#G5 Entertainment: Focus on topline

Sweden listed mobile gaming developer and publisher G5 Entertainment published its Q4 2014 report on Tuesday, February 24th. Revenues of SEK 57.7m were up 101% y-o-y and stronger from us expected, while EBIT excluding non-recurring items of SEK 2.9m once again came in below our expectations. Despite the significant sequential revenue increase of 29%, the adjusted EBIT margin increased only 70bp sequentially to 5.1% in Q4 2014. Elsewhere, there was little in the report that surprised in either way.

G5’s CEO Vlad Suglobov states in the report that the focus on effective marketing continues to benefit the company. Investment in user acquisition (UA) enables fast topline growth, but it does obviously put pressure on profitability. According to G5, users acquired in a given month, will generate a return on that UA investment over an extended period of time, usually for months and possibly years to come. We believe that this remains to be seen. Consumer loyalty in mobile gaming is at least questionable, in our opinion, given the vast supply of games and constant flow of new games. While we certainly appreciate the rapid topline growth, which was actually ahead of the market growth during 2014, we hope to see a better balance between growth and profitability going forward.

Today, www.introduce.se published an interview with CEO Vlad Suglobov:

Q: Can you please comment on the growth in Q4 and why your growth was somewhat higher than your preliminary one?

VS: The growth pace in Q4 is a result of the chosen strategy to focus on achieving the highest possible organic growth, while the opportunity is available. We have been talking about it for some time, that our increasing investments in marketing are fundamentally profitable and lead to faster growth, and Q4 results prove that point. It takes some time to monetise users we are acquiring. It takes effort to acquire and retain the right kind of users and to do it in a fundamentally profitable way. To me, Q4 results validate both the strategy we have chosen and the method we are using.

As one can probably see from the report, by looking at substantial growth with thin profit and cash flow margin, the management now has a very good control of the company’s profitability and cash flow. We have very substantial monthly marketing budget at this point, covered fully by the cash flow from operations. These marketing costs are a variable cost, at management’s discretion. Part of these costs are marketing costs that replace the players that naturally fall off from our audience in the normal course of business. And another bigger part are the costs that bring in even more players. Think of this latter part of marketing expenses as a throttle pedal. We could push it even further and go into negative cash flow and profit, in order to speed up the growth even more. Or, we could ease up on the throttle, and immediately improve the margins and the cash flow, at the expense of the growth pace. I can argue that even substantially easing up on throttle and reducing UA expenses will not lead to declining sales, as we are still acquiring the large number of new users organically, through the exposure in the application stores. This throttle of marketing expenditure can be adjusted on a day by day basis, so there’s a great degree of management control over this “throttle pedal”. What we choose to do is accelerate this company at the optimal pace, so that we could do it organically. As I mentioned in the report, it is our chosen strategy of the moment to not go into substantially negative or positive profit/cash flow zones, but to maximize the growth through organic means. And I think Q4 results is a great demonstration of how it works.

Our preliminary sales information is not precise by nature. By the time we provide this information, we have a good understanding of how the sales look like, but we still don’t have the very final reports. There can be discrepancies, therefore, and it’s normal. Substantial last minute changes in the exchange rates can also affect the outcome, and I believe this was one of the major reasons in this case.

Q: Excluding turnover and profits, what is the biggest gain from the increased number of players and usage of your games?

VS: The driver of the revenue growth are sales of F2P games. The growth of F2P games revenue is driven by the underlying growth of the active user audience, and the underlying growth of monetisation per user, and user retention. The active user base is growing due to our marketing efforts. The monetisation per user is growing both through the focus of the marketing on acquiring fundamentally profitable users, and through the efforts of the development to continue improving games through regular updates. In our case higher revenue is a key to the possibility of higher profits, as we can increase the sales of our games without increasing underlying fixed costs of the company. In general case, the cost of acquiring new users needs to be kept proportional to the revenue, but the cost of producing new content and improving the game is pretty much fixed as monthly burn rate.

Q: You discard your margin ambition of 30%, which is reasonable considering your new turnover reporting including provisions. Can you comment why you didn’t lower the ambition instead of removing it?

VS: As I explained in the report, both the board and the management want to make G5 a bigger company, and we believe this is in the interests of the shareholders. Being a larger company, with larger audience, has a number of important advantages, including the possibility of higher profits and profit margins. G5 is in the unique and very good position right now. The company can grow fast organically, the management knows how to do it, and shareholders can see from Q4 results that it’s working. It’s not like this is something every other company in this business has. Some other companies are actually struggling to achieve any growth, by any means. We have to use this position as long as it lasts. It will be over at some point, no doubt about it, and then we’ll focus on profits. But we want to make sure that until that moment happens, we go full speed. In this situation we felt that removing the margin target would be the right course of action. It is still the target we like, we just can’t commit to achieving it in a specific time frame, given the situation we have. And it felt even more right to do it at this point because of the upcoming change in revenue recognition.

Q: You have great success with The Secret Society, is this helpful attracting more third part developers?

VS: G5 always had great reputation among developers. At some point we worked with over 80 developers while focusing on unlockable games. We paid and continue paying substantial royalties to our partners. We are receiving numerous proposals from developers, every day. We are also committed to our long-time partners, very talented studios that we continue working with. The quality bar is pushed up constantly, and in the F2P business there’s much more focus on quality and experience, rather than quantity. Our team has developed very good understanding of how F2P games work and how to achieve success in this area. We can help studios achieve success in F2P games, like we did with TSS and other games. This brings developers to us.

Q: Can you comment on your fixed costs, and how much you can grow with the current organizational size?

VS: At this point there’s not much connection at all between our fixed costs and how big the sales of our games can grow. I think we could double, triple or quadruple the revenue with about the same number of employees. There is a certain standard of how much content and how many updates a game needs, but it’s based on the game play experience of a player within the game. It does not matter if a game has 10k daily users or 1M daily users, one player still needs the same amount of content to be happy. The pressure to increase fixed costs in development comes from the number of games in development/support, and from gradually increasing production values. Right now we have enough staff to take care of the games we have released and in development, and the pressure to increase budgets has slowed down after the transition to F2P was accomplished. The situation is similar in the marketing and other functions, where fixed costs need to scale proportionally to the number of games actively managed, but not the audience or the sales levels of particular games. Marketing 10k DAU game and 1M DAU game would not use substantially different amount of resources, at least in my experience. And if the games are of high quality, even player support function does not need to be scaled proportionally to the game audience

Q: Once the aggressive investment/growth phase ends, what are the profit margins one can expect from G5?

VS: This is going to depend on a number of factors, and the biggest ones would be how big G5 gets by then, how our portfolio composition is going to look like by then, and how good the games in the portfolio are going to be by then. The overall size is important to offset the fixed costs. The bigger we are going to be, the higher our gross margins would be. The more successful 1st party (G5’s own) games are going to be in our portfolio, the higher possible profit margins are going to be, as on these games we do not need to share revenue with other companies. And the better the games would be fundamentally, the less UA expenses we would need to incur to maintain and grow the sales. One could build a model which takes the assumption of certain revenue share (0% in case of 1st party games), certain UA expense level in proportion to the game revenue, certain composition of the portfolio, and certain fixed expenses, and calculates the profit margin that is possible given certain annual revenue. We actually do have such model internally. It shows a range of possible outcomes depending on the assumptions, it allows for very positive yet realistic scenarios, and we are navigating the company to the scenario which will provide good returns to the shareholders.


#Thinfilm: Prospectus a good case reminder

This morning, Thin Film Electronics published a Prospectus Summary pursuant to Section 7-2 of the Securities Trading Regulation in connection with the transfer of listing from Oslo Axess to Oslo Børs Main List. It’s shares will begin trading there as of tomorrow, February 26th.

While not including any major news, the Prospectus still contains some interesting information for investors who want to learn more of this interesting play on the Internet of Everything.

Thinfilm makes low-cost printed electronics for ultra-high-volume applications. Thinfilm’s vision is to bring electronics to even the most cost – sensitive applications, introducing electronics to market segments not addressed by silicon – based technologies.
Thinfilm has developed a printed non – volatile, rewritable ferroelectric memory for use in both standalone and integrated system applications. Thinfilm has also developed and licensed
technology to print organic transistors, and to protect the resulting integrated systems. In addition, the Company has acquired technology and assets to print logic based on Printed Dopant Polysilicon (“PDPS”) that allows Thinfilm to produce components and products that communicate wirelessly.
Thinfilm’s business model is based on the following products:

  • Memory Labels: Thinfilm Memory stores digital data on a label thinner than a human hair, for just a few cents. It is rewritable and permanent, storing data without the need for external power.
  • Brand Protection Solution & Refill Authentication Solution:
    The Thinfilm Brand Protection & Refill Authentication
    Solutions are two – part systems that can help
    manufacturers protect their brands from counterfeiting and grey
    – market activity, as well as provide an effective means of refill authentication. It consists of adhesive labels that generate a distinct forensic electrical signature. A Thinfilm Authentication
    Unit reads the label.
  • EAS (Electronic Article Surveillance) Tags: Thinfilm EAS tags use a proprietary process to improve traditional electronic article surveillance technology by introducing a new category of soft anti-shoplifting tags. These next generation labels are compatible with the global base of installed 8.2MHz RF EAS infrastructure.
  • Sensor Labels: Thinfilm is commercializing a line of intelligent labels that will sense information and store data for 80% to 90% less than the cost of conventional electronics. This is part of Thinfilm’s vision to bring the Internet of Everything to even the lowest-cost items.
  • NFC Smart Labels: Following the acquisition of Kovio, Inc.’s NFC technology in January 2014, Thinfilm has accelerated its plans for the launch of NFC – enabled sensor and display labels. Thinfilm’s Smart Labels will use the Thinfilm NFC Barcode protocol to enable seamless data exchange from a sensor label to a smart phone. The protocol is currently supported by Google Android and most major manufacturers of NFC controllers.

Thinfilm’s business model is to earn revenues from products based on these technologies, and by licensing its IP and know – how.

The Printed Electronics market is still in its early stages,
however, according to industry analyst group IDTechEx, the market for printed and potentially printed products is expected to grow to more than USD 44 billion in value over the next seven years. IDTechEx predicts that logic (i.e., memory and transistors) will be one of the principal segments in this market.
Item level labelling is the largest single market opportunity for application of Thinfilm Memory™. Also, the trend to replace clunky traditional EAS tags with sleek, flexible and integrated soft tags is expected to continue. Thinfilm’s EAS labels, unique since they do not

reactivate, are being rolled out with a global fashion retailer in 2015.
Smart Labels are expected to constitute a significant opportunity for Thinfilm. Multiple applications are being developed together with
Thinfilm’s customers in this product area; from time – integrated threshold sensor labels to interactive packaging, and pharma quality
assurance. This second wave of applications will constitute closed systems, i.e. powered by a laminar battery, and communicating status by means of a display and/or contact – based read-out.
The third wave of Thinfilm products, contactless near-field readout,
has been demonstrated and further applications are being developed while initial customer discussions are ongoing. This market, expected to emerge between 2015 and 2020, is believed to have the largest potential, and is often referred to as the Internet of Everything, where individual inanimate objects communicate with consumers through the use of RF-based near field communication.
While such communication is expected to occur at a lower frequency and at shorter distances than today’s ISO-standard RFID systems, it is the ubiquity of such systems that makes their
development compelling. According to IDTechEx, the numbers of printed and chipless RF-enabled labels sold globally will rise from 12 million in 2011 to 209 billion in 2021.
Nordic Investor

#TrustBuddy: #Victory Park to #IPO specialty lending investments vehicle

Interesting news out today from the world of P2P lending. www.reuters.com reports that Chicago-based Victory Park Capital plans to launch a specialist investment vehicle through a London listing aimed at raising 200 million pounds ($310 million) to invest in online peer-to-peer lending ventures in the United States and Europe.

Victory Park said it intends to publish its prospectus for the initial public offering (IPO) of VPC Specialty Lending Investments around Feb. 26, aiming for a stock market debut on March 17.

Specialty lending platforms have prospered in the United States and Europe since the financial crisis, benefiting from regulation that has curbed certain types of bank lending to small businesses and consumers.

The market for such lending in the United States was nearly $7 billion in 2014, Victory Park says. In Britain, specialty small business lending was worth 749 million pounds in the same year, according to a study by the University of Cambridge and charity NESTA.

Victory Park said that VPC Specialty Lending Investments will target a net dividend yield of 8 percent, with quarterly payouts.

With its significant sourcing network, Victory Park Capital Advisors has identified a strong pipeline of investment opportunities in which the company may invest,” said Brendan Carroll, co-founder of Victory Park Capital.

In this context, we find it extremely interesting to remember what Europe’s leading P2P lending provider TrustBuddy, which is listed on the Swedish stock exchange, said in connections with its FY 2014 report, published last week.  TrustBuddy stated that itanticipates increased attention from major global investors who want to gain ownership posts in the P2P sector in 2015, to secure a position for institutional lending.” We cannot interpret in any other way than that TrustBuddy is already in contact with interested players and Victory Park might just be one of them. Any such announcement would of course be very positive for TrustBuddy’s share price development.

Nordic Investor


#Thinfilm: To good momentum to ignore

A few weeks ago (February 2nd) we closed our long position in Thinfilm Electronics, with a solid 27% gain in just 4 weeks. The major share price increase took place on the milestone agreement with Xerox, widely considered as the commercial break-through for the company. In hindsight, our decision was proven to be premature as  newsflow has continued to be strong.

We believe that momentum is simply too strong to ignore and re-enter a position at SEK 8,00. Here is what happened since our last update:

  • February 19th: Thinfilm decides to establish a Level 1 ADR (American Depositary Receipt) program in the United States, and that the Company today has filed a registration statement (Form F-6) with the U.S. Securities and Exchange Commission. The Bank of New York Mellon has been appointed as the Company’s depositary bank for this program.
  • February 25th: Thinfilm today announced the launch of OpenSense(TM), a new NFC sensor tag technology with the ability to drive enhanced consumer engagement and improved product security. This innovative technology addresses compelling applications in a range of global markets, including wine and spirits, pharmaceuticals, cosmetics, health and beauty care, and automotive.
  • February 25th: Diageo plc, (NYSE: DEO) a world leader in beverage alcohol, and Thin Film Electronics ASA (“Thinfilm”) (OSE: THIN.OL), a global leader in the development of printed electronics and smart systems, will look to completely change the role of a bottle in the consumer experience, with a prototype JOHNNIE WALKER BLUE LABEL® “smart bottle” that will be unveiled at Mobile World Congress, taking place March 2-5, 2015.
  • February 25th: Reference is made to the announcement on 28 January 2015 regarding Thinfilm applying for transfer to the OSE Main List. The Board of Oslo Børs today approved Thin Film Electronics ASA for listing on Oslo Børs. The first day of trading on the main list will be Friday 27 February. Thinfilm’s CEO, Davor Sutija, will ring the bell at the start of trading on the Oslo Børs at 9 am CET, after which, he will deliver a presentation for financial press, analysts and investors.

We believe the transfer to OSE Main list will have positive consequences, both for the liquidity in the share but also in terms of ownership. Many major investments funds are limited by internal policies to only invest in companies listed on the Main list. Furthermore, the ADR programm should be helpful to increase international awareness and increase valuation multiples as US investors tend to be more generous in valuing fast growing growth companies, compared with Scandinavian investors.

Also, the developments on the product side are quite encouraging. Deals and co-operations with high profile names such as Xerox and now Diageo, hugly help to put Thinfilm on the map.  The connected “smart bottle” aims to enhance the consumer experience by using printed sensor tags featuring Thinfilm’s OpenSenseTM technology, which can detect both the sealed and opened state of each bottle. The tags and the sensor information they contain will allow Diageo to send personalized communications to consumers who read the tags with their smartphones.

The innovation, created by Thinfilm in collaboration with Diageo Technology Ventures, will make it possible to send consumers targeted and timely marketing messages, whether at retail or after purchase, such as promotional offers, cocktail recipes and exclusive content.

Thinfilm’s proprietary and patent-pending OpenSenseTM technology makes use of smartphones’ Near Field Communication (NFC) capabilities. The technology allows Diageo to track bottle movements across the supply chain, in-store and to the point of consumption, with the sensor tags remaining readable even when the factory seal has been broken, providing an additional layer of security in protecting the authenticity of the product.

Unlike conventional static QR codes that are often difficult to read, easy to copy, and do not support sensor integration, OpenSenseTM tags can dynamically detect if a bottle is sealed or open with the simple tap of an NFC smartphone. To ensure authenticity, the tags are also completely and permanently encoded at the point of manufacture and cannot be copied or electrically modified.

Helen Michels, Global Innovation Director, Futures Team at Diageo, said:

Mobile technology is changing the way we live, and as a consumer brands company we want to embrace its power to deliver amazing new consumer experiences in the future.

“We constantly experiment with the latest cutting edge technologies to enrich and enhance the experiences delivered by our iconic brands. Our collaboration with Thinfilm allows us to explore all the amazing new possibilities enabled by smart-bottles for consumers, retailers and our own business, and it sets the bar for technology innovation in the drinks industry.”

Davor Sutija, Thinfilm Chief Executive Officer, said:

As mobility becomes ubiquitous, consumers want and expect brands to follow suit and deliver custom mobile experiences. But today’s conventional NFC mobile marketing solutions are not technologically advanced enough to create immersive or customizable consumer experiences.

By leveraging OpenSense(TM), Thinfilm is enabling the ‘smart bottles’ to carry digital information that can be accessed via NFC smartphones. Diageo can reap the benefits of the intelligence gleaned from our smart sensors and create engaging experiences for its customers. This is how we will begin to build the real Internet of Everything.

The prototype bottle will be on display at Thinfilm’s booth at Mobile World Congress in Barcelona, Spain throughout the four-day event. Furthermore, CEO Sutija will discuss Thinfilm’s OpenSense technology during his keynote address on Thursday, March 5, at Mobile World Congress 2015 in Barcelona, Spain. Thinfilm will also conduct live demonstrations of the OpenSense technology at its exhibition booth located in the Innovation Norway pavilion located in Hall 6, Stand 6H20.

We expect Thinfilm’s participation at the Mobile World Congress to further strengthen momentum around the company.

Nordic Investor


#Nexam: Confident #CEO comments

Nexam Chemical just released its Q4 2014 report. Given the early commercial state of the company, the focus was clearly on management’s comments rather than the actual figures.

Says Nexam’s chairman of the Board, Lennart Holm: “(In 2014) We did not succeed in delivering on the anticipated commercial volumes that were promised, which naturally,is a disappointment for us…We underestimated the inherent sluggishness caused by awareness of the potentially devastating consequences of an erroneous decision regarding materials. We will learn from this as we move forward.

With BASF, we agreed not to extend the exclusive agreement, which, on the positive side, enables us to initiate cooperation with other players that have shown interest in Nexam Chemical ‘s crosslinkers
in Nylon 66. Work on our crosslinkers in Nylon 66 will definitely not be suspended and we anticipate evaluating material in components for the automotive and electrical industries in 2015.
Regarding Armacell, the development project was delayed after Armacell made a strategic decision to change from “virgin PET”
to rPET (recycled green PET) for the manufacture of PET foam. Using rPET as the raw material, the dynamic of both the chemistry and the manufacturing process is changed, which means that
parts of the completed development work, which includes our crosslinking technology, must be redone, with delays as a result. Our cooperation with Armacell is continuing and being intensified, as we have extended our exclusive supply agreement and initiated a new development project for recycled PET that is part-financed by
Although we did not succeed in living up to the expectations that we had for sales, there have been many positive developments in the past year.
Our cooperation with  a major pipe manufacturer has taken decisive steps forward and in 2015, full-scale tests will take place at the customer using products that include our crosslinking. Interest in and sales of our NEXIMID products for applications in polymides grew during the year. The polyimide segment is no huge market for the company in the near future, but provides a key indication that our chemistry works and creates value for the customer. We launched two new products, NEXAMITE PBO and NEXIMID MHT-R, and marketing and sales activities for these are now set to be intensified.”
For the first time we also get a detailed comment by recently appointed CEO Anders Spetz:Even before I started, I was convinced of the relevance of Nexam Chemical’s technology, but now I am even more convinced and astonished by its breadth and depth. Through the technology developed by our R&D team in

recent years, we have established a strong foundation for building a
sustainable business. Another of Nexam Chemical’s strengths that I have discovered during this initial period, is the deep competence and vast knowledge of chemistry and processes that my new coworkers command…. The company is now in its commercialization phase, which requires a comprehensive change in effort with the aim of becoming a fully business-driven operation.
The plastics additives market served by Nexam Chemical is constantly expanding and annual growth of 5 percent is anticipated
until 2020. This is driven by the general growth of plastic usage in society and the fact that environmental and sustainability issues are high on the agenda. Recycling represents an extremely important and positive component for Nexam Chemical.
The business model I envision for the further development of the company is based on customers intimacy. Cooperation with the customer to further develop applications in which Nexam Chemical’s technology offers concrete customer value, creating possibilities for growth and profitability for both parties.
By reallocating resources, I anticipate being able to increase the focus on marketing and sales with no material cost increases. We are in the final phase of recruiting a CMO who, together with me, will focus all attention on marketing and customers. We are also strengthening our organization by employing Christian Svensson as CFO.
Already yesterday evening, the company announced that it has postponed its plans to move its listing from First North to NASDAQ OMX Small-cap. This seems like a natural and wise decision given the restructuring in the management team. The new CEO and CFO will have to put their own mark on operations. Any major share price movement will depend on new contracts and orders, which we will hopefully see plenty off during 2015.
Nordic Investor

$GLUU CEO bullish on $KING and industry consolidation

www.venturebeat.com has managed to get an interesting guest article by Niccolo de Masi, CEO of US mobile gaming developer and publisher Glu Mobile. Mr de Masi shares his thoughts on what investors are missing when valuing mobile gaming companies and what he believes will be the developments in the years to come.

Amongst other things, Mr de Masi is bullish on King, saying that he expects the company to “indeed prove that it can sustain impressive profitability in 2015 and beyond“, citing the enormous active user base as a major asset to support longevity and ultimate growth potential. He is also highlighting the importance of industry consolidation going forward and the creation of global industry giants as a consequence.

Here is what Mr de Masi has to say in detail:

“The CEO of any company controls the fundamental performance of their firm — revenues, costs, and hence, profitability. We work to grow our firms with a balance of upside and downside risk that we hope is optimal for our investor base’s risk-return profile. Much less in a CEO’s control, however, is what public market investors are willing to pay to own a piece of the firm’s equity.

Current public-company sentiment and in turn valuations are volatile and cyclical — particularly in the macro-environment we find ourselves. King (KING), Zynga (ZNGA), and Glu (GLUU) have all experienced some investor skepticism thus far.

As Glu did navigating from feature-phone to smartphone revenues, Zynga is undergoing a platform transition from Web to mobile. Now that its mobile revenues are approximately the same size as its web revenues, I believe that it will be able to more easily deliver overall top-line growth. King’s top-line, by comparison, is dominated by the enormous success of one engine. To the extent that renewed top-line vigor occurs for both companies, an upward re-rating of their equity should be expected.

Public market investors typically understand that the overall macro-environment in which mobile gaming operates is a strong one:

  1. Rising smartphone penetration worldwide
  2. A growing middle class in emerging markets
  3. Increasing time spent by consumers on mobile devices
  4. An expanding share of disposable income going to gaming

They often, however, find two elements of mobile gaming companies’ business models difficult to fully value:

  1. The predictability of new title launch performance
  2. The longevity of existing titles

Due to uncertainty over “when the next hit is” and “the catalog,” public mobile gaming companies do not currently enjoy valuations on par with a range of other, often far less profitable — but more predictable — technology companies. I am highly optimistic this will change over the coming years due to a combination of:

  1. Elongating operating history
  2. Portfolio diversification
  3. Scaling
  4. Market share gains

I anticipate that King will indeed prove that it can sustain impressive profitability in 2015 and beyond. With an enormous active user base, I believe that its longevity and ultimate growth potential is presently underestimated by public market investors.

Modern book publishers, record labels, and film studios have been operating for nearer 100 than 10 years in their current organizational forms. Consolidation in each of these sectors created giants and minnows — “majors and indies.” Consolidation was driven by the opportunity to save on SG&A costs, scale balance sheets, and to diversify content portfolios. A broader set of bets on new content is, on average, more predictable. A deeper catalog on average creates a bigger annuity income stream. More scale means that the risks of a new investment not paying off are more readily absorbable. Scale also creates barriers to entry when content is stored and transported physically — as owning and managing inventory is a logistical exercise in its own right. Scale also creates the opportunity to bundle content together and leverage package pricing.

The digital revolution is in fact about:

  1. A changing format
  2. Elimination of physical inventory
  3. Changing distribution mechanisms

Gaming, on the other hand, is a much younger content creation segment. It is nearer to 10 years old than 100. It has progressed from physical distribution enjoyed primarily in the living room, to most of its daily consumers interacting with digitally distributed content on their mobile device. The business model has evolved from “pay upfront regardless of whether you know you will like it” to “pay if you wish to progress faster in this title that you know you enjoy.”

I believe that free-to-play is the more efficient business model because it enables consumers to decide how they wish to trade off their time versus disposable income. We as developers use data to constantly optimize average underlying metrics such as retention, conversion, and lifetime value of paying users. Unlike other content creation sectors, the majority of our life cycle costs for a successful title typically occurs post-launch — through software updates and digital marketing spend. Our overall project risk can be calibrated on an ongoing basis by monthly, weekly, and even daily revenue trends.

No longer needing to buy and store a physical good has reduced the friction and barriers for consumers to enjoy a game. It has as such driven an explosion in the breadth and depth of choices. Instead of (at peak) hundreds of console games to choose from, they now have hundreds of thousands of mobile games to sample. More choice has led to more precise matching between what a player is looking for and what they find. As channels and choices have increased, the overall video content sector has grown its annual revenue significantly.

Free-to-play is the business model of choice. Pricing cannot go any lower — it is effectively on sale every day. Content is already unbundled — you download the precise game you want and only that. Distribution power never existed for mobile gaming content creators. At first it resided with mobile telecoms operators in the feature-phone era. Now it is with mega-platforms who keep 30 percent of revenues for providing billing, distribution, and hosting services. In short, mobile gaming is an industry built around endpoints.

While the mega-platforms have been established and are here to stay, I believe it is still early for the mobile gaming industry. Approximately two dozen public companies around the world have significant portion of their business in mobile gaming content creation: King, Zynga, Glu, and EA listed in the U.S.; Colopl, DeNa, Gree, Nexon, Klab, DreCom, Mixi, and Gung-Ho in Japan; Gamevil, Kakao, Com2Us in Korea; Tencent, KongZhong, Perfect World, Giant, NetDragon, Boyaa, Forgame, OurPalm, and ZQGames in China. Upcoming potential IPOs include Line in Korea, Kabam in the U.S., and Gumi in Japan.

Our industry has yet to create even one global multigenre free-to-play mobile giant. The advantages of scale for mobile gaming players include the same ones enjoyed by traditional content creators other than those tied to physical distribution. Being at “the top of the barbell” creates value through opportunities to:

  • Rationalize SG&A costs
  • Scale balance sheets
  • Diversify content portfolios
  • Increase the size of the catalog

I believe that as soon as the first global player is created with strength in all of the major gaming markets — U.S., China, Japan, Korea — there will be an acceleration of consolidation pressure to create the second and third. Ultimately, I believe that there will be a handful of ‘majors’ in the mobile gaming space — with diversified product portfolios and catalogs.

At Glu we are keenly aware of the need to increase the predictability of our product pipeline of new launches, as well as the depth of our catalogue annuity. Over the five years of my tenure, we have operated with a constancy of purpose to build world-class prowess in multiple genres, with IP and engines working with synergy to make our revenue streams more predictable.

Our priorities for each project Glu undertakes are always centered on identifying and nurturing upside while simultaneously working to minimize downside probability and magnitude Be it a new title in an existing studio, organic studio expansion, an acqui-hire, or outright acquisition, we are always looking for potentially outsized reward situations with disproportionately small amounts of downside. Consistently accumulating advantages for the past 19 quarters has allowed us to grow non-GAAP revenues from $66.9m in 2010 to $241.8m in 2014.”

At Nordic Investor, we have been closely following the mobile gaming sector ever since the apperance of Apple’s appstore. Our current favourites in the sector include King, G5 Entertainment, iDreamSky and Sky-Mobi.

Nordic Investor

#VA Automotive: Unconvincing Q4 2014 report

VA Automotive, whose share has had a rough ride ever since its IPO in December 2014, reported its FY 2014 numbers today. Two days ago, the company had announced that the numbers would be released earlier, due to their participation at an investors conference in Stockholm today. Investors apparently interpreted that as a good sign and bought the share following the announcement.

Unfortunately, today’s report is not really a pleasant reading. 2014 revenues amounted to SEK 333,2m which marked a decline of 3% compard to 2013. EBIT amounted to SEK 5m, which was up versus the SEK 3,6m in 2013, but still way short of what we had expected. Also FY 2014 EPS of SEK 0,21 was significantly below our expectations.

In the report, VA Automotive states that during Q4 deliveries of tools were at a lower level than during the same period one year ago, which had been strong. On the component side, the company is noticing a change of models at its clients which leads to a temporary decline of sales before deliveries for the new models start. VA Automotive also states that activity among its customers was lower towards the end of the year compared with previous years.

On a positive note, operating cashflow continued to improve during 2014 which was primarily due to improved working capital. Thanks to the proceeds of the IPO, VA Automotive was able to pay down a large junk of its debt, reducing interest bearing debt to SEK 72,8m, compared with SEK 100,3m at the end of 2013. This will obviously imply lower financing costs going forward. Another positive is the improved profitability which is a consequence of the different measures implement during 2013 and early 2014.

The weaker than from us expected Q4 numbers were somewhat offset by the announcement that VA Automotive has reached an agreement with an unnamed company to take over a portfolio of products which generates revenues of SEK 300m over a three years period. The takeover will take place during the summer and VA Automotive will pay a royalty as compensation for the product equipment and operations. Elsewhere, VA Automotive noticed a strong order intake on the tools side and received orders worth a total of SEK 60m from different suppliers. The majority of these orders will be delivered during Q3 2015. This also implies that capacity utilisation is more or less 100% in VA Automotive’s tool factories up until Q3.

In its outlook statement, VA Automotive says that it foresees a continuation of the trend witnessed in recent quarters with an increased share of revenues coming from tools and less from components. During H2 2015, the component share is expected to increase again. The company is also guiding for a continued improvement of its result. 2015 is expected tp start weaker than last year but H2 will be stronger.

All in all, we are left with less confidence after today’s report. VA Automotive seems to have the right prerequisites to become an interesting play on the recovering automotive sector. However, we believe it will take several quarters until the company will gain investor confidence. A report like today’s does not help. On an expected 5% revenue growth for 2015, we model a further profitability improvement of 160bp on the EBIT margin level which in combination with an improved financial net leaves us with an 2015 EPS estimate of SEK 0,30.  At the current share price of SEK 4,65 this would imply a 12m-forward PE-ratio of around 15x. This is not expensive given current market circumstances, but we do not think it is a screaming buy either, given the uncertainties and short track-record. New contracts and further acquisitions could of course, meaningful affect our assessment going forward. If VA Automotive will eventually deliver on its aggressive financial targets, the upside seems large. We’ll continue to follow the story closely, but from the sidelines for the time being.

Nordic Investor

#TrustBuddy: Many steps into the right direction

Yesterday, Europe’s leading P2P lending provider and one of our top-picks, TrustBuddy, published its Q4 2014 report. The recent months have been eventful for the company due to its important acquisitions, organizational restructuring and investments in a state-of-the-art IT system to improve quality and lower future operating costs. The latest example of the internal restructuring and streamlining is the fact, that TrustBuddy has transitioned to reporting in accordance with the new K3 regulatory framework in order to increase transparency.

TrustbuddyrevenueTrustBuddy is still a young company and growing rapidly. Naturally, growth is always connected to costs which meant that the company reported a LBIT of SEK 35,8m for FY 2014. Given the extensive change that the company is undergoing, we think this is only natural. Talking to management, we get the impression that around SEK 16m were non-recurring costs which were related to, amongst others, costs for lawyers due to the license application in Sweden.

Digging into the numbers, we note that TrustBuddy reported revenues of SEK 85,1m for FY 2014, which marks a 47% increase y-o-y. (In Q4, revenues increased by 52% y-o-y.) The total amount lent reached SEK 827,7m for 2014, which is 57% compared to the previous year.

LendingvolumeAlso, as we have stated before, business is going very well for the recently acquired Dutch SME player Geldvoorelkaar (GVK), which was consolidated as of December 17th 2014. GVK increased its total amount lent by 67% during 2014 and reached a total of EUR 28,9m for the year. The year has started extremely strong for GVK and as of today, the company has lent out EUR 51,5m in total.

GVKIn his comment in connection with the Q4 results, TrustBuddy’s CEO Linus Lönnroth highlights the fact that 2014 was a transitional year for the company. Importantly, he states that he is “confident that our performance will be positive as a result of stringent cost control measures“. In other words, TrustBuddy is committed to report a profit for FY 2015. Mr Lönnroth also highlights the fact that the new IT platform will add increased efficiency to operations, which we believe will play an important role in becoming profitable this year. We get the impression that the new Board, which came to office during the fall 2014, is pushing into the right direction. The new chairman, Mr Simon Nathanson, has held such posts as President of Neonet and Executive Vice President of NASDAQ, in addition to which he served on the Board of Nordnet.

A very important comment in the Q4 report was Mr Lönnroth’s remark that TrustBuddy will launch its lending products for SMEs in new countries (Belgium and the Nordics to begin with), which we believe will be a major revenue driver going forward. SMEs, and specifically exciting new entrepreneurial startups, are experiencing extreme difficulty in securing financing through conventional channels. Besides the new SME product, TrustBuddy will also expand its portfolio of products geared towards private individuals, offering larger loans over longer periods. Also, lenders who are members of the TrustBuddy platform will be provided with better tools for analyzing their investments.

Outlook: In his outlook statement, CEO Lönnroth states that the company is of the assessment that the sharp growth in the P2P lending market will continue in 2015. After the successful IPO of US company Lending Club, followed by OnDeck Capital, the company believes that the P2P market will receive more attention than in the past from authorities, investors and consumers. It is the company’s assessment that other P2P companies, particularly in Europe, will initiate IPO proceedings. We believe this should further help to establish a sector valuation and highlight TrustBuddy’s extreme discount valuation at this point.  TrustBuddy also states that it anticipates the interest from both major and minor investors to increase significantly, since they are seeking an attractive investment alternative in the current market which is nearing deflation. We find it very interesting to note that TrustBuddy also states in the report that it “anticipates increased attention from major global investors who want to gain ownership posts in the P2P sector in 2015, to secure a position for institutional lending. We cannot interpret in any other way than that TrustBuddy is already in contact with interested players. Any such announcement would of course be very positive for the share price development.

Conclusion: Yesterdays’ report did not provide any surprises as such, but we find many comments made by the company very encouraging. TrustBuddy is taking all the right steps towards growth, complying with regulatory requirements and building an efficient operation which is likely to become profitable already during 2015. As we noted in the previous comments, applying the same multiples that Lending Club is trading at to GVK, would give a fair value of SEK 1,70 for TrustBuddy’s Dutch SME business alone. We believe that TrustBuddy as a whole should easily be trading north of SEK 2, once investors skepticism towards the P2P concept fades in Sweden, or larger international investors decide to acquire a larger position in the company. We would also appreciate to see the new members of the Board and management buy additional shares at the current depressed share price levels, in order to show their confidence in their own plans and strategies.

Nordic Investor

#Opus: Acquires #US #OBD leader

logoVehicle inspection specialist Opus continues its impressive growth path. This morning, the company announced that it has signed a share purchase agreement to acquire Drew Technologies Inc, a leading manufacturer of vehicle communication analysis and diagnostic equipment for the vehicle inspection and automotive service industry. Not only does the acquisition add valuable technology to Opus’ offer, it also increases the company’s US exposure which was at around 60% before the acquisition. 

The purchase price is USD 30 million (approximately SEK 254 million) plus a contingent earn-out of 4.4 million (approximately SEK 37 million). The transaction is expected to close within the next 30 days.  The acquisition includes a cash balance of approximately USD 400,000 (approximately SEK 3.4 million). Hence, the acquired business excluding cash is valued at approximately USD 29.6 million (approximately SEK 250 million). After the acquisition, Drew Tech will become a subsidiary of Opus Inspection. However, the company will continue to operate as a stand-alone legal entity with the current management in place.

Drew Tech is a leading manufacturer of On Board Diagnostic (OBD) equipment for the vehicle inspection industry and for the OEM automotive industry. Drew Tech offers tools for vehicle development, end-of-line testing, vehicle diagnostics and vehicle inspection programs. In 2014, Drew Tech had revenues of approximately USD 13 million (approximately SEK 110 million) with EBITDA of USD 5.4 million (approximately SEK 46 million). In 2014, Drew Tech had sales to Opus Inspection of approximately USD 2.2 million (approximately SEK 19 million). Excluding the sales to Opus inspection, Drew Tech adds some 6% to Opus 2014 revenues.

The transaction is financed through USD 25 million (approximately SEK 211 million) in cash, USD 5 million (approximately SEK 42 million) in a directed issue in kind to the sellers of Drew Tech and USD 4.4 million (approximately SEK 37 million) in earn-out over five years. The transaction is expected to contribute to net profit per share for Opus Group beginning in March 2015.

We are excited about the acquisition of Drew Tech, a leading technology company focused on vehicle communication. The company has a leading position in the OBD scan tool and data logger market and a bright future ahead of itself. Drew Tech will continue to operate stand alone and focus on its strong customer relationships. Short and mid-term we see a great strategic fit between both Drew Tech and Opus Inspection as vehicle communication will become a significant portion of vehicle inspection programs ” said Lothar Geilen, CEO of Opus Inspection. “Their technical expertise in OBD technology is the companys leading strength. I especially want to express a warm welcome to the Drew Tech employees, who have been instrumental in the companys ongoing success.”

Background and reasons for the Acquisition:

Drew Tech, founded in 1996 and headquartered in Ann Arbor, Michigan, USA, has developed into a leading supplier of OBD equipment for vehicle communication analysis and diagnostics systems for automobile manufacturers, workshops, automotive dealerships and inspection stations worldwide. All product development, design and final production take place in Ann Arbor. The company is at the forefront with its latest OBD technology that is used to inspect vehicles for both emission and safety vehicle inspection. The acquisition means that Opus Inspection controls market leading OBD technology it intends to use in several markets. This technology is of great importance for the future global product and service offering of Opus Inspection, including in the U.S. vehicle inspection markets.

In connection with the acquisition Opus also announces a rights issue to existing shareholders of approximately SEK 150 million before transaction costs. The proceeds will be used to strengthen Opus Groups balance sheet in conjunction with the acquisition of Drew Technologies and to finance the company’s continued expansion. The rights issue is subject to approval by Extraordinary General Meeting (EGM) on March 10, 2015. The subscription price and offer ratio intends to be decided no later than March 4, 2015 and announced no later than March 5, 2015 at the latest. The subscription period will run from and including March 17, 2015 up to and including March 31, 2015

Nordic Investor

#Nexam: New patent increases market potential

NexamLogoNexam Chemical has received a notice of allowance from the European patent office (EPO) stating that they intend to grant Nexam Chemical´s European patent application relating to catalysis of crosslinking.

Nexam Chemical´s crosslinking technology, which includes a number of unique crosslinking systems, results in improved processability of plastics at the same time as properties such as heat and chemical resistance is improved. The catalysis technology was developed to allow for Nexam Chemical´s crosslinkers to be used in a wider temperature range and for adjusting the curing speed and temperature to specific applications. As previously announced the corresponding application has already been granted in the US.

In practice this means that Nexam Chemical´s crosslinking technology can be used in an even wider range of plastics and in an increased number of processes, which today has restrictions in e.g. getting to the right activation temperature. In short the catalysis technology enables an increased market potential and improved competitiveness for our crosslinking technology”, says Anders Spetz, CEO.

Nordic Investor

Investing up North

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