Keywords Studios warns of Hollywood strikes after strong first half

Video game creative and technical services provider Keywords Studios reported a 19.4% increase in first-half group revenue on Tuesday, reaching €383.5m thanks to a combination of robust organic growth and strategic acquisitions.

The AIM-traded firm said organic revenue jumped 10.4%, with the growth primarily propelled by the strong performance in its ‘Create’ segment.

Its adjusted operating profit margin stood at 15.4%, which was consistent with both the guidance and 2022’s second-half results.

That translated to a 5.2% rise in adjusted operating profit, totaling €58.9m.

Adjusted free cash flow for the period was €18.5m, compared to the €31.7m in the first half of 2022, owing to the timing of working capital.

The company's net debt for the six months ended 30 June stood at €11.4m, in contrast to the net cash of €81.8m recorded at the end of 2022.

Keywords’ board said the shift reflected the company's acquisition activity and EBT share buybacks.

The directors announced an interim dividend of 0.85p per share, making for 10% growth from the 2022 interim dividend.

Operationally, Keywords said it was making significant strides in its strategic initiatives, with increased engagement with AAA clients, particularly with AI-driven product families across its ‘Globalise’ and ‘Engage’ sectors.

Additionally, Keywords Labs was expanding into an AI ‘Centre of Excellence’, and had onboarded key personnel.

In terms of growth in adjacent markets, there had been a notable expansion in the company's LiveOps studio.

Additionally, the firm had unveiled a dedicated studio specialising in in-game cinematics and virtual production.

The acquisition of DMM meanwhile served to enhance the company's entertainment offerings.

Keywords said it was continuing to be active on the acquisition front, successfully closing four high-quality acquisitions, with consideration totalling around €130m for the year to date.

The firm had expanded its revolving credit facility to $400m, with maturity now extended until 2027.

That, the board said, would ensure long-term liquidity, granting the company the flexibility to explore more merger and acquisition opportunities.

Looking ahead, Keywords said it remained poised for growth, expanding faster than the market by complementing organic growth with acquisitions.

However, the firm said it was keeping a watchful eye on strikes in the US entertainment industry, which were starting to influence performance early in the second half.

The board warned that the strikes could affect organic growth by an estimated 2% to 2.5% for the full year.

It forecast that full-year underlying organic growth would be consistent with the first half's performance, although growth in the second half was expected to be more prominent in the fourth quarter.

“Keywords delivered good first-half growth despite the current industry backdrop, benefitting from our focus on strategic partnerships and our unique provision of solutions across the full game development cycle,” said chief executive officer Bertrand Bodson.

“We have continued to broaden our offering through high-quality targeted acquisitions and are excited about the pipeline ahead.

“We are on track to deliver underlying organic growth, excluding the unfortunate impact of the US entertainment strikes, and operating margins in line with our guidance for the year.”

Bodson said the company was “uniquely placed” to capture the opportunities that technology advancement was creating over time, as it increased the bounds of possibility, leading to a proliferation of ever-improving content as clients looked to engage the world’s three billion gamers.

“We are excited about the opportunities that lie ahead and are building for the future whilst we continue to grow market share and deliver against our plans for 2023 and beyond.”

At 1057 BST, shares in Keywords Studios were down 8.35% at 1,350p.

Reporting by Josh White for Sharecast.com.