Keywords Studios Plc Regulatory News (KWS)

23 September 2014

Keywords Studios plc ("Keywords Studios", "the Group")

Half year results for the 26 weeks to 30 June 2014

Keywords Studios, the international technical services provider to the global video games industry, today provides its half year results for the 26 weeks to 30 June 2014.

Operational overview:

· First half financial performance in line with expectations

o Group revenue, including the contribution of acquisitions increased to €14.3m (H1 2013: €7.2m)

· Significant investment in the further development of the business:

o Acquisitions of Liquid Violet (London) in January 2014; Babel Media (Montreal and New Delhi) in February 2014; and Binari Sonori (Milan and Los Angeles) in May 2014

o €0.1m investment in new Singapore operation to support Electronic Arts as it moved from an insourced to an outsourced solution in the region

o Increased staff levels in most locations across the Group

· Continued gains in market share

o Recent titles worked on include Game of War: Fire Age, Watchdogs, Kim Kardashian: Hollywood, Assassins Creed, Minecraft and WildStar

o New clients include Gumi, Carbine Studios and Sega

Financial overview:

· Group revenue almost doubled compared to prior year, reflecting impact of acquisitions

· Revenues from existing operations grew by 14%

· Adjusted profit before tax* of €1.3m (H1 2013: €0.6m)

· Statutory profit before tax of €0.04m (H1 2013: Loss of €0.2m)

· Earnings per share of €(0.34c) (H1 2013: (0.87c))

· Net cash of €9.6m (H1 2013: €3.1m)

· 9% increase in interim dividend to 0.36p per share (2013: 0.33p)

*Profit before tax before acquisition and integration expenses, IPO expenses, share option charges, amortisation of intangibles and foreign currency movements

Current Trading and Outlook

· Many game titles targeting release windows during Q1 2015 when the installed bases of Xbox One and PlayStation 4 will have increased following Thanksgiving and Christmas

· Keywords' activity expected to have a greater weighting towards the fourth quarter than in previous years in line with this year's games launch cycle

· Full financial year profit outturn expected to be in line with analyst expectations based on anticipated activity levels in the final quarter

· Continued new clients wins and increased market share

· Selectively reviewing a strong acquisition pipeline

Andrew Day, Chief Executive of Keywords Studios, commented:

"We continue to execute our stated strategy of developing the leading, global technical services business for the video games market through organic growth and acquisitions, having grown our market share and considerably broadened our offering during the first half of the year. The video games market has reacted well to the

acquisitions we have made, we are pleased with the progress we have made in integrating those businesses and weare already seeing the benefits of a larger business with more balanced income streams.

"We have seen steadier production schedules through the first three quarters of the year than in previous years, with activity levels expected to have a greater weighting to the fourth quarter than a typical year as we support clients in preparation of anticipated console games title launches in the pre-Easter release window in 2015, rather than the traditionally favoured pre-Christmas and Thanksgiving period.

"The games market as a whole continues to develop strongly and, with the benefit of expected strong activity in the remainder of the year combined with anticipated incremental margin improvements in our recently acquired businesses, we expect the outturn for the full year to be in line with expectations as we continue to deliver on ourstrategy of growing organically, complemented by selective acquisitions."

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Notes to Editors

Keywords Studios is an international technical services provider to the global video games industry. Established in 1998, and now with facilities in Dublin, Montreal, Seattle, Tokyo, Singapore, New Delhi, Rome, Milan, London and Seattle, it provides integrated localisation, testing and audio services across 40 languages and 14 games platforms to a blue chip client base in more than 15 countries. It has a strong market position, providing services to 15 of the top 25 most prominent games companies, including Microsoft, Namco Bandai, Sony, Konami, Electronic Arts, 2K, and Square Enix. Keywords Studios is listed on AIM, the London Stock Exchange regulated market (KWS.L). For further information please visit: www.keywordsstudios.com

Report of Management

The first half of the financial year has seen the Group more than double in size and become a more balanced business as a result of the acquisitions we have made, whilst it has continued to deliver organic growth with revenues from existing operations having increased by 14% from the comparable period.

Overall, Group revenues almost doubled to €14.3m in the first half, including partial contributions from Liquid Violet, Babel Media and Binari Sonori since their acquisition in January 2014, February 2014 and May 2014 respectively. As previously stated, these acquisitions have historically achieved lower margins than Keywords, partly due to a different mix of services but also due to the more rigorous focus Keywords places on lean and agile operations. We have made good progress with the integration of the acquisitions and anticipate the benefits of the roll out of Keywords' approach to operational efficiency to be realised incrementally over the course of their respective earn-out periods.

In addition to its first three acquisitions, Keywords Studios has invested in organic expansion during the period with the establishment of new Singapore operations to support the outsourcing requirements of Electronic Arts for South East Asia, and has continued to increase its market share and win new clients, including Gumi, Carbine Studios and Sega.

The Group typically experiences lower levels of activity in the first half of the year compared to the second half, with a seasonal peak in activity during its third quarter as publishers prepare games for launch in the pre-Christmas and Thanksgiving period. This year we have seen steadier production schedules through the first three quarters of the year, with activity levels in the fourth quarter expected to be higher than in a typical year as many games publishers aim to launch console games in the pre-Easter release window in 2015 rather than the traditionally favoured pre-Christmas and Thanksgiving period. Whilst this shift in the anticipated launch cycles has held back console-orientated activities in Keywords' testing and Binari's translation and audio service lines, we benefited from a strong performance in our functional QA business, which was significantly extended by the acquisition of Babel Media, in the first half. Overall, we anticipate slightly slower console-related activities to be substantially offset by higher than normal levels of activity in the remaining months of 2014.

Results for the period

Last year Keywords Studios plc's prepared consolidated results for the 27 weeks to 8 July 2013, as it was at this date that Keywords Studio plc acquired Keywords International Limited following the Group's Admission to AIM. These results have been used for comparative purposes throughout the 2014 interim report.

Group revenues increased by 99% to €14.3m (H1 2013: €7.2m) during the period. This increase was driven by a combination of continued growth of existing operations, which saw an increase in revenue of 14%, and the partial contributions of Liquid Violet, Babel Media Group and Binari Sonori since their respective acquisition dates.

In terms of Keywords' mix of activities, the most significant change has been the increase of Functional Testing services to €2.8m and 19% of sales (FY 2013: €0.2m and 2%). This is primarily due to the incorporation of Babel Media's sales.

The acquisitions have also decreased the Group's reliance on Localisation Testing which accounted for 39% of Group revenues during the first half (FY 2013: 58%). The service remains a strong line of business within Keywords, with sales having increased by 65% to €5.5m (H1 2013: €3.4m) including Babel Media's localisation testing revenues since its acquisition. This represents a robust performance given the delays to AAA console game launches which we will now be testing primarily in the second half of the year. As a result of this increase in activity, we expect Localisation Testing to account for a greater proportion of Group revenue in the second half of the year, particularly as we will also have the benefit from a full period contribution from Babel Media.

The Localisation activities have grown by 56% to €4.6m (H1 2013: €2.9m), including a small proportion of Babel's sales and just eight weeks of sales from Binari, and have remained a constant proportion of Group revenue (H1 2014: 32%, FY 2013: 32%).

Binari is a leader in the Audio services market place, which in conjunction with Liquid Violet, has played a role in the 112% increase in sales of Audio services to € 1.4m (H1 2013: €0.7m). As Binari is the larger business and they only joined the Group in May and January 2014 respectively, the impact on Audio services will be greater in the second half of the year, albeit that delays from a major client are holding Binari back from achieving its targets.

The acquisitions have greatly increased Keywords presence in North America with 45% of sales coming from our studios based in the US and Canada (FY 2013: 24%) which we anticipate will give us greater opportunity to increase our market share in this region. Similarly we have made gains, albeit more modest, from our Asian studios which now account for 12% of sales (FY 2013: 7%).

During the period, the gross profit margin was broadly stable at 30.8% (H1 2013: 30.6%) but was held back by the greater mix of relatively lower margin functional testing and lower margins from the new acquisitions.

Operating expenses increased in the first half of the year to €3.1m (H1 2013: €1.6m) reflecting the costs of the newly acquired entities and Singapore, albeit they were lower than the comparable period as a proportion of sales at 21.4% (H1 2013: 22.8%) as a result of the work which continues to be undertaken to integrate the new entities into the Group and reduce costs.

One-off costs of acquiring and integrating the newly acquired companies of €1.2m (H1 2013: nil) were incurred in the period. Included in net finance costs are foreign exchange gains of €0.11m in the first half of the current year, which compared to a foreign exchange loss of €0.17m in H1 2013 represents a positive swing of €0.28m. This is primarily due to sterling strengthening against the euro which has partially been offset by the appreciation of the Euro against the Canadian Dollar.

Underlying profit before tax and acquisition-related costs, IPO expenses, share option charges, amortisation of intangibles and foreign currency movements for the first half of the current financial year was €1.3m (H1 2013: €0.6m). After these items, the Group reported a profit before tax for the period of €0.04m (2013: loss before tax of €0.25m).

The estimated tax in the period is €0.181m (H1 2013: €0.03m). The tax is calculated for all of Keywords' entities, across all geographies which have generated profits during the period, after taking into account any tax losses brought forward is calculated.

As previously announced, the reduction of the multimedia tax credits in Quebec Province from 37.5% of the costs of qualifying labour to 30%, with effect from 4 June 2014, will directly affect profitability at our Montreal based studios. We will be increasing prices to compensate for this when client contracts allow for price changes, such that we expect the impact of the tax credit reduction to be offset in future years.

Basic and diluted earnings per share from continuing operations were €(0.34)c (2013: €(0.87)c).

DIVIDENDS

The Board is pleased to announce a 9% increase in its interim dividend payment, in line with its progressive dividend policy subject to the retention of funds needed to fund future growth of the Group's business and its strategic aims. The interim dividend of 0.36p per share will be paid on 21 October 2014 to shareholders on the register on 3 October 2014. The interim dividend payment will absorb approximately £0.21m of cash resources.

Strategy

Our strategy is focussed on continuing to grow the Group organically, building on its existing expertise to further extend its technical services offering to the video games industry. In addition, the Group plans to play a leading role in the consolidation of the highly fragmented video games services industry through selective acquisitions of complementary technical services businesses. The Directors believe that there is clear opportunity for Keywords Studios to build on its existing relationships with many of the major video games companies by extending its services into original games content development and operational support services; expanding geographically, as clients require support; and by executing the full outsourcing of client localisation requirements.

We have made good progress during the period, in line with our strategy, undertaking three acquisitions which extend and strengthen our range of services and by gaining market share through adding to our strong, established client base. We are continuing to review a number of interesting acquisition opportunities that could further extend our range of services.

CURRENT TRADING AND OUTLOOK

We are pleased with the way in which our recent acquisitions are being integrated into the Group. We have seen and executed upon opportunities to cross sell services as we are now able to offer our existing and potential clients wider choice with services within the Group differentiated by factors such as time zone, scalability, flexibility and price. We are also starting to see the benefits of a more balanced business with a broader service mix and customer base.

Despite a slightly slower seasonal increase in activity in the third quarter than has been typical of our business, the remainder of the year is anticipated to be strong with the Group supporting many game titles where the anticipated release dates fall in the first three months of 2015. We also expect the combination of the introduction of Keywords' operational efficiency to our recently acquired businesses as well as strengthened demand for our higher margin services in the second half to result in incremental improvements in the Group's gross margins. As a result, we expect the outturn for the full year to be in line with expectations, albeit with a greater weighting towards the final quarter than in previous years. This is due in part to the rejuvenation of the console market with some developers refocusing on the console game sector and Microsoft and Sony actively soliciting independent games developers to develop titles for their new consoles. We welcome the launches during September of the Xbox One by Microsoft into 28 territories which were omitted from the initial launch in November 2013. In addition, the opening of the Chinese market to the sale of video game consoles for the first time is being watched with interest, with Microsoft planning to launch later this year while Sony has yet to confirm a launch window. This anticipated proliferation of content and territories will serve us well as developers seek to maximise revenues by localising the games to attract larger audiences.

From the strength of our growing market position, we remain confident of making further progress in line with our stated strategy of growing organically and gaining market share, complemented by selective acquisitions to extend our market penetration and expand our range of services.

Interim consolidated statement of comprehensive income

Interim consolidated Statement of Financial Position

Condensed Consolidated Statement of changes in equity

Interim consolidated statement of cash flows

Adjustments to reconcile net income to net cash provided by operating activities

Notes to the financial information

The Group was formed on 8 July 2013 when Keywords Studios Plc (formerly Keywords Studios Limited) acquired the entire share capital of Keywords International Limited through the issue of 31,901,332 ordinary shares.

The acquisition of Keywords International Limited is deemed to be a 'combination under common control' as ultimate control before and after the acquisition was the same. As a result, these transactions are outside the scope of IFRS 3 "Business combinations" and have been accounted for under the principles of merger accounting as set out under UK GAAP.

Keywords Studios Limited was incorporated on 29 May 2013. Accordingly, although the units which comprise the Group did not form a legal group for the entire period, the current period comprises the results and balances of the subsidiary companies and the Company as if the Group had been in existence throughout the entire period and comparative results and balances comprise the consolidated results and balances of Keywords International Limited.

The interim financial statements were approved by the Board of Directors on 16 September 2014. The interim results for the 26 weeks ended 30 June, 2014 and the 27 weeks ended 8 July 2013 are neither audited nor reviewed by our auditors and the accounts in this interim report do not therefore constitute statutory accounts in accordance with Section 434 of the Companies Act 2006. They do not include all of the information required for full annual financial statements, and should be read in conjunction with the consolidated financial statements of Keywords Studios plc for the year ended 31 December 2013.

The consolidated statutory accounts of Keywords Studios for the year ended 31 December 2013 have been filed with the Companies House. The report of the auditors on those accounts was unqualified, did not contain any statements under s.498 (2) or (3) of the Companies Act 2006 and did not contain any matters to which the auditors drew attention without qualifying their report.

The same accounting policies, presentation and methods of computation are followed in these condensed consolidated financial statements as were applied in the Keywords Studio plc latest annual audited financial statements.

The financial information has been prepared in accordance with recognition and measurement requirements of International Financial Reporting Standards, International Accounting Standards and interpretations (collectively IFRS) issued by the International Accounting Standards Board (IASB) as adopted by the European Union ("adopted IFRSs"). In the current year the Group has adopted all of the new and revised standards and interpretations issued by the IASB and the International Financial Reporting Interpretations Committee (IFRIC) of the IASB, as they have been adopted by the European Union, that are relevant to its operations and effective for accounting periods beginning on 1 January 2012.

2. Significant accounting policies

There have been no changes to the accounting policies detailed in the 2013 Annual Report. Over the period covered by the Interim Report the company has acquired new companies, resulting in the creation of both Intangible Assets and Goodwill. The accounting policies relating to Intangible Assets and Goodwill are detailed below.

Goodwill

Goodwill is capitalised as an intangible asset with any impairment in carrying value being charged to the consolidated statement of comprehensive income. Where the fair value of identifiable assets, liabilities and contingent liabilities exceeds the fair value of consideration paid, the excess is credited in full to the consolidated statement of comprehensive income on the acquisition date.

Intangible Assets

Intangible assets, separately identified from goodwill acquired as part of a business combination, are initially stated at fair value. The fair value attributed is determined by discounting the expected future cashflow to be generated from the asset at the risk adjusted average weighted cost of capital appropriate to the intangible asset. The assets are estimated over their useful life which presently is 5 years starting from date the asset was capitalised.

There has been no material revisions to the nature and amount of changes in estimates of amounts reported in the annual financial statements 2013 for Keywords International Limited

Management considers that the Group's activity as a single source supplier of Localisation and Localisation Testing Services constitutes one operating and reporting segment, as defined under IFRS 8.

Management review the performance of the Group by reference to group-wide profit measures and the revenues derived from four main service groupings:

·..... Localisation - Localisation services relate to translation and cultural adaptation of in-game text and audio scripts across multiple game platforms and genres.

·..... Localisation Testing - Localisation Testing involves testing the linguistic correctness and cultural acceptability of computer games.

·..... Audio - Audio Services relate to the audio production process for computer games and includes script translation, actor selection and talent management through pre-production, audio direction, recording, and post-production, including native language QA.

·..... Functional Testing - Functional Testing relates to quality assurance services provided to game producers to ensure games function as required.

There is no allocation of operating expenses, profit measures, assets and liabilities to individual product groupings. Accordingly the disclosures below are provided on an entity-wide basis.

The activity is reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision maker has been identified as the executive management team made up of the Chief Executive Officer and the Finance Director.

Geographical Analysis of Revenues by Jurisdiction

Analysis by geographical regions is made according to the Group's operational jurisdictions. This does not reflect the region of the Group's customers, whose locations are worldwide.

Geographical Analysis of Non-current assets from Continuing Businesses

The video games industry, and in particular the console sector of the games industry, is heavily dependent on sales of new releases of games and consoles during the traditional holiday season, including the run up to Thanksgiving in the United States and Christmas in other parts of the world. As with all other service providers to the video games industry, Keywords Group typically experiences significantly higher activity as part of this release cycle during the six months from June to November. This activity drives increased revenues in that period and generates higher Gross Profit margins compared with the other six months.

Revenue for the 52 weeks ended 30th June 2014 totalled €23,719,492 (2013: 53 weeks €15,099,181) and Gross Profit of €7,782,555 (2013: 53 weeks €4,586,817).

Please note that within the last 6 months to June 30th, 2014, Keyword's Group has acquired 3 new entities which are also included in the results above.

6. Financing income and costs

.

The tax charge for the period is € 180,174 (2013 H1; € 29,110).

The tax is calculated for all of the Keyword's entities, across all geographies, which have generated profits during the period after taking into account any tax losses brought forward. A number of entities within the group have incurred losses during the period, on which no tax refund has been assumed. No tax deferred tax assets have been recognised relating to tax losses carried forward.

In May 2013, Keywords International Limited distributed €8.42 per share, based on the shares in issue at that time, or €124,516 in total, as a special dividend for 2011.

In June 2013, Keywords International Limited distributed €33.79 per share, based on the shares in issue at that time, or €500,000 in total, as a final dividend for 2012.

In October 2013, Keywords International plc distributed its maiden dividend of £0.33p/€0.39 per share, based on the shares in issue at that time, or €156,609 in total, as an interim dividend for 2013.

In June 2014, Keywords International Limited approved a dividend of €0.84 per share, based on the shares in issue at that time, or €393,767 in total, as a final dividend for 2013. The dividend was paid in July 2014.

The directors' recommend an interim dividend of £0.36 in respect of the financial year ended 31 December 2014 to the shareholders who are on the register at 3 October 2014. The dividend is not reflected in the financial statements as it does not represent a liability at 30 June 2014. The interim dividend will reduce shareholders' funds by an estimated €211,576.

Diluted earnings per share

This has not been disclosed as it is anti-dilutive.

On 17 February the group issued 1,516,944 of 1p shares which formed part of the consideration for the acquisition of Babel Media Limited.

On 9 May the group issued 1,555,650 of 1p shares which formed part of the consideration for the acquisition of Binari Sonori S.R.L.

On 9 May the group placed 4,000,000 of 1p shares into the market at a value of £1.50 per share.

During the period goodwill arose on the acquisition of Liquid Violet Ltd, Babel Media Group Ltd and Binari Sonori S.R.L.

The goodwill will be tested for impairment on an annual basis. The impairment test will be performed as part of the year end process and any adjustment required reported in the Annual report.

Customer relationships are amortised over 5 years from the point of acquisition on a straight line basis.

Acquisitions during the period

During the period KWS Group acquired 3 companies; Liquid Violet Limited, Babel Media Ltd and Binari Sonori S.R.L.

Liquid Violet Limited

On 15th January, the group acquired 100% of the issued share capital of Liquid Violet Limited ("Liquid Violet"), obtaining control of Liquid Violet. The principal activity of Liquid Violet is the provision of video games voice production services. Liquid violet was acquired to strengthen the Group's offering of audio services and to extend the service offering to new customers and to new geographies.

The amounts recognised in respect of the identifiable assets acquired and liabilities assumed are set out in the table below.

The intangibles assets are to be amortised over their estimated useful lives of 5 years. The book value of Trade and other receivables acquired was € 58,820 and a fair value adjustment of € 37,684 has subsequently been made.

The main factors leading to recognition of goodwill on the acquisition of Liquid Violet are the presence of certain intangible assets in the acquired entity which do not value for separate recognition such as the expertise in sound recording, reputation within the industry, and, an unidentified proportion representing the balance contributing to profit generation.

The sale purchase agreement includes a provision for an earn out which is based on Profit after tax over the next 2 years. The earn out amount is shown as deferred consideration and is calculated from management's best estimates based on the available information. The maximum value of the deferred consideration is € 1,565,890.

Liquid Violet contributed € 181,235 revenue (including €2,827 of intercompany sales subsequently billed onwards) and €51,772 profit before tax to the Group between the date of acquisition and the balance sheet date. If the acquisition had been completed on the first day of the financial year, revenue of €190,482 would have been contributed to the Group (including intercompany sales) and €8,708 profit before tax before taking into account fair value adjustments of €37,684.

Acquisition costs of € 39,324 have been charged through the Comprehensive Income Statement.

Babel Media Limited

On 17th February, the group acquired 100% of the issued share capital of Babel Media Limited ("Babel Media"), obtaining control of Babel Media. The principal activity of Babel Media is the provisioning of technical services for the video games publishers and developers. Babel Media was acquired as it is one of the most recognised brands in the industry and has key strengths in localisation testing, functional testing and translation which will complement and enhance the Keyword's Group offering to the industry.

The amounts recognised in respect of the identifiable assets acquired and liabilities assumed are set out in the table below.

The intangibles assets are to be amortised over their estimated useful lives of 5 years. The book value of Trade and other receivables acquired was € 2,721,336 and a fair value adjustment of € 305,905 has subsequently been made.

The main factors leading to recognition of goodwill on the acquisition of Babel Media are the presence of certain intangible assets in the acquired entity which do not value for separate recognition such as the expertise in provision of technical services, reputation within the industry, cost synergies with the Keywords Group, and, an unidentified proportion representing the balance contributing to profit generation.

Babel Media contributed €4,618,478 revenue (including €114,256 of intercompany sales subsequently billed onwards) and €579,664 profit before tax to the Group before integration costs of € 823,790, between the date of acquisition and the balance sheet date. If the acquisition had been completed on the first day of the financial year, revenue of € 5,845,967 would have been contributed to the group (including intercompany sales) and € 529,953 profit before tax. This profit excludes acquisition and integration costs of € 823,790 and fair value adjustments of €504,308 which have been charged against the profit.

Acquisition costs of € 123,906 and integration costs of € 854,958 have been charged through the Comprehensive Income Statement.

Binari Sonori S. R. L.

On 8th May, the group acquired 100% of the issued share capital of Binari Sonori S. R. L. ( "Binari Sonori" )for a cash consideration of € 8,622,409 and consideration of € 3,000,000 in KWS Group shares, obtaining control of

Binari Sonori. The principal activity of Binari is the provision of outsourced voice-over and translation services to the international video games market. Binari Sonori was acquired to strengthen the Group's audio services and translation services business and to extend the Group's client base.

The amounts recognised in respect of the identifiable assets acquired, liabilities assumed, purchase consideration and goodwill are set out in the table below.

The intangibles assets are to be amortised over their estimated useful lives of 5 years.

The main factors leading to recognition of goodwill on the acquisition of Binari Sonori are the presence of certain intangible assets in the acquired entity which do not value for separate recognition such as the expertise in sound recording, reputation within the industry, and, an unidentified proportion representing the balance contributing to profit generation.

The sale purchase agreement includes a provision for an earn out which based on Profit after tax over the next 2 years. Management does not believe that any deferred consideration is required to be provided for.as the Profit after tax targets will not be met based on management's best estimates calculated from the available information. The maximum value of the deferred consideration per the contract is €3,600,000.

Binari Sinori S.R.L contributed € 1,492,125 revenue (including €24,056 of intercompany sales subsequently billed onwards) and €166,682 profit before tax to the Group between the date of acquisition and the balance sheet date before acquisition costs of €1,751. If the acquisition had been completed on the first day of the financial year, revenue of €2,187,198 (including intercompany sales) and €217,871 loss before tax would have been added to the group before fair value adjustments of € 170,991.

Acquisition costs of € 156,917 have been charged through the Comprehensive Income Statement.

There are no significant events post the balance sheet date.