed enviable resilience to the general gaming slowdown. As an outsourced supplier to the gaming industry, Keywords doesn't rely on the success of individual titles. Instead, it benefits from overall industry growth.

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 could become more than just a blip on the radar.

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 5% share, there are likely more opportunities for organic and acquisitive growth ahead.

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.

Despite making five acquisitions this year, significant free cash flow means the group still has a sizeable chunk of cash sitting on the balance sheet. That will no doubt fund future deals, long a key part of the group's strategy to become the go to provider of outsourced services in the industry.

However, discipline is still important, and a careless buying spree could be damaging.

Keywords has previously flagged an inability to find highly skilled workers to fill out its Game Development roster. A recent flurry of layoffs at other tech firms may ease this strain going forwards, but it's too early to tell. Regardless, a proactive approach towards talent retention and development is seeing good levels of satisfaction amongst employees which we argue are a vital asset for the company. Keywords has a strong focus on nurturing talent in India and this is continuing through a proposed educational programme together with the Indian Government.

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 of just under 25. That's a significant premium to many of its peers and one we think is merited.

But an industry-wide slowdown could have near-term consequences. Plus, as the group continues to invest internally and on acquisitions, the next few sets of results could see earnings squeezed, with consensus forecasts expecting operating profit growth below the double-digit rates seen in recent years. So investors should take a long-term view.

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
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 25th January 2023