Keywords Studios plc (KWS) Earnings Call Transcript & Summary

All right. Ladies and gentlemen, good morning, and thank you for joining us today for the 2022 Annual General Meeting of Keywords Studios plc. I'm Ross Graham, Chairman of the Board, and I'm Chairman also of today's meeting. As everyone now is either seated or has joined us via the platform, I'm pleased to be able to open the AGM. We're glad you've been able to join us whether in person or online. There aren't very many people in person other than people who we know rather well. Please be aware that this meeting is being recorded. For this morning's AGM, I'm pleased to -- I'm joined by Bertrand Bodson, our new CEO, well, new from December, seems as though he's been here for years; Jon Hauck, CFO, he has been here for years; I've got David Reeves on my left, who is Senior Independent Director and Chair of the Remuneration Committee; and Charlotta Ginman, Chair of the Audit Committee and will succeed David as Senior Independent Director following the meeting. We've also got in the room, Marion Sears, who's going to take over as RemCo Chairman from David; Georges Fornay, who is in charge of the ESG Committee; and Neil Thompson, who is in charge of nothing, but helps us with a lot. David is in standing for reelection this year and view is having served 9 years as a director. I'd personally like to thank David for his support, challenges and for his excellent service, 2 key words throughout his period in office. I'd also like to thank Charlotta for agreeing to take on the SID role, and Marion as our new RemCo Chair. The session will begin with a presentation from Bertrand and Jon providing an update on the company's performance and activities and will, I hope, give a sense of the direction of travel for Keywords, in the new Bodson era. The [ direction ] will be available for a Q&A session. We'll answer any questions that have been submitted either in writing or orally, and then we'll go through the formal business of the AGM. So I'll now ask Bertrand and Jon to tell us all about the business.

Thank you, Ross. Thanks for that. And I have to say, it's a pleasure as well to join my first AGM with the Keywords hat on. And thank you, a special thank you to all the investors as well who are showing up for the AGM, supporting us and being part of that journey together. Yes, it has been my first 6 months. I have to say, in short to me, it's been even better so far than what I would have expected, what I even hoped when joining. Very fortunate as well we have been able to get on the board to meet about 30 of our studios so far, to meet about most of our top 25 customers, to spend time with investors as well to understand the key priorities, including long term. And maybe high-level observations would be a very high level, but one I've been very impressed by -- internally by the quality of the talent. The passion that is in this business is immense. There's a huge sense of entrepreneurship. I'll share a bit more about that, trying to bring that to life. Very impressed as well by the quality of the work that our teams are doing. It's very apparent when talking to our customers, how much this is really one of the highlights and how much appetite there is for the type of services that we have. And thirdly, what I hoped when joining, but it's clearly showing to be the case is there's so much more to go after. You'll get a sense from Jon and myself. We're in a market leadership position, but we are still pretty much at day 1 and hopefully writing the next chapter of what is ahead of us as we're building the platform of Keywords. So we'll give you a bit of a whistle tour of what's some of the latest, including what we covered at the 2021 full year results fairly recently. I hope we'll give you justice. We'll try to go as quickly as we can. In terms of summary, it has been another strong year when you look at 2021, a very strong revenue driven by a very buoyant market, very strong game business behind -- very strong across the different service lines. What you see, it has translated very well in terms of profitability. So good conversion to cash as well and very solid balance sheet, including some of the cash positions we had previously. We have been true to our approach for the past decade of being strong on the acquisition front. There have been 6 acquisitions being made, especially around game dev, around art and marketing for total consideration proceeds of EUR 124 million. So well on track, one of the really good years on that front. I'll share a bit more about what we've been doing from an ESG agenda as well and how much it matters to us to be a corporate responsible business. We'll try to bring a few examples to life. Likewise, I'll show -- we're coming off a session with our top 50 leaders, where we locked into -- ourselves into a room for 3 days and effectively shaping the next chapter of the strategy together. I think it was a really energizing moment. I'll share probably the 4, 5 key areas that are coming out of it. And from a trading point of view, we're doing well. We have had a strong beginning of the year. So business is solid, and we've reiterated that we are well within the guidelines despite all the headwinds that are happening in the broader markets right now. So concretely, how does that translate 37% growth for 2021 on a year-over-year basis, 19% of this being organic. You've seen 56% year-over-year improvement in terms of adjusted PBT, and a margin that reached actually last year, 16.8%, which is 210 bps higher than what we had the year before. In part, we are benefiting as well from COVID, from no travel in 2021. So we'd expect this to normalize probably more directionally towards the 15% that we have historically been aiming for. We have also generated a dividend of 2.5% for the full year, which I think you can see as a reflection of the continued confidence that we collectively have into the business. Very importantly, close to my heart, I touched on us being a responsible business. We have here, Georges, who is running the ESG Committee, something that we take very seriously. I think there's a huge engagement from pretty much all of us, whether it's in the ESG committee or on the Board, about that agenda. Critical for the future. We want to build the business for the long time, but we also really want to operate it in a proper way. It will be one of the feature at the CMD that we'll be hosting soon. So you'll get more on that. But I just wanted to share on the left-hand side, you see the 5 key priorities that we are working towards. Top of the list are really people. We now have almost close to 11,000 people in the organization across 70 studios, across 23 geographies. Really, at the end of the day, we couldn't do it without the talent that we have. So that's absolutely top of the list, including a very strong focus on the -- [ in AI ] across the organization. A few examples very concretely on the right-hand side. I'm proud that our MSCI rating has moved from BBB to A. It's a good step up. We have a long way to keep going on that front, but at least it's a judgment by the market that was pleasing for us to see. We have joined an association called Women in Games, which has globally about 500 ambassadors, women professionals, leaders who are highly involved into the gaming industry, highly tech-centric. We have just a few of our leaders have joined fairly recently. I spent 3 hours with them yesterday as part of the full day that was organized by Women in Games. I have to say it was really uplifting to see that, to see the careers as well of our colleagues being developed, and seeing the openness of the sharing of information that is happening there. So we hope to be very strong contributors to our many games in the years ahead. We've also made more from a policy point of view, especially on the developing our first group environmental policy. We're still early. We're still at the stage where we're benchmarking, looking at each of our studio and how do they benchmark compared to the targets that we want to try to reach. Jon, myself, has signed a few lease recently over the past 2, 3 months from Poland to more recently in London, where one of our #1 question everywhere is like, is it a green-friendly, eco-friendly environment in the setup that we have, including in the partners that we are bringing on board to help us on the reshaping of those facilities as well. And finally, one that I find actually very warming in current times is to see how much our teams are stepping up in terms of hardship funds, whether it's in Eastern Europe, whether it's in COVID, which hasn't stopped, still exists in quite a few areas of the world to be reminded. Shanghai is an area impacted. But it's amazing to see how much the team has set up local vaccine clinics, how much in Eastern Europe we have set up hardship funds to help colleagues or non-colleagues as well to step up and find jobs as well across our own facilities. So in terms of strategy, I won't go too long, but I've -- one of the clear observation I had is like we have a very strong strategy. We have a very strong business. It is very core even before we look at what we can do to accelerate that we are being seen as the go-to provider for technical and creative services for the video game industry. I get to observe that every day. We're really in a place where most publishers are knocking at the door with 23 of the top 25 publishers working with us. And my way of looking at this is I'm very grateful for the -- for how the team, including Andrew Day, have built a very, very strong end-to-end proposition over the last decade, quite frankly. And this has been sweat and tears of really hard work. But the 8 service lines that we have right now are very strong and resonating with the customers. That in turn allows us to go to customers to have more strategic type of relationship with them. And I think the quality that I was alluding to is very strong there as well. Once you get that strong offering, that strong proposition that resonates with our customers, that then allows us to attract some of the best deals, some of the best partnerships, to work on some of the best titles in the industry, to have long-term relationship with each of those publishers. That in turn attracts some of the best talent. It attracts as well some of the best M&A, which is a key part of our growth story as well, which then reinforces the proposition itself. So you can see there's sort of a flywheel effect that I think will be the beneficiary of our job, Jon, myself and the Board, is to inject the right investment, the right resources, the right focus on anything that helps accelerate that wheel in keeping our leadership position in that market. In terms of -- I'm probably misplacing a slide here. But let me go here first. So this is just to showcase the consistency that the business had, had historically. So this is not just a one-off. We have typically brought between 10% and 19% of organic growth in this business over different times and different types of periods. And one way we like to portray is we are in a very booming industry right now, we are the picks and shovels in the gold rush associated with gaming in general, which is, I think, especially when you think about the turbulent times that are happening in the market right now, when you think about the volatility as a shareholder as well happening there, it's very pleasing to be on very strong grounds and a business that has very strong cash generation. And at the same time, that is not depending on a few titles or depending on the wind of the market. We really have a very strong, diversified portfolio that is very solid with a strong cash position behind. Talking about that market. We did the -- a bit of work to quantify the space we operate in. This is a EUR 200 billion market business overall. The space we operate in is about EUR 35 billion, when you think about the content generation associated to video game, of which roughly EUR 11 billion right now is being outsourced. And we see 9% CAGR into the main market itself over the past 5, 6 years. We expect that to continue over the next certainly 4, 5, 6 years. The piece on content is growing even faster and the piece on the -- that is being outsourced is growing even faster than that. So you can see the underlying way that we're effectively benefiting from in that market is actually very favorable to us. Now for us to, of course, shape that and to make sure that we make the very best of that, the interesting piece to me is we are still only EUR 512 million revenue, which is roughly 6% of that EUR 11 billion we take on. So while being market leader in that space, it gives you a sense of how much there is really to go after in the years ahead. That's why I joined in. That's why I thought that this business has an opportunity figuratively, but to go 10x, and how do we really take that and drive that business forward. Another big part of the story is about acquisition, and I'll probably pass on to Jon to share that better than me.

Yes. Thank you, Bertrand. Yes, as you all know, M&A has been a really important tool that we've used to build the business into the platform it is today. And really, this chart is there to demonstrate that we've got a very strong track record of delivering M&A. As Bertrand mentioned, we brought 6 really high-quality businesses into the group in 2021, with the focus on building out our service lines and building out our platforms so that we can further cement this sort of go-to provider within the industry. At the moment, our focus is on game development, which is one of the largest areas of spend within the content cycle; and marketing, where we're at the early stages of building out our marketing capabilities, again, to try and be able to provide a platform for holistic marketing services into the video games industry. On the left-hand chart, you can see the impact that it's had. Going back to the IPO, we've acquired over 50 businesses in that time. And of that, about EUR 300 million of revenue has been acquired. But importantly, a further EUR 215 million of revenue has been delivered organically, and that just shows the power of combining these businesses with the Keywords operations and really driving very consistent and growing organic growth levels. And then moving on, just to give you a bit of a feel for the size and breadth of the business. We've now got a very well-balanced business across all of the service lines. We can now provide end-to-end services across the whole of the development cycle, and that really is unlocking opportunities for us. It allows us to go up the value chain with our customers, partner with them on more and more aspects of the game. We increasingly have client-specific teams. We're very integrated into our clients, into their workflows, which makes us sticky and gives us really, really good quality relationships. And indeed, a good portion of our revenue is really ongoing repeat revenue with the same clients, a real partnership that we're developing together. And very, very proud to be working with the publishers. We really do work with the who's who of the video game industry, really proud to be working with 23 of the top 25 publishers on the games side. So all of the top 10 mobile publishers. And that's very important. That allows us to encourage talent into the business and people get to work on the best titles, and we get to develop those strategic relationships with important partners. And on the right-hand side, we truly are a global business. As Bertrand mentioned, we're now just shy of 11,000 people. We're across 23 geographies, and that's important. That gives us access to different talent pools around the world that we can tap into and grow. But importantly, it also gives us client proximity. We're in a global industry. It's a digital industry, but it's also very important to be located where your clients are. And it's a position that we hope to build on further. In 2021, we made our first acquisition in Australia with a view that we wanted to try and build our capabilities in that market and followed that up at the end of the year with our second one. So we're starting to see the consolidation there. And we also entered Romania. It was actually a really good quality art business. But we've also got an opportunity to develop that business further, particularly in things like player support and testing, which we had identified as an attractive market. So we really are starting to build this business out into a global platform. And with that, I'll hand back to Bertrand.

Thank you, Jon. Maybe this is a good time to go a little bit more personal. And yes, but I'm going to this one. I just wanted to -- as you're on the journey with us, I wanted to share as well what we have been up to as a team, not just Jon and myself, actually, the Board was with us at an event that you see here on the slide. I'll explain right away. But maybe going back in time, I'm going back 6 months, and I spent quite a bit of time with Andrew Day as well trying to understand all the great things that have been built in this business. And we spent probably quite a few hours together. And at the end of it, his parting advice to me was, don't mess it up. And I think there was a lot of wisdom in what he was sharing there, which is it's a very healthy business. It has really those type of offering, that type of geographic footprint, that type of client base and trust as well that Jon is alluding to. This being said, we also wanted to take the opportunity as we write the next chapter together to look at how can we make the wheel spin faster, how can we really bring this to the next level. And for that, we mobilized about 60 of our top leaders across the organization. Frankly, it was a way for me as well to get to know the leadership team, to note some of the hidden gems that we have in terms of talent in the business itself. And we looked at 5 topics that I'll share right away. But we looked at 5 topics where we felt quite strongly there is upside there if we really can take that on. And instead of going outside, instead of going to a BCG or McKinsey to do the strategy for us, we really shaped that up together. And we started 1st of June -- 1st of January, really working in those 5 teams. So we send those 50, 60 leaders across 5 teams. Each -- on purpose, we put some teams that may have a different point of view across the topics themselves, but to really get the full value of our teams and the spirit and the experience that we had in there. We worked on biweekly sprints. So it was quite intense on top of the day job. And each of the team really stepped up brilliantly. And it resulted in what you see on the slide here, which is an event we hosted 2 weeks ago, early May here, in Berkshire, in London, where it all came together, where all those teams came together to really share the strategy together. So we are going to share more of that at the Capital Markets Day, but I wanted to give you a quick preview to the shareholders. So here are the 5 -- sorry, I'm juggling a bit. But here are the 5 topics that we've been talking about, and you'll see us investing into those in a proper way. The first one is what Jon and I call strategic partnership. So yes, we have 23 of the top 25 publishers. Yes, we have 900 clients. Yes, we have shown that we have 130 of those clients who use 3 or more of our services. But if I'm really candid, there are quite a few ways, because of the natural entrepreneurship of our studios, they find their ways to the publishers. But we could do a better job at coming together and having a more orchestrated solutions for our clients. And they're asking it. They're asking us to be more of a solution provider. You guys know -- we know Keywords better than they do. So how can we come up with the right proposition in a more holistic way? Some newer publishers who don't necessarily want to grow big teams and want to rely on the Keywords and making the best of Keywords, over a certain period of time to be able to do that. Some, frankly, are telling us -- some of the biggest publishers in the world with pretty big spend over the next couple of years coming in, are telling us, it's getting more and more complex to get a game, a AAA game over the line. It takes 300, 400, 500 people. It needs to land on all the different platforms. It needs to be in 20 languages from day 1. We cannot cope with that anymore. How can you help us? So we are really trying to review that, starting with 4, 5 of the key partners where we think we can establish this relationship. I've been personally meeting a lot of the CEOs, CXOs, thanks to some of the contacts of the Board as well, but starting to make a dent and to get a point of view about that. So -- but you'll hear us more over the next 2, 3 years talking about that topic. The second one is technology. And there I'm -- probably no surprise, I'm coming from a technology background, in terms of profile, but I feel that there is so much more we can go after. We're very proud about the 11,000 colleagues we have across the business. But we also want to make sure we have the right infrastructure to think about our workforce management systems, to automate some of the processes that we have, to address our customers' needs using technology much more. And we spent a lot of time at that -- at those 3 days when we were together as a team to look at what's -- who do the -- what is really happening in the best practices basically are there? How can a leader emulate that? And I think a lot of ideas came of it. One of the things I was most proud of was to see some of our own teams in localizations already with one of our big publishers picking on that and making things happen. So that's going to be a big topic of investments and capabilities for the next few years. The next one, bottom left, is you'll hear us talk about One Keywords. So we have 70 studios. We are very creative. We absolutely want to preserve the entrepreneurship of our studios. That's what makes the magic happen within Keywords. But -- and each are running their own P&L, each are running their own operations, but we want to add some spine to that. And if the spine is too rigid, the entire body breaks. If the spine is too -- if there is no spine, it's everybody for their own. So how do we bring the right spine in terms of systems, in terms of capability, in terms of short services, in terms of culture, so that we can make better use of each other as part of that. I think it's fair to say that 6 months in, there's a real appetite to make that happen. On the hardware side, we have also been, Jon and myself, reshaping the organization as a natural evolution to make sure that it gets ready for scale. Once you get 70 studios, it's tough to have all of them as direct report. You cannot get them into your leadership team. So we have started to organize that. We have announced that effectively on May 3. It has been very well received by the team, and we'll share more of the details on that on Capital Markets Day. Talent is an absolute must, especially in current times. There's so much more demand than there is quality talent out there. Now we don't want to compromise on the quality of talent. But you're going to see us investing much more into career path, career trajectory, into academies where we can -- if you take a 3-year lens, how can you build talent over time. Some of our studios are even owning that curriculum within university and some very prestigious one, to build talent that we can have first pick over time. And finally, all this is really into gaming itself. That's our core. That's our business. We're very clear that our DNA sits there. But if you take a longer-term lens, we also want to look at some adjacencies that could be very interesting for us. And there are some on which we already are in. We're already actually in movie entertainment right now, in part, a small piece of our business, and audio already touches that. We're already in that capacity through what we do with some of the trailers business in our marketing studios as such. So we're looking at should we accelerate, what would it take to do that? We're looking at operations like lab ops. So how do we have continuous streams of content that gets generated for the game? The gaming industry is completely evolving the dimension. So we even didn't wait for the strategy to be in place to launch a first studio in that dimension in there. So we're looking at 2, 3 options without creating distraction to the core of our gaming business. But there is a world of opportunity that we could say is there as well. So more on that again at Capital Markets Day. And finally, to close, maybe bring it all together, we've had a positive start of 2022 across each of the service names we've had. We have, notwithstanding, Russia. We have a relatively small, but an entity, one of us is over there. We have reiterated the confidence into the guidelines that we have right now, again, doing well across all service lines. We have joined and steered the business towards a 15%, 16% -- 14%, 15% in terms of PBT margin, which allows us actually to be very healthy, to be disciplined and at the same time to make some of the investment on a 2, 3-year horizon that we want to make there. We're well funded with risk cash as well before. We are a very good cash generation, close to 100% last year. So I would argue that in the current time, I was touching on it earlier, but we are particularly well positioned. And probably we need to do a better job to communicate that at the Capital Markets Day to the business that we could be one of those businesses that gets you into a really good place based on the turbulent times coming ahead of us. Very strong growth. I tried to illustrate it as well by giving us a sense of the size of the market. But what I want to anchor on is we're only 6% of what is a very, very big 11-plus billion market and growing rapidly and for us to shape it more. And finally, I'd like to extend the invitation to all of you for the Capital Markets Day on June 8, if you get the chance to join us in over there. So on that note, I'll pass on back to you, Ross.

Thank you very much, indeed, Bertrand. I think it's an understatement to say that since you've joined the team and headed it up, you've actually galvanized everything. It's your enthusiasm, your energy. It's been just very, very impressive to see. And I know I'm speaking for everyone within Keywords and probably for investors as well to thank you for your efforts so far. I think it's going to be a very, very exciting time over the next few years. Right. So now we go for the formal business of the meeting. But before doing so, let's go -- sorry. Yes. Before doing so, we'll go open for questions to the Board from people online or from the floor.

I don't think many from the floor because we're all internal, and we know the answers to the questions we'd like to be asked. But we have had 2 questions already submitted from Mark Bentley. His first question, what does Bertrand see as his and Keywords' biggest challenge in the years ahead?

I guess that's for me. I think the biggest one to me is more than -- you've seen some of the damages we're going to focus on, all those will need operationally to be really on point, right, leadership, anything behind that you would expect. But beyond that, if I step back, when I go in bed at night, it's really about keeping, finding the right balance because we have such a healthy business in its own right in the gaming space. We have great entrepreneurs in the business itself. But at the same time, we see a clear opportunity to go completely to the next chapter of this business. So how do we keep that right balance? How do we preserve the entrepreneurship, at the same time, how do we build One Keywords? How do we make sure that we can keep moving fast, but at the same time, build the right tech infrastructure that can get us there? How do we make sure that we preserve each of entrepreneurs relationship directly with the studios, but at the same time that will build those strategic partnerships? Talent, everybody is hunting for talent. But how do we step back and build that balance when we bring our collective muscle together where we can bring some of the academies and others in a very different type of stratosphere that we currently do right now? So it's really that balancing act all the time about preserving what 11,000 people and many of our entrepreneurs are doing brilliantly on the day-to-day. But at the same time, finding the 4, 5 key areas, hitting the buttons right and driving that with the right ambition.

I'd love to ask you, Jon, what do you think?

Yes. No. I think I agree completely. I mean the word that springs to mind is execution. I think we've got a fantastic opportunity. I think we've got the right team in place now with the right structure, and it's really about delivering the potential of the business and executing, in my mind.

Yes. Well, I agree with that. I think actually, introducing more technology, technology DNA, our technology focus into the business is actually going to be crucial because we've basically been -- we get the stuff in and we do the work. We can do it smarter, cleverer. But I agree with all of that. Mark, second question. Do you have a program to partner with educational institutions to identify and nurture talent that could join Keywords in the future? And if so, please tell us about it. If not, is this something you'll consider for the future? I don't know whether Mark is wanting -- is a university, but let's see.

I'll start. It's a topic I feel very passionate about. You can sense the focus on talent is really paramount to us. Everybody is fighting for the same pool of talent. And we have a variety of talent. We have really high-end engineering, 1,500 of them. We have artists, very creative. We have marketing agencies at the same time. We have first-time jobs, but passionate about the gaming space. So we have to think a bit about segmenting that differently. But specifically to your question, Mark, tangibly, what we do right now, I have a 4-hour call next week, which is all about what we call the in-game academy in India. So we're looking at, with our Indian leader, about in an onshore, offshoring model. Starting point at the summit was we have 1 million engineers being produced in India every single year. How could we gamify them? How can we really have the right type of skill set that we need? How can they master the Unity engine, the Unreal engine in a proper way? Well, that's in our hands to some extent. Again, if you take a 2-, 3-year lens, we are putting the right curriculum in place. We have reached out to the right -- at least to a subset of university and a few big cities in India, where the courses lends itself very well. We have credibility within the government as well to do that. And we're going to take a long-term lens of seeing how can we really produce, not only 1 million engineers, but to have gaming engineers and then on which we get effectively first pick. We're doing something similar, which I only got to appreciate over the past 2 months in Dublin, where we now have a leader called John Gibson, who runs one of our studio called Electric Square. He has launched some boot camps in Dublin, which show a term version of that, where it's really having some academic courses being deployed over there to try to tap into talents. We have a leader in -- that Jon and I met in Ottawa called Jean-Sylvain, running a business call Snowden that joined the Keywords family 3 years ago. To give you a sense, they had 30 people when they joined us 3 years ago. They are now 160 with us. He is absolutely passionate about creating 500 jobs into the Ottawa region. And part of the way he went about it is to tap into the top 2 universities in the region, dedicated some of his senior leadership and senior developers to go and create a curriculum that is fit for purpose for the type of engineering skills that they have over there. So you can sense. We have a few examples, some that are shaping up, some are still small scale. But that's going to be a big -- it's a good point mark because it's going to be a big part of what we want to push in the years ahead.