Keywords Studios plc (KWS) Earnings Call Transcript & Summary

Good morning, everyone. Thanks for joining. Sorry, we can't be there in person as we normally would be at this time, but we all know the reason for that. So we'll do our best in this remote world that we find ourselves in to take you through the results for 2019. And so if I could just quickly skip over Slide 2 in the presentation, which is the normal legal disclaimer wording, and then start properly on Slide 3 with an agenda for today. So what we hope to do is to take you through the highlights for 2019, which I will do. You'll then be pleased to not have to listen to me for a while, while I hand over to Jon Hauck, our CFO, who will take you through the financial overview with a bit more detail behind the numbers. And then we'll come back to the operational review, at which point I'll go through service line by service line to give you a little bit more color as to what we saw during 2019 and importantly as well, how each business is faring in this COVID-19 world of ours in 2020. And then, be moving on to the outlook, concentrating on the medium-term outlook for the business as a whole. So having shared the agenda with you, let's turn to Slide 4, which is actually not on the agenda, but I don't think we can avoid talking about COVID-19. So update for you, given that we did update only 3 weeks ago, I'm pleased to share that we've now, in that period of time, moved from around 4,500 employees working from home to 5,500 people working from home. And that's in addition to those people that are working from studios that are still productive or have returned to full production as in the case of China. But there are about another 800-or-so people working from studio locations around the Keywords Group. We have several service lines. Five of those service lines have transitioned very, very quickly to work-from-home arrangements, hardly skipping a beat in doing so. Tremendous efforts by IT, operational teams and HR in terms of getting that to happen. A couple of our service lines have been a little bit more affected than others, so particularly our testing business, where we're dealing with highly sensitive prerelease full game builds and obviously, moving that to a work-from-home environment does mean the need to get client consent to do that and to agree with the security protocols and so on that we've put around those projects. So that's taken a little bit longer, but we are, team by team, moving people back to work as we get client consent. And then in our audio business, a lot of this relies on getting actors into studios and recording their voices in studios under voice direction and with audio engineers in attendance and so on. So obviously, when those studios are no longer available to us, we can't perform that work. So a little bit more challenging in audio and testing. But fortunately, for us, both of those have very flexible cost bases as well. So if I just give you a sense of where we are as a business, my overriding sense is one of the business with a lot of resilience in it, a very good business model, providing a lot of flexibility and super encouraged, by the way, in which across 59 studios, each studio has managed to adapt incredibly fast to the challenging environment that they found themselves facing. So customer demand is actually, if anything, increased a bit over where we would have expected it to be. In part, that's because they're turning to companies like us to help them deal with the challenges that they themselves face in these times, and obviously, it's a factor. The games business is one which is performing rather robustly during COVID-19. We also have a strong balance sheet. Our liquidity is good. We've just announced today that we have -- we are in the final stages of extending our revolving credit facility from EUR 100 million to EUR 130 million with the support of our banks. And so we have something like EUR 110 million in liquidity available to us. It's also worth saying right upfront here that the Board has decided that it's not appropriate to pay a dividend at this time. That's not really because of liquidity issues. It's just -- we're in this time where a bunch of senior execs have voluntarily waived bonuses and taken salary reductions. We have some of our colleagues, unfortunately, on furlough. And it just seems appropriate not to be paying a dividend. The dividend, as you know, at Keywords is very small anyway. So probably not a major impact for anyone. So if I can go on now to Slide 5 and talk through the results for the year. So very, very pleased with the performance during the year. Revenue is up 30%. Most importantly, though, revenues up on an organic basis, 15.5%, and that strips out the effect of acquisitions and currency tailwinds as we experienced last year. And that revenue, as we previously said, was driven particularly by functional testing and game development. We're now able to reveal exactly the growth that we felt in those businesses on an organic basis. Functional testing increased by 37% and game development increased by 36%. So really incredible growth in those 2 areas of the business. And we did note, particularly in functional testing and game development, signs of an accelerated trend towards outsourcing. And our marketing audio and localization businesses were a little bit held back by being in the sort of tail end of the current generation of consoles in the run-up to the transition to the new consoles, which are still expected to launch at the end of this year. Looking at the profit numbers. On an EBITDA measure, we moved from EUR 43.7 million EBITDA in 2018, up to EUR 49.5 million in 2019, so an increase of 13%. As we have already talked about, I think, following our trading update in late January, the margin did come under a bit of pressure in 2019. A lot of that was due to some inefficiencies that were introduced as we ramped up incredibly fast, particularly in our testing business where we almost doubled our headcount in testing. And also a little bit of holdback from an underperforming fixed-price contract in our engineering business, which we finally put to bed in -- right at the end of last year. So we actually ended up with an EBITDA margin of 15.2% compared with 2018 of 17.4%. And we did see the margin coming back a little bit in the second half of last year, and I'm sure Jon will talk more about how that margin builds later on. And finally for me in this section, on Page 7. While we were growing our business very strongly organically, we were also busy making acquisitions as you've come to expect from Keywords. So on Page 7, by the different color schemes, you can see, we made 2 acquisitions in marketing services; 2 in our engineering business, Wizcorp and GetSocial; 3 in our audio business, 2 of which extended our reach into some nongames, audio services. So TV+SYNCHRON in Berlin, very high-quality producer of German language dubbed and subtitled content and descriptive video works in Vancouver, which provides audio description for blind and visually impaired people across live events as well as film television content, et cetera. We also acquired a company called Kantan machine translation business. This is an AI, a business that supports companies like eBay, for instance, with their machine translation also the European Commission. But it's one that we chose to work with over the last sort of couple of years on a commercial footing in order to introduce machine translation into our standard workflows within games localization. So very excited to add that capability to our localization efforts. And again, that helps us put some distance between ourselves and the highly fragmented competitor base that we find in that localization space. So at this point, we are now on Slide 8, and I'm pleased to hand over to Jon Hauck, who will take you through the financial details.

Thanks, Andrew, and good morning, everyone. I'll turn to Slide 9. But before I run through the financial highlights, I just wanted to remind everyone that we adopted the new leasing standard IFRS 16 from the start of 2019. And as we have previously guided, IFRS 16 does not have a material impact on either net profit or the cash flows of the business, but it does change the presentation of the P&L and the cash flow statements. So to help with the comparability with prior year, which doesn't include IFRS 16, we provide the numbers as reported, but also excluding IFRS 16 so that it's comparable with the prior year. And unless I state otherwise, all references in my presentation are going to be to the numbers excluding IFRS 16. So I'll now run through the key financial highlights for 2019. As Andrew has just mentioned, revenue for the group grew by 13.2% in the year. Organic revenue, which excludes the impact of acquisitions and currency movements, grew very strongly by 15.5% compared to 10.1% in the prior year. This includes particularly strong performances in both the game developments and functional testing service lines, which both grew organically by over 30% in the year. The organic revenue growth, as Andrew just mentioned, was complemented by the acquisition of 8 businesses in the year as well as the full year impact of the acquisitions that were made into the prior year flowing through into 2019. Adjusted EBITDA, which excludes depreciation, amortization, share option expenses and the cost of acquisitions and integration, increased by 13.2% to EUR 49.5 million. This resulted in an adjusted EBITDA margin of 15.2% representing a reduction of 2.2 percentage points on the prior year. This was driven by a number of factors, which I'll run through in a little bit more detail shortly. Adjusted profit before tax increased by 9.1% to EUR 41.3 million, with a relatively small impact coming from the adoption of IFRS 16. There was a small reduction in the effective tax rate resulted in an adjusted EPS of EUR 0.4944 per share, representing an increase of 8.7%. From a cash perspective, adjusted free cash flow was EUR 32.3 million with adjusted cash conversion rate of 79%, which is broadly in line with prior year, despite the impact of an increase in the accrual for tax credits, which I'll run through in a bit more detail shortly. So turning now to margins on Chart 10. As I mentioned earlier, whilst the business delivered very strong revenue growth in 2009 (sic) [ 2019 ], we did experience a reduction in our EBITDA margins and this was driven by 4 main areas that we set out on the Chart 9. Firstly, we had an underperforming fixed-price contract, which was entered into by an acquisition. And it effectively broke even in 2019. So this tied up some resources that we could have otherwise been deployed on more profitable projects. And whilst the contract was finalized at the end of 2019, it did drag margins down by approximately 0.6 percentage points in the year. We also have a number of early-stage technology businesses. These are businesses that have potentially exciting prospects but are currently pre revenue, and therefore, impact margins as we've invested in them during the year. And as Andrew mentioned earlier, we've experienced very strong organic revenue growth. And in particular, in our game development and functional testing service lines, and we've invested behind this growth, both in terms of short-term measures. So to deliver the growth for things like recruitment cost, temporary space as well as longer-term expansion where we've been fitting out new space in Mexico, Katowice, our studio in Montreal, for those that were there at the end of last year, amongst others. The growth also introduced some operational inefficiencies, as Andrew mentioned. It's hard to manage such fast increase in volume of work in such a short space of time. So that did introduce some operational inefficiencies into the business. Finally, as well as investment behind the growth in the service lines, we've also invested in upgrading the operational capability of the business and our support functions, including IT, finance and HR. These are important investments to ensure that we have the right backbone to support the business, both now and in the future. Moving forward, we'd expect to leverage these investments and would expect margins to improve incrementally back towards our more historic norms, albeit this will clearly now be impacted by the impact of COVID-19 in 2020. So now turning to cash flows on Chart 11. Set out on the chart, EBITDA increased by approximately EUR 6 million year-over-year. But this was offset by an increase in the accrual for MMTC and VGTR tax credits in the year. These are labor credits that are earned during the year as the work is produced but are not typically collected until the following year. So that does result in a working capital outflow as a result of the timing difference. In addition, we did see an increase in CapEx, increased by almost EUR 4 million in 2019, and that was to support the growth in the business. This was offset by an improvement in other working capital of approximately EUR 3 million, and it was encouraging to see debtor days showing an overall improvement of 3 days over the prior year. All this combined resulted in operating cash flows in 2019 of EUR 28 million, which is up EUR 1 million on the prior year. Cash tax increased by EUR 7 million to EUR 13 million due to the settlement of a prior year tax item of EUR 2.5 million and other phasing differences. As a result, as I said earlier, free cash flow was EUR 32.8 million in 2019, and adjusted cash conversion rate was 79% and broadly in line with prior year despite the headwinds from the MMTC tax credits. Moving now to Chart 12. Just looking at net debt. Spend on acquisitions amounted to EUR 31.6 million in the year. This included just shy of EUR 50 million of deferred consideration in respect to prior year acquisitions and also acquisition and integration costs of EUR 3.8 million. This, together with dividend payments of EUR 1.2 million resulted in an underlying increase in net debt of EUR 18.3 million in 2019 compared to an increase of EUR 11.5 million in the prior year and net debt at the end of the year was EUR 17.9 million versus EUR 0.4 million at the end of 2018. So just moving to my last slide on Chart 13. And before I hand back to Andrew, I have a few comments on the strength of the balance sheet and liquidity. Whilst clearly, COVID-19 is having a significant operational impact on the business in the short term, we do have a very resilient business model, as Andrew mentioned. The business is cash generative, and as Andrew has already mentioned, we continue to see robust demand for our services as customers look to continue to produce new content. It's good that we can operate most of our services in a work-from-home model and where we're not able to do this, we can flex the cost base to minimize the financial impact of any reduced production levels on a short-term basis. And we also operate in an industry that's historically been pretty resilient in economic downturns and is actually benefiting in many ways from working from home. So turning to the balance sheet. We exited the year with a strong balance sheet with liquidity of EUR 82 million through a combination of both cash and also undrawn committed headroom under our RCF. The net debt-to-EBITDA ratio at the end of the year was 0.4x and well within the 3x bank covenant. And in addition, as Andrew mentioned earlier, as a precautionary measure, we're in the final stages of exercising the accordion feature under the RCF, which will provide access to an additional EUR 30 million of funds. Within the current environment, as you'll understand, we are taking steps to preserve cash with a very close focus on costs. We're eliminating discretionary expenditure and clearly a very close focus on working capital. It's obviously too early at this stage to predict how long the COVID-19 destruction will last, but we're confident that the business will be well placed to respond once the operation environment normalizes. And with that, I'll hand you back to Andrew.

Thanks, Jon. So I'm going to take you through the operational review now, and we will be going through service line by service line. But slides -- I'm now on Slide 14. Slides 15 through to 19 are kind of all in the category of helping to paint the picture of the business that's become really quite resilient over time as we continue to build our global platform. So if we can turn to Page 15. This slide shows how the business in a relatively short period of time from 2013 to 2019 has dramatically changed its shape while being focused entirely on the video games market. So in 2013, we effectively had 2 service lines, which made up more or less all of the business. And in 2019, we have 7 service lines with a really good spread, each one contributing meaningfully to the whole, and each service line on its own representing an opportunity for growth. And as we've progressed in this direction with a wider range of services, we've also been increasing sort of naturally the way in which we interact with our clients, such that those interactions are more integrated than ever before they're more strategic than they were and that sort of direction of travel remains. We've also invested in some services, which are arguably higher up the value chain with services such as game development and arts production included in the mix. So very nice continued progression through to 2019 in terms of services offered. And on Page 16, you've all seen this map before. The main thing here is this is another point of robustness for the business. We're in all the right geographies where games are made and where talent resides so that we have access to clients and talent around the world. We've also been very good at kind of landing and expanding. So where we either acquired a new location or have organically opened a new studio. We've been really quite successful exceeding in other services alongside that anchor point that was provided through the acquisition or the opening of the studio. Turning now to Page 17. Again, this is all adding to a picture of some resilience for the business. We do, as you all know, supply pretty much the who's who of the video games industry. And that has continued to serve us well. So I think we have close to 1,000 clients in total. But obviously, the big game companies do represent a meaningful proportion of the whole to us. And here, you see some of those names. On Page 18 now of the presentation. In terms of how all this translates in financial terms, we have year-on-year delivered very strong organic revenue growth and particularly pleased to see the organic revenue growth picking up again in 2019. What -- I have to laugh when we would think that 2018, we only achieved 10% organic revenue growth. So 2019, a 50% increase on that to 15.5%. And on a CAGR basis, revenue growth, 54% compound annual growth rate from 2015. Our profits likewise have pretty much followed that trend. As we've already commented on, margins were a little bit held back in 2019, and we were certainly looking forward to having those come back in 2020. Obviously, COVID-19 has something to say on that front. On Page 19, again, a picture of some resilience with less dependence on clients, any particular client than ever before. No single client representing more than 10% of our revenue. And again, pleasing to see the continued progress in cross-selling with this rather sort of crude measure we share with you, which is the number of clients that use 3 or more of our services. That's now up to 108 of those clients. And as you can imagine, a lot of our bigger clients are buying far more than 3 services from us, with some of them buying all 7 services. And then on the bottom right there, for me, pleasing to see the way in which game development, in particular, has come from nothing 3 years ago to representing 20% of our overall revenues. So very pleased with the success that we've managed to achieve there in building that business through a series of acquisitions and then enhancing those through some very strong organic growth. So starting on Page 20. We'll go through service line by service line. There's a lot of information on each slide here. I'm not going to talk to all of that by any means. We don't have time for it. But obviously, you can read the slides. And by all means, we'll be taking questions at the end of the session. So if there are any points you particularly want to dig into service line by service line, just raise them at the end. So starting with our Art Services here on Page 20 of the deck. Again, good organic revenue growth from this service line, and it was also pleasing that we were able to continue to build out our Marketing Services business, which sits under the umbrella of Art Services, but now -- and making a couple of additional acquisitions in 2019 and building up those that were already present in 2018. Our Marketing Services were held back a little bit in the latter half of 2019, as some clients decided to delay products or to refocus launch plans to coincide with the launch of the new consoles that are expected in late 2020. And as you might expect as well from COVID, some of those marketing services businesses have been impacted by some changes in marketing strategy with some big conferences like game development conference and E3 having been canceled this year. Those usually involve a bunch of launch trailer bigger sort of content production pieces. On the other hand, some of our studios have done very well in picking up some really quite meaningful work in terms of social media content production, where you make up for one big piece with a whole bunch of smaller marketing communication pieces for our clients. Also talking about this in terms of art studios. Obviously, in China, where COVID-19 first sort of broke out. We were very much as the rest of China was, we went through the whole sort of lockdown process, working back from home where we could. And then, obviously, as China has opened up again and lockdown has been eased state by state. So we have moved back to more or less full operations in China from our 5 studio set. So turning now to Game Development on Page 20. As I said before, very strong organic growth. Very strong demand. We continue to face a situation where opportunities for bidding on projects far exceeds our ability to deliver those. So we're in a very fortunate position of demand outstripping supply as far as we're concerned. And as Jon and I both said, we did exit the underperforming contract in December 2019. So we enter 2020 without that drag. It's been very, very quick to transition this business to a work-from-home model. The guys studio by studio have done a tremendous job in making that happen. And we have also opened 3 new studios, one in the U.K.; one in Singapore; and one in Austin, Texas. Obviously, those are now operating from home rather than from their intended new studio locations. But as a business, we are very well placed to continue to meet and to grow into the demand from our clients for outsourced game development services be those full game development or co-development or indeed porting services. So turning now to Audio service line on Page 22. This is one of the service lines that's been more affected by COVID-19 than many of the other service lines. So as I mentioned, first of all, we had a situation where actors were reluctant to come into studios to record and then those studios were obviously closed down as government after government introduced lockdown measures country by country. We have been really quite successful in developing some interesting technology and method of operation where we're able to record, really, quite successfully, actors working from home. We hope to be able to continue that into the future as a sort of adjunct to our in-studio operations as well. It's important to note, of course, that in audio, whilst we might be impacted from not being able to perform these services, our cost base is highly variable as well. And that, obviously, if we don't -- if we can't record, we don't have the cost of third-party studios, we don't have the cost of freelance audio directors and audio engineers, and we don't have the cost of the actors themselves. And I think the impacts that we're seeing to revenue in Audio Services are so far very much of the nature of being delays rather than lost revenue. Clients still want audio in their games. It's just a question of waiting a little bit of time until we can find a way to provide that for our clients, either through recording from home or getting access to our studios and getting talent back in to record them. On Page 23 now, talking about functional QA. This was another one of our service lines that has been most affected by COVID-19, not because of any lack of demand, in fact, quite the opposite. Demand really spiked in the sort of run-up to the lockdowns and everything as clients turned to us for help as a major or the major provider with the sort of resilience that we discussed in terms of multiple locations and just scale that able to be deployed at a time like this. But what has held us back a bit is just the operational complexity because we are dealing with very valuable prerelease software content. It is work that we do in very strict security within our secured facilities. In moving this sort of work to a work-from-home environment, it does involve a little bit of a compromise to security, and we've been very keen to make sure that our clients fully understand that. And they have the option of simply waiting it out a bit or moving to work-from-home arrangements. And we're very pleased that we've had 1,500 of our people in this area of business. We've managed to get them to work from home so far. And we are working client-by-client to get even more of our staff working from home. So in terms of the outlook for this business, this is an area where we've seen very strong growth over the last couple of years as we've become the go-to player, particularly in North America. We've also taken time during 2019 to open new operations in Mexico City; in Katowice, in Poland. And actually, we've started some functional testing operation in Tokyo, Japan as well. So quite a lot of sort of activity, which points towards good ongoing underlying growth in that business. And of course, as we are able to move back into our secure studios, we hope to be able to grow into some of that pent-up demand. Page 24 is our localization business. Now this business, probably the fastest and easiest to adapt to a work-from-home environment. A lot of the work actually happens in that kind of environment anyway. We have a large pool of very dedicated freelance translators, specialized in video game translation that have been working with us for a number of years. We've built up that resource base over the 20 years or so that we've been in the business. And so for us, it was a question of moving our project managers, our language leads and those dedicated teams that we have set up studio by studio at the request of our clients to service their businesses. We move those to work-from-home arrangements. As I mentioned before, we've invested in the business during 2019, particularly with the acquisition of the AI and machine learning business KantanTM (sic) [ KantanMT ], which has helped, again, put Keywords at the very sort of forefront of video game localization, having deep access to the very fundamentals of machine translation that we are then able to apply in a very sort of sensible and context-friendly manner to video game localization. On Page 25, Localization QA. This follows a very similar sort of story to Functional QA. In fact, for those people that were able to join us for our Capital Markets Day in Montreal, you saw Functional Testing and Localization Testing happening sort of side-by-side. And it's actually quite difficult to figure out the differences. So this business, like Functional Testing, has been affected by the sort of slightly slower pace in getting teams to work from home as we've gone through those discussions client by client. We have, during 2019, expanded our locations into facilities in Katowice, Poland and also Ottawa in Canada. And those expansions, together with the investments that we've made in facilities in Dublin, in Montreal and so on, will stand us in good status as we come out the other end of this and are able to grow into that space fully. And finally, our player support business. This employs some 1,300 people, and I'm happy to confirm that pretty much everybody has transitioned to a work-from-home arrangement. It's been a pretty smooth transition, supported with our clients around the world. And in terms of the performance during 2019, this business was one which didn't grow during the year. And we have messaged all way back, I think, in end of 2018 and again at the half year of 2019, that after a very, very strong period of growth in which I think the business grew something like 300% in 2018 that 2019 was going to be a period of consolidation. And that's exactly what we did. We invested in improved management. We invested in facilities, particularly in Manila. And we continued to invest in the sort of underlying technology platform for the business. So the business is in good shape. During the COVID crisis, we have not really seen any marked impact on productivity from work from home. In fact, in some cases, we're actually seeing a bit of an increase in productivity and also an increase in attendance. So less absenteeism than we normally experience in this business. And I think, looking forward, the demand for player support is very, very obvious at a time like this where you've got more players playing games as a live service than ever before. So we are seeing an increase in demand, and we hope to be able to continue to differentiate this business from the more generalist sort of call center operators that also operate in this space, albeit that those are pretty large providers. We like to think that our very specialist focus on video games gives us a bit of an edge when it comes to the actual quality of the customer service delivered. So that's the end of the operational review, service line by service line, and we are now on Page 27 of the deck. And I'm going to talk through a couple of slides that are covering off where we see the business outlook for the medium term. So on Page 2018 (sic) [ 28 ], just to remind people, again, that we are very fortunate to be operating in the video game space, given what's going on in the world, this seems to be one of the most robust spaces we could've hoped to be serving. Our clients, generally speaking, are all doing well. More people are playing more video games than before. And so -- and of course, we're in a business, which anyway was growing organically, really quite fast at about 8% per annum. We also benefit from this trend towards outsourcing, which, if anything, we're probably seeing that coming to the fore a little bit during this crisis. And we would hope to see more clients building more strategic outsourcing partnerships as part of the contingency planning going forward. And the other thing that's become very clear, of course, is this idea that scale begets scale. The bigger we can make ourselves, the bigger projects we can take on, and the bigger project clients can bring for us to take care of. So that really does count in what is otherwise a very fragmented industry, which in turn, obviously provides us with plenty of opportunities for selective acquisitions. So that's what's happening in the sort of market as a whole. If you look at what's Keywords is able to control, we've been able, really, very successfully, to create ourselves into this very unique end-to-end service platform provider on a global basis. There's no company quite like Keywords in the marketplace. And that -- it feels like a good position to be in at the moment. We also have this multiple pillars of growth. We have each service line, which individually represents an opportunity for growth and investment. And we have our geographies which do likewise, both in their ability to access clients and also access talent. And then, of course, we do complement all of this through our fairly successful acquisition program to date. And one of the questions that obviously comes up at a time like this is, do we see more opportunities for acquisitions, given the impact of COVID-19? I would just say it's probably a little bit too early to comment on that, but for sure, I think a lot of entrepreneurs who were probably thinking like we all were, that life was very good, suddenly are now feeling a little bit more vulnerable than they might otherwise have been. So yes, I think for a lot of businesses, including businesses that we own, I think they feel being part of a group like Keywords, with our diversity and our robustness of business model, is a good place to be right now, and they're probably thankful that they joined Keywords when they did. So further acquisitions, I'm sure, will be both coming in due course, but don't expect us to rush out and spend heaps of money on acquisition right in the teeth of the COVID-19 crisis. So on Page 29 (sic) [ 19 ], yes. We've, again, very successfully pivoted. Thanks to the work of so very, very many people across the Keywords Group, tremendous efforts made to enable us to move so much of our operation to work from home across all 59 of our studios. It really is a remarkable achievement by so many people. And the fact of the matter is the first few months of the year, we were really trading really quite well, very much in line with where we had hoped to be, and seeing all of that progress coming through. So let's hope we can get back on track very, very quickly as we start to see some easing of the lockdown country by country. It will be a gradual shift, I think, to operations within studios again. There will definitely be some continuation of social distancing measures, the hygiene that we've all come to expect in our work environment now will continue. And I'm sure we will continue to have people working from home for quite some time. So looking longer term, the investments that we've made during the year and before that have really positioned us well to be this provider of choice for many of our clients. And we do feel that clients turning to us in this time has been further evidence of that positioning that we've achieved. We do expect our margins to continue to increase incrementally. We were hoping to get there in 2020. Some of that might have been pushed out to the -- right now to 2021. We're also very pleased to have a strong balance sheet, cash-generative business, good liquidity, which has recently been enhanced, as we said, by that access to a further EUR 30 million of funding under our revolving credit facilities, which is now committed. And our acquisition pipeline remains strong. We are continuing to build it through this period. And you will imagine that we're not rushing to part with large chunks of cash at the moment, but we will be in a position to execute on acquisitions as the situation rights itself, and we feel it's the appropriate time to start investing in those new businesses again. So that's the end of the presentation on Page 30. I think we will pause with this slide up and just open the floor to any questions.

[Operator Instructions] And we move to the first question now.

This is James Lockyer here from Peel Hunt. Just 2 questions from me, please. Firstly, on Kantan, can you talk more about the capabilities of that? And then with a particular focus on whether it is able to fulfill all of your current translation and localization needs. Or whether you may need to use some form of external partners. And then how can owning Kantan potentially improve your margins versus previously using it as a supplier? That's my first question.

James, Andrew here. So yes, I can give you senses to that capabilities. Unfortunately, my brain is not big enough to be able to explain it in a lot of detail. But basically what Kantan does is give us very flexible access to highly customizable engines, translation engines, language by language and game genre by game genre or actual individual game by individual game. And the reason that's important is because games have a language of their own. So a generic translation engine, like Google Translate or something, is not the most appropriate way to get any value out of applying machine translation to gain localization workflow. It's worth also saying, though, that we're very far from a world in which we can use machine translation to translate content without human intervention. So this is a question of using machine translation to enhance the translation efforts that are being done by individuals. So the effort moves from translating to post-editing, in a lot of cases. And we basically embed machine or able to embed machine translation into a really quite sophisticated workflow, which includes translation memory [ through ] machine translation, and it includes various sort of connected teams of translators and post editors. And so yes, it provides us with a capability that goes beyond what was available to us before. And more importantly, it enables us to collaborate very, very openly in making sure that the way in which machine translation is applied in video games is the most productive and meaningful it could possibly be in video games. So I think that's a big part of it. The other thing that Kantan brings to the party is the Skynet platform. So it has a platform which allows for crowd-based translation, which again, is powered by machine translation. And that's quite exciting for wider applications beyond video games as well as within video games. So very interesting acquisition.

Okay. That's great. And then my second question, just around, the working-from-home environment. If you can talk about the sort of types of communication or collaboration investment you've been making to make sure that it goes as well and you get the productivity that you've been seeing? And then if we get past the COVID situation into the new normal, can you talk about whether actually could you see more of your people working from home in a new normal world, which might actually mean that you're able to recruit better, recruit wider, may not be tied down to office locations?

Yes. So in terms of working-from-home infrastructure and tools and so on, we've been very quick to be able to move people to work from home. Now a lot of the time, that has meant literally picking up the workstation equipment that was in the studio and having it delivered to people's homes or people taking it back to their homes. And then the clever bit is how the communication that happens between those devices and the central infrastructure that we maintain service line by service line go through all sorts of VPN arrangements, all sorts of better ways in which we distribute content. Having what is sometimes pretty heavy content, backwards and forwards, to those remote machines. And of course, all of the encryption and lockdown and everything that we install those machines have before sending them to home. And then, obviously, the encryption that we applied to the communication channels that are being set up. So quite a lot of work goes in on that front, and I'm not best placed to talk about the sort of details of it. But in terms of the other side of the businesses, how we communicate with people, how we share project information, how we measure productivity and so on. A lot of those systems are already in place, and we're used to measuring productivity and what individuals are contributing on an individual project, which is, obviously, incumbent on us because we're filling for that sort of work for our clients. So it's important that we're able to justify that spend with us. So for us, it's perhaps been a little bit easier than it would have been for a client, for instance, that is just used to working with internal teams. And then the final part of the puzzle is the videos and conferencing systems. So as a group, we adopted, some time ago, Microsoft Teams. That is the sort of worldwide norm for collaboration with -- around Keywords. But we also use Zoom and Slack and all sorts of other collaboration tools that help our teams remain connected. And then the final point is just the human side of it. We've been -- a lot of our studios have -- well, all of our studios, to be honest, have made tremendous efforts to make sure that people feel connected, and that goes beyond their involvement on individual projects. So whether they're setting up quiz nights or beer night or all sorts of other ways in which people are sending little hampers to homes and all sorts of things. We're sending, personal protective equipment, masks and sanitizers and so on to people's homes. So we're doing what we can to not only take care of business but also take care of the people in a time of really quite some isolation. And if we're not careful, people can start to feel a bit disconnected.

Just the last part of my question was just once we exit this situation, could you see yourself being a greater work-from-home business post-COVID? And how that might benefit recruitment, benefit you on the other side of these -- on the other side?

Yes. I think there's no doubt that we probably will, in the long run, not only Keywords, but I suspect a lot of industries, will find themselves preserving some of the work from homes that they've established during these difficult times. I would say that with Keywords, we are really quite used in working from home. Not necessarily en masse, but we have a large part of our business, like our localization business, that kind of works in that way anyway. Some of our business works in that way, always has done. And so we are comfortable with it as a concept, and we kind of know how to do it. A lot of this is just down to almost what traditionally has been the case in the industry in terms of client preference to work from home or working within secured studios. So an example of this is our Player Support business. When we first acquired into that business way back in 2013, I think it was, that was entirely a work-from-home business model. And in responding to client demands for that, those teams to be in secure facilities, we actually significantly changed the model to being one which worked in secured facilities. But obviously, now, the entire team is working from home. So I think we will emerge, for instance, with a pretty solid hybrid, some people working from homes, some working from facilities type of model.

And we move on to the next question.

It's Patrick here from Goodbody. Just a quick number of questions, one on acquisitions. You highlighted, obviously, you potentially ease or you preserved capital over the coming months. To what extent are you seeing opportunities there in terms of valuation opportunities of companies that are struggling, given the COVID-19 crisis? And then maybe I'll come on to my next question there.

Yes. So it's probably a little bit too early to talk about sort of pricing impacts or anything. I'm not -- obviously, we might see the odd business that is particularly distressed, which might provide a bit of an opportunity if we've got the sort of appetite to move on those businesses. Obviously, if they're distressed, it's because their business has been impacted. And we'll want to make sure that the business can write itself pretty quickly. I think the main effect here will just be that it makes it slightly easier to get some of these deals done because entrepreneurs will be a little bit less confident about the long-term future, and feel that it's not a bad time to be part of a larger and more supportive group.

Okay. One final question. Just in terms of the excess demand, you're seeing across your service lines. Could you point those, where you're seeing that, in particular? And whether the new or existing work is coming from -- sorry, whether the new work is coming from existing clients or additional clients that you haven't actually worked with before?

Yes, good question. So the demand has been relatively good across all service lines, I would say. I think a particular sort of peak in our testing business, a bit of an increase in demand in our game development business. As I mentioned, some increasing demand from player support as well, particularly for existing games that are in that sort of live operations mode. And then marketing is a bit of a mixed bag. There's a mix there. And in our art business, again, I think probably we're seeing net addition, but it's a little bit patchy depending on the sort of stage of game development, I guess, that we were looking at. The point about new clients versus an existing one is an interesting one. We haven't really talked about this yet. But one of the things that we've been very careful to do throughout this, is to make sure we looked after our existing clients before turning our attention to new clients. It's a strange one. We have -- we feel a very strong responsibility to deliver as best we can on those projects that have already been entrusted to us. So our focus has really been on making sure our existing clients and projects are taken care of before we start trying to apply resources to new inbound clients and opportunities.

And we move to the next question. [Technical Difficulty]

I'm sorry, caller, I'm not getting any of that.

It's Chirag from HSBC. Just within the game development labor markets, how do you sort of see that in that tightening unwind in the second half of the year?

Sorry, in the game development labor market, did you say?

Yes.

Yes. So obviously, game development, we grew that business some 36% last year -- that, obviously, meant that we were very successful at recruiting and onboarding and getting people productive. We remained very hungry for talent across all of our game development studios. So we're actively hiring everywhere as far as I'm aware. At a time like this, obviously, for those people that are in work, they're probably a little bit less reluctant to move from one job to another. On the other hand, some of the more sort of junior talent coming out of college and so on is just as available to us now as before, and we've developed good processes and experiencing -- experience in terms of onboarding people in a remote working environment. I suppose the flip side of it is, well, that attrition is much lower than it would normally be as well for the same reasons, is that people that work for us that might otherwise have considered a move somewhere else are less likely to move right now. But I think, obviously, there are 2 sides of it. One is working from home enables you to access talent effectively anywhere in the world. And that's good, and it's something which, any way, we have, as a business, been happy to take advantage of. So we've always had the odd person working remotely in our engineering business. And we might find that we end up with more people working in that manner going forward. But we -- as a business, we are very widely spread geographically. So we have access to talent pools in Russia or in Poland, in Japan, in Canada, in the U.S. and so on and so forth. So I think for us, we're quite well placed in terms of being able to find talent, but it is going to be a little bit tighter over the coming, well, currently and probably over the next few months as we continue to live through these restrictive sort of measures.

And just on -- in terms of the COVID impact, in terms of gross margin, how has that sort of been -- how has the gross margin been impacted over the past few weeks? And how have you seen any sort of flexing in the SG&A as well?

Yes. I'll let Jon talk to that in more detail. But obviously, at the moment, I think you'll be aware that, for obvious reasons, we're not really guiding at the moment. It's very early days in terms of this whole situation. As a business, we've already messaged that we have our 2 areas of business that are most affected are actually those businesses that have the highest degree of flexible variable cost element to them. So I think it should be fairly obvious to the listener that there's a good degree of gross margin preservation within the business model. Of course, though, we do have costs. We are continuing to incur costs of facilities and so on, rent and what have you, even if we're not able to access those facilities. And we do have some costs in terms of moving people to work from home, even if it's simply the cost of moving a PC rig or a test -- piece of test equipment to an individual's home. On the other hand, that's offset by some cost savings elsewhere. So the one that comes to mind, my mind, in particular, given how much I do of it is travel. None of us are traveling at the moment. So there is some sort of automatic savings that result from that.

Yes. I'm not sure I have got a great deal to add, honestly, to that. It's also a little bit early. Obviously, the -- April is the month where we've seen -- where we're likely to see the biggest impact. But as Andrew said, in the 2 service lines that are most affected, there is a pretty decent variable cost element that we can flex. But I'm sure it will have an impact on margin just because we are operating in a less efficient way.

And my final question is just regarding support from the government regarding MMTC and VGTR. Have you seen any sort of talk around any potential increase in this?

No. I'm not so...

I'm...

Sorry, Andrew.

Yes. Off you go, Jon. You address it.

I was just going to say, no, we haven't seen anything of that at this point in time.

And we move to the next question.