A global service delivery
platform for the video
games industry
ANNUAL REPORT AND ACCOUNTS 2016
Keywords is the leading
international creative and
technical services provider to
the global video games industry.
Established in Dublin in 1998, Keywords now has 27
studios across Europe, North and South America and
Asia. It provides integrated art creation, audio recording,
localisation, testing, and customer support services across
50 languages and 14+ games platforms, to a blue-chip
client base around the world.
Its customers comprise many well-known multi-national
games publishers and developers including 21 out of the
25 largest games companies by revenue.*
Visit the website for further information
www.keywordsstudios.com
STRATEGIC REPORT
01-25
DIRECTORS’ REPORT
26-34
FINANCIAL STATEMENTS
35-78
Board of Directors
Directors’ Report
Directors’ Remuneration Report
Directors’ Remuneration Policy Report
Highlights in 2016-2017
At a Glance
Chairman’s Statement
Market Outlook
Key Players
Our Strategy
Our Business Model
Chief Executive’s Review
Financial and Operating Review
Principal Risks and Uncertainties
01
02
04
06
08
10
12
14
20
24
26
28
31
33
Independent Auditor’s Report
Consolidated Statement of
Comprehensive Income
Consolidated Statement
of Financial Position
Consolidated Statement
of Changes in Equity
Consolidated Statement of Cash Flows
Company Statement of Financial Position
35
36
37
38
39
40
Company Statement of Changes in Equity 41
Company Statement of Cash Flows
Notes Forming Part of the Consolidated
Financial Statements
Company Information
42
43
IBC
* Source: NewZoo, Top 25 Companies by revenues, December 2016, and management information.
HIGHLIGHTS IN 2016–2017
Revenue (m)
€96.6m
h67%
Adjusted earnings per share (c)
20.59c
h62%
€96.6
€58.0
€37.3
2014
2015
2016
20.59
12.71
8.54
2014
2015
2016
Adjusted profit before tax (m)
€14.9m
h86%
Dividend per share (p)
1.33p
h10%
Art creation (m)
h102%
€16.6
€0.6
2014
2015
€8.2
2016
Functional testing (m)
h32%
€8.6
€6.5
€5.0
Audio services (m)
h140%
€17.3
€5.1
€7.2
2014
2015
2016
Localisation testing (m)
h8%
€14.7
€15.0
€16.2
2014
2015
2016
2014
2015
2016
€14.9
€8.0
€5.1
2014
2015
2016
1.10
1.21
1.33
2014
2015
2016
Localisation services (m)
h89%
€32.3
€17.1
€12.0
2014
2015
2016
Customer support (m)
h44%
€5.6
€3.9
€0.0
2014
2015
2016
ANNUAL REPORT AND ACCOUNTS 2016
01
IIIIIStrategic Report At a Glance
Further extended
our global reach
The Group now has 27 studios strategically located to provide full,
integrated services by combining a presence that is local to our clients
in key gaming clusters with lower cost production sites across four
continents. Since the beginning of 2016, we have expanded further
organically and by acquisition into new locations, including Quebec City,
Hamburg, Paris and Taipei.
Keywords has offices in 23 cities worldwide:
Dublin (HQ)
Rio de Janeiro
Montreal
Quebec City
Portland
Mexico City
Los Angeles
Seattle
Tokyo
Singapore
New Delhi
Pune
Rome
Milan
Barcelona
Madrid
Taipei
Shanghai
Beijing
Manila
Hamburg
Paris
London
02
KEYWORDS STUDIOS PLC
50+
14+
21
27
Providing services across more
than 50 languages
and more than 14 games
platforms to a blue-chip client
base in over 15 countries
serving 21 of the top 25*
games companies by revenue
from 27 studios worldwide
In contrast to 2014 and 2015, during which we added Customer
Support and Art, 2016 was focused on adding capabilities and
scale to and deriving synergies from the same six service lines.
ART CREATION
The creation of graphical art assets for
inclusion in the video game including concept
art creation, 2D and 3D art asset production,
animation and cinematics.
AUDIO
Multi-language voiceover recording,
original language voice production and
related services.
LOCALISATION
Translation of in-game text, audio scripts,
cultural and local adaption, accreditation,
packaging and marketing materials in over
50 languages.
See more on Page 16
See more on Page 16
See more on Page 16
FUNCTIONAL
TESTING
Quality assurance including discovery and
documentation of game defects and testing to
verify the game’s compliance with hardware
manufacturers’ and app stores’ specifications,
as well as focus group and user experience
testing and consulting.
LOCALISATION
TESTING
Testing for out of context translations,
truncations, overlaps, spelling, grammar,
age rating issues, geopolitical and cultural
sensitivities and console manufacturer
compliance requirements in over 30
languages using native speakers.
CUSTOMER
SUPPORT
24/7, multilingual support for gamers when
games are in live operation, forum monitoring
and moderation services and social media
engagement on behalf of the game brand.
See more on Page 17
See more on Page 17
See more on Page 17
* Source: Newzoo, Top 25 Games Companies by Revenues, December 2016.
ANNUAL REPORT AND ACCOUNTS 2016
03
IIIIIStrategic Report Chairman’s Statement
Continued organic
and acquisitive
growth globally
Ross Graham
Chairman
Keywords performed ahead of previous
expectations in 2016 as a result of another year
of strong organic and acquisitive growth which
has seen the Group grow from full year revenues
of just over €14m, derived from four service lines
and five studios across three continents prior
to the IPO in July 2013, to revenues of nearly
€100m derived from six service lines and 27
studios across four continents at the end of 2016.
The Group’s successful expansion is testimony
not just to the dynamic and innovative nature of
the Keywords business model but, perhaps more
importantly, to the disciplined and effective
execution of the Company’s strategy by our CEO,
Andrew Day, and his expanded executive team.
It is rare for a company to exceed the ambitious
strategic expectations set out at the time of its
flotation but Keywords has achieved that feat
in terms of both organic and acquisitive growth.
During 2016, the Group delivered further strong
revenue growth reflecting the contributions of
the eight acquisitions completed during the year
as well as continued strong like-for-like revenue
growth, whilst also maintaining operating margins.
The acquisitions the Group has made since the
beginning of 2016 have expanded our art creation,
audio, localisation, functional and localisation
testing offerings; added new capabilities including
player experience analysis and design, focus group
testing, animation and cinematics for both the
video game and film markets; and given the Group
solid operating bases in China and the Philippines.
This continued strong profitable growth reflects
Keywords’ resilience to global upheavals, such
as Brexit, as its key drivers remain the growth
of the global video games market and its ability
to increase its share of video games companies’
spend on services that are fundamental to their
customers’ experiences. Increases in the
penetration of smart phones and other mobile
devices and in consumer spend on video games
continue unabated, supporting strong demand
for Keywords as the leading international creative
and technical services platform for the industry.
In addition, Keywords’ recent early steps to take a
more influential position in technology and player
experience consulting through the acquisition
of Player Research, provides the Group with the
opportunity to become ever more embedded
in how the world of electronic gaming evolves.
This is, genuinely, an exciting development.
“Keywords performed ahead of previous
expectations in 2016 as a result of another
year of strong organic and acquisitive growth.”
04
KEYWORDS STUDIOS PLC
REASONS TO INVEST IN KEYWORDS
ACCESS TO HIGH
GROWTH MARKET
Keywords operates in
an exciting high growth
market, without the risk
of direct exposure to the
successes or failures of
individual game titles and
our focus on content means
that we are platform
agnostic. The increased
sophistication of games
and complexity of the video
games market is driving
demand for larger,
professional, outsourced
specialists, such as
Keywords, in a highly
fragmented
supplier market.
MARKET LEADING
POSITION
Keywords has a market
leading position as the
only provider of fully
integrated outsourced
creative and technical
services to the global video
games industry. With an
industry reputation for
quality, reliability and
flexibility, our scale and
reputation mean we are
well placed to take
advantage of the trend for
clients to move to fewer,
larger suppliers.
STRONG GROWTH
RECORD
In addition to delivering
strong like-for-like growth,
we have successfully
acquired and integrated
16 acquisitions since IPO
adding two new services,
Art Creation and Customer
Support, as well as
extending our existing
service lines and
geographical reach.
OPPORTUNITY TO
GROW FURTHER
Having made strong
progress in extending
the Group’s client base,
market penetration,
geographic footprint
and service lines, we now
see significant potential
for increased cross
pollination of our service
lines and geographic
locations, including taking
advantage of our dual
shore capabilities.
A STRONG
BUSINESS MODEL
Keywords’ flexible
resourcing and charging
model, with charges
levied for time or output
rather than a fixed
price, combined with
relatively low working
capital and capital
expenditure requirements
support its ability to grow
the business whilst
also achieving strong
cash conversion.
Managing and funding growth
Managing growth successfully requires a balance
between nurturing entrepreneurialism and
innovation whilst providing a strong technology,
financial and operational infrastructure. Progress
has been made during 2016 to improve the
Group’s technology infrastructure and select
the systems (for finance and operations) that
will be robust and scalable enough to support the
Group to multiply in size over the next few years.
To that end we have recently appointed new
Group Finance and IT directors, both resident
in Dublin, the Group’s operational head office,
in addition to strengthening the operational
management team over recent years as a result
of the strong managerial talent that acquisitions
have brought into the business.
In May 2016, we secured a five year revolving
credit facility of up to €15m with Barclays Bank
Plc to provide funds for both the Group’s working
capital and acquisition financing as it continues to
grow, and since the period end and in keeping with
the growth in the business we have agreed terms
on an enlarged facility of up to €35m, which gives
us further headroom for selective acquisitions.
Culture of quality and people
Keywords has established itself as the “go to”
provider of creative and technical services for
electronic games. This is not just a function of the
team; average number of employees having grown
from 1,273 to 1,818 people over the last year;
the Keywords studios must deliver consistently
good quality service in everything we do to
a demanding set of customers against tight
deadlines. The Group’s track record shows a high
level of customer satisfaction, which is testament
to the Keywords culture, where the customer
always comes first, and the skill and commitment
of Keywords’ operatives. The cultural tone, set by
the top team at Keywords, is radiated throughout
the studios and is shared by all businesses that
join the Group. There is a real sense at our annual
Strategy Conferences that Keywords will continue
to consolidate its market leadership. On behalf
of the Board and shareholders I’d like to thank
everyone involved for their individual contributions
both last year and for the future.
Shareholders and dividend
In line with its progressive dividend policy, and
allowing for the need to retain resources to fund
future growth of the Group’s business and its
strategic aims, the Board is pleased to recommend
a final dividend of 0.89p per share which, following
the interim dividend payment of 0.44p per share,
will make the total dividend for the year ending
31 December 2016 1.33p per share, an increase of
10% on 2015. Subject to shareholder approval at
the Annual General Meeting, the final dividend will
be paid on 23 June 2017 to all shareholders on the
register at 2 June 2017 and the shares will trade
ex-dividend on 1 June 2017.
Current trading and outlook
Trading in the first two months of the year
has been in line with the Board’s expectations.
With the benefit of an expanded and more
diversified business, and a strong market and
financial position in a growing yet still fragmented
industry, we are confident that we can continue
to make strong progress in line with our organic
and acquisitive growth strategy and, at this early
stage, maintain our current expectations for 2017.
Looking longer term, we maintain a watching
brief on the medium to long-term potential for
the Group in closely adjacent markets such as
e-learning, film and television, and other content
rich sectors where our expertise in the most
interactive form of content, video games, is highly
relevant and transferable.
Ross Graham
Chairman
4 April 2017
ANNUAL REPORT AND ACCOUNTS 2016
05
IIIIIStrategic Report
Market Outlook
The leading provider
in a growing market
STRONG GROWTH IN CONTENT
SET TO CONTINUE
The global video games industry is set for further significant
growth over the next few years. According to Newzoo, the
market will be worth $118.6bn by 2019, representing a
2015 to 2019 Compound Annual Growth Rate (“CAGR”)
of almost 7% (Newzoo Global Games Market Report, June
2016). Newzoo expects eSports, VR and collectible and
tradeable gaming to be the key new trends in the evolution
of global gaming over the coming years, all of which will
continue to drive richer and deeper content. The Asia-Pacific
region remains the largest market with a dominating 47%
share and an impressive 10.7% year-on-year growth in 2016.
RICHER AND CONTINUALLY
UPDATED CONTENT SUPPORTED
BY HIGHER PERFORMANCE
GAMES PLATFORMS
As technology platforms develop, bringing increased
processing power, connectivity and storage, they support
ever more complex content creation, in turn driving consumer
demand for more innovative and richer content. This content
takes much longer for games developers to create, requiring
significantly larger teams, and therefore driving games
developers towards outsourced development partners
who can provide the specialist support they require,
when they need it.
Global games market size 2015-2019 ($bn)
$118.6bn
h6.6% CAGR
$106.5bn
$99.6bn
$91.8bn
$118.6bn
$112.5bn
2015
2016
2017
2018
2019
Source: Newzoo, Global Games Market Report, June 2016.
06
KEYWORDS STUDIOS PLC
PROLIFERATION OF PLATFORMS
EXPECTED TO CONTINUE AS
VIRTUAL REALITY BECOMES
MORE ESTABLISHED
2016 has been considered to be a “breakthrough year”
for Virtual Reality (“VR”) according to PWC’s Global
entertainment and media outlook 2016-2020,
June 2016 report. With the release of a first generation
of consumer virtual reality headsets from Facebook/Oculus,
Sony, Samsung and HTC in 2016, the VR experience is
beginning to reach a wider consumer market and further
advances in this hardware form, as well as the quality of
content supported by higher specification hardware, is
expected to drive further consumer uptake over the coming
years. North America has accounted for approximately
35% of the global demand in recent years, with the market
demand due to double by 2022 to around $4bn. The
Asia-Pacific region is currently the most lucrative virtual
reality gaming market and is also expected to emerge
as the fastest growing (Grand View Research, Virtual
Reality in Gaming Market Analysis by Component,
March 2016).
Despite the exciting VR opportunity, mobile gaming
continues to offer the biggest immediate growth potential,
with smartphone gaming set to grow by $13.9bn to $54.5bn
in 2019 – a CAGR of almost 8%. This has been driven by the
rise of ‘mid-core’ casual gamers, with titles such as Clash of
Clans and Game of War: Fire Age generating revenues of
around $1bn in revenue each (SuperData, 2016 Year
in Review, Digital Games and Interactive Media,
December 2016).
Mobile games revenue 2016-2019 ($bn)
$54.5bn
h9% CAGR
$50.0bn
$44.8bn
$40.6bn
$54.5bn
2016
2017
2018
2019
Source: SuperData, 2016 Year in Review, Digital Games
and Interactive Media, December 2016.
ANNUAL REPORT AND ACCOUNTS 2016
07
IIIIIStrategic Report Key Players
An efficient team playing
a strong game
Fred Stockton
Head of Art Creation
Andrea Ballista
Head of Audio Services
Fabio Minazzi
Head of Localisation Services
Q: Art is still a relatively new service line for
Keywords. How has it developed during the year?
Q: What was behind the rapid growth in Audio
in 2016?
Q: What drove yet another great performance
for Localisation in 2016?
A: We saw both good underlying growth and
an exceptionally strong performance from
newly acquired Synthesis which benefitted
from some very large audio projects in the
year. The acquisitions of Synthesis, Kite Team
and Sonox have transformed the scale and
geographical spread of our audio services team,
which is now an undisputed world leader.
Q: Is there still room for growth if you are now the
market leader?
A: We are very strong in the market for integrated,
multi-language voice-over recording but some
game companies still source key languages direct
on a single language basis. Our Italian, Spanish,
Mexican and Brazilian operations benefit as go-to
studios for their respective languages, and there
is an opportunity to create the same for other key
languages, such as French, German and Japanese.
Rapid development of mid-core games played on
smartphones means they are not only becoming
larger and richer in content but they are also using
audio more. VR is also increasing the demand for
audio services as this richer, more immersive
content form demands audio to match.
A: We were very pleased with Localisation’s
performance in 2016 as, despite having been
one of the Group’s largest service lines at the time
of the float, we have continued to grow strongly.
This reflected greater demand for more languages
for mobile games and a strong performance from
newly acquired Synthesis.
Q: What do you expect to see in 2017?
A: I think we’ll continue to see growing demand
from mobile games which are rapidly becoming
bigger franchises and are being supported in a
wider number of territories. Likewise, our portfolio
of AAA games for console and PC is unmatched
anywhere and our 20+ years’ expertise is much
valued by our clients who can rely on us to deliver
time after time despite often challenging timelines.
Overall, I see content for games only growing from
here and as it does, so we will be there to localise
it into an increasing number of languages. Chinese
and Arabic have seen rapid growth for us over
the past two or three years and we expect these
languages to continue to grow alongside more
emerging languages for video games.
A: We initially entered the art outsourcing
market with the acquisition of Lakshya at the
end of 2014. Since then, we have grown rapidly,
both organically and through further acquisitions,
expanding the team from 200 to 850 and
annualised revenues from c.$4m to c.$20m.
2016 has seen us acquire Mindwalk which
was the Group’s first significant move into the
fast-growing Chinese market. Importantly, we
also added to our services with the acquisition of
Volta which provides concept art for video game
developers. So we now work with clients at the
very early, creative design phase of games, helping
them to set the look and feel of the game and
develop reference material to be used by art
studios, such as Lakshya, Liquid Development
and Mindwalk, to produce the art assets. In the
first quarter of 2017 we also added Spov to the
family, extending our services into high-end
cinematics and motion graphics.
Q: Are the different teams across art services
increasingly working together?
A: Yes, we are already working across different
studios for many of our clients. It’s a model that
really appeals to our clients because we can
seamlessly ensure that the assets produced are
consistent with the original concept and we can
blend higher cost on-shore service with lower
cost off-shore production sites in India and China.
08
KEYWORDS STUDIOS PLC
Mathieu Lachance
Head of Functional Testing
Thomas Barth
Head of Localisation Testing
Fred Arens
Head of Customer Support
Q: Functional Testing had a good year in 2016
– what were your biggest successes?
A: We had a strong performance in part due to
good demand from existing customers, such as
Oculus, but also from new clients for this service
line such as Ubisoft. 2016 also saw us add some
exciting new services with the acquisition of
Player Research, which has ensured that the
experiences of more than 600 million gamers have
been as close as possible to the designers’ vision.
The acquisition of Enzyme added focus group
testing, which fits well with Player Research’s
services in addition to expanding our Functional
Testing capability.
Q: What do you expect to see in 2017?
A: We expect to integrate Enzyme with our other
activities in this space by the middle of 2017. This
includes moving to a common operating platform,
which will help us maximise operational benefits
and ensure our service delivery remains robust as
we leverage our increased scale and dual testing
locations in Quebec.
Having successfully started managing Functional
Testing services on behalf of our clients on
their premises, we also anticipate other major
clients moving from an in-house model to
managed services.
Q: How was 2016 for Localisation Testing?
A: The addition of localisation testing operations
from Synthesis and from Enzyme boosted our
service line during 2016 and we are working
to have these operations fully integrated by
mid-2017.
We continue to enjoy a leadership position for
this specialised service and are innovating new
operational models with our colleagues in
localisation and customer support in particular
to efficiently support the continuous content
models of large, successful mobile games and
online game franchises. As is typical in localisation
testing, we saw a higher level of activity in the
second half of the year as a greater proportion
of games are tested ahead of Christmas launches
but we also saw very good levels of activity
through December.
Q: What does 2017 have in store for
Localisation Testing?
A: Over many years we have established some
deep and long-lasting relationships with our
clients. These have been evolving year-on-year
and we believe that the addition of Synthesis and
Enzyme activities in localisation testing will help
drive more of these client relationships towards
true strategic partnerships.
Q: Customer Support is another relatively new
service line for Keywords – how has it developed
during 2016?
A: 2016 has been an important year for Customer
Support, which we first established with the
acquisition of Alchemic Dream in 2015. 2016
saw us acquire the Philippines-based customer
support team from Ankama which took us into
live operations support, promotions and fraud
management and we have since significantly
increased the scale of its operations by moving
to larger, newly fitted out offices. We have made
much progress with leveraging the Group’s wider
infrastructure by seeding customer services into
many of the Group’s existing studios.
Q: How will you be taking this service line forward
in 2017?
A: We are pursuing our strategy for growth by
leveraging our secure studio facilities while
maintaining the highly flexible remote working
model pioneered by Alchemic Dream, giving us
excellent coverage across over 30 languages
in all time zones, 24/7.
In several facilities we have begun to share talent
creating specialist support teams with detailed
game knowledge acquired during functional and
localisation testing, providing a significant point
of differentiation from existing large-scale call
centres. It has the added benefit of smoothing
seasonal peaks and troughs in our testing
staffing requirements.
ANNUAL REPORT AND ACCOUNTS 2016
09
IIIIIStrategic Report Our Strategy
Growing through
operational efficiency
STRATEGIC PRIORITY
DEVELOPING CUSTOMER
RELATIONSHIPS
AND OUTSOURCING
STRATEGIC PRIORITY
EXTENDING
OUR SERVICES
OUR VISION
To be the “go to” global service delivery
platform for the video games industry.
OUR STRATEGY
To grow organically and by acquisition
to extend the Group’s client base, service
lines and geographical penetration, where
the Group can use its existing expertise,
multi-service platform, scale and global
reach to generate synergies in a highly
fragmented games service industry.
PROGRESS IN 2016
PROGRESS IN 2016
• Same services to existing customers
accounted for c.80% of revenues.
•
Initial outsourcing arrangement
with Ankama established a platform
in Manila from which to grow further
in Asia.
• 64 of our c.400 clients now use
3 or more services.
• Extended our customer services
operation to add live operations,
promotions management, fraud
management, quality assurance
and bot hunting.
• Expanded our Functional Testing
offering, adding services such as
player research and focus group testing
and strengthening our compatibility
and certification testing services.
• Our newer art creation and customer
support services accounted for 17%
and 6% of Group revenues respectively.
KPI
KPI
25%
Increase in clients using
3 or more services.
€25.2m
Revenues from non-language-
based services.
10
KEYWORDS STUDIOS PLC
STRATEGIC PRIORITY
EXPANDING OUR
GEOGRAPHICAL REACH
STRATEGIC PRIORITY
SELECTIVE
ACQUISITIONS
STRATEGIC PRIORITY
DRIVING OPERATIONAL
EFFICIENCY AND SYNERGIES
PROGRESS IN 2016
PROGRESS IN 2016
PROGRESS IN 2016
• Bolstered European presence, adding
sites in Paris, France; Hamburg,
Germany; and Brighton, UK.
• Also, added locations in Taipei, Taiwan;
Beijing, China; Manila, Philippines; and
St Jerome near Montreal, Canada.
• Now have a strong presence across
• Milestone €18m acquisition of
Synthesis positioned Keywords
as the global leader in video game
localisation and voice-over recording.
• Acquisitions of Volta and Mindwalk
Studios reinforced strong art
creation offering.
four continents.
• Brighton-based Player Research
added new capabilities in user testing,
fitting well with the focus group testing
services offered by newly acquired
Enzyme Testing Labs.
• Sonox strengthened the Group’s
Audio services in Spanish and Latin
American markets.
• Each service line within Keywords
operates on a global toolset providing
common project management, workforce
management and operational reporting
capabilities onto which acquired entities
are migrated. The exception to this is Art
which is in the process of assessing
several operating systems.
• We are consolidating three studios
into two around Montreal following the
acquisition of Enzyme, and have brought
Kite Team, Synthesis Iberia and Sonox
together into the Kite Team premises
in Madrid.
• Customer support has been introduced
into Montreal, Dublin and Tokyo facilities
where we have begun to share talent
between testing and customer support.
KPI
27
Grew from 19 to 27 studios
globally during 2016.
KPI
KPI
€21.1m
Net cash consideration
for acquisitions in 2016.
22.4%
Operating expenses reduced to
22.4% of revenue (2015: 23.5%).
ANNUAL REPORT AND ACCOUNTS 2016
11
IIIIIStrategic Report Our Business Model
Creating value
and growth
DRAWING ON
OUR KEY STRENGTHS
OPERATIONAL
EFFICIENCY
1
PRE-PRODUCTION
– Concept art
Level design
–
2
EARLY STAGE GAME
DEVELOPMENT
–
Programming/co-development
Story writing
–
– Motion capture
– Development quality
assurance
– Game trailers
– Art production
– Cinematics/visual effects
– Audio production
– Original language
voice production
– Music scoring
Sound design
–
6
NEW CONTENT
FOR GAMES
– Art
– Audio
– Testing
–
– Marketing
Localisation
Global presence
Provides access to the best talent and
enables us to deliver projects across
studios in multiple time zones, allowing
seamless 24-hour turnarounds whilst
remaining close to the client.
Flexible resource model
Allows us to scale up or down to meet
demand, mirroring the seasonality
of games production.
Knowledge and expertise
Deep games-specific knowledge and
experience of working on multiple
instalments of AAA game franchises.
Reputation for quality
Our commitment to quality, reliability
and integrating with our clients’
processes promotes long-term
customer relationships.
Financial strength
Our strong financial performance
and position gives our customers
reassurance of resilience in their
supply chain and is part of our
attraction to businesses we acquire.
Acquisition track record
We have a strong track record in
identifying acquisitions with a strong
fit with Keywords in terms of culture
as well as expertise or geography and
integrating them effectively to support
their growth.
12
KEYWORDS STUDIOS PLC
3
LATER STAGE GAME
DEVELOPMENT
– Functional testing
– Text localisation
– Audio localisation
–
– Player research
– Game porting
Localisation testing
4
LAUNCH
– Certification
testing
– Marketing
5
ONGOING LIVE
OPERATIONS
SUPPORT
– Customer support
– Community
management
– Data analytics
–
Payments processing
CREATING VALUE FOR
OUR STAKEHOLDERS
INVESTORS
Consistent track record of delivering
earnings and dividend growth.
Increase in adjusted EPS since 2013
290%
ACQUIRED BUSINESSES
Strong financial position makes us
attractive to potential new acquisitions.
The Group had €17m in cash at the year
end and had utilised €8m of its €15m
rolling credit facility, giving it headroom
for acquisitions.
Cash at year-end
€17m
EMPLOYEES
Keywords provides employees with an
excellent and sustainable variety of work,
good career advancement opportunities
and, increasingly, opportunities to work
in many different locations.
Average number of employees
1,818
ANNUAL REPORT AND ACCOUNTS 2016
13
IIIIIStrategic Report Chief Executive’s Review
Strong growth complemented
by acquisitions
Andrew Day
Group Chief Executive Officer
2016 saw Keywords continue to grow strongly,
both organically and through acquisitions,
which increased our capacity and scale in existing
service lines and expanded our service capabilities
and geographical reach. The eight acquisitions
completed in 2016 are in line with the Group’s
strategy to lead the consolidation of the industry
to become the “go to” global service delivery
platform for the video games industry. They
comprised: Synthesis, which positioned Keywords
as the global leader in localisation and voice-over
recording; Volta and Mindwalk Studios which
reinforced the Group’s strong art creation offering;
Player Research which added new capabilities
in player experience analysis and design; Enzyme
Testing Labs which brought focus group testing
services to the Group as well as increased scale
to both functional and localization testing; Sonox
which strengthened the Group’s Audio services
in the Spanish and Latin American markets; and
Ankama Asia, which added a presence in the
Philippines. The Group also acquired the 50% of
Kite Team it did not already own during the year.
All acquisitions have or are being integrated into
the Group by service line and by geographic region.
The global management structure, which provides
for globally managed service lines supported by
strong regional, country and studio management,
was implemented in mid-2015 and has been
instrumental in providing the management focus
and capacity to execute the acquisition strategy
and drive the operational performance of and
synergies within the business.
The Group finished the year with 27 operating
locations around the world, compared with
17 at the beginning of 2016, giving it further
geographical diversification across its revenues.
Of its €96.6m revenues in 2016, 48% were
denominated in USD, 35% in Euros, just 3%
were denominated in Sterling, with the remainder
being a mix of Japanese Yen, Canadian Dollars
and others, meaning the Group has been largely
unaffected by the UK’s decision to withdraw
from the EU.
Results overview
Including the effect of acquisitions, the Group’s
revenues increased by 67% to €96.6m (2015:
€58.0m) during the period, reflecting growth
across all lines of business as outlined in the
Operational Review below.
Using a like-for-like measure of organic revenue
growth in the businesses that Keywords now
owns, which provides a 2015 comparative as if all
of the 2016 acquisitions had been owned for the
same period in 2015 as they have been in 2016,
organic growth was 24% in 2016 (20% in 2015).
This like-for-like growth is a key focus and was
driven primarily by our Localisation and Audio
Service lines, both of which benefitted additionally
from the very strong performance of Synthesis,
acquired in April, and by Art, Customer Support,
and Functional testing which all grew well, while
Localisation Testing posted like-for-like growth
of 8%.
Gross profit margins increased to 38.0%
(2015: 37.6%) reflecting a combination of
the Group’s revenue mix and continued good
margin management.
Adjusted profit before tax (before share option
charges, amortisation of intangible assets, costs
of acquisition and integration, and foreign currency
movements) increased by 86% to €14.9m in 2016
(2015: €8.0m). Statutory profit before tax for the
period was €9.5m (2015: €5.2m).
“2016 saw Keywords
continue to grow strongly,
both organically and
through acquisitions.”
14
KEYWORDS STUDIOS PLC
CASE STUDY
LAKSHYA
20%
Increase in revenue per person
LAKSHYA DIGITAL WAS FOUNDED IN INDIA IN
2004 TO PROVIDE VIDEO GAME ART CREATION
SERVICES A TIME WHEN THE COUNTRY WAS
NOT KNOWN FOR ITS GAMING INDUSTRY. IN 2014
THE TEAM, WHICH HAD BEGUN AS SIX PEOPLE,
NUMBERED 204.
At that time, the founders of Lakshya decided that to drive the
business to its next level of growth, it would join the Keywords
Studios family. Keywords was already an established name in the
global games market and provided Lakshya with an easy stepping
stone to set up a North American art studio in one of Keywords
existing facilities. Lakshya chose Seattle, gaining access to top
talent and local clients. The support provided by Keywords allowed
Lakshya to both expand its capabilities in India with management
from Seattle and create a local interface with its US clients. It then
used this combination of increased skills and management support
in Seattle to further grow its established Japanese customer base.
Keywords operates in a very fragmented market that it is
consolidating to expand its global offering to video game
developers and publishers while maintaining individual studio
brands, service lines and hence preserving choice for its clients.
The benefits of the Lakysha acquisition to both businesses were
two-fold – the new Seattle studio opened doors for numerous US
and Japanese clients whilst Keywords can tap into a strong pool
of raw art talent in India.
As part of Keywords, not only has the team at Lakshya grown
from 204 to 418 people, but the revenue per person has increased
by over 20%, reflecting the added value delivered by the business
combination through its focus on both growth and efficiency.
ANNUAL REPORT AND ACCOUNTS 2016
15
IIIIIStrategic Report Chief Executive’s Review continued
The Group’s effective tax rate has decreased
as we make better use of our brands, operating
models and tools from our Dublin operational
headquarters in support of our business around
the world, much of which is in higher tax rate
jurisdictions including Canada, the US, Japan,
India and Italy. The Group’s effective tax rate
based on Keywords Studios’ measure of profit
before taxation in the period (as set out in
the financial overview below) was 21.7%
(2015: 22.9%).
Adjusted basic earnings per share for the year
(before one-time costs of acquisitions and
integration, share option charges, amortisation
of intangibles, and foreign exchange movements),
increased to 20.59c compared with 12.71c for
2015. After these items, the basic earnings per
share from continuing operations was 11.22c
(2015: 6.98c).
The group delivered strong operating cash flow
in the year of €15.0m, with the benefit of €1.6m
of multimedia tax credit (“MMTC”) payments from
2013 and 2014, up from €3.4m in 2015. Following
the investment of €21.1m net cash consideration
for acquisitions in 2016, the Group had €17m in
cash at the year end, having utilised €8m of its
€15m revolving credit facility, giving a net cash
position of €8.7m.
Since the year end, terms have been agreed to
replace our existing €15m facility with a revolving
credit facility of €35m for an initial 3 year term,
with the opportunity to extend by a further 2
years. This new facility is on very similar terms to
the existing arrangement and gives us additional
headroom to support our acquisition strategy.
Operational review
In contrast to 2014 and 2015, during which
we added Customer Support and Art, 2016 was
focussed on adding capabilities, geographies
and scale to, and deriving synergies from, our
existing six service lines. Whilst there is plenty
more to do, we were pleased to have made some
good progress in achieving synergies across
the Group, with teams increasingly combining
the Group’s services, resources and dual-shore
delivery effectively to meet clients’ needs.
This is reflected in a 25% increase in the number
of clients using 3 or more of the Group services
from 51 to 64 during the year.
Art Creation
(17% of Group revenues in the year)
Art creation services revenue grew 102% to
€16.6m (2015: €8.2m) reflecting underlying
growth particularly at Lakshya Digital and
post-acquisition contributions from both
Mindwalk and Volta acquired in June and October
respectively. On a like-for-like basis, Art grew
by approximately 34% year on year, reflecting
strong market demand in the second half of the
year, particularly in our Asian studios. We finished
the year with 650 artists on our payroll of which
600 are in India and China. Through Liquid
Development and Volta, we manage further
pools of freelance artists numbering about 200
in total. This talent base makes Keywords one
of the largest art services businesses in the
highly fragmented global video games market.
We continue to see excellent synergistic benefits
between our concept art studio, Volta, which
operates at the earliest stages of the game
production lifecycle and our other studios which
operate further downstream in the production of
art assets for final incorporation into the games.
Furthermore, all studios are working with each
other to leverage their respective capacities, and
capabilities, to deliver top quality work to their
global client base.
The objective for our Art Creation services line is to
grow capacity to meet demand, whilst maintaining
our reputation for quality and reliability of delivery
to our customers’ timescales. In addition, we aim
to extend our capabilities in areas such as visual
special effects, user interface design, cinematics
and motion graphics, which we have started to
do with the acquisition of Spov after the year end.
Audio
(18% of Group revenue for the year)
Our Audio business increased revenues by
approximately 140% to €17.3m (2015: €7.2m)
including contributions from Synthesis and Sonox
which were acquired in April and December
respectively. On a like-for-like basis, revenues in
our Audio service line grew by approximately 20%.
During the year, we strengthened the
management of our Mexican audio studio;
consolidated Synthesis Iberia, Kite Team and
Sonox under Kite Team in Madrid; completed
the earn out of Liquid Violet in London; and, this
year, we are opening an audio recording studio
in Tokyo, Japan.
The current, well-documented strike of video
game voice actors in Los Angeles, which started
in October, has had little direct effect on our
audio business as it is focussed more on multi
language “dubbing” rather than original language,
US English recording.
Localisation
(33% of Group revenue in the year)
Our Localisation activities, including contributions
from Synthesis and Sonox which were acquired
in the year, increased revenues by approximately
89%, to €32.3m (2015: €17.1m), and continued
its excellent record of growth with a like-for-like
increase of 33%.
16
KEYWORDS STUDIOS PLC
Operating from 17 studios, our localisation
business employed 85 project managers and
70 language specialists and editors and managed
a network of approximately 1,000 games
specialised translators in-territory around the
world, giving it the scale to respond flexibly to
client’s needs to translate into multiple territories
simultaneously. The business translated around
210m words during the year.
Our Localisation service line continued to benefit
from the trend towards ‘games as a service’ which
necessitates fresh content being added to the
game on a frequent basis to expand the game
worlds and keep players engaged. We are the
leading localisation provider for video games and
enjoy a strong position in the fast-growing mobile
games segment of the market, where content
additions to the many leading games that we
support result in continuous localisation work
for the Group in as many as 30 languages.
Functional Testing
(9% of Group revenue for the year)
Our Functional Testing services grew by 32%
to €8.6m (2015: €6.5m), including a six-week
contribution from Enzyme which was acquired
in November 2016, and grew by 23% on a
like-for-like basis.
Staff utilisation remains a strong point for this
service line which needs to react flexibly to
changes in game production schedules with last
minute alterations in testing team composition
required. The ability to combine large, multi-month
testing projects and small projects of a few days’
duration while keeping non-billable time to a
minimum is greatly enhanced by scale and we
expect to see continued improvement in this
as we integrate the functional testing activities
of Enzyme in 2017.
In October we acquired Player Research,
a Brighton, UK based business that provides
user testing and consultancy services to game
developers and publishers to help them optimise
their games for increased player retention and
monetisation. Although Player Research’s
business spans many of our service lines we
have chosen to report its results within Functional
Testing due to the play testing element of its
service offering which has natural synergies
with this service line.
Localisation Testing
(17% of Group revenue in the year)
Our Localisation Testing operations grew by
8% on both absolute and like-for-like bases
to €16.2m (2015: €15.0m). The acquisition of
Synthesis in April 2016 and Enzyme in November
2016 added acquired revenues to this service
line for the first time since the acquisition
of Babel Media in February 2014. Integration
of both businesses is progressing well.
With secure localisation testing studios in
Montreal, Dublin, Milan, Singapore and Tokyo
we believe this service line is the largest provider
of localisation testing in the video games market.
We look forward to continuing to serve our clients
around the world while optimising our production
efficiency, assisted by our increased scale, and
developing our talent pool of games passionate
professionals of over 30 different nationalities.
Customer Support
(6% of Group revenue for the year)
Revenues for this service line grew by 44%
to €5.6m (2015: €3.9m). On a like-for-like basis,
the business grew 17% to account for 6%
of total revenues.
Our Customer Support and Community
Management business commenced in January
2015 with the acquisition of Alchemic Dream.
Originally using a network of multi lingual agents
working remotely but connected through a
technology platform, this business has developed
another operating model using teams of agents,
employed and housed in our studios in Montreal,
Dublin and Tokyo, often including teams which,
having been involved with testing, already have
a deep knowledge of the games. Since acquiring
a Manila, Philippines, based customer support
operation from one of our clients, Ankama, in
March 2016, this English only operation has been
expanded from 23 people to close to 120 as
further clients have been added to this studio.
Whilst our Customer Support service line remains
a relatively small part of the Group, we believe
our specialist teams offer an attractive alternative
to existing large customer support call centres.
Our customers, as ever, are highly focussed
on keeping gamers in their games for longer.
We believe our model of using teams with deep
knowledge of the games provides improved user
satisfaction and will enable us to grow our share
of this market over time.
Delivering our strategy
We have made strong progress in delivering
on our strategy to grow Keywords Studios both
organically and by acquisition to extend the
Group’s client base, service lines and geographical
penetration. This allows the Group to use its
existing expertise, multi-service platform,
scale and global reach to generate synergies
in a highly fragmented games services industry.
We have not only expanded our Art Creation,
Audio, Localisation, Functional and Localisation
Testing service lines but we have also added
new capabilities including in player experience
analysis and design, focus group testing, animation
and cinematics for both the video game and
film markets. In addition, we have established
significant operations in China and the Philippines.
ANNUAL REPORT AND ACCOUNTS 2016
17
IIIIIStrategic Report Chief Executive’s Review continued
18
KEYWORDS STUDIOS PLC
CROSS SELLING
THE LARGEST SINGLE OPPORTUNITY FOR KEYWORDS
COMES FROM OUR OWN ABILITY TO GUIDE CLIENTS
WHO ALREADY TRUST US WITH THEIR HIGH VALUE IPS
TO OTHER SERVICES WE COULD PROVIDE TO THEM FROM
WITHIN THE KEYWORDS GROUP.
Increased sales by 600% with a multi-platform game developer
First worked with this multiplatform game publisher/developer in 2009, when
they used our localisation testing service for many years regularly providing
Keywords with 60% and more of its requirements for their European markets.
In 2013, Keywords was enlisted to provide localisation for new languages
not being provided by the client’s established localisation and audio providers.
In 2014, Keywords started to provide services for the clients Americas region,
particularly for localisation. In 2015, we established ourselves as suppliers
to their Asian operations. The acquisition of Lakshya in 2014 brought us
an important art services relationship with the client, while the acquisition
of Synthesis in 2016 brought key localisation and audio languages work for
the client. Today we are exploring the provision of functional testing services
to the client and continue to discuss the possible provision of customer support.
By expanding Keywords’ relationship, we have increased Group revenues with
this client by 600% over this period.
Four fold growth in annualised revenues from a leading mobile
game developer
We started working with a leading mobile game developer for the localisation
of their first game, starting in late 2014, which was launched into 11 languages.
Since then we have worked on their second and third games, which are highly
successful and are now localised in over 30 languages. Having begun to provide
art for the client in 2016, Keywords has also recently been selected to provide
customer service support as well as localisation testing, because of which
annualised revenues from this client have increased by four-fold over the last
three years.
Trebled revenues with market leading online game developer
We began our collaboration with this market leading online game developer in
2015 by providing some localisation and audio support. The number of languages
grew over time, and in 2015 we established a service for the client from one of our
secure facilities in which we provide localisation and localisation testing through
teams specialised in each discipline but working together in a highly iterative
fashion. This is being delivered in tandem with our audio recording and in-territory
localisation services. Overall, our expanded relationships mean we have trebled
revenues from this client over the two-year period.
As a more diversified, better balanced business
with an expanded range of services and locations
to offer our clients, we see many opportunities
to extend our existing relationships with major
games companies both through providing
additional services to existing customers and
through providing dedicated outsourced services.
We have made good progress in this regard with
a significant increase in the number of our clients
buying multiple services from the Group.
People
The Group employed an average 1,818 people in
2016 (2015: 1,273). This talent pool is a particular
strength of our Group as it provides a broad and
deep pool of high quality expertise that our clients
can use at the appropriate time to help them
get their products and services to market with
a flexible, cost efficient and trusted partner.
For our staff, the Group offers a welcoming home
amongst other games passionate colleagues,
in which the games come to them. Working on
around 150 games at any time in the year and
around more than 500 in total throughout the
year, Keywords provides an excellent and
sustainable variety of work, good career
advancement opportunities and, increasingly,
opportunities to work in many different locations.
We are proud to serve as a stepping stone for
those that go on to make their careers in games
production and publishing and are fortunate
to have an excellent alumni of Keywordians
employed by many of our client companies.
Current market trends
2016 saw the first of what many believe will be
a number of refreshes of the PlayStation® and
Xbox consoles with the launch of the PS4 Pro and
the Xbox One S as well as the launches of various
first generation, virtual reality hardware devices
including Facebook’s Oculus Rift, Valve/HTC’s
Vive, Sony’s PS VR and Samsung’s Gear VR. While
the VR hardware did not sell as well at launch as
some analysts were expecting, and we have not
assumed stronger demand for our services in this
area in 2017 compared to 2016, the backing of
large groups such as Facebook, Google, Sony and
others supports the potential for the continued
development of the hardware and applications
that will lead to mass adoption over time. Overall,
we expect VR to be just one factor in the
continued growth in content over time.
January 2017 saw the launch of Nintendo’s Switch
which we hope will establish itself as a major
platform along with PS4 and Xbox One, leading
to additional services work for Keywords as
we support the content destined for this exciting
new platform.
Outlook
After a strong finish to 2016 in which we saw
record activity in some of our studios including
our largest, Montreal, the Group’s performance
in the first two months of the current financial
year has been positive and in line with the
Board’s expectations.
Our acquisition programme also brings fresh
talent to the Group at all levels and we have been
successful at integrating our businesses including
providing opportunities for staff to move between
our various studios. This is reflected in our senior
leadership team, which comprises four people from
the original Keywords business, three from Binari
Sonori, one from Lakshya, one from Babel Media,
one from Liquid Development as well as four
externally hired employees.
High demand for our art outsourcing services,
particularly at Lakshya in India and Mindwalk in
China, has returned in the second half of 2016 and
into 2017. Collaboration between all four of our art
studios is going well and in many cases, clients are
requesting that we work across a number of our
studios to configure services that meet their needs
in terms of specific capabilities as well as scale.
Our unique ability to blend services delivered to
clients from near shore studios in the US or Canada
combined with lower cost production in India and
China is working well and we remain confident
of good growth from this service line during 2017.
The addition in February this year of Spov with
its focus on highly creative motion graphics and
cinematics for video games and for film further
extends our capabilities and capacity and we
expect this expansion to lead to further increases
in demand for Keywords Art services.
Each service line is pursuing a growth strategy
formulated for its own market opportunity, with
some including a larger acquisition component
than others and with the aim of a good balance
between all 6 service lines over time. The synergies
available to us across the Group, from sharing
access to our talented people and production
facilities, to leveraging our established client
relationships, global sales force and marketing
spend across all service lines, provide us with
a solid platform for continued organic and
acquisition led growth.
We fully expect to make continued good progress
during 2017 as we take advantage of the
synergies afforded by our enlarged platform and
as we make further selective acquisitions, with
the support of our strong cash generation and
increased debt facilities.
Andrew Day
Group Chief Executive Officer
4 April 2017
ANNUAL REPORT AND ACCOUNTS 2016
19
IIIIIStrategic Report
Financial and Operating Review
Extended service offering,
market penetration and
geographic reach
David Broderick
Chief Financial Officer
Group performance
2016 has seen the Group deliver another year of
good organic growth, substantially complemented
by acquisitions which have further extended
its service offering, market penetration and
geographic reach.
During the year, we have continued to invest in the
business having expanded our customer support
offering with the acquisition of a Philippines-based
team from Ankama; consolidated our Spanish and
Latin American presence by acquiring both the
remaining 50% of audio and localisation firm, Kite
Team and Madrid based Sonox Audio; established
the group as the global leader in localisation
and voice-over recording through the acquisition
of Synthesis; and acquired China-based firm,
Mindwalk as well as Quebec City-based, Volta
which significantly enlarged the scale of our art
services business line.
We have also made good progress integrating prior
period acquisitions, all of which are making good
contributions to the Group. We have continued
to invest in our management structure in order
to support future growth, with the appointment
of senior managers to lead our art services and
strategic outsourcing offerings as well as a Group
IT Director.
Keywords’ geographic reach continued to increase
through acquisitions in St. Jerome, Quebec City,
Taipei, Brighton, and Manila.
Revenue mix
Revenues increased across all lines of business in 2016, resulting in our six service lines accounting for
the following proportion of Group Sales in the year:
Functional Testing
Localisation Testing
Localisation
Audio
Customer Support
Art Creation
Total
Year ended
31 December
2016
%
Year ended
31 December
2015
%
Pro forma* for the
year ended
31 December
2016
%
8.9
16.8
33.5
17.9
5.8
17.1
100
11.2
25.9
29.6
12.4
6.8
14.1
100
13.2
15.8
32.3
16.6
4.9
17.2
100
*
Pro forma includes the annualised sales of all acquisitions made in 2016 in order to give a better overview of the balance of
the business as we head into 2017.
20
KEYWORDS STUDIOS PLC
24%
Like-for-like revenue growth.
€35m
Agreed terms for a new €35m debt facility,
providing further headroom for acquisitions.
The sales mix by region based on the Group’s
operational jurisdictions are as follows:
Europe
Asia
Americas
Year ended
31 December
2016
%
Year ended
31 December
2015
%
56
15
29
100
41
17
42
100
Revenue
Revenue for 2016 was up 67% at €96.6m
(2015: €58.0m) due to both organic growth and
acquisitions. The like-for-like revenue growth rate,
which provides a 2015 comparative as if all of the
2016 acquisitions had been owned for the same
period in 2015 as they have been in 2016, was
24% for the year which was up from 20% in
2015 and demonstrates the strong momentum
the studios have managed to maintain throughout
the year.
Gross margin
Gross profit for the year was €36.7m (2015:
€21.8m). The gross margin percentage increased
to 38.0% (2015: 37.6%).
Operating profit (“EBITDA”)
Adjusted EBITDA is a measure of operating profit
used by the Board, which excludes depreciation,
amortisation, share option expenses and one-time
costs related to acquisitions. For 2016, adjusted
EBITDA increased 78% to €16.7m, compared with
€9.4m for 2015. As a percentage of revenue,
adjusted EBITDA has increased from 16.2% to
17.3%, reflecting the improvement in the Group’s
gross margin partially offset by an increase
in operating expenses as described below.
Operating expenses excluding depreciation,
increased by €7.5m to €19.8m (2015: €12.3m)
mainly as a result of the new acquisitions
made during the year. The continued additional
investment in strengthening Keywords
management to successfully manage the growth
of the Group also contributed. However, the
continued drive on achieving synergies across
the Group helped these costs decrease from
21.3% to 20.5% of revenue, with teams
increasingly combining the Group’s services
and resources effectively to meet clients’ needs.
We expect the operating costs as a percentage
of revenue to trend towards 20% as we manage
additional volume from organic and acquisition
led growth within the established framework
of the Group.
Operating Profit and Adjusted Profit Before tax for Year Ended 31 December 2016
Statutory profit before tax
Add back costs excluded from Group’s measure of PBT*
Add back loss attributable to non-controlling interest
KWS measured profit before tax
Add back depreciation and net Interest
Earnings before interest, tax, depreciation, amortisation, share
Year Ended
2016
€’000s
9,435
5,368
61
14,864
1,861
Year Ended
2015
€’000s
5,086
2,812
109
8,007
1,355
option costs and one-time costs related to acquisitions
16,725
9,362
* Acquisition and integration expenses of €1.3m (2015: €1.1m), share option charges of €0.7m (2015: €0.4m), amortisation
of intangibles of €1.6m (2015: €0.9m), and foreign currency loss of €1.7m (2015: loss of €0.5m).
ANNUAL REPORT AND ACCOUNTS 2016
21
IIIIIStrategic Report Financial and Operating Review continued
Net finance costs
During 2016 there was a net finance cost of
€2.0m compared to a cost of €0.7m in 2015
primarily due to the impact of foreign exchange
losses. Foreign exchange losses of €1.7m (2015:
loss of €0.5m) were in large part due to exchange
rates losses on cash deposits resulting from the
£10.5m Placing in November 2015 and inter-
company loans. The increase in interest expense
to €0.2m (2015: €0.1m) is largely due to a secured
credit facility with Barclays of up to €15m over
a five-year period of which €8m was drawn down
at the year end.
Adjusted Profit before Tax
Adjusted Profit before Tax is used by the Board
to measure the more meaningful underlying profit
generation of the Group. This measure excludes
one-time expenses, such as acquisition and
integration costs, share option expenses, foreign
currency gains or losses and amortisation of
intangibles. Adjusted profit before tax for 2016
increased by 86% to €14.9m compared with
€8.0m in 2015.
Taxation
The Group’s effective tax rate reduced to 21.7%
(2015: 22.9%) as the Group looked to charge more
services from Ireland in the year. This will continue
during the next year and we would anticipate
a further slight reduction in the effective tax rate.
Basic earnings per share
Basic earnings per share for the year, before
one-time costs of acquisitions and integration,
share option charges, amortisation of intangibles,
and foreign exchange movements, increased by
61% to 20.59c compared with 12.71c for 2015.
Basic earnings per share based on the statutory
profit after tax was 11.22c (2015: 6.98c).
Cash flow and debt
The Group generated operating cash flow of
€15m for the year, up from €3.4m in 2015, with
the benefit of €1.6m of MMTC payments from
2013 and 2014. During the year the Group
also accumulated MMTCs in Quebec of €2.8m
(2015: €1.3m). Previous delays in receiving the
multimedia tax credits were not encountered
in 2016 and this significantly improved the cash
collection levels year on year. The total multimedia
tax credit accrual amounted to €2.9m as at
31 December 2016 (2015: €3.9m).
The Group made eight acquisitions to strengthen
the business during the year with a net cash
outflow on consideration payments of €21.1m,
and an additional €1.3m in acquisition and
integration expenses.
Investment in fixed assets amounted to €2.3m
(2015: €1.6m) reflecting the cost of increasing
the capacity of the Montreal studio, improvements
to both the Dublin and Manila studios and
investment in the Art service line for both Lakshya
Digital and Mindwalk. Additionally, there were
ongoing purchases of games testing equipment.
Cash and cash equivalents decreased to €17.0m
from €19.0m excluding accrued multimedia tax
credits of €2.9m (2015: €3.9m). The loans and
borrowings were €8.4m at 31 December 2016
(2015: €1.7m)
Foreign exchange
Keywords does not hedge foreign currency profit
and loss translation exposures. The effect on the
Group’s results of movements in exchange rates
and the foreign gains and losses incurred during
the year, which mainly relate to cash deposits
resulting from the £10.5m Placing in November
2015 and inter-company loans, are set out in the
net finance costs section above.
Dividend
The Company has a progressive dividend policy,
subject to the retention of funds needed to fund
future growth of the Group’s business and its
strategic aims.
Following the interim dividend payment of
0.44p per share on 28 October, 2016, the
Board has recommended a final dividend of
0.89p per share, which will make the total dividend
for the year ending 31 December 2016 1.33p per
share, a 10% increase over 2015. Subject
to shareholder approval at the Annual General
meeting, the final dividend will be paid on
23 June 2017 to all shareholders on the register
at 2 June 2017. The cash cost of the final proposed
dividend will be an estimated €0.83m, subject to
currency fluctuations.
Events after the reporting period
On 17 February 2017 the Group acquired the
entire share capital of Spov Ltd. (“Spov”) for a total
consideration of up to £1.16m in cash from its
founder, Allen Leitch. Based in London, UK, Spov
provides creative development, cinematics, UI,
visual effects and motion graphics services to the
video game and film markets.
The Group has agreed heads of terms on a
revolving credit facility with Barclays for €35m
for an initial 3 year term, with the opportunity to
extend by a further 2 years. The new facility
replaces the existing €15m facility and is on similar
terms. This increased facility is in keeping with the
growth of the Group and its financial performance
and provides support for the Group’s ongoing
acquisition strategy.
22
KEYWORDS STUDIOS PLC
Key performance indicators
We monitor our financial performance against
a number of different benchmarks. These are set
in agreement with the Board and used to evaluate
progress against our strategy.
Financial performance is measured by:
• Revenue growth
Revenue growth is measured by line of
business and overall against the Board’s
strategic goal to grow organically and
by acquisition.
Non-financial performance is measured by:
• Resource deployment
The Board reviews the efficiency at which the
Group is utilising its staff resources to ensure
optimum staffing strategies are deployed and
to maximise utilisation rates.
• Business won/lost
The Board reviews the levels of new business
won and lost, and monitors the reasons
for both, to ensure that the services being
offered to the market are appropriately priced
and relevant.
• Gross profit
• Customer satisfaction and quality
Gross profit is a key measure of the Group’s
pricing strategies, use of resources and
its ability to optimise resource utilisation.
• Overhead costs
The Board monitors the overheads to ensure
the costs of the Group are in line with the level
of business being generated.
• Adjusted EBITDA margin
The Board uses an adjusted measure of
EBITDA to monitor the performance of the
Group. This measure excludes foreign
exchange gains or losses, any one-time
expenses and the cost of employee share
option awards.
• Adjusted operating profit margin
The Board also uses an adjusted measure of
operating profit to monitor the performance
of the Group. This measure similarly excludes
foreign exchange gains or losses, any one time
expenses, and the cost of employee share
option awards.
of service delivery
The Board monitors the quality and timeliness
of service delivery on an ongoing basis and
reviews the level of repeat revenue from
existing customers, typically around 80%,
as a key measure of customer satisfaction.
David Broderick
Chief Financial Officer
4 April 2017
ANNUAL REPORT AND ACCOUNTS 2016
23
IIIIIStrategic Report
Principal Risks and Uncertainties
Managing risks
efficiently
Keywords is a fast-growing but relatively small Group operating in a
widespread geography. The markets we operate in are fragmented
in terms of the suppliers of services but our client base is relatively
concentrated with a number of very large, global companies at the
head and a large tail of small, independent developers.
The market is highly dynamic, with technology,
business models and consumer tastes evolving
constantly. In this environment Keywords has the
objective of becoming the leading global supplier
of localisation, testing, audio, art and other related
services to the industry and sees the following
risks as it pursues this objective.
The principal risks associated with the Group’s
strategy can be divided into:
1. General business risks for any
international company;
Industry-related risks; and
2.
3. Those specific to the Keywords
Group and its strategy.
Beyond the general business risks associated
with any international company, the principal
risks related to the industry or more specifically
to Keywords and its strategy, as identified by the
management and the Board, are set out below.
EXTERNAL RISKS
EXPOSURE TO LARGE
CUSTOMERS
THE CITY AND INVESTORS
SUDDEN BUSINESS
INTERRUPTION
TECHNOLOGY
24
KEYWORDS STUDIOS PLC
The Company’s client base principally comprises global game companies whose revenues are in the
billions and hundreds of millions of dollars. Our top five clients account for 28.4% (2015: 36.4%) of the
Company’s revenues. These companies have exacting standards and demand a high quality of service.
Any failure in this regard or breakdown in the relationships at the top level could cause considerable
damage to the business. The potential impact is partially mitigated through the Company’s highly flexible
resource base and its expansion continues to reduce its exposure to any single large client.
Keywords floated on AIM in July 2013 with an expressed set of objectives of growing the business
organically and by acquisition. Should the Company lose the confidence of investors, the Company’s rating
will suffer and this in turn will affect its ability to raise money for or place shares to pay for acquisitions.
However, the Company makes every effort to communicate regularly with investors via announcements
and face-to-face contact and this effective communication of how it continues to execute on its stated
growth strategy and successfully integrate the businesses it acquires should continue to maintain the
confidence of its investors.
Keywords is a global business and needs to minimise business interruptions and be able to continue
servicing customers. This threat could be internal such as a major failure in its IT systems but also
external such as the Group experienced and managed during the 2011 Tokyo earthquake and tsunami.
The Group’s multiple, full-service, delivery hubs provide for a good level of contingency and, supported
by a solid business continuity plan and comprehensive insurance, the effects of such disasters can
be managed.
The Company uses various third party and proprietary tools and technologies for process control and
productivity purposes. Continued investment in these tools is important to ensure the Groups’ effectiveness.
New technologies for automated testing, machine translation and crowdsourcing, could pose a threat to
the Group in the long-term. The Company participates directly and with clients in various pilot programmes
for new technologies to keep abreast of the state of the art.
INTERNAL RISKS
CYBER AND
INFORMATION SECURITY
SUCCESS OF ACQUISITIONS
SERVICE DELIVERY
The industry requires the highest standards of security within a company offering services such as
Keywords. Security breaches may lead to piracy, disruption of clients’ marketing plans, loss of competitive
edge and could result in compensation claims. Keywords maintains physical and data security policies and
procedures which are regularly audited by its larger clients.
Keywords has an active acquisition strategy to reinforce its global growth. Managing such acquisitions
successfully and embedding the Keywords culture is a crucial ingredient of success. Failure to do so will
have adverse consequences such as management distraction, disposal and reduced profit. Since IPO,
the Company has involved a broader number of senior managers in the acquisition and integration
process, building on the considerable experience that exists at Board level thus providing further
bandwidth to identify, execute and integrate acquisitions.
Most of Keywords’ services are of a time-critical nature with delays or service delivery failures potentially
impacting the development or launch plans for games. Timely delivery and the resourcing flexibility
to enable delivery to tight deadlines has been an integral part of the Company’s modus operandi, and
Keywords’ approach to project management is applied across the Group. With the expansion of the
Group, measures are being taken to assess ongoing delivery performance beyond the regular project
post-mortems that are routinely conducted.
CROSS CONTAMINATION
As the Group succeeds in delivering multiple services to the same clients, so the risk of failure in one
service line contaminating the relationship with the client across the other service lines increases.
Adhering to Keywords’ strong standards of delivery and efficient communication across service lines
is key to managing this risk.
FINANCIAL RISKS
ADEQUATE OVERSEAS
FINANCIAL CONTROLS
HUMAN RESOURCES/
TALENT MANAGEMENT
As a business like Keywords grows rapidly, global financial controls and regular audits need to be in
place to ensure smooth, timely and accurate reporting to satisfy the relevant accounting bodies to local
branches as well as the Board. Failure to accurately report or forecast financial results through error or
fraud would damage the Group’s reputation. Therefore, the Group has invested and continues to invest
in its financial reporting functions to facilitate strong reporting and management control as it grows.
Keywords management structure has been fundamental to the Group’s success. A failure to attract,
retain or develop high quality entrepreneurial management across the business could impact on the
attainment of strategic objectives. The Group is focused on this area with the implementation of globally
managed service lines, management development and remuneration programmes, incorporating long
and short-term incentives. A new Global HR Director is to be appointed in 2017 to further drive initiatives
in this area.
LEGAL AND ETHICAL
STANDARDS
A material failure to comply with applicable legal and ethical standards could result in penalties, costs,
reputational harm and damage to relationships with suppliers and customers. The Group promotes
a culture of “Doing the right Thing” in all activities. Business conduct guidelines are in place and are
supported by more detailed policies and procedures where needed.
ANNUAL REPORT AND ACCOUNTS 2016
25
IIIIIStrategic Report Board of Directors
Ross Graham (69)
Independent Non-Executive Director
and Chairman
Ross Graham has extensive executive and
non-executive experience in the technology
sector. He worked from 1987 to 2003 at Misys plc,
a global software product and solutions provider.
He joined Misys as Finance Director upon its
flotation, latterly becoming Corporate
Development Director; throughout he played
a key role in developing and implementing
its acquisition strategy. Ross also held a
non-executive directorship at Psion plc from
2005 until 2012 when that company was
successfully sold to Motorola Solutions Inc.
During his time at Psion, he held various roles
including the senior independent directorship
and chairman of the audit and remuneration
committees. He was also a non-executive
director at Wolfson Microelectronics Plc and
was previously senior independent director
and the audit committee chairman prior to its
sale to Cirrus Logic Inc. in 2014. Ross qualified
as a chartered accountant with Arthur Young
in 1969 and was made a partner of that firm
in 1981. He is a Fellow of the Institute of
Chartered Accountants in England & Wales.
Ross was appointed Director and Chairman
of Keywords prior to the flotation in July 2013.
26
KEYWORDS STUDIOS PLC
Andrew Day (53)
Group Chief Executive Officer
David Broderick (42)
Chief Financial Officer
Andrew has a background in technology,
manufacturing and business services through
corporate development and general management
roles within both publicly quoted and private
companies. Andrew started his career in 1983
at Rothmans International PLC in production
management. From 1986 to 1993 he had
responsibility for corporate development activities
at Britannia Security Group PLC, TIP Europe PLC
and Brent International PLC before holding the
position of Divisional Managing Director at Brent
International PLC for six years. Andrew was Chief
Executive Officer of interactive retail software
developer, Unipower Solutions and Head of Retail
and CPG for EMEA, a NYSE-listed advanced
analytics business, FICO, before joining Keywords
as its Chief Executive Officer in April 2009.
David joined Keywords in 2016 from Dublin-based
Arconics, a high-growth aviation software
company where he was Chief Financial Officer.
Prior to this, David was the Finance Director
of European regional airline, Stobart Air (formerly
Aer Arann), during a period of significant growth in
2013-2014. David previously spent eight
years at Europe’s largest low-cost airline,
Ryanair Holdings plc, the latter six years of
which were spent as Head of Investor Relations
and overseeing the group’s Inflight Sales Unit’s
finances and operations.
David Reeves (69)
Independent Non-Executive Director
Giorgio Guastalla (47)
Non-Executive Director
Giorgio Guastalla is co-founder of Keywords.
Prior to establishing Keywords in Ireland in 1998,
Giorgio held various positions in marketing and
IT at Brent International PLC based in the US,
Spain, the UK and France. In 2002 Giorgio
founded Italicatessen Ltd, a company operating
in the food sector. Giorgio was CEO of Keywords
until 2009 before concentrating on his other
business interests and moving to a non-executive
Director role at Keywords Studios.
David has spent over 30 years in management
roles within multinational companies. He began his
career as an operational research consultant
before moving overseas with RJ Reynolds
Nabisco where he worked from 1979 to 1991,
becoming the Marketing Director in 1986 and
Worldwide Marketing Director in 1989. In 1991,
David served as the General Manager and Vice
President of Marketing in Tokyo for Mitsubishi
Shoji JV Technology Company. David has
considerable experience in the computer
entertainment industry. David was the Managing
Director for Sony Computer Entertainment
(PlayStation) from 1995 until his appointment
as its Executive Vice President in 1999 and
President in 2003. Throughout his career,
David has developed knowledge of the various
working styles of European, American and Asian
corporations. He was appointed to the Board
of Keywords Studios Limited on 29 May 2013.
ANNUAL REPORT AND ACCOUNTS 2016
27
IIIIGovernance Directors’ Report
The Directors present the annual report together with both the audited consolidated financial statements and the parent company (Keywords Studios Plc)
financial statements for the year ended 31 December 2016.
Disclaimer
The purpose of this Annual Report & Financial Statements is to provide information to the members of the Company. The Annual Report & Financial Statements
have been prepared for, and only for, the members of the Company, as a body, and no other persons. The Company, its Directors and employees, agents or advisers
do not accept or assume responsibility to any other person to whom this document is shown or into whose hands it may come and any such responsibility or
liability is expressly disclaimed.
The Annual Report & Financial Statements contain certain forward-looking statements with respect to the operations, performance and financial condition of
the Group. By their nature, these statements involve uncertainty since future events and circumstances can cause results and developments to differ materially
from those anticipated. The forward-looking statements reflect knowledge and information available at the date of preparation of this Annual Report & Financial
Statements and the Company undertakes no obligation to update these forward-looking statements. Nothing in this Annual Report & Financial Statements
should be construed as a profit forecast.
Dividends
The results for the year are set out on page 36. Dividends paid and proposed are set out on page 50. The Board is proposing a final dividend of 0.89p per share
following the payment of an interim dividend of 0.44p per share in September, 2016.
Directors and changes to the Board
The Directors of the Company during the year were Ross Graham, Andrew Day, Andrew Lawton, David Reeves, Giorgio Guastalla and David Broderick.
Andrew Lawton resigned on 4 October 2016, and David Broderick was co-opted to the Board.
Details of members of the Board at 31 December 2016 are set out on pages 26-27.
Going concern
In view of the Group’s resources, cash at 31 December 2016 of €17.0m, free cash flow in 2016 of €14.2m, results of operations, excluding acquisition and
integration costs, and the overall financial condition of the Group, the Directors have reasonable expectation that the Group has adequate resources to
continue in operation for the foreseeable future. For this reason, the Directors continue to adopt the going concern basis in preparing the financial statements.
Political donations
No political donations were made in the year.
Directors and their interests
A list of Directors, their interests in the ordinary share capital of the Company, their interests in its long-term performance share plan and details of their options
over the ordinary share capital of the Company are given in the Directors’ remuneration report on page 31. No director had a material interest in any significant
contract, other than a service contract or contract for services, with the Company or any of its operating companies at any time during the year.
The names of all persons who, at the year end, were Directors of the Company can be found on page 26 under The Board of Directors.
Corporate Governance
Compliance with UK Corporate Governance Code
Keywords is committed to high standards of corporate governance throughout the Group. As a company whose shares are traded on AIM, it is not required to
comply with all the requirements of the UK Corporate Governance Code 2015 ("the Code"). However, the Board recognises the importance of, and is committed
to, ensuring that effective corporate governance procedures are in place as appropriate for a public company of its size and complexity and in the light of the
risks and challenges it faces.
The Group’s corporate governance arrangements are set out below:
The Board
The Board is comprised of two Executive and three Non-Executive Directors. The Board considers that Ross Graham and David Reeves are independent in
character and judgement and that there are no relationships or circumstances which are likely to affect their independent judgement.
The Board is responsible for the overall management of Keywords, our strategy and long-term objectives. It provides leadership to Keywords having regard
to the interests of shareholders and other stakeholders.
Audit Committee
The Audit Committee is chaired by David Reeves. Ross Graham is the other Committee member. The Audit Committee is responsible for assisting the Board
in fulfilling its financial and risk responsibilities. The Audit Committee oversees our financial reporting, risk management and internal control procedures,
and reviews the work of external auditors.
Remuneration Committee
The Remuneration Committee is responsible for determining the remuneration of the Chairman, executive Directors, the Company Secretary and senior
executives of Keywords.
For further information please see pages 33 to 35.
28
KEYWORDS STUDIOS PLC
Internal controls and risk management
The Board has overall responsibility for the Group’s system of internal controls. The system is designed to manage, rather than eliminate the risk of failure
to achieve business objectives, and can only provide reasonable assurance against material misstatement or loss.
The Directors believe that the Group has internal control systems in place appropriate to the size and nature of the business. The key elements are:
• Group Board Meetings, at a minimum of eight times per year, with reports from and discussions with senior executives on performance and key risk areas
in the business;
• Monthly financial reporting, for the Group and for each subsidiary, of actual performance compared to budget and the prior year;
• Annual budget setting; and
• A defined organisational structure with appropriate delegation of authority.
The Board also receives a report from the external auditor on matters identified in the course of the statutory audit.
Substantial shareholdings
At 31 December 2016, the Company had been notified, in accordance with the Disclosure and Transparency Rules, of the following interests in its ordinary
share capital:
Name
P.E.Q Holdings
Andrew Day
Hargreave Hale, stockbrokers
Invesco Perpetual
Kabouter Management
BlackRock
Schroder Investment Management
Liontrust Asset Management
Shares
7,978,736
3,796,573
3,720,076
3,514,896
3,296,126
3,173,999
2,218,897
2,079,381
%
14.7%
7.0%
6.8%
6.5%
6.1%
5.8%
4.1%
3.8%
Future developments
Important events since the financial year end are described on page 19 of the Strategic Report and future developments are described in the strategy section
of the Strategic report on page 10.
People and organisation
Keywords is, and always has been, dependent on the quality and commitment of its entire staff to provide and maintain the high levels of services expected by
the Group’s clients.
The average headcount reached a peak of 2,666 in December 2016. Keywords permanent staff complement averaged 1,118 during 2016. This permanent
headcount is supplemented with employees on short term contracts as activity changes throughout the year.
The Group continues to give full and fair consideration to applications for employment made by disabled persons, having regard to their respective aptitudes
and abilities. The policy includes, where practicable, the continued employment of those who may become disabled during their employment and the provision
of training and career development and promotion, where appropriate. The Group has continued its policy of employee involvement by making information
available to employees on matters of concern to them. Many employees are stakeholders in the Company through participation in share option schemes and
a long-term performance share plan.
The Group has not disclosed further details on employment of disabled persons or employee involvement as it has fewer than 250 employees within the UK.
Corporate responsibility
Keywords seeks to be a socially responsible Group which has a positive impact on the communities in which operates. By the nature of the business, we employ
a diverse workforce, with many nationalities. No discrimination is tolerated, and we endeavour to give all employees the opportunity to develop their capabilities.
We provide an excellent working environment, the latest technology and appropriate training.
Statement of Directors’ responsibilities
The Directors are responsible for preparing the Annual Report & Financial Statements.
Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the Group and Company
financial statements in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union (“EU”).
Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs
of the Company and the Group and of the profit or loss of the Group for that period. The Directors are also required to prepare financial statements in accordance
with the rules of the London Stock Exchange for companies trading securities on the Alternative Investment Market.
In preparing these financial statements the Directors are required to:
• Select suitable accounting policies and then apply them consistently;
• Make judgements and estimates that are reasonable and prudent;
• State whether IFRS as adopted by the EU have been followed, subject to any material departures disclosed and explained in the Group and Company
financial statements respectively; and
• Prepare the financial statements on a going concern basis, unless it is inappropriate to presume that the Company will continue in business.
ANNUAL REPORT AND ACCOUNTS 2016
29
IIIIGovernance Directors’ Report continued
Statement of Directors’ responsibilities continued
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with
reasonable accuracy at any time the financial position of the Company and the Group and to enable them to ensure that the financial statements and the
Directors’ remuneration report comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and the Group
and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors as at the date of this report, whose names and functions are listed in the Board of Directors on page 26, confirm that:
• So far as the Director is aware, there is no relevant audit information of which the Company’s auditors are unaware; and
• The Director has taken all the steps that he or she ought to have taken as a Director in order to make himself/herself aware of any relevant audit information
and to establish that the Company’s auditors are aware of that information.
This confirmation is given and should be interpreted in accordance with the provisions of section 418 of the Companies Act 2006.
Website publication
The Directors are responsible for ensuring the annual report and the financial statements are made available on a website. Financial statements are published
on the Group’s websites in accordance with legislation in the United Kingdom governing the preparation and dissemination of financial statements, which
may vary from legislation in other jurisdictions. The maintenance and integrity of the Group’s websites is the responsibility of the Directors. The Directors’
responsibility also extends to the ongoing integrity of the financial statements contained therein.
By Order of the Board
David Broderick,
Company Secretary
4 April 2017
30
KEYWORDS STUDIOS PLC
Directors’ Remuneration Report
Dear fellow shareholder,
It is my pleasure to present the Directors’ remuneration report for the period ended 31 December 2016.
It is my hope that you find this a clear and comprehensive report and I look forward to hearing the views of our investors on the information presented here
over the coming months. We will carefully monitor emerging practice in this area as well as guidance from investor representative groups.
We operate a simple remuneration structure made up of base salary and benefits, a bonus plan and share option scheme, and a long-term incentive plan,
which provide a clear link between pay and our key strategic priorities.
The Board of Directors
The Board of Directors have a duty to act in the best interests of their shareholders when determining remuneration. It is their responsibility to promote
the long-term success of the company while also considering the employees, suppliers, customers and other external factors which may be impacted by
remuneration decisions.
Executive directors will be responsible for developing and implementing remuneration strategy for the Group. Non-executive directors will be responsible
for constructively reviewing and contributing to this strategy.
The Remuneration Committee
The members of the Remuneration Committee are Giorgio Guastalla (Committee Chairman), David Reeves and Ross Graham. The members are all Non-
Executive Directors.
The remit of the Committee is primarily to determine and agree with the Board the framework or broad policy for the remuneration of the Company’s Executive
Directors, and if required by the Board, the Senior Management of the Group.
Non-executive directors, who are the members of the remuneration committee, should oversee Executive remuneration. The remuneration of the Chairman
of the Board is determined by the Remuneration Committee. The remuneration of the Non-Executives is a matter for the Executive member of the Board
in conjunction with the committee Chairman.
No Director or Senior Manager is involved in any discussion or decision about his own remuneration.
The Remuneration Committee consists of non-executive directors all of whom are independent with no personal financial interest, other than as shareholders,
in the decisions of the Committee. The remuneration committee secretary will be the company human resource manager. By invitation, other members of the
Board may attend the Committee’s meetings.
Meetings
The Remuneration Committee is planned to meet at least three times a year. In the year ended 31 December 2016, the remuneration committee met on
three occasions.
Directors’ emoluments and Pension Contributions
The aggregate remuneration for the Directors of the Company, for service in all capacities for the period year ended 31 December 2016 was €650,432
(2015: €645,727). The remunerations of individual directors were as follows.
Andrew Day
David Broderick
David Reeves
Giorgio Guastalla
Ross Graham
Andrew Lawton
Salary or
fees
204,025
36,218
63,819
46,926
67,736
107,113
61,208
10,865
–
–
–
52,521
2016
Bonus
Pension
Share
Options
2015
Bonus
Pension
Total
265,233
47,083
63,819
46,926
67,736
159,634
Salary or
fees
187,395
–
66,610
48,156
68,812
120,509
61,983
–
–
–
–
37,190
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Share
Options
38,546
–
–
–
–
16,526
Total
287,924
–
66,610
48,156
68,812
174,225
55,072
645,727
–
–
–
–
–
–
–
525,838
124,594
650,432
491,482
99,173
Directors’ Interest in Shares
The interests of each person who was a director of the Company as at 31 December 2016 (together with interests held by his or her connected persons) were:
Giorgio Guastalla(1)
Andrew Day
David Reeves
Ross Graham
1 Giorgio Guastalla’s indirect shareholding arises out of his 90% holding in P.E.Q. Holdings Limited.
2016
Number
7,180,862
3,796,573
28,732
58,440
2015
Number
10,780,862
5,296,573
22,510
58,440
11,064,607
16,158,385
ANNUAL REPORT AND ACCOUNTS 2016
31
IIIIGovernance
Directors’ Remuneration Report continued
Directors’ Interest in Shares continued
The outstanding awards granted to each director of the Company are as follows.
Long-Term Investment Plan
Andrew Day
Andrew Lawton
David Broderick
Share Option Plan
Andrew Day
Start of year
Number
86,593
35,000
–
50,000
35,000
–
–
206,593
Awarded
Number
–
–
60,000
–
–
35,000
30,000
30,000
Exercised
Number
–
–
–
–
–
–
–
–
Lapsed
Number
–
–
–
–
(35,000)
(35,000)
–
(35,000)
Start of year
Number
Awarded
Number
Exercised
Number
Lapsed
Number
21,167
21,167
21,168
63,502
–
–
–
–
–
–
–
–
–
–
–
–
Vesting
Date
12 July 2016
1 June 2018
10 May 2019
03 July 2017
01 June 2018
10 May 2019
03 October 2019
Vesting
Date
12 July 2015
12 July 2016
12 July 2017
End of year
Number
86,593
35,000
60,000
50,000
–
–
30,000
201,593
End of year
Number
21,167
21,167
21,168
63,502
Awards of shares have vested or will vest on the dates shown. In the event that a Director ceases to be an employee of the Group for reasons other than death,
retirement, redundancy, injury, ill-health or disability before the vesting date, then the rights to the award will lapse, unless the Remuneration Committee
recommend otherwise. Awards that have vested are valid until 11 May 2020.
Awards are not subject to further performance conditions once granted.
Transactions with Directors
During the year, there were no material transactions between the Company and the Directors, other than their emoluments.
All transactions between the Group and the Directors are set out in the notes to the financial statements, including note 25 on related party transactions.
Giorgio Guastalla,
Chairman of the Remuneration Committee
32
KEYWORDS STUDIOS PLC
Directors Remuneration Policy Report
Policy and principles
The Remuneration Committee determines the Company’s policy on the structure of executive directors’ and if required, senior management’s remuneration.
The objectives of this policy are to:
• Reward executive directors and senior management in a manner that ensures that they are properly incentivised and motivated to perform in the best
interests of shareholders.
• Provide a level of remuneration required to attract and retain high calibre executive directors and senior management of appropriate calibre.
• Encourage value creation through consistent and transparent alignment of incentive arrangements with the agreed company strategy over the long term.
• Ensure the total remuneration packages awarded to executive directors, comprising both performance-related and non-performance-related remuneration,
is designed to motivate the individual, align interests with shareholders and comply with corporate governance best practice.
The Board and the Remuneration Committee believe the foregoing objectives are best achieved by a remuneration structure whereby:
• Basic pay is set at a below median level albeit sufficient for the challenges and pressures of the role.
• Annual bonuses are set at modest levels with a maximum of 30% of basic on the premise that an annual bonus doesn’t influence the behaviour or
commitment of a senior executive.
• Long-term incentives are the means by which executives can earn significant rewards if, but only if, shareholders likewise have obtained a good return.
Remuneration components
Various remuneration components are combined to ensure an appropriate and balanced remuneration package which reflects the size and importance of the
business unit, the executive’s experience, responsibility and position in the company as well as market practice. For this the Remuneration Committee takes into
account the performance of the individual, comparisons with peer companies and, where considered appropriate, reports from external independent consultants.
The remuneration components are comprised of the following elements:
• Fixed remuneration (basic salary);
• Performance-based remuneration (variable salary in the form of an annual bonus);
• Pension contribution;
• Other benefits; and
• Long-term incentives (in the form of performance shares or share options).
For non-executive directors there is only one component, a base fee determined by the executive directors.
Basic salaries and benefits
Basic salaries are initially determined to reflect the role, and the responsibility of the individual within that role, while also upholding the principle of paying
no more than is necessary (below the median).
The basic salaries of executive directors and senior management are reviewed annually having regard to personal performance, company performance,
significant changes in their responsibilities and competitive market practice. With effect from 1 March 2017 salary increases of 7.5% have been awarded to
the executive directors, Andrew Day and David Broderick. These are explained by the very material rise in the size of the business year on year. Even after
the salary increases both executive directors have a base salary and maximum bonus below the median salary for a company of equivalent size and therefore
in line with the Remuneration Policy as set out elsewhere.
Performance-based (annual) bonus
Under current arrangements, which will be reviewed annually by the Remuneration Committee, executive directors and senior management are eligible to
participate in a bonus scheme. The bonus amount is a percentage of salary of up to 30% which is subject to the attainment of specific targets set for each
individual. The portion of bonus earned in any one year depends on the Remuneration Committee’s assessment of each individual’s performance and the
overall performance of the Company against predetermined turnover and profitability targets for the year.
Performance targets are weighted 80% towards the Company’s financial performance and 20% towards personal performance (however if the Company’s
financial performance is considered to be unsatisfactory the 20% for personal performance is likely to be foregone).
The Remuneration Committee will review targets and the weighting of performance measures each year.
The bonus may not exceed the agreed percentage of the fixed salary, which level can only be achieved at a weighted target achievement of 100%.
Pension contribution
At the discretion of the Remuneration Committee the executive directors and senior management may participate in a pension scheme facilitated by the
Company. The Company does not operate any pension scheme or make pension provision for non-executive directors.
Benefits
During the period since incorporation, the Company has not contributed to any employment related benefits.
ANNUAL REPORT AND ACCOUNTS 2016
33
IIIIGovernance Directors Remuneration Policy Report continued
Long-term incentives
Share options
Share options programmes are in place for permanent members of staff, including the Senior Management. The focus of the share option programmes
is to retain talent and create long-term shareholder value consistent with fulfilment of the company’s long-term strategic goals.
Long-Term Incentive Plan (LTIP)
The purpose of the LTIP is to incentivise delivery against total shareholder return. Share awards further the alignment of executives’ and shareholders’
interests.
LTIP grants are made annually to a range of senior employees across the Company. Awards are made in the form of nil value share options which vest subject
to performance conditions. Performance conditions are measured over three financial years and are not retested. Conditions are reviewed annually.
Leaver treatment
Fair treatment will be extended to departing executives. Executives who resign or are dismissed for cause are, by default, not eligible for an annual bonus
if they have left or are under notice at date of payment, and forfeit all unvested share options or LTIP shares.
At the Committee’s discretion good leavers (normally including such circumstances as retirement, death, disability, and redundancy) may be eligible for an
annual bonus for the proportion of the bonus year served. However performance will be tested in line with the normal performance schedule. Similarly good
leavers, including those who have served as executive directors, may be allowed to exercise a proportion of unvested share options or LTIPs post termination
when, or to the extent that, the underlying options or LTIPs meet the performance criteria for vesting.
The Committee reserves the right to make any remuneration payments and payments for loss of office, notwithstanding that they are not in line with the
policy set out above, where the terms of the payment were agreed (i) before the policy came into effect or (ii) at a time when the relevant individual was not
a director of the Company and, in the opinion of the Committee, the payment was not in consideration for the individual becoming a director of the Company.
For these purposes the term “payments” includes the Committee satisfying awards of variable remuneration and, in relation to an award over shares, the terms
of the payment were “agreed” at the time the award is granted.
34
KEYWORDS STUDIOS PLC
Independent Auditor’s Report
To the Members of Keywords Studios PLC
We have audited the financial statements of Keywords Studios plc for the year ended 31 December 2016 which comprise the Group and Parent Company
Statements of Financial Position, the Group Statement of Comprehensive Income, the Group and Parent Company Statements of Cash Flows, the Group and
Parent Company Statements of Changes in Equity, and the related notes. The financial reporting framework that has been applied in their preparation is
applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the parent company financial
statements, as applied in accordance with the provisions of the Companies Act 2006.
This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been
undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose.
To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the Company’s members as a body,
for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of directors and auditors
As explained more fully in the Statement of Directors’ responsibilities, the directors are responsible for the preparation of the financial statements and for being
satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law
and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Financial Reporting Council’s (FRC’s) Ethical Standards
for Auditors.
Scope of the audit of the financial statements
A description of the scope of an audit of financial statements is provided on the FRC’s website at www.frc.org.uk/auditscopeukprivate.
Opinion on financial statements
In our opinion:
•
•
•
•
•
the financial statements give a true and fair view of the state of the Group’s and the parent Company’s affairs as at 31 December 2016 and of the group’s
profit for the year then ended;
the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union;
the parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in
accordance with the provisions of the Companies Act 2006; and
the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.
Opinion on other matters prescribed by the Companies Act 2006
In our opinion, based on the work undertaken in the course of the audit:
•
the information given in the strategic report and directors’ report for the financial year for which the financial statements are prepared is consistent with the
financial statements; and
the strategic report and directors’ report have been prepared in accordance with applicable legal requirements.
Matters on which we are required to report by exception
In the light of the knowledge and understanding of the group and the parent company and its environment obtained in the course of the audit, we have not
identified material misstatements in the strategic report or the directors’ report.
We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:
• adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not
•
visited by us; or
the parent company financial statements are not in agreement with the accounting records and returns; or
certain disclosures of directors’ remuneration specified by law are not made; or
•
• we have not received all the information and explanations we require for our audit.
Teresa Morahan (Senior statutory auditor)
For and on behalf of BDO, statutory auditor,
Dublin 2,
Ireland.
4 April 2017
ANNUAL REPORT AND ACCOUNTS 2016
35
IIIFinancial Statements Note
4
20
6
6
7
Years ended 31 December
2016
€'000
96,585
(62,196)
2,289
(59,907)
36,678
(686)
(1,316)
(1,629)
(21,588)
(25,219)
11,459
94
(2,118)
9,435
(3,223)
6,212
489
(63)
6,638
6,273
(61)
6,212
6,699
(61)
6,638
2015
€'000
57,951
(37,460)
1,287
(36,173)
21,778
(392)
(1,089)
(857)
(13,616)
(15,954)
5,824
70
(808)
5,086
(1,832)
3,254
763
–
4,017
3,363
(109)
3,254
4,126
(109)
4,017
Euro cent
Euro cent
9
9
11.22
10.87
6.98
6.87
Consolidated Statement of Comprehensive Income
Revenues
Operating costs
Multimedia tax credits
Net Operating Costs
Gross profit
Share option expense
Costs of acquisition and integration
Amortisation of intangible assets
Other administration expenses
Administrative expenses
Operating profit
Financing income
Financing cost
Profit before taxation
Tax expense
Profit from Operations
Other comprehensive income:
Exchange gains on translation of foreign operations
Actuarial loss on defined benefit
Total comprehensive income:
Profit for the period attributable to:
Owners of the parent
Non-controlling interest
Total comprehensive income attributable to:
Owners of the parent
Non-controlling interest
Earnings per share
Basic earnings per ordinary share (Euro cent)
Diluted earnings per ordinary share (Euro cent)
The notes on pages 43 to 78 form an integral part of these consolidated financial statements.
On Behalf of the Board
Andrew Day
Director
4 April 2017
David Broderick
Director
36
KEYWORDS STUDIOS PLC
Consolidated Statement of Financial Position
Non-current assets
Property, plant and equipment
Goodwill
Intangible assets
Deferred tax assets
Current assets
Trade receivables
Other receivables
Short-term investments
Cash and cash equivalents
Total assets
Equity
Share capital
Share capital – To Be Issued
Share premium
Merger reserve
Foreign exchange reserve
Treasury shares held in EBT
Share option reserve
Retained earnings
Non-controlling interest
Total equity
Current Liabilities
Trade payables
Other payables
Loans and Borrowings
Corporation tax liabilities
Non-current liabilities
Other payables
Employee Defined Benefit
Loans and Borrowings
Deferred tax liabilities
Total equity and liabilities
Years ended 31 December
Note
14
12
13
15
16
18
17
19
21
23
21
22
23
29
2016
€’000
5,498
46,799
8,696
880
61,873
13,879
7,778
–
17,020
38,677
100,550
654
8,792
19,983
22,109
987
(1,434)
1,305
14,308
66,704
–
66,704
4,822
12,431
8,025
2,552
27,830
1,592
826
345
3,253
6,016
2015
€’000
3,486
23,893
3,782
971
32,132
7,519
8,320
27
19,018
34,884
67,016
646
–
18,542
22,109
498
(804)
619
10,293
51,903
(1,309)
50,594
2,761
7,862
1,163
752
12,538
300
590
571
2,423
3,884
100,550
67,016
The notes on pages 43 to 78 form an integral part of these consolidated financial statements. The financial statements were approved and authorised for
issue by the Board on 4 April 2017.
On Behalf of the Board
Andrew Day
Director
4 April 2017
David Broderick
Director
ANNUAL REPORT AND ACCOUNTS 2016
37
IIIFinancial Statements
Consolidated Statement of Changes in Equity
Shares
to be
issued
€'000
–
–
–
–
–
–
–
–
–
–
–
–
Share
capital
€'000
551
–
–
–
–
–
–
78
17
–
–
95
646
–
–
–
–
–
–
–
–
–
–
763
–
–
–
14,118
2,694
–
–
16,812
–
–
–
–
–
–
–
–
– 18,542 22,109
498
Share
premium
€'000
18,542
–
–
Merger
reserve
€'000
5,297
–
–
Foreign
exchange
reserve
€'000
Treasury
shares held
in EBT
€'000
(265)
–
763
Share
option
reserve
€'000
227
–
–
Retained
earnings
€'000
7,667
3,363
–
Total
attributable
to equity
holders of
parent
€'000
32,019
3,363
763
Non
Controlling
Interest
€'000
Total
equity
€'000
–
(109)
–
32,019
3,254
763
–
3,363
4,126
(109)
4,017
–
–
–
–
–
–
(804)
–
–
–
392
–
–
–
–
–
–
(737)
–
–
–
–
392
(737)
(804)
14,196
2,711
–
–
–
–
–
–
(50)
392
(737)
(804)
14,196
2,711
(50)
–
–
–
–
(1,150)
(1,150)
(804)
(804)
392
(737)
15,758
(1,200) 14,558
619 10,293
51,903
(1,309) 50,594
–
–
–
–
–
–
–
5
1
–
–
–
1
–
1
–
8
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
643
169
6,906
–
1,886
–
–
–
–
–
–
–
149
–
331
149
8,792
1,441
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
489
489
–
–
–
–
–
–
6,273
(63)
6,273
426
(61)
–
6,212
426
6,210
6,699
(61)
6,638
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(632)
–
2
686
–
–
–
–
–
(825)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(1,370)
–
–
–
–
686
(632)
(825)
2
648
170
6,906
1,886
(1,370)
150
–
332
149
–
–
–
–
–
–
–
–
1,370
–
–
–
–
686
(632)
(825)
2
648
170
6,906
1,886
0
150
–
332
149
(630)
686
(2,195)
8,102
1,370
9,472
Balance at 1 January 2015
Profit for the period
Other comprehensive income
Total comprehensive income
for the year
Contributions by and contributions
to the owners:
Share option expense (note 19)
Dividends paid (note 10)
Shares bought for EBT
Shares issued for cash
Shares issued upon acquisitions
Liabilities on acquisition of Kite Team
Purchase of Put Option – remaining 50%
Kite Team
Contributions by and contributions to
the owners
Balance at 31 December 2015
Profit for the period
Other comprehensive income
Total comprehensive income
for the year
Contributions by and contributions
to the owners:
Share option expense (note 19)
Share Options Exercised
Dividends paid (note 10)
Treasury shares ring-fenced for EBT
Shares issued for cash – Numis
Warrants (note 19)
Shares issued upon acquisition – Volta
Creation Inc
Shares to be issued (Synthesis
Acquisition)
Shares to be issued (Mindwalk
Acquisition)
Elimination of Minority Interest in Kite Team
Shares Issued on settlement with Kite Team
Keywords France Incorporation
Shares issued upon acquisition – Player
Research Ltd
Shares issued upon acquisition – Sonox
Audio Solutions SL
Contributions by and contributions
to the owners
Balance at 31 December 2016
654
8,792 19,983 22,109
987
(1,434)
1,305 14,308
66,704
– 66,704
38
KEYWORDS STUDIOS PLC
Consolidated Statement of Cash Flows
Cash flows from operating activities
Profit/(loss) after tax
Income and expenses not affecting operating cash flows
Depreciation
Intangibles amortisation
Income tax expense
Share option expense
Loss on disposal of fixed assets
Loss on payment of deferred consideration
Interest receivable
Actuarial Loss on Employee Benefit
Share Issuance Expenses
Interest expense
Net Foreign Exchange Losses on investments
Changes in operating assets and liabilities
(Increase)/Decrease in trade receivables
(Increase)/Decrease in other receivables
Increase/(Decrease) in trade and other payables
Income taxes paid
Net cash provided by operating activities
Cash flows from investing activities
Acquisition of subsidiaries net of cash acquired
Acquisition of remaining 50% of Kite
Settlement of deferred liabilities on acquisitions
(Acquisition)/disposal of short term investments
Acquisition/disposal of property, plant and equipment
Interest received
EBT share purchase
Net cash used in investing activities
Cash flows from financing activities
Repayment of loan to Directors of acquired company
Loan to finance Multi Media Tax Credits
Repayment of loans
Loan to finance acquisitions
Dividends paid
Share options exercised
Shares issued
Share issuance expenses
Interest paid
Net cash used in financing activities
Decrease in cash and cash equivalents
Exchange gain/loss on cash and cash equivalents
Cash and cash equivalents at beginning of the period
Cash and cash equivalents at end of period
Years ended 31 December
Note
2016
€’000
2015
€’000
6,212
3,254
1,803
1,629
3,223
686
–
264
(94)
63
–
152
55
7,781
(3,788)
3,245
3,718
3,175
(2,129)
15,039
(19,109)
(1,000)
(995)
27
(2,306)
94
2
(23,287)
–
(1,157)
(625)
8,000
(825)
(632)
643
–
(152)
5,252
(2,996)
998
19,018
17,020
1,297
857
1,832
392
20
194
(70)
–
14
128
–
4,664
29
(2,533)
(646)
(3,150)
(1,362)
3,406
(7,409)
–
–
232
(1,635)
70
(804)
(9,546)
(300)
1,110
–
–
(737)
–
14,213
(14)
(128)
14,144
8,004
–
11,014
19,018
6
10
6
ANNUAL REPORT AND ACCOUNTS 2016
39
IIIFinancial Statements Company Statement of Financial Position
Non-current assets
Property, plant and equipment
Investment in subsidiaries
Other receivables
Current assets
Other receivables
Cash and cash equivalents
Total assets
Equity
Share capital
Share capital – To Be Issued
Share premium
Merger reserve – acquisitions
Treasury shares held in EBT
Share option reserve
Retained earnings
Current Liabilities
Trade payables
Other payables
Loans and Borrowings
Corporation tax liabilities
Non-current liabilities
Other payables
Loans and Borrowings
Total equity and liabilities
Note
24
16
16
17
19
20
21
23
21
Years ended 31 December
2016
€’000
2
30,659
4,243
34,904
22,088
946
23,034
57,938
654
8,792
19,983
27,792
(1,434)
1,305
(8,605)
48,487
175
414
8,000
2
8,591
860
–
2015
€’000
–
12,765
3,300
16,065
18,093
11,656
29,749
45,814
646
–
18,542
27,792
(804)
619
(2,598)
44,197
132
1,481
–
4
1,617
–
–
57,938
45,814
In accordance with Companies Act 2006, the Company is availing of the exemption from presenting its individual Statement of Comprehensive Income to
the annual general meeting and from filing it with Companies House. The amount of profit/(loss) after tax dealt with in the parent undertaking is (€5,182k)
(2015: loss (€1,576k).
The notes on pages 43 to 78 form an integral part of these financial statements. The financial statements were approved and authorised for issue by the
Board on 4 April 2017.
On Behalf of the Board
Andrew Day
Director
4 April 2017
David Broderick
Director
40
KEYWORDS STUDIOS PLC
Company Statement of Changes in Equity
Balance at 1 January 2015
Profit for the period
Total comprehensive income for the year
Contributions by and contributions to the
owners:
Share option expense (note 19)
Dividends paid (note 10)
Dividends received from Subsidiaries
Shares bought for EBT
Shares issued for cash
Shares issued upon acquisitions
Contributions by and contributions to the
owners
Balance at 31 December 2015
Profit for the period
Total comprehensive income for the year
Contributions by and contributions to the
owners:
Share option expense (note 19)
Share Options Exercised
Dividends paid (note 10)
Treasury shares ring fenced for EBT
Shares issued for cash – Numis Warrants
Shares issued upon acquisition – Volta Creation Inc
Shares to be issued (Synthesis Acquisition)
Shares to be issued (Mindwalk Acquisition)
Acquisition of Kite Team Final 50%
Keywords France Incorporation
Shares issued upon acquisition – Player Research
Ltd
Shares issued upon acquisition – Sonox Audio
Solutions SL
Contributions by and contributions to the
owners
Share
capital
€’000
551
–
–
–
–
–
–
95
–
95
646
–
–
–
–
–
–
5
1
–
–
1
–
1
–
8
Balance at 31 December 2016
654
Shares
to be issued
€’000
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
6,906
1,886
–
–
–
–
8,792
8,792
Share
premium
€’000
18,542
–
–
–
–
–
–
–
–
–
Merger
reserve
€’000
10,980
–
–
–
–
–
–
14,414
2,398
16,812
18,542
27,792
–
–
–
–
–
–
643
169
–
–
149
–
331
149
1,441
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Treasury
shares held
in EBT
€’000
–
–
–
–
–
–
(804)
–
–
(804)
(804)
–
–
–
(632)
–
2
–
–
–
–
–
–
–
–
Share
option
reserve
€’000
227
–
Retained
earnings
€’000
(317)
(1,576)
Total
equity
€’000
29,983
(1,576)
–
(1,576)
(1,576)
392
–
–
–
–
–
392
619
–
–
686
–
–
–
–
–
–
–
–
–
–
–
–
(737)
32
–
–
–
392
(737)
32
(804)
14,509
2,398
(705)
15,790
(2,598)
44,197
(5,182)
(5,182)
(5,182)
(5,182)
–
–
(825)
–
–
–
–
–
–
–
–
–
686
(632)
(825)
2
648
170
6,906
1,886
150
–
332
149
(630)
686
(825)
9,472
19,983
27,792
(1,434)
1,305
(8,605)
48,487
ANNUAL REPORT AND ACCOUNTS 2016
41
IIIFinancial Statements Years ended 31 December
Note
2016
€’000
2015
€’000
(5,182)
(1,575)
4
145
264
(17)
–
82
478
4,199
(304)
3,895
(4)
(813)
(18,030)
(2)
17
2
–
(18,013)
8,000
(825)
1,449
–
(494)
(14)
8,116
(10,710)
11,656
946
4
392
194
(20)
14
–
584
98
38
136
(4)
(859)
(897)
–
20
(804)
33
(1,648)
–
(737)
14,213
(14)
–
–
13,462
10,955
701
11,656
10
Company Statement of Cash Flows
Cash flows from operating activities
Profit/(loss) after tax
Income and expenses not affecting operating cash flows
Income tax expense
Share option expense
Loss on payment of deferred consideration
Interest Income
Share issuance costs
Interest expense
Changes in operating assets and liabilities
(Increase)/Decrease in other receivables
Increase/(Decrease) in trade and other payables
Income taxes paid/(refunded)
Net cash provided by operating activities
Cash flows from investing activities
Acquisition of subsidiaries
Acquisition/disposal of property, plant and equipment
Interest received
EBT share purchase
Dividends received from Subsidiaries
Net cash used in investing activities
Cash flows from financing activities
Loan to finance acquisitions
Dividends paid
Shares issued
Share issuance expenses
Share Options Exercised
Interest paid
Net cash used in financing activities
(Decrease)/Increase in cash and cash equivalents
Cash and cash equivalents at beginning of the period
Cash and cash equivalents at end of period
42
KEYWORDS STUDIOS PLC
Notes Forming part of the Consolidated Financial Statements
1 Basis of preparation
Keywords Studios plc (the “Company”) is a company incorporated in the UK. These consolidated financial statements include the financial statements of the
Company and its subsidiaries (the “Group”) made up to 31 December 2016. The Group was formed on 8 July 2013 when Keywords Studios Plc (formerly
Keywords Studios Limited) acquired the entire share capital of Keywords International Limited through the issue of 31,901,332 ordinary shares.
The parent company financial statements present information about the Company as a separate entity and not about its Group.
The consolidated and Company financial statements have been prepared in accordance with International Financial Reporting Standards, International
Accounting Standards and interpretations (collectively IFRS) issued by the International Accounting Standards Board (IASB) as adopted by the European Union
(“adopted IFRSs”).
New Standards, Interpretations and Amendments Effective from 1 January 2016
There were no new standards or interpretations implemented by the group for the first time for periods beginning on or after 1 January 2016. None of the
amendments to Standards that are effective from that date had a significant effect on the Group’s financial statements.
New Standards, Interpretations and Amendments not yet Effective
There were no new standards or interpretations available for early adoption for the first time for periods beginning on or after 1 January 2016, which have been
implemented by the Group.
On review of IFRS 15, Revenue from Contracts with Customers, the five key points to recognise revenue have been assessed;
Step 1: Identify the contract(s) with a customer
Step 2: Identify the performance obligations in the contract
Step 3: Determine the transaction price
Step 4: Allocate the transaction price to the performance obligations in the contract
Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation
On the basis of the contracts in place, the group do not envision a material change in reporting once IFRS 15 is implemented.
There are a number of operating leases across the group. In accordance with IFRS 16 Leases, their change in treatment in the financial statements from
1 January 2019 will impact the Statement of Financial Position, increasing both long-term assets and liabilities.
The financial statements for 2016 have been prepared in thousands (€’000) and the comparative numbers have also been revised to the same format. In 2015
the financial statements were rounded to one (€). The financial statements are presented in Euro (€) which is the functional currency of the Group.
2 Significant accounting policies
Basis of Consolidation
Where the company has control over an investee, it is classified as a subsidiary. The company controls an investee if all three of the following elements are
present; power over the investee, exposure to variable returns from the investee, and the ability of the investor to use its power to affect those variable
returns. Control is reassessed whenever facts and circumstances indicate that there may be a change in any of these elements of control.
De-facto control exists in situations where the company has the practical ability to direct the relevant activities of the investee without holding the majority
of the voting rights. In determining whether de-facto control exists the company considers all relevant facts and circumstances, including:
• The size of the company’s voting rights relative to both the size and dispersion of other parties who hold voting rights;
• Substantive potential voting rights held by the company and by other parties;
• Other contractual arrangements; and
• Historic patterns in voting attendance.
The consolidated financial statements present the results of the company and its subsidiaries (“the Group”) as if they formed a single entity. Intercompany
transactions and balances between Group companies are eliminated in full.
The acquisition of Keywords International Limited was deemed to be a ‘combination under common control’ as ultimate control before and after the acquisition
was the same. As a result, these transactions were outside the scope of IFRS 3 “Business combinations” and have been accounted for under the principles of
merger accounting as set out under UK GAAP from the date on which control is obtained until the date on which control ceases.
As part of the Group reconstruction in 2013, the Company issued 31,901,332 shares at a value of £1.23 each, being the flotation price, as part of a share for
share exchange with the shareholders of Keywords International Limited. The £0.01 nominal value of the shares issues was accounted for in Issued Share
Capital. On the 2013 consolidated balance sheet, the difference between the nominal value of shares issued by the company as consideration for the shares
in Keywords International Limited, and the nominal value of the shares in Keywords International Limited was treated as a merger reserve arising on group
reconstruction. On the Company balance sheet, the excess of net book value of the assets held by Keywords International Limited, at the date of the share
for share exchange, over the nominal value of the shares issued was treated as a merger reserve.
Business Combinations
The consolidated financial statements incorporate the results of business combinations using the purchase method. In the Consolidated Statement of Financial
Position, the acquiree’s identifiable assets, liabilities and contingent liabilities are initially recognised at their fair values at the acquisition date. The results of
acquired operations are included in the consolidated income statement from the date on which control is obtained. They are deconsolidated until the date on
which control ceases.
ANNUAL REPORT AND ACCOUNTS 2016
43
IIIFinancial Statements Notes Forming part of the Consolidated Financial Statements continued
2 Significant accounting policies continued
Any contingent consideration payable is recognised at fair value at the acquisition date and is split between current liabilities and long-term liabilities
depending on when it is due. At each balance sheet date the fair value of the contingent consideration will be revalued and any change will be recognised in
the statements of comprehensive income.
For deferred consideration which is to be provided for by the issue of a fixed number of shares at a future defined date, where there is no obligation on Keywords
to offer a variable number of shares, the deferred consideration is to be classified as an Equity Arrangement and the value of the shares is fixed at the date of
the acquisition.
Goodwill
Goodwill represents the excess of the cost of a business combination over, in the case of business combinations completed prior to 1 January 2010, the Group’s
interest in the fair value of identifiable assets, liabilities and contingent liabilities acquired and, in the case of business combinations completed on or after
1 January 2010, the total acquisition date fair value of the identifiable assets, liabilities and contingent liabilities acquired.
For business combinations completed prior to 1 January 2010, cost comprised the fair value of assets given, liabilities assumed and equity instruments issued,
plus any direct costs of acquisition. Changes in the estimated value of contingent consideration arising on business combinations completed by this date were
treated as an adjustment to cost and, in consequence, resulted in a change in the carrying value of goodwill.
For business combinations completed on or after 1 January 2010, cost comprises the fair value of assets given, liabilities assumed and equity instruments issued,
plus the amount of any non-controlling interests in the acquiree plus, if the business combination is achieved in stages, the fair value of the existing equity
interest in the acquiree. Contingent consideration is included in cost at its acquisition date fair value and, in the case of contingent consideration classified as a
financial liability, re-measured subsequently through profit or loss. For business combinations completed on or after 1 January 2010, direct costs of acquisition
are recognised immediately as an expense.
Goodwill is capitalised as an intangible asset with any impairment in carrying value being charged to the consolidated statement of comprehensive income.
Intangible Assets
Intangible assets, separately identified from goodwill acquired as part of a business combination, are initially stated at fair value. The fair value attributed is
determined by discounting the expected future cashflows to be generated from net margin on the business from the main customers taken on at acquisition.
The assets are amortised over their useful economic lives, which is deemed to be 5 years.
Impairment
Impairment tests on goodwill and other intangible assets with indefinite useful economic lives are undertaken annually at the financial year end. Other non-financial
assets are subject to impairment tests whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Where the
carrying value of an asset exceeds its recoverable amount (i.e. the higher of value in use and fair value less costs to sell), the asset is written down accordingly.
Where it is not possible to estimate the recoverable amount of an individual asset, the impairment test is carried out on the smallest group of assets to which it
belongs for which there are separately identifiable cash flows; its cash generating units (‘CGU’s). Goodwill is allocated on initial recognition to each of the group’s
CGUs that are expected to benefit from a business combination that gives rise to the goodwill.
The Group has one CGU. This CGU represents the lowest level at which goodwill is monitored by the Group and the lowest level at which management captures
information for internal management reporting purposes about the benefits of the goodwill. Impairment charges are included in profit or loss, except to the extent
they reverse gains previously recognised in other comprehensive income. An impairment loss recognised for goodwill is not reversed.
Foreign Currency
Transactions entered into by Group entities in a currency other than the currency of the primary economic environment in which they operate (their “functional
currency”) are recorded at the rates ruling when the transactions occur. The Functional currency for the Company is euro. Foreign currency monetary assets
and liabilities are translated at the rates ruling at the reporting date. Exchange differences arising on the retranslation of unsettled monetary assets and
liabilities are recognised immediately in profit or loss.
On consolidation, the results of overseas operations are translated into euro at rates approximating to this ruling when the transactions took place. All assets
and liabilities of overseas operations, including goodwill arising on the acquisition of those operations, are translated at the rate ruling at the reporting date.
Exchange differences arising on translating the opening net assets at opening rate and the results of overseas operations at actual rate are recognised in other
comprehensive income and accumulated in the foreign exchange reserve.
Exchange differences recognised in profit or loss in Group entities’ separate financial statements on the translation of long-term items forming part of the
Group’s net investment in the overseas operation concerned are classified to other comprehensive income and accumulated in the foreign exchange reserve
on consolidation.
On disposal of a foreign operation, the cumulative exchange differences recognised in the foreign exchange reserve relating to that operation up to the date
of disposal are transferred to the consolidated statement of comprehensive income as part of the profit or loss on disposal.
44
KEYWORDS STUDIOS PLC
Revenue Recognition
Revenue recognised represents the consideration received or receivable for the rendering of services, net of sales taxes, rebates discounts and after
eliminating intercompany sales. Services are provided based on agreed client instructions and when projects are in progress at the period end, revenue
is recognised to the extent that services have been provided net of any provisions.
Revenue is recognised on the basis of words translated, studio time completed, testing hours finished, or milestones reached in art creation as a proportion
of the estimate total to complete the projects, by the expected revenue accruing on completion.
MMTC Grants
The Multimedia tax credits received in Montreal on testing services are a credit against staff costs. Accordingly they are treated as a deduction against direct
costs. The nature of the grants are such that they are not dependent on taxable profits.
Share Based Payments
The Company issues equity settled share-based payments to certain employees and Directors under a share options plan and a long-term incentive plan (“LTIP”).
The fair value determined at the grant date is expensed on a straight line basis over the vesting period, based on the Company’s estimate of shares that will
eventually vest and adjusted for the effect of non-market-based vesting conditions. At each reporting date, the Company revises its estimate of the number
of equity instruments expected to vest as a result of the effect of non-market based vesting conditions. The impact of the revision of the original estimates,
if any, is recognised in profit or loss such that the cumulative expense reflects the revised estimate, with a corresponding adjustment to equity reserves.
The Company has no legal or constructive obligation to repurchase or settle the options in cash.
Where share-based payments are issued to employees of subsidiary companies, the annual cost of the option is expensed in the subsidiary company,
with a corresponding increase in capital contribution from the Company. This annual cost is recorded as an increase in the Company’s cost of investment
in that subsidiary.
Share Option Plan
These are measured at fair value, taking into account market vesting conditions but not non-market vesting conditions on the grant date using a Black-Scholes
option pricing model which calculates the fair value of an option by using the vesting period, the expected volatility of the share price, the current share price,
the exercise price and the risk free interest rate. The fair value of the option is amortised over the vesting period, with one third of the options vesting after two
years, one third after three years, and the balance vest after four years. The only vesting condition is continuous service. There is no requirement to revalue the
option at any subsequent date. The charge that is recognised is adjusted to reflect failure to vest due to non-achievement of a non-market vesting condition
but not failure to vest due to the non-achievement of a market vesting condition.
LTIP
An alternative share plan was introduced to give awards to Directors and staff, subject to outperforming the Numis Small Cap Index (excluding Investment
Trusts) in terms of shareholder return over a three year period. For the awards up to 2015, there were three award levels; one third of the share options vest
if the company shall exceed the Total Shareholder Returns of the Numis Small Cap Index by not less than 10%, two thirds if the shareholder return exceeds
by over 20% and 100% if the shareholder return exceeds by over 30%. This was amended for the 2016 awards to 100% if the shareholder return exceeds
by over 45%, and a pro-rated return between 10% and 100% if the shareholder return exceeds by between 0% and 45%.
These are measured at fair value, taking into account market vesting conditions but not non-market vesting conditions, at the date of grant, measured by using
the Monte Carlo binomial model. The charge that is recognised is adjusted to reflect failure to vest due to non-achievement of a non-market vesting condition
but not failure to vest due to the non-achievement of a market vesting condition.
Dividend Distribution
Final dividends are recorded in the Group’s financial statements in the period in which they are approved by the Group’s shareholders. Interim dividends are
recognised when paid.
Income Taxes and Deferred Taxation
Provision for income taxes is calculated in accordance with the tax legislations and applicable tax rates in force at the reporting date in the countries in which
the Group companies have been incorporated.
Deferred tax assets and liabilities are recognised where the carrying amount of an asset or liability in the consolidated statement of financial position differs
from its tax base, except for differences arising on:
•
the initial recognition of goodwill;
the initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction affects neither
accounting or taxable profit; and
investments in subsidiaries and jointly controlled entities where the Group is able to control the timing of the reversal of the difference and it is probable
that the difference will not reverse in the foreseeable future.
•
•
The amount of the asset or liability is determined using tax rates that have been enacted or substantively enacted by the reporting date and are expected to
apply when the deferred tax liabilities/(assets) are settled/(recovered).
Deferred tax assets and liabilities are offset when the Group has a legally enforceable right to offset current tax assets and liabilities and the deferred tax
assets and liabilities relate to taxes levied by the same tax authority on either:
•
• Different Group entities which intend either to settle current tax assets and liabilities on a net basis, or to realise the assets and settle the liabilities
simultaneously, in each future period in which significant amounts of deferred tax assets or liabilities are expected to be settled or recovered.
the same taxable Group company; or
ANNUAL REPORT AND ACCOUNTS 2016
45
IIIFinancial Statements Notes Forming part of the Consolidated Financial Statements continued
2 Significant accounting policies continued
Property, Plant and Equipment
Property, plant and equipment comprise computers, leasehold improvements, and office furniture and equipment, and are stated at cost less accumulated
depreciation. Carrying amounts are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amount may not be
recoverable. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount.
Property, plant and equipment acquired through business combinations are valued at fair value on the date of acquisition.
Depreciation is calculated to write off the cost of fixed assets on a straight line basis over the expected useful lives of the assets concerned. The principal
annual rates used for this purpose are:
Computers and Software
Office furniture and equipment
Building and leasehold improvements
%
33.33
10.00
over the length of the lease
Gains and losses on disposals are determined by comparing proceeds with carrying amount and are included in the consolidated statement of
comprehensive income.
Financial Assets
Loans and Receivables
These assets are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise principally through
the provision of services to customers (e.g. trade receivables), but also incorporate other types of contractual monetary asset. They are initially recognised at
fair value plus transaction costs that are directly attributable to their acquisition or issue and are subsequently carried at amortised cost using the effective
interest rate method, less provision for impairment.
The Group’s receivables comprise trade and other receivables and cash and cash equivalents in the statement of financial position.
Trade receivables, which principally represent amounts due from customers, are initially recognised, thereafter, are recognised at amortised cost. An estimate
for doubtful debts is made when there is objective evidence that the Group will not be able to collect amounts due according to the original terms of receivables.
Bad debts are written off when identified.
Cash and cash equivalents are necessary for the working capital requirements of the group. They include cash in hand, deposits held at call with banks and
other short term highly liquid investments. Where cash is on deposit with maturity dates greater than three months, it is disclosed as short-term investments.
Share Capital
Financial instruments issued by the Group are treated as equity only to the extent that they do not meet the definition of a financial liability. The Group’s
ordinary shares are classified as equity instruments.
Financial Liabilities
Trade payables and other short-term monetary liabilities are initially recognised at fair value and subsequently carried at amortised cost using the effective
interest method.
Leased Assets
Where substantially all of the risks and rewards of ownership are not transferred to the Group (“operating lease”), the total rental payables are charged to the
consolidated statement of comprehensive income on a straight-line basis over the term of the lease.
Finance Leases
Where substantially all of the risks and rewards incidental to ownership of a leased asset have been transferred to the Group (a “finance lease”), the asset is
treated as if it had been purchased outright. The amount initially recognised as an asset is the lower of the fair value of the leased property and the present
value of the minimum lease payments payable over the term of the lease. The corresponding lease commitment is shown as a liability. Lease payments are
analysed between capital and interest. The interest element is charged to the consolidated statement of comprehensive income over the period of the lease
and is calculated so that it represents a constant proportion of the lease liability. The capital element reduces the balance owed to the lessor.
Employee Benefit Trust
Ordinary Shares purchased by the Employee Benefit Trust on behalf of the Parent Company under the Terms of the Share Option Plan are deducted from equity
on the face of the Consolidated Statement of Financial Income. No gain or loss is recognised in relation to the purchase, sale, issue or cancellation of the Parent
Company’s Ordinary Shares.
3 Critical accounting estimates and judgements
The preparation of consolidated financial statements under IFRS requires the Directors to make estimates and judgements that effect the application of
policies and reported amounts.
The areas requiring the use of estimates and critical judgements that may significantly impact the Group’s earnings and financial position are revenue recognition
in respect of accrued income and computation of income taxes. Estimates and judgements are continually evaluated and are based on historic experience and
other factors including expectations of future events that are believed to be reasonable. Actual results may differ from these estimates and assumptions.
46
KEYWORDS STUDIOS PLC
Income Taxes
The Group is subject to income tax in several jurisdictions and judgement may be required in determining the provision for income taxes. During the ordinary
course of business, there are transactions and calculations for which the ultimate tax determination may be uncertain. As a result, the company recognises tax
liabilities based on an understanding of taxation legislation in particular jurisdictions and any related estimates of whether taxes and/or interest will be due. This
assessment relies on estimates and assumptions and may involve a series of complex judgments about future events. To the extent that the final tax outcome
of these matters is different than the amounts recorded, such differences will impact income tax expense in the period in which such determination is made.
Goodwill and Intangible Assets Arising on Acquisition
The value of goodwill and intangible assets recognised on the Group’s acquisitions during the year, were derived from the projected cashflows for those
businesses at the time of acquisition, based on management forecasts. The accuracy of the valuation would therefore be compromised by any differences
between the forecasts and the levels of business activity that the entity might actually have been able to generate in the absence of acquisition. The valuation
will also be affected by the accuracy of the discount factor used.
The carrying value of goodwill and intangibles assets is dependent on the accuracy of the inputs into the impairment test detailed in note 12.
Multi Media Tax Credits
The submissions for the repayment of Multi-Media Tax Credits in Montreal are made on an annual basis to Investment Quebec and Revenue Quebec. Both the
costs and basis of the claim are subject to audit by the authorities prior to approval and payment of the claim. While the group complete a detailed exercise in
relation to the claim and to the accrual there may be occasions where the actuals amounts may be more or less than accrued which will lead to a change in the
amounts recognised within the financial statements.
Employee Defined Retirement Benefit
In line with statutory requirements in Italy, the subsidiaries in Milan maintain Employee Defined Benefit schemes. On leaving the company, each employee
is entitled to 1/13.5 of their final salary for each year of service.
At year end, the Group commissioned an actuarial valuation of the related liability, based on salaries, length of service and variables including employee
turnover, estimated salary increases and cost of capital.
The liabilities at year end are recorded as long term. The actuarial loss is recorded separately as other comprehensive income.
4 Segmental analysis
Management considers that the Group’s activity as a single source supplier of Services to the gaming industry constitutes one operating and reporting
segment, as defined under IFRS 8.
Management review the performance of the Group by reference to Group-wide profit measures and the revenues derived from six main service groupings:
• Localisation Services– Localisation services relate to translation and cultural adaptation of in-game text and audio scripts across multiple game platforms
and genres.
• Localisation Testing – Localisation Testing involves testing the linguistic correctness and cultural acceptability of computer games.
• Audio/Voiceover Services – Audio Services relate to the audio production process for computer games and includes script translation, actor selection and
talent management through pre-production, audio direction, recording, and post-production, including native language Quality Assurance of the recordings.
• Functional Testing – Functional Testing relates to quality assurance services provided to game producers to ensure games function as required.
• Art Creation Services – Art creation services relate to the production of graphical art assets for inclusion in the video game including concept art creation
along with 2D and 3D art asset production and animation.
• Customer Support – Customer support relates to the live operations support services such as community management, player support and associated
services provided to producers of games to ensure that consumers have a positive user experience.
There is no allocation of operating expenses, profit measures, assets and liabilities to individual product groupings. Accordingly the disclosures below are
provided on an group-wide basis.
Activities are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision maker has
been identified as the executive management team made up of the Chief Executive Officer and the Finance Director.
Revenue by line of business
Art creation
Audio
Localisation
Functional testing
Localisation testing
Customer support
2016
€’000
16,559
17,263
32,360
8,619
16,204
5,580
96,585
2015
€’000
8,211
7,157
17,141
6,472
15,021
3,949
57,951
No single customer (2015: One) accounted for more than 10% of the Group’s revenue during the year. Revenues generated from that customer in 2015 was €7.2m.
ANNUAL REPORT AND ACCOUNTS 2016
47
IIIFinancial Statements Notes Forming part of the Consolidated Financial Statements continued
4 Segmental analysis continued
Geographical Analysis of Revenues by Jurisdiction
Analysis by geographical regions is made according to the Group’s operational jurisdictions. This does not reflect the region of the Group’s customers, whose
locations are worldwide.
Ireland
Japan
Italy
Canada
United States
India
Singapore
United Kingdom
Brazil
Spain
Switzerland
Germany
Others
Total revenues
Geographical Analysis of Non-current Assets from Continuing Businesses
Ireland
Japan
Italy
Canada
United States
India
Singapore
United Kingdom
Brazil
Spain
Mexico
Switzerland
China
Germany
Philippines
5 Operating Profit
Operating profit is stated after charging:
Depreciation
Amortisation of Intangible Assets
Costs of Acquisitions & Integration
Operating lease repayments
2016
€’000
25,570
4,886
7,269
22,053
5,250
4,591
4,787
1,276
619
2,167
17,838
163
116
96,585
2016
€’000
4,779
43
12,188
8,937
8,657
2,991
60
6,874
259
1,475
121
12,657
287
1,241
424
60,993
2015
€’000
14,167
3,324
8,343
17,438
6,573
3,602
3,083
650
465
306
–
–
–
57,951
2015
€’000
284
32
8,984
1,981
8,707
3,039
83
6,885
204
867
95
–
–
–
–
31,161
Years ended 31 December
2016
€’000
1,803
1,630
1,316
2,371
2015
€’000
1,297
857
1,089
1,663
One-time costs of €1,316 were incurred in acquiring and integrating the new entities into the group. The most significant costs within the integration costs are
for internal resource who have led the activities to integrate the new acquisitions into the Group, and legal costs in relation to acquisitions.
48
KEYWORDS STUDIOS PLC
Auditors’ remuneration
Audit services
Parent company and Group audit
Subsidiary companies audit
Non-audit services
Accounting services
Taxation compliance
Due diligence services
6 Financing income and costs
Finance income
Interest received
Finance cost
Bank charges
Interest expense
Foreign exchange losses
Net financing income/(cost)
7 Taxation
Current income tax
Income tax on profits of parent company
Income tax on profits of subsidiaries
Deferred tax (note 29)
The tax charge for the year can be reconciled to accounting profit as follows:
Profit before tax
Expected tax charge based on the standard rate of taxation in the UK at 20% (2015: 23%)
Higher rates of current income tax in overseas jurisdictions
Lower rates of current income tax in overseas jurisdictions
Losses incurred
Effects of other timing differences
Total tax charge
The Group’s subsidiaries are located in different jurisdictions and are taxed on their residual profit in those jurisdictions.
2016
€’000
2015
€’000
115
111
–
52
–
278
2016
€’000
94
94
(229)
(152)
(1,737)
(2,118)
(2,024)
2016
€’000
4
3,928
(709)
3,223
48
95
–
12
–
155
2015
€’000
70
70
(206)
(128)
(474)
(808)
(738)
2015
€’000
4
1,518
310
1,832
Years ended 31 December
2016
€’000
9,435
1,887
1,331
(555)
998
(438)
3,223
2015
€’000
5,086
1,170
286
(100)
238
238
1,832
ANNUAL REPORT AND ACCOUNTS 2016
49
IIIFinancial Statements Notes Forming part of the Consolidated Financial Statements continued
9 Earnings per share
Basic
Diluted
Profit for the period from continuing operations
Denominator (weighted average number of equity shares)
Basic
Diluted
2016
Euro cent
11.22
10.87
€’000
6,273
2015
Euro cent
6.98
6.87
€’000
3,363
Number
Number
55,918,481
57,716,435
48,192,371
48,971,278
The basic and diluted weighted average denominators include the impact of the 2,376,518 and 513,190 shares to be issued relating to the acquisitions of
Synthesis and Mindwalk respectively.
The dilutive impact of share options has been considered in calculating diluted earnings per share. Details of the number of share options outstanding at the
year-end are set out in note 20.
10 Dividends
Final Dividends Paid
Interim Dividends Paid
Dividends paid to shareholders
2016
2015
Per share
€ Cent
1.03
0.49
1.52
Total
€’000
561
264
825
Per share
€ Cent
1.03
0.54
1.57
Total
€’000
482
255
737
In June 2015, Keywords Studios plc approved a dividend of Stg 0.74/€1.03 per share, based on the shares in issue at that time, or €482,333 in total, as a final
dividend for 2014. The dividend was paid in June 2015.
In September 2015, Keywords Studios plc approved a dividend of Stg 0.40/€0.54 per share, based on the shares in issue at that time, or €254,934 in total,
as an interim dividend for 2015. The dividend was paid in October 2015.
In May 2016, Keywords Studios plc approved a dividend in respect of the financial year ended 31 December 2015 of Stg 0.81p/€1.034 per Ordinary share,
or €561,000 in total, as a final dividend for 2015. The dividend was paid in June 2016.
In September 2016, Keywords Studios plc approved a dividend of Stg 0.44/€0.49 per share, based on the shares in issue at that time, or €264,000 in total,
as an interim dividend for 2016. The dividend was paid in October 2016.
The Directors’ recommend a final dividend in respect of the financial year ended 31 December 2016 of Stg 0.89p per Ordinary share, to be paid on 23 June 2017
to shareholders who are on the register at 2 June 2017. This dividend is not reflected in these financial statements as it does not represent a liability at
31 December 2016. The final proposed dividend will reduce shareholders’ funds by an estimated €556,801.
There are no income tax consequences for the company in respect of the dividends proposed prior to issuance of the Consolidated Financial Statements and
for which a liability has not been recognised.
11 Staff Costs
Total staff costs (including Directors) comprise the following:
Group
Salaries and related costs
Share based payment costs
50
KEYWORDS STUDIOS PLC
Years ended 31 December
2016
€’000
41,643
686
42,329
2015
€’000
29,773
392
30,165
Company
Salaries and related costs
Share based payment costs
Key management compensation:
Salaries and related costs
Social Welfare cost
Pension costs
Share based payment costs
The key management compensation includes compensation to six Directors of Keywords Studios plc during the year. (2015: five).
The breakdown of Directors’ remuneration for the Company is included in the Directors’ Remuneration Report on page 31.
Group
Average number of employees
Operations
General and administration
Company
Average number of employees
Directors
General & Administration
12 Goodwill
Group
Cost and net book value
At 1 January 2015
Recognition on acquisition of subsidiaries
Revaluation on Exchange Rate movement
At 31 December 2015
Recognition on acquisition of subsidiaries
Revaluation on Exchange Rate movement
At 31 December 2016
2016
€’000
1,010
145
1,155
2015
€’000
852
392
1,244
Years ended 31 December
2016
€’000
769
97
29
42
937
2015
€’000
719
88
5
135
947
2016
2015
1,688
130
1,818
1,169
104
1,273
2016
2015
5
2
7
5
2
7
Total
€’000
14,711
8,354
828
23,893
23,055
(149)
46,799
During the period goodwill arose on the acquisitions of Ankama Service Centre in Philippines, Mindwalk, Synthesis, Volta, Player Research, GVGS trading as
Enzyme and Sonox.
ANNUAL REPORT AND ACCOUNTS 2016
51
IIIFinancial Statements
Notes Forming part of the Consolidated Financial Statements continued
12 Goodwill continued
Key assumptions for the value in use calculations are as follows:
CGU
1-5 Year
Growth Rate
Long-term
Growth Rate
Discount Rates
10%
2%
12.50%
As part of the value in use calculation, management prepared an initial cash flow forecast, approved by the Board of Directors, covering the period to
31 December and the following five years. The long-term growth rate has been used to determine a terminal value for the CGU.
The Group has conducted a sensitivity analysis on the carrying value on the CGU. If the sales projections reduce by 16%, the group will consider the possibility
that the value of goodwill would be impaired.
The result of the value in use calculations was that no impairment is required in this period.
13 Intangible Assets – customer relationships
Cost
As at 31 December 2013
Additions
As at 31 December 2014
Additions
Revaluation on Exchange Rate movement
As at 31 December 2015
Additions
Revaluation on Exchange Rate movement
As at 31 December 2016
Amortisation and impairment
As at 31 December 2014
Amortisation charge
Revaluation on Exchange Rate movement
As at 31 December 2015
Amortisation charge
Revaluation on Exchange Rate movement
As at 31 December 2016
Net book value
As at 31 December 2015
As at 31 December 2016
Customer relationships are amortised over 5 years from the point of acquisition on a straight line basis.
Total
€’000
–
3,434
3,434
1,511
187
5,132
6,509
(11)
11,630
468
857
25
1,350
1,629
(45)
2,934
3,782
8,696
52
KEYWORDS STUDIOS PLC
14 Property, plant and equipment
Group
Cost
At 1 January 2015
Currency revaluation
Additions
Acquisitions through business combinations at fair value
Disposals
At 31 December 2015
Currency revaluation
Additions
Acquisitions through business combinations at fair value
Disposals
At 31 December 2016
Accumulated depreciation
Cost
At 1 January 2015
Currency revaluation
Depreciation charge
Disposals
At 31 December 2015
Currency revaluation
Depreciation charge
Disposals
At 31 December 2016
Net book value
As at 31 December 2015
At 31 December 2016
15 Trade Receivables
Group
Customers
Provision for Bad Debts
Computers and
software
€’000
Office, furniture and
equipment
€’000
Leasehold
improvements
€’000
4,947
88
1,191
86
(59)
6,253
131
1,370
798
(67)
1,728
(15)
373
247
(14)
2,319
99
597
145
(2)
787
(16)
71
16
(3)
855
80
376
416
(3)
Total
€’000
7,462
57
1,635
349
(76)
9,427
310
2,342
1,359
(73)
8,485
3,158
1,724
13,367
3,765
102
857
(55)
4,669
(73)
1,205
(45)
5,756
1,584
2,729
868
(76)
344
–
1,136
225
429
–
1,790
1,183
1,368
68
(28)
96
–
136
18
169
–
323
719
1,401
2016
€’000
14,347
(468)
13,879
4,701
(2)
1,297
(55)
5,941
170
1,803
(45)
7,869
3,486
5,498
2015
€’000
7,825
(306)
7,519
ANNUAL REPORT AND ACCOUNTS 2016
53
IIIFinancial Statements
Notes Forming part of the Consolidated Financial Statements continued
16 Other Receivables
Group
Accrued Income
Prepayments
Other receivables
Other Tax and Social Security
Restricted cash (note 25)
Company Short Term
Intercompany Receivables (note 25)
Accrued Income
Prepayments
Other receivables
Restricted cash (note 25)
Company Long Term
Intercompany Receivable
17 Cash and cash equivalents
Group
Cash at bank
Short term bank deposits
Company
Cash at bank
Short term bank deposits
As of 31 December
2016
€’000
1,661
1,769
4,002
346
–
7,778
2016
€’000
21,398
24
81
585
–
22,088
2016
€’000
4,243
4,243
2015
€’000
1,661
989
4,931
394
345
8,320
2015
€’000
17,299
35
58
356
345
18,093
2015
€’000
3,300
3,300
As of 31 December
2016
€’000
17,020
–
2015
€’000
19,018
–
17,020
19,018
2016
€’000
946
–
946
2015
€’000
11,656
–
11,656
Short term bank deposits relate to cash on deposit with maturity dates less than three months, or which can be accessed before on demand.
54
KEYWORDS STUDIOS PLC
18 Short term investments
Group
Medium term bank deposits
As of 31 December
2016
€’000
–
–
2015
€’000
27
27
Medium term bank deposits relate to cash on deposit with maturity dates greater than three months, which cannot be accessed before maturity.
19 Shareholder’s Equity
Share Capital
As at 1 January 2015
Ordinary Shares of £0.01 issued for earn out of Binari Sonori S.R.L
Ordinary Shares of £0.01 issued on acquisition of Liquid Development LLC.
Placing of ordinary Shares of £0.01 on the market
As at 31 December 2015
Ordinary Shares of £0.01 issued on acquisition of remaining 50% of Kite Team shares
Ordinary Shares of £0.01 issued on acquisition of Volta
Exercise of Numis Warrants
Ordinary Shares of £0.01 issued on acquisition of Player Research
Ordinary Shares of £0.01 issued on acquisition of Sonox
Shares
€’000
47,105,007
158,250
1,074,440
5,500,000
53,837,697
55,508
45,192
400,324
65,280
24,881
551
2
15
78
646
1
1
4
1
1
As at 31 December 2016
54,428,882
654
On 6 April, 2016 the Group issued 55,508 of 1p shares at a value of 215p (€2.70) which formed part of the consideration for the acquisition of the remaining
50% of Kite Team.
On 28 July, 2016 the Group issued 45,192 of 1p shares at a value of 321p (€4.21) which formed the part of the consideration for the acquisition of Volta.
On 18 August 2016, Numis exercised warrants of 400,324 of 1p shares at a value of 138.5p (€1.61).
On 26 October 2016, the Group issued 65,280 of 1p shares at a value of 432p (€4.86) which formed the part of the consideration for the acquisition of
Player Research.
On 22 December 2016, the Group issued 24,881 of 1p shares at a value of 508p (€6.03) which formed the part of the consideration for the acquisition
of Sonox.
There is no limit to the number of shares which the company can issue.
Shares held by the Employee Benefit Trust (EBT)
Ordinary Shares held by the EBT
2016
2015
Number
399,026
€’000
802
Number
400,000
€’000
804
ANNUAL REPORT AND ACCOUNTS 2016
55
IIIFinancial Statements Notes Forming part of the Consolidated Financial Statements continued
19 Shareholder’s Equity continued
Reserves
The following describes the nature and purpose of each reserve within owner’s equity:
Reserve
Description and purpose
Retained earnings
Cumulative net gains and losses recognised in the consolidated statement of comprehensive income.
Foreign Exchange Reserve
Gains or losses arising on retranslation of the net assets of the overseas operations into euro.
Share premium
Share option reserve
Shares to be issued
The Share Premium account is the amount received for shares issued in excess of their nominal value, net of share
issuance costs.
The Share option reserve is the credit arising on share based payment charges in relation to the Company’s share
option schemes.
For deferred consideration which is to be provided for by the issue of a fixed number of shares at a future defined date,
where there is no obligation on Keywords to offer a variable number of shares, the deferred consideration is to be
classified as an Equity Arrangement and the value of the shares is fixed at the date of the acquisition.
Merger reserve
The merger reserve was initially created following the Group reconstruction, when Keywords Studios plc acquired the
Keywords International Limited Group of companies.
When the Group uses Keywords Studios plc shares as the 100% consideration for the acquisition of an entity, the value
of the shares in excess of the nominal value, net of share issuance costs are now also recorded within this reserve, in
line with S612 of the 2006 UK Companies Act.
Non-Controlling Interest Reserve
The non-controlling interest reserve represents the share of net assets/(liabilities) at the reporting date which is
attributable to the holders of the non-controlling interest.
20 Share Options
In July 2013, at the time of the IPO, the Company put in place a Share Option Scheme and a Long-Term Incentive Plan (“LTIP”). The charge in relation to these
arrangements is shown below, with further details of the schemes following:
Share Option Scheme Expense
Share Option Scheme – LTIP Expense
2016
€’000
208
478
686
2015
€’000
157
235
392
Of the total share option charge, €45k relates to Directors of the Company as at 31 December, 2016. (2015: €55k).
Share Option Scheme
Share options are granted to Directors and to permanent employees. The exercise price of the granted options is equal to the market price of the shares at the
time of the award of the options. The Company has no legal or constructive obligation to repurchase or settle the options in cash.
Movements in the number of share options outstanding and their related weighted average exercise prices are as follows:
Outstanding at the beginning of the year
Granted
Lapsed
Exercised
Outstanding at the end of the year
Exercisable at the end of the year
2016
2015
Average exercise
price in £ per share Number of options
Average exercise
price in £ per share
Number of options
1.2
2.45
1.67
1.31
1.58
1.38
1,642,242
223,200
(44,547)
(148,839)
1,672,056
522,035
1.2
1.58
1.2
1.2
1.2
1.2
642,286
1,059,040
(32,553)
(26,531)
1,642,242
178,133
There were 203,200 options granted on 10 May 2016 at an exercise price of £2.54. All options were granted to employees of the Group, of which 12,800 of
these options lapsed due to staff leaving in the period. Of the total options 190,400 remaining at 31 December, 2016, 63,466 are exercisable from 10 May 2018
to 9 May 2023, 63,466 are exercisable from 10 May 2019 to 9 May 2023 and 63,467 are exercisable from 10 May, 2020 to 9 May, 2023.
There was an opening balance of 1,054,780 options granted on 1 June 2015 at an exercise price of £1.58. All options were granted to employees of the Group
of which 8,520 of these options lapsed due to staff leaving in the year and 50,000 options were exercised. A further 20,000 options were granted in relation
to the June 2015 tranche at an exercisable price of £1.58. Of the total options of 1,016,260 remaining at 31 December, 2016, 250,000 are exercisable as at
31 December 2016 to 9 Oct, 2021, 300,000 are exercisable from 10 October, 2017 to 9 October 2021, 55,420 are exercisable from 1 June 2018 to 31 May, 2023,
300,000 are exercisable from 10 October, 2018 to 9 October 2021, 55,420 are exercisable from 1 June 2019 to 31 May 2023, and 55,420 are exercisable
from 1 June 2020 to 31 May 2023.
56
KEYWORDS STUDIOS PLC
There was an opening balance of 587,462 of options that were granted on 12 July 2013 at an average exercise price of £1.20. During the year 23,227 of the
options lapsed due to staff leaving and 98,839 options were exercised. All options were granted to either employees or Directors of the Group. Of the total
465,396 options granted remaining at 31 December, 2016, 136,018 are exercisable as at 31 December 2016 to 11 July 2020, 136,017 are exercisable as
at 31 December 2016 to 11 July 2020 and 193,361 are exercisable from 12 July 2017 to 11 July 2020.
The inputs into the Black-Scholes model, used to value the options are as follows:
Share Options granted in 2013
Weighted average share price (£)
Weighted average exercise price (£)
Average Expected Life
Expected Volatility
Risk free rates
Average expected dividends yield
Share Options granted in 2015
Weighted average share price (£)
Weighted average exercise price (£)
Average Expected Life
Expected Volatility
Risk free rates
Average expected dividends yield
Share Options granted in 2016
Weighted average share price (£)
Weighted average exercise price (£)
Average Expected Life
Expected Volatility
Risk free rates
Average expected dividends yield
2016
1.23
1.20
3 years
36.12%
0.5%
1.00%
2016
1.64
1.58
3 years
28.03%
0.9%
0.75%
2016
2.54
2.535
3 years
27.17%
0.551%
0.58%
2015
1.23
1.20
3 years
36.12%
0.5%
1.00%
2015
1.64
1.58
3 years
28.03%
0.9%
0.75%
2015
–
–
–
–
–
–
Expected volatility was determined by calculating the historical volatility of two similar listed companies over the previous 3 years. The expected life used in
the model has been adjusted based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations.
The weighted average remaining contractual life of the options outstanding at 31 December 2016 granted in 2013 was 3 months (2015: 6 months), granted
in 2015 was 11 months (2015: 2 years and 7 months), and granted in 2016 was 2 years and 4 months. All of the outstanding options granted in 2013 can be
exercised at an average of £1.20 over a 1 to 3 year period, for those granted in 2015 can be exercised at £1.58 over a 3 to 5 year period, for those granted
in 2016 can be exercised at £2.535 over a 3 to 5 year period.
Long-term incentive plan scheme
An alternative share plan was introduced to give awards to Directors and staff subject to outperforming the Numis Small Cap (excluding Investment Trusts)
index in terms of shareholder return over a three year period. A total of 1,443,691 (2015: 860,206) nil price (1p) options are available to vest to Directors and
to selected employees on the basis of the number of options they are entitled to.
ANNUAL REPORT AND ACCOUNTS 2016
57
IIIFinancial Statements Notes Forming part of the Consolidated Financial Statements continued
20 Share Options continued
Movements in the number of share options outstanding and their related weighted average exercise prices are as follows:
Outstanding at the beginning of the year
Granted
Lapsed
Exercised
Outstanding at the end of the year
Exercisable at the end of the year
2016
2015
Average exercise
price in £ per share Number of options
Average exercise
price in £ per share
Number of options
0.01
0.01
0.01
0.01
0.01
0.01
860,206
720,000
(105,654)
(30,861)
1,443,691
295,365
0.01
0.01
0.01
–
0.01
–
376,226
489,540
(5,560)
–
860,206
–
On 10 May 2016 670,000 options were granted at an exercise price of £0.01 to Directors and employees of the Group. The options are exercisable from
10 May 2019 to 10 May 2023 if the market performance conditions are met as at 10 May 2019. Of the options granted on 10 May 2016, 40,000 have lapsed.
On 1 June 2015 388,480 options were granted at an exercise price of £0.01 to Directors and employees of the Group. The options are exercisable from 1 June
2018 to 1 June 2022 if the market performance conditions are met as at 1 June 2018. Of the options granted on 1 June 2015, 51,680 have lapsed.
A further 20,000 options were granted in relation to the June 2015 tranche at an exercise price of £0.01 to either employees or Directors of the Group.
On 6 January 2015, 101,060 options were granted at an exercise price of £0.01 to employees of the Group. The options are exercisable from 6 January 2018
to 6 January 2022 if the market performance conditions are met as at 6 January 2018. Of the options granted on 6 January 2015, 19,534 have lapsed.
On 12 July 2013, 326,226 options were granted at an exercise price of £0.01 to employees or Directors of the Group. Of these, 30,861 options were exercised
in the year. The remaining 295,365 options granted are exercisable from 31 December 2016 to July 11, 2020.
Additionally 50,000 options granted at an exercise price of £0.01 to a director of the Group on 3 July 2014 remain as at 31 December, 2016. The options are
exercisable from 3 July 2017 to 3 July 2021 if the market performance conditions are met as at 3 July 2017.
The options were valued using a Monte Carlo binomial model using the following inputs:
LTIPS granted in 2013
Weighted average share price (£)
Weighted average exercise price (£)
Average Expected Life
Expected Volatility
Risk free rates
LTIPS granted in 2014
Weighted average share price (£)
Weighted average exercise price (£)
Average Expected Life
Expected Volatility
Risk free rates
LTIPS granted in January 2015
Weighted average share price (£)
Weighted average exercise price (£)
Average Expected Life
Expected Volatility
Risk free rates
58
KEYWORDS STUDIOS PLC
2016
1.23
0.01
3 years
36.12%
0.5%
2016
1.60
0.01
3 years
35.52%
0.5%
2016
1.43
0.01
3 years
31.2%
0.58%
2015
1.23
0.01
3 years
36.12%
0.5%
2015
1.60
0.01
3 years
35.52%
0.5%
2015
1.43
0.01
3 years
31.2%
0.58%
LTIPS granted in June 2015
Weighted average share price (£)
Weighted average exercise price (£)
Average Expected Life
Expected Volatility
Risk free rates
LTIPS granted in May 2016
Weighted average share price (£)
Average Expected Life
Expected Volatility
Risk free rates
2016
1.64
0.01
3 years
28.03%
0.9%
2016
2.54
3 years
27.17%
0.55%
2015
1.64
0.01
3 years
28.03%
0.9%
2015
–
–
–
–
Expected volatility was determined by calculating the historical volatility of two similar listed companies over the previous 3 years. The expected life used in
the model has been adjusted based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations.
As any dividends earned are to be re-invested into the business the impact of dividends has been ignored in the calculation of the LTIP share option charge.
The weighted average remaining contractual life of the options outstanding at 31 December 2016 was 2 years 4 months (2015: 1 years 8 months). All of the
outstanding options can be exercised at £0.01 over a 4 year period.
21 Other payables
Group
Current
Accrued expenses
Payroll Taxes
Other payables
Contingent Consideration
Related party payable (note 25)
Non-current
Other payables
Contingent Consideration
Company
Current
Intercompany Payable
Accrued expenses
Payroll Taxes
Other payables
Contingent Consideration
Non-current
Other payables
Contingent Consideration
As of 31 December
2016
€’000
7,702
542
3,927
251
9
12,431
113
1,479
1,592
2016
€’000
70
324
20
–
–
414
–
860
860
2015
€’000
3,268
482
2,124
1,979
9
7,862
55
245
300
2015
€’000
368
38
340
735
1,481
–
–
–
During 2015 an amount of €590,000 relating to the Italian defined benefit pension was included within other current payables. This item has been shown
as a separate line item on the face of the Statement of Financial Position during 2016, and as a result the classification in the 2015 comparative figures have
been regrouped.
ANNUAL REPORT AND ACCOUNTS 2016
59
IIIFinancial Statements Notes Forming part of the Consolidated Financial Statements continued
22 Employee Defined Benefit Plan
In line with statutory requirements in Italy, the subsidiaries in Milan maintain Employee Defined Benefit schemes. On leaving the company, each employee
is entitled to 1/13.5 of their final salary for each year of service.
At year end, the Group commissioned an actuarial valuation of the related liability, based on salaries, length of service and variables including employee
turnover, estimated salary increases and cost of capital.
The liabilities at year end are recorded as long term. The actuarial loss is recorded separately as other comprehensive income. The movements through the
year are detailed:
Group
Opening liability position as at 1 January
Service cost
Interest cost
Benefits paid
Branch transfer
Actuarial loss recorded
Closing liability position as at 31 December
2016
€’000
590
193
10
(30)
–
63
826
2015
€’000
490
94
7
(67)
57
9
590
The Directors have considered the key specific risk factors which the Group faces due to the employee defined benefit plan which is in place. Having fully
considered all specific elements of these plans the directors believe that the key issues faced are as follows:
• The plan is currently 100% unfunded, there are no specific assets to meet the future liabilities as they fall due. As such there will be a significant cash flow
impact as the liabilities must be met with current working capital as they fall due.
The Group has taken no specific actions to mitigate against these factors as due to the long–term nature of the plans it is expected that there will be no sudden
financial impact on the Groups results caused by any of these factors.
In 2017, the group expects the costs of the employee benefit plan to be in line with current year levels, as staff levels in the Italian operations stay stable.
The actuarial valuation is based on the Projected Unit Credit Method, in line with IAS 19.
2016
€’000
826
654
(172)
3,318
2,492
193
10
63
266
30
5
28
63
Actuarial valuations
Defined benefit obligations
Current concern provision
Current concern provision surplus/(deficit)
Value of accrued benefits
Future service liability
Cost for year
Service cost
Interest cost
Actuarial loss
Actuarial losses
Change due to experience
Change due to demographical assumptions
Change due to financial assumptions
60
KEYWORDS STUDIOS PLC
Assumptions underlying the Actuarial Valuations and Sensitivities of the Assumptions
For the actuarial valuations the following demographic and economic & financial assumptions were applied:
Demographic Assumptions
• The probabilities of death were derived from the bill of the Italian population by age and sex, as recorded by the Government Statistics Office in 2000 and
reduced by 25%.
• The probabilities of elimination for absolute and permanent disability of the employee are taken from the disability tables currently used in practice
separate reinsurance for age and sex.
• The probabilities of employees leaving due to resignations and dismissals in accordance with company management have been placed at 6% per annum.
• The probabilities of requesting an advance have been estimated on the basis of company history 2010 to 2016, and placed equal to 2.94% per annum with
an average rate of advance equal to 54.38%.
• For retirement for the general working population, it is assumed that the first of the pension requirements is valid for the mandatory general insurance.
Economic & Financial Assumptions
Salary Increase
Inflation
Discount rate
Key Statistics
Staff Number
Average Age
Average Service
Average Defined Benefit per staff
Average Salary for Defined Benefit
Actuarial Losses
Change due to Experience
Change due to Demographical assumption
Change due to Financial assumption
Actuarial Losses
Interest Rate Sensitivities
-0.50%
0.50%
Mortality Rate Sensitivities
-0.025%
0.025%
Staff Turn Over Rate Sensitivities
-0.50%
0.50%
Staff Salary Increases Rate Sensitivities
-0.50%
0.50%
23 Loans and borrowings
Group
Expiry within 1 Year
Expiry between 1 Year and 2 Years
Expiry over 2 Years
2.50%
1.73%
1.29%
97
38.2
3.6
6,745
31,723
2016
€’000
32
5
30
67
882
776
827
782
835
818
808
845
2015
€’000
1,163
350
221
1,734
2016
€’000
8,025
55
290
8,370
A loan with RBC bank in Canada of CAD $1.7m (€1.1m) at 31 December 2015 was repaid on 15 April 2016.
The loans in Kite Team of €0.6m at 31 December 2015 were settled in March 2016.
The company entered into a loan agreement with Barclay’s Bank. The agreement allows financing up to €15 million. At year end, €8 million was drawn down.
The group also took on loans on the acquisition of Enzyme of CAD $0.5m (€0.4m).
ANNUAL REPORT AND ACCOUNTS 2016
61
IIIFinancial Statements Notes Forming part of the Consolidated Financial Statements continued
23 Loans and borrowings continued
The currencies of these loans are as follows;
Euro
Canadian Dollars
Company
Expiry within 1 Year
Expiry between 1 Year and 2 Years
Expiry over 2 Years
Euro
Canadian Dollars
24 Investment in subsidiaries
Opening 1 January 2016
Acquisition of Synthesis
Closing 31 December 2016
The results and financial position of all the subsidiaries are included in the consolidated statements.
2016
€’000
8,000
370
8,370
2016
€’000
8,000
–
–
8,000
2016
€’000
8,000
8,000
2015
€’000
621
1,113
1,734
2015
€’000
–
–
–
–
2015
€’000
–
–
–
2016
€’000
12,765
17,894
30,659
62
KEYWORDS STUDIOS PLC
Details of the Company and Group’s subsidiaries as at 31 December 2016 are set out below:
Name
Keywords International Limited
Keywords International Co. Limited
Keywords International Corporation Inc
Keywords Italia Srl
Keywords International Inc
KW Studios Limited
Liquid Violet Limited
Babel Media Limited
Babel Games Services Inc
Babel Media India Private Limited
Babel Media USA Inc
Keywords International Pte. Limited
Binari Sonari SRL
Binari Sonari Inc
Lakshya Digital Private Limited
Lakshya Digital Singapore Pte Ltd
Edugames Solutions Private Limited
Alchemic Dream Inc
Keywords International Barcelona SL
Reverb Localizacao – Prearacao de Documentos Ltda
Keywords (Shanghai) Information Technology
Kite Team SL
Kite Team Mex S. de R.L. de. CV
Liquid Development LLC
Ankama Asia Pte. Ltd
Synthesis Global Solutions
Synthesis Deutschland
Sillabit S.R.L
Keywords International SAS
Volta Creation Inc
Player Research
Global Video-Games Services Inc., trading as Enzyme Testing Labs
Sonox Audio Solutions S.L.U.
Country of incorporation
Date of incorporation/
acquisition
Proportion of voting
rights and ordinary
share capital held
Ireland
Japan
Canada
Italy
United States
United Kingdom
United Kingdom
United Kingdom
Canada
India
United States
Singapore
Italy
United States
India
Singapore
India
Canada
Spain
Brazil
China
Spain
Mexico
United States
Singapore
Switzerland
Germany
Italy
France
Canada
United Kingdom
Canada
Spain
13/05/1998
30/11/2010
22/12/2010
18/05/2011
26/09/2012
29/05/2013
15/01/2014
17/02/2014
17/02/2014
17/02/2014
17/02/2014
24/04/2014
08/05/2014
08/05/2014
10/10/2014
10/10/2014
10/10/2014
06/01/2015
09/01/2015
18/01/2015
02/04/2015
16/07/2015
16/07/2015
20/08/2015
22/03/2016
12/04/2016
12/04/2016
12/04/2016
08/06/2016
29/07/2016
26/10/2016
16/11/2016
22/12/2016
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
25 Related parties and shareholders
Italicatessen Limited, a company registered in Ireland is related by virtue of a common significant shareholder. P.E.Q. Holdings Limited is 100% owner of Italicatessen
Limited. At 31 December 2016, P.E.Q Holdings Limited owned 22.2% (2015: 24.5%) of the Company. In addition, Mr. Giorgio Guastalla is a Director of Italicatessen
Limited, P.E.Q. Holdings Limited and the Company, and owns, or controls, 90% of the share capital of P.E.Q Holdings Limited.
The following transactions arose with Italicatessen Limited, which provides canteen services to Keywords International Limited
Operating Expenses
Canteen Charges
The following are year-end balances:
Italicatessen Limited
2016
€’000
53
53
2016
€’000
9
9
2015
€’000
24
24
2015
€’000
9
9
ANNUAL REPORT AND ACCOUNTS 2016
63
IIIFinancial Statements Notes Forming part of the Consolidated Financial Statements continued
25 Related parties and shareholders continued
The Company paid the following amounts to Mr. Giorgio Guastalla, Director of the Company, and shareholder of P.E.Q Holdings Limited, in respect of rent on
premises occupied by the employees of the Group in Dublin.
Operating Expenses
Rental Payment
2016
€’000
22
22
2015
€’000
22
22
The Company entered into a deed of undertaking and indemnity on 8 July 2013 with Mr. Andrew Day, CEO and Director of the Company related to possible
liabilities which might arise due to the restructuring of the Group prior to its IPO on 12 July 2013. As part of this deed of undertaking and indemnity, Mr. Day
deposited £250,000 as security for the Company. This is included as Restricted Cash in Other Receivables of the Company. This amount has been repaid to
Mr. Day in 2016. There was a corresponding liability included in Other Payables in 2015.
The details of key management compensation (being the remuneration of the Directors) are set out in note 11.
As at 31 December 2016 and 2015, the Company had amounts receivable from its subsidiaries, amounting to €20,454,923 (2015: €20,598,567) relating to
intergroup trading activities.
26 Financial instruments and risk management
Interest rate risk
Interest rate risk is the risk that the value of financial instruments will fluctuate due to changes in market interest rates. The Group’s income and operating cash
flows are substantially independent of changes in market interest changes. The management monitors interest rate fluctuations on a continuous basis and
acts accordingly.
Where the Group has a significant amount of surplus cash, it will invest in higher earning interest deposit accounts.
Due to interest rate conditions, the interest rates for short term deposits are at similar levels to those achieved for longer terms. The Group is not unduly
exposed to market interest rate fluctuations, and no interest rate sensitivity analysis has been presented as a result.
Credit Risk
Credit risk arises when a failure by counterparties to discharge their obligations could reduce the amount of future cash inflows from financial assets on hand
at the reporting date.
The Group closely monitors the activities of its counterparties and maintains regular contact which enables it to ensure the prompt collection of customers’ balances.
The Group’s main financial assets are cash and cash equivalents as well as trade and other receivables and represent the Group’s maximum exposure to credit
risk in connection with its financial assets. Trade and other receivables are carried on the statement of financial position net of bad debt provisions estimated
by the Directors based on prior year experience and an evaluation of prevailing economic circumstances.
Whenever possible and commercially practical the Group invests cash with major financial institutions in each jurisdiction where it operates. The Group periodically
monitors the credit rating and stability of these institutions.
The ageing of trade and receivables that are past due but not impaired can be analysed as follows:
Group
As at 31 December 2016
As at 31 December 2015
The above balances relate to customers with no default history.
Total
€’000
Not past due
€’000
1-2 months overdue
€’000
More than 2 months
past due
€’000
13,879
7,519
12,877
5,313
907
2,049
95
157
64
KEYWORDS STUDIOS PLC
A provision for doubtful debtors is included within trade receivables that can be reconciled as follows:
Provision at the beginning of the year
Charged to income statement
Utilised
Provision at end of the year
2016
€’000
306
188
(26)
468
2015
€’000
260
46
–
306
Related party receivables of €nil were past due at 31 December 2016 (2015: nil).
Company
Intercompany receivables of €20,454,923 were not past due at 31 December 2016 (2015: €20,598,567).
Currency Risk
Currency risk is the risk that the value of financial instruments will fluctuate due to changes in foreign exchange rates.
The foreign exchange risk arises for the Group where assets and liabilities arise and are held in overseas subsidiaries in a currency other than the euro and
to a lesser extent where individual Group entities enter into transactions denominated in currency other that their functional currency.
The Group’s policy, where possible, is for Group entities to manage foreign exchange risk at a local level by matching the currency in which revenue is generated
and the expenses incurred and by settling liabilities denominated in their functional currency with cash generated from their own operations in that currency.
Where Group entities have liabilities denominated in a currency other than their functional currency (and have insufficient reserves of that currency to settle
them), cash already denominated in that currency will, where possible, be transferred from elsewhere within the Group.
Over the course of the year the Group’s currency has increased and diversified due to the addition of the newly acquired subsidiaries. The Group is predominantly
exposed to currency risk on the balances held within working capital within the Group and the exposure is concentrated in the movement of the Canadian
Dollar, US dollar and Sterling against the Euro. The effect of a strengthening and weakening of 10% of these currencies against the euro at the reporting date
on the working capital balances held at this date would, all other variable held constant, have resulted in the following pre-tax profit/(loss) impact for the year
as follows:
United States Dollar to Euro
Canadian Dollar to Euro
Sterling to Euro
10% Strengthening
€’000
10% Weakening
€’000
549
209
129
(499)
(190)
(117)
Total financial assets and liabilities
The carrying amount of the financial assets and liabilities shown in the Group and Company statements of financial position are stated at fair value.
Liquidity Risk
Liquidity risk arises from the Group’s management of working capital and the financial charges on its debt instruments.
The Group’s policy is to ensure that it will have sufficient cash to allow it to meet its liabilities when they become due.
The following are the contractual maturities (representing undiscounted contractual cash flows) of the Group’s and Company’s financial liabilities:
Group
Year ended 31 December 2016
Trade payables
Contingent Consideration
Employee Defined Benefit
Other accounts payable
Year ended 31 December 2015
Trade payables
Contingent Consideration
Employee Defined Benefit
Other accounts payable
Total
€’000
Within 1 year
€’000
4,822
251
–
12,180
1-2 years
€’000
–
1,479
–
113
2-5 years
€’000
–
826
–
Within 1 year
€’000
1–2 years
€’000
2–5 years
€’000
2,761
1,979
–
5,883
–
245
–
55
–
–
590
–
4,822
1,730
826
12,293
Total
€’000
2,761
2,224
590
5,938
Contingent considerations at 31 December 2016 have arisen on business combinations. They are based on set amounts to be paid in the future to sellers
under the purchase agreements.
ANNUAL REPORT AND ACCOUNTS 2016
65
IIIFinancial Statements Notes Forming part of the Consolidated Financial Statements continued
26 Financial instruments and risk management continued
Company
Year ended 31 December 2016
Trade payables
Contingent Consideration
Other accounts payable
Year ended 31 December 2015
Trade payables
Contingent Consideration
Other accounts payable
Total
€’000
175
860
414
Total
€’000
132
735
746
Within 1 year
€’000
1-2 years
€’000
2-5 years
€’000
175
–
414
–
860
–
–
–
–
Within 1 year
€’000
1–2 years
€’000
2–5 years
€’000
132
735
1,481
–
–
–
–
–
–
27 Operating lease commitments
The Group maintains a portfolio of leased properties. The terms of property leases vary from country to country, although they all tend to be tenant repairing
with rent reviews every 2 to 5 years and some have break clauses.
The total future value of the minimum lease payments is due as follows:
Group
Not later than one year
Later than one year and not later than five years
Later than five years
2016
€’000
2,318
6,031
903
9,252
2015
€’000
1,563
4,224
476
6,263
28 Finance lease commitments
The Group has leased computer equipment and office telephone systems. Such assets are generally classified as finance leases as the rental period amounts
to the estimated useful economic life of the assets concerned and often the Group has the right to purchase the assets outright at the end of the minimum
lease term by paying a nominal amount.
The total future value of the minimum lease payments is due as follows:
Group
Minimum Lease
Payments
€’000
Interest
€’000
Present Value
€’000
31
18
–
49
120
61
–
181
2
1
–
3
8
3
–
11
29
17
–
46
112
58
–
170
2016
Not later than one year
Later than one year and not later than five years
Later than five years
2015
Not later than one year
Later than one year and not later than five years
Later than five years
66
KEYWORDS STUDIOS PLC
29 Deferred tax
Details of the deferred tax assets and liabilities, and amounts recognised in the profit or loss are as follows:
Accelerated capital allowances
Personal severance indemnity
Available losses
Rent – free inducement
Fixed asset excess of tax over accounting
Deferred tax related to Multi Media Tax Credits
Other temporary and deductible differences
Deferred Tax arising on intangibles
Net tax assets/(liabilities)
All deferred tax assets have been classified in non-current assets in 2016.
30 Non-controlling interest
Opening Balance
Liabilities of Kite Team attributable to shareholder at the acquisition date
Loss of Kite team attributable to the shareholders of the Group
Contingent Consideration for the purchase of the remaining 50% of Kite Team
Settlement of Non-Controlling Interest
Asset
2016
€’000
–
109
44
–
173
5
300
249
880
Liability
2016
€’000
9
–
–
116
3
796
19
2,310
3,253
(Charged)/credited
to profit or loss
2016
€’000
Net
2016
€’000
(9)
109
44
(116)
170
(791)
281
(2,061)
(2,373)
2016
€’000
(1,309)
–
(61)
–
1,370
–
4
100
(243)
(66)
42
501
(88)
459
709
2015
€’000
–
(50)
(109)
(1,150)
–
(1,309)
Keywords International Limited acquired 50% of the issued share capital of Kite Team in 2015, a company registered in Spain.
In March 2016, Keywords International Limited acquired the remaining 50% of shares in Kite Team. The settlement value was €1,370,000; comprising the
settlement of the put and call option of €1,150,000 through €1,000,000 in cash and €150,000 in KWS shares, plus €220,000 transfer of losses from
Minority Interest.
31 Acquisitions completed in the current year
Acquisition of Ankama Asia Pte Ltd.
On 22 March 2016 the Group acquired the entire issued share capital of Ankama Asia Pte Ltd (“Ankama”), a company registered in Singapore, which specialises
in providing services to support the live operations of the games of Ankama France. The company has a four year agreement for the continued provision to
service to Ankama and also plans to significantly increase the scale of the Studio, which is based in Manila, to service new and existing clients of Keywords.
The acquisition will strengthen Keywords range of customer service offerings to customers with online and mobile games.
The amounts recognised in respect of the identifiable assets acquired and liabilities assumed are set out below:
Ankama Asia Pte
Financial Assets
Identifiable intangible assets – customer relationships
Trade and other receivable
Cash and cash equivalents
Trade and other Payables
Deferred tax liabilities
Total identifiable assets
Goodwill
Total consideration
Satisfied by:
Cash
Less: cash and cash equivalent balances transferred
Book
Value
€’000
–
6
120
(81)
–
45
Fair Value
Adjustment
€’000
44
–
–
–
(7)
37
Fair
Value
€’000
44
6
120
(81)
(7)
82
214
296
296
(120)
176
ANNUAL REPORT AND ACCOUNTS 2016
67
IIIFinancial Statements
Notes Forming part of the Consolidated Financial Statements continued
31 Acquisitions completed in the current year continued
The intangible assets are to be amortised over their estimated useful lives of 5 years.
The main factors leading to recognition of goodwill on the acquisition of Ankama Asia Pte Ltd are the presence of intangible assets in the acquired entity
which do not value for separate recognition such as the expertise in customer service and an unidentified proportion representing the balance contributing
to profit generation.
Ankama Asia Pte Ltd contributed €527,856 revenue and €17,288 loss before tax to the Group between the date of acquisition and the balance sheet date.
If the acquisition had been completed on the first day of the financial year, revenue for 2016 of €540,693 would have been contributed to the Group and loss
before tax of €18,022.
Acquisition costs of €39,140 have been charged through the Statement of Comprehensive Income.
Acquisition of Synthesis Group
The Group acquired the business of the Synthesis Group of Companies on 12 April 2016, including:
• 100% of the share capital of Sillabit SRL, a company registered in Italy;
• 100% of the share capital of Synthesis Deutschland GmBH, a company registered in Germany; and
• 100% of the share capital of Synthesis Global Solutions SA, (SGSS) a company registered in Switzerland.
The Synthesis Group provide localization and audio services to some of the leading games publishers, and was acquired to extend the Group’s client base and
global reach.
The amounts recognised in respect of the identifiable assets acquired and liabilities assumed are set out in the table below:
Synthesis Group
Financial Assets
Property, plant and equipment
Identifiable intangible assets – customer relationships
Trade and other receivables
Cash and cash equivalents
Trade and other payables
Deferred tax asset
Deferred tax liabilities
Total identifiable assets
Goodwill
Total consideration
Satisfied by:
Cash
Shares to be Issued
Deferred consideration
Total consideration transferred
Net cash outflow arising on acquisition
Cash
Less: cash and cash equivalent balances transferred
Book
Value
€’000
Fair Value
Adjustment
€’000
236
–
1,716
992
(1,856)
–
–
1,088
–
2,774
(92)
–
–
–
(538)
2,144
Fair
Value
€’000
236
2,774
1,624
992
(1,856)
–
(538)
3,232
14,664
17,896
10,200
6,906
790
17,896
10,200
(992)
9,208
Deferred Cash Consideration of €1,000,000 is due for payment on 12 April 2018 in accordance with the share purchase agreement. The deferred consideration
recorded within as contingent consideration within non-current other payables on the 2016 balance sheet represented the fair value amount at the balance due.
The main factors leading to the recognition of goodwill on the acquisition of the Synthesis Group are the presence of certain intangible assets in the acquired
entity, which are not valued for separate recognition, such as the expertise in sound recording and localisation and reputation of the staff within the industry.
68
KEYWORDS STUDIOS PLC
A fixed amount of 2,376,518 Keywords Studios Plc shares will be issued as part of the deferred consideration. The shares have been valued at the share price
at the date of acquisition, £2.32 (€2.91). €6,906,000 has been recorded as Shares to be Issued within equity.
The Synthesis Group of companies contributed €18,012,547 revenue and €3,494,458 profit before tax to the Group between the date of acquisition and the
balance sheet date.
If the acquisition had been completed on the first day of the financial year, total revenue for 2016 of €20,662,464 would have been contributed to the Group,
and a corresponding profit before tax of €3,887,462.
Acquisition costs of €254,698 have been charged through the Statement of Comprehensive Income.
Acquisition of Mindwalk Studios Inc. and Mindwalk Studios Ltd.
On 31 May 2016 the Group acquired 100% of the assets, the business and the customer contracts of Mindwalk Studios Inc., a company registered in China,
and Mindwalk Studios Ltd, a company registered in the British Virgin Islands. The companies trade as one business entity and specialise in the provision of art
creation services for the video games industry. The acquisition is in line with the Group’s strategy to further strengthen art services and to extend the Group’s
client base in this service.
The amounts recognised in respect of the identifiable assets acquired and liabilities assumed are set out in the table below:
Mindwalk
Financial Assets
Property, plant and equipment
Identifiable intangible assets – customer relationships
Trade and other receivables
Cash and cash equivalents
Deferred tax asset
Deferred tax liabilities
Total identifiable assets
Goodwill
Total consideration
Satisfied by:
Cash
Deferred Cash Consideration
Shares to be Issued
Total consideration transferred
Net cash outflow arising on acquisition
Cash
Less: cash and cash equivalent balances transferred
Book
Value
€’000
465
–
581
442
–
–
1,488
Fair Value
Adjustment
€’000
(333)
1,100
(39)
(30)
83
(137)
644
Fair
Value
€’000
132
1,100
542
412
83
(137)
2,132
3,117
5,249
3,048
315
1,886
5,249
3,048
(412)
2,636
The main factors leading to recognition of goodwill on the acquisition of Mindwalk are the presence of certain intangible assets in the acquired entity, which
are not valued for separate recognition, such as the expertise in art creation service and reputation of the staff within the industry. The fair value of the shares
to be issued as part of the acquisition has been determined as being the share price on the date of the transaction.
A fixed amount of 513,189 shares will be issued as part of the deferred consideration. The shares have been valued at the share price at the date of acquisition,
£2.80 (€3.67) and €1,886,000 has been recorded as Shares to be Issued in reserves.
Deferred Cash Consideration of USD$500,000 is due for payment on 5 April 2019 in accordance with the purchase agreement. The deferred consideration
recorded within as contingent consideration within non-current other payables on the 2016 balance sheet represented the fair value amount at the
balance due.
Mindwalk contributed €3,166,196 revenue and €227,528 profit before tax to the Group between the date of acquisition and the balance sheet date. If the
acquisition had been completed on the first day of the financial year, revenue for 2016 of €4,825,497 would have been contributed to the Group and €301,165
profit before tax.
Acquisition costs of €199,312 have been charged through to the Comprehensive Income Statement.
ANNUAL REPORT AND ACCOUNTS 2016
69
IIIFinancial Statements Notes Forming part of the Consolidated Financial Statements continued
31 Acquisitions completed in the current year continued
Acquisition of Volta Création Inc.
On 28 July 2016, the Group acquired 100% of the issued share capital of Volta Création Inc., a company registered in Canada, which specialises in Art Creation
for the Games industry. Volta was acquired to increase the capabilities and capacity of the art creation service and in particular to strength to the Groups
offering in concept art.
The amounts recognised in respect of the identifiable assets acquired and liabilities assumed are set out in the table below:
Volta
Financial Assets
Fixtures, Fittings & Equipment
Identifiable intangible assets – customer relationships
Trade and other receivable
Cash and cash equivalents
Trade and other Payables
Deferred tax liabilities
Total identifiable assets
Goodwill
Total consideration
Satisfied by:
Cash
Equity Instruments (45,192 shares of the parent company)
Net cash outflow arising on acquisition
Cash
Less: cash and cash equivalent balances transferred
Book
Value
€’000
74
–
513
(31)
(322)
–
234
Fair Value
Adjustment
€’000
–
761
–
–
–
(202)
559
Fair
Value
€’000
74
761
513
(31)
(322)
(202)
793
2,701
3,494
3,324
170
3,494
3,324
31
3,355
The main factors leading to the recognition of goodwill on the acquisition of Volta Création Inc. are the presence of certain intangible assets in the acquired
entity, which are not valued for separate recognition, such as the expertise in Art and Art Services and reputation of the staff within the industry.
Volta Création Inc. contributed €1,181,050 revenue and €209,305 profit before tax to the Group between the date of acquisition and the balance sheet date.
If the acquisition had been completed on the first day of the financial year, revenue for 2016 of €2,406,878 would have been contributed to the Group and
profit before tax of €277,687.
Acquisition costs of €19,298 have been charged through the Statement of Comprehensive Income.
70
KEYWORDS STUDIOS PLC
Acquisition of Player Research Ltd
On 26 October 2016, the Group acquired 100% of the issued share capital of Player Research Ltd., a company registered in the United Kingdom, which is an
industry-leading user research and playtesting specialist. The acquisition is in line with the Group’s strategy to extend its services, with the objective of providing
end to end services to its global client base covering all aspects of game production and live operations support.
The amounts recognised in respect of the identifiable assets acquired and liabilities assumed are set out in the table below:
Player Research
Financial Assets
Fixtures, Fittings & Equipment
Identifiable intangible assets – customer relationships
Trade and other receivable
Cash and cash equivalents
Trade and other Payables
Deferred tax liabilities
Total identifiable assets
Goodwill
Total consideration
Satisfied by:
Cash
Deferred Cash
Equity Instruments (65,280 shares of the parent company)
Net cash outflow arising on acquisition
Cash
Less: cash and cash equivalent balances transferred
Book
Value
€’000
45
–
169
489
(133)
–
570
Fair Value
Adjustment
€’000
–
158
–
–
–
(32)
126
Fair
Value
€’000
45
158
169
489
(133)
(32)
696
1,014
1,710
1,128
265
317
1,710
1,128
(489)
639
Deferred Cash Consideration of STG £300,000 is due for payment on 26 October 2018 in accordance with the share purchase agreement. The deferred
consideration recorded within as contingent consideration within non-current other payables on the 2016 balance sheet represented the fair value amount
at the balance due.
The main factors leading to the recognition of goodwill on the acquisition of Player Research Ltd. are the presence of certain intangible assets in the acquired
entity, which are not valued for separate recognition, such as the expertise in user research and playtesting and reputation within the industry.
Player Research contributed €182,820 revenue and €64,525 profit before tax to the Group between the date of acquisition and the balance sheet date. If the
acquisition had been completed on the first day of the financial year, revenue for 2016 of €921,339 would have been contributed to the Group and profit
before tax of €307,592.
Acquisition costs of €40,785 have been charged through the Statement of Comprehensive Income.
ANNUAL REPORT AND ACCOUNTS 2016
71
IIIFinancial Statements Notes Forming part of the Consolidated Financial Statements continued
31 Acquisitions completed in the current year continued
Acquisition of Global Video-Games Services Inc., trading as Enzyme Testing Labs
On 16 November 2016, the Group acquired 100% of the issued share capital of Global Video-Games Services Inc., trading as Enzyme Testing Labs, a company
incorporated under the laws of Quebec. Enzyme’s strengths are in functional QA and localisation testing of video games for leading game publishers and
developers. In addition, it provides localisation services and focus group testing, all of which will significantly strengthen Keywords’ service offerings to the
global video games market.
The amounts recognised in respect of the identifiable assets acquired and liabilities assumed are set out in the table below:
Enzyme
Financial Assets
Fixtures, Fittings & Equipment
Identifiable intangible assets – customer relationships
Trade and other receivable
Cash and cash equivalents
Trade and other Payables
Deferred Tax Assets
Deferred tax liabilities
Total identifiable assets
Goodwill
Total consideration
Satisfied by:
Cash
Net cash outflow arising on acquisition
Cash
Less: cash and cash equivalent balances transferred
Book
Value
€’000
Fair Value
Adjustment
€’000
929
–
2,546
695
(2,334)
–
–
1,837
(13)
1,669
–
–
–
3
(761)
899
Fair
Value
€’000
916
1,669
2,546
695
(2,334)
3
(761)
2,735
731
3,466
3,466
3,466
(695)
2,771
The main factors leading to the recognition of goodwill on the acquisition of Enzyme are the presence of certain intangible assets in the acquired entity, which are
not valued for separate recognition, such as the expertise in functional QA and localisation testing.
Enzyme contributed €1,094,913 revenue and €59,820 profit before tax to the Group between the date of acquisition and the balance sheet date. If the
acquisition had been completed on the first day of the financial year, revenue for 2016 of €8,632,254 would have been contributed to the Group and profit
before tax of €954,332.
Acquisition costs of €243,774 have been charged through the Statement of Comprehensive Income.
72
KEYWORDS STUDIOS PLC
Acquisition of Sonox Audio Solutions S.L.U.
On 22 December 2016, the Group acquired 100% of the issued share capital of Sonox Audio Solutions S.L.U. (“Sonox”), a company incorporated under the laws
of Spain. Sonox provides Audio and Localisation for Spain and Mexico. Sonox already provides certain services to the Group and its acquisition will enable the
Group to capture the margins on those services.
The amounts recognised in respect of the identifiable assets acquired and liabilities assumed are set out in the table below:
Sonox
Financial Assets
Fixtures, Fittings & Equipment
Identifiable intangible assets – customer relationships
Trade and other receivable
Cash and cash equivalents
Trade and other Payables
Deferred tax liabilities
Total identifiable assets
Goodwill
Total consideration
Satisfied by:
Cash
Equity Instruments (24,881 shares of the parent company)
Net cash outflow arising on acquisition
Cash
Less: cash and cash equivalent balances transferred
Book
Value
€’000
2
–
268
177
(411)
–
36
Fair Value
Adjustment
€’000
–
–
–
–
–
–
–
Fair
Value
€’000
2
–
268
177
(411)
–
36
614
650
500
150
650
500
(177)
323
The main factors leading to the recognition of goodwill on the acquisition of Sonox are the presence of certain intangible assets in the acquired entity, which
are not valued for separate recognition, such as the expertise in audio and localisation.
Sonox contributed €52,032 revenue and €87,969 additional profit before tax to the Group between the date of acquisition and the balance sheet date. If the
acquisition had been completed on the first day of the financial year, revenue for 2016 of €1,308,004 would have been contributed to the Group and profit
before tax of €454,827.
Acquisition costs of €21,687 have been charged through the Statement of Comprehensive Income.
ANNUAL REPORT AND ACCOUNTS 2016
73
IIIFinancial Statements
Notes Forming part of the Consolidated Financial Statements continued
32 Business combinations completed in 2015
Acquisition of Alchemic Dream Inc.
On 6 January, 2015 the Group acquired the entire issued share capital of Alchemic Dream Inc., a company registered in Canada, which specialises in providing
live operations support to on-line games for a number of game publishers. The acquisition is in line with the Group’s strategy to diversify into the provision of
complementary services to the video game market and strengthens the Group’s service of games already in production. Additionally the acquisition leverages
the Group’s existing expertise, locations, scale and global reach to extend the services provided by Alchemic Dream as well as generating synergies.
The amounts recognised in respect of the identifiable assets acquired and liabilities assumed are set out in the table below:
Alchemic Dream
Financial Assets
Property, plant and equipment
Identifiable intangible assets – customer relationships
Trade and other receivable
Cash and cash equivalents
Trade and other Payables
Deferred tax liabilities
Total identifiable assets
Goodwill
Total consideration
Satisfied by:
Cash
Net cash outflow arising on acquisition
Cash
Less: cash and cash equivalent balances transferred
Book
Value
€’000
38
–
802
38
(802)
–
75
Fair Value
Adjustment
€’000
(21)
286
(111)
–
–
(36)
118
Fair
Value
€’000
17
286
691
38
(802)
(36)
194
690
883
883
883
(38)
845
The intangibles assets are to be amortised over their estimated useful lives of 5 years.
The main factors leading to recognition of goodwill on the acquisition of Alchemic Dream are the presence of certain intangible assets in the acquired entity
which do not value for separate recognition such as the expertise in customer service, reputation within the industry, and, an unidentified proportion
representing the balance contributing to profit generation.
During 2015 Alchemic Dream contributed €4,100,036 revenue and €348,608 profit before tax to the Group. If the acquisition had been completed on the first
day of the financial year, revenue of €4,161,397 would have been contributed to the Group and €359,996 profit before tax before taking into account fair
value adjustments of €154,193 in 2015.
Acquisition costs of €67,146 were charged through the Comprehensive Income Statement in 2015.
74
KEYWORDS STUDIOS PLC
Acquisition of Reverb Localização – Preparação de Documentos Ltda
On 18 January, 2015 the Group acquired 100% of the issued share capital of Reverb Localização – Preparação de Documentos Ltda (“Reverb”), a company
registered in Brazil. Reverb provides localisation and audio management services for Brazilian Portuguese for some of the leading games publishers.
Reverb Studios was acquired to widen the scope of the Group’s services business and to extend the Group’s client base.
The amounts recognised in respect of the identifiable assets acquired and liabilities assumed are set out in the table below:
Reverb Localização – Preparação de Documentos Ltda
Financial Assets
Trade and other receivable
Cash and cash equivalents
Total identifiable assets
Goodwill
Total consideration
Satisfied by:
Cash
Deferred consideration
Total consideration transferred
Net cash outflow arising on acquisition
Cash consideration
Less: cash and cash equivalent balances transferred
Book
Value
€’000
14
12
26
Fair Value
Adjustment
€’000
–
–
–
Fair
Value
€’000
14
12
26
274
300
200
100
300
200
(12)
188
The main factors leading to recognition of goodwill on the acquisition of Reverb were the presence of certain intangible assets in the acquired entity which
did not value for separate recognition such as the expertise in sound recording and localisation, reputation within the industry, and, an unidentified proportion
representing the balance contributing to profit generation.
During 2015, Reverb contributed €544,043 revenue (including €79,097 of intercompany sales subsequently billed onwards) and €238,539 profit before tax
to the Group. If the acquisition had been completed on the first day of the financial year, revenue of €572,234 would have been contributed to the Group and
€243,770 profit before tax in 2015.
Acquisition costs of €1,224 were charged through the Comprehensive Income Statement in 2015.
ANNUAL REPORT AND ACCOUNTS 2016
75
IIIFinancial Statements Notes Forming part of the Consolidated Financial Statements continued
32 Business combinations completed in 2015 continued
Acquisition of Kite Team
On 16 July, 2015 the Group acquired 50% of the issued share capital of Kite Team, a company registered in Spain. Kite provides localisation and audio
management services for some of the leading games publishers. The acquisition is in line with the Group’s strategy to diversify into the provision of
complementary services to the video game market and strengthens the Group’s service of games already in production.
The Directors of the Group have reviewed IFRS 10 (Consolidated Financial Statements) and are satisfied that the Group has effective control of Kite Team and
accordingly at the date of acquisition it is treated as a subsidiary within the consolidation. This conclusion has been determined with particular consideration
given to the influence over the acquired entity, exposure to variable returns, and the ability to influence the entity to affect the amount of the variable returns.
At the date of acquisition the Group set up a put and call option to acquire the remaining 50% of the share capital of Kite Team by the end of 2017. The terms
of the contract are such that the original owners retain an active interest in the business until such time that the put or call option is exercised, and have the
ability to participate in the variable returns of the business. On that basis the Directors have concluded that it is appropriate to record the remaining 50% as
a non-controlling interest in the business.
As a consequence of the put option a financial liability was recognised as at 31 December, 2015 which was based on the anticipated cash and share settlement,
which was calculated by reference to anticipated earnings. The fair value of this financial liability at 31 December 2015 was €1,150,000, and was recorded in
other payables in accordance with IAS 32. This amount was agreed to be settled in 2016, and was settled as €1m in cash and €150,000 in equity instruments
in Keywords Studios. As the amounts were known prior to the finalisation of the signing of the 2015 annual report, and agreed to be settled during 2016, this
represented the fair value of the liability recorded as at 31 December 2015.
During 2016, the remaining 50% interest in Kite Team was acquired via the settlement of the €1.15m liability as noted above.
The amounts recognised in respect of the identifiable assets acquired and liabilities assumed are set out in the table below:
Kite Team
Financial Assets
Property, plant and equipment
Trade and other receivable
Cash and cash equivalents
Trade and other payables
Long-term loan
Total identifiable liabilities
Less non-controlling interest
KWS share of total identifiable liabilities
Goodwill
Total consideration
Satisfied by:
Cash
Net cash outflow arising on acquisition
Cash consideration
Less: cash and cash equivalent balances transferred
Book
Value
€’000
322
377
117
(291)
(625)
(100)
50
(50)
Fair Value
Adjustment
€’000
–
–
–
–
–
–
–
–
Fair
Value
€’000
322
377
117
(291)
(625)
(100)
50
(50)
550
500
500
500
(117)
383
The main factors leading to recognition of goodwill on the acquisition of Kite are the presence of certain intangible assets in the acquired entity which did
not value for separate recognition such as the expertise in sound recording and localisation, reputation within the industry, and, an unidentified proportion
representing the balance contributing to profit generation.
During 2015 Kite contributed €610,307 revenue (including €304,681 of intercompany sales subsequently billed onwards) and €217,721 of a loss before
non–controlling interest to the Group. If the acquisition had been completed on the first day of the financial year, revenue of €1,149,460 would have been
contributed to the Group and €301,124 of a loss before non-controlling interest in 2015.
Acquisition costs of €70,174 were charged through the Comprehensive Income Statement in 2015.
76
KEYWORDS STUDIOS PLC
Acquisition of Liquid Development LLC
On 20 August 2015 the Group acquired 100% of the assets of Liquid Development through the purchase of the membership interests. The company registered
in USA specialises in providing art creation services for the video games industry. The acquisition is in line with the Group’s strategy to diversify into the provision
of complementary services to the video game market and strengthens the Group’s service of games already in production.
The Directors of the Group have reviewed the requirements of IFRS 3 (Business Combinations) paragraph B5 – B12 and concluded that as Liquid Development
constitutes an on-going business within the Group that it should be accounted for as a business combination.
The amounts recognised in respect of the identifiable assets acquired and liabilities assumed are set out in the table below:
Liquid Development LLC
Financial Assets
Property, plant and equipment
Identifiable intangible assets – customer relationships
Trade and other receivable
Cash and cash equivalents
Trade and other payables
Deferred tax liabilities
Total identifiable liabilities
Goodwill
Total consideration
Satisfied by:
Cash
Equity instruments (1,074,440 shares of the parent company)
Deferred consideration settled in 2017
Total consideration transferred
Net cash outflow arising on acquisition
Cash consideration
Less: cash and cash equivalent balances transferred
Book
Value
€’000
–
–
340
269
(185)
–
424
Fair Value
Adjustment
€’000
108
1,225
–
–
–
(541)
792
Fair
Value
€’000
108
1,225
340
269
(185)
(541)
1,216
6,801
8,017
5,365
2,413
239
8,017
5,365
(269)
5,096
The deferred consideration recorded within other payables on the 2015 balance sheet represented the fair value amount of the balance due.
The main factors leading to recognition of goodwill on the acquisition of Liquid Development are the presence of certain intangible assets in the acquired
entity which do not value for separate recognition such as the expertise in art creation services, reputation within the industry, and, an unidentified proportion
representing the balance contributing to profit generation. The fair value of the shares issued as part of the acquisition has been determined as being the share
price on the date of the transaction.
During 2015, Liquid Development contributed €1,999,469 revenue and €345,591 profit before tax to the Group. If the acquisition had been completed on the
first day of the financial year, revenue of €6,068,150 would have been contributed to the Group and €1,169,440 profit before tax in 2015.
Acquisition costs of €63,145 were charged through the Comprehensive Income Statement in 2015.
ANNUAL REPORT AND ACCOUNTS 2016
77
IIIFinancial Statements Notes Forming part of the Consolidated Financial Statements continued
33 Events after the reporting date
Acquisition of Spov Ltd
On 16 February 2017 the Group acquired the entire issued share capital of Spov Ltd, a company registered in the United Kingdom, a specialist animation studio.
It is expected that the acquisition will strengthen the group’s market position as a leading global provider of digital art services and will contribute to the
continuing growth in this area.
Under the terms of the acquisition, a total consideration of not more than STG 1.16m (€1.36m) was agreed. STG 0.3m (€0.351m) was paid on acquisition, the
remaining consideration will be paid to a maximum of STG 0.816m (€0.955m) over two years to March 2018.
The book value acquired of net assets is as follows:
Financial Assets & Liabilities
Fixed Assets
Trade Receivables
Trade Payables
Overdraft
Net Liabilities
Goodwill
Total Consideration
Satisfied by
Cash
Deferred Consideration
Net Cash outflow arising on acquisition
Cash
Overdraft
€’000
30
16
(120)
(18)
(93)
1,450
1,357
351
1,006
351
18
369
At the date of authorisation of these financial statements a detailed assessment of the fair value of the identifiable net assets has not been completed.
Information on the revenue and impact on profit due to this acquisition has not been disclosed as it is impracticable to do so at this point in time.
78
KEYWORDS STUDIOS PLC
Notes
ANNUAL REPORT AND ACCOUNTS 2016
79
IIIFinancial Statements Notes
80
KEYWORDS STUDIOS PLC
Company Information
Directors
Secretary
David Broderick
Andrew Day
Ross King Graham
Giorgio Guastalla
David Reeves
David Broderick
Registered Number
8548351
Registered Office
Auditors
Principal Bankers
Nominated Adviser and Broker
Financial PR Adviser
Solicitors
8 Clifford Street
London W1S 2LQ
United Kingdom
BDO
Registered Auditors
Beaux Lane House
Mercer Street Lower
Dublin 2
Barclays Bank
27 Soho Square
London
W1D 3QR
Numis Securities Limited
The London Stock Exchange Building
10 Paternoster Square
London
EC4M 7LT
MHP Communications
6 Agar Street
London
WC2N 4HN
Squire Patton Boggs (UK) LLP
7 Devonshire Square
London EC2M 4YH
United Kingdom
Brown Rudnick LLP
8 Clifford Street
London W1S 2LQ
United Kingdom
DWF LLP
20 Fenchurch Street
London EC3M 3AG
United Kingdom
KEYWORDS STUDIOS PLC
WHELAN HOUSE
SOUTH COUNTY BUSINESS PARK
DUBLIN 18
IRELAND
T: +353 190 22 730
www.keywordsstudios.com