g5

G5 remains in the profitability loop and releases new games

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G5 Entertainment (G5EN:ST) is about to reveal their Q4 preliminary sales figures in approximately three weeks. As customary Alpha Researcher has estimated the figures in advance and also provided an EBIT estimate. Our estimates are being disclosed in the article’s premium section. Furthermore, other big news is that two games whereof one in-house developed hidden objects free-to-play game was released yesterday.

G5 starts to chase other detective games

Revenue estimates are great, but the most important news of recent times is that G5 Entertainment has released their first in-house developed F2P hidden objects game ever, and also a mid-core game. We have previously written that we expect two games to be released in Q4, whereof at least one hidden objects game. With slightly more than two weeks left of Q4 two games have been released. The first game (which we will focus on in this article) is called S.E.D.: Special Enquiry Detail and its plot consists of the famous S.E.D. Detectives Turino and Lamonte that operates to return law and order to the streets of New York. The game is a hidden objects game and has so far been released on the Ios appstore on Ipad devices. The second one is called Rage of Realms and is a mid-core (multiplayer RTS) game similar to Clash of Clans. It has been released on both Iphone and Ipad devices and seems to be a third-party developed game.

Official game trailer of S.E.D.: Special Enquiry Detail

Alpha Researcher argues that the hidden objects game is set to compete with other detective titles such as CSI: Hidden Crimes and Criminal Case. The CSI game has not been a block-buster and is currently having a grossing performance slightly below G5’s Letters from Nowhere. The latter on the other hand has since its release in August 2014 been located at grossing placements of 25-50 on Ipad games in the United States. Criminal Case’s grossing performance is hence pretty similar to G5’s current best-seller The Secret Society. If G5’s new game, SED, were to perform like Criminal Case in the future it would however be of a much higher economical importance to G5 than TSS currently is…

By that we do not mean that TSS would be superfluous. We argue that there might arise significant cross-selling opportunities between the two games. With “much higher economical importance” we simply mean that a game performing like Criminal Case (and thus like TSS) would generate twice as much revenues to G5 than The Secret Society currently does. The logic behind this reasoning is that SED is an in-house developed game and will not render in a revenue-sharing deal like TSS. The company’s gross profit margin will thus be enhanced. Please observe that this solely is one of many possible scenarios. Within one or two months we can assess SED’s performance (and Rage of Realms’) in a more concrete manner.

Going forward we still expect another hidden objects game in the near future, possibly in Q1 2016. We did not expect the first hidden objects game to be based on a detective plot, and hence we still believe that an additional hidden objects game might be released in the near future.

Strong October and November performance indicates a solid growth in Q4

In the fourth quarter G5’s games have continued to perform well despite the company’s new focus on balanced profitability and hence on less marketing spending. Some titles have experienced somewhat declining rankings in the United States, like for example The Secret Society on Iphone and Letters From Nowhere on Ipad. On the contrary some titles, like Hidden City and Farm Clan on Ipad, have experienced a continued strong performance. Hidden City even got a global feature (editor’s choice) on Google Play just a week ago.

We argue that some of the declining rankings could be a result of cautious marketing ahead of new game releases. By observing download levels on Ios in the fourth quarter we have come to the conclusion that it has been on the same level overall as in Q3. Though, TSS on Iphone has experienced a significant decreasing amount of downloads in the United States, which might be due to temporarily halted marketing efforts. The most interesting development during the autumn (except for Farm Clan) is however the rise of Hidden City. Large parts of its increased grossing performance seems to be of an organic origin, such as superb game updates.

In the chart below we have visualized the ranking development for G5’s top-performing games in the United States. It is based on trailing 14 day rankings. The red mark highlights the performance after G5 started to focus on balanced marketing efforts and profitbaility. This development should eliminate all the speculations regarding if G5 is dependent on extreme marketing efforts or not. We argue that they are not.

G5

As our revenue model suggest we estimate G5 Entertainment’s revenues in the fourth quarter to SEK 107.2 million, implying a growth rate of 30.2 percent compared to last year’s Q4. Sequentially it would mean a growth rate of almost 11.6 percent. We argue that it was G5’s strong grossing performance in October and November that contributed to major parts of this growth. Hence we suspect that the company might have observed an opportunity for somewhat cautious marketing efforts during the past couple of weeks. Partly to increase profitability but also to save some room ahead of new game releases.

In the chart below we have visualized the company’s estimated net revenues per day given available market data, together with some assumptions that have been mixed down in our own Excel model. As mentioned above it suggests a strong performance in October and November. To estimate the remaining days of Q4 we have used the average daily revenues during the last month.

g5Given our revenue scenario of SEK 107.2 million we believe that an EBIT result (adjusted for possible write-offs) of SEK 10.3 million is reasonable to assume in the quarter, corresponding to an EBIT margin of 9.6 percent. To reach this estimate we have assumed user acquisition costs of SEK 17 million in Q4, compared to SEK 15 million in Q3. In terms of earnings per share such an EBIT should render in an EPS of SEK 0.82.

Gross revenues in full-year 2015 should thus reach SEK 390.3 million (net revenues of SEK 273.8 million). The gross margin is expected to have increased from 44.7 percent in 2014 to 47.3 percent in 2015, due to a greater share of revenues from wholly-owned games. Adjusted EBIT should land at SEK 28.2 million, which corresponds to an EBIT margin of 7.2 percent. Full-year adjusted EPS is estimated to reach SEK 2.15 (reported EPS of SEK 1.47).

A brief comment on the recent share price development is that the company, according to our view, has to report an adjusted EBIT margin of at least 9 percent in Q4 to justify today’s market cap. We hence take a neutral stance to the share until we know more about Q4’s profitability. Another development that we also will pay close attention to is how the new games perform. We argue that they could completely change the investment case, for the better.

Disclosure and disclaimer

G5 Entertainment is a part of Alpha Researcher’s portfolio and is also included as one of our Alpha Picks. The analyst owns shares in the company. Click on the link to read our initation of coverage analysis of G5 Entertainment.

Alpha Researcher does not take any responsibility for investments made in G5 Entertainment. The analysis or article written above, and all the conclusions that are made within it, are solely Alpha Researcher’s opinions and expectations. It should absolutely not be seen as any investment advice. We highly encourage investors to make their own analysis and/or contacting investment professionals before buying any shares in G5 Entertainment.

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