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G5 Entertainment: strong Q2 2011 result

G5 Entertainment reported this morning a strong Q2 2011 result, in-line with its previous guidance. Revenues of SEK 19.1m were up 133% y-o-y, while EBIT of 7.8m was up 161% y-o-y. The implied EBIT margin of 41% continuous to be impressive and its 400 b.p. above the level reported in Q2 2010.

May and June 2011 became record months for G5 in terms of revenue, only surpassed by January 2011. This positive trend has continued into Q3, as July set a new record and August seems to be on track to surpass July revenues.

For the first 9-months of 2011, management is now guiding for an EPS of SEK 1.26 and is keeping its keeping its FY 2011 guidance of SEK 1.90.  This seems rather conservative on first sight as its implies quarterly EPS of SEK 0.37 for Q3 and SEK 0.64 for Q4.

 In 2010, the quarterly EPS figures were as follows: Q1 SEK 0.17, Q2 SEK 0.20, Q3 SEK 0.18 and Q4 SEK 0.45

In 2011, the quarterly EPS figures are as follows: Q1 SEK 0.44, Q2 SEK 0.45, Q3 guidance SEK 0.37 and Q4 guidance SEK 0.64

So this would mean that y-o-y EPS growth would develop as follows: Q1 +158%, Q2 +125%, Q3 guidance +106% and Q4 guidance +42%.

Even if we account for the 8% dilution following the Traction deal it appears to be very conservative to assume that Q4 EPS will grow by only 42% given the trend we have seen so far in 2011 and the tremendous success G5 games’ experience in Q3 so far. Also, there are many more games to come towards the end of the year. Another quick sanity check can be made by annualizing H1 2011 EPS of 0.89 which gives as a FY 2011 EPS of 1.78, i.e. 6% below the 1.90 guidance. So earnings are supposed to grow by only 6% in the second half of 2011 compared to the first half? Seems strange to me. In 2010, H2 EPS grew by 70% compared to H1…

The other comments in the report are all positive and in-line with what I have written about previously, including recent developments in the Android market, successes for Special Enquiry Detail in early Q3 on iOS and the upcoming launch of Virtual City 2.

Conclusion: The G5 story is on track and things are developing very favourably. Management decided to stay conservative and did not hike its guidance for 2011 today. Nor do they comment on the potential for 2012. Naturally, this would have been greatly appreciated already now but it seems reasonable to wait a few more weeks and management has indicated that we will get such comments in early October, in connection with the mid-quarter update. I am absolutely certain that this will be a major trigger for the share price. When I am writing this, the G5 share is down some 7% and trading at SEK 22.90. Given Friday’s spike of +14% I can understand the reaction since many investors probably bought in anticipation of an increase of the guidance. But as usual, investing in stocks requires patience and short-term trading is a different thing than investing! Every fundamental investor in G5 should be happy today.

 I am long G5 Entertainment and you should be too!

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