U.S. Markets closed

Edited Transcript of KWS.L earnings conference call or presentation 18-Sep-19 8:30am GMT

Half Year 2019 Keywords Studios PLC Earnings Call

DUBLIN Sep 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Keywords Studios PLC earnings conference call or presentation Wednesday, September 18, 2019 at 8:30:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Andrew John Day

Keywords Studios plc - Group CEO & Executive Director

* David Broderick

Keywords Studios plc - CFO & Director

================================================================================

Conference Call Participants

================================================================================

* Andrew Alec Kaplowitz

Citigroup Inc, Research Division - MD and U.S. Industrial Sector Head

* Kenneth Charles Rumph

Jefferies LLC, Research Division - Equity Analyst

* Natasha Brilliant

Citigroup Inc, Research Division - VP

* Neil Shah;Stifel, Nicolaus & Company;Analyst

* Richard John Langford Williamson

Edison Investment Research Limited - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Andrew John Day, Keywords Studios plc - Group CEO & Executive Director [1]

--------------------------------------------------------------------------------

Right. That was designed to wake everybody up, but the reason for showing it actually is just the fact that, first of all, I love that particular trailer. It's quite recent. The other reason to show it is because it was made by us. It was made by one of our marketing services business called The Trailer Farm down in Brighton, but it was made using inputs from 3 or 4 other Keywords Studios. So it starts to show you how the business starts working together.

So Trailer Farm down in Brighton specialize in marketing trailers for games, but to make that, they took visual special effects from our company over in Portland, Oregon, Liquid Development. They used arts and animation and motion capture [clips] from our companies in Beijing and in New Delhi, so showing this sort of power Keywords in the direction of travel. This is obviously a very top-end video game that's chosen to use our services to promote their game, and also, of course, the fact that it's going on to Stadia, the new streaming platform from Google.

So if we can move on to the results. That was just a bit of scene-setting for you. I need to press the button here, I guess, in order to do that. So first of all, I should say, thank you very much for coming.

So another great set of results from Keywords. Particularly pleasing for us is the fact that our organic revenue is up 17% this year. Again, we're giving you the like-for-like measure, but it's worth noting that there hasn't been that much acquisition impact on these numbers this year. So that is a much sort of cleaner, organic measure than perhaps you're used to seeing. And top line, up 39%. Adjusted EBITDA are again up nicely, and profit before tax, up 15.5%.

So what I really want to talk about is what's behind some these numbers. So organic growth of 17.3%, what that looks like is particularly strong growth in a couple of our areas of business, Functional Testing, Game Development services, which we used to call Engineering, and also in our art business. And it's also come with some considerable cross-selling in our business. As you know, one of the things that we are very successful at doing is selling across our 7 service lines, and the measure that we provide for that is the number of clients that buy 3 or more services.

But if you look below those as well, and we don't have the numbers to share with you, but what you see is nice, steady progress in the number of clients buying 4 services, buying 5 services and buying 7 services. So a very good year-on-year progression confirming the sort of Keywords story.

A feature of this year as well has been the amount of investment we've put into the business to support the growth that we're experiencing. So as all of this demand is coming to us, we have 2 choices: one is, do we try and do everything we can to capture that demand; or do we sit back and let it pass us by? So obviously, we choose to make the investment so that we can take on the work. And what that has involved is this year, we're adding of 1,400 workstations, which is roughly a 25% increase in the number of workstations. That doesn't equate directly to a 25% increase in capacity across the business because those workstations are more geared to certain types of activities than others. But it is an indication of the confidence we have in the business and where it is going and the demand that we're seeing.

We've also continued to strengthen the management in the business, which has led to bit of an increase in the OpEx cost. And that, together with the cost of expanded facilities, are what's weighing on that OpEx cost.

So you'll see, as we get into the details of the margins, which David will get onto later on, is you're seeing our first half margin of about 12% -- operating margin of 12%, which is a bit down on what it's been previously. And the reason for that is precisely this sort of level of activity and the level of growth that we are experiencing. So if you think about our normal operating margins of around 15%, what you've got going on here is you've got about a percentage of margin that's going into this very high ramp-up in resource to capture what has been a faster and steeper growth curve in the first half of the year.

So somewhere in here, we talk about number of people. But the number of people -- the average number of people in the business at the moment is about 6,000, 6,500 people. That's up over 1,000 people on this time last year. So as you ramp up and you're recruiting and you're doing that very, very fast, you're obviously training. You've got recruiting costs. And then you probably got a bit more churn than you would normally have if you are able to ramp up in a more sort of smoother fashion. So that impacts your gross margin.

And then we've also called out an underperforming contract in our Game Development services, which was a contract we inherited through an acquisition. We're getting to the end of that contract at the moment, but that's been a bit of a drag on gross and net margin.

And then this sort of addition of the OpEx costs, so our OpEx costs have probably risen about 1 percentage point of revenues, where we normally would try and maintain that under the 20% level. That's gone above that this year as we've invested in senior and mid-level management, plus those expanded facilities.

And the other thing that you're seeing, of course, in the numbers is some impact from acquisitions. I think we've made 5 acquisitions to date, the most recent of which we've just announced today which is the acquisition of TVS, which is an audio business based in Berlin. And one of the features of that is it takes us just a little bit further into the market of TV and film subtitling and dubbing, which is the neighboring activity that we do in games, which we call localization and voiceover. It's pretty much the same thing but in a different market, although it's geared obviously to provide us with operational capacity for the voiceover work that we have in games currently in Germany, some of which we are actually outsourcing to third-parties because we have a relatively small presence in Germany at the moment for that activity.

And the other thing on the acquisition side is just to give you a very quick update on where we are with some of the larger acquisitions that we've done. So talking, first of all, and hopefully for the last time, about VMC which we acquired back in 2017, which remains our largest acquisition to date. That was fully bedded down, fully integrated by the end of 2018. I think we already messaged that, that was producing group-level margins, which is a considerable improvement from where it was pre-acquisition. And the other thing that it's doing is it's brought us real scale in our Functional Testing business. So when you see this very strong growth in Functional Testing, a lot of that is actually down to the fact that we've now consolidated a number of these Functional Testing businesses in North America to become the go-to player. So we benefit from that scale and consolidation.

The other acquisition that we've done which was of bigger size was Studio Gobo and Electric Square, Game Development business based in Brighton. Now, that has performed very well. And I think David and his colleagues are just finalizing the numbers at the moment for the purpose of the earnout, but you can expect them to receive the deferred consideration associated with that acquisition. So we're delighted with that performance.

Just quick one, setting up the market dynamics as we see them at the moment. So the video games market, as you all know, is fast moving, both in terms of growth and in terms of what's happening within it in terms of new platforms and all the rest of it. So this year, I suppose the news in the games market has been about streaming of games, people trying to become the Netflix of videogames. So Google Stadia launching their -- sorry, Google launching their streaming service, Stadia, and Apple launching their Apple Arcade game servers, both of those current.

And then the other news that's happening is that we're going through a console transition. So we're moving from PlayStation 4 and Xbox One to the next generation of those devices, so PlayStation 5 and whatever the new Xbox is going to be called. That's the transition that's happening at the moment. So we -- the market expects those devices to -- sorry, we've got a whirring noise or something they're trying to fix. So the market expects those new devices probably to launch towards the end of next year, and I'll talk a little bit about the impact of those -- both of those later on.

As I said, we have the 7 services. We've renamed Engineering to Game Development. That's, I think, an attempt to try and help people understand exactly what that activity is. But it's exactly the same. There's no change. It's the same businesses. We've continued to develop those organically, growing our team of developers as rapidly as we can to fulfill the demand, which is far exceeding our ability to supply.

And the other one to call out is our marketing services business, which is currently under the art service line and was demonstrated a little bit by the trailer I played at the beginning. And that's another area of the business which continues to grow well and hopefully will receive the benefit of further acquisitions.

Geographically, we are in all the territories where we want to be. If I would give you one thing to concentrate on this slide, it's just how successful we've been at leveraging our presence in the various markets to spin up services in those areas. So yes, a simple example is if you look at Tokyo, we're currently providing 6 services from Tokyo. We started that business totally organically with just a single service, same as if you'll look at Montréal and Singapore and elsewhere, we've been very good at leveraging the HR teams, the facilities, the IT, the security and everything that we've got in those locations. So that's a tremendous asset. It's -- I come across businesses that are talking about making their first sort of international moves and how difficult it is for them to actually try and get their heads around going from the West Coast to the U.S. to the U.K., for instance, and how big an issue that is for them. We're doing it all the time in our business.

As you know, we provide these services to pretty much the who's who of the video games industry. This is just one view of the penetration we have in the industry. But pretty much all major game companies, developers and publishers will use some of Keywords' services.

So coming back to the sort of financial trends in the business. A strong growth, as you can see, year-on-year. Continues to be a very impressive picture with all the lines pointing to the top right-hand corner, which is what I always like to see. Obviously, in the blue, those are half year numbers rather than full year numbers, the exception to that being the rolling 12-month view of return on capital employed in the last of those 4 charts. But again, if you take those blue lines and you kind of double them in your head, you'll get a sense as to where the trends lie for the full year.

This next slide, I tend to regard as a bit of a slide that talks to the quality of the business, the solidity of the business, if you like. So coming back to the console transition point that I mentioned earlier, if you look at the last transition cycle, which was back in 2013 when we -- the Xbox One came out and the PlayStation 4 came out, at that point in time, I think Keywords was exposed to 2 or 3 large customers to the extent of more than 60% of its business, 2 of those being Sony and Microsoft. And that transition was, certainly in one of those cases, was a bit of a troubled transition. And that affected us because of that exposure that we had to those clients. To the extent that we have today, we have no single client accounting for more than 6% of our revenue. So it's a very different business today than it was 7 years ago.

And with that as well comes the fact that we're more embedded in our clients. And by that, I mean we are providing value at a sort of higher level in the organization. So we will do a lot more kind of PM-ing, project management type services to our clients rather than them just throwing work over the fence and us throwing it back. We're more integrated into their systems, into their game development pipelines. We have access to their game engines and all that sort of thing, which is a big step from where we were at the time of IPO.

And then the other bit of news on the client side is, obviously, as you move from selling a single service to selling 4, 5, 6, 7 services,

so your relevancy to the client increases and you become far more strategic as far as they're concerned. So all of that is very positive in my eyes.

And then the final point I would draw your attention to on this chart is what's happening with Gaming Development over here on the far right. So this is an activity we've only really been in for a couple of years, and already it's growing to be one of our biggest -- neck and neck between that and Functional Testing as to which will be our biggest service line this year. So really, really strong growth. And again, that's a service which is -- it receives attention of game producers and CEOs in a way that perhaps localization and testing doesn't. So I'm not saying it's necessarily a more valuable service, but certainly in terms of the eyes of the client, it gets a lot more attention than some of the other services do. And that's a good thing for us.

So looking at the balance of the business and how the pizza is now sliced. As you can see, if you think about our business going back 10 years or more, this area of localization was the sort of founding pillar of Keywords. Now testing and Game Development are bigger than that activity. And it's not because that other activity has failed to grow. Quite the opposite. It's been a very strong growth performer year-on-year. But some of the other areas are growing faster, and some of them are benefiting more from that trend towards -- a more recent trend towards outsourcing. And that's certainly the case of Game Development that historically wasn't outsourced much at all. Same is true with Functional Testing, particularly in the West where that has continued to be a very much an in-house activity and is really now starting to benefit from people constraining their own sort of investments in game testing and using more outsourced provision for that.

A very small sprinkling of the titles that we work on every -- work on currently. But every year, we are very fortunate as a business to get to work on the world's leading video games across the world, so whether that's in Japan, whether it's in China, whether it's in the U.S. or U.K. And that is part of what makes working at Keywords -- that's what attracts people to work at Keywords, and that's what keeps people working at Keywords is this variety of games that they just cannot find anywhere else. If you were working on one of our clients, you'd be working on usually the same titles every couple of years or whatever, but the range of titles that come across Keywords' desk is unparalleled.

So I'm going to stand back and let David talk you through the more detailed parts of the financials.

--------------------------------------------------------------------------------

David Broderick, Keywords Studios plc - CFO & Director [2]

--------------------------------------------------------------------------------

Thanks, Andrew. So I think Andrew has kind of touched already on a lot of what's in the physical numbers itself. Obviously, we're very pleased to see the revenue up so strongly, just shy of 40%. I think that really is underpinned by the fact that we've seen a strong like-for-like growth of 17%; the cross-sell performance, so well at 14%; the strong performance in the individual service lines like FQA, Engineering and art; and equally, the fact that the revenue is performing strongly in terms of growth terms in each of the service lines: at its lowest, 5%; at its highest, north of 30%. So I think you're seeing all these other factors underlying -- underpinning this and the strong growth in the first half of the year.

Obviously, in delivering that growth and chasing that revenue and chasing that opportunity, we've sacrificed a bit of gross margin. You've seen part of the -- the principal reasons behind this are the rapid recruitment and training; building out some of the additional IT, HR, support functions to help deliver and support the size of organization in the first half; staffing for the new facilities, again, with massive expansion creating nearly 1,400 seats, only of which about 200 were occupied by the end of the first half of the year; and then obviously, Andrew's talked about the individual contract that came in through an acquisition and then its impact.

Moving on down then to the operating costs. Again, our internal target will be to hit about 20% of revenues in terms of our long-term target and our traditional metric. It's obviously trending slightly above that. Some of the factors in terms of scaling up in growth are driving that. We'd expect that to kind of come back down. The year-end figure will probably still sit above the 20%, though, as a result of the first half impact.

EBITDA, profit before tax. Again, all performing strongly year-on-year. The adjusted effective tax rate, obviously, what you would have seen in full years and half years previously is that we've been making steady kind of progress. You see somewhere up to about 1% decrease. I think our long-stated aim previously was that we would land somewhere in the kind of mid-teens in terms of our effective tax rate, primarily as a function of the blend and the diversity of the group and the geographic reach that we have.

Again, we have a kind of an exceptional EUR 500,000 element of tax charge coming in that relates to a pre-acquisition period. If you strip that out, the progress would have been down to about 17%. So the underlying trend, our structuring is fundamentally sound and directionally going the correct way.

Moving on to the balance sheet. Again, at this time of year, we're at our lowest point in terms of cash. We kind of harvest the cash in the second half of the year as you come through the peak production. Net debt, marginally up where it was at this time last year at EUR 9 million. Most of the outlay has been on EUR 7 million of net cash considerations and just shy of EUR 3 million on acquisition costs and integration expenses on the 4 acquisitions that we made in the half year.

Accrued MMTCs are sitting at 8 point -- sorry, EUR 18.2 million at the period end. Just to put this into context, EUR 10.1 million was at the year-end of fiscal '18. The increase is primarily coming from the trading in the first half. That's up strongly versus what we accrued in last year, which was only about EUR 3.7 million. So quite a steep rise. That's primarily out of our activities in Montréal, where we received the MMTC credit and FQA, which is growing strongly in one of those prime locations, again, which is Montréal.

Capital expenditure. I think at the full year, we would have guided you to a similar level of spend, about EUR 9 million, EUR 10 million in the year. We've done a significant proportion of that already in the first half at EUR 5.1 million, up from where it was last year. Testing, art and Game Development, again, the service lines which are growing strongly, being the principal service lines, being recipients of that investment and locations such as Manila, Montréal, Mexico City and Katowice in the sites where we've grown to help support those and other service lines.

Cash flow. Again, traditionally, when you see us at the H1, we're at that kind of low point. Cash conversion is generally lower. And it's the second half where you see a large step-up. Again, I touched on the fact that we've accrued nearly EUR 6.9 million in the period in terms of MMTCs and VGTR. We're continuing with our progressive dividend policy, which is to be up 10% year-on-year.

I think one thing that's kind of been pleasing as well is that our debtors' days have crept up slightly, post the VMC integration. We seem to be through that. The debt collection is working back to its more kind of normalized levels, and the progress in that area is back to where it should be.

I think probably important to point out as well in the second half of the year, on the balance sheet, you'll see about EUR 18.8 million of deferred considerations. Most of that will be going out in the second half of the year, if not all of it. The lion's share of that going to 2 of our larger acquisitions that we did previously.

Moving on to guidance. Again, strong organic and acquisitive growth. We expect that to be slightly slower in H1. But again, for the full year, a strong overall performance. We've had the H1 capacity investments. We expect to benefit from those from a margin perspective in H2 and rolling on and progressing into 2020. And again, we'd look to see that those operating expenses, as a percentage of revenues, will trend back to the more traditional 20% levels.

Again, we'll have the full 6-month contribution from the first half acquisitions. Again, this is our first full year reporting under IFRS 16. So just remember that you're seeing an inflated depreciation charge which has an element attributed to it, which will be the traditional kind of lease and rental costs associated with the properties that we're in.

Interest expense, to the extent that we utilize our bank facility for acquisitive growth, expect to see that increase. Again, we've opened up the new facility with 4 supportive banks: Silicon Valley, HSBC, Barclays and HSBC (sic) [Citibank].

A slight reduction in the effective tax rate. Again, we touched on that earlier in terms of the progress that we've already made in H1. And the long-term target, like I said, to be in the kind of mid-teens. And then you should expect to see the seasonal H2 positive cash conversion kind of flow through.

I'll hand you back to Andrew.

--------------------------------------------------------------------------------

Andrew John Day, Keywords Studios plc - Group CEO & Executive Director [3]

--------------------------------------------------------------------------------

Thanks, David. So I'll just have a quick flip through some of the operational highlights of the business, and then we'll get onto looking at outlook.

So service line by service line, just some color around them. So art services, like-for-like growth of 16%. So again, another very strong performance from this service line, which now does include the 3 marketing services businesses, which are obviously contributing both to the overall size and overall growth, which is 50% overall revenue growth. But they are growing nicely organically as well.

So I think in terms of this business, what we should be looking at is that continued good organic growth, then also further acquisitions to come as we expand out that marketing services businesses in particular. And at some point, if we get it to the scale that we would hope it would achieve, then we'll be looking at separating that out as a separate service line so that you can track it a little bit more granularly.

Game Development, next up, previously called Engineering. Fantastic performance from this service line, which is benefiting very much from a really marked demand for outsourced support from our game clients. Not only that, but I've been very pleased with the way in which our individual studios have been able to hire into that demand in their local areas, which to remind you, in the U.K., that's Brighton where we have 3 facilities. It's in Liverpool, Runcorn area where we have d3t. But we're also in Florida. We're also in Ottawa in Canada. And we have a larger single studio in St. Petersburg. We have a good studio in Poland, in Kraków, and we recently made an acquisition over in Japan. So yet again, I think that's showing the strength of Keywords in that we're able to fairly easily acquire and absorb and support these businesses in all these key geographies. It's a real asset of ours. I keep -- I mentioned it earlier on. And sometimes, people look at that map that I showed you and think, "Oh, that's very complex." But the other way of looking at it, that's a tremendous asset, and you're going to start seeing us leverage that more and more.

On our Audio services only, 7% like-for-like growth. Of course, in most businesses, that would be a fantastic achievement. And what I would say about this business is that as we go into the second half, this is one area that's being affected a bit more by the console transition that I mentioned earlier. So some of our clients are sort of pausing, if you like, a little bit for thought as to what their strategy is going to be for developing games either for the new console or for the existing console. And as they sort of pause for thought, that's starting to impact some of those businesses that are more focused on console games than necessarily mobile or PC or whatever. And Audio is one of those which you might remember usually has a seasonal peak: either just before the half year or just after the half year. This year, we don't expect to see any such seasonal peak because there's been -- there's a little sort of hesitation around the console games as to whether to launch them this year or to hold back and launch next year and so on. So that's what we're seeing a little bit -- or we believe we're seeing that in the Audio services activities.

As I move onto functional QA, this is another just absolutely phenomenal performance when you really stop to think what a 30% organic growth looks like in operational terms for a business like this. It's -- the guys have done an absolutely fantastic job in absorbing all of this incremental demand. And I would encourage you, if you can persuade whoever signs off your expenses at some point, to come and visit the guys over in Montréal just to get a sense for the scale of the operation. It's kind of jaw-dropping and absolutely world-class operations out there, of the like that you won't see anywhere else in the world.

But as I said earlier on, that growth, that phenomenal steep increase in activity in the first few months of the year did come at a little bit of a cost to our gross margins. But that's starting to unwind as we settle down into a more sort of steady pattern into the second half of the year. But I expect this business to continue to be a strong growth driver, and we've also -- as a result of that, we've also taken decision to invest in some new facilities and operations in both Mexico City, where we had a small presence in our Audio business in particular. We're leveraging that sort of local presence, local knowledge, local support infrastructure to build a bigger FQA presence. We're doing the same thing in Katowice in Poland, where we have previously opened a Player Support activity. But those sort of organic openings of activities do come at a bit of a cost because you have to staff them and so on before you can start providing any services out of them. So expect further growth. And what we're seeing there is basically a market, at least in the West, that's traditionally been in-sourced that is gradually moving towards more and more use of outsourced services, and we're right in the path of that which is great.

Sorry, I'm skipping a slide. Localization, more settled growth from them. You'll be aware that year-on-year, sometimes they can have a 20%-or-so like-for-like growth. This year is a little bit more stable. It's coming off the impact that we had from Fortnite and so on last year, which, fortunately, we're not having to talk much about this year. But just so you understand, that's a business that, in terms of its growth, was sort of knocked back a bit last year because of some of the disruptive effect of Fortnite. It's now settling down into a sort of steadier growth pattern.

Localization QA, which, once upon a time -- actually not that many years ago was the biggest activity in Keywords. I think probably at the time of the IPO, it might have been a biggest single activity. That's now looking a little bit underweight within the Keywords' overall business. And it's another one of the service lines which is being affected by the console transition. So like the Audio business, this is a business where quite a lot of its activity is geared around the big console releases that get perhaps a bit more investment in [Polish], particularly on the language side of things, prior to release. And again, because of the sort of what we perceive to be a slower release pattern coming up to this year-end, this Christmas, this Thanksgiving period, we're seeing lower demand -- or rather, I should say, we're not seeing the normal sort of seasonal peak of activity that we'll be seeing at this time within the Localization QA business.

And the final one, which I signaled based on last year's results, is Player Support, which, again, if you remember, went through a tremendous growth spurt in 2018. I said, following those results, that this was going to be a period of consolidation for Player Support, and that's what you're seeing in this number. You grow at tremendous rate, at some point, you have to pause for breath, get everything together, get your facilities and what have you in shape as we've been doing so with investments in Manila in particular, and then hopefully, we'll see this business grow faster again next year.

So just to remind you a little bit of the background to what we're seeing, and again, this is probably easier if I stand up here to show you. So art services, where you've got the sort of 16% like-for-like growth, that's a market which is currently only about 50% outsourced. So there's still a big tailwind to come from further outsourcing rather than insourcing of art services.

The Game Development market here, which actually I suspect is bigger than the EUR 3 billion number we've assigned to it. But this is -- going back a few years, there would have been very little outsourcing in game development. It's hard to find a client now that's not asking for outsourced services or is least trying to explore how they can tap into outsourced services for game development. And I'm pretty sure that's going to shift dramatically to the right over the years, assuming people like us can grow into that demand and don't constrain it.

If you look at Audio services on the other hand, Audio services is already mostly outsourced. Having said that, it's still a very fragmented market. So you don't benefit quite as much from the trend towards outsourcing here, but you do have a great growth opportunity, which is to take market share and to consolidate.

Functional Testing, which is one which I've always found to be a bit odd. I'm not quite sure why this is so insourced as an activity, but only about 30% of functional testing in the West is outsourced. I see no reason why that shouldn't go all the way to the right. And so on, you can see the way the market is playing out. So you can see a lot of that actually in the Keywords' numbers if you look at it, and hence, why we've got this 3 particularly big growth areas at the moment in our business.

Obviously, how we manage our business, you've -- most of you have seen this slide before. Just to signal that we are looking at ways in which we might leverage some of the synergies -- the operational synergies within the businesses. So if you look, for instance, at our -- where is it, our functional QA business and our Localization QA businesses, if you were to visit us in our studios, you would see those as being pretty much the same sort of activity, the difference being that one is staffed by language experts, the other one is staffed by nonlanguage game testers. But there's opportunities potentially to combine some of the management of those businesses and extract some synergies as a result. And the same is true probably of our Audio and our Localization businesses, if you think that a big chunk of our Audio business is actually putting -- effectively doing the dubbing for video games. That's an activity where the client is usually the same sort of clients. So you're buying -- the client is buying -- is 1 buyer, and they're currently buying from 2 different service lines within Keywords, it might make sense to consolidate that. And as I said, the other one is the marketing services line, which, on the other hand, might be something that we spin out as a separate service line.

Further little note for your consideration is the fact that we're mentioning Jon Hauck as the incoming new CFO to the business. Jon's actually kindly here with us today, so sat at the back. He was waving earlier on, but if you want to grab him after this, please do, give him a grilling. So we're fully expecting Jon to join us very soon.

So quickly onto outlook. So trading in the second half has started very well. The growth that we've called out in the first half is not temporary growth. You need to really understand this. This is growth that sticks. So this becomes the new base level for Keywords, and then obviously, we're looking to grow on top of that.

The trend towards outsourcing, I've mentioned, we're obviously not going to slow down investment. If investment is needed in order to capture that growth, we won't hesitate at all. As you've seen probably from the CapEx numbers, it's not a hugely capital-intensive business in order to flesh out these new workstations. It's operationally demanding, but it's not capital-demanding particularly. And so we will continue to grow into the demand.

On the acquisition side of things, you've probably seen that we've been a little bit quieter, albeit we just snuck in an acquisition announcement this morning. We have been a little bit quieter than we would normally be over a sort of 12-month period, but that's not an indication of anything. The pipeline of acquisitions, if anything, is probably healthier than it's been at any time, and it's simply a question of when these acquisitions land rather than us having slowed our sort of appetite or our pace of acquisition growth. So continue to expect us to deliver more earnings-enhancing acquisitions as we go through the second half and into 2020.

So before I come onto the investment summary, I just want to sort of summarize a little bit the way I see the business over this year. So fantastic top line growth. Operating margin, a little bit lower than we've traditionally delivered. So I think about this business as kind of 38% gross margin business, 20% operating costs, leaving 18% EBITDA margin, reducing to kind of 15% pretax profit margin.

First half, we've only delivered 12% of that pretax profit margin. But again, if you look at that sort of temporary impacts that we've got, we've got about 1 percentage point on the gross margin coming from this very steep growth in the business. We've got 1 percentage point coming off from the underperforming contract that I mentioned and David elaborated on as well. And then we've got about 1 percentage coming off on the operating costs, where additional facilities, temporary space, and so on that we've taken to support the growth, plus investment in mid- and sort of senior-level management has weighed on those operating costs, which again, should unwind next year. So if you start looking into 2020, we fully expect to see our underlying margins come through again at about 15% operating margin next year.

So another way to look at this is all of those margin effects are purely internally -- are internal, they're fully within our own control. This is not a margin squeeze through some sort of external factors.

And then a quick reminder of the investment summary. So a major thing for me that this is a business which provides investors access to a very large dynamic fast-growing market, which is the market for videogames. It's a global market. We also benefit from very strong drivers, whether that's market growth, continuous pressure on content whether that's on the quantity content or on the quality of content. So as you progress to new consoles, those are more capable devices and the games become bigger, higher definition and so on, and that leads to more demand for our services in itself.

Our business model and the sort of diversification that we have within the industry across different services and across different geographies, I think puts us in a very unique position and we continue to drive towards being this go-to provider for the videogames industry.

So that's it from me. And I will now stop talking and let you fire questions, if you have any. I'll take this one from Peter here.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Unidentified Analyst, [1]

--------------------------------------------------------------------------------

On the localization. Is your localization restricted to videogames localization or do you also look at the major content providers for the film and video industries and...

--------------------------------------------------------------------------------

Andrew John Day, Keywords Studios plc - Group CEO & Executive Director [2]

--------------------------------------------------------------------------------

Very topical question. Thank you very much. It has been really 100% focused on videogames. Having said that, we do get some creepage of content, which is of a more linear-type, so whether it's for animated TV, film-type work, whether it's voiceover or subtitling for film and television. We do have a very small amount of that business internally and we do some work for people like Netflix, and so on.

What we've done and you don't see but it's actually part of the investment that we're making in the business, is we actually have a small team now dedicated to that market. It's -- I don't want people to start thinking that this is some big bet that we're placing. It's tiny, tiny little baby steps into that market as we sort of explore the possibilities of leveraging the Keywords' infrastructure and expertise that we have in what is essentially the same discipline but applied to a slightly different content type. And we're very pleased with the sort of response we get from people like the over-the-top platform holders, the Amazons, the Netflix, Disneys, and so on, looking for additional suppliers to them that will help them get that content to market faster and in a simultaneous fashion.

So, there's a marked difference between videogame content and that content in that the film and television content has historically followed a waterfall sort of model where they release first in the U.S. and then they will release in France and they will release in Germany and so on, whereas videogames since the very beginning have always gone into all languages simultaneous and that's what those new streaming platforms are trying to do.

So we see -- we're keeping a close eye on it, I guess. And the acquisition that we've made in TVS today is another little sort of toe in the water, as we, on the one hand, get some capacity in the German market that we need for videogames. Its base business is subtitling and dubbing or doubling mostly for film and television content. So I think the answer is we're looking at it. We're not placing any major bets at the moment.

Sorry. Ken?

--------------------------------------------------------------------------------

Kenneth Charles Rumph, Jefferies LLC, Research Division - Equity Analyst [3]

--------------------------------------------------------------------------------

Ken Rumph from Jefferies. A couple of questions. Firstly, just to sort of perhaps clarify the kind of weighting of different comments you mentioned. I think you were keen to mention a couple of points, the light slate of games in the second half, which was evident at E3 and people clearly are saving a few things up for next year.

To be as you -- you said you expect to be at the kind of higher end of the range of consensus that would seem to be around EUR 315 million, that would still mean double-digit organic growth in the second half to me. So I think just in case anyone gets away with the idea that kind of it all grinds to a halt in the second half, we can see there's less acquisitions because you made them kind of around the middle of the year and anything you do now is not going to make a big effect, but sort of slower is still a...

--------------------------------------------------------------------------------

Andrew John Day, Keywords Studios plc - Group CEO & Executive Director [4]

--------------------------------------------------------------------------------

A big number.

--------------------------------------------------------------------------------

Kenneth Charles Rumph, Jefferies LLC, Research Division - Equity Analyst [5]

--------------------------------------------------------------------------------

A big number.

--------------------------------------------------------------------------------

Andrew John Day, Keywords Studios plc - Group CEO & Executive Director [6]

--------------------------------------------------------------------------------

Yes, yes. Thanks for the clarification. That's helpful.

--------------------------------------------------------------------------------

Kenneth Charles Rumph, Jefferies LLC, Research Division - Equity Analyst [7]

--------------------------------------------------------------------------------

The second question I had was functional testing to me is surprising and I did see the mother ship in Montréal and they were in the process of taking another floor in that enormous building. Is it that the business is now big enough to do jobs that people wouldn't have offered them before? So it's a market share gain, which in a way perhaps as you say, as people maybe did them internally but also, I can't see where else you would have gone with -- without mentioning any of the names, [Leaping Lizzards] or whatever.

--------------------------------------------------------------------------------

Andrew John Day, Keywords Studios plc - Group CEO & Executive Director [8]

--------------------------------------------------------------------------------

No, I think it is a factor, so if you look at scale, scale achieves a couple of things. One is, it allows you to operate more efficiently, which means that either you can be more competitive in the market or you can get a little bit more margin. In our case, as you've seen our margins have been fairly stable.

So operationally, you get operational efficiency at scale. You also, of course, get to see more content and more experience as to how best to test things, you get better exposure to whether you're developing your own automation tools, which we do regularly to assist in the process, or its clients own automation tools that we are working with. All of that helps.

And then the other thing is just the way in which you're perceived by your clients. If you have the ability to put on a team of 100 or 200 people from almost 1 day to the next, that's a capability that nobody else has in the market. So you then become a player for stuff that maybe before the client didn't appreciate could have been outsourced, that now can be outsourced and that really helps.

And then the simple thing is just becoming the experts. So if you want -- why try and maintain your own expertise, if it can never be as good as say, Keywords because of just the sheer number of games that we're testing, and the types of games, and the different platforms and the compliance testing and the compatibility testing across devices, it's of a scale and a depth that is just unrivaled. So I think it's part of the story.

--------------------------------------------------------------------------------

Kenneth Charles Rumph, Jefferies LLC, Research Division - Equity Analyst [9]

--------------------------------------------------------------------------------

Sorry, and I'll ask a final one, which is with a console change over the next year with streaming coming in that would normally imply a lot of porting-type work in next year.

--------------------------------------------------------------------------------

Andrew John Day, Keywords Studios plc - Group CEO & Executive Director [10]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Kenneth Charles Rumph, Jefferies LLC, Research Division - Equity Analyst [11]

--------------------------------------------------------------------------------

And actually you're having a busy time in testing this year, but that would be good for that part of the engineering, yes?

--------------------------------------------------------------------------------

Andrew John Day, Keywords Studios plc - Group CEO & Executive Director [12]

--------------------------------------------------------------------------------

Yes, it's good for testing and in fact, as you port these games they need to be tested, platforms themselves whether it's Google Stadia or Apple or whatever, they need to test those games before they go onto the platform. I'll leave it for you to decide how they get that work done, but there's a big testing company over here. .

The -- and as you say, the porting work and the development work that it's all driving, those Stadia platforms, the [Arcade] platform. These are new platforms effectively. You then have the new consoles coming out. So a proliferation of platforms, if you want to see it that way. But not only are they new platforms, they're platforms that give access to a far larger audience that will hopefully consume games in more and more languages as well. So I think it's all incredibly positive for Keywords.

--------------------------------------------------------------------------------

Richard John Langford Williamson, Edison Investment Research Limited - Analyst [13]

--------------------------------------------------------------------------------

Richard Williamson from Edison. Just wanted to ask about M&A opportunities and what you're seeing in the market. Again, I recognize this has been a slightly slower period with smaller acquisitions, which is great to highlight the underlying organic growth.

--------------------------------------------------------------------------------

Andrew John Day, Keywords Studios plc - Group CEO & Executive Director [14]

--------------------------------------------------------------------------------

That's the upside...

--------------------------------------------------------------------------------

Richard John Langford Williamson, Edison Investment Research Limited - Analyst [15]

--------------------------------------------------------------------------------

I take that point. But looking forward, are you seeing a more challenging acquisition market? Are you seeing multiples arising or is it very hard to generalize at this stage, and it's -- it is just an opportunistic approach?

--------------------------------------------------------------------------------

Andrew John Day, Keywords Studios plc - Group CEO & Executive Director [16]

--------------------------------------------------------------------------------

Yes, yes. No, I mean, first of all, I like to think that we are anything but opportunistic. We have a very sort of targeted approach to the sorts of businesses we're looking at. We do our own origination. We're not sitting there waiting for things to come across our desk really. You've probably seen by the sort of multiples we've been paying for business that they haven't -- multiples haven't been rising. I'm not going to say they will never arise, but we don't see the pressure on acquisition prices today.

I mean, the important thing that I think you need to remember is that the quality of a business that's acquired as a stand-alone business is a very different quality of business that it becomes once it's part of the Keywords, sort of under the Keywords' umbrella. So things like client concentration, which is a problematic issue for a small stand-alone business evaporates, when it comes into the Keywords' picture. So if you take a game development studio it might have 2 or 3 contracts running. Each one of those contracts, if there's something goes wrong with one of those contracts can be fairly disastrous for a stand-alone studio, so that's obviously reflected in the value that you would attribute to a stand-alone game development studio. But when it comes into Keywords, you have so much demand that should you have to unplug one contract and plug another one in, it's just a completely different risk profile and in fact, moving from one contract to another, particularly in this market, gives you an opportunity to probably push your prices up a bit as well. So it's kind of an interesting dynamic.

I don't know where to look, sorry. Fight amongst yourselves. I'll let [Nessia] choose.

--------------------------------------------------------------------------------

Unidentified Analyst, [17]

--------------------------------------------------------------------------------

And just you talked on pricing there, is there anything you're currently doing in terms of price discriminating across the service lines. Since you become more of an engineering-centric business as opposed to Game Development as it now is?

--------------------------------------------------------------------------------

Andrew John Day, Keywords Studios plc - Group CEO & Executive Director [18]

--------------------------------------------------------------------------------

It depends what you mean by price discrimination, I suppose.

--------------------------------------------------------------------------------

Unidentified Analyst, [19]

--------------------------------------------------------------------------------

It's about cross service lines. Are you pricing appropriately to the service?

--------------------------------------------------------------------------------

Andrew John Day, Keywords Studios plc - Group CEO & Executive Director [20]

--------------------------------------------------------------------------------

I think we're pricing appropriately to the service. So all our -- we don't operate in a bubble. So there are sort of market prices and market norms, some of which are a bit more transparent than others. So for instance, the pricing in game development is a little bit murkier than the pricing in say, testing or localization, which is a bit more sort of established. You know exactly where you sit relative to sort of market norm.

What you might be sort of asking as well is, how sophisticated are we with our pricing? So for instance, if we're able to get multiple services across a client, does that mean that we can charge sort of less? The answer is, it really depends on how that relationship is then put together. So individually, the services don't become more efficient just because you're selling 7 or 8 services -- 6 or 7 services into a client. What becomes more efficient if you can get a commitment from the client and you can start perhaps gaining shares, so you increase the volume with client, you get closer to them, you get better visibility, you get more integrated delivery, then you can sort of talk providing a discount in order to get that, either the longer-term commitment or the increased volume.

--------------------------------------------------------------------------------

Unidentified Analyst, [21]

--------------------------------------------------------------------------------

And just one other question. In relation to the console cycle, usually it's about a 2-year period or so for a game to get up and running. So you can imagine some of these games are already in progress, are you seeing a huge -- like how big is that versus cloud gaming, I guess, for Keywords in terms of medium-term, the new console?

--------------------------------------------------------------------------------

Andrew John Day, Keywords Studios plc - Group CEO & Executive Director [22]

--------------------------------------------------------------------------------

I think, well, console games as a whole is obviously bigger than cloud gaming and so on. So this is console games as a whole. I think what's happening this year, which is in stark contrast to what happened at the last console transition, is if you've got such a big install base of the current consoles and I don't know, if it's -- I think it's the majority of the games are probably running a bit of a services model where there is continuous content being uploaded or provided to those existing games on the existing console. I don't think many of our clients are going to want to cut off that revenue stream overnight.

So they'll need support in supporting those existing games on existing consoles, while they focus on producing content that shows off the capabilities of the new consoles.

So I think this is going to be a smoother console transition and one in which we should see perhaps ultimately, an increased demand for a period as we move between the previous generation and the new generation, which is a process that takes a couple of years anyway.

--------------------------------------------------------------------------------

Natasha Brilliant, Citigroup Inc, Research Division - VP [23]

--------------------------------------------------------------------------------

It's Natasha Brilliant from Citi. A couple of questions on the margin. Firstly, you've talked about the 15% next year, but how should we think about that across the different service lines? Can you just give us a bit of help in kind of how these margins stand out?

--------------------------------------------------------------------------------

Andrew John Day, Keywords Studios plc - Group CEO & Executive Director [24]

--------------------------------------------------------------------------------

Yes, I would happily do so if I knew, but I don't. The way in which we run our business is, we share the sort of facilities and that operating costs across the businesses. So we are not directly attributing them to each of the individual businesses.

And it's easy to think that sort of your -- again, we don't provide them, but the higher gross margin activities that you'd expect from game development versus say, player support, easy to make the assumption that, that higher gross margin automatically drops to a higher net margin. It's not always the case because in something like game development you might have more of an issue with utilization and efficiently rolling staff from one project to another. You've got more of a sort of project nature to that whereas something like player support is continuous business, where you've got sort of 50 or a 100 people supporting a game and you're billing them monthly.

And your OpEx for player support can be much thinner than your OpEx for game development. So I'm not giving you an answer. But I'm just saying, even if I could which I can't, I would be surprised if there is a massive difference on the net margin basis from service line to service line just because of the -- what it takes to support them and the cost of the people in those various businesses itself.

--------------------------------------------------------------------------------

Natasha Brilliant, Citigroup Inc, Research Division - VP [25]

--------------------------------------------------------------------------------

And then just a second question on sort of operational leverage and again, thinking about next year. We've had a couple of one-off factors this year at the margin. Is there a risk that if this sort of demand continues at this steep pace, actually ongoing investment will be needed and you'll sort of cover a new level, I guess, of investment required to support that growth?

--------------------------------------------------------------------------------

Andrew John Day, Keywords Studios plc - Group CEO & Executive Director [26]

--------------------------------------------------------------------------------

I think, David can correct me, but I think even though, for instance, we're talking about 1,400 workstations, the level of CapEx in the business is relatively light. I mean, we're talking something like 3...

--------------------------------------------------------------------------------

David Broderick, Keywords Studios plc - CFO & Director [27]

--------------------------------------------------------------------------------

Between 3 -- traditionally, between 3% to 4% of revenue. And it's still at that kind of run rate. H1 is more an issue of timing, where you'd see maybe a bit more in the second half then.

--------------------------------------------------------------------------------

Andrew John Day, Keywords Studios plc - Group CEO & Executive Director [28]

--------------------------------------------------------------------------------

So we always have the choice. We always can decide, yes we're going to invest behind the growth, or no, we're going to let it pass us by and benefit somebody else. I mean my own preference is to continue to invest. We know it's a very profitable activity. The more scale you get, the more operational leverage you can get. It's not massive but it all counts.

--------------------------------------------------------------------------------

Unidentified Analyst, [29]

--------------------------------------------------------------------------------

Just a couple of questions from me. So firstly on the multimedia tax credits. Can you just remind us how the -- how that's recognized in the P&L versus the sort of offsetting costs associated to operating costs with that? And how quickly you'll be able to get the cash from the multimedia tax credits, which is obviously building quite quickly through the cash flow?

--------------------------------------------------------------------------------

David Broderick, Keywords Studios plc - CFO & Director [30]

--------------------------------------------------------------------------------

I suppose going in a reverse order. Collection is effectively a year in arrears. So at the end of the fiscal year, what you see accrued on the balance sheet is effectively for that year in question. And we will additionally collect that by the time it's gone through all its gauging processes, traditionally, again, around October, November of the following year. So that's the collection cycle. In terms of how we treat it. Again, we're offsetting it against the kind of employment costs of the people carrying out the activity and that's the treatment there against that from a P&L perspective.

--------------------------------------------------------------------------------

Unidentified Analyst, [31]

--------------------------------------------------------------------------------

I guess there's no sort of transitionary period where they maybe benefits or loss in, say, one half versus the other when credits are recognized versus the costs that's [unmet]?

--------------------------------------------------------------------------------

Andrew John Day, Keywords Studios plc - Group CEO & Executive Director [32]

--------------------------------------------------------------------------------

No. They're recognized as the work is done.

--------------------------------------------------------------------------------

Unidentified Analyst, [33]

--------------------------------------------------------------------------------

And then just one other thing. There was, in the cash flow statement, there's a large other receivables change. I was just wondering, one, what that is? And then, as you get to the full year, where do you expect sort of net cash/debt position to be at?

--------------------------------------------------------------------------------

David Broderick, Keywords Studios plc - CFO & Director [34]

--------------------------------------------------------------------------------

Yes, other receivables is again, is part of the function of the expansion, rental deposits, import taxes like VAT and purchase-related taxes that are reclaimable. Again, on a lot of the outfitting, fitting out, et cetera, that we've done and then the underlining growth as well as function. So you're seeing part of the increase in activity and then, you're seeing some specific stuff to the expansion.

--------------------------------------------------------------------------------

Unidentified Analyst, [35]

--------------------------------------------------------------------------------

Have you also got multimedia tax credits in the other receivables maybe?

--------------------------------------------------------------------------------

David Broderick, Keywords Studios plc - CFO & Director [36]

--------------------------------------------------------------------------------

No, it's interest separate.

--------------------------------------------------------------------------------

Andrew John Day, Keywords Studios plc - Group CEO & Executive Director [37]

--------------------------------------------------------------------------------

Because it's separate, it's shown separate.

--------------------------------------------------------------------------------

Unidentified Analyst, [38]

--------------------------------------------------------------------------------

And then just last one. You're saying, obviously the like-for-like growth is a bit cleaner and for the moment, just purely because of fewer acquisitions. What would the -- if I was to ask the sort of true organic growth, if that make sense. If you have to exclude all acquisitions in the last 12 months, how close or how clean is the 17.3%? If you know that off the top of your head?

--------------------------------------------------------------------------------

Andrew John Day, Keywords Studios plc - Group CEO & Executive Director [39]

--------------------------------------------------------------------------------

I don't know it. What...

--------------------------------------------------------------------------------

David Broderick, Keywords Studios plc - CFO & Director [40]

--------------------------------------------------------------------------------

The proportion of that was from acquisitions, is relatively minimal, so I think it's a relatively clean proxy as to being almost one and the same.

--------------------------------------------------------------------------------

Andrew John Day, Keywords Studios plc - Group CEO & Executive Director [41]

--------------------------------------------------------------------------------

The other way I look at it, because I find it very difficult to strip out acquisitions because they are an integral part of the business. So if you start to strip them out, you're not looking at the business as it is today. But the other way of looking at is pro forma growth. And if you sort of assume that you have the acquisitions for the full period, the full 6 months versus -- and you have them for the same full 6 months last year, I think that number is about 21%. So I don't -- depending on which way you do it, sometimes it's going to look better, sometimes it's going to look worse. But I think overall the picture is one of astonishingly good organic growth, however, you measure it. Questions keep coming.

--------------------------------------------------------------------------------

Neil Shah;Stifel, Nicolaus & Company;Analyst, [42]

--------------------------------------------------------------------------------

Sorry, I'll keep it quick, Andrew. Neil Shah from Stifel. So first question is just on automation. We hear a lot of talk about automation in software testing. What are you seeing in your market?

--------------------------------------------------------------------------------

Andrew John Day, Keywords Studios plc - Group CEO & Executive Director [43]

--------------------------------------------------------------------------------

Yes, it's very different from sort of enterprise software testing. Games are a very complex and evolving sort of creature. I think everybody, including ourselves frankly, would love to be able to automate more. We have no fear of automation. We have 20 -- more than 20 people dedicated to automation, automation engineers, test engineers within our business.

The truth of the matter is there's only so much you can commercially, sensibly sort of automating in game testing because of the speed of the cycles and the way in which games change so rapidly. So by the time you've built your sort of automation harnesses and everything else that you need, it's almost too late really. So and also the complexity of games and they're almost too big to test in some cases. So you have to use currently what is really good human intelligence to try and figure out where you should be looking for issues, where you should sensibly be looking for issues and then concentrate resources in particular areas and that's going to vary hugely from game to game.

--------------------------------------------------------------------------------

Neil Shah;Stifel, Nicolaus & Company;Analyst, [44]

--------------------------------------------------------------------------------

And the second question was just on debt. What were you paying on the HSBC facilities today? Your balance sheet looks underlevered and would you explore using more debt in the future?

--------------------------------------------------------------------------------

David Broderick, Keywords Studios plc - CFO & Director [45]

--------------------------------------------------------------------------------

About 1.5%?

--------------------------------------------------------------------------------

Andrew John Day, Keywords Studios plc - Group CEO & Executive Director [46]

--------------------------------------------------------------------------------

Yes, about 1.5% above EURIBOR, right? So -- and it's rolling credit facility. So it's got a lot of flexibility in it as well.

The -- in terms of the leverage, we do generate good cash flows, we've consistently generated those cash flows, so I think it's a business that can certainly withstand a reasonable amount of debt. I think we haven't been shy of saying that we are -- we have an appetite to certainly use more debt than we have in the past. In the past, our balance sheet hasn't been leveraged at all. Today, it's fairly underleveraged as well, if you want to look at it that way.

But I don't think you should expect us to push anywhere beyond sort of 2x EBITDA anytime soon. But bear in mind that we're using a lot of that debt from acquisitions which in itself brings in EBITDA, so it's sort of self-fulfilling.

--------------------------------------------------------------------------------

Unidentified Analyst, [47]

--------------------------------------------------------------------------------

Just 2 very quick ones on the game development segment. First was, the current game development hubs appear to be in say, very high wage areas. So you've got San Francisco, you've got Brighton as well. So just wondering, is there an opportunity to maybe look to develop some centers within maybe India or somewhere like that and get some of the lower creative work going over there instead and try to drive margins that way or is that just a function of being a AAA game developer?

And the second question I had was, game development and outsourcing is still around 20%. Is there an opportunity to look to accelerate that outsourcing share by driving share capture reducing margins potentially on the game development side of it or are you just protecting ROI?

--------------------------------------------------------------------------------

Andrew John Day, Keywords Studios plc - Group CEO & Executive Director [48]

--------------------------------------------------------------------------------

Yes, both good questions. So in terms of high cost versus low-cost location for game development, the issue is, cost is not only about the day rate or the per day or per month cost of your developers or something, it's also about the capabilities of your developers. So the capabilities need to come first because if you've got a bunch of very inexperienced game developers or people that haven't done game development before but are a good software developers, that's not necessarily what you need to deliver against the requirements.

And the other thing is that proximity to clients still counts for a lot. There's a lot of sort of interpretation that goes into how you develop a game and being culturally close to your client is quite valuable as well.

So I wouldn't undervalue having game development centers in high-cost centers, if that's where the client is and that's where the talent is. But I think our big opportunity is to work in a distributed fashion. So you can have the sort of spearhead in a high-cost center like a, we don't have them currently, but let's say, like a Los Angeles, or a San Francisco, or a London, Brighton sort of thing and then work in a distributed fashion where we can leverage our resources in Poland, Russia, ultimately lower-cost centers even beyond that.

But it isn't something that we must do today in order to play in the market. It's something which directionally we would like to move to. We are starting to work more in a distributor fashion across the studios that we've got already and our clients are appreciating that sort of additional capacity that it brings and that capability that it brings.

And I think, given we've got a very strong presence in China. For instance, we've got a strong presence in India. If there are opportunities for us to create sort of offshore engineering capabilities on the back end of some of the projects we do, we'll certainly be looking at that.

In terms of margin, this -- I can't see any good argument for dropping price in gaming development in order to capture more market share because the problem really isn't that, the problem is in staffing it. The problem is in how much resource can you hire, how quickly and how quickly can you cement it together in a team and then perform the work at the sort of quality and efficiency levels that we used to do. So the challenge isn't really one of speed in terms of accelerating speed by reducing price, it's the challenge is one of speed in terms of finding your resources and growing into the demand.

--------------------------------------------------------------------------------

Unidentified Analyst, [49]

--------------------------------------------------------------------------------

Two more questions on the game development services line. Firstly, just on that pricing point. You actually say in your prepared comment that pricing increases will start to flow through in fact. So if you could just talk a little bit, both about the internal and external drivers for that? And then I'll hold the second question.

--------------------------------------------------------------------------------

Andrew John Day, Keywords Studios plc - Group CEO & Executive Director [50]

--------------------------------------------------------------------------------

Yes, so I think I mentioned that pricing in game development is a little bit more opaque than it is in some of our other services. So obviously what we do in sort of acquiring these businesses is we find we acquire businesses that are maybe working with the same clients or on similar projects but at a different price point. There's obviously, an opportunity for some pricing equalization as we do that.

So the market knowledge we have of where market price lies or where it can lie is significantly enhanced within Keywords, relative to any of the individual studios. So this is not something where you go in with a sort of bulldozer approach and just raise all your prices tomorrow. It's really as you cycle off from one project to another, as you are bidding on the next project with basically bidding at higher price than we would have done a year or so ago. And so it's a continual process of moving price into the demand and into the growth.

--------------------------------------------------------------------------------

Unidentified Analyst, [51]

--------------------------------------------------------------------------------

Second question, just so I understand a little bit better about your game development business. Is it more about doing end-to-end development on a fixed-price contract or is it more about selling time and capacity?

--------------------------------------------------------------------------------

Andrew John Day, Keywords Studios plc - Group CEO & Executive Director [52]

--------------------------------------------------------------------------------

Yes, we are hugely in favor of time and material work. Fixed-price comes with risk which given that we don't share the rewards with the developer, we don't particularly want to share the risk either. So we would rather be paid for the work we do at a decent price than share the risk on those contracts. So we don't see particular logic in us chasing a whole bunch of fixed-price work.

--------------------------------------------------------------------------------

Unidentified Analyst, [53]

--------------------------------------------------------------------------------

It that therefore -- would it be right to assume therefore, that you don't have milestone deliverables if you prefer that?

--------------------------------------------------------------------------------

Andrew John Day, Keywords Studios plc - Group CEO & Executive Director [54]

--------------------------------------------------------------------------------

Yes, it depends. Let's say, if you look at most of the contracts are structured, they're more sort of around monthly deliveries rather than your 1/3, 2/3, final sort of deliveries.

--------------------------------------------------------------------------------

Unidentified Analyst, [55]

--------------------------------------------------------------------------------

Actually, I'll just sneak one last one. You mentioned when you depict your game engineering -- sorry, game development business as having several elements of proprietary software, does that include proprietary game development engine?

--------------------------------------------------------------------------------

Andrew John Day, Keywords Studios plc - Group CEO & Executive Director [56]

--------------------------------------------------------------------------------

It actually does, but I wouldn't get hugely excited about it. So we do have our own game engine. So d3t came to us with a game engine that they use and actually that engine has been used to ship games, including fairly recently. But please don't think of it at all in the same sort of category as an Unreal or a Unity or anything like that. It's not that sort of thing but it is a well-developed sort of code base on which you can run and ship games.

--------------------------------------------------------------------------------

Unidentified Analyst, [57]

--------------------------------------------------------------------------------

Andrew, you touched on the streaming services a few times and have you got a view on how successful you think they might be in the next say year or 2, given the high-speed Internet connection that the players need? And would the streaming services change the way your clients need to operate and therefore, change the way they interface with you guys?

--------------------------------------------------------------------------------

Andrew John Day, Keywords Studios plc - Group CEO & Executive Director [58]

--------------------------------------------------------------------------------

Yes. So this is one of the things I like about Keywords is, I don't have to worry too much about how successful those particular platforms are going to be, kind of we get paid whatever. Having said that, I have to believe that with the sort of commitments being made by Google and others to streaming Microsoft, of course, and who knows what Amazon and others are going to be doing in this space, that a lot of the technical challenges have been overcome and will continue to be overcome. So perhaps in the early phases of streaming it's going to work better for some consumers than for others. But I think with the advent of proper 5G and everything else, it's going to become much more universal, I would assume and therefore, why shouldn't you be able to play a game on any device from anywhere as long as you've got an Internet connection. And I think that's directionally the way the business is going. It's the way we all thought it would go sort of 10 years ago. It's just taken a bit longer than it has for music or film and TV content. But it seems inevitable that that's where it's going. Whether it goes -- how fast it goes in that direction is, well, I'm not going to sort of speculate. So that was one -- do you have a second part. Sorry, Tom.

--------------------------------------------------------------------------------

Unidentified Analyst, [59]

--------------------------------------------------------------------------------

Is there anything -- does it change the behavior of your clients, the fact that the games are all streaming and then there's a takeaway interfaces...

--------------------------------------------------------------------------------

Andrew John Day, Keywords Studios plc - Group CEO & Executive Director [60]

--------------------------------------------------------------------------------

Yes, it can do. I think streaming itself not necessarily, but what some streaming platforms will do is allow you to be far more integrated than before and to have larger content. So whether it's using the power of the cloud to make your game universe much, much bigger than you are able to make if you're confined to the capacity of an individual console machine or something. Or if it's the fact that you can now sort of integrate with YouTube or different services out there through the cloud infrastructure.

The more connected these experiences become, the more support they require, the more testing they require, the more customer support issues you generate and so on and so forth. So, I think that will generate further demand for our services in addition to what I've said in terms of the language mix.

--------------------------------------------------------------------------------

Andrew Alec Kaplowitz, Citigroup Inc, Research Division - MD and U.S. Industrial Sector Head [61]

--------------------------------------------------------------------------------

I'm Andy Kap from Citi. Andrew, maybe just a question on cross-sell. So about 100-odd customers getting more than 3 services but you've got almost 900 customers there in total. You mentioned simplification of some of the business lines. Can we maybe -- just trying to understand a little bit better how big do you think the opportunity is? And how perhaps you can go about accelerating it because obviously there's a lot of complexity within the business through the M&A that's been built?

--------------------------------------------------------------------------------

Andrew John Day, Keywords Studios plc - Group CEO & Executive Director [62]

--------------------------------------------------------------------------------

Yes so what I'm -- we talk about sort of cross-selling, so from a client perspective, but you've also got this other thing going on, which is like I showed at the beginning with the trailer business, where you're actually joining the dots internally between different service lines as well to create a packaged delivery.

So I think there are great opportunities on both those fronts. I think as we -- as our business evolve and as our clients evolve and start to sort of engage with us in a more structured fashion across service lines, because a lot of our clients are still engaging on a separate service basis, as they start to engage across multiple services, we'll be able to invest more heavily in account management, and so on, and so forth, and I think that will further accelerate cross-selling as well.

So I think there's huge opportunity. I mean even in our biggest clients that are buying 7 or more services, I mean, the penetration that we have in terms of their total outsourcing needs or in terms of their -- what they could in future outsource, is relatively small.

--------------------------------------------------------------------------------

Kenneth Charles Rumph, Jefferies LLC, Research Division - Equity Analyst [63]

--------------------------------------------------------------------------------

Ken Rumph again. It would be remiss to let David get away from his last results meeting without a detailed analysis of IFRS 16. No. Please no.

Just coming back perhaps to the question of net debt. You made the point that you've historically always tended to generate more cash in the second half. You've got some of the deferred payments that are visible to you to come out. Adding that up, heading towards kind of a balance of debt and cash by the end of the year, absent further acquisitions and depending kind of how busy you are at the end of December in a sense, but as a sort of broad guide sort of heading toward 0?

--------------------------------------------------------------------------------

David Broderick, Keywords Studios plc - CFO & Director [64]

--------------------------------------------------------------------------------

Yes, I mean again, it's contingent on a couple of factors that can sway you either side.

--------------------------------------------------------------------------------

Kenneth Charles Rumph, Jefferies LLC, Research Division - Equity Analyst [65]

--------------------------------------------------------------------------------

Yes, there's a few million leeway...

--------------------------------------------------------------------------------

David Broderick, Keywords Studios plc - CFO & Director [66]

--------------------------------------------------------------------------------

I mean, the other thing we didn't kind of -- touched on but we're starting to get momentum in terms of starting to implement and leverage a kind of a banking network that we've built, start to look at cash pooling on a more effective basis, now that that's kind of layered out, help improve the liquidity and manage the cash better and in a more systematic way. So I mean, I think if you're plus 5, minus 5, broadly speaking that's probably...

--------------------------------------------------------------------------------

Kenneth Charles Rumph, Jefferies LLC, Research Division - Equity Analyst [67]

--------------------------------------------------------------------------------

Okay. I was just going to ask one last one. One of the points also that you made was that you've effectively got some kind of startup operations like Yokozuna and GetSocial, which inevitably either they're going to work or they're not -- you're going to stop doing them. They're also probably businesses that would ultimately have software-type margins, not so to speak service-type margins. Where sort of are we and what's the sort of path towards commercialization?

--------------------------------------------------------------------------------

Andrew John Day, Keywords Studios plc - Group CEO & Executive Director [68]

--------------------------------------------------------------------------------

Yes, that's a good question. So I think the way I would address that is twofold. Yes, we have been investing in some more sort of technology-type businesses. I think you should expect us to continue to do that. And to the extent that we can use technology to provide better services to our clients or actually just provide that technology directly to the clients, and if they don't have sort of direct access to it elsewhere, we'll happily do that. Some of them are very early-stage businesses. As you say, some of them have yet to prove themselves. And but that's not going to necessarily stop us investing in technology businesses going forward. We think there is a good marriage between some technology and the service that goes alongside them.

How long you give them to prove themselves? It's horses for courses really. So I'm sure David and Jon in future will be sort of questioning how -- at what point we decide whether we've got a really viable vibrant business coming out of these units or whether we should reconsider our ongoing investment in them or not. But yes, it's difficult to say exactly what the time line is.

I think we are at the final question.

--------------------------------------------------------------------------------

Unidentified Analyst, [69]

--------------------------------------------------------------------------------

Just one final hopefully short question. Just want to ask about the problematic project that you acquired, sort of touching on the gamedev side earlier. In terms of, essentially it's either behind in terms of quality or over in terms of cost, I presume one or the other.

--------------------------------------------------------------------------------

Andrew John Day, Keywords Studios plc - Group CEO & Executive Director [70]

--------------------------------------------------------------------------------

Yes, the latter.

--------------------------------------------------------------------------------

Unidentified Analyst, [71]

--------------------------------------------------------------------------------

What can you do to sort of remedy that? And how big a drag is it going to be? Why wasn't it identified [DD] as well.

--------------------------------------------------------------------------------

Andrew John Day, Keywords Studios plc - Group CEO & Executive Director [72]

--------------------------------------------------------------------------------

That was the question I was hoping not to get. Yes, that's a good question and perhaps, there's a lesson for us for future [DD] operations.

I think a game development project is very complex. So I think a lot of our clients would readily admit to not getting budgets right on game development projects because it's very hard to know what you're dealing with at the start.

Now, this is not exactly in that category. I think we could have done a better job of scoping it and pricing it correctly. So this is sort of on us particularly, I would say. It's not an issue of quality or capability and it's not a project that's leading to any sort of acrimonious behavior between us and client. We fully accept that we took the project on and we need to deliver and we are making very good progress. So the resources that have been committed to that project are starting to ramp up as we get closer to the end of the project, and they are obviously being reassigned to normal profitable level contract work. So the effect of that is starting to unwind.

Yes, due diligence, I mean, this is a project that was signed fairly soon before the sale of the business. And for the development company itself, it takes a lot of time and effort and resource to fully scope out a project. For us, to be able to do that during due diligence may be hard to expect but obviously, we know there's risk in fixed-price contracts. We try and avoid them. Perhaps seeing this one in the mix, we should have perhaps spent a bit more time looking at that.

And the other thing you can ask yourself is, maybe we should have cut our losses early on because with these sort of things, if you realize you're in that situation, there's sometimes a way out early on, there really very rarely is later on. You sort of have to get to the end of it.

Are we through? Great. Time for a glass of water. Thank you.