Keywords Studios plc (KWS) Earnings Call Transcript & Summary

Welcome to the Keywords Studios Interim Results Webinar. [Operator Instructions] At the end of the presentation, there will be the opportunity to ask questions. There's a PDF of the slides on the right-hand side, and this webinar is being recorded. I now hand over to Andrew Day, CEO; and Jon Hauck, CFO. Andrew, over to you.

Good morning, and pleased to see so many people taking the time to join us in this results webinar. So we're pleased to be sharing with you the results for the first half of the year, which was an interesting first half, given everything that happened throughout the world, but very pleased to be reporting robust revenue growth. And that's being driven by continued strong demand for our services and proving once again the resilient business model that Keywords enjoys. Next slide, please. Thank you very much. I'm not going to spend too much time on the H1 impact. That's already been well-documented and shared with you before. What, instead, I'm going to do is just talk to you a little bit about the outlook. So we continue to trade in an environment where COVID provides certain headwinds for us, certainly. But we have, as I said before, proven ourselves to be quite resilient. The vast, vast majority of our 8,500 people are working remotely from home, about 1,000 or so working in studios on a socially distanced basis. And while we have had some constraints on recruitment due to government support for people that have been unfortunate enough to become unemployed during this period of time. As those additional supports are eased back on by governments, so we're finding ourselves more able to access talent, particularly at that staff level for our customer support and our QA businesses, our Testing businesses. We do retain a very flexible approach to where and how we work going forward. And so we expect to be able to deal with any further upcoming challenges from COVID-19. Pleasingly, of course, we work in the video games market that has experienced some exceptionally high demand for that product. And those products being content is what drives the demand for our services as they -- our clients continually seek to provide more content so that their players can spend more money. Finally, points to make that as a Board, we remain committed to resuming our dividend -- progressive dividend policy, and we hope to be able to resume that in 2021. And then really throughout the second half, we do expect to see good revenue growth, incremental margin increases and certain structural drivers of a growing market and an increasing trend towards outsourcing remain very much intact. Next slide, please. So talking of the growth drivers, as you know, we -- the video games market has consistently grown at about 8% -- sorry, 8% CAGR over a number of years, the graph on the right showing 2018 to 2023. However, that was produced in May 2020. So it doesn't fully capture the increased demand that's been seen during this year, during lockdown and so on. So content demand remains strong. We are looking forward to the release of the new PlayStation and Xbox consoles, both of which have now got launch dates and got prices. So there's a lot of excitement in the market surrounding that. It's going to be good news. Certainly, the launches are not going to be quite what the manufacturers would have hoped for initially. But it marks a refresh of a console cycle that otherwise has been in existence for about 8 years. So it's very good news for the games industry overall over the coming 3, 4, 5 years. Streaming platforms continue to develop. And as we've seen, there is increased game play, and some of that increased game play that's happened during COVID, I'm sure, is likely to stick. We're also seeing continued trend towards outsourcing. I don't think that's going to stop anytime soon. What I'm hoping for is that COVID-19 will have shown that suppliers like Keywords are particularly robust, plenty of points of redundancy built into a multisite infrastructure and that we can be seen as very reliable, safe and perhaps even the best homes for a lot of the services that our clients currently provide to themselves internally. And with that, we've seen year-on-year that supply chains are becoming a bit more structured. There's a lot more integration between ourselves and our clients, a lot more continuous production methodologies, workflows, pipelines. All of that is pointing to an industry that is gradually maturing, and Keywords is very well positioned to benefit from that. The other point that we've shared previously and we feel very markedly is that scale begets scale. So as we ourselves have become bigger, so our clients trust us or turn to us with bigger and bigger engagements, larger individual projects and multiple services across many of our service lines. And finally, of course, as far as our M&A program is concerned, the fragmented nature of the supply side of the industry, so the services supply side being so fragmented throws up plenty of opportunities for selective consolidation, which is a process that we are very much leading in the video game space. Slide 5, please. So in terms of our performance for the first half, we are very pleased to have produced 13.3% revenue growth, taking us to EUR 173.5 million, which is -- yes, which we kind of pre-reported back in January. Obviously, we're going to be sharing with you some more details. And one of those details is the fact that organic growth was actually 8%, and that strips out the effect of currency and the effect of acquisitions. And Jon will be talking about some of these adjusted numbers a bit later on in his piece of the presentation. Also pleasingly, we continue to make progress in improving our margins. We are reporting a 19.3% increase in EBITDA to EUR 30.8 million, giving us an adjusted EBITDA margin of 17.8%, which compares to 16.9% at the half year 2019. Now again, we've taken -- we've made adjustments to the EBITDA to make sure that it is a representative underlying figure. And again, Jon will talk to that a bit later. Slide 6, please. Finally, the acquisitions we have during the period, made 3 acquisitions, the most recent of which we announced today, which was the acquisition of Heavy Iron. Heavy Iron is a game development studio based in Los Angeles. It's a business that we've known for a while. And so very pleased to welcome them to the team. As indeed, we are -- Coconut Lizard, which was the first acquisition we made in the first half of this year; and a bit more recently, Maverick Media, which is in the marketing services side of our business. So 2 game development acquisitions and 1 marketing services acquisition, and all of this despite lockdowns and COVID-19 restrictions. So -- and I'm sure there'll be plenty more acquisitions to come. Slide 7, please. Jon, over to you.

Thank you, Andrew, and good morning, everyone. So I'm now on Chart 8, if you go to the next one. So I'll quickly run through the key financial highlights in the first half. As Andrew has mentioned, revenue for the group grew by 13.3% in H1. Organic revenue, which, as Andrew has said, excludes the impact of acquisitions and currency movements, grew by 8%. I will provide a little bit more color on what that looks like by service line. But I guess, in summary, despite the COVID-19 disruption, we've seen growth across all of our service lines with the exception of Localization and with very strong progress in Game Development, which grew by over 25%. Adjusted EBITDA, which excludes depreciation and amortization, share option expenses and M&A costs, increased by 19.3% to EUR 30.8 million in the first half. And also, the group received EUR 3.4 million in COVID-related subsidies. These are employment retention subsidies, primarily in North America. And given the nonrecurring nature of this income, these have also been excluded from our adjusted profit measures, including adjusted EBITDA. So this has resulted in an adjusted EBITDA margin of 17.8%, representing an increase of 0.9 percentage points on the prior year. So it's nice to see some margin improvement, but it's fair to say that this has been held back by the revenue shortfalls from COVID versus our original expectations, albeit this was partly offset by some cost savings that the business has enjoyed, if that's the right word, things like travel. Adjusted profit before tax increased by 17.9% to EUR 21.7 million with, again, the margin increasing there by 0.5 percentage points to 12.5%. Profit before tax on a statutory basis increased by 66%, and this reflects the improvement in adjusted PBT, but also the COVID-19 subsidy income that I just mentioned and a EUR 1.9 million noncash impairment of some intangible assets, together with an increase in the charge for share option schemes. Adjusted free cash flow was EUR 10.9 million in the first half, marking a pretty good improvement over the prior year, and I'll provide a little bit more detail on the key pieces of the cash performance in a few more slides. So turning now to the service line performance on Chart 9. Art Services, which includes our marketing businesses, grew 7.9% organically in the first half, with what we feel is a good revenue performance despite the disruption that we've experienced. As you may recall, our Chinese business is one of the first to be impacted by COVID-19 with the closure of 5 of our studios in late February. And some of our marketing businesses have been held back inevitably as marketing plans have been reassessed during the COVID-19 period. Our Game Development, which is now our largest service line, delivered strong organic growth performance, growing by 25.7% in the first half. This was supported by continued recruitment across all of our studios and also with the addition of new studios in Leamington Spa in the U.K., Singapore and also Austin. And these also helped us to meet the strong demand that we're continuing to see for our services in this service line. Total revenue in our Audio Service line was up 12.7%, following the impact of the TV+SYNCHRON acquisition in Germany last year, but organic revenue growth was flat in the half. As we previously guided, our Audio business was particularly impacted by COVID-19 as a result of the studio closures, which reduced our voice-over recording capacity, particularly in April and May. On the positive side, since June, we've been able to reopen most of our studios around the world, and we've seen a good pickup in organic revenue growth in July and August. Functional testing, so I'm moving on to the next chart. Functional Testing delivered 10.7% organic revenue growth in the first half, a pretty robust performance given all the operational constraints we experienced. If people will recall, our project work in this service line is normally done out to secure facilities, and so we effectively had to put most of that work on hold when the studios were closed towards the end of March. But in consultation with our clients, the business moved really quickly actually to move the majority of our teams into remote-working arrangements. And now most of our studios are back open, but we're prioritizing the work that we do in those studios for things that are harder to achieve in the work-from-home model, so things like recruitment, training and some of our work on things like hardware testing, which is a bit more challenging to do in a remote model. As I mentioned earlier, our Localization service line went backwards in the first half. The performance was held back by some delays that we saw in the receipt of content as production schedules got disrupted as a result of some of the disruption of our clients. But again, we've seen a return to growth in that service line in July and August in the second half. Localization Testing delivered revenue growth of 1.9%. This service line experienced very similar constraints to the Functional Testing business, but it's also been held back a little bit by the lack of native language resources available to us due to some of these travel restrictions that have been in place through the COVID period. And finally, moving on to our Player Support business, this returned to growth in H1, delivering 5.5% of organic revenue growth. And we were pretty successful in transitioning all of that work to remote-working arrangements very quickly, and we continue to operate that business on that basis at the moment. So now turning to cash flow and the cash flow performance. In overall terms, adjusted free cash flow increased by EUR 11.7 million in the first half of the year. This was driven by the improvement in EBITDA of EUR 5 million that I mentioned earlier and also a reduction in the cash outflow for MMTC and VGTR credits with a sort of a EUR 2.7 million benefit coming from that year-over-year. And this was due to the combination of the phasing of VGTR credits, we did get some receipts in the first half of this year, and slightly lower levels of MMTC claims in our Canada business. As a reminder, these are labor credits that are basically earned during the year as the work is produced but are not typically collective until the following year, and that does result in a working capital outflow in H1 as a result of this timing difference. Other working capital was pretty steady with trade receivable days in line with prior year of 46 days. We did see a small reduction in CapEx in the first half despite the higher revenue in the half. This was driven by a combination of lower levels of equipment purchases during the COVID period. I think we would have expected to spend a little bit more on equipment, but with all the disruption, I think we were more focused on making use of equipment that we had, and also a reduction in some of the expansionary CapEx following from the investments that we made in 2019. As I mentioned earlier, we also received EUR 3.4 million of government retention subsidies, primarily in North America. And obviously, we didn't have those in the prior year. And our cash tax decreased by EUR 1.8 million to EUR 2 million in the first half, largely due to the absence of a settlement that we had in the prior year and a few other phasing differences. This all resulted in an overall improvement in the adjusted cash conversion rate to 50% from 30% in the prior year, albeit that's in the context of what is always a seasonally lighter cash conversion period. And if people will recall, we delivered 80% conversion in the full year last year. Moving now to Chart 12. Spend on acquisitions amounted to EUR 2.5 million in the half, including EUR 1.3 million of cash spend on the Coconut Lizard acquisition in June. And since then, we've deployed a further EUR 6 million into M&A so far in H2 following the completion of Maverick in August and on the acquisition of Heavy Iron that we announced today. Our successful placing in May resulted in net proceeds of just under EUR 110 million. And this, together with the increase in cash flow, resulted in an overall increase in net cash in the period of EUR 119 million in H1 compared to a decrease of EUR 8.6 million in the prior year. And this resulted in a net cash position at the end of June of EUR 101 million versus a net debt position at the start of the year of EUR 18 million. So finally, on my last chart before I hand back to Andrew, just a few comments on the strength of the balance sheet and liquidity. First of all, clearly, COVID-19 has had a significant operational impact on the business in the first half of the year, but I think it's also highlighted the resilience of the Keywords model. The business is cash-generative and has continued to be cash-generative throughout the COVID period, demonstrated a huge amount of flexibility and that we can operate most of our services in the work-from-home model. And we're very fortunate to be operating in an industry that's shown to be pretty resilient in economic downturns. And as Andrew said, we continue to see really robust demand for our services as our customers continue to look to produce new content. So turning to the balance sheet. As I've said earlier, we exited with a very strong balance sheet with liquidity of over EUR 200 million through a combination of the EUR 101 million of cash that I mentioned earlier and a further EUR 100 million of available liquidity from our undrawn RCF facility. This capacity puts us in a really strong position to continue to execute our acquisition strategy while also supporting the business and customers through and beyond any further COVID-19 disruption that we might experience. And with that, I will hand you back to Andrew.

Thank you, Jon. Now from my section on strategic review, next slide, please, 15. So just a reminder for those people on our strategy, we continue to drive to become the go-to provider for each and every one of the services that make up Keywords Studios. And at the same time, we continue to differentiate ourselves from anybody else in the market by providing this unique end-to-end global services platform. And what that means is that our clients can source not only services that they might originally have acquired from us, but over time, acquire all the way up to 7 separate services. And on that one, I'll come to update you on the numbers and the progress we're making with our cross-selling efforts. We do enjoy relationships with all the top gaming companies around the world. And they are, in vast part, all increasing their outsourcing needs and doing so in an increasingly structured fashion, which again plays to partnering with a company of Keywords' sale expertise and professionalism. The scale points that are made before is important, and we continue to build scale in all of our services whilst maintaining a very flexible resource structure so that we can provide a service to our clients on a variable cost basis rather than their internal alternative, which is invariably of fixed cost nature. We are a very attractive employer to pools of resources around the world, and we seek to -- we seek out those pools of talent in our strategy of implanting ourselves in key geographies. And you will have seen that from us as we acquire businesses in certain areas of the world or, indeed, as we open new studios, latest one of which, of course, is Heavy Iron in Los Angeles, which is a pool of talent that we haven't hitherto tapped. So we have built ourselves into a highly resilient business, and that resilience comes from both the business model itself, how we operate, how we staff ourselves. But the diversified geography that we enjoy with a full global reach, the diversified mix of services and the global client base across all types of video games and all platform types, each one of those points of resilience also provides a point of growth for us. And as we continue to build the backbone of our kind of infrastructure for HR, for IT, for finance and so on and our business development capability, so we become a very attractive platform into which companies joining Keywords through acquisition can plug themselves. And it's that ability to aggregate these businesses together that really creates the additional value that our shareholders have seen us deliver year-after-year through our M&A program. And all of the above really is increasingly adding barriers to entry. And of course, that's enhanced by our reputation for quality, our transparency as a publicly quoted company, our scale and our global reach. Slide 15 (sic) [ Slide 16 ], please. The thing that I think investors that have been following Keywords for a long time have come to realize is that we're really quite keen on this idea of balance. And we're pleased to be able to present charts like this, which really demonstrate the balance that we have achieved in our business across the different service lines. And of course, we also have a pretty good balanced business across the geographies as well. But that's important when we're talking about a resilient business because each of these business units has a slightly different operational profile and by spreading ourselves around the 7 service lines so we can iron out, to a large extent, any sort of bumps in the road. The other thing that's worth mentioning on this slide is that year-after-year, we've become more relevant to our clients. We become more partner-like in our engagements with our clients. We're increasingly integrated with our client system, delivering assets of various sorts directly into their game engines, doing co-development projects or full game development projects for our clients. So it's a business of increasing quality, I would say, year-on-year. The revenues and the profits should be more robust as we continue to build the business in the way that we have done so far. Next slide, please, 17. The geographic reach point is important. We establish ourselves close to our clients, which still matters even in a world like the one we inhabit today, which is very virtual. Proximity is important, proximity of culture as well. But we're also in locations which give us access to a fantastic, passionate, talented people for the specific services that we require in order to provide our overall service to our clients. And we've been very successful in kind of landing and expanding. So where we do acquire a business in a certain geography, we've been very successful at broadening out that business to provide a wider range of services. And indeed, the same thing is true for organic openings, such as we did originally in Montreal or in Tokyo, where we now have 7 service lines associated with those locations. We do have 8,000 people on average who were employed during the first half of the year. Obviously, that number is increasing all the time as we continue to grow. And I'm looking forward to be able to share with you the numbers for the second half when we get to that point. Onwards to Slide 18, please. As we've shared with you each time, these numbers do change a little bit because they're based on third-party studies by Newzoo and Sensor Tower. But we currently work with 23 of the top 25 game companies worldwide. That's across all types of games. And we work with 10 of the top 10 mobile game companies, and there's obviously some intersection between those 2. So again, very well spread. Keywords very much does cover the crews who are the video games industry in terms of our clients. Slide 19, please. So what all that translates to in terms of performance, financial performance is very consistent growth, year-on-year growth. Organic -- sorry, revenues have -- over the period from 2016 to 2019, for instance, we've generated 50% compound annual growth rate in our revenues; and in our adjusted PBT measure, 40% CAGR growth over that same period. So it's been a tremendously consistent growth story, both in terms of revenue and in terms of profit. And that's something that I think we expect of ourselves. And it's worth just stressing, we are a company that is really quite disciplined in the way in which we go about things, whether that's acquisitions or whether it's growth. And we're not in this for growth for growth's sake. We're interested in profitable growth. So very pleased to have achieved just that over many years now. Slide 20, please. And as we broaden our business, so we find ourselves with broadening our client base and, at the same time, broadening our services. So that enables us to sell more services to our clients. And if you look on the right-hand side of the top left-hand graph, at the end of the half year 2020, for that preceding 12-month period, we had 124 clients buying 3 or more services from us, which is nicely up on the figure of 108 for the 12 months to the end of 2019. And that's on a base of about 1,000 clients. Our client concentration remains fairly limited. It's not that I would have anything against any client representing 10% or more of our service, but as we sit here today, no one client represents more than about 7% of our revenue. On the bottom right-hand side, I think the takeout for me on this slide -- well, there are probably 2 takeouts. One is the fact that the growth that I've just referred to has come across all service lines, so consistency not only at the top level in terms of the overall growth for the business, but each service line has continued to grow strongly year-on-year. And then the second takeout point is just the phenomenal growth of our Game Development business, which is a service that we entered only 3 years ago. So particularly pleased to see that continuing to grow so strongly. Page 21, please. Following on Jon's sort of comments on the first half of the year for these service lines of ours, I just wanted to give you a little flavor of what to expect through the second half service line by service line. So in our Art Services business, we are seeing really good demand across the board for our services. Our Marketing Services business, which forms part of that, as Jon said before, has seen a slightly more mixed picture where some of our Art Services at the earlier stages of planning, campaign development, marketing strategy and creation were affected a little bit as clients paused to think about what they were going to do during these new unprecedented times. But I'm pleased to say that most of -- we seem to be through most of that, and we're looking forward to a strong finish to the year. Our Game Development business, which has continued to grow incredibly strongly in challenged times, it's not been unaffected, but has done tremendously well with the growth that it has achieved. And I would just only point out the fact that, of course, having had a very high growth rate last year in 2019, coming into 2020, perhaps the first half comparators were a little bit lighter. We're now coming into H2 where the comparators are going to get a little bit stronger. Our Audio Services business has got off to a very good start in the second half of the year, benefiting from access to its studios. And of course, a certain amount of catch-up work in terms of getting the audio recording for some of those AAA game releases, some of which are certainly destined for the new console launches. So again, all being well, we should have a good second half in our Audio Services business. Functional QA, probably the most affected business by COVID in the first half, has seen an increase of activity in July and August, a significant increase in activity, I should say, and is benefiting finally from some ease-up in the recruitment constraints that it's been affected by. So we expect to see it scale quickly into these peak months and trade very well through the end of the year. Localization business, which unfortunately was held back in the first half of the year, has got off again to a much-improved trading pattern in July and August. And again, we would expect that to continue to grow nicely through the rest of the half. Localization QA, just like Functional QA in terms of its setup and the same sort of impacts of unavailability of secured studios and some difficulties in terms of resourcing talent, exacerbated further by the fact that the talent is all native-speaking talent and, of course, some of those predominantly young people when COVID came along went back to home countries and sheltered with families, that situation is easing again, and we expect it to have a better second half in 2020. Player Support, which you may recall we had a year of consolidation in 2019, so little, if any, growth in 2019, looking for a good growth in 2020. Plans, of course, were mitigated by COVID. But that business is now growing [ in Italy ], and we're [ going ] to push on strongly through the second half. So Page 22, please. The Keywords M&A strategy, I think, can sometimes be a little bit misunderstood, and it's worth just reminding people of the real value of the M&A strategy. Keywords is not involved in any sort of land grab. We're not running around trying to buy any and every company we find in our space. We would have to do a phenomenal number of transactions if that's really what we were looking to do. We're being highly selective in the businesses we acquire. We're plugging them into this global platform. We're integrating them. And then -- and this is the most important part: and then we are working with them to grow those businesses at a rate far higher than they had historically achieved before. And that graph on the top left-hand corner really sort of says it all. We've acquired something like EUR 215 million in revenues since 2013. And on that base, plus the rather what looks now to be a fairly small base of EUR 16 million original Keywords business, we've actually laid on EUR 116 million of organic growth throughout the period. On the right-hand side, you can see just how selective we are with these acquisitions. We're not buying companies all of the same types. We are service line by service line, responding to the strategies of those service lines, filling out their expertise, filling out their geographic reach and building scale in each and every service line. On the far right side, the year-to-date picture, and I've shared this with investors and analysts in the past, our current focus with M&A is very much on our art and marketing businesses -- I should say, our Marketing Services businesses more so than our Art business and also on our Game Development business, and that's reflected in the 3 acquisitions that we've made so far this year. We do maintain a very strong pipeline of acquisitions. It's an interesting picture at the moment. We're finding those conversations probably easier to have than before. However, COVID is placing some constraints on executing on those transactions. There are, as perhaps demonstrated by the Heavy Iron acquisition, the fact [ that we have ] a separate signing and closing, the current environment with government supports and [ everything else ] can sometimes get in the [ wall ] of doing these deals quite as quickly as we would like to do. But we are very confident that we'll be making further acquisitions between now and the end of the year and then, of course, continue to make plenty of acquisitions in 2021. And we are fortunate in having this very strong balance sheet with about EUR 200 million of firepower. Thank you. Can we move on to Slide 23? So finally, in terms of our strategic priorities, you should, of course, as I'm sure you have come to expect from us, you should expect us to produce ongoing good organic growth despite everything that's been thrown at us. And continued focused M&A, with our organic growth, it's continuing that process of cross-selling to our clients or helping our clients discover the valuable services that are available to them within the Keywords platform. We will be continuing to enhance our service lines where necessary with additional investments in people, in capacities, in facilities as needed and, indeed, in helping them expand to geographies which represent opportunities to get close to clients or talent pools. And as far as our clients are concerned, throughout everything we do really is geared around how our clients want to work. And we are constantly sort of meshing ourselves into our clients' organization so we can become an extension of their internal teams. And so that ability to respond to their needs with an increased degree of specialism, we're increasingly seen as the experts in the fields in which we operate. And our clients are increasingly recognizing that. And so our engagements with our clients are becoming of kind of, I would say, higher-level integrated services and arguably higher-valued services. For our M&A program, as I've said, particular focus on Marketing Services and Game Development, but that's not to say that you shouldn't expect us to make acquisitions in the other areas of our businesses as well. Our pipeline contains plenty of opportunities in services outside of marketing and game development. And we are continuing to not only work through that pipeline of opportunities, and we have discussions and engagements with those companies in the pipeline at various stages of development, but we are continuously originating new opportunities as well. So could I move on to Slide 24, please? So on Slide 25, to leave you with what the second half looks like. So we've got off to a positive start in H2. We all know what's happening with COVID around the world. I'm sure there are going to be further changes thrown in our path. But I'm also determined not to let COVID get in the way of the Keywords story, our plans and our intents to provide these world-leading services to our clients around the world. And so as we go into what is soon to become the fourth quarter of the year, we're expecting to trade well right the way through to the end of the year. Just bear in mind that we are going to be trading against stronger comparators. And we do have, certainly at the moment, a weaker U.S. dollar than we had 6 months or so ago. We are working to increase our operating margins, and you should expect us to continue to drive those incremental margin performances through the rest of the second half and heading back towards our historic norms probably sometime next year and certainly by the end of next year. We are very well positioned in a growth market. And as the provider of scale and with diversity of these services, we expect to be able to capitalize on opportunities presented both by the fact that we're -- our clients as game developers and game publishers are doing, by and large, very well at the moment. But also, we expect to do well from the ongoing trend towards outsourcing. And as our clients make themselves leaner and more focused on what really matters to them, we expect to be able to provide them with more and more of the means of production. We are well-funded to deliver on our accretive acquisition strategy, and it really is a very accretive acquisition strategy. And as I've said before, we have active engagements with many potential acquisition targets. And we fully intend to add and welcome into the Keywords family plenty more companies, such as those that we've already welcomed in the first half of this year. Thank you.

[Operator Instructions] And we'll go to Chirag Vadhia at HSBC.

Just on your game development strategies, what are your priorities for acquiring game development studios in terms of geography? And are you looking for companies with proprietary engine expertise or third party? Could you give a bit more sort of color on that?

Yes. Yes, thanks, Chirag. Yes, we're looking to build a broad-based capability in our -- what we might refer to as work for higher game development services. So it's worth just reminding everybody that we're not developing our own games to publish ourselves or anything like that. We are providing game development as a service. So if somebody wants a game built, we'll happily build a game for them as long as they pay for it. And we provide a whole range of services within that, everything from some discrete engineering support to help our clients optimize the performance of their games, for instance, through to porting of games and moving games that were perhaps targeting a certain platform onto different platforms. And we'll do some fairly large co-development projects where we work alongside our clients' own game development teams, usually taking responsibility for a fairly sort of chunky area of the game and working hand in glove with the client to produce the finished product. And then we will do full game developments where somebody commissions a game to be built by us. Now in terms of the platforms, we are largely, I would say, platform agnostic. That's not true necessarily individual team by individual team. But as a business, we're equally content to work on one of our clients' proprietary game engines, which we very frequently do. And obviously, we come to master those technologies and, therefore, make ourselves quite sticky with our clients. But we're also very competent on industry standard game engines such as Unreal, Unity, the CRYENGINE and so on. So it's really across the board, Chirag. And yes, some of our teams will be known for being experts at racing games, for instance, and some of our teams will be known for other sort of genres of games. But across the board, across what is something like over 1,000 people in our Game Development business, we have tremendous expertise in all fields of game development.

And just a quick one on that. I mean considering that...

[Operator Instructions] Can we go to Ken Rumph at Jefferies?

Okay. I'll try and be quick. Obviously, video games is the core, but you have mentioned in the past doing more work for TV and film. And yet, I guess, those industries, at least in some part, were quite badly affected in their ability to operate in the first half. Where are we at in terms of the kind of overlap into film and TV? And particularly in the first half, was that something that took a step back as they had studio issues?

Thanks, Ken. Good question. Yes. So I've certainly kept a pretty active eye on what's happening in the film and TV side of the industry. And as you rightly say, they have been really quite severely impacted by COVID-19. There's been very limited live production going on. And that's obviously affected the whole services side of the film and TV industry as well. And it's probably a disruption that's likely to continue for some time, I think, given what's going on territory by territory. So I think that's going to continue to be disrupted. We do have a little bit of business in that area, as I think many of you are aware. We do some subtitling, we do some dubbing and we will occasionally bleed across into some of the marketing services, making trailers and, indeed, some animated content here and there. I do think it is an attractive area for Keywords at some point. Convergence of film, TV and games is continuing. And it's very interesting to see how virtual production is gaining ground in the film and television space, where the use of game engine technology to make games is really proving itself to be very flexible, very cost-effective and of film-ready quality. So really interesting times. And so I believe our strategy to consider entering these neighboring markets like film television, like the e-learning space remain very much intact. It's really a question of timing. And it has been interesting to see the quite distinct difference in impact of COVID on that industry compared to games, which has kind of continued. Games has been able to make its content throughout COVID, whereas obviously, you see film and television just had to stop, certainly as far as the live content side is concerned. So very interesting. Thank you for the question.

And we'll go to Patrick O'Donnell from Goodbody.

Just, Andrew, just based on your outlook, can you give us any sense of what the likely run rate is in the start of FY '21? Or is it too early for that?

Yes. I think if we weren't virtual, if I had said anything on that, I probably would have got a slap from Jon Hauck. I don't think we're ready to give guidance at this point, Patrick. I think the world is still a little bit too uncertain. Hopefully, you've got from what we said during this presentation that we are quietly confident about the outturn for the second half. I'm certainly feeling pretty upbeat about it. I think what causes me to be that way is just the fantastic response that we have from all 8,000-plus Keywords colleagues around the world who have just knuckled down and got on with it and not let the current situation get the better of us. And that passion and that dedication to quality is just absolutely remarkable. It's a remarkable quality and one for which I'm so incredibly grateful.

And we'll go to Natasha Brilliant at Citi.

I've got a question on the margins. So you've talked about margin improvement as we go through next year. Can you just give us a bit more color on what's going to be driving that? Is it revenues coming back? Is it some of the cost savings from this year that might be permanent? Just a bit more color there. And then beyond FY '21, how should we think about the margins for this business?

Yes. And Jon, would you like to pick up that point?

Yes, I'll pick that one up. So as we entered this year, you will recall, we did invest in the business last year, and our expectations were to be able to leverage those investments as we went through 2020. And what I mean by leverage is effectively hold fixed costs a bit more static. And obviously, with higher revenue coming through on that fixed cost base, that comes through in your margins. And our medium-term view on that has not changed at all. We remain very confident that we can get back to those historic norms. I think it's fair to say that COVID-19 has just pushed back delivery out to the right a little bit. We do have fixed cost in that business, and we were built in expectation of higher revenues than the revenues that we delivered in H1. That's not to say we're not disappointed with where we've ended up, given everything that's going on, but our expectation was that those would be slightly higher. We are pleased that we've been able to show some margin improvement, and I would expect and hope that we would continue to demonstrate that as we go through the back half of this year. But I think our expectations for getting back to those historic levels are moving out to the right a bit. And as Andrew said, that probably starts to come through more in 2021 now. Most of it, I think it's fair to say, is coming from more revenue on a fixed cost base. The cost savings that we have enjoyed, I think that some of it, we had a natural tightening of the belt through COVID-19, not least because we've been focused on delivering for our clients and probably less focused on hiring into other positions. And some of the costs that we've saved on things like travel, we will desperately hope we won't be saving that next year because we want to be able to travel to meet our customers at games conferences, that sort of thing. So I think most of the margin development is going to be coming from the revenue leverage. And as we get out to the other side of COVID, also from some of the pricing initiatives that we started the year with, we will continue to drive forward as well.

And we'll now go to Will Wallis from Numis.

I want to just go back to the game development market and ask a question about the conversations that you have at a high level with your largest clients. To what extent are they really embracing game development? Of course, you did game development as a core part of their business. Or is it something that they're still dabbling with? How fast do you think that outsourcing trends can develop? And where do you see it going over the long term?

Yes. Thanks, Will. Yes, I think -- well, it's a bit of a mixed picture, to be honest, across client by client. So some clients are coming to outsource development for the very first time. This is a function that you might expect has been very sort of closely held internally by our clients. It's been -- the knowledge of how to make a game has been vested within clients, generally speaking, up until fairly recent times. But some clients embrace external development very structurally. So they set themselves up with the full intent game title by game title of outsourcing large chunks of the development. There are clients that approach us without any intent of making their own games, but securing the funding, securing the publishing channels for their games and then come to us, asking us to bring to life their idea for a particular game from A to Z. And I personally believe that that's going to be a model that increasingly gains traction. I think it's no longer the case that the secret sauce of a game is knowing how to build the game. Secret sauce lies elsewhere. It's having that idea of being able to bring characters to life, be able to tell the story and somehow find that very elusive quality of a game, which is the fun factor. And from thereon, obviously, being able to go on and monetize the game and continue to pump content into the game to maintain the player base and so on. So I personally think this is an area that's going to only accelerate in terms of its trend towards outsourcing.