Keywords Studios reports profitability challenges ahead of acquisition

16th Sep 2024 08:41

(Sharecast News) - Keywords Studios, a provider of creative and technology services to the global video game and entertainment industries, reported a modest increase in first-half revenue in its interim results on Monday, but faced challenges with profitability.

The AIM-traded company said revenue for the six months ended 30 June rose 6.6% to $440.4m, up from $413m in the same period last year.

It said the growth was primarily driven by recent acquisitions, while organic revenue experienced a slight decline of 1.9%.

Adjusted EBITDA fell 6.6% to $77.8m, with the adjusted EBITDA margin decreasing to 17.7% from 20.2% in the first half of 2023.

Keywords Studios reported an operating loss of $18.7m - a significant downturn compared to an operating profit of $31.7m in the first half of last year.

Adjusted operating profit also declined, by 9.6% to $57.4m, resulting in a margin of 13%, down from 15.4% year-on-year.

The company attributed the decrease in profitability to moderated growth and delayed cost-saving measures from ongoing restructuring programmes.

Despite the challenges, net cash reserves improved substantially to $102.5m, up from $12.4m in the first half of 2023.

Adjusted free cash flow remained stable at $16m, and the adjusted cash conversion rate was consistent at 31%.

Strategic partnerships continued to contribute positively, with increased spending from major clients.

The company noted strong engagement with its AI-driven product solutions in its Globalise and Engage segments.

It said the restructuring of its go-to-market approach in the Globalise division was progressing as planned, as it remained active in pursuing acquisition opportunities, having agreed to three acquisitions so far this year.

Looking ahead, the firm said it was confident in achieving overall revenue growth for the full year.

It said it anticipated improved performance in the second half as the industry recovered from slower content creation trends that had impacted spending.

Cost management initiatives were expected to support margins, as the company maintained a positive outlook on its long-term growth trajectory.

On 3 July, Keywords Studios agreed to a final cash acquisition offer from Houting UK (Bidco), a company indirectly owned by EQT's BPEA Fund VIII and co-investors CPP Investments and Rosa Investments.

The offer price of £24.50 per share represented a significant increase from EQT's initial unsolicited proposals, and valued the company at around £2.1bn on a fully-diluted basis.

Shareholders voted in favour of the acquisition on 30 August, and all necessary competition approvals had now been obtained.

The transaction was expected to be completed on 23 October, with the firm's shares set to be delisted the following day.

In line with the terms of the acquisition, the Keywords Studios board did not declare an interim dividend.

"Keywords delivered solid growth in the first half despite the current mixed market backdrop," said chief executive officer Bertrand Bodson.

"This has resulted in lower activity levels across the industry, as clients recalibrated their operations and game portfolios, and meant that our organic growth was lower than originally anticipated, as flagged in July.

"We continued to make good progress against our strategy, enhancing our leading position in the market whilst expanding the use of technology within our business and on behalf of clients."

Bodson said the firm had started to see the results of actions taken on costs, and expected to see a pick-up in activity levels as it moved into 2025.

"The transaction represents an exciting new chapter for the business as we continue our journey.

"There is no question that the long-standing support we received as a public company provided the fuel for our growth over the last 10 years, and we wanted to take this opportunity to thank all of the shareholders who have supported us since we listed on AIM in 2013 with just €16m of revenue, many of whom are still on the shareholder register."

At 0947 BST, shares in Keywords Studios were up 0.16% at 2,430p.

Reporting by Josh White for Sharecast.com.