Keywords Studios is expecting to report organic revenue growth of about 9% for 2023, ignoring the impact of currency movements and a 2.6% impact from entertainment industry strikes in the US. This is broadly in line with previous guidance.
Underlying operating profit is expected to grow at a slightly slower pace, to about €122mn from €114.6mn despite cost-cutting measures. Cash conversion has remained healthy at over 80%.
The group made five acquisitions last year for a maximum consideration of €225m.
Keywords expects organic growth to improve this year, as demand for new video games returns, and output normalises post the US strikes. Operating margins are expected to remain above 15%.
The shares were trading flat after 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. But with organic growth now in low single-digit territory, it's perhaps no surprise that investor enthusiasm has retreated. There are some exciting growth drivers ahead for the sector in 2024. There's also the potential for pent up demand to be released following a slow year for new releases in 2023. Keywords is expecting growth to accelerate but is yet to give any clearer guidance. We think consensus forecasts for total revenue growth in the mid-teens this year are achievable, but also relatively modest given recent acquisition activity.
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. But we don't think that's likely to return any time soon to the blistering levels seen in earlier years. 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.
Environmental, social and governance (ESG) risk
The technology sector is generally low-risk in terms of ESG, but some segments like Electronic Components can be more exposed to environmental risks. Regulatory interest in the sector has picked up recently, leading to more acute business ethics risks. Other key risks include labour relations, data privacy and product governance.
According to Sustainalytics, Keywords Studios overall management of material ESG issues is average, with poor disclosure called out as the biggest concern. Nevertheless, the company has not been implicated in any significant ESG-related controversies. When it comes to ethical protection of IP, we think that Keywords as a service provider rather than publisher is less exposed to issues.
However the Group, which has integrated multiple acquisitions does have established IT Security and Data Protection policies in place. As a service provider talent retention and acquisition is key, and whilst improvements have been made in the way employees view Keywords compared to before the pandemic, there is still work to do on engagement and diversity.
The Share Research team is ceasing covering of Keywords. This is the last update and house view HL will produce on this stock. You can still find out more about our thoughts on the Financials industry by signing up to our Share Insight email.
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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