Keywords continues to profit from video game growth

Keywords Studios (KWS) is a gaming outsourcer. It helps developers with everything including designing, testing and marketing games. The benefit of this model is it gets access to the fast-growing gaming market without the risk of games flopping. In the first six months of the year, it has worked nicely.

Organic revenue growth was 21.7 per cent while the adjusted cash profit (Ebitda) margin increased by 60 basis points to 21.8 per cent, driven by faster growth in the higher-margin Create and Globalize businesses. More revenue at a better margin meant cash profits rose 49.5 per cent to €61mn (£53.5mn).

Despite the increase in profits, operating cash actually dropped from €34.4mn to €31.3mn. The dramatic-looking fall in the cash conversion rate from 94.9 per cent to 57.9 per cent was because of a €21mn increase in working capital. The company says this is exceptional and should the rate normalise at around 80 per cent for the full-year – but it is worth keeping an eye on.

The growth argument is that Keywords only makes up 5 per cent of the outsource market and it is not just limited to traditional games. Media companies are diversifying their offerings as shown by Netflix’s (US:NFLX) foray into gaming and they will need partners to help with development and marketing. Keywords has just acquired Canadian mobile game developer Smoking Gun which works for both Netflix and Microsoft (US:MSFT).

The flipside is that media companies have been throwing money at new content to attract subscribers, but now they are more concerned with cash flow. In the coming years they could be more circumspect about the money they spend.

Broker consensus is for Keywords' EPS to rise to 119p in 2024, giving a 2024 PE of 22. That’s not terrifying given the long-term potential of its market – even if there are some short-term bumps in the road. Buy.  

Last IC View: Hold, 3,096p, 15 Sep 2021