Archive | July, 2011

G5 Entertainment: some thoughts and interview with EA CEO

29 Jul

The G5 Entertainment share has managed to withstand the recent weakness in the broader market. Over the last 4 weeks, G5 has gone up some 10% and is currently trading in reach of its all-time high levels from January this year. The OMX30 is down almost 2% since late June and particular small-cap names got beaten even more as investor take risk off the table.  

G5′s relative strength is rather impressive and it is fundamentally justified given the positive newsflow during recent weeks, including the successes of some its recent game releases. The share price resilience should also be interpreted as a sign of increased trust from investors. People have started to believe in the G5 case more and more and management made a wise move in taking on board Swedish “Traction” as a strategic investor. All eyes are now on August 15th, when the company will present its Q2 2011 report and is likely to increase its FY 2011 guidance. A glimpse into 2012 would be highly appreciate as well, but it might be a bit too early for that. On the other, it would be in everybody’s interest if G5 was to shed some light on how they want to use the Traction money, which in my opinion should be directly related to the number of games to be released in 2012.  So sit tight and enjoy the ride!

www.nordicinvestor.de

PS:  The Wall Street Journal Digital Network (www.allthingsd.com) published an interview with Electronic Arts’ CEO John Riccitiello, who says that smartphones and tablets have “radically changed” the gaming space.

“We have a new hardware platform and we’re putting out software every 90 days,” Riccitiello told IndustryGamers. “Our fastest growing platform is the iPad right now and that didn’t exist 18 months ago. … Consoles used to be 80 percent of the industry as recently as 2000. Consoles today are 40 percent of the game industry.”

An interesting observation coming from the CEO of one of the biggest games publishers in the world. It seems that iOS and the devices that run it have indeed created pricing and customer migration pressure for the traditional gaming platforms whose proprietors initially dismissed them. As Riccitiello observed during EA’s Wednesday earnings call: “Gone forever is the 4- to 5-year console cadence that gave developers ample time to invest and retool for the next big wave. Consider that just 18 months ago, there was no iPad, Google was just experimenting with Android and most big games were limited to a single revenue opportunity at launch. Consider that each of the major consoles now has a controller that encourages users to get off the couch and get into the action. On smartphones and tablets like the iPhone and iPad, the top paid apps are all games.”

More acquisitions in the gaming sector following PopCap and Zynga hype

25 Jul

The Wall Street Journal’s Digital Network edition had an interesting article over the weekend (www.allthingsd.com), highlighting that more acquisitions are expected to follow in the gaming space after an intense bidding war for PopCap.

Two weeks aog, PopCap accepted Electronic Arts’ bid of $1.3 billion, including earn-outs, and opted to turn down a smaller — but all-cash — $1 billion offer from Zynga.  It seems rather obivous for many industry experts that more blockbuster purchases will ensue.  If that’s the case, the question is who will be next?

First, it’s important to understand why there’s a sense of urgency. Right now, nontraditional digital gaming platforms, like mobile and social, are really starting to take off, and game publishers need new content and expertise to be a player on those platforms. “The general conversations have increased,” said Kushal Saha, the managing director of the Information Technology practice at Cascadia Capital, a Seattle-based investment bank. “We are seeing a lot more activity in financings as well. When you have a $1.3 billion acquisition, that really creates a lot of tailwinds from investors and strategics.” Tim Chang, a partner at Norwest Venture Partners, has a theory as to who will be the most active in the next wave of acquisitions: It will be companies from China and Japan that are trying to get a foothold in the lucrative U.S. games market.

Here are just some of the recent transactions: Tencent, the giant Chinese Web holding company, bought Los Angeles-based Riot Games for about $400 million; OpenFeint was purchased by Japan-based Gree for $100 million in April; and Japan-based DeNA bought San Francisco-based ngmoco for $400 million late last year.

Specifically, he says these companies will be looking to buy game studios, which can create content for new platforms. Ngmoco is building a mobile social network, and while it develops some games in-house, DeNA will need much more content to be successful. Same goes for Gree, which purchased OpenFeint, a mobile social platform that has 100 million players signed up. Gree’s Senior Product Manager Jori Pearsall said that Gree is trying hard to get up and running in the U.S., where they have hired about 40 employees who are independent from OpenFeint. Pearsall says its first game is expected to launch soon on the OpenFeint mobile social network. In other words, first comes distribution. Next up: content. One example of this already taking place is the merger between 6waves and Lolapps, which was announced earlier this week. San Francisco-based Lolapps is making social games for Facebook, while Hong Kong-based 6waves has been more focused on building a publishing platform. Together, the two will have a publishing platform with its own games.

One of the companies that is being considered an obvious acquisition target is Glu Mobile, which is making social games for smartphones and tablets. Since the PopCap acquisition was announced, Glu’s stock has been trading close to $6 a share, up from $5.20 early last week. It is now trading at $5.64. Are people sniffing around Glu? “Nothing is off the table. We’ll do what’s best for the shareholders. We have a vision and a strategy and we are executing on the goal of transitioning to one of the top three feature phone companies to our goal of being one of the top freemium tablet and smartphone games company,” said Michael Breslin, Glu’s VP of marketing. Other potential acquirers are in the U.S., ranging from content companies like Time Warner and Disney to other game makers like Activision, THQ or Ubisoft. Zynga has been acquiring more than one company every month for nearly a year. Google could even be a candidate if it’s truly serious about its Google+ games network.

My comment on this:

Outside the US, an obvious target should be G5 Entertainment, listed in Sweden. While still rather small in size, it is growing rapidly and aims to grow its revenues by more than 100% in 2011. For 2012, growth initiatives are also aggressive and the company has recently opened a marketing office in San Francisco. Their casual games are successful for both iPhone and iPad, with the most recent example being the number 1 spot in the UK top grossing iPhone games list for “Special Detail Enquiry”. With a discount valuation of 13x expected 2011 EPS, the stock is simply too cheap to ignore and potential acquirers can easily pay double that multiple without making the valuation looking stretched.  

http://www.nordicinvestor.de/

G5 Entertainment: “Special Enquiry Detail” tops iPhone charts in the UK

20 Jul

G5 Entertainment’s latest release “Special Enquiry Detail: The Hand that Fees” continues to climb in the charts. Not even one week after its release it is now numer 1 in the top grossing games for iPhone in the UK! The rankings in other main markets aren’t shabby either including France #6, Italy #3, China #33 and Germany #42.

Additionally, the game sells VERY well also for iPad. Rankings in the top grossing charts are as follows: UK #9, France #11, China #16, Germany #28, USA #76.

These numbers are even more interesting as the UK is a very important market in terms of absolute number of downloads. According to a recent report from app store researcher Distimo (http://www.distimo.com/) the UK stood for more than one third of all app downloads  when comparing the Apple App Stores in the UK; France; Germany; Italy; Poland; Russia and Spain. On the iPhone, 35% of downloads were from the United Kingdom, while on the iPad it was 33%.

While the study only took into account the top 300 most popular paid and free apps, it shows that the UK is still the most important European market for developers to target. Of course, language plays a hugely important factor in this. Big-name English language apps from the US are more likely to get a foothold in the UK than elsewhere in Europe where English is at most a second language. Interestingly, France takes a much greater share of downloads on the iPhone than the iPad, while in Russia the reverse is true.

Distimo’s report also found that Europeans are more likely to download apps at weekends, especially on the iPad where 37% of downloads take place on Saturdays or Sundays. This is most likely down to the fact that you’re far more likely to take an iPhone out and about than an iPad, which for many remains a luxury for the home.

Time to be bullish on G5 Entertainment? You bet!

http://www.nordicinvestor.de/

Apple’s monster sales of iPhone and iPad bode well for G5 Entertainment

20 Jul

 

Apple reported another monster quarter yesterday as iPhone and iPad sales blew away estimates.

 

Steve Jobs said, “We’re thrilled to deliver our best quarter ever, with revenue up 82 percent and profits up 125 percent.”

 

 

The highlights of Apple’s Q3 2011 report in summary:

 

Revenue: $28.57 billion vs. $24.72 billion Street consensus

 

EPS: $7.79 vs. $5.71 Street consensus

 

iPhone shipments: 20.3 million vs. 16.5 million Street consensus

 

iPad shipments: 9.25 million vs. 7.8 million Street consensus

 

Mac shipments: 3.95 million vs. 4.2 million Street consensus

 

iPod shipments 7.54 million vs. 8.4 million Street consensus

 

Revenue guidance: $25 billion vs. $27.69 billion Street consensus

 

EPS guidance $5.50 vs. $6.36 Street consensus

 

 In January,  the iPad had a market share equal to 7% of the PC market.  Now, it’s at 11%.  The iPad has been on sale a little more than a year ago. This quarter, Apple sold 9.25 million of them. That’s up 142% from last year. As a shareholder in Swedish app developer G5 Entertainment I am thrilled to see these numbers . More devices out there mean more potential customers for G5. People want games on their smartpones/tablets and G5 is developing and publishing high quality casual games that are selling well across the world. As G5 is also massively ramping up its own pipeline of games it becomes a double-whammy: increasing base + increasing product offering.

http://www.nordicinvestor.de/

Very strong first weekend for G5 Entertainment’s “Special Enquiry Detail”

17 Jul

It has been a rather dull weekend here in Stockholm weather wise, but G5 Entertainment’s latest game “Special Enquiry Detail: The Hand that Feeds” was off to a great start indeed!

Released on Thursday 14th July, the game is ranked number 4 in the UK, 19 in France, 15 in Italy in the App Stores’ top grossing games for the iPhone. Additional, it’s at number 78 in Germany,90 in Japan and 89 in China – all three are rather big markets! For the iPad, the results are not less impressive: USA ranked 110, UK 16, Germany, 76, Canada 80, France 23, Japan 88, Australia 91, Italy 37, Netherlands 91, Spain, 30, China 28!

I am also impressed by the success G5 is having with its newly released first 5 games for Android. While it remains to be seen how much of the freely downloaded games will materialize in actual sales (Android users are known to be less willing to pay for games), it is nevertheless encouraging to have “Stand o’food” on number 45 in the USA, “Supermarket Mania” ranked 116 and “Success Story” at number 190. It is still the US market we are talking about and the games that can be downloaded for free at the beginning do require an actual purchase at a later stage in the game!

So all in all, another great weekend for G5 Entertainment and its shareholders!

www.nordicinvestor.de

For a great summary of the rankings of G5 games go to: www.g5info.se/spelstatistik.htm

G5 share continues to underperform Glu Mobile

14 Jul

G5 Entertainment’s share continues to underperform relative to Glu Mobile. I have plotted the ratio since July 2010 and on average it has been at 2.6x. As you can see in the chart above, it is at 1.9x right now, i.e. almost 30% below the average. The ratio peaked at 5.2x in January this year and has been around 3x for a long time…

Glu Mobile rallies on EA’s PopCap deal

13 Jul

Glu Mobile rallies more than 10% in today’s trading on the news of EA’s acquisition of PopCap. That clearly has the market on the hunt for other companies that make games for mobile phones, tablets and the Web. And that seems to be giving a big lift this morning to shares of Glu Mobile, a San Francisco-based company that provides games for the  iOS, Android, Palm and Windows Phone 7 platforms.

Glu posted 2010 revenue of $64.3 million, down from $79.3 million in 2009, and $89.8 million in 2008, which is not a good trend, and it has been losing money. Wall Street sees the business stabilizing, forecasting revenue of $63 million this year and $69.9 million next year. PopCap by contrast had revenue of $100 million last year, and expects an increase of at least 40% this year, so Glu’s business is clearly not nearly as healthy.  G5 Entertainment (http://www.g5e.com/), which is listed in Sweden, is growing its business by more than 100% according to recent management guidance for FY 2011 , profitability is high and there is no debt!

http://www.nordicinvestor.de

Now it’s official: EA snaps up PopCap

13 Jul

Late Tuesday evening it became official: Electronic Arts agreed to acquire PopCap Games, a Seattle-based maker of casual games like Plants vs. Zombies and Bejeweled.   The deal is valued at upwards of $1.3 billion, including $750 million up-front ($650m in cash) and up to $550 million in multi-year earn-outs based on financial milestones.  The PopCap transaction is expected to close in August. EA is investing more in digital content as customers are buying fewer games on discs to play on consoles. Video game companies are now offering users options to play free or low-priced games on mobile devices, PCs and Facebook. EA’s Chief Financial Officer Eric Brown said the deal would help EA better compete with Zynga. Zynga filed with regulators on July 1 for an initial public offering of up to $1 billion.

 PopCap, which is based in Seattle, has been profitable for 10 years since its founding. It makes easy-to-play games for platforms such as Facebook, RenRen, Google Android, Apple iPhone and iPad. In 2010, PopCap generated $100 million in revenue,  implying an EV/Sales multiple of 13x on last year’s revenues (assuming PopCap is debt free). 

Despite the lofty valuation, I found several comments that the deal will prove inexpensive for EA. “Once Zynga comes out, this acquisition is going to look like the bargain of the century,” says for example Larry Haverty, associate portfolio manager of the Gabelli Global Multimedia Trust, which owns EA shares. “Outside of Zynga, EA is going to be the only way for investors to play the casual gaming phenomenon,” Haverty added. Zynga’s IPO plans along with the acquisition of PopCap has investors searching the landscape for other hot up-and-coming video game publishers, including CrowdStar, Wooga and Badoo, said Sterne Agee analyst Arvind Bhatia. An obvious choice in this space is G5 Entertainment, listed in Sweden. Using the same valuation criteria as for PopCap (i.e. EV/Sales on last year’s revenues), G5 Entertainment is trading at a 50% discount and actually the real valuation discount is even higher as G5 is growing by more than 100% this year. Looking at the PER on 2011 EPS, the share is trading at 11.6x. Earlier this week, G5 announced that it will open an office in California, which will certainly help to put it on the map even in the US. Do I hear “takeover target”? You bet!

www.nordicinvestor.de

 

 

Further background information:

PopCap has been around since 2000, but didn’t raise outside funding until a $22.5 million investment in 2008 led by Meritech Capital Partners. CNNMoney published an edited transcript of an interview of fortune.com with Rob Ward, the Meritech partner who led the deal and sits on the PopCap board of directors. I took the liberty to post some of the highlights:

Q: Was PopCap games headed toward an IPO?

Rob Ward: The answer is yes, it absolutely was well under way. Right after we invested, they hired Bob Chamberlain as their first real CFO, and he had been CFO of Watchguard and F5 Networks and a number of big, public Seattle-area companies. Then they added Rick Fox as audit committee chair and Steve Raymond, former CEO of Tech Data, as compensation chairman. So they had made those changes to the board, and also changed auditors to get their books in order. The plan was to file for an IPO in the second half of this year, and go out in Q4 if the SEC was willing or in Q1 of next year if they were less helpful. Then they did a market check like you always do, and found themselves in a situation where they got a compelling enough offer from the right partner.

Q: PopCap CEO Dave Roberts expressed concern that the tech valuation bubble could put Popcap in the untenable position of justifying an inflated valuation in the public markets. Legitimate worry?

RW: It’s a very fair question and one we talked about a lot at PopCap board meetings and other portfolio company board meetings. How I’d frame it is: I don’t think it’s the best thing in the world to have your IPO value get ahead of the true intrinsic value of your company. IPOs are supposed to be financing events, not the end game. The problem with having your stock go from $15 to $100 in T+1 trading days is that you’ve got to bring in new employees with option pricing way out of line from where it should be. And it’s different than what existing employees have, which can create strange issues internally. The challenge is particularly tough with digital media and consumer-branded companies, because that strong retail component often drives the post-pricing pop. Ironically a lot of companies decide to have smaller deal sizes to avoid scarcity, get a good pop and trade up. I think that if you’re a recognizable consumer brand, you need to have a larger IPO to mitigate that effect. So it was absolutely a concern, but it wasn’t the overriding reason why the sale to EA is happening.

Q: So why is it happening?

RW: PopCap went out to a small handful of folks that it made sense to do a market check with, and everyone on that list either formally or informally came back at them with an offer to buy the company. It’s not really shocking, because this is one of the last great franchise companies in the casual gaming space, with some of the best brands like Bejeweled. Until now, the company had always said no to takeover offers. Sometimes it wasn’t the right cultural fit or they didn’t think the buyer had enough appreciation for great game developers or it just wasn’t the right time for PopCap. But this was a very compelling offer. Not just from a financial standpoint, but also the way that they’ll be allowed to operate inside of EA. At the end of the day, this is a great chance to build a preeminent digital gaming company across all these different distribution platforms and geographies. PopCap is about great brands and great games, which makes them a fit with EA.

Q: Well it’s clearly a strong move into digital by EA, following the Playfish purchase.

RW: I think it’s a masterstroke by [EA CEO] John Riccitiello. How many times do you see a 1.0 company turn into a 2.0 winner? It can happen, look at Apple, but it usually ends up more like Yahoo. This puts EA at the front and center of digital gaming.

Q: This deal involves a lot of earn-outs. When biotech VCs get an earn-out, they usually expect to see around 20% of it. How do you forecast a gaming earn-out? 

RW: I wish I could be that formulaic. For us it’s much more deal-by-deal. One of the things that gave us a lot of comfort here was how EA dealt with other acquisitions recently, including Playfish. That deal had similar components and not only has turned into a very nice financial returns for Playfish investors, but a lot of those senior execs are still running important parts of EA’s business. So we’re banking on seeing lots of that money.

G5 Entertainment: Growth, growth, growth

11 Jul

 

G5 Entertainment announces this morning that the company has opened a marketing office in San Francisco, California, USA. The office, located at Suite 136, 1750 Montgomery Street, is going to oversee marketing of company’s games in Americas. North America continues to be the single largest market for G5 games, accounting for some 35% of the group’s iOS revenue in Q1’2011.

 

Larissa McCleary became G5′s first hire in California in the position of Director of Marketing, joining G5 after spending 5 years marketing PC casual games in San Francisco-based companies iWin and Playfirst.

 

Vlad Suglobov, CEO and board member of G5 Entertainment AB, comments: “As the management previously communicated, this year G5 is going to release 80 games. With so many games released this year, and many more next year, our marketing efforts need more structured approach, especially in USA, where we have so many customers. With Larissa’s experience, we are going to do an even better job at reaching and retaining our audience. San Francisco was  the natural choice as the place for our marketing office because of its access to the best talent and proximity to the headquarters of Apple and Google. Our goal with the San Francisco office is to establish a small but effective marketing team, which is going to focus on growing company’s sales in the region. G5 will continue to perform its product development out of the group’s offices in Ukraine and Russia.”  More information about G5 Entertainment can be found at: www.g5e.se/corporate

Scaling up the business is key. G5 Entertainment is still a small company but with enormous growth potential. Getting the word out is just as important as developing new games. With a low-cost development set up in Eastern Europe, G5 Entertainment is very efficient which is reflected in its impressive margins today. Leveraging on this solid development base by hiring dedicated regional sales  and marketing directors seems a reasonable way to grow! I am really looking forward to the company’s first statements on 2012. Lately, the CEO has hinted in his statements on continued strong growth potential. Traction’s investment and now the increased sales efforts in North America should bode well for stellar growth even in 2012.

http://www.nordicinvestor.de/

M&A activity in app market remains high as Zynga goes Canada

11 Jul

“Zynga is crossing the border!” the company wrote in a blog post last Friday.

Social gaming giant Zynga has announced plans to establish a Canadian headquarters after scooping up Toronto-based mobile developer Five Mobile. The San Francisco-based company behind the popular Facebook games FarmVille and Mafia Wars announced the deal to acquire Five Mobile in a blog post on Friday.

“Today we are excited to announce a new addition to the Zynga family, the Toronto-based Five Mobile team. In addition to the team, Zynga is also acquiring certain assets and Intellectual Property developed by Five Mobile. Five Mobile, now Zynga Toronto, creates compelling, robust and scalable mobile applications.  The team has worked closely with some of the largest media and technology companies in North America across a multitude of platforms and handsets.” Financial terms of the deal were not released.

For Zynga - which recently filed a prospectus for an IPO - the acquisition is the 15th for the company in 13 months.

Small, profitable app developers with a proofen track-record are high up on the wish list these days. Check out G5 Entertainment!

http://www.nordicinvestor.de/

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