Keywords Studios (AIM: KWS) has been a great success, with its shares rising 465 per cent since its 2013 IPO at 123p. The company is expanding rapidly by supplying a comprehensive range of services to the global video games industry. This is a large market that is making increasing use of outsourced providers like Keywords. In turn Keywords is consolidating a fragmented market of service providers to supply studios with a one-stop shop.
Eight deals last year
To achieve 24 per cent organic growth while at the same time pulling off eight acquisitions is pretty impressive stuff. Revenues including the acquisitions grew by 67 per cent and the number of operating locations spread all over the world rose to 27 from 17 during last year. The business is organised into six global service lines. The largest, Art Creation, had a superb year with like for like revenues up 34 per cent. Keywords also carries out testing, localisation, customer service and audio for video games studios. This allows the studios to focus on the creative and gameplay aspects of authoring games.
Acquisitions will continue as a central feature of the model with a possible move into providing programming services at some point, which is a big component of the costs of producing a game. So far Keywords seems to have got the integration of its acquisitions down to a fine art, though there are always extra risks involved with highly acquisitive businesses.
The details of the results confirmed the company’s quality with improved margins and cash conversion. Using a combination of highly-rated equity and cash to make complementary acquisitions at good prices should continue to add value. Management has also stated that in time could move into adjacent markets like e-learning, online gambling and TV streaming, where its skills would be readily transferable. Meanwhile the current year has started in line with expectations and the board is confident it can continue making ‘strong progress’.
Of course all this comes at a price. The shares now trade on a current year p/e of 30 times having moved up 24 per cent in the last two weeks. Having said that, the momentum in both the share price and business is very impressive.