Full year revenue rose 37.1% to €512.2m. On an organic basis, which excludes the effect of exchange rates and acquisitions, there was a 19% increase. Underlying pre-tax profit reached €86.0m, a rise of 56.4%. Both revenue and profits are in-line with upgraded guidance given in January.
The group's been helped by the non-repeat of Covid-related production delays, as well as high levels of demand thanks to "a buoyant video games market refocused on new content creation". Keywords said the industry is still leaning towards outsourcing production.
The group expects to deliver full year revenue and profit towards €610m and €95m- the top end of analysts' expectations. However, it remains mindful of the ongoing situation in Russia, where its teams are still working but only completing critical work for non-Russian clients, and relocation is being pursued.
A final dividend of 1.45p per share was announced, taking the total dividend for the year to 2.15p per share.
The shares rose 4.7% following the announcement.
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Our View
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.
It's often said that during the California goldrush the big winners weren't the miners themselves, but those selling shovels. We see Keywords as a purveyor of pickaxes in the digital goldrush that is global gaming - no bad place to be while the boom lasts.
Not too long ago we said growth could start to temper. More fool us. In fact, guidance has been raised for the second time in three months, as Keywords reaps the rewards of continued strong demand.
We're also expecting the strong run of new game launches to continue. The recent market growth isn't being taken for granted by gaming companies, who are aware that new content generation is a tried and tested way to keep hold of new and existing gamers. That should help bolster demand, which still looks sticky. All we mean by that is new gamers picked up in the pandemic look to be staying put, despite the real world opening back up.
We're particularly impressed with the improvement in profitability - with profit growth comfortably outpacing revenues. However, temporary tailwinds like lower travel and marketing costs have nudged margins higher, and we're keen to see higher margins sustained going forwards.
Making that a reality will require Keywords to keep revenue flowing at a high rate as those helpful external forces unwind. While we admire the group's position, we'll need proof momentum can be sustained for a longer run before feeling more at ease.
Despite several acquisitions, significant free cash flow means the group 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. This is keeping the group from taking full advantage of strong demand for its services. The result will be wage inflation and higher costs for Keywords, which may or may not pass through to customers. This isn't make-or-break for performance, but it could temper profit growth somewhat moving forward.
Overall, we think Keywords is in a strong position. Revenues have continued to improve and the trends emerging from the current crisis probably play in the group's favour. Keywords' strengths are reflected in a price to earnings ratio of just over 29. That's not unduly demanding, but shows a level of confidence in the group's end market, which could increase the risks of ups and downs.
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.
Full year results (revenue figures are organic)
Game Development (27.1% of group revenue) rose 16% to €138.9m, as it benefitted from a renewed focus on content generation in the gaming industry. The growth came despite the lack of Keywords' "tradeshow-centric" model in normal times. Functional Testing (18.1% group revenue), which provides quality assurance, posted a 17.2% increase in revenue to €92.7m.
Art Creation (9.6% of group revenue) revenue rose 24.4% to €49.3m, reflecting strong demand across all art studios. There was "exceptional" growth in India, thanks to an unusually successful ability to ramp up recruitment to match demand. The strong demand is expected to last into the new financial year.
Despite fewer in-person events and game launches, Marketing (9.0% of revenue) did well, with revenue rising 33.7% to €46.2m. The group made a number of acquisitions in the year, and spoke of the potential opportunity given how fragmented the industry is.
Audio (12% group revenue), recorded revenue of €61.3m, as growth in new clients, across all core services offset the challenges of different working requirements.
The customer service arm, Player Support (9% of group revenue) benefitted from stronger social media, quality control and consulting services. Revenue rose 12.7% to €45.9m.
Localization and Localization Testing saw revenue rise 12.2% and 16.7%, to €50.8m and €27.1m respectively.
Overall operating costs increased, but working from home-related savings helped group gross margins improve from 38.0% to 39.1%.
Free cash flow, before tax, rose 46.2% to €84.5m. Net cash increased to €105.6m, from €102.9m in 2020.
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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