Renowned Hollywood sound designer, Scott Gershin and his Sound Lab team, have joined Keywords Studios PLC (LON:KWS), the technical services provider, from Technicolor.
Sound Lab is a leader in the video game and immersive entertainment market (virtual reality/augmented reality, or VR/AR) and provides sound services for movies and streaming (over the top - OTT content). In support of the Sound Lab team joining the group, Keywords is investing in new, state of the art production equipment to fit out a sound design studio in “beautiful downtown” Burbank that is already occupied by Sound Lab.
Strong results from KWS as trailed in last month's trading update. Sound Lab to join KWS and one acquisition announced.
— Philip (@Glawsphilip) September 18, 2018
With more than 30 years' experience in sound design, Scott Gershin and his team have been credited on an extensive list of bestselling video games including the likes of Final Fantasy XV, Resident Evil and Gears of War, and have worked on projects for Riot, Capcom, Activision, Infinity Ward, Amazon and a host of others.
At Keywords, Gershin will also be continuing his work in the film and broadcast industry.
WATCH: Keywords Studios reports 'excellent' first half; acquires UK-based Trailerfarm
Closer to home, Keywords has acquired The TrailerFarm Ltd, a Brighton-based company that produces trailers for the marketing and support of video games.
The acquisition will complement Keywords' recently-acquired Fire Without Smoke marketing services business in producing high impact, cost-effective trailers for a broad range of games.
Keywords is paying up to £2mln for TrailerFarm, which in the year to the end of June 2018 posted revenues of £1mln and adjusted EBITDA of £165,000. The initial consideration of £1mln is being settled largely in cash (£790,000), with the remainder satisfied by the issue to the vendors of 11,070 new Keywords shares.
READ: Keywords Studios buys video game trailers specialist for £5.2mln
The acquisition announcements accompanied the group’s half-year results that largely rubber-stamped last month’s first-half trading update.
Revenue, including contributions from acquisitions, increased by 72% to €110.0mln in the first half of 2018 from €63.8mln in the corresponding period of 2017. On a constant currency basis, the increase was 84%.
Stripping out the effect of acquisitions, revenue rose 2% on a like-for-like basis, or by 8.6% when stripping out currency fluctuations.
Adjusted profit before tax rose 67% to €16.0mln from €9.6mln the year before.
READ: Keywords Studios delivers profit growth of over 60% in first half
Net cash at the end of June stood at €0.1mln, down from €11.1mln at the end of 2017, reflecting the €10.6mln laid out on acquisitions.
Followers of Keywords will not be surprised to learn that the group is selectively reviewing a strong acquisition pipeline.
The interim dividend has been increased by 10% to 0.53p from 0.48p the year before.
Trading in the second half has been good and Keywords expects to meet market expectations for the full year before the positive impact of any additional acquisitions.
"In a period in which the gaming phenomenon, Fortnite, had a significant impact on the games market and in which the US dollar, which represented 54% of our revenues, declined by 12% compared to the same period in 2017, we have none the less delivered yet another strong set of results for the first six months of 2018 as we continue to deepen and broaden the business for the future,” said Andrew Day, the chief executive officer of Keywords.
Fortnite the reason for hundreds of divorces, website says https://t.co/eRCWSPw5Ne pic.twitter.com/8dCGv9XqQA
— ABC13 Houston (@abc13houston) September 18, 2018
"Our continued organic investment and acquisitions have extended our geographical reach, added further scale to our existing service lines, and broadened the range of capabilities we can offer our clients to include co-development, analytics, music, marketing services and sound effects,” Day continued.
"We are particularly pleased with our performance in respect of acquisitions and their subsequent integration. Our largest acquisition to date, VMC, which was absorbed into the group with a track record of reducing revenues and an operating margin of 9.1% in October 2017, has been fully integrated and the resulting synergies are already significantly enhancing operating margins as can be seen by the overall group profit margin of 14.5%. We are confident of being able to return it to revenue growth in the near to medium term,” Day declared.
READ: Keywords Studios into the major leagues with VMC acquisition
"The games market is starting to focus on the prospect of games being streamed and played live across all connected devices. Advances in technology and increases in internet bandwidth including the forthcoming 5G mobile networks and the resultant reduction in latency of communications could enable streaming of games for the first time, which we believe will drive record demand for gaming content. We are excited by the prospect of assisting the industry in creating and repurposing content for this new medium over the coming years and Keywords is already working on interactive streaming content and porting games to upcoming streaming platforms,” Day said.
House broker Numis Securities is leaving its full-year numbers unchanged after the half-year update.
“Despite, as previously announced, somewhat slower organic growth in H1 [first half], management remains comfortable with market expectations for the year. This would mean CCY [constant currency] organic growth for the year of c.13%, or close to 18% ex VMC, demonstrating ongoing market share gain within an already attractive market,” Numis said, as it reiterated its “scenario-based” price target of 2,420p.
The broker noted that Keywords’ management believes that the global popularity of Fortnite has had a negative influence on customer spending in the period as customers adjust their development schedules.
“With these results, the group has announced the up-to-£2mln acquisition of Trailerfarm, a UK-based video game trailer company. The initial £1mln consideration is 1x revenue, 6x EBITDA,” Numis reported.
“We understand that the earn-out requires a substantial improvement in profits. At less than 0.5% of 2019 group revenue and profits, we have not adjusted forecasts,” it advised.
Like Numis, Peel Hunt believes the projected full-year numbers are “very achievable”, with the second half of the year set to benefit from a strengthening dollar, a six-month contribution from companies acquired in the first half of the year, a management team with greater capacity and a greater contribution from higher-margin businesses.
Shares in Keywords were down 8p at 1,896p in lunchtime trading.
--- Adds broker comment and video interview with the CEO; updates share price reaction ---