REG - Keywords Studios PLC - Replacement - Final Results
11/04/2019 07:05
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RNS Number : 8314V
Keywords Studios PLC
11 April 2019
Correction: The following is a correction to the Final Results announcement
for the year ended 31 December 2018 announced at 7 a.m. on 08.04.19 (RNS no:
3625V).
The changes relate to the cash conversion calculation in the Alternative
Performance Measures, certain note numbers from note 19 onwards, as well as
deletion of references in notes to the Company Balance Sheet that is not
presented in the RNS. The cash conversion figure has also been updated in the
highlights section.
The rest of the final results announcement remains unchanged. The errors
have been corrected in the final results for the year ended 31 December
2018 set out below.
8 April 2019
Keywords Studios plc ("Keywords", "the Group")
Full year results for the year to 31 December 2018
A strong performance and further expansion of new and existing services
Keywords Studios, the international technical services provider to the global
video games industry, today provides its full year results for the year to 31
December 2018.
Financial overview:
· Group revenue increased by 66% to €250.8m (2017: €151.4m)
· On a Constant Currency(1) basis, revenue grew to €258.6m (2017:
€151.4m)
· Gross margin increased to 38.2% (2017: 36.4%)
· Adjusted profit before tax(2) increased by 65% to €37.9m (2017:
€23.0m)
· Adjusted basic earnings per share(2) up by 53% to 47.75c (2017:
31.18c)
· Return on capital employed (ROCE)(3) of 19.4% (2017: 15.8%)
· Cash conversion of 87% (2017: 84%)
· Net debt(4) of €0.4m (2017: €11.1m net cash)
· Final dividend of 1.08p (2017: 0.98p); 10% increase in total
dividend to 1.61p per share (2017: 1.46p)
Operational overview:
· 10.1% increase in like-for-like(5) revenue or 14.9% excluding the
impact of VMC
· 8 acquisitions in 2018 completed and integrated, expanding new and
existing service lines:
o Integration of VMC across four service lines and five studios completed
ahead of schedule, giving us the benefits of scale in North America
o Significantly expanded our newer engineering service line
o Added marketing services, music management and predictive analytics to our
range of services
· Invested in capacity, adding 930 work stations across multiple
studios to support organic growth
· 99 clients now using three or more services, up from 93 in 2017
indicating further cross-selling success
· Keywords Ventures launched to make modest investments in
innovations that will benefit our clients
Current trading and outlook:
· An encouraging start to 2019, with the first quarter in line with
our expectations
· 2 further acquisitions made in 2019, adding scale in marketing
services with Sunny Side Up and user retention and social engagement services
with GetSocial
· Significant new business gains including our first key wins in game
streaming
· Capital expenditure expected to be lighter in 2019 than in 2018
· Healthy pipeline of acquisition opportunities, with a particular
focus on building marketing, engineering and audio services
The business uses a number of adjusted measures that are not defined or
recognised under IFRS. For full definitions and explanations of these measures
and a reconciliation to the most directly referenceable IFRS line item, please
refer to the end of the statement.
(1) revenue in 2018 calculated at the currency rates consistent with those
that applied in 2017
(2) before acquisition and integration expenses of €5.6m (2017: €3.0m),
share option charges of €4.1m (2017: €1.4m), amortisation of intangibles
of €6.9m (2017: €3.0m) and foreign currency exchange gain of €0.8m
(2017: loss of €3.6m).
(3) ROCE represents adjusted profit before tax, including pre-acquisition
profit and excluding interest expense, expressed as a percentage of the total
capital employed which are both adjusted as if all the acquisitions made
during each year were made at the start of that year.
(4) after payment of €24.9m net cash consideration for acquisitions
(2017: €86.8m), €4.5m of acquisition costs and integration expenses
(2017: €3.0m).
(5) like for like revenue at constant exchange rates is calculated by
adjusting the prior year revenues comparison by adding pre-acquisition
revenues for the corresponding period of ownership in the current year results
and applying consistent foreign exchange rates in both years.
( )
Andrew Day, Chief Executive of Keywords Studios, commented:
"The Group delivered a strong performance in 2018 as we increased our share of
the growing video games market and expanded our range of services. This
considerable progress has further improved our quality of earnings and moved
us higher up the value chain with our customers.
"We have started 2019 promisingly, and we are seeing good overall demand for
our services across the Group. We are actively reviewing acquisitions from
which we will continue to be selective, with many businesses excited about the
strong platform Keywords could potentially provide for their services and
people.
"This, combined with the likely increase in demand for content driven by the
arrival of games subscription and streaming services from new entrants such as
Apple and Google, give us confidence in the outcome for the full year.
"Our strengthened market leadership and breadth and scale of service offering
enable us to take advantage of the multiple growth opportunities afforded by a
market that continues to grow in size and sophistication."
A presentation of the full year results will be made to analysts at 9.30am
today at MHP's offices. There will also be a live, listen only webcast of the
presentation and a video recording which will be made available via
www.keywordsstudios.com (http://www.keywordsstudios.com) . To register for
access or obtain alternative dial in details, please email keywords@mhpc.com
(mailto:keywords@mhpc.com) or contact Charles Hirst at MHP Communications on
+44 20 3128 8193.
For further information, please contact:
Keywords Studios (www.keywordsstudios.com) +353 190 22 730
Andrew Day, Chief Executive Officer
David Broderick, Chief Financial Officer
Numis (Financial Adviser) + 44 20 7260 1000
Stuart Skinner / Kevin Cruickshank (Nominated Adviser)
James Black / Tom Ballard (Corporate Broker)
MHP Communications (Financial PR) + 44 20 3128 8100
Katie Hunt / Ollie Hoare / Nessyah Hart / Charles Hirst Keywords@mhpc.com
Certain information contained in this announcement would have constituted
inside information (as defined by Article 7 of Regulation (EU) No 596/2014)
prior to its release as part of this announcement.
About Keywords Studios (www.keywordsstudios.com)
Keywords Studios is an international technical services provider to the global
video games industry. Established in 1998, and now with over 50 facilities in
21 countries strategically located in Asia, the Americas and Europe, it
provides integrated art creation, software engineering, testing, localization,
audio and customer care services across more than 50 languages and more than
16 games platforms to a blue-chip client base of approximately 850 clients
across the globe.
It has a strong market position, providing services to 23 of the top 25 most
prominent games companies, including Activision Blizzard, Bandai Namco,
Bethesda, Electronic Arts, Konami, Riot Games, Sony, Square Enix, Supercell,
TakeTwo, Epic Games and Ubisoft. Recent titles worked on include Uncharted 4:
A Thief's End, Call of Duty: WWII, Mortal Combat X, Assassin's Creed Origins,
Battlefield 1, League of Legends, Fortnite, Clash Royale and Rainbow Six
Siege. Keywords Studios is listed on AIM, the London Stock Exchange regulated
market (KWS.L).
Chairman's Statement
Introduction
2018 was a year of good, and perhaps underappreciated, progress in which we
delivered a 65% increase in Adjusted Profit Before Tax to €37.9m (2017:
€23.0m) which was within the range of market expectations albeit it was held
back by certain project deferrals into 2019 and, unusually for us, bad debts
of approximately €1.6m relating to four clients entering insolvency
processes, some of which were caused by the 'Fortnite effect' on the industry
(as explained in more detail in the Chief Executive's Review).
The 53% increase in Adjusted Basic Earnings Per Share to 47.75c demonstrates
how effectively the Company is deploying capital and managing its margins
while growing so strongly. This performance was delivered while continuing
to develop the Group's strong positioning in the video games market and
creating an even better balanced, more diversified business with the addition
of several new services including marketing services, music management, sound
effects and game and predictive analytics. We also significantly strengthened
our relatively new engineering/game development services offering and invested
in the expansion of studios which created an additional 930 work stations
across Beijing, Chengdu, Katowice, Liverpool, London, Los Angeles, Manila,
Milan, Montreal, Seattle and Tokyo. The businesses that have joined the Group
through acquisitions have integrated well, embracing the dynamic and
self-effacing Keywords culture.
Like-for-Like revenue growth(5) was 10.1%; without the expected drag in the
year from the VMC acquisition, Like-for-Like revenue growth would have been
14.9%. However, we are pleased with the overall contribution from VMC which
has been significantly earnings enhancing. The Like-for-Like growth reflected
good performances across the business although Localization Testing revenues
declined unexpectedly at the end of the year as a number of projects slipped
into 2019.
(5) Calculated on the basis that the full year 2017 comparative included all
of the 2017 and 2018 acquisitions, as if they had been owned for the same
period in 2017 as they have been in 2018 and applying consistent foreign
exchange rates in both years.
Multiple growth opportunities
Overall, Keywords is well positioned to take advantage of the multiple
opportunities we see as the video games industry is predicted to continue to
grow strongly, at a CAGR of c.9% (source: Newzoo, October 2018), despite the
short-term disruption caused by Fortnite last year, and the trend towards
outsourcing continues as video games companies aim to avoid substantially
increased fixed costs to handle peaks in activity levels. Having extended
our service offering further during the year, many of our blue-chip games
producers and developer clients now see us as an important and trusted
business partner who can bring considerable value to their games' development
and creation process.
Importantly, as cloud gaming and other subscription models emerge, we expect
to see strong demand for our services to support the significant growth in
content that these services will drive.
Our strategic vision hasn't changed since the flotation on AIM in July 2013,
and, pleasingly, we are significantly ahead of those early plans both in size
and scope. We continue to see plenty of opportunity in the video games
market to support our growth both organically and through selective
acquisitions and the landscape remains fertile with a number of businesses
expressing interest in joining us, so they can participate in Keywords'
compelling partnering and growth model.
Managing and funding growth
Keywords' ability to source, execute and integrate acquisitions effectively is
a core skill and, as the Group expands, more of the management team are
involved in these assimilation processes. We look for a strong cultural fit
and focus on the people joining the Group, rather than just seeing it as
acquiring businesses, so that we engender a partnership through which both
parties work closely together to complement each other.
We are also highly focussed on maintaining the interest, drive and passion of
those who join Keywords, to make sure that they are stimulated by new
opportunities as part of a much larger organisation without losing their
entrepreneurial drive. One of the ways in which we have done this is by
strengthening the Group's management team with the highly experienced people
we bring in through our acquisitions; this, in combination with developing our
existing team, in turn provides further bandwidth across the management team
to support the ongoing growth of the business.
The funding of our acquisitions is achieved both by cash generated organically
and through bank facilities. We are continuously improving our
profit-to-cash conversion, assisted by the streamlining of our banking
arrangements around the Group and are working towards centralised cash pooling
and regular draw-downs as standard within the treasury function. The
increase in our bank facilities to up to €105m, which we secured during the
year, gives us good headroom and demonstrates the strong support we enjoy from
our banks for our growth strategy, given the strength of our financial
performance and the recurring nature of many of the revenues.
As we grow, we have continued to develop our business processes and strengthen
our governance practices. We have had a particular focus in 2018 on
developing our operating and financial systems in order to enhance the
management information available and streamline our reporting processes
further; this remains work in progress. We have also improved our governance
procedures with the adoption of the Quoted Companies Association code, as
outlined in further detail later in the Annual Report. Ensuring we have the
best internal systems and controls, as well as more integrated and efficient
processes with our clients, will remain a focus in 2019.
People
The progress of Keywords and its successful transition from being a small
company with two service lines into what it is today is a credit not just to
the top team, but to everyone throughout the organisation for their part in
making it happen. On behalf of the Board, I would like to thank all of the
team for their strong contributions.
The whole executive team led by CEO Andrew Day, has worked impressively and
performed well during the year. The team is operating in an industry that is
not only fast growing but is a leading technological innovator in interactive
technology; that Keywords is now a respected provider of services and
increasingly of technical innovations shows how much we have become a key
partner to our customers, despite most being many times our size.
Dividend
The Board is pleased to recommend a final dividend of 1.08p per share which,
following the interim dividend of 0.53p per share will make a total dividend
for the year ending 31 December 2018 of 1.61p per share. This reflects an
increase of 10% compared to 1.46p for 2017 and is consistent with our
progressive dividend policy whilst retaining sufficient resources to fund our
future growth. Subject to shareholder approval at the Group's AGM, the
dividend will be paid on 21 June 2019, to shareholders on the register on 31
May 2019.
Current Trading and Outlook
We have started 2019 promisingly. In a year in which the games industry is
likely to see some changes with the arrival of games subscription and
streaming services from new entrants like Apple and Google, we feel well
placed to benefit from the likely increased demand for content.
The considerable progress we made in 2018 has improved our quality of earnings
and moved us higher up the value chain. Accordingly, as we continue to
strengthen our market leadership and the breadth and scale of our service
offering, we are well placed to take advantage of the multiple growth
opportunities afforded by a market that is growing in size and sophistication.
Ross Graham
Chairman
Strategic Report and Chief Executive's Review
Well placed to benefit from the growth in content that will be driven by
streaming games and next generation consoles
The Group produced another good performance during the year, albeit its growth
was slightly held back by the anticipated low growth of VMC combined with the
'Fortnite effect' and, late in the year, certain unforeseen project delays and
cancellations (both explained in more detail in the organic growth and
investment section of this review). Despite these reverses, the underlying
performance of all but one of the seven service lines has been strong. The
exception was Localization Testing where we were particularly impacted by
delays at the tail end of 2018 some of which we are now working on in 2019.
Overall, we continued to increase our share of the growing video games market,
with customers attracted by our ability to flexibly deliver high quality
services, across an increased and unrivalled range of services and
geographies. The addition of music management and sound effects, marketing
services and data analytics through acquisitions in the year will further
extend relationships with our clients.
Delivering on our strategy
Our strategy of building the world's leading technical and creative services
platform for the video games market and beyond continues to yield rapid,
synergistic growth.
Operating globally across the lifecycle of video games, we continue to benefit
from the major structural drivers of a growing industry, combined with a trend
towards the outsourcing of services to create, test, market, internationalise
and support interactive content. The video games services market remains
highly fragmented despite the scale and global nature of the major video games
publishers and developers. We continue to believe that the services provision
market needs to consolidate further in order to support the needs of game
publishers and developers who are grappling with the challenges of producing
more extensive content whilst meeting demands for higher quality. This
includes the provision and support of this content in more markets, across
more devices and delivered in a range of formats - which looks set to extend
to cloud-based delivery in 2019 and beyond. The ability and flexibility to
expand team sizes and to turn to specialists who are available as needed is
essential for publishers looking to satisfy these demands rapidly, thus making
outsourced and embedded services ever more attractive.
During 2018 we successfully acquired and integrated eight companies, investing
€33.1m in cash (gross) and €27.3m in deferred cash and in shares. These
businesses extended our services into new areas such as marketing services,
music management and predictive analytics and significantly strengthened our
existing service lines including a considerable scaling up of our newer
Engineering Service line.
In particular, our entry into the design and production of trailers used to
promote games has added a new pillar for growth through the acquisition of
Fire Without Smoke and The TrailerFarm. In the first few days of 2019, we
also completed the acquisition of our third company in marketing services,
Sunny Side Up, and we hope to add further scale to this activity to turn it
into our eighth service line.
We added Snowed In and, more substantially, Studio Gobo and Electric Square to
our Engineering Service line which had been significantly enhanced by the
acquisition of Sperasoft in the last weeks of 2017. Following these
acquisitions, this service line generates annualised revenues of c. €35.8m,
demonstrating that we have been able to build a service line of scale that is
now the fourth largest of our seven service lines, in a very short space of
time. We are continuing to review further acquisitions in this area of our
business while we further integrate the six studios that currently comprise
the service line.
Our recent acquisitions of Yokozuna Data and GetSocial have brought back-end
gaming platforms and underlying analytics to the Group to help games companies
keep gamers in their game for longer and improve their monetisation of the
games. Whilst these acquisitions are not currently earnings enhancing, we
believe that they can be developed into valuable additional technologies and
services for clients and, therefore, additional revenue generators.
In our Audio Service Line, we extended our service offering outside our
traditional localised voice-over services, a field in which we lead the video
games industry, to music management, sound effects and sound design and
original language voice production through the acquisition of Cord and Laced,
the hiring of a complete team in SoundLab and the acquisition of Blindlight.
This broadened scope of services has already led to synergies and cross
selling successes within the service line and with other service lines.
The Group has now fully integrated VMC, which was acquired in October 2017 for
$66.4m (€57.9m). This very thorough integration exercise across four service
lines and five studio locations was completed ahead of schedule. As a result,
VMC has contributed significantly to the Group's achievement of a 15.1%
operating margin, despite the pre-acquisition operating margin of VMC having
been about 9%. Although initially a drag on revenue growth (as expected), it
has given us the benefits of real scale in certain service lines in North
America, where we are seeing growing demand, and it is significantly earnings
enhancing.
Keywords Ventures
In July 2018, we launched Keywords Ventures ("KWV") to make modest investments
in companies with innovative technologies and services that will benefit our
clients and where we can help commercialise those products and services
through access to our global platform, relationships and funding. We would
not expect our annual investment in KWV to exceed 5% of our annual spend on
acquisitions. Our first investment was for £300,000, in a Series A funding
for up to a 45% shareholding in a pre-revenue company, AppSecTest Ltd, which
has created AS Analyser, a cloud based automatic testing solution that
analyses apps and mobile games for compliance with the GDPR, and which
launched in late 2018.
Organic growth and investment
We have continued to deliver organic growth, having achieved a 10.1% increase
in Like-for-Like revenue at constant exchange rates in 2018 During 2018, our
Like-for-Like revenue growth on this basis was negatively affected by two
principal factors including the contribution from VMC where revenue declined
in the year, as anticipated, and due to what we have labelled as the 'Fortnite
effect'.
The phenomenally successful Fortnite game attracted some 200 million players
during the course of the year and in so doing disrupted other games which we
support, although we ourselves now do a considerable amount of work on
Fortnite. In some of those cases, the competitive effect and loss of player
base was material enough for clients to reduce their spending on supporting
games, to terminate games and, while it may not be the only contributing
factor, a few companies ceased trading altogether (or went into insolvency
processes), including Telltale and Starbreeze. Localization was the service
line most affected by the 'Fortnite Effect'.
The drag on the Group's revenue growth by VMC primarily affected Functional
Testing, Player Support and, to a lesser extent, Localization Testing.
However, having now fully integrated VMC, we expect it to contribute to
revenue growth and good margins in those divisions incrementally during 2019.
Due to these impacts, the headline growth per service line in some instances
masks the underlying trends but we have attempted to provide those underlying
trends, alongside the reported numbers, in the service line review section
below.
We continue to make good progress in cross selling our services into our
client base. For the 12-month period under review we increased the number of
clients using three or more of our services to 99 clients in 2018 from 93
clients in 2017.
The investment programmes in the existing businesses that we began in late
2017 were successfully completed in 2018 and resulted in increased capacity to
support the organic growth of the business. The additional work stations
created are being well utilised already and have helped to support our organic
growth during the year. We expect to further increase our available work
space in certain locations in 2019 but anticipate the level of investment
returning to the ordinary course of business, in contrast to 2017 to 2018 when
the demand pressures for space came together in many geographies and service
lines.
While we successfully consolidated some locations during the year, the results
of organic and acquisition led expansion meant we finished the year with 52
operating units in 21 countries up from 42 and 20 respectively in 2017.
Service line review
Revenue Mix €'000 Year ended Year ended Year ended Year ended
31-Dec-18 31-Dec-18 31-Dec-17 31-Dec-17
Art Creation 41,688 16.6% 26,193 17.3%
Engineering 26,161 10.4% 3,572 2.4%
Audio 34,190 13.6% 20,657 13.6%
Functional Testing 49,128 19.6% 30,033 19.8%
Localization 43,983 17.6% 41,959 27.7%
Localization Testing 19,751 7.9% 19,848 13.1%
Player Support 35,904 14.3% 9,168 6.1%
Total 250,805 100% 151,430 100%
As the Group made a number of acquisitions during the year, the following
table also provides an overview of revenues on a Pro Forma basis, which
includes the annualised sales of all acquisitions made in each year, in order
to provide a better overview of the size and balance of the business at the
end of each year. The service line commentary which follows reports on the
statutory revenues unless otherwise stated.
Proforma Revenue Mix €'000 Year ended Year ended Year ended Year ended
31-Dec-18 31-Dec-18 31-Dec-17 31-Dec-17
Art Creation 43,978 16.6% 36,239 16.4%
Engineering 35,803 13.5% 17,059 7.7%
Audio 36,897 13.9% 24,573 11.1%
Functional Testing 49,128 18.5% 48,183 21.8%
Localization 43,984 16.6% 43,323 19.6%
Localization Testing 19,751 7.4% 22,717 10.3%
Player Support 35,904 13.5% 28,626 13.0%
Total 265,445 100% 220,720 100%
Art Creation (16.6% of Group revenues for the year)
This service line creates video game graphical art, including concept art, 2D
and 3D art asset production & animation and provides marketing services
including game trailers, marketing art and materials.
Headed by Ashley Liu, based in Beijing, Art Creation services revenue grew
59.2% to €41.7m (2017: €26.2.m) reflecting full year contributions from
the 2017 acquisitions, SPOV, Red Hot and part of Sperasoft, and, since May and
September 2018, the contributions from the acquisitions of Fire Without Smoke
and The TrailerFarm respectively.
On a Like-for-Like basis, Art Creation grew by 11.9% year-on-year, having
benefited from our investment in expanded capacity in late 2017 and into 2018
which enabled it to meet more of the demand for its services. In addition,
increasing integration across a greater number of studios in the art service
line has enabled us to take on and deliver work that we would not otherwise
have been able to service.
During the year we added marketing services, including the production of game
trailers and marketing art and materials, to the range of services Art
Creation is able to offer through the acquisitions of Fire Without Smoke and
The TrailerFarm. Just after the year end, Sunny Side Up, another game trailer
and marketing services business joined the Group through acquisition. We are
continuing to review other acquisition opportunities in this area and may
establish a separate services line to house these activities once it reaches
the requisite scale.
Engineering (10.4% of Group revenue for the year)
Engineering provides software engineering, porting to different platforms and
game development services to publishers and developers as well as access to
exclusive technology platforms and data analytics. It works with its clients
in a number of engagement models from the provision of trouble shooting
services, team augmentation, game porting to different target platforms,
co-development, full game development services and the provision of live game
operations services.
The Engineering service line which only started in 2017 has grown to represent
around 13.5% of Group revenues on a proforma basis in 2018. Principally due to
acquisitions made in the year its revenues grew seven-fold to €26.1m (2017:
€3.6m) reflecting full year contributions from Gamesim, d3t and Sperasoft
which were acquired during 2017, while Snowed In, and Studio Gobo and Electric
Square have contributed since July and August 2018, respectively. Jamie
Campbell, formerly CEO of d3t, assumed responsibility for this service line in
July 2018.
On a Like-for-Like basis, its revenues grew by 23.3%. We now have a
333-strong team which is currently working on some very high-profile titles
for some leading game developers and publishers and we were able to announce
projects we had delivered in 2018 including significant work on Shenmue I
& II for Sega; Assassin's Creed Odyssey, Rainbow Six: Siege, and For Honor
for Ubisoft; and Miami Street for Microsoft. While this service line is more
project based and exhibits a lumpier revenue profile than the rest of the
Keywords business, it is important for the Group as it is highly valued by our
customers and ensures we are even more integrated with their development life
cycles, often at an earlier stage. It is also expected to see significant
demand as customers increasingly port games content to cloud gaming platforms
for streaming. We are, therefore, actively assessing further acquisition
opportunities in this area and as we build its scale, we expect to achieve
smoother and more predictable revenues for this service line.
Audio (13.6% of Group revenue for the year)
Our Audio service line provides multi-language voiceover recording, original
language voice production, Hollywood production, and music and related
services.
It increased revenues by 65% to €34.2m (2017: €20.7m) including full year
contributions from our 2017 acquisitions in Paris (La Marque Rose, Around the
Word, Dune Sound and asrec) and of Lola, and contributions from Cord and
Laced, and Blindlight since they were acquired in April and June 2018
respectively.
On a Like-for-Like basis, revenues in our Audio service line grew by 9.8%.
This was achieved despite the collapse of two companies which were important
clients for the service line and certain unexpected delays and scale backs in
projects, all of which can in part be attributed to the 'Fortnite effect'.
It reflects the benefits of our previous investments in our Audio service
line, including new studios in Tokyo and London.
Our search for suitable premises in which to co-locate our four voice
recording businesses in Paris is continuing but our continued focus on
ensuring the premises are suitable and good value means it is taking longer
than previously envisaged to achieve this goal. In the meantime, these
businesses are operating well from their existing studio locations under
common management and reporting.
Led by Andrea Ballista, based in Milan, Italy, our Audio business extended its
services offering into sound design, music management and original language
voice recording (principally in Hollywood) during 2018 and these new services
are showing good promise in their own right, in addition to bringing cross
selling benefits to the Group. Games music is a niche but growing market and
one example of our success in this area is that our games music record label,
Laced Records, saw strong forward orders for its four-vinyl album of the music
from Doom. As another example, Cord managed all the music elements for a
highly anticipated upcoming game, in which it arranged the composition of
music and the licensing of previously published tracks on behalf of the
developer.
Our audio studio in Tokyo, which we opened in 2017, had a good first full year
of operations and has benefitted from a recently strengthened team in
preparation for an even busier 2019, and our new, larger studios in London are
enabling us to meet the strong demand for their services.
Functional Testing (19.6% of Group revenue for the year)
Functional Testing provides quality assurance, including discovery and
documentation of game defects and testing to verify the game's compliance with
hardware manufacturers' and app stores' specifications, as well as focus group
and user experience testing and consulting.
Our Functional Testing service line grew by 64% to €49.1m (2017: €30.0m),
including a full year's contribution from VMC which was acquired in October
2017. The service line also grew by 6.4% on a Like-for-Like basis despite the
anticipated drag from the inclusion of c. 52% of VMC revenues (at the time of
acquisition) falling within Functional Testing. Excluding VMC, we estimate
that this Like-for-Like growth would have been 26.5% as our functional testing
business in North America has become the "go to" provider.
The service line management team led by Mathieu Lachance, who is based in
Montreal, Canada, have done well in integrating the VMC business, having
consolidated their facilities, improved the processes in the business and
implemented common tools such that there is now no discernible difference
between what was VMC and what is the larger Keywords team today. We expect
the functional testing activities of VMC to grow at the same rate as the
underlying service line in 2019 and beyond. The VMC brand along with that of
Babel has been replaced by the Keywords name to reflect this complete
integration. Enzyme Testing labs continues to have its own branding for now,
although this may be rebranded during 2019.
Localization (17.6% of Group revenue in the year)
Localization provides translations of in-game text, audio scripts, cultural
and local adaption, accreditation, packaging and marketing materials in over
50 languages.
Our Localization activities increased revenues by 5% to €44.0m (2017:
€42.0m). Like-for-Like revenues grew by 3.5% despite suffering a significant
impact from clients reducing support for some of their games, which we believe
was in large part due to the 'Fortnite effect'. In particular, one client who
was the top ranked client by revenue for this service line in 2017 reduced its
spend substantially compared to the prior year and our expectations, leaving
the Localization service line to make up a c.€6m deficit.
During the year, the Localization service line, led by Fabio Minazzi in Milan,
continued to invest in new functionality and the scalability of our
proprietary "BPS" operating platform and worked with our suppliers of
translation memory systems to increase the robustness of these solutions to
support the ever-increasing workloads we are putting through them. We have
continued to explore machine translation solutions and while we have found few
opportunities for the use of this technology in video games localization so
far, we will none-the-less be more active in building this capability into our
workflows during 2019. Our XLOC globalization content management product
progressed further in 2018 and we recently launched XLOC 6.2 with more
developer file formats supported and new user interfaces, including in both
Chinese and Japanese, making it the only product of this kind available for
Asian developers.
Localization Testing (7.9% of Group revenue for the year)
Localization Testing tests for out of context translations, truncations,
overlaps, spelling, grammar, age rating issues, geopolitical and cultural
sensitivities and console manufacturer compliance requirements in over 30
languages using native speakers.
Our Localization Testing operations maintained revenues at €19.8m (2017:
€19.8m) helped by the full year contribution from VMC. On
Like-for-Like-basis however, its revenues declined by 10.6%.
This performance in part reflects VMC's inclusion (if VMC were excluded,
Like-for-Like sales would have declined 8.7%), but the key impact was from
some important titles, that were expected to come in for testing in the last
two months of the year, being delayed to Q1 2019. Consequentially, the service
line has started strongly in the first months of 2019.
In addition, we anticipate that longer sales cycles, as we have concentrated
more effort on multi service line strategic client relationships, should bear
fruit in 2019 and the management team, led by Thomas Barth from Dublin,
Ireland, are continuing to focus on quality and cost efficiencies. In line
with this focus, they are exploring the option of establishing a localization
testing operation in Katowice, Poland, leveraging the management, personnel
and facilities infrastructure created there by the Player Support Group to
access the local, high calibre, yet good value talent.
Player Support (14.3% of Group revenue for the year)
Player Support provides 365/24/7, multilingual support for gamers when games
are in live operation, forum monitoring and moderation services and social
media engagement on behalf of the game brand.
Revenues for this service line, which benefitted significantly from a full
year contribution from VMC, almost quadrupled to €35.9m (2017: €9.2m).
The VMC business reduced the Like-for-Like growth of the business, as
expected. Without VMC Like-for-Like growth would have been 94.1%, rather than
30.8% including the effect of VMC.
This excellent underlying performance led by Frederic Arens, who moved from
Montreal to our Tokyo studio during the year, was driven by organic expansion,
including the opening of a new support centre in Katowice, Poland, making use
of the nearby presence of Sperasoft in Krakow. This facility now employs 200
people having commenced in June 2018. Our Manila operation has also
continued to grow strongly and now has 700 employees, double the number in the
prior year. Player support is planning for a year of consolidation in 2019,
after the exceptional growth in 2018. The Player Support operations assumed
from VMC are being stabilised, although some further attrition is expected in
2019, and we expect it to return to growth by next year.
Managing growth and developing our people
In July 2018, we strengthened the senior management team with the promotions
of Igor Efremov, previously from Sperasoft, and Jamie Campbell, previously
with d3t, to the roles of Chief Commercial Officer and Service Line Director,
Engineering respectively. In addition, we appointed Andrew Brown, whose
background is in marketing at Danone, Coca Cola, Johnston & Johnston and
Activision, to the role of Chief Marketing Officer.
The Group employed an average of 5,238 people in 2018 (2017: 3,167). Of
these around 1,100 are flexibly resourced positions, most notably in our
testing businesses, which enables us to scale up and down with the demands of
the projects. Across our three regions of the Americas, Europe and Asia, we
employed an average of 2,056, 1,267 and 1,915 respectively. By function, these
5,238 positions break down in to 1,199 artists, 333 engineers/software
developers, 1,615 testers and test engineers, 1,113 player support agents, 165
internal linguists, 100 audio engineers, and 255 project managers and
supervisors. We also have 458 people in our support functions, including in
finance/accounting, HR, IT, facilities, administration, and general
management. Our increasingly broad and deep pool of highly experienced and
games-passionate co-workers provide a tremendous resource that our clients can
access as needed in order to get their content developed, localised, marketed
and supported in live operations, in a flexible and cost-efficient manner
across the globe and in appropriate time zones.
While we continue to develop our own tools to improve productivity and to use
best of breed solutions where we can in our business, talent remains by far
our most important asset. There is always more to do in investing in our
people, but we continue to make improvements with training, benefit schemes,
career planning and we monitor ourselves in line with our policies of
non-discrimination, to ensure we are providing equal opportunities.
We are particularly proud and protective of our culture. It acts as the glue
that binds our co-workers around the world together. Empowered, relaxed,
professional and humble with a focus on doing the very best we can for each
project entrusted to us, this culture creates an environment in which
games-passionate individuals can work as an extension of our client's
organisations together with like-minded colleagues, while enjoying the
opportunity to collaborate on most of the world's leading games ahead of their
release.
We are an increasingly attractive employer for many in the wider games
industry, as we offer the opportunity for individuals to work on around 250
leading games at any time or over 600 throughout the year, giving them an
excellent and sustainable variety of work as well as good career advancement
and opportunities to work in many different locations. We are proud of and
aim to develop and retain our home-grown talent, but we are equally proud that
a healthy proportion of our colleagues have, and will, go on to work in games
publishing and development within our clients' organisations, creating a
Keywords' alumnus which is helpful to both us and the games industry in
general.
Our acquisition programme also brings fresh talent to the Group at all levels
and we continue to be successful at integrating our businesses, including
providing opportunities for our staff and colleagues to move between our
various studios and the countries in which we operate. Our senior leadership
team, which comprises four people from the original Keywords business, ten
people from acquired entities as well as six externally hired employees is
itself testament to the opportunities provided across the Group and our
ability to complement the leadership team with talented individuals from
acquired companies.
We continue to see demand for our services from outside of the games industry
due to the specific expertise we have in interactive content development,
testing and support. Working on different forms of content can help to further
expand the horizons of our colleagues as they get the opportunity to tackle
challenges in new but related fields such as film and TV, retail, education,
automotive, advertising, architecture, urban planning, theme parks and
interactive experiences. In time, we intend to more proactively target
expansion into some of these adjacent market sectors, building on the
experience we are already gaining.
Current video games market trends
Bursting onto the scene in the last months of 2018 has been the promise of
streaming of video games or cloud-based gaming. While earlier attempts from
companies like OnLive and Gaikai stalled in the earlier part of this decade,
Google has now entered the market with its newly launched Stadia streaming
service and Microsoft has indicated its plans for its games streaming
project, codenamed xCloud, to provide streaming access to over 3,000 current
Xbox titles, supported by its Azure cloud infrastructure of 54 data centres
serving 140 countries. Apple also announced in March 2019 its Arcade
subscription-based gaming service which, although not a streaming platform per
se, does provider gamers with access to many games through this new
subscription platform.
The promise of these subscription platforms providing easy, mostly device
independent access, to play video games anywhere in the world is compelling
and, if successful, will be a major opportunity for new entrants (such as
Google and Apple) and for potentially new monetisation models. As the music
and film and TV industries have experienced when moving towards streaming
services, we expect to see an increased demand for content as these streaming
platforms compete to become the "Netflix of games" and endeavour to host the
most and the best content to attract and retain their player bases. While we
can't rule out some short-term disruption from this development, we believe
that Keywords is well placed to benefit from this trend as games are
repurposed to run well on the new streaming platforms and new content is
created that best fits their capabilities. Keywords started working on a
number of projects directly related to video game streaming in the second half
of 2018 and we have further increased our exposure in the first months of this
year, with a number of services being provided and discussions ongoing with
existing and potential clients about how we might support future projects.
Few industry observers expect these developments in cloud-based gaming to
displace the video game consoles and PCs, on which so many games are played,
in the short term. This is expected to change as internet bandwidth improves
around the world and latency issues are overcome. The current generation of
Sony and Microsoft devices launched in November 2013 have been refreshed since
but there is now speculation over a new generation of Xbox and PlayStation
consoles which could launch over the next two years. This would represent
another milestone for the games industry and one from which we believe
Keywords is well placed to benefit. At the time of the last launch, there
was a sudden switch of investment by publishers and developers away from the
previous generation of games. This time, given that games as a service is
such a feature of games now, we expect to see the current generation of games
continue to be supported while new games are developed that take advantage of
the enhanced capabilities of the new consoles.
The astounding success of Fortnite and, to a lesser extent, Player Unknown
Battleground ("PUBG"), has been a disruptor in the market in 2018, helping to
attract new video gamers to the market while also outcompeting other games.
While we expect the success of both to continue, we think the market is more
settled now with Fortnite, PUBG and more latterly, Apex Legends an integral
part of it.
The mobile games sector continues to grow faster than other platform types,
with much of this growth originating in Asia. Keywords is proud to be
supporting many of the world's leading mobile games and, as the quality,
complexity and scale of individual mobile games grows, this benefits Keywords
as the skills, scale and global reach of all its services from development to
player support become more relevant to them.
MagicLeap released their much-anticipated augmented reality headset for use
commercially in August, albeit it was restricted to the US. Microsoft have
confirmed that their HoloLens 2 augmented reality headset will be launched
later this year but augmented reality, much like virtual reality, is showing
signs of slower adoption in the games industry than many had thought a few
years ago. Keywords does work extensively on VR content (games and non-games)
as well as AR but we don't anticipate these being major growth drivers in
2019.
eSports continues to develop strongly, and we increased our exposure to this
market in a small way through our entry into marketing services with the
acquisitions of Fire Without Smoke, The TrailerFarm and Sunny Side Up. We
continue to seek out ways in which we can participate in this segment in a
more meaningful manner.
Also, of note has been Epic Games (publisher of Fortnite) move into providing
the market with a lower cost route of getting games to market than the
established platforms such as Steam. If game developers and publishers reduce
their costs of distribution and increase their margins as a result, this may
translate into higher spend on content creation, marketing and support which
will benefit Keywords.
Service provider market
The service provider market remains highly fragmented and, in addition to the
continued growth in our end market driving demand, we continued to see a trend
to outsourcing across all our service lines, with Art Creation, Functional
Testing and Engineering likely to benefit more given the high proportion of
this type of work that remains in house. In addition, we hope to further
increase market share and benefit from our larger scale as we further
consolidate our market.
Outlook
We have had an encouraging start to 2019, with trading for the first quarter
being in line with our expectations. Some important new business wins,
including in the game streaming space, and good overall demand for our
services across the Group give us confidence in the outcome for the full year.
We expect 2019 to be lighter in capital expenditure than 2018, although we
won't hesitate to invest in growth and enabling technologies as the
opportunities arise and as we see the business requiring more space, people,
tools, and systems.
Whilst we are listed in the UK, only a relatively small proportion of our
business is in the UK where we now employ a total of 317 people. As a highly
international diversified business that operates in a very global market we,
therefore, do not expect Brexit to have a material impact on the business.
Our acquisition program is continuing at pace, with a particular focus on
building up our marketing, engineering and audio services. Having completed
the acquisition of Sunny Side Up in early January, we announced in February
2019 that we had acquired GetSocial, which brings to the Group leading edge
technology which drives user engagement, retention, acquisition and
monetisation through social interactions of players within the game. We are
actively reviewing a healthy pipeline of acquisition opportunities from which
we will continue to be selective, with many businesses excited about the
strong platform Keywords could potentially provide for their services and
people.
Our Keywords Ventures arm has an active pipeline of investment opportunities
in areas that would benefit our video game client base and beyond. The
application of artificial intelligence and machine learning to the video games
space is interesting and a number of these opportunities lie in this general
arena. We see potential to leverage the latest technologies and big data
expertise to provide services to our clients which help them better understand
and influence player behaviour, so they can attract players more cost
effectively, retain them for longer and better monetise players while, at the
same time, fine tuning and improving the game experience for players.
As a more diversified, better balanced business with significantly expanded
range of services to offer our clients, we look forward to developing our
relationships with our clients through increased integration of services, the
development of more strategic client relationships, across multiple services,
and through the provision of dedicated outsourced or embedded services.
Andrew Day
Group Chief Executive Officer
Financial and Operating Review
Strong results driven by good organic growth complemented by acquisitions
Group performance
2018 has seen the Group deliver another year of significant increases in
revenue, profit and underlying cash generation driven by strong organic
growth, substantially complemented by acquisitions which have further extended
its service offering, market penetration and geographic reach.
Revenue
Revenue for 2018 was up 66% at €250.8m (2017: €151.4m). Overall six of the
seven service lines grew, with Engineering and Player Support being
particularly strong. This growth was generated through a combination of both
organic and acquisitive growth. On a Constant Currency basis, revenue grew
to €258.6m (2017: €151.4m). The Like-for-Like revenue growth rate was
10.1% for the year, down from 15% in 2017 due to the onboarding of the VMC
business. Excluding VMC, the Like-for-Like revenue growth rate, was 15%, which
was in line with our expectations and a strong growth rate from a larger base.
Gross margin
Gross profit for the year was €95.8m (2017: €55.1m). The gross margin
percentage increased to 38.2% (2017: 36.4%).
EBITDA
EBITDA for the year was €34.3m (2017: €21.9m). Adjusted EBITDA is a
measure of operating profit used by the Board, which excludes depreciation,
amortisation, share option expenses and one-time costs related to
acquisitions. For 2018, Adjusted EBITDA increased 66% to €43.7m compared
with €26.3m for 2017. As a percentage of revenue, Adjusted EBITDA has been
maintained at 17.4% compared to 17.4% for 2017.
Adjusted Operating Costs, which excludes depreciation, increased by €23.2m
to €52m (2017: €28.8m) mainly as a result of the acquisitions made in 2017
and during the year. The continued additional investment in strengthening
Keywords' management to successfully manage the growth of the Group also
contributed. These costs increased from 19.0% to 20.7% of revenue.
Net finance costs
During 2018, there was a net finance cost of €0.5m compared to a cost of
€4.4m in 2017 primarily due to the impact of foreign exchange gains of
€0.8m (2017: loss of €3.6m). The foreign exchange movements were
largely due to the effect of translating net current assets held in foreign
currencies. The interest expense of €0.5m (2017: €0.3m) related partly
to the syndicated revolving credit facility ("RCF") of up to €105m over a
three-year period of which €40m was drawn down at the year end.
Profit before taxation
Profit before tax for the year was €22.1m (2017: €12.0m). Adjusted Profit
Before Tax is used by the Board to measure the more meaningful underlying
profit generation of the Group. This measure adds back one-time expenses,
including acquisition and integration expenses of €5.6m (2017: €3.0m),
share option charges of €4.1m (2017: €1.4m), foreign currency exchange
gains or losses of €0.8m (2017: loss of €3.6m), and amortisation of
intangibles of €6.9m (2017: €3.0m) to the statutory profit before tax.
As a result, Adjusted Profit Before Tax for 2018 increased by 65% to €37.9m
compared with €23.0m in 2017.
Revenue mix
Revenues increased across six of our seven lines of business in 2018, staying
constant in Localization Testing, resulting in our seven service lines
accounting for the following proportion of Group sales in the year on a
statutory and pro forma basis*:
Revenue Revenue Proforma* revenue for the
Revenue mix % Year ended Year ended Year ended
31-Dec-18 31-Dec-17 31-Dec-18
% % %
Art Creation 16.6 17.3 16.6
Engineering 10.4 2.4 13.5
Audio 13.6 13.6 13.9
Functional Testing 19.6 19.8 18.5
Localization 17.6 27.7 16.6
Localization Testing 7.9 13.1 7.4
Customer Support 14.3 6.1 13.5
Total 100.0 100.0 100.0
* Pro forma includes the annualised sales of all acquisitions made in 2018 in
order to give a better overview of the balance of the business at the start of
2019. Total pro forma revenue for 2018 on this basis was €265.4m (2017:
€220.7m).
Following acquisitions made in late 2017 and through 2018, the proportion of
the Group's revenues denominated in US Dollars is running at around 49%, while
those in Euros and Canadian Dollars are around 22% and 16% respectively. The
UK has grown in importance to the Group as a result of our investments in the
more technical and creative areas of our business, resulting in annualised
revenues denominated in Sterling of approximately 9%.
Taxation
The Group's effective tax rate has decreased again in 2018. We continue to
make steady progress in making better use of our Ireland-based operational
headquarters in contracting and treasury management such that we expect our
effective tax rate to continue to reduce despite our exposure to higher tax
jurisdictions in most of the territories we operate in. The Group's adjusted
effective tax rate, based on the Adjusted measure of Profit Before Taxation in
the period (as set out in the financial overview above), was 19.0% (2017:
20.5%).
Basic earnings per share
Basic earnings per share based on the statutory profit after tax was 23.16c
(2017: 12.37c). Adjusted Basic Earnings Per Share for the year, before
one-time costs of acquisitions and integration, share option charges,
amortisation of intangibles, and foreign exchange movements, increased by 53%
to 47.8c compared with 31.2c for 2017.
Cash flow and debt
The Group generated operating cash flow of €32.2m for the year, up from
€16.7m in 2017.
During the year the Group also received multi-media tax credits ("MMTCs") in
Quebec of €10.9m (2017: €3.4m). MMTCs in relation to VMC for the years
2015 to 2017 were collected in 2018 and the total MMTC accrual amounted to
€9.2m as at 31 December 2018 (2017: €10.0m).
The Group made eight acquisitions to strengthen the business during the year
with a related net cash outflow on consideration payments of €24.1m, and an
additional €4.5m in acquisition and integration cash outlay.
Investment in fixed assets amounted to €9.4m (2017: €3.8m) reflecting the
ongoing costs of IT across larger staff numbers and cost of further increasing
the capacity of the Montreal, Tokyo and Manila studios, and improvements to
both the Dublin and London studios. Additionally, there were ongoing purchases
of games development and testing equipment.
Following the investment of €24.1m net cash consideration for acquisitions
in 2018, cash and cash equivalents increased to €39.9m from €30.4m. The
loans and borrowings were €40.3m at 31 December 2018 (2017: €19.3m) having
utilised €40m of its €75m revolving credit facility, giving a net debt
position of €0.4m (2017: €11.1m net cash).
Capital Structure and Group Financing
The Keywords Group funds itself primarily through cash generation and a
syndicated revolving credit facility. The bank debt facility is a €75m RCF,
with an option to increase this to €105m. The Keywords Group had €40m
drawn from the RCF at year-end 2018. The RCF matures in June 2021 and has an
option to extend it for up to a further 2 years.
As at 31st December 2018, the Group had available cash balances and undrawn
facilities which, aggregated, were c. €75M. These available funds and
ongoing cash generation from activities provide appropriate operational
headroom and available funding for strategic purposes.
Key Financial Covenants
The majority of Group borrowings are subject to financial covenants that are
calculated in accordance with the facility agreement:
· Leverage: A maximum Total Net Borrowings to Adjusted EBITDA ratio
of 3 times; and
· Interest Cover: A minimum Adjusted Operating Profit to Net
Finance Costs ratio of 4 times.
The Group's performance against these covenants is the current and comparative
year is set out below:
2018 2017
Covenant Times Times
Leverage Maximum 3.0 0.19 -0.47
Interest Cover Minimum 4.0 40.29 40
Foreign exchange
Keywords does not hedge foreign currency profit and loss translation
exposures. The effect on the Group's results of movements in exchange rates
and the foreign gains and losses incurred during the year mainly relate to the
effect of translating net current assets held in foreign currencies.
Dividend
The Group has a progressive dividend policy, subject to the retention of funds
needed to fund future growth of the Group's business and its strategic aims.
Following the interim dividend payment of 0.53p per share in October 2018, the
Board has recommended a final dividend of 1.08p per share, which will make the
total dividend for the year ending 31 December 2018, 1.61p per share, a 10%
increase over 2017. Subject to shareholder approval at the Annual General
Meeting, the final dividend will be paid on 21 June 2019 to all shareholders
on the register at 31 May 2019 and the shares will trade ex-dividend on 30 May
2019. The cash cost of the final proposed dividend will be an estimated
€0.8m, subject to currency fluctuations.
Review of distributable reserves and rectification of prior dividends
The Board has identified technical breaches in respect of certain interim and
final dividends having been declared and paid otherwise than in accordance
with the requirements of the Companies Act 2006 (the "Act").
The Company has previously declared final dividends and certain interim
dividends relating to the financial years 2014 to 2016 without having had
sufficient distributable reserves in the holding company as required by the
Companies Act 2016 due to a failure to make the necessary upstream
distributions from subsidiaries to the Company despite such reserves being
available. This was recognised during 2017 and a major distribution exercise
was undertaken to rectify the problem.
In addition to the above, no interim accounts were filed at Companies House
prior to the payment of interim dividends previously paid by the Company in
the years 2013 to 2018. This was identified by the Board in August 2018 and
legal advice obtained.
It is important to make clear that no party has been or is in a worse position
as a result of these oversights.
The Company is seeking authority to release all relevant parties from any
potential liability via a specific shareholder resolution to be put to the
shareholders at the 2019 AGM. Accordingly, the appropriate resolution, if
passed, will authorise the Company to enter into deeds of release to put all
relevant parties in the position in which they were always intended to be had
the relevant dividends been made in accordance with the Act.
Full details, including the form of the deeds of the release, will be included
in the circular and notice of the 2019 AGM to be sent to shareholders. For the
avoidance of doubt, procedures are now in place to ensure that this does not
happen again in the future.
Events after the reporting period
On 3 January 2019, we announced that the Group acquired Sunny Side Up Creative
Inc in Canada for a total consideration of CAD 5.9m comprised of an initial
cash consideration of CAD 4.75m on completion and the issue of 60,179 ordinary
shares in Keywords. Sunny Side Up generated Adjusted EBITDA of CAD 1.2m in the
year to September 2018.
On 21 February 2019, we announced that the Group acquired GetSocial B.V. in
Netherlands for a total consideration of €0.2m.
David Broderick, FCCA
Chief Financial Officer
Consolidated Statement of Comprehensive Income
Years ended 31 December
2018 2017
Note €'000 €'000
Revenue from contracts with customers 4 250,805 151,430
Cost of sales 5 (154,997) (96,345)
Gross profit 95,808 55,085
Share option expense 17 (4,129) (1,426)
Costs of acquisition and integration 5 (5,296) (3,016)
Amortisation of intangible assets 12 (6,872) (3,038)
Total of items excluded from adjusted profit measures (16,297) (7,480)
Other administration expenses (56,826) (31,170)
Administrative expenses (73,123) (38,650)
Operating profit 22,685 16,435
Financing income 6 791 26
Financing cost 6 (1,316) (4,467)
Share of post-tax profit / (loss) of equity accounted associates 27 (66) -
Profit before taxation 22,094 11,994
Tax expense 7 (7,191) (4,731)
Profit 14,903 7,263
Other comprehensive income:
Items that will not be reclassified subsequently to profit or loss
Actuarial gain / (loss) on defined benefit plans 19 27 (25)
Items that may be reclassified subsequently to profit or loss
Exchange gain / (loss) in net investments foreign operations * 1,270 (893)
Exchange gain / (loss) on translation of foreign operations 771 (3,598)
Total comprehensive income 16,971 2,747
Earnings per share € cent € cent
Basic earnings per ordinary share 8 23.16 12.37
Diluted earnings per ordinary share 8 22.24 11.87
* Please note that "Exchange gains / (loss) on net investments in foreign
operations" 2017, have been re-classified to correctly classify them as "Items
that may be reclassified subsequently to profit or loss", within Other
Comprehensive Income
All Profit and Comprehensive Income is attributable to the shareholders. The
notes form an integral part of these consolidated financial statements.
On behalf of the Board
Andrew Day David Broderick
Director Director
8 April 2019
Consolidated Statement of Financial Position
At 31 December
2018 2017
Restated (note 31)
Note €'000 €'000
Non-current assets
Property, plant and equipment 13 15,002 10,111
Goodwill 11 154,202 108,062
Intangible assets 12 25,884 23,548
Investment in associate 27 160 -
Deferred tax assets 26 2,967 1,206
198,215 142,927
Current assets
Trade receivables 14 37,019 27,473
Other receivables 15 23,459 22,335
Cash and cash equivalents 39,871 30,374
100,349 80,182
Total assets 298,564 223,109
Equity
Share capital 16 763 737
Share capital - to be issued 16 15,648 11,620
Share premium 16 102,225 102,054
Merger reserve 16 35,996 28,878
Foreign exchange reserve (1,463) (3,504)
Shares held in EBT (1,997) (1,997)
Share option reserve 6,674 2,545
Retained earnings 34,529 20,679
Total equity 192,375 161,012
Current Liabilities
Trade payables 7,142 7,310
Other payables 18 41,153 22,179
Loans and borrowings 20 40,071 18,943
Corporation tax liabilities 6,665 3,245
95,031 51,677
Non-current liabilities
Other payables 18 1,062 1,233
Employee defined benefit plans 19 1,378 1,055
Loans and borrowings 20 230 337
Deferred tax liabilities 26 8,488 7,795
11,158 10,420
Total equity and liabilities 298,564 223,109
The notes form an integral part of these financial statements. The financial
statements were approved and authorised for issue by the Board on 8 April
2019.
On behalf of the Board
Andrew Day David Broderick
Director Director
8 April 2019
Consolidated Statement of Changes in Equity
Share capital Share capital / shares to be issued Share premium Merger reserve Foreign exchange reserve Shares held in EBT Share option reserve Retained earnings Total equity
€'000 €'000 €'000 €'000 €'000 €'000 €'000 €'000 €'000
Balance at 1 January 2017 654 8,792 19,983 22,109 987 (1,434) 1,305 14,308 66,704
Profit for the period - - - - - - - 7,263 7,263
Other comprehensive income - - - - (4,491) - - (25) (4,516)
Total comprehensive income for the period - - - - (4,491) - - 7,238 2,747
Contributions by and contributions to the owners:
Shares issued for cash 61 - 82,261 - - - - - 82,322
Share option expense - - - - - - 1,240 - 1,240
Share options exercised 6 - 608 - - (563) - - 51
Dividends paid (note 9) - - - - - - - (867) (867)
Acquisition related issuance of shares (note 16) 16 2,947 - 5,971 - - - - 8,934
Reclassification of share premium on acquisitions to merger reserve - - (798) 798 - - - - -
Contributions by and contributions to the owners 83 2,947 82,071 6,769 - (563) 1,240 (867) 91,680
Balance at 31 December 2017 737 11,739 102,054 28,878 (3,504) (1,997) 2,545 20,679 161,131
Measurement period adjustment (note 31) - (119) - - - - - - (119)
Balance at 31 December 2017 restated 737 11,620 102,054 28,878 (3,504) (1,997) 2,545 20,679 161,012
Profit for the period - - - - - - - 14,903 14,903
Other comprehensive income - - - - 2,041 - - 27 2,068
Total comprehensive income for the period - - - - 2,041 - - 14,930 16,971
Contributions by and contributions to the owners:
Shares issued for cash - - - - - - - - -
Share option expense - - - - - - 4,129 - 4,129
Share options exercised 3 - 171 - - - - - 174
Dividends paid (note 9) - - - - - - - (1,080) (1,080)
Acquisition related issuance of shares (note 16) 23 4,028 - 7,118 - - - - 11,169
Contributions by and contributions to the owners 26 4,028 171 7,118 - - 4,129 (1,080) 14,392
Balance at 31 December 2018 763 15,648 102,225 35,996 (1,463) (1,997) 6,674 34,529 192,375
Consolidated Statement of Cash Flows
Years ended 31 December
2018 2017
Note €'000 €'000
Cash flows from operating activities
Profit after tax 14,903 7,263
Income and expenses not affecting operating cash flows
Depreciation 13 5,316 2,730
Intangibles amortisation 12 6,872 3,038
Income tax expense 7 7,191 4,731
Share option expense 17 4,129 1,426
Costs of acquisition & integration * 5 5,296 3,016
Loss on disposal of fixed assets 63 103
Unwinding of present value adjustment on deferred consideration * 6 311 266
Share of post-tax loss of equity accounted associates 27 66 -
Interest receivable 6 - (26)
Employee benefit costs 19 279 209
Interest expense * 6 502 312
Unrealised foreign exchange (gain)/loss (992) 2,033
29,033 17,838
Changes in operating assets and liabilities
Decrease / (increase) in trade receivables (7,680) 2,506
Decrease / (increase) in MMTC and VGTC receivable (370) (873)
Decrease / (increase) in other receivables 2,850 (4,540)
(Decrease) / increase in trade and other payables (252) (82)
(5,452) (2,989)
Income taxes paid (6,304) (5,454)
Net cash provided by operating activities 32,180 16,658
Cash flows from investing activities
Current year acquisition of subsidiaries net of cash acquired 28 (24,163) (86,776)
Prior year acquisition of subsidiaries net of cash acquired 29 (726) -
Settlement of deferred liabilities on acquisitions 18 (1,603) (298)
Investment in associate 27 (226) -
Acquisition of property, plant and equipment 13 (9,440) (3,803)
Investment in intangible assets 12 (1,599) -
Acquisition & integration cash outlay 5 (4,530) (3,016)
Interest received - 26
Net cash used in investing activities (42,287) (93,867)
Cash flows from financing activities
Repayment of loans 30 (10,835) (23)
Loan to finance acquisitions 30 31,850 10,250
Dividends paid 9 (1,080) (867)
Financing EBT for share options exercised - (563)
Shares issued for cash 16 174 82,936
Interest paid (502) (279)
Net cash provided by financing activities 19,607 91,454
Increase / (decrease) in cash and cash equivalents 9,500 14,245
Exchange (loss) / gain on cash and cash equivalents (3) (891)
Cash and cash equivalents at beginning of the period 30,374 17,020
Cash and cash equivalents at end of period 39,871 30,374
* Please note that comparatives have been re-classified to reflect current
year presentation as the Directors consider this presentation to be more
meaningful.
Notes Forming Part of the Consolidated Financial Statements
1. Basis of Preparation
Keywords Studios PLC (the "Company") is a company incorporated in the UK. The
consolidated financial statements include the financial statements of the
Company and its subsidiaries (the "Group") made up to 31 December 2018. 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 consolidated financial statements have been prepared in accordance with
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").
The financial statements have been prepared in thousands (€'000) and the
financial statements are presented in Euro (€) which is the functional
currency of the Group.
New Standards, Interpretations and Amendments Effective 1 January 2018
Impact of IFRS 9
The Group implemented IFRS 9 Financial Instruments, as of 1 January 2018. The new standard includes revised guidance on the classification and measurement of financial instruments. With the exception of adopting the new expected credit loss model for calculating impairment on financial assets, the implementation of the new standard has not resulted in significant change in the relevant accounting policies for the Group. For the Group, the financial instruments that are impacted are trade receivables. At the end of each accounting period, the Group assesses the requirement for the impairment of trade receivables on the basis of the expected credit loss rate. Having assessed the requirements according to the standards, the Group has concluded that no significant additional impairment to the carrying values of the assets was required at 1 January 2018, or at 31 December 2018. The new standard has not resulted in a significant change in how the Group records financial liabilities.
Impact of IFRS 15
The Group implemented IFRS 15 Revenue from Contracts with Customers, as of 1
January 2018. The new standard sets out revenue recognition requirements, and
establishes principles for reporting information about the nature, amount,
timing and uncertainty of revenue and cash flows arising from the Group's
contracts with customers. Following implementation of IFRS 15, there was no
material impact of transition on retained earnings at 1 January 2018, on the
Group's statement of financial position as at 31 December 2018, on its
statement of profit or loss and other comprehensive income, or on the cash
flows for the period to 31 December 2018. The new standard also introduces
expanded disclosure requirements; however, the implementation of the new
standard did not result in a significant change in the revenue recognition
accounting policies of the Group.
New Standards, Interpretations and Amendments Not Yet Effective
The Group has adopted the following standards from 1 January 2019. The Group does not expect any other standards issued by the IASB, but not yet effective, to have a material impact on the Group.
Impact of IFRS 16
IFRS 16 Leases was issued in January 2016 and replaces IAS 17 Leases, IFRIC 4
Determining Whether an Arrangement Contains a Lease, SIC-15 - Operating Leases
- Incentives and SIC-27 - Evaluating the Substance of Transactions Involving
the Legal Form of a Lease. The new standard is applicable from 1 January 2019.
The Group has entered into leases, across the business, principally relating
to property. These property leases have varying terms and renewal rights.
The Group has adopted IFRS 16 from 1 January 2019, by applying the modified
retrospective approach. In 2019, the Group now recognise a liability to make
lease payments (i.e. the lease liability) and an asset representing the right
to use the underlying asset during the lease term (i.e. the right-of-use
asset), for all material lease arrangements over 12 months in duration.
The main impact on the financial statements will be to recognise on 1 January
2019, assets and liabilities, in the Statement of Financial Position in
relation to right-of-use assets and liabilities (previously considered as
operating leases), of €22.8m. In the 2019 Consolidated Statement of
Comprehensive Income, as the right-of-use assets are capitalised and
depreciated over the term of the lease, with an associated finance cost
applied to the lease liability, we anticipate operating expenses will
decrease, as lease payments of €7.1m (which is less than operating lease
payments disclosed in note 5 as short term leases will continue to be
recognised under IAS 17), previously recognised in administration expenses,
are capitalised. In addition, depreciation expenses (also recognised in
administration expenses) of €6.9m will be recognised, while financing costs
will increase by €0.6m, under the new standard. This will lead to an
improvement in EBITDA, Operating profit and Profit before taxation. The
Group's Cash Flow Statement in 2019 will separate the interest and capital
repayment elements of leases payments.
These financial statements made up to 31 December 2018 have been prepared
under IAS 17 as outlined in note 2.
Impact of IFRIC 23
IFRIC 23 Uncertainty over Income Tax Positions, which was issued in June 2017,
clarifies how to recognise and measure current and deferred income tax assets
and liabilities when there is uncertainty over income tax treatments. The
new standard is applicable from 1 January 2019. The Group do not anticipate
a material impact on the financial statements on transition to the new
standard.
2. Significant Accounting Policies
Basis of Consolidation
Where the Company has control over an investee, it is classified as a
subsidiary. The Company controls an investee if all three of the following
elements are present: power over the investee, exposure to variable returns
from the investee, and the ability of the investor to use its power to affect
those variable returns. Control is reassessed whenever facts and circumstances
indicate that there may be a change in any of these elements of control.
De-facto control exists in situations where the Company has the practical
ability to direct the relevant activities of the investee without holding the
majority of the voting rights. In determining whether de-facto control exists,
the Company considers all relevant facts and circumstances, including:
· The size of the Company's voting rights relative to both the size
and dispersion of other parties who hold voting rights;
· Substantive potential voting rights held by the Company and by
other parties;
· Other contractual arrangements; and
· Historic patterns in voting attendance.
The consolidated financial statements present the results of the Company and
its subsidiaries ("the Group") as if they formed a single entity. Intercompany
transactions and balances between Group companies are eliminated in full.
Business Combinations
The consolidated financial statements incorporate the results of business
combinations using the purchase method. In the Consolidated Statement of
Financial Position, the acquired identifiable assets, liabilities and
contingent liabilities are initially recognised at their fair values at the
acquisition date. The results of acquired operations are included in the
consolidated income statement from the date on which control is obtained. They
are consolidated until the date on which control ceases.
Any contingent consideration payable is recognised at fair value at the
acquisition date and is split between current liabilities and long-term
liabilities depending on when it is due. The fair value of contingent
consideration at acquisition date is arrived at through discounting the
expected payment (based on scenario modelling) to present value. In general,
in order for contingent consideration to become payable, pre-defined profit
and / or revenue targets must be exceeded. At each balance sheet date, the
fair value of the contingent consideration is revalued, with the expected
pay-out determined separately in respect of each individual acquisition and
any change recognised in the Statements of Comprehensive Income.
For deferred consideration which is to be provided for by the issue of a fixed
number of shares at a future defined date, where there is no obligation on
Keywords to offer a variable number of shares, the deferred consideration is
classified as an equity arrangement and the value of the shares is fixed at
the date of the acquisition.
Equity accounted investments
The Group's investments in its associates are accounted for using the equity
method from the date significant influence is deemed to arise until the date
on which significant influence / joint control ceases to exist or when the
interest becomes classified as an asset held for sale.
Goodwill
Goodwill represents the excess of the cost of a business combination over, in
the case of business combinations completed prior to 1 January 2010, the
Group's interest in the fair value of identifiable assets, liabilities and
contingent liabilities acquired and, in the case of business combinations
completed on or after 1 January 2010, the total acquisition date fair value of
the identifiable assets, liabilities and contingent liabilities acquired.
For business combinations completed prior to 1 January 2010, cost comprised
the fair value of assets given, liabilities assumed and equity instruments
issued, plus any direct costs of acquisition. Changes in the estimated value
of contingent consideration arising on business combinations completed by this
date were treated as an adjustment to cost and, in consequence, resulted in a
change in the carrying value of goodwill.
For business combinations completed on or after 1 January 2010, cost comprises
the fair value of assets given, liabilities assumed and equity instruments
issued, plus the amount of any non-controlling interests in the acquiree plus,
if the business combination is achieved in stages, the fair value of the
existing equity interest in the acquiree. Contingent consideration is included
in acquisition date fair value and, in the case of contingent consideration
classified as a financial liability, re-measured subsequently through profit
or loss. For business combinations completed on or after 1 January 2010,
direct costs of acquisition are recognised immediately as an expense.
Goodwill is capitalised as an intangible asset with any impairment in carrying
value being charged to the consolidated statement of comprehensive income.
Intangible Assets
The Group's Intangible Assets comprise Customer Relationships and Other
Intangible Assets.
Customer Relationship
Intangible assets, separately identified from goodwill acquired as part of a
business combination (mainly Customer Relationships), are initially stated at
fair value. The fair value attributed is determined by discounting the
expected future cashflows generated from the net margin of the business from
the main customers taken on at acquisition. The assets are amortised on a
straight-line basis (to administration expenses) over their useful economic
lives. A useful economic life of five years is deemed appropriate, however,
this is re-examined for each acquisition.
Other Intangible Assets
Other intangible assets include Intellectual Property and Music Licences, both
acquired and internally developed. Other intangible assets are recognized as
assets where it is probable that the use of the asset will generate future
economic benefits and where the costs of the asset can be determined reliably.
Other intangible assets that are acquired by the Group are stated at cost less
accumulated amortization (see below) and impairment losses, if any. Subsequent
expenditures on capitalised intangible assets are capitalised only when they
increase the future economic benefits embodied in the specific assets to which
they relate. All other expenditure is expensed as incurred. Other intangible
assets with definite useful lives are amortized from the date they are
available for use on a straight-line basis over their useful lives, being the
estimated period over which the Group will use the assets. Residual amounts,
useful lives and the amortization methods are reviewed at the end of every
accounting period.
Development costs are capitalised as an intangible asset if all of the
following criteria are met:
• the technical feasibility of completing the intangible asset so that it
will be available for use or sale;
• the intention to complete the intangible asset and use or sell it;
• the ability to use or sell the intangible asset;
• the asset will generate probable future economic benefits and demonstrate
the existence of a market or the usefulness of the intangible asset if it is
to be used internally;
• the availability of adequate technical, financial and other resources to
complete the development and to use or sell it;
• the ability to measure reliably the expenditure attributable to the
intangible asset during its development.
Following initial recognition of the development expenditure as an intangible
asset, the cost model is applied requiring the intangible asset to be carried
at cost, less any accumulated amortization and accumulated impairment losses.
The intangible asset is amortized on a straight-line basis over the period of
its expected benefit, starting from the date of full commercial use of the
product. During the period of development, the asset is tested for impairment
annually. If specific events indicate that impairment of an item of intangible
asset may have taken place, the item's recoverability is assessed by comparing
its carrying amount with its recoverable amount. The recoverable amount is the
higher of the fair value net of disposal costs and the value in use.
Impairment
Impairment tests on goodwill and other intangible assets with indefinite
useful economic lives are undertaken annually at the financial year end. Other
non-financial assets are subject to impairment tests whenever events or
changes in circumstances indicate that their carrying amount may not be
recoverable. Where the carrying value of an asset exceeds its recoverable
amount (i.e. the higher of value in use and fair value less costs to sell),
the asset is written down accordingly.
Where it is not possible to estimate the recoverable amount of an individual
asset, the impairment test is carried out on the smallest group of assets to
which it belongs for which there are separately identifiable cash flows; its
cash generating units ("CGUs"). Goodwill is allocated on initial recognition
to each of the Group's CGUs that are expected to benefit from a business
combination that gives rise to the goodwill.
The Group has one CGU. This CGU represents the lowest level at which goodwill
is monitored by the Group and the lowest level at which management captures
information for internal management reporting purposes about the benefits of
the goodwill. Impairment charges are included in profit or loss, except to the
extent they reverse gains previously recognised in other comprehensive income.
An impairment loss recognised for goodwill is not reversed.
Cash and Cash Equivalents
For the purpose of presentation in the Statement of Financial Position and on
the Statement of Cash Flows, cash and cash equivalents include cash on hand
and on call deposits with financial institutions.
Foreign Currency
Transactions entered into by Group entities in a currency other than the
currency of the primary economic environment in which they operate (their
"functional currency") are recorded at the rates ruling when the transactions
occur. The functional currency of the Company is Euro. Foreign currency
monetary assets and liabilities are translated at the rates ruling at the
reporting date. Exchange differences arising on the retranslation of unsettled
monetary assets and liabilities are recognised immediately in profit or loss.
On consolidation, the results of overseas operations are translated into Euro
at rates approximating to this ruling when the transactions took place. All
assets and liabilities of overseas operations, including goodwill arising on
the acquisition of those operations, are translated at the rate ruling at the
reporting date. Exchange differences arising on translating the opening net
assets at opening rate and the results of overseas operations at actual rate
are recognised in other comprehensive income and accumulated in the foreign
exchange reserve.
Exchange differences recognised in profit or loss in Group entities' separate
financial statements on the translation of long-term items forming part of the
Group's net investment in the overseas operation concerned are classified to
other comprehensive income and accumulated in the foreign exchange reserve on
consolidation. On disposal of a foreign operation, the cumulative exchange
differences recognised in the foreign exchange reserve relating to that
operation up to the date of disposal are transferred to the consolidated
statement of comprehensive income as part of the profit or loss on disposal.
Revenue from Contracts with Customers
Contracts are typically for services, performing agreed-upon tasks for a
customer and can be time-and-materials or milestone based. Most contracts
are short term in duration (generally less than one month), however milestone
based contracts are typically long term and extend to many months (or over a
year in many cases). Where there are multiple performance obligations outlined
in a contract, each performance obligation is separately assessed, the
transaction price is allocated to each obligation, and related revenues are
recognised as services or assets are transferred to the customer.
Revenue is derived from seven main service groupings:
· Art Creation Services - Art creation services relate to the
production of graphical art assets for inclusion in the video game including
concept art creation along with 2D and 3D art asset production and animation.
Contracts can be either time-and-materials based, or milestone based, with
performance obligations satisfied over time. Contracts are generally short
term in duration, however for longer contracts the input method is used to
measure progress. Time and materials-based contract revenue is recognized as
the related services are rendered. For milestone-based contracts where
progress can be measured reliably towards complete satisfaction of the
performance obligation, revenue is recognised using the input method to
measure progress. Where progress cannot be measured reliably, revenue is
recognised on milestone acceptance.
· Engineering - Engineering relates to software engineering services
which are integrated with client processes to develop video games. Contracts
can be either time-and-materials based, or milestone based, with performance
obligations satisfied over time. Contracts are generally long term in
duration. Time and materials-based contract revenue is recognised as the
related services are rendered. For milestone-based contracts where progress
can be measured reliably towards complete satisfaction of the performance
obligation, revenue is recognised using the input method to measure progress.
Where progress cannot be measured reliably, revenue is recognised on milestone
acceptance.
· Audio / Voiceover Services - 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 quality assurance of
the recordings. Audio contracts may also involve music licencing or selling
music soundtracks. Audio service contracts are typically milestone based, with
performance obligations satisfied over time. Audio services contracts are
generally short term in duration, however for longer contracts where progress
towards complete satisfaction of the performance obligation can be measured
reliably, revenue is recognised using the input method to measure progress.
Where progress cannot be measured reliably, audio services revenue is
recognised on milestone acceptance. Music licencing and music soundtracks
performance obligations are assessed separately, and related revenue is
recognised on licence inception and on delivery of the soundtracks,
respectively.
· Localization Services - Localization services relate to translation
and cultural adaptation of in-game text and audio scripts across multiple game
platforms and genres. Contracts are typically time-and-materials based and
performance obligations are satisfied over time. Contracts are generally short
term in duration, however for longer contracts the input method is used to
measure progress. Localization contracts may also involve licencing
translation software as a service. Such revenue is assessed separately.
Revenue is recognised as the related services are rendered.
· Localization Testing - Localization Testing involves testing the
linguistic correctness and cultural acceptability of computer games. Contracts
are typically time-and-materials based and performance obligations are
satisfied over time. Contracts are generally short term in duration, however
for longer contracts the input method is used to measure progress. Revenue is
recognised as the related services are rendered.
· Functional Testing - Functional Testing relates to quality
assurance services provided to game producers to ensure games function as
required. Contracts are typically time-and-materials based and performance
obligations are satisfied over time. Contracts are generally short term in
duration, however for longer contracts the input method is used to measure
progress. Revenue is recognised as the related services are rendered.
· Player Support - Player support relates to the live operations
support services such as community management, player support and associated
services provided to producers of games to ensure that consumers have a
positive user experience. Contracts are typically time-and-materials based and
performance obligations are satisfied over time. Contracts are generally long
term with the input method used to measure progress. Revenue is recognised as
the related services are rendered.
Due to the nature of the services provided and the competitive nature of the
market, contracts generally allocate specific transaction prices to separate
performance obligations. Individual services or individual milestones
generally involve extensive commercial negotiation to arrive the specific
agreed-upon tasks, and the related pricing outlined in the contract. Such
negotiations extend further for milestone based contracts to also include the
criteria involved in the periodic and regular process of milestone acceptance
by the customer. Such criteria may involve qualitative, as well as
quantitative measures and judgements.
In measuring progress towards complete satisfaction of performance
obligations, the input method is considered to be the most appropriate method
to depict the underlying nature of the contracts with customers, the
interactive way the service is delivered and projects are managed with the
customer. For time-and-materials contracts, other than tracking and valuing
time expended, significant judgement is not normally involved. For milestone
based contracts, progress is generally measured based on the proportion of
contract costs incurred at the balance sheet date, (e.g. worked days) relative
to the total estimated costs of the contract, involving estimates of the cost
to completion etc. Added to this significant judgement can be involved in
measuring progress towards customer acceptance of the milestone. Significant
judgement may also be involved where circumstances arise that may change the
original estimates of revenues, costs or extent of progress towards complete
satisfaction of the performance obligations. In such circumstances estimates
are revised. These revisions may result in increases or decreases in revenue
or costs and are reflected in income in the period in which the circumstances
that give rise to the revision became known. When the outcome of a contract
cannot be measured reliably, contract revenue is recognised only to the extent
that milestone have been accepted by the customer. Contract costs are
recognised as incurred. When it is probable that total contract costs will
exceed total contract revenue, the expected loss is recognised immediately.
Revenue recognised represents the consideration received or receivable, net of
sales taxes, rebates discounts and after eliminating intercompany sales.
Revenue is recognised only where it is probable that consideration will be
received. Where consideration is received and the related revenue has not been
recognised, the consideration received is recognised as a contract liability
(Deferred Revenue), until either revenue is recognised or the consideration is
refunded.
Multimedia Tax Credits / Video Game Tax Credits
The multimedia tax credits ("MMTC") received in Montreal and video games tax
credits ("VGTC") in the UK, are a credit related to staff costs. Accordingly,
they are treated as a deduction against direct costs. The nature of the grants
is such that they are not dependent on taxable profits. Tax credits have only
been recognised where management believe that a tax credit will be recoverable
based on their experience and the success of similar historical claims.
Share-based Payments
The Company issues equity settled share-based payments to certain employees
and Directors under a share options plan and a Long-Term Incentive Plan
("LTIP").
The fair value determined at the grant date is expensed on a straight-line
basis over the vesting period, based on the Company's estimate of shares that
will eventually vest and adjusted for the effect of non-market-based vesting
conditions. At each reporting date, the Company revises its estimate of the
number of equity instruments expected to vest as a result of the effect of
non-market-based vesting conditions. The impact of the revision of the
original estimates, if any, is recognised in profit or loss such that the
cumulative expense reflects the revised estimate, with a corresponding
adjustment to equity reserves. The Company has no legal or constructive
obligation to repurchase or settle the options in cash.
Where share-based payments are issued to employees of subsidiary companies,
the annual cost of the option is expensed in the holding company and recharged
to the subsidiary company through an inter-company charge.
Share Option Plan
These are measured at fair value, taking into account market vesting
conditions but not non-market vesting conditions on the grant date using a
Black-Scholes option pricing model which calculates the fair value of an
option by using the vesting period, the expected volatility of the share
price, the current share price, the exercise price and the risk-free interest
rate. The fair value of the option is amortised over the vesting period, with
one-third of the options vesting after two years, one-third after three years,
and the balance vest after four years. The only vesting condition is
continuous service. There is no requirement to revalue the option at any
subsequent date. The charge that is recognised is adjusted to reflect failure
to vest due to non-achievement of a non-market vesting condition, but not
failure to vest due to the non-achievement of a market vesting condition.
LTIP
An alternative share plan was introduced to give awards to Directors and
staff, subject to outperforming the Numis Small Cap Index (excluding
Investment Trusts) in terms of shareholder return over a three-year period.
For the awards up to 2015, there were three award levels: one-third of the
share options vest if the Company shall exceed the Total Shareholder Returns
of the Numis Small Cap Index by not less than 10%, two-thirds if the
shareholder return exceeds by over 20% and 100% if the shareholder return
exceeds by over 30%. This was amended for the 2016 and 2017 awards to 100% if
the shareholder return exceeds by over 45%, and a pro-rated return between 10%
and 100% if the shareholder return exceeds by between 0% and 45%.
These are measured at fair value, taking into account market vesting
conditions but not non-market vesting conditions, at the date of grant,
measured by using the Monte Carlo binomial model. The charge that is
recognised is adjusted to reflect failure to vest due to non-achievement of a
non-market vesting condition, but not failure to vest due to the
non-achievement of a market vesting condition.
Dividend Distribution
Final dividends are recorded in the Group's financial statements in the period
in which they are approved by the Group's shareholders. Interim dividends are
recognised when paid.
Income Taxes and Deferred Taxation
Provision for income taxes is calculated in accordance with the tax
legislations and applicable tax rates in force at the reporting date in the
countries in which the Group companies have been incorporated.
Deferred tax assets and liabilities are recognised where the carrying amount
of an asset or liability in the consolidated statement of financial position
differs from its tax base, except for differences arising on:
· The initial recognition of goodwill;
· The initial recognition of an asset or liability in a transaction
which is not a business combination and at the time of the transaction affects
neither accounting or taxable profit; and
· Investments in subsidiaries and jointly controlled entities where
the Group is able to control the timing of the reversal of the difference and
it is probable that the difference will not reverse in the foreseeable future.
The amount of the asset or liability is determined using tax rates that have
been enacted or substantively enacted by the reporting date and are expected
to apply when the deferred tax liabilities / (assets) are settled /
(recovered).
Deferred tax assets and liabilities are offset when the Group has a legally
enforceable right to offset current tax assets and liabilities and the
deferred tax assets and liabilities relate to taxes levied by the same tax
authority on either:
· The same taxable Group company; or
· Different Group entities which intend either to settle current tax
assets and liabilities on a net basis, or to realise the assets and settle the
liabilities simultaneously, in each future period in which significant amounts
of deferred tax assets or liabilities are expected to be settled or recovered.
Property, Plant and Equipment
Property, plant and equipment comprise computers, leasehold improvements, and
office furniture and equipment, and are stated at cost less accumulated
depreciation. Carrying amounts are reviewed for impairment whenever events or
changes in circumstances indicate that their carrying amount may not be
recoverable. Where the carrying amount of an asset is greater than its
estimated recoverable amount, it is written down immediately to its
recoverable amount.
Property, plant and equipment acquired through business combinations are
valued at fair value on the date of acquisition.
Depreciation is calculated to write off the cost of fixed assets on a
straight-line basis over the expected useful lives of the assets concerned.
The principal annual rates used for this purpose are:
%
Computers and software 33.33
Office furniture and equipment 10.00
Building and leasehold improvements over the length of the lease
Gains and losses on disposals are determined by comparing proceeds with
carrying amount and are included in the consolidated statement of
comprehensive income.
Financial Assets
The Group's most significant financial assets comprise trade and other
receivables and cash and cash equivalents in the statement of financial
position, whereas the Company's most significant financial assets comprise
inter-group receivables.
Trade Receivables
Trade receivables, which principally represent amounts due from customers, are
recognised at amortised cost as they meet the IFRS 9 classification test of
being held to collect, and the cash flow characteristics represent solely
payments of principal and interest.
The Group's impairment methodology has been revised in line with the
requirements of IFRS 9. The simplified approach to providing for expected
credit losses has been applied to trade receivables, which requires the use of
a lifetime expected loss provision. As part of the IFRS 9 transition project,
the Group assessed its existing trade and other receivables for impairment,
using reasonable and supportable forward looking information that is available
without undue cost or effort, to determine the credit risk of the receivables
at the date on which they were initially recognised and compared that to the
credit risk as at 1 January 2018. This assessment has not resulted in a
material adjustment to trade and other receivables.
Trade receivables are written-off when there is no reasonable expectation of
recovery, such as a debtor failing to engage in a repayment plan with the
company.
There has been no significant change to the carrying value of trade and other
receivables as a result of the implementation of IFRS 9.
Previous accounting policy for impairment of trade and other receivables
In the prior year, the impairment of trade receivables was assessed based on
the incurred loss model. Individual receivables which were known to be
uncollectible were written off by reducing the carrying amount directly. An
estimate for doubtful debts was made when there was objective evidence that
the Group would not be able to collect amounts due according to the original
terms of receivables. Bad debts were written off when identified.
Intercompany Receivables
Intercompany receivables are recognised at amortised cost as they meet the
IFRS 9 classification test of being held to collect, and the cash flow
characteristics represent solely payments of principal and interest.
The Group applies the general approach to applying the expected credit losses
to its related party loans. Under the General Approach, at each reporting
date, the Group determines whether there has been a Significant Increase in
Credit Risk (SICR) since initial recognition and whether the loan is credit
impaired. This determines the amount of expected credit losses to be
recognised.
There has been no significant change to the carrying value of intercompany
receivables upon the implementation of IFRS 9.
Previous accounting policy for intercompany receivables
In the prior year, the impairment of intercompany receivables was based upon
the incurred losses model, whereby impairment losses were recognised when
there was objective evidence that the Group would not be able to collect
amounts due to the original terms.
Cash and cash equivalents
Cash and cash equivalents are necessary for the working capital requirements
of the Group. They include cash in hand, deposits held at call with banks and
other short-term highly liquid investments. Where cash is on deposit with
maturity dates greater than three months, it is disclosed as short-term
investments.
Contract Assets
Contract assets arising from Revenue from Contracts with Customers are
recognised in accordance with our Revenue Recognition policy, as discussed
separately in this note. The Group applies the simplified approach to
assessing expected credit losses in relation to contract assets, as the
maturities of such assets are less than 12 months. Based upon the
recoverability of contract assets subsequent to the year end, no significant
expected credit loss provision has been applied.
Share Capital
Financial instruments issued by the Group are treated as equity only to the
extent that they do not meet the definition of a financial liability. The
Group's ordinary shares are classified as equity instruments.
Financial Liabilities
Trade payables, bank borrowings and other short-term monetary liabilities are
initially recognised at fair value and subsequently carried at amortised cost
using the effective interest method.
Leased Assets
Where substantially all of the risks and rewards of ownership are not
transferred to the Group ("operating lease"), the total rental payables are
charged to the consolidated statement of comprehensive income on a
straight-line basis over the term of the lease.
Finance Leases
Where substantially all of the risks and rewards incidental to ownership of a
leased asset have been transferred to the Group (a "finance lease"), the asset
is treated as if it had been purchased outright. The amount initially
recognised as an asset is the lower of the fair value of the leased property
and the present value of the minimum lease payments payable over the term of
the lease. The corresponding lease commitment is shown as a liability. Lease
payments are analysed between capital and interest. The interest element is
charged to the consolidated statement of comprehensive income over the period
of the lease and is calculated so that it represents a constant proportion of
the lease liability. The capital element reduces the balance owed to the
lessor.
Employee Benefit Trust
Ordinary shares purchased by the Employee Benefit Trust on behalf of the
parent company under the Terms of the Share Option Plan are deducted from
equity on the face of the Consolidated Statement of Financial Position. No
gain or loss is recognised in relation to the purchase, sale, issue or
cancellation of the parent company's ordinary shares.
3. Critical Accounting Estimates and Judgements
The Group makes certain estimates and assumptions regarding the future.
Estimates and judgements are continually evaluated based on historical
experience and other factors, including expectations of future events that are
believed to be reasonable under the circumstances. In the future, actual
experience may differ from these estimates and assumptions.
Judgements
The judgements, apart from those involving estimations, that management have
made in the process of applying the entity's accounting policies and that have
the most significant effect on the amounts recognised in the financial
statement, are outlined below.
· Functional Currency: The directors have considered the requirements
of IAS 21 in determining the currency that most faithfully represents the
economic effects of the underlying transactions, events and conditions to
determine the Group's functional currency. Detailed consideration has been
given to both the Primary and Secondary Indicators in forming this conclusion.
The Primary Indicators relate to revenues, regulation, competitive forces and
costs, while the Secondary Indicators are primarily concerned with financing
the business and the currency in which receipts from operating activities are
usually retained. With a mix of currencies dominating the indicators, there is
no clear single currency that influences the Group, however the EUR remains
marginally the most dominant when all factors are considered. Therefore the
directors consider the EUR as the currency that most faithfully represents the
economic effects of the underlying transactions, events and conditions.
· Business Combinations: When acquiring a business, the Group is
required to identify and recognise intangible assets, the determination of
which requires a significant degree of judgement. Acquisitions may also result
in intangible benefits being brought into the Group, some of which qualify for
recognition as intangible assets while other such benefits do not meet the
recognition requirements of IFRS and therefore form part of goodwill.
Customer relationships are recognised as separate assets where revenues are
recurring in nature and material revenues have been generated with the
customer for a continuous period of 3 years. For the Engineering service
line, the key asset acquired is typically "know-how", an asset that is not
readily measurable and thus intrinsically linked to goodwill.
Relationships are typically short term contract based rather than relationship
based. Therefore neither customer contracts or customer relationships are
typically recognised on the acquisition of an Engineering business.
Estimates and assumptions
The estimates and assumptions that could have a significant risk of causing a
material adjustment to the carrying amounts of assets and liabilities within
the next financial year, are monitored by the Directors on an ongoing basis. A
number of areas requiring the use of estimates and critical judgements impact
the Group's earnings and financial position. These include revenue
recognition, the computation of income taxes, the value of goodwill and
intangible assets arising on acquisitions, the valuation of multimedia tax
credits / video game tax credits and the valuation of defined retirement
benefits. The Directors consider that no reasonably possible changes to any
of the assumptions used in the estimates would in the view of the Directors
give rise to significant risk of a material adjustment to the carrying value
of the associated balances in the subsequent financial year. While a number
of these areas were highlighted in the 2017 Annual Report, because the
Directors consider that no reasonably possible changes to any of the
assumptions used in the estimates would give rise to significant risk of a
material adjustment, these items have been removed from the Critical
Accounting Estimates and Judgements.
4. Revenue From Contracts With Customers and Segmental Analysis
Revenue From Contracts With Customers
Revenue recognised in the reporting period arises from contracts with
customers, and is predominantly recognised over time. There were no
significant amounts of revenue recognised in the reporting period that were
included in a contract liability balance at the beginning of the reporting
period, or from performance obligations satisfied in the previous reporting
period.
2018 2017
€'000 €'000
Revenue by line of business
Art creation 41,688 26,193
Audio 34,190 20,657
Localization 43,983 41,959
Functional testing 49,128 30,033
Localization testing 19,751 19,848
Customer support 35,904 9,168
Engineering 26,161 3,572
250,805 151,430
Analysis by geographical regions is made according to the Group's operational
jurisdictions. For many contracts, operations are completed in multiple sites.
Revenue is associated with the jurisdiction from which the final invoice to
the client is raised. This does not reflect the region of the Group's
customers; whose locations are worldwide.
2018 2017
€'000 €'000
Canada 69,536 45,648
Ireland 47,203 34,277
Switzerland 20,067 19,565
Italy 8,673 10,029
India 2,407 5,177
United States 52,321 12,199
Japan 7,724 6,352
United Kingdom 21,205 2,467
Spain 1,968 2,194
China 3,126 3,685
Singapore 5,046 4,451
Germany 741 928
Brazil 1,016 520
Mexico 936 180
France 8,489 3,758
Russia - -
Poland 347 -
Philippines - -
Taiwan - -
250,805 151,430
No single customer accounted for more than 10% (2017: None) of the Group's
revenue during the year.
For all service lines excluding Engineering, contracts do not extend to more
than one year, therefore we do not disclose information concerning unsatisfied
performance obligations, as allowed under the practical expedient exemption
under IFRS 15. This practical expedient is also availed of for Engineering
contracts of less than one year in duration. For Engineering contracts that
extend beyond one year the aggregate amount of the transaction price allocated
to the performance obligations that are unsatisfied (or partially unsatisfied)
as of the end of the reporting period is as follows:
Value of undelivered performance obligations for contracts greater than one Total undelivered Scheduled completion within 1 year Scheduled completion
year
1-2 years
€'000 €'000 €'000
At 31 December 2018 10,417 9,112 1,305
At 31 December 2017 - - -
The balances arise primarily in new acquisitions during 2018. There were no
significant undelivered performance obligations for contracts greater than one
year in 2017.
Segmental Analysis
Management considers that the Group's activity as a single source supplier of
Services to the gaming industry 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 seven main service groupings.
There is no allocation of operating expenses, profit measures, assets and
liabilities to individual product groupings. Accordingly, the disclosures
above are provided on a Group-wide basis.
Activities are 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 Non-Current Assets from Continuing Businesses
2018 2017
Restated (note 31)
€'000 €'000
Canada 11,760 8,889
Ireland 3,542 119
Switzerland 11,117 11,158
Italy 11,650 11,723
India 2,321 2,588
United States 84,685 77,177
Japan 796 565
United Kingdom 48,929 10,011
Spain 1,535 1,520
China 7,850 7,707
Singapore 52 42
Germany 1,097 1,168
Brazil 888 231
Mexico 885 892
France 6,318 6,531
Russia 797 866
Poland 267 58
Philippines 595 472
Taiwan 4 4
195,088 141,721
Geographical Analysis of Non-current Assets from Continuing Businesses 195,088 141,721
Investment in associate 160 -
Deferred tax assets 2,967 1,206
Non-current assets 198,215 142,927
5. Cost of Sales and Operating Profit
Cost of sales 2018 2017
€'000 €'000
Operating expenses * 163,112 98,850
Multimedia tax credits / video game tax credits (12,220) (4,408)
Other direct costs 4,105 1,903
154,997 96,345
*Please note the comparative has been re-classified to be consistent with
current year presentation, as the Directors have determined this presentation
to be more meaningful.
Operating profit is stated after charging:
2018 2017
€'000 €'000
Depreciation 5,316 2,730
Amortisation of intangible assets 6,872 3,038
Costs of acquisitions & integration 5,296 3,016
Operating lease payments 8,708 2,369
Costs of acquisitions & integration 2018 2017
€'000 €'000
Post-acquisition integrations costs re: 2018 acquisitions (note 28) 758 -
Post-acquisition integrations costs re: 2017 acquisitions (note 29) 1,875 2,336
Fair value adjustments to contingent consideration 766 -
Deferred consideration related to continuing employment 590 -
Acquisition related and other borrowing costs 693 -
Acquisition team and related costs 614 680
5,296 3,016
2018 2017
€'000 €'000
Auditors' remuneration
Audit services
Parent company and Group audit 329 164
Subsidiary companies audit 137 99
Non-audit services
Acquisition related due diligence services - 242
Audit related assurance services 16 -
Taxation compliance 7 73
489 578
6. Financing Income and Cost
2018 2017
Restated
€'000 €'000
Finance income
Interest received - 26
Foreign exchange gain 791 -
791 26
Finance cost
Bank charges (503) (320)
Interest expense (502) (312)
Unwinding of discounted liabilities * (311) (266)
Foreign exchange losses - (3,569)
(1,316) (4,467)
Net financing income / (cost) (525) (4,441)
*Please note the comparative has been restated to separate "Unwinding of
discounted liabilities" from "Interest expense", as the Directors have
determined this presentation to be more meaningful.
7. Taxation
2018 2017
Restated
€'000 €'000
Current income tax
Income tax on profits of parent company - -
Income tax on profits of subsidiaries 9,592 5,762
Deferred tax (note 26) (2,401) (1,031)
7,191 4,731
The tax charge for the year can be reconciled to accounting profit as follows:
2018 2017
Restated
€'000 €'000
Profit before tax 22,094 11,994
Tax charge based on the Effective Tax Rate* 5,345 3,175
Corporate tax prior year (over) / under provision (352) 62
Deferred tax prior year (over) / under provision and impact of change in tax (368) (55)
rates
Items disallowed for tax purposes 2,205 717
Exempt and non-taxable income (588) (259)
Tax incentives (1,035) (222)
Current year tax losses utilised (131) (40)
Current year tax losses where deferred tax has not been provided 730 631
State and other direct taxes 1,529 758
Other differences - net (144) (36)
Total tax charge 7,191 4,731
*Effective tax rate - being the statutory tax rate relative to the profit 24.2% 26.5%
before tax in each jurisdiction
Please note the reconciliation of Profit before tax to the Total tax charge
for 2017 has been restated to present the note with reference to the effective
tax rate, whereas in the 2017 financial statements the note was presented with
reference to the UK tax rate, as the Directors have determined this
presentation to be more meaningful.
The Group's subsidiaries are located in different jurisdictions and are taxed
on their residual profit in those jurisdictions. The effective tax rate will
vary year on year due to the effect of changes in tax rates and changes in the
proportion of profits in each jurisdiction.
Tax effects relating to each component on other comprehensive income
2018 2017
€'000 €'000
Exchange gain / (loss) in net investments foreign operations 1,270 (893)
Tax (expense) / benefit - -
Net of tax amount 1,270 (893)
Actuarial gain / (loss) on defined benefit plans 27 (25)
Tax (expense) / benefit 6 7
Net of tax amount 33 (18)
Exchange gain / (loss) on translation of foreign operations 771 (3,598)
Tax (expense) / benefit - -
Net of tax amount 771 (3,598)
8. Earnings per Share
2018 2017
€ cent € cent
Basic 23.16 12.37
Diluted 22.24 11.87
€'000 €'000
Profit for the period from continuing operations 14,903 7,263
Denominator (weighted average number of equity shares) Number Number
Basic * 64,335,162 58,720,884
Diluting impact of Share Options 2,679,932 2,477,788
Diluted * 67,015,094 61,198,672
* Includes (weighted average) shares to be issued (note 16) 1,321,707 2,174,526
Contingently issuable Ordinary Shares are excluded from the computation of
diluted earnings per Ordinary Share where the conditions governing
exercisability have not been satisfied:
2018 2017
Number Number
LTIPs 951,800 -
Share options 544,900 -
1,496,700 -
Details of the number of share options outstanding at the year-end are set out
in note 17.
9. Dividends
Dividends Paid In respect of Approval date € Cent per share Pence STG per share Total dividend €'000 Payment date
Final 2016 Apr-17 1.01 0.89 563 Jun-17
Interim 2017 Sep-17 0.54 0.48 304 Oct-17
Dividends paid to shareholders 2017 1.55 1.37 867
Final 2017 Apr-18 1.11 0.98 696 Jun-18
Interim 2018 Sep-18 0.60 0.53 384 Oct-18
Dividends paid to shareholders 2018 1.71 1.51 1,080
Recommended In respect of Approval date Expected € cent per share Pence STG per share Expected total dividend €'000 Expected payment date
Final 2018 1.21 1.08 774 Jun-19
There are no income tax consequences for the Company in respect of the
dividends proposed prior to issuance of the Consolidated Financial Statements
and for which a liability has not been recognised.
The Group does not recognise deferred tax on unremitted retained earnings, as
in general, retained earnings are continually re-invested by the Group and
dividends are only remitted where there are minimal tax consequences.
At 31 December 2018 Retained Earnings available for distribution (being
retained earnings plus share option reserve) in the Company were €4.1m
(2017: €2.2m). The Directors do not foresee any impediment in continuing to
implement the dividend policy of the Group.
Following on distributions made in 2016 and 2017 that were not fully in
compliance with the Companies Act 2006, the Directors have implemented legal
advice to ensure ongoing compliance and rectify the oversights in earlier
periods.
10. Staff Costs
Total staff costs (including Directors) comprise the following:
2018 2017
€'000 €'000
Salaries & related costs 146,785 81,563
Share based payment costs 4,129 1,426
150,914 82,989
Key management compensation:
2018 2017
€'000 €'000
Salaries & related costs 907 690
Social welfare costs 99 79
Pension costs 27 4
Share based payment costs 501 141
1,534 914
The key management compensation includes compensation to seven Directors of
Keywords Studios PLC during the year (2017: seven).
Group 2018 2017
Average number of employees
Operations 4,733 2,921
General & administration 505 246
5,238 3,167
11. Goodwill
€'000
At 1 January 2017 46,799
Recognition on acquisition of subsidiaries (note 29) 66,853
Exchange rate movement (4,645)
At 31 December 2017 as reported 109,007
Measurement period adjustment on Sperasoft goodwill (note 31) (945)
At 31 December 2017 restated 108,062
Recognition on acquisition of subsidiaries (note 28) 43,144
Exchange rate movement 2,996
At 31 December 2018 154,202
The Group assesses the carrying value of goodwill each year on the basis of
budget projections for the coming year extrapolated using a one to five year
growth rate and a terminal value calculated using a long term growth rate
projection. The discount rates used of 12.5% (2017: 12.5%) is based on the
Board's assessment of the WACC of the Group. The WACC assessment is supported
by an annual independently calculated report, using the Capital Asset Pricing
Model. However, the Board have excluded the impact of short term market
volatility on these calculations in determining the Group WACC.
Key Assumptions
Actual Sensitivity analysis
2018 2017 2018 2017 2018 2017
1-5 year growth rate assumption 10% 10% 15% 15% 5% 5%
Long term growth rate assumption 2% 2% 2% 2% 2% 2%
Value in use (€m) 445 371 532 399 378 284
Carrying value - goodwill (€m) 154 108
The value in use calculations were consistently calculated year over year,
with no significant changes in the assumptions made. The result of the value
in use calculations was that no impairment is required in this period.
12. Intangible Assets
Customer relationships Intellectual property Music licences Total
€'000 €'000 €'000 €'000
Cost
At 1 January 2017 11,630 - - 11,630
Recognition on acquisition of subsidiaries 18,962 - - 18,962
Exchange rate movement (1,310) - - (1,310)
At 31 December 2017 29,282 - - 29,282
Recognition on acquisition of subsidiaries 6,564 - 362 6,926
Additions - 1,521 78 1,599
Exchange rate movement 867 - (4) 863
At 31 December 2018 36,713 1,521 436 38,670
Amortisation
At 1 January 2017 2,934 - - 2,934
Amortisation charge 3,038 - - 3,038
Exchange rate movement (238) - - (238)
At 31 December 2017 5,734 - - 5,734
Amortisation charge 6,758 - 114 6,872
Exchange rate movement 179 - 1 180
At 31 December 2018 12,671 - 115 12,786
Net book value
At 31 December 2017 23,548 - - 23,548
At 31 December 2018 24,042 1,521 321 25,884
Customer relationships, intellectual property and music licences are amortised
on a straight-line basis over five years. Customer relationships and music
licence amortisation commences on acquisition, whereas intellectual property
amortisation commences when the product is launched.
13. Property, Plant and Equipment
Group
Computers and software Office furniture and equipment Leasehold improvements Total
€'000 €'000 €'000 €'000
Cost
At 1 January 2017 8,485 3,158 1,724 13,367
Currency revaluation (685) (216) (222) (1,123)
Additions 2,514 772 601 3,887
Acquisitions through business combinations at fair value 2,214 603 1,350 4,167
Disposals (54) (1) (29) (84)
At 31 December 2017 12,474 4,316 3,424 20,214
Currency revaluation (114) (15) 27 (102)
Additions 6,248 1,082 2,110 9,440
Acquisitions through business combinations at fair value 362 272 332 966
Disposals (645) (248) (89) (982)
At 31 December 2018 18,325 5,407 5,804 29,536
Accumulated depreciation
At 1 January 2017 5,756 1,790 323 7,869
Currency revaluation (293) (111) (72) (476)
Depreciation charge 1,795 543 392 2,730
Disposals (6) (14) (20)
-
At 31 December 2017 7,252 2,222 629 10,103
Currency revaluation (51) 11 74 34
Depreciation charge 3,805 643 868 5,316
Disposals (645) (185) (89) (919)
At 31 December 2018 10,361 2,691 1,482 14,534
Net book value
At 31 December 2017 5,222 2,094 2,795 10,111
At 31 December 2018 7,964 2,716 4,322 15,002
14. Trade Receivables
Group 2018 2017
€'000 €'000
Trade receivables 38,736 27,891
Provision for bad debts (1,717) (418)
Financial asset held at amortised cost 37,019 27,473
Trade receivables arise from revenues derived from contracts with customers.
15. Other Receivables
Group Short Term* 2018 2017
€'000 €'000
Accrued income from contracts with customers 6,317 5,140
Prepayments & rent deposits 2,490 4,179
Other receivables 2,459 2,524
Multimedia tax credits / video games tax credits 10,820 10,016
Tax and social security 1,373 476
23,459 22,335
*Please note the comparative Group Short Term, "Other Receivables" has been
re-classified to be consistent with the current year presentation.
Accrued income from contracts with customers, represent mainly contract assets
in process and related items. The movement in the year is comprised of
transfers in and out as items are accrued and subsequently invoiced to
customers, with no significant amounts written off or impaired in the period.
16. Shareholders' Equity
Share Capital
Date Per share € Number of ordinary Number of ordinary Share capital Share premium Merger reserve Shares to be issued
£0.01 shares
£0.01 shares to be issued
€'000
€'000
€'000
€'000
At 1 January 2017 54,428,882 2,889,707 654 19,983 22,109 8,792
Shares issued on the first anniversary of the acquisition of Synthesis 13-Apr 9.40 1,188,253 (1,188,253) 14 - 3,440 (3,454)
Shares issued on acquisition of Xloc 10-May 9.47 19,134 - - - 184 -
Shares issued on acquisition of Gamesim 17-May 9.20 151,725 - 2 - 1,392 -
Shares to be issued on acquisition of Red Hot 22-May 9.12 - 160,842 - - - 1,468
Shares issued on acquisition of Asrec 04-Aug 13.12 9,534 - - - 101 -
Shares to be issued on acquisition of Around the Word 04-Aug 12.07 - 66,262 - - - 800
Shares issued on acquisition of d3t 19-Oct 14.46 42,368 - - - 686 -
Shares to be issued on acquisition of Sperasoft 13-Dec 14.26 - 252,248 - - - 4,133
Shares issued on acquisition of Lola 15-Dec 16.56 10,106 - - - 168 -
Acquisition related issuance of shares 1,421,120 (708,901) 16 - 5,971 2,947
Reclassification of share premium on acquisitions - - - (798) 798 -
Placing of shares on the market 24-Oct 15.62 5,357,143 - 61 82,261 - -
Issue of shares on exercise of share options 1.23 501,060 - 6 608 - -
At 31 December 2017 61,708,205 2,180,806 737 102,054 28,878 11,739
Measurement period adjustment (note 31) 14.26 - (8,806) - - - (119)
At 31 December 2017 restated 61,708,205 2,172,000 737 102,054 28,878 11,620
Shares to be issued on acquisition of Cord & Laced 09-Apr 17.48 - 73,744 - - - 1,289
Shares issued on the second anniversary of the acquisition of Synthesis 24-Apr 2.91 1,188,263 (1,188,263) 15 - 3,440 (3,455)
Shares issued on the second anniversary of the acquisition of Synthesis in 24-Apr 19.39 51,562 - 1 - 999 -
lieu of deferred cash
Shares to be issued on acquisition of Fire Without Smoke 01-May 20.12 - 77,006 - - - 1,550
Shares issued on the second anniversary of the acquisition of Mindwalk 14-Jun 3.67 513,189 (513,189) 6 - 1,880 (1,886)
Shares to be issued on acquisition of Blindlight 11-Jun 20.57 - 64,521 - - - 1,327
Shares to be issued on acquisition of Snowed In 20-Jul 19.55 - 37,983 - - - 743
Shares to be issued on acquisition of Studio Gobo & Electric Square 20-Aug 19.74 - 254,529 - - - 5,024
Shares to be issued on acquisition of The Trailerfarm 18-Sep 21.33 - 11,070 - - - 236
Shares issued on the first anniversary of Around the Word 01-Oct 12.07 66,262 (66,262) 1 - 799 (800)
Acquisition related issuance of shares 1,819,276 (1,248,861) 23 - 7,118 4,028
Issue of shares on exercise of share options 0.67 260,805 - 3 171 - -
At December 2018 63,788,286 923,139 763 102,225 35,996 15,648
There is no limit to the number of shares which the Company can issue, nor are
there are any restrictions on dividends or distributions on such shares.
Shares to be issued are valued at the share price at the date of acquisition,
and are recorded as shares to be issued, in accordance with IAS 32.16.
Shares held by the Employee Benefit Trust ("EBT")
2018 2017
Shares €'000 Shares €'000
Ordinary shares held by the EBT 335,425 1,997 335,425 1,997
Reserves
The following describes the nature and purpose of each reserve within owners'
equity:
Reserve Description and purpose
Retained earnings Cumulative net gains and losses recognised in the Consolidated Statement of
Comprehensive Income.
Foreign exchange reserve Gains or losses arising on retranslation of the net assets of the overseas
operations into Euro.
Share premium The share premium account is the amount received for shares issued in excess
of their nominal value, net of share issuance costs.
Share option reserve The share option reserve is the credit arising on share-based payment charges
in relation to the Company's share option schemes.
Shares to be issued For deferred consideration which is to be provided for by the issue of a fixed
number of shares at a future defined date, where there is no obligation on
Keywords to offer a variable number of shares, the deferred consideration is
classified as an Equity Arrangement and the value of the shares is fixed at
the date of the acquisition.
Merger reserve The merger reserve was initially created following the Group reconstruction,
when Keywords Studios PLC acquired the Keywords International Limited Group of
companies.
When the Group uses Keywords Studios PLC shares as consideration for the
acquisition of an entity, the value of the shares in excess of the nominal
value (net of share issuance costs) is also recorded within this reserve, in
line with S612 of the Companies Act 2006.
17. Share Options
In July 2013, at the time of the IPO, the Company put in place a Share Option
Scheme and a Long-Term Incentive Plan ("LTIP"). The charge in relation to
these arrangements is shown below, with further details of the schemes
following:
2018 2017
€'000 €'000
Share option scheme expense 646 178
LTIP option scheme expense 3,483 1,248
4,129 1,426
Of the total share option expense, €501k relates to Directors of the Company
(2017: €141k).
Share Option Scheme
Share options are granted to Executive Directors and to permanent employees.
The exercise price of the granted options is equal to the market price of the
shares at the time of the award of the options. The Company has no legal or
constructive obligation to repurchase or settle the options in cash.
Movements in the number of share options outstanding and their related
weighted average exercise prices are as follows:
2018 2017
Average exercise price in £ per share Number of options Average exercise price in £ per share Number of options
Outstanding at the beginning of the period 2.79 1,375,201 2.79 1,672,056
Granted 17.10 591,000 7.76 282,000
Lapsed 13.24 (65,246) 3.56 (30,000)
Exercised 1.93 (68,254) 1.35 (548,855)
Outstanding at the end of the period 7.11 1,832,701 2.79 1,375,201
Exercisable at the end of the period 1.47 706,524 1.30 515,296
Weighted average share price at date of exercise 17.68 12.32
Summary by share option arrangement
Date of Option 12-Jul-13 01-Jun-15 10-May-16 15-May-17 18-May-18 Total
Exercise Price £1.20 £1.58 £2.54 £7.76 £17.10
Outstanding at the beginning of the period 285,311 636,816 180,074 273,000 - 1,375,201
Granted - - - - 591,000 591,000
Lapsed - (2,371) (11,875) (4,500) (46,500) (65,246)
Exercised (9,827) (29,412) (29,015) - - (68,254)
Outstanding at the end of the period 275,484 605,033 139,184 268,500 544,500 1,832,701
Exercisable at 31 December 2018 275,484 403,988 27,052 - - 706,524
Exercisable 2019 - 201,045 56,066 89,500 - 346,611
Exercisable 2020 - - 56,066 89,500 181,500 327,066
Exercisable 2021 - - - 89,500 181,500 271,000
Exercisable 2022 - - - - 181,500 181,500
The inputs into the Black-Scholes model, used to value the options are as
follows:
Date of Option 12-Jul-13 01-Jun-15 10-May-16 15-May-17 18-May-18 Total
Weighted average share price (£) £1.23 £1.64 £2.54 £7.74 £17.21
Weighted average exercise price (£) £1.20 £1.58 £2.54 £7.76 £17.10
Fair value at measurement date (€) €0.81 €0.56 €0.40 €1.13 €3.79
Average expected life 3 Years 3 Years 3 Years 3 Years 3 Years
Expected volatility 36.12% 28.03% 27.17% 24.79% 35.87%
Risk free rates 0.50% 0.90% 0.58% 0.16% 0.89%
Average expected dividends yield 1.00% 0.75% 0.55% 0.21% 0.10%
Weighted average remaining life of options in months - 2 9 17 29 12
Expected volatility was determined by reference to KWS volatility. The
expected life used in the model has been adjusted based on management's best
estimate, for the effects of non-transferability, exercise restrictions and
behavioural considerations.
Long-term Incentive Plan Scheme
An alternative share plan was introduced to give awards to Directors and staff
subject to outperforming the Numis Small Cap (excluding Investment Trusts)
index in terms of shareholder return over a three-year period.
Movements in the number of share options outstanding and their related
weighted average exercise prices are as follows:
Summary by LTIP Arrangement
2018 2017
Average exercise price in £ per share Number of options Average exercise price in £ per share Number of options
Outstanding at the beginning of the period 0.01 1,976,416 0.01 1,443,691
Granted 0.01 996,000 0.01 696,000
Lapsed 0.01 (102,398) 0.01 (47,621)
Exercised 0.01 (192,551) 0.01 (115,654)
Outstanding at the end of the period 0.01 2,677,467 0.01 1,976,416
Exercisable at the end of the period 0.01 436,667 0.01 222,238
Weighted average share price at date of exercise 17.50 13.09
Date of option 08-Jul-13 06-Jan-15 01-Jun-15 10-May-16 03-Oct-16 15-May-17 18-May-18 23-Jul-18 Total
Exercise price £0.01 £0.01 £0.01 £0.01 £0.01 £0.01 £0.01 £0.01 £0.01
Outstanding at the beginning of the period 222,238 101,060 317,118 610,000 30,000 696,000 - - 1,976,416
Granted - - - - - - 990,000 6,000 996,000
Lapsed - (11,198) - (15,000) - (32,000) (44,200) - (102,398)
Exercised - (89,862) (102,689) - - - - - (192,551)
Outstanding at the end of the period 222,238 - 214,429 595,000 30,000 664,000 945,800 6,000 2,677,467
Exercisable at 31 December 2018 222,238 - 214,429 - - - - - 436,667
Exercisable 2019 - - - 595,000 30,000 - - - 625,000
Exercisable 2020 - - - - - 664,000 - - 664,000
Exercisable 2021 - - - - - - 945,800 6,000 951,800
Date of option 08-Jul-13 06-Jan-15 01-Jun-15 10-May-16 03-Oct-16 15-May-17 18-May-18 23-Jul-18
Weighted average share price (£) £1.23 £1.43 £1.64 £2.54 £4.15 £7.74 £17.21 £18.56
Weighted average exercise price (£) £0.01 £0.01 £0.01 £0.01 £0.01 £0.01 £0.01 £0.01
Fair value at measurement date (€) €0.62 €1.10 €1.40 €1.73 €2.06 €4.96 €11.82 €12.90
Average expected life 3 Years 3 Years 3 Years 3 Years 3 Years 3 Years 3 Years 3 Years
Expected volatility 36.12% 31.20% 28.03% 27.17% 23.31% 24.79% 35.87% 35.87%
Risk free rates 0.50% 0.58% 0.90% 0.55% 0.08% 0.16% 0.89% 0.80%
08-Jul-13 06-Jan-15 01-Jun-15 10-May-16 03-Oct-16 15-May-17 18-May-18 23-Jul-18 Total
Weighted average remaining life of options in months - - - 4 9 17 29 31 15
LTIP's vest on the third anniversary of the grant, if the performance criteria
are met. LTIPs must be exercised before the seventh anniversary of the grant.
The options were valued using a Monte Carlo binomial model using the following
inputs:
Expected volatility was determined by reference to KWS volatility. The
expected life used in the model has been adjusted based on management's best
estimate, for the effects of non-transferability, exercise restrictions and
behavioural considerations.
As any dividends earned are to be re-invested into the business the impact of
dividends has been ignored in the calculation of the LTIP share option charge.
18. Other Payables
Group 2018 2017
Restated (note 31)
€'000 €'000
Current
Accrued expenses 16,671 15,229
Payroll taxes 2,338 1,530
Other payables (ii) 3,890 2,986
Deferred and contingent consideration (i) 18,249 2,425
Related party payable (note 22) 5 9
41,153 22,179
Non-current
Other payables 5 16
Deferred and contingent consideration (i) 1,057 1,217
1,062 1,233
(i) The movement in deferred and contingent consideration
during the financial year was as follows:
Group 2018 2017
Restated (note 31)
€'000 €'000
Opening balance 3,642 1,730
Consideration settled by cash (1,603) (298)
Consideration settled by shares (1,000) -
Unwinding of discount (note 6) 311 266
Additional liabilities from current year acquisitions (note 28, 29) 17,068 1,885
Fair value adjustment (note 5) 766 -
Translation adjustment 122 59
19,306 3,642
In general, in order for contingent consideration to become payable,
pre-defined profit and/or revenue targets must be exceeded. The valuation of
contingent consideration is derived using data from sources that are not
widely available to the public and involves a degree of judgement (Level 3
input in the fair value hierarchy). On an undiscounted basis, the Group may be
liable for deferred and contingent consideration ranging from €0.6m to a
maximum of €20.3m. A 10% movement in expected performance results, has no
impact on the fair value of the contingent consideration, and hence there are
no reasonably probable changes to the assumptions and inputs (including the
discount rate), that would lead to a material change to the fair value of the
total amount payable.
(ii) Other payables includes deferred income from contracts
with customers of €312K (2017: €nil), which mainly comprise items invoiced
prior to services being delivered. The movement in the year is comprised of
transfers in and out as items are deferred and subsequently recognised as
revenue.
19. Employee Defined Benefit Plans
In line with statutory requirements in Italy and India we are required to
maintain employee defined benefit termination payment schemes.
In Italy, on leaving employment, each employee is entitled to 1/13.5 of their
final salary for each year of service.
In India, on retirement at age 60, each employee with over 5 years service is
entitled to 15/26 of their last drawn monthly salary for each year of service.
At year end, the Group commissioned an actuarial valuation of the related
liability, based on salaries, length of service and variables including
employee turnover, estimated salary increases and the cost of capital.
The liabilities at year end are recorded as long term. The actuarial loss is
recorded separately within other comprehensive income. The movements through
the year are detailed:
Group
2018 2017
€'000 €'000
Opening liability Italy at 1 January 1,055 826
Liability India recognised 1 January 2018 188 -
Service cost * 247 199
Interest cost 32 11
Benefits paid (117) (6)
Actuarial (gain) / loss recorded (27) 25
Closing liability at 31 December 1,378 1,055
* Please note the comparative has been restated to reflect the current year
presentation as the Directors have determined this presentation to be more
meaningful.
The Directors have considered the key specific risk factors which the Group
faces due to the employee defined benefit plans which are in place. Having
fully considered all specific elements of these plans the Directors believe
that the key issues faced are as follows:
· The plan is currently 100% unfunded, there are no specific assets to
meet the future liabilities as they fall due, as such there will be a cash
flow impact as the liabilities must be met with current working capital as
they fall due.
The Group has taken no specific actions to mitigate against these factors as
due to the long-term nature of the plans it is expected that there will be no
sudden financial impact on the Group's results caused by any of these factors.
A maturity profile of the obligation is not presented as the liability is not
significant in the context of the Group.
In 2019, the Group expects the costs of the employee benefit plan to be in
line with current year levels, as staff levels in the Italian operations stay
stable.
The actuarial valuation is based on the Projected Unit Credit Method, in line
with IAS 19.
2018 2017
Restated
Actuarial valuations €'000 €'000
Defined benefit obligations 1,378 1,055
Future service liability 3,214 2,977
Value of accrued benefits * 4,592 4,032
* Please note the comparative has been restated to reflect the current year
presentation as the Directors have determined this presentation to be more
meaningful.
2018 2017
Cost for year €'000 €'000
Service cost 247 199
Interest cost 32 11
Actuarial (gain) / loss (27) 25
252 235
2018 2017
Actuarial (gain) / loss €'000 €'000
Change due to experience 2 17
Change due to demographical assumptions (38) 30
Change due to financial assumptions 9 (22)
(27) 25
Assumptions Underlying the Actuarial Valuations and Sensitivities of the
Assumptions
For the actuarial valuations the following demographic and economic and financial assumptions were applied:
Demographic Assumptions in respect of Italy, representing 84% of the overall liability;
· The probabilities of death were derived from the population
demographics by age and sex, as recorded by the relevant Government Statistics
Offices and reduced by 25%, while other key inputs were taken from relevant
life assurance statistics.
· Certain inputs were estimated by management including
o Employee attrition rates at 5.71% per annum.
o Cash advances estimated on the basis of company history of 2.42% incidence
of advance per annum and a drawdown rate equal to 57.25%.
Economic & Financial Assumptions 2018 2017
Salary increase 3.08% 2.76%
Inflation 2.18% 1.70%
Discount rate 2.43% 1.54%
Key Statistics
Staff number 558 98
Average age (years) 31.5 39.3
Average service (years) 3.4 4.5
Average defined benefit per staff (€) 2,301 8,595
Average salary for defined benefit (€) 8,647 34,438
Interest Rate Sensitivities
-0.25% 1,456 1,136
0.25% 1,308 983
Mortality Rate Sensitivities
-0.025% 1,379 1,056
0.025% 1,378 1,055
Staff Turn Over Rate Sensitivities
-0.50% 1,389 1,067
0.50% 1,369 1,045
Staff Salary Increases Rate Sensitivities
-0.50% 1,370 1,029
0.50% 1,390 1,084
20. Capital Management, Loans and Borrowings
(i) Loans & Borrowings
Group
2018 2017
€'000 €'000
Expiry within 1 Year 40,071 18,943
Expiry between 1 and 2 years - 31
Expiry over 2 years 230 306
40,301 19,280
In 2017, the Company had a facility in place with Barclays Bank which allowed
financing of up to €25m of which €18.25m was drawn down at 31 December
2017. In 2018 the Company entered into a new Syndicated Bank revolving credit
facility ('RCF'), completely replacing the existing facility. This transaction
has been accounted for as an extinguishment of a financial liability under
IFRS 9, along with the recognition of a new liability with the new lenders.
There was no significant difference between the carrying value of the
financial liability at the time of extinguishment and the settlement value of
the loan.
The RCF allows financing of up to €75 million, with an option to increase
this by €30m to a total of €105 million. The RCF extends to June 2021,
with an option to extend this maturity date by a further 2 years.
As part of the facilities agreement, there are charges over the assets of the
major subsidiaries of the Group and lenders require the Group to monitor and
report interest cover and leverage ratios. Throughout the period, both ratios
were well within permitted levels. Non-compliance with terms of the facilities
agreement could result in lenders refusing to advance more funds, or in the
worst case, calling in outstanding loans.
There were a number of drawdowns during the year to fund new acquisitions.
Towards the end of 2018, excess funds of €10.1m were used to make a partial
repayment of outstanding loans. As at 31 December 2018 the Group had €40
million outstanding, at a rate based on a margin over EURIBOR, plus a separate
margin charged for the unutilised facility.
Loans owed by Enzyme at the end of 2017 of €0.4m reduced to €0.3m during
2018. Amounts owed by Sperasoft Inc. at the end of 2017 amounting to €0.6m
were repaid during 2018.
Loans and borrowings (classified as financial liabilities under IFRS 9), are
held at amortised cost. Interest expenses which are calculated using the
effective interest method, are disclosed in note 6.
The currencies of these loans are as follows:
Group 2018 2017
€'000 €'000
Euro 40,000 18,301
Canadian Dollars 301 347
US Dollars - 632
40,301 19,280
(ii) Capital management
Group 2018 2017
€'000 €'000
Loans and borrowings 40,301 19,280
Less: cash and cash equivalents (39,871) (30,374)
Net debt / (net cash) position 430 (11,094)
Total equity 192,375 161,012
Net debt / (net cash) to capital ratio (%) 0.2% -6.9%
The Group manages capital by monitoring debt to capital and net debt ratios.
This debt to capital ratio is calculated as net debt to total equity. Net
debt is calculated as total debt (as shown in the consolidated statement of
financial position) less cash and cash equivalents. The liquidity risk and
cash management for the Group is managed centrally by the Group treasury
function. The Board receives projections on a monthly basis as well as
information regarding cash balances. The Group's strategy is to preserve a
strong cash base and secure access to finance at reasonable cost by
maintaining a good credit rating.
21. Investment in Subsidiaries
The results and financial position of all the subsidiaries are included in the
consolidated statements.
Details of the Company and Group's subsidiaries as at 31 December 2018 are set
out below:
Name Country of incorporation Date of incorporation / acquisition Proportion of voting rights and ordinary share capital held Registered office
Keywords International Ltd Ireland 13-May-98 100% Whelan House, South County Business Park, Dublin 18, Ireland.
Keywords International Co Ltd Japan 30-Nov-10 100% 5F, Aoba No.1 Bldg. 2-3-1 Kudanminami, Chiyoda, Tokyo, 102-0074 Japan.
Keywords International Inc USA 26-Sep-12 100% 18300 Redmond Way, Suite 120, Redmond, WA 98052
KW Studios Limited UK 29-May-13 100% 201 Temple Chambers, 3-7 Temple Avenue, London, England, EC4Y 0DT
Liquid Violet Ltd UK 19-Jan-14 100% Bryant House Bryant Road, Strood, Rochester, Kent, ME2 3EW
Keywords Studios QC-Games Inc. Canada (Quebec) 17-Feb-14 100% 1751 Richardson, suite 8400, Montréal, Québec, Canada H3K1G6
(Formerly Babel Games Services Inc.)
Babel Media USA Inc USA 17-Feb-14 100% 1751 Richardson Office 8400, Montreal, Canada, H3K 1G6
Babel Media India Private Limited India 17-Feb-14 100% 3rd floor, Vardhman Orchard Plaza, Plot No 4, LSC, West Enclave, Pitampura,
New Delhi, 110034, India
Babel Media Ltd UK 18-Feb-14 100% Fifth Floor, 6 St. Andrew Street, London, EC4A 3AE
Keywords International Pte. Limited Singapore 24-Apr-14 100% 20 Kallang Avenue, #06-6A, Lobby B, Pico Creative Centre, Singapore 339411
Keywords Studios Italy S.R.L. Italy 08-May-14 100% Via Egadi 2, Milano, MI, 20144, Italy
(Formerly Binari Sonori S.R.L)
Binari Sonori America, Inc USA 08-May-14 100% 350 N. Glenoaks Blvd., Suite 305, Burbank, CA 91502, USA
Binari Sonori Audio Productions LLC USA 08-May-14 100% 350 N. Glenoaks Blvd., Suite 305, Burbank, CA 91502, USA
Lakshya Digital Private Limited India 10-Oct-14 100% 3rd floor, Vardhman Orchard Plaza, Plot No 4, LSC, West Enclave, Pitampura,
New Delhi, 110034, India
Edugames Solutions Private Limited India 10-Oct-14 100% D - 3/C, Munirka Flats, New Delhi - 110067
Lakshya Digital Singapore Pte. Ltd Singapore 10-Oct-14 100% 20 Kallang Avenue, #06-6A, Lobby B, Pico Creative Centre, Singapore 339411
Keywords Studios QC-Tech Inc. Canada (Quebec) 06-Jan-15 100% 1751 Richardson Street Suite 8400 Montreal QC H3K 1G6 Canada
(Formerly Alchemic Dream Inc.)
Keywords International Barcelona SL Spain 09-Jan-15 100% Passeig de Gràcia 49, 1er2a, 08007 Barcelona, Catalonia, Spain
Keywords do Brasil Localizacao e Traducao Ltda Brazil 18-Jan-15 100% Av. Churchill, 109 - Sala 204 - Centro, Rio de Janeiro-RJ, Brazil CEP:
(Formerly Reverb Localizacao-Prearacao de Documentos Ltda) 20020-050
Keywords (Shanghai) Information Technology Ltd China 02-Apr-15 100% 142 Room, Building 7, No.311 Jin Gao Road, Pudong New District, Shanghai
Keywords Studios Spain SLU Spain 16-Jul-15 100% Julián Camarillo 6A, 3B, 28037 Madrid, Spain
(Formerly Kite Team SL)
Kite Team Mex S.de R.L. de. CV Mexico 16-Jul-15 100% Av. Insurgentes Sur 1853,
(Currently in process of changing name to Keywords Studios Mexico, S. DE
Guadalupe Inn,
R.L.DE C.V.)
01020 Ciudad de México,
CDMX Mexico
Liquid Development LLC USA 20-Aug-15 100% 411 SW 2nd Ave #300, Portland, OR 97204, USA
Keywords Asia Private Ltd Singapore 22-Mar-16 100% 20 Kallang Avenue #06-6A, Lobby B
(Formerly Ankama Asia Pte Ltd)
Pico Creative Centre
Singapore 339411
Synthesis Deutschland GmbH Germany 12-Apr-16 100% Holstenkamp 46 A, Bahrenfeld, 22525 Hamburg, Germany
Sillabit S.R.L Italy 12-Apr-16 100% Via Marco D'Oggiono, 12, Milano (MI) 20123, Italy
Synthesis Global Solutions SAS Switzerland 12-Apr-16 100% Corso Elvezia 16, 6900 Lugano, Ticino, Switzerland
Keywords Studios France SAS France 08-Jun-16 100% 11 rue Torricelli, 75017 Paris, France
(Formerly Keywords International SAS)
Player Research Ltd UK 26-Oct-16 100% 2nd Floor, Claremont House, 95 Queens Road, Brighton, England, BN1 3XE
Keywords Studios QC-Interactive Inc. Canada (Quebec) 16-Nov-16 100% 1751 Richardson Street Suite 8400 Montreal QC H3K 1G6 Canada
(Formerly Enzyme Testing Lab Inc.)
SPOV Ltd UK 17-Feb-17 100% 205-209 Hackney Road, London, England, E2 8JL
Xloc Inc. USA 10-May-17 100% 712 Presnell Court, Raleigh, NC 27615-1240, USA
GameSim Inc. USA 17-May-17 100% 12000 Research Parkway, Suite 436, Orlando, FL 32826, USA
Strongbox Ltd Seychelles 22-May-17 100% Suites 103, 106 and 107 Premier Building, Victoria, Mahe, Seychelles
Red Hot Software (Shanghai) Ltd China 22-May-17 100% Dong Ti Yu Hui Road #860, Building 5, 4th Floor, Shanghai,
China
Red Hot Software (Zhengzhou) Ltd China 22-May-17 100% Room 207, 11th Floor, Building No. 3, No. 57 Ke Xue Da Dao, Zheng Zhou, He
Nan, China
Eastern New Media Limited Hong Kong 22-May-17 100% Flat/Rm 4304, 43F, China Resources Building, 26 Harbour Road, Wanchai, Hong
Kong
PT Limitless Indonesia Indonesia 22-May-17 100% JI. Timoho II, No. 32, Yogyakarta,
Around the Word GmbH Germany 28-Jul-17 100% Rosenstrasse 2, D-10178 Berlin
d3t Ltd UK 19-Oct-17 100% 201 Temple Chambers, 3-7 Temple Avenue, London, England, EC4Y 0DT
Keywords US Holdings Inc USA 23-Oct-17 100% 1209 Orange Street, Wilmington, New Castle County, Delaware 19801, USA.
Keywords Canada Holdings Inc. Canada (Quebec) 27-Oct-17 100% 1751 Richardson Street Suite 8400 Montreal QC H3K 1G6 Canada
(Formerly Volt Canada Inc.)
Keywords Studios BC Inc. Canada (BC) 27-Oct-17 100% 400-725 Granville Street, Vancouver, BC V7G 1G5, Canada
(Formerly VMC Volt Information Sciences BC Inc.)
VMC Consulting Corporation USA 27-Oct-17 100% 11611 Willows Road NE, Redmond, WA 98052, United States of America
Sperasoft Poland Spólka z.o.o. Poland 13-Dec-17 100% Ul. Na Kozłówce 27, 30-664 Kraków, Poland
Sperasoft Studios LLC Russia 13-Dec-17 100% 196084, Russia, Saint-Petersburg, Kievskaya street, 5 - building
Sperasoft Inc USA 13-Dec-17 100% 1013 Centre Road, Suite 403-B, Wilmington, DE 19805, USA
Keywords Studios Ltd Ireland 27-Mar-18 100% Whelan House, South County Business Park, Dublin 18, Ireland.
Keywords UK Holdings Limited UK 28-Mar-18 100% 201 Temple Chambers, 3-7 Temple Avenue, London, England, EC4Y 0DT
Keywords Ventures Limited UK 06-Apr-18 100% 8 Clifford Street, London, United Kingdom, W1S 2LQ
Cord World Wide Spain, SL Spain 09-Apr-18 100% Avenida Concha Espina 39 B28016, Madrid, Spain
Laced Music Ltd UK 09-Apr-18 100% 201 Temple Chambers, 3-7 Temple Avenue, London, England, EC4Y 0DT
Cord Worldwide Ltd UK 09-Apr-18 100% 201 Temple Chambers, 3-7 Temple Avenue, London, England, EC4Y 0DT
Cord Artists Management Limited UK 09-Apr-18 100% 12-14 Denman Street, London, England, W1D 7HJ
Paleblue Limited UK 09-Apr-18 100% 12-14 Denman Street, London, England, W1D 7HJ
Fire Without Smoke Ltd UK 30-May-18 100% 98 Chingford Mount Road, South Chingford, London, E4 9AA
Fire Without Smoke Inc. USA 29-May-18 100% 12701 Marblestone Drive, Suite 330, Woodbridge, Virgina, 22192 USA
Blindlight LLC USA 11-Jun-18 100% 8335 Sunset Blvd.
West Hollywood, CA 90069 USA
Snowed In Studios, Inc Canada (Ontario) 19-Jul-18 100% 400 - 981 Wellington Street
West Ottawa, Ontario K1Y 2Y1
Canada
Studio Gobo Limited UK 20-Aug-18 100% Unit 8 Hove Business Centre, Fonthill Road, Hove, East Sussex, BN3 6HA
Bitsy SG Limited UK 20-Aug-18 100% Unit 8 Hove Business Centre, Fonthill Road, Hove, East Sussex, United Kingdom,
BN3 6HA
Electric Square Limited UK 20-Aug-18 100% Unit 8 Hove Business Centre, Fonthill Road, Hove, East Sussex, England, BN3
6HA
Alset Ltd UK 20-Aug-18 100% Unit 8, Hove Business Centre, Fonthill Road, Hove, United Kingdom, BN3 6HA
Itsy SGD Limited UK 20-Aug-18 100% Unit 8, Hove Business Centre, Fonthill Road, Hove, United Kingdom, BN3 6HA
d3t Development Ltd UK 30-Aug-18 100% 201 Temple Chambers, 3-7 Temple Avenue, London, England, EC4Y 0DT
The TrailerFarm Limited UK 18-Sep-18 100% The Old Casino, 28 Fourth Avenue, Hove, East Sussex, BN3 2PJ
Post-acquisition, the Group reviews entities acquired to streamline activities
and close any dormant entities acquired. Re-structuring details are set out
below:
Name Country of Incorporation Date of incorporation / acquisition Proportion of voting rights and ordinary share capital held Re-structuring details Date of
re-structuring
Maximal Studio Audiovisuais Ltda Brazil 22-Mar-18 100% Merged into Keywords do Brasil Localizacao e Traducao Ltda 20-Sep-18
Keywords International Corporation Inc. Canada 22-Dec-10 100% Merged into Keywords Canada Holdings Inc. 01-Jan-19
Volta Creation Inc. Canada 28-Jul-16 100% Merged into Keywords Canada Holdings Inc. 01-Jan-19
Global Video Games Services Inc. Canada 16-Nov-16 100% Merged into Keywords Canada Holdings Inc. 01-Jan-19
La Marque Rose SARL France 04-Aug-17 100% Merged into Keywords Studios France SAS 04-Oct-18
AsRec SAS France 28-Jul-17 100% Merged into Keywords Studios France SAS 31-Aug-18
Dune Sound SAS France 28-Jul-17 100% Merged into Keywords Studios France SAS 30-Nov-18
Around the Word SAS France 28-Jul-17 100% Merged into Keywords Studios France SAS 30-Nov-18
GVGS Europe SARL France 16-Nov-16 100% Dissolved 26-Dec-18
22. Related Parties and Shareholders
Italicatessen Limited, a company registered in Ireland, is related by virtue
of a common significant shareholder. P.E.Q. Holdings Limited is 100% owner of
Italicatessen Limited. At 31 December 2018, P.E.Q. Holdings Limited owned 6.3%
(2017: 6.5%) of the Company. In addition, Mr. Giorgio Guastalla is a Director
of Italicatessen Limited, P.E.Q. Holdings Limited and the Company, and owns,
or controls, 90% of the share capital of P.E.Q. Holdings Limited.
The following transactions arose with Italicatessen Limited, which provides
canteen services to Keywords International Limited, on an arms length basis:
2018 2017
€'000 €'000
Operating Expenses
Canteen charges 44 57
44 57
The following are year-end balances owing by the Group:
2018 2017
€'000 €'000
Italicatessen Limited 5 9
5 9
The Company paid the following amounts, on an arms length basis, to Mr.
Giorgio Guastalla, Director of the Company, and shareholder of P.E.Q. Holdings
Limited, in respect of rent on premises occupied by employees of the Group in
Dublin.
2018 2017
€'000 €'000
Operating Expenses
Rental payment 22 22
22 22
The details of key management compensation (being the remuneration of the
Directors) are set out in note 10.
23. Financial Instruments and Risk Management
Interest Rate Risk
Interest rate risk is the risk that the value of financial instruments will
fluctuate due to changes in market interest rates. The Group's income and
operating cash flows are substantially independent of changes in market
interest changes. The management monitors interest rate fluctuations on a
continuous basis and acts accordingly.
Where the Group has a significant amount of surplus cash, it invests in higher
earning interest deposit accounts.
Due to interest rate conditions, the interest rates for short-term deposits
are at similar levels to those achieved for longer-terms. The Group is not
unduly exposed to market interest rate fluctuations, and no interest rate
sensitivity analysis has been presented as a result.
Credit Risk
The Group's main financial assets are cash and cash equivalents, as well as
trade and other receivables which represent the Group's maximum exposure to
credit risk in connection with its financial assets.
Credit risk arises when a failure by counterparties to discharge their
obligations could reduce the amount of future cash inflows from financial
assets on hand at the reporting date. Credit risk arising in the context of
the Group's operations is not significant with the total bad debt provision at
the balance sheet date amounting to 4.6% of gross trade receivables (2017:
1.5%), with the majority of the year over year increase attributable to one
customer. Customer credit risk is managed at appropriate Group locations
according to established policies, procedures and controls. Customer credit
quality is assessed and credit limits are established where appropriate.
Outstanding customer balances are regularly monitored and a review for
indicators of impairment (evidence of financial difficulty of the customer,
payment default, breach of contract etc.) is carried out at each reporting
date. Significant balances are reviewed individually while smaller balances
are grouped and assessed collectively. Receivables balances are unsecured and
non-interest-bearing. The trade receivables balances disclosed comprise a
large number of customers spread across the Group's activities and geographies
with balances classified as "Not past due" representing 74% of the total trade
receivables balance at the balance sheet date (2017: 61%). Trade and other
receivables are carried on the statement of financial position net of bad debt
provisions.
Group Treasury manage bank balances centrally, and monitors the credit rating
and stability of the institutions the Group banks with.
The ageing of trade receivables that are past due but not impaired can be
analysed as follows:
Group
Total Not past due 1-2 months overdue More than 2 months past due
€'000 €'000 €'000 €'000
At 31 December 2018 37,019 27,504 7,996 1,519
At 31 December 2017 27,473 16,713 9,126 1,634
A provision for doubtful debtors is included within trade receivables and can
be reconciled as follows:
2018 2017
€'000 €'000
Provision at the beginning of the year 418 468
Impairment of financial assets (trade receivables) charged to administration 2,055 3
expenses
Foreign exchange movement in the year (30) -
Utilised (726) (53)
Provision at end of the year 1,717 418
Trade receivables loss allowance is estimated using a practical expedient to
arrive at lifetime expected credit losses. Overdue receivables are evaluated
to calculate an expected credit loss using a historical credit loss experience
of 0.5% (2017: nil). Taking into account internal and external information,
the historical credit loss experience may be adjusted where it is determined
that there has been a significant increase in credit risk. Where there is
evidence that a receivable is credit impaired, the impairment is recognised
immediately, and impaired balances are removed from the expected credit loss
calculation.
Total Not past due 1-2 months overdue More than 2 months past due
€'000 €'000 €'000 €'000
Trade receivables gross 39,074 27,874 8,586 2,614
Credit impaired (1,872) (234) (551) (1,087)
Expected credit losses (183) (136) (39) (8)
At 31 December 2018 37,019 27,504 7,996 1,519
Trade receivables gross 27,891 16,713 9,126 2,052
Credit impaired (418) - - (418)
Expected credit losses - - - -
At 31 December 2017 27,473 16,713 9,126 1,634
Related party receivables of €nil were past due at 31 December 2018 (2017:
€nil).
Currency Risk
Currency risk is the risk that the value of financial instruments will
fluctuate due to changes in foreign exchange rates. The foreign exchange risk
arises for the Group where assets and liabilities arise in a currency other
than the functional currency of the entity.
The Group's policy, where possible, is for Group entities to manage foreign
exchange risk at a local level by matching the currency in which revenue is
generated with the expenses incurred and by settling liabilities denominated
in their functional currency with cash generated from their own operations in
that currency. Where Group entities have liabilities denominated in a currency
other than their functional currency (and have insufficient reserves of that
currency to settle them), cash already denominated in that currency will,
where possible, be transferred from elsewhere within the Group.
Over the course of the year the Group's currency exposure has increased and
diversified due to the addition of the newly-acquired subsidiaries. The Group
is predominantly exposed to currency risk on the balances held within working
capital across the Group and the exposure is concentrated in the movement of
the Canadian Dollar, US Dollar and Sterling against the Euro. The effect of a
strengthening and weakening of 10% in those currencies against the Euro at the
reporting date on the working capital balances would, all other variables held
constant, have resulted in the following pre-tax profit / (loss) impact for
the year:
10% Strengthening 10% Weakening 10% Strengthening 10% Weakening
2018 2018 2017 * 2017 *
€'000 €'000 €'000 €'000
US Dollar to Euro 2,140 (1,946) 2,363 (2,148)
Canadian Dollar to Euro 2,026 (1,842) 1,267 (1,152)
Sterling to Euro 884 (803) 620 (564)
* Please note the comparatives have been amended to reflect current year
presentation, as the Directors consider this presentation to be more
meaningful
Total Financial Assets and Liabilities
The carrying amount of the financial assets and liabilities shown in the Group
statement of financial position are stated at amortised costs, with the
exception of contingent consideration held at fair value.
Liquidity Risk
Liquidity risk arises from the Group's management of working capital and the
financial charges on its debt instruments.
The Group's policy is to ensure that it will have sufficient cash to allow it
to meet its liabilities when they become due.
The following are the contractual maturities (representing undiscounted
contractual cash flows) of the Group's financial liabilities:
Group
Year ended 31 December 2018 Total Within 1 year 1-2 years 2-5 years
€'000 €'000 €'000 €'000
Trade payables 7,142 7,142 - -
Deferred and contingent consideration (i) 19,306 18,249 1,057 -
Other payables 22,909 22,904 5 -
Loans and borrowings 40,301 40,071 - 230
Loan interest 55 55 - -
Year ended 31 December 2017 Total Within 1 year 1-2 years 2-5 years
€'000 €'000 €'000 €'000
Trade payables 7,310 7,310 - -
Deferred and contingent consideration (i) 4,468 3,251 1,217 -
Other payables 19,770 19,754 16 -
Loans and borrowings 19,280 18,943 31 306
Loan interest 80 80 - -
Deferred and contingent consideration at 31 December 2018 has arisen on
business combinations, and is based on set amounts to be paid in the future to
sellers under share purchase agreements.
24. Operating Lease Commitments
The Group occupies a portfolio of leased properties. The terms of property
leases vary from country to country, although they all tend to be tenant
repairing with rent reviews every two to five years and typically have a
five-year break clause, with options to renew.
The total future value of the minimum lease payments is as follows:
Group
2018 2017
€'000 €'000
Not later than one year 6,557 4,561
Later than one year and not later than five years 8,882 10,708
Later than five years 1,451 4,793
16,890 20,062
25. Finance Lease Commitments
The Group leases computer equipment and office telephone systems. Such assets
are generally classified as finance leases, as the lease term equates to the
estimated useful economic life of the assets concerned, and often the Group
has the right to purchase the assets outright at the end of the minimum lease
term by paying a nominal amount. As the carrying value of assets under
finance lease commitments are negligible, the net book value of the assets is
not disclosed.
The total future value of the minimum lease payments is as follows:
Group
Minimum lease payments Interest Present value
€'000 €'000 €'000
2018
Not later than one year 5 - 5
Later than one year and not later than five years - - -
Later than five years - - -
5 - 5
2017
Not later than one year 25 1 24
Later than one year and not later than five years 20 4 16
Later than five years - - -
45 5 40
26. Deferred Tax
Details of the deferred tax assets and liabilities, and amounts recognised in
the profit or loss are as follows:
Asset Liability Net (Credited) / charged to Income Statement
2018 2018 2018 2018
€'000 €'000 €'000 €'000
Accelerated capital allowances - 1 (1) 1
Defined benefit termination payments 66 - 66 (3)
Available losses 875 - 875 40
Rent free period provisions 30 - 30 4
Fixed asset tax base versus accounting book value 558 71 487 (100)
Deferred tax related to multimedia tax credits - 2,468 (2,468) (112)
Deferred tax arising on items deductible on a paid basis 1,438 155 1,283 (415)
Deferred tax arising on intangibles - 5,793 (5,793) (1,448)
Net tax assets / (liabilities) 2,967 8,488 (5,521) (2,033)
Impact of change in tax rates - - - (4)
Prior year (over) / under provision - - - (364)
Total (credited) / charged to Income Statement - - - (2,401)
Asset Liability Net (Credited) / charged to Income Statement
2017 2017 2017 2017
€'000 €'000 €'000 €'000
Accelerated capital allowances - 1 (1) 1
Defined benefit termination payments 32 - 32 (2)
Available losses 237 - 237 (162)
Rent free period provisions 17 - 17 13
Fixed asset tax base versus accounting book value 258 139 119 (33)
Deferred tax related to multimedia tax credits - 2,284 (2,284) 132
Other temporary and deductible differences 581 112 469 (225)
Deferred tax arising on intangibles 81 5,259 (5,178) (700)
Net tax assets / (liabilities) 1,206 7,795 (6,589) (976)
Impact of change in tax rates - - - (149)
Prior year (over) / under provision - - - 94
Total (credited) / charged to Income Statement - - - (1,031)
Please note that the comparative has been re-classified to reflect the
current year presentation as the Directors have determined this presentation
to be more meaningful.
The deferred tax not recognised on available losses at the period end is €3.9m (2017: €3.1m).
27. Investment in Associate
2018 2017
€'000 €'000
Opening Balance - -
Investment in AppSecTest Limited 226 -
Post-acquisition changes in the Group's share of net assets (66) -
160 -
In May 2018, the Group, through the newly established Keywords Ventures Ltd,
invested £100k (€113k) in 15% of the share capital of AppSecTest Limited.
Incorporated in the UK, AppSecTest is creating a cloud based automatic testing
solution for mobile apps, including games (principally for GDPR compliance). A
further investment of £100K (€113K) was made in September 2018 bringing the
total investment to 30% of the share capital of the company. Under a
shareholder agreement the Group is entitled to appoint one director to the
board. Based on these factors, the Group consider that it has the power to
exercise significant influence.
28. Business Combinations / Acquisitions Completed in the Current Year
Cord Laced Maximal Fire Without Smoke Blindlight Snowed In Studio Gobo & Electric Square The Trailerfarm Total
€'000 €'000 €'000 €'000 €'000 €'000 €'000 €'000 €'000
Date of acquisition 09-Apr-18 09-Apr-18 22-Mar-18 30-May-18 11-Jun-18 19-Jul-18 20-Aug-18 18-Sep-18
Acquisition company jurisdiction UK UK Brazil UK US Canada UK UK
Book value of identifiable assets and liabilities
Property, plant & equipment 79 - 14 11 4 38 803 17 966
Intangible assets 362 - - - - - - - 362
Trade and other receivables - gross 1,135 126 22 810 256 48 3,558 98 6,053
Bad debt provision - - - (268) - - - - (268)
Cash and cash equivalents 1,803 40 112 1,123 96 282 5,409 129 8,994
Trade and other payables (1,455) (224) (271) (419) (128) (122) (1,404) (51) (4,074)
Net book value 1,924 (58) (123) 1,257 228 246 8,366 193 12,033
Fair value adjustments
Identifiable intangible assets - customer relationships 2,163 - - 1,404 2,413 584 - - 6,564
Deferred tax liabilities (411) - - (267) (511) (159) - - (1,348)
Total fair value adjustments 1,752 - - 1,137 1,902 425 - - 5,216
Total identifiable assets 3,676 (58) (123) 2,394 2,130 671 8,366 193 17,249
Goodwill 2,377 521 647 4,455 5,949 2,003 25,870 1,322 43,144
Total consideration 6,053 463 524 6,849 8,079 2,674 34,236 1,515 60,393
% Share capital acquired 100% 100% 100% 100% 100% 100% 100% 100%
Satisfied by:
Cash 4,907 320 345 4,726 3,097 1,822 17,015 925 33,157
Deferred cash - - - - - 109 1,033 - 1,142
Deferred cash contingent on performance - - 179 574 3,655 - 11,164 354 15,926
Shares to be issued 1,146 143 - 1,549 1,327 743 5,024 236 10,168
Total consideration transferred 6,053 463 524 6,849 8,079 2,674 34,236 1,515 60,393
Number of shares
Issued at the date of acquisition - - - - - - - - -
Fixed amount agreed to be issued 65,550 8,194 - 77,006 64,521 37,983 254,529 11,070 518,853
Net cash outflow arising on acquisition Cord Laced Maximal Fire Without Smoke Blindlight Snowed In Studio Gobo & Electric Square The Trailerfarm Total 2018
€'000 €'000 €'000 €'000 €'000 €'000 €'000 €'000 €'000
Cash 4,907 320 345 4,726 3,097 1,822 17,015 925 33,157
Less: cash and cash equivalent balances transferred (1,803) (40) (112) (1,123) (96) (282) (5,409) (129) (8,994)
Net cash outflow - acquisitions 3,104 280 233 3,603 3,001 1,540 11,606 796 24,163
Related acquisition costs charged through to the Consolidated Statement of 104 20 8 138 4 57 388 39 758
Comprehensive Income
Pre-acquisition revenue in 2018 H1 1,721 47 243 1,653 1,139 1,013 7,286 534 13,636
Pre-acquisition revenue in 2018 H2 - - - - - - 2,064 331 2,395
Pre-acquisition revenue with Keywords Group - - (243) - - - - - (243)
Post-acquisition revenue 2,864 510 180 2,641 2,653 1,210 8,195 662 18,915
2018 Pro forma revenue 4,585 557 180 4,294 3,792 2,223 17,545 1,527 34,703
Pre-acquisition profit / (loss) before tax 93 (10) 82 238 (143) 325 4,065 246 4,896
Post-acquisition profit / (loss) before tax (196) 36 319 820 785 420 2,878 243 5,305
Pro forma profit / (loss) before tax (103) 26 401 1,058 642 745 6,943 489 10,201
The acquisitions made in the year are in line with the Group's strategy to
grow organically and by acquisition, as it selectively consolidates the highly
fragmented market for video game services. The companies will bring additional
talent, expertise and industry experience to Keywords' client base. Being able
to offer the additional services to our clients will further enhance our
reputation as the leading provider of services to the global video games
industry.
The amounts recognised in respect of the identifiable assets acquired and
liabilities assumed of acquisitions in the year are set out in the table
above.
The main factors leading to the recognition of goodwill on the acquisitions
are the presence of certain intangible assets in the acquired entities, which
are not valued for separate recognition, such as:
· The expertise and music industry experience in Cord
& Laced
· The expertise in high end video game trailers and
reputation within the industry in Fire Without Smoke
· The expertise in voiceover production, celebrity
acquisition and rights management, game writing, music, sound design and
motion capture in Blindlight
· The expertise and additional scale to Keywords' new and
growing video game development business in Snowed In and Studio Gobo &
Electric Square
· The experience and expertise in producing trailers for
the marketing and support of video games in The Trailerfarm
The total amount of goodwill arising on business combinations completed in the
current year, that is expected to be deductible for tax purposes was €nil.
29. Business Combinations / Acquisitions completed in 2017
Restated Restated
Spov Ltd. XLOC Gamesim Red Hot Around the Word Asrec Le Marque Rose d3t VMC Sperasoft Lola Total
€'000 €'000 €'000 €'000 €'000 €'000 €'000 €'000 €'000 €'000 €'000 €'000
Date of acquisition 17-Feb-17 10-May-17 17-May-17 22-May-17 28-Jul-17 04-Aug-17 04-Aug-17 19-Oct-17 27-Oct-17 13-Dec-17 15-Dec-17
Acquisition company jurisdiction UK US US China France France France UK US / Canada Russia / US Mexico
Book value of identifiable assets and liabilities
Property, plant & equipment 30 7 13 230 342 123 148 188 1,834 1,053 13 3,981
Trade and other receivables - gross 16 33 768 975 2,142 49 598 602 18,255 3,890 147 27,475
Bad debt provision - - - - - - - - - (944) - (944)
Cash and cash equivalents - 120 26 584 497 76 494 802 - 587 43 3,229
Trade and other payables (139) (73) (353) (356) (2,067) (115) (504) (678) (3,192) (2,710) (118) (10,305)
Corporation tax payable - - - (64) - - - - (150) (86) - (300)
Deferred tax liabilities - - - - - - - - (1,408) (46) - (1,454)
Loan - - - (0) - - - - - (1,022) - (1,022)
Net book value (93) 87 454 1,369 914 133 736 914 15,339 722 85 20,660
Fair value adjustments
Identifiable intangible assets - customer relationships - 147 - 1,465 651 - - - 13,245 3,454 - 18,962
Deferred tax liabilities - (59) - (366) (217) - - - (2,781) (691) - (4,114)
Total fair value adjustments - 88 - 1,099 434 - - - 10,464 2,763 - 14,848
Total identifiable assets (93) 175 454 2,468 1,348 133 736 914 25,803 3,485 85 35,508
Goodwill as reported 491 652 3,828 2,513 3,495 577 1,293 2,886 32,128 18,206 784 66,853
Measurement period adjustment (note 31) - - - - - - - - - (945) - (945)
Goodwill (restated) 491 652 3,828 2,513 3,495 577 1,293 2,886 32,128 17,261 784 65,908
Total consideration 398 827 4,282 4,981 4,843 710 2,029 3,800 57,931 20,746 869 101,416
% Share capital acquired 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Asset Purchase
Satisfied by:
Cash 351 643 2,888 3,514 2,500 610 2,029 3,127 57,931 16,733 405 90,731
Equity instruments - 184 1,394 - - 100 - 673 - - - 2,351
Deferred cash (restated) 47 - - - 1,543 - - - - - 295 1,885
Shares to be issued (restated) - - - 1,467 800 - - - - 4,013 169 6,449
Total consideration transferred 398 827 4,282 4,981 4,843 710 2,029 3,800 57,931 20,746 869 101,416
Number of shares
Issued at the date of acquisition - 19,134 151,725 - - 9,534 - 42,368 - - 222,761
Fixed amount agreed to be issued - - - 160,842 66,262 - - - - 252,248 10,106 489,458
Net cash outflow arising on acquisition Spov Ltd. XLOC Gamesim Red Hot Around the Word Asrec Le Marque Rose d3t VMC Sperasoft Lola Total 2017
€'000 €'000 €'000 €'000 €'000 €'000 €'000 €'000 €'000 €'000 €'000 €'000
Cash 351 643 2,888 3,514 2,500 610 2,029 3,127 57,931 16,733 405 90,731
Less: cash and cash equivalent balances transferred - (120) (26) (584) (497) (76) (494) (802) - (587) (43) (3,229)
Settled in 2018 re 2017 acquisitions - - - (321) - - - - - - (405) (726)
Net cash outflow - acquisitions 351 523 2,862 2,609 2,003 534 1,535 2,325 57,931 16,146 (43) 86,776
Related acquisition costs charged through to the Consolidated Statement of 9 9 3 70 435 - - 36 1,690 82 2 2,336
Comprehensive Income
Pre-acquisition revenue in 2017 H1* 4 243 1,532 2,266 3,518 265 1,154 1,547 23,582 8,902 449 43,462
Pre-acquisition revenue in 2017 H2 - - - - 588 44 193 903 16,979 8,378 548 27,633
Adjustment for pre-acquisition trading with Keywords Group - - - - (575) (43) (189) - - - (997) (1,804)
Post-acquisition revenue 208 236 2,266 3,980 2,048 571 1,154 560 7,769 798 - 19,590
2017 Pro forma revenue 212 479 3,798 6,246 5,579 837 2,312 3,010 48,330 18,078 - 88,881
Pre-acquisition profit / (loss) before tax* (10) 82 64 305 (313) (32) (151) 120 2,358 (1,007) 68 1,484
Post-acquisition profit / (loss) before tax* (203) (114) 397 848 313 141 191 (7) 804 (34) - 2,336
Pro forma profit / (loss) before tax (213) (32) 461 1,153 - 109 40 113 3,162 (1,041) 68 3,820
* Restated to exclude revenue from one contract that did not novate to VMC
post acquisition and information that was not available when preparing the
FY17 Annual Report
The acquisitions made in the prior year are in line with the Group's strategy
to grow organically and by acquisition, as it selectively consolidates the
highly fragmented market for video game services. The companies will bring
additional talent, expertise and industry experience to Keywords' client base.
Being able to offer the additional services to our clients will further
enhance our reputation as the leading provider of services to the global video
games industry.
The amounts recognised in respect of the identifiable assets acquired and
liabilities assumed of our acquisitions in the year are set out in the table
above.
The main factors leading to the recognition of goodwill on the acquisitions
are the presence of certain intangible assets in the acquired entities, which
are not valued for separate recognition, such as
· Expertise in art services and reputation within the
industry in Spov
· Expertise in localization processes and reputation
within the industry in XLOC
· The expertise in simulation technology for the games
industry in Gamesim
· Broader access to the Chinese pool of video game art
talent, which is the largest in the world, and expertise in art service for
the games industry in Red Hot
· Expertise in audio service for the games industry and
reputation in the French entities
· A software development team with capabilities including
HD re-mastering, porting, optimisation, rendering and game systems and
reputation within the industry in d3t
· Expertise in art and engineering services for the games
industry and reputation in Sperasoft.
The total amount of goodwill arising on business combinations completed in
2017, that is expected to be deductible for tax purposes was €nil.
30. Supplementary Information to the Statement of Cash Flows
Group Movement on Loans
Current Non-current Total
€'000 €'000 €'000
Balance at 1 January 2017 8,025 345 8,370
Cash flows:
Cash received via additional loans in the year 10,250 - 10,250
Repayment of loans (23) - (23)
Non-cash flows
Amounts recognised on business combinations 632 51 683
Non-current transferred to current 59 (59) -
Balance at 31 December 2017 18,943 337 19,280
Cash flows:
Cash received via additional loans in the year 31,850 - 31,850
Repayment of loans (10,835) - (10,835)
Non-cash flows
Foreign exchange difference on Canadian loans 6 - 6
Non-current transferred to current 107 (107) -
Balance at 31 December 2018 40,071 230 40,301
31. Measurement Period Adjustment
Group Deferred consideration Shares to be issued Goodwill Other payables (current)
€'000 €'000 €'000 €'000
note 18 note 16 note 11 note 18
As reported 31 December 2017 4,468 11,739 109,007 23,005
Measurement period adjustment (826) (119) (945) (826)
Restated 31 December 2017 3,642 11,620 108,062 22,179
Goodwill recognised on the acquisition of Sperasoft has been reduced by
deferred cash consideration withheld of €826K and a reduction in shares to
be issued of €119K under an acquisition agreement warranty claim, which
occurred within the measurement period.
Details of the restated purchase consideration and the restated goodwill are
as follow:
Deferred consideration Shares to be issued Goodwill
Sperasoft Acquisition Accounting - extract €'000 €'000 €'000
As reported 31 December 2017 826 4,132 18,206
Measurement period adjustment (826) (119) (945)
Restated 31 December 2017 - 4,013 17,261
Full details of the restated purchase consideration, the restated goodwill and
the fair value of identifiable assets and liabilities acquired as measured at
the acquisition date, together with the other disclosures relevant to the
acquisition as reported, are presented in note 29.
The 2017 Group comparatives have been restated in these financial statements
to include the effect of the adjustments noted. Under paragraph 10(f) of IAS 1
Presentation of financial statements, this restatement would ordinarily
require the presentation of a third consolidated statement of financial
position as at 31 December 2017. However, as the restatement would have no
significant effect on the statement of financial position as at that date, the
Directors do not consider that this would provide useful additional
information and, in consequence, have not presented a third consolidated
statement of financial position due to the restatement of prior period
business combinations.
32. Events after the Reporting Date
Acquisition of Sunny Side Up Creative Inc.
On 4 January 2019, Keywords Canada Holdings Inc. acquired the entire issued
share capital of Sunny Side Up Creative Inc. ("Sunny Side Up"). Based in
Quebec City, Canada, Sunny Side Up produces high quality marketing assets for
game publishers and developers including game trailers, key art assets and
motion graphic production. The total consideration for the acquisition is
CAD$5.9m, of which CAD$4.75m was paid in cash on completion, CAD$0.35m will be
paid 18 months after the acquisition (subject to certain conditions being met)
and the balance of the consideration is to be met through the issue of 60,179
new ordinary shares in Keywords on the first anniversary of the acquisition
and will then be subject to orderly market provisions for a further 12 months.
Acquisition of the GetSocial business and assets
On 18 February 2019, Keywords Studios Netherlands BV and Keywords
International Limited acquired the assets and business of GetSocial B.V.
("GetSocial") a company based in The Hague, Netherlands. GetSocial is a
cloud-based software platform that provides a suite of functions that enable
games developers to manage all social interactions between their games and
their players plus their friends' networks. GetSocial works with Android,
iOS and Unity apps, and supports interactions on most social media and
messaging platforms including Facebook, Instagram and WhatsApp. The total
consideration for the acquisition is €170K paid in cash.
Alternative Performance Measures
The group reports certain alternative performance measures that are not
required under IFRS. The group believes that these measures, in conjunction
with our IFRS financial information, provide investors with meaningful
understanding of the underlying financial and operating performance of the
group. These measures are key for the ongoing assessment of performance by the
board and management of the group.
The measures are used to:
- Assess and monitor the underlying trends of our results of our
operations
- Explain the group performance to the investor analyst community
- Set internal management targets
These measures can have limitations as analytical tools and therefore should
not be considered in isolation, or as a substitute for IFRS measures. Other
companies may calculate similarly named measures using different bases of
calculations, and therefore they may not be comparable.
The principal measures used by the group, with reconciliations to reported
IFRS measures as reported, are as follows:
Adjusted Operating Costs
This comprises administration expense as reported on the Consolidated
Statement of Comprehensive Income, before non-operating costs including; share
option costs, costs of acquisitions and integration, amortisation,
depreciation, and including bank charges.
2018 2017 2016
Calculation Reference in Financial Statements €'000 €'000 €'000
Administrative Expenses Consolidated Statement of Comprehensive Income 73,123 38,650 25,219
Less Non-Operating Costs
Share option expense Consolidated Statement of Comprehensive Income (4,129) (1,426) (686)
Costs of acquisition and integration Consolidated Statement of Comprehensive Income (5,296) (3,016) (1,316)
Amortisation of intangible assets Consolidated Statement of Comprehensive Income (6,872) (3,038) (1,629)
Non-controlling Interest (61)
Depreciation Note 5 (5,316) (2,730) (1,803)
Bank Charges Note 6 503 320 229
Adjusted Operating Costs 52,013 28,760 19,953
Revenue from contracts with customers Consolidated Statement of Comprehensive Income 250,805 151,430 96,585
Adjusted operating costs as a % of revenue 20.7% 19.0% 20.7%
Adjusted EBITDA
Adjusted EBITDA comprises gross profit, less the adjusted operating costs,
less the share of post-tax losses on the equity accounted associate.
2018 2017 2016
Calculation Reference in Financial Statements €'000 €'000 €'000
Gross profit Consolidated Statement of Comprehensive Income 95,808 55,085 36,678
Adjusted Operating Costs As Above (52,013) (28,760) (19,953)
Share of post-tax profits of equity accounted associates (66)
Adjusted EBITDA 43,729 26,325 16,725
Revenue from contracts with customers Consolidated Statement of Comprehensive Income 250,805 151,430 96,585
Adjusted EBITDA as a % of revenue 17.4% 17.4% 17.3%
Adjusted Profit before Tax
Adjusted Profit before tax comprises adjusted EBITDA less interest and
depreciation.
Adjusted profit before tax comprises profit before tax as reported on the
Consolidated Statement of Comprehensive Income, before non-operating costs
including share option costs, costs of acquisitions and integration,
amortisation, and foreign exchange gains and losses.
2018 2017 2016
Calculation Reference in Financial Statements €'000 €'000 €'000
Adjusted EBITDA As Above 43,729 26,325 16,725
Less non-operating Costs;
Interest Expense* Note 6 (502) (578) (152)
Interest Received Note 6 26 94
Depreciation Note 5 (5,316) (2,730) (1,803)
Adjusted Profit before Tax 37,911 23,043 14,864
Revenue from contracts with customers Consolidated Statement of Comprehensive Income 250,805 151,430 96,585
Adjusted Profit before Tax as a % of revenue 15.1% 15.2% 15.4%
*The prior year comparative has not been re-classified to reflect current year
presentation as the differences are not significant
Adjusted Effective Tax Rate
The Adjusted effective tax rate is the tax expense as reported on the
Consolidated Statement of Comprehensive Income, as a percentage of the
adjusted profit before tax.
2018 2017 2016
Calculation Reference in Financial Statements €'000 €'000 €'000
Adjusted Profit before Tax As Above 37,911 23,043 14,864
Tax expense Consolidated Statement of Comprehensive Income 7,191 4,731 3,223
Adjusted Effective Tax Rate Calculation; Tax expense / Adjusted profit before Tax 19.0% 20.5% 21.7%
Adjusted earnings per share
The adjusted profit after tax comprises the adjusted profit before tax, less
the tax expense as reported on the Consolidated Statement of Comprehensive
Income.
The adjusted earnings per share comprises the adjusted profit after tax over
the non-diluted weighted average number of shares as reported on note 8.
2018 2017 2016
Calculation Reference in Financial Statements €'000 €'000 €'000
Adjusted Profit before Tax As Above 37,911 23,043 14,864
Tax expense Consolidated Statement of Comprehensive Income (7,191) (4,731) (3,223)
Adjusted Profit after Tax 30,720 18,312 11,641
Denominator (weighted average number of equity shares) Note 8 64,335,162 58,720,884 55,918,481
€ c per € c per € c per
share share share
Adjusted Earnings per Share Calculation; Adjusted Profit after Tax / weighted average number of shares 47.75 31.18 20.59
Adjusted Earnings per Share % growth 53% 51% 62%
Return on Capital Employed (ROCE)
ROCE represents adjusted profit before tax, including pre-acquisition profit
and excluding interest expense, expressed as a percentage of the average total
capital employed. As the group continue to make multiple acquisitions each
year, the calculation adjusts the profit before tax and the capital employed
as if all the acquisitions made during each year were made at the start of
that year.
Total adjusted profit before tax (continuing) therefore comprises adjusted
profit before tax, plus the add backs of net interest costs and bank charges,
plus pre-acquisition profits of current year acquisitions.
Capital employed represents equity as reported on the statement of financial
position adding back cumulative amortisation of intangible assets and
retirement benefits, acquisition related liabilities and adding the net
borrowings.
2018 2017 2016
Calculation Reference in Financial Statements €'000 €'000 €'000
Adjusted Profit before Tax As Above 37,911 23,043 14,864
Net Interest Cost Note 6 502 552 152
Bank Charges Note 6 503 320 229
Pre-Acquisition profits of current year acquisitions Notes 28 and 29 4,896 1,484 2,040
Adjusted Profit before Tax 43,812 25,399 17,285
Tax including pre-acquisition profit excluding interest expense
Total equity Statement of Financial Position 192,375 161,012 66,704
Retirement benefits Note 19 1,378 1,055 826
Cumulative amortization on acquired Intangibles Note 12 12,786 5,734 2,934
Acquisition Related Liabilities Note 18 19,306 3,642 1,730
Borrowings Note 20 40,301 19,280 8,370
Cash and cash equivalents Statement of Financial Position (39,871) (30,374) (17,020)
Capital Employed 226,275 160,349 63,544
Return on Capital Employed Adjusted Profit before Tax including pre-acquisition profit excluding interest 19.4% 15.8% 27.2%
expense / Capital Employed
*The prior year comparative has not been re-classified to reflect current year
presentation as the differences are not significant
Like for like revenue comparison at constant exchange rates
Like for like revenue at constant exchange rates is calculated by adjusting
the prior year revenues comparison, by adding pre-acquisition revenues for the
corresponding period of ownership, as presented in the current year results,
and applying consistent foreign exchange rates in both years.
Free cash flow
Free cash flow represents net cash flow provided by operating activities, plus
income taxes paid, less capital expenditure.
2018 2017 2016
Calculation Reference in Financial Statements €'000 €'000 €'000
Net cash provided by operating activities Consolidated Statement of Cash Flows 32,180 16,658 14,822
Income taxes paid Consolidated Statement of Cash Flows 6,304 5,454 2,129
Acquisition of property, plant and equipment Consolidated Statement of Cash Flows (9,440) (3,803) (2,306)
Free cash flow before tax 29,044 18,309 14,645
Adjusted free cash flow
Adjusted free cash flow is a measure of cashflow adjusting for capital
expenditure that is supporting growth in future periods as measured by
capital expenditure in excess of maintenance capital expenditure and is
represented by free cashflow before tax plus capital expenditure in excess of
depreciation
2018 2017 2016
Calculation Reference in Financial Statements €'000 €'000 €'000
Free cashflow before tax As Above 29,044 18,309 14,645
Capital Expenditure in Excess of Depreciation -
Acquisition of property, plant & equip. Consolidated Statement of Cash Flows 9,440 3,803 2,306
Depreciation Consolidated Statement of Cash Flows (5,316) (2,730) (1,803)
Capital Expenditure in Excess of Depreciation Calculation: Depreciation less Capital Expenditure 4,124 1,073 503
Adjusted Free cashflow 33,168 19,382 15,148
Adjusted cash conversion rate
Adjusted cash conversion percentage is the adjusted free cash flow as a
percentage of the adjusted profit before tax:
2018 2017 2016
Calculation Reference in Financial Statements €'000 €'000 €'000
Adjusted Free cashflow As Above 33,168 19,382 15,148
Adjusted Profit before Tax As Above 37,911 23,043 14,864
Adjusted Cash Conversion Ratio Free cashflow before tax & capex adjusted as a % of Adjusted Profit Before 87% 84% 102%
Tax
Annual report and accounts
The annual report and accounts will be posted to shareholders shortly and will
be available to members of the public at the Company's registered office at 8
Clifford Street London W1S 2LQ and on the Company's website
http://www.keywordsstudios.com/en/investors.
Annual General Meeting
The Annual General Meeting of Keywords Studios plc will be held on 25 May
2019.
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