Archive | September, 2011

G5 Entertainment: 2012 estimates

24 Sep

One week left of Q3 2011 and as usual G5 Entertainment will come with an update on how things are going a few days after the quarter is over. My guess is that they will publish the statement on Monday, October 2nd.

Even more interesting than the comments on Q3 or even FY 2011 will be the fact that management is very likely to comment on 2012. It’s hard to say if they will give an actual earnings guidance already for 2012 or if they will rather comment on the amount of new games to be published next year. Following the Traction-deal, the cash position is significant and G5 will put that cash to work. As a first move, the company hired a marketing expert and opened an office in San Francisco. My guess is that this will not only help the marketing efforts but also makes it easier to find co-operation partners, i.e. developers that want their PC games published on iOS and Android.

While I find it rather challenging to make a forecast for 2012 for G5, I have nevertheless made some calculations on possible outcomes, sort of as a sanity check.

I am trying to be conservative in my assumptions so that any surprise is likely to be on the upside.  Therefore my starting point is the current base of partner studios, i.e. 25 as mentioned in the most recent quarterly report. Again, the company is aggressively looking for further partners so 25 should be on the low side. If we then assume that G5 Entertainment will publish only one game from each of these partner studios on iPhone, iPad, Mac and Android (i.e. 4 platforms) this gives a number of 100 new games to be published in 2011. On top of that, I am assuming that G5 will publish 5 games on their own (could be Virtual City 3 etc.) on all of the 4 platforms which gives a total number of 120 new games to be published in 2011. Furthermore, I have assumed that G5 will publish 85 new games in total in 2011 which will take the total number of games to 129 by the end of 2011. Adding, the 120 new games to the base of 129, this would the take overall number of G5 games to 249 by the end of 2012.

So what does this mean for revenues? My starting point here is the current guidance of revenues of SEK 47m for 2011.  If I assume an average sold price per game of SEK 10 (that would be average for all games and all platforms), this would imply a total number of games sold of 4,700,000. I am then looking at the average of the total number of games at the end of 2010 and the total number of games at the end of 2011 in order to get an approximation of the number of games G5 has been working with during the course of 2011. That number is 86.5. Dividing the 4,700,000 by 86.5 gives an approximation of how many times each of these 86.5 games has been downloaded in 2011. That number is 54,335 times. For 2012 I take this ratio down to 50,000 in order to take cannibalization amongst the games into consideration, which means that I apply the 50,000 times on the average number of the games at the end of 2011 and the expected number of games at the end of 2012 – i.e. (129 + 249) /2= 189. That would imply a total number of games sold of 9,450,000 for 2012 and at an average price of SEK 10 that would mean 2012 revenues of SEK 94.6m.

Continuing to be conservative I am using an EBIT margin of 30%, versus the expected EBIT margin of 35% for 2011. Personally, I think the leverage of G5′s business model should be higher than that but let’s be cautious. With a slightly positive financial net and an assumed tax rate of 26.3% (according to the annual report 2010), I end up at an expected net profit of SEK 20,2m for and an EPS of SEK 2,60.

I feel that most of my assumptions made are on the conservative side which would mean that the SEK 2,60 for 2012 can be see as some kind of minimum level. How big the upside is shows the fact that when we increase the number of partner studios to 3o, instead of 25, and leave everything else equal, 2012 revenues would end up at SEK 99,5m and EPS would be 2,80.  It gets really juicy if we assume that these 30 partners would give G5 two instead of only one game to port to iOS, Mac and Android. In this scenario,  2012 revenues would end up at SEK 129,5m and EPS would be SEK 3,60.

Time will tell, but I strongly feel that G5 Entertainment is probably the most interesting stock out there.

Good luck!

www.nordicinvestor.de

Rovio valuation indicates huge potential in G5 Entertainment

21 Sep

Last weekends’ edition of the Swedish magazine “DI Weekend” featured an article about Rovio, the guys behind Angry Bird. I haven’t had the time to share a quick reflection with you, until now.
According to a recent report by Bloomberg, Rovio is in the process of a fundraising round that would value the company at USD 1.2bn. According to a Finnish newspaper, Rovio’s Q1 2011 revenue was around USD 20m. Annualizing this number gives us a revenue figure of USD 80m for 2011. In order to be nice to them, we assume they will achieve some sequential growth during the year and achieve revenues of USD 100m. Assuming that there is no debt in the company this gives a EV/ Sales multiple of 12x.

Applying this EV/Sales multiple on G5 Entertainment’s current sales guidance for 2011 of SEK 47m we get an enterprise value of around SEK 560m. Adjusted for the net cash position of around SEK 7m (as of end Q2) we get a justified market cap of SEK 567m, i.e. SEK 71 per share (240% upside to current levels)!

I am not saying that we’ll see G5 trading at these levels tomorrow but it clearly highlights the upside potential in this case. G5 is more profitable than Rovio, grows faster and has a broader portfolio versus the one-hit-wonder from Finland.

www.nordicinvestor.de

G5 Entertainment outperforms gaming peers but valuation still relatively cheap

19 Sep

The G5 Entertainment has outperformed its international gaming peers over the recent turbulent weeks, as indicated by the graphs below:

Despite the relative outperformance, the G5 share still stands out as undervalued compared to the likes of Glu Mobile, Gameloft and Electronic Arts. US analysts do not expect Glu Mobile to turn profitable any time soon and growth rates and profitability of Gameloft and Electronic Arts are much lower. Furthermore, the expected newsflow for G5 Entertainment is extremely positive with the highlight being the company’s first glimpse on 2012 earnings potential at the beginning of October.

I am long G5 Entertainment and you should be too!

www.nordicinvestor.de

G5 Entertainment: Nordic Investor Q&A with CEO

8 Sep

CEO Vlad Suglobov was kind enough to answer a couple of questions we put to him. Here is the complete Q&A session:

Nordic Investor: Are you still sticking to the target to release 80 games in total during 2011 and if so, how many of those will be for the Android platform ( a rough %-number would be great)?

Vlad Suglobov: We have changed the way we talk about our release plans recently. Our goal is releasing one iOS app and one Android app every week. And there will be some Mac releases as well. I’m quite sure we will end up releasing more than 80 games in 2011, in total. The exact mix is difficult to say at this very moment.

Nordic Investor: Are you satisfied with the conversion rate on the Android platform? When trying to model your numbers, I am currently using a conversion rate of 10%. Is this too far off from reality?

Vlad Suglobov: We don’t want to announce our conversion rates, we never do. But Android rates are definitely lower than iOS rates, like for other developers who spoke on the matter publicly. We get a lot of downloads on Android though. I was not very optimistic about Android, as I’m a conservative person by nature, and I think the audience is different. But the platform ended up exceeding my (conservative) expectations both in terms of downloads and revenue. I’m happy with what I see. We know our way to Top100 Grossing Games now.

Nordic Investor: M&A activity within the mobile gaming sector has been picking up steadily in the US, with bigger names like EA but also Glu Mobile expanding their development teams. Do you see a risk that these big companies will become too dominating and might start a price war?

Vlad Suglobov: EA, Glu, Gameloft – they have been on iOS/Mobile ever since G5 started releasing games on iOS, even earlier. They are aggressive and grow as fast as they can. We do the same, even though they’re there all this time. I don’t think anything changed recently. I think the market is large enough and — most importantly — it’s growing, and is going to grow like crazy for quite some more time. So there’s enough space for everyone. Price war – do you mean on game prices? Everybody’s at the bottom already, how can you do a price war when everyone is selling their games at 99c from time to time, and the lowest virtual good transaction is always priced 99c?

Nordic Investor: How do you see in general on the price development on the different platforms. I understand that your price/mix has been developing favourably over the last years but I guess this is mostly related to mix (i.e. more iPad and Mac sales vs in the past)?

Vlad Suglobov: It’s not only because of the mix, but because we were gradually (a) going away from longer 99c sales periods to shorter 99c sales periods (b) pricing our games higher on the launch – from 1.99 and 0.99 back in 2009 to 2.99 later and now to 4.99 for iPhone game. On iPad, we moved from 4.99 and below to 6.99 as a standard start price, and some games like Virtual City sold many copies at 9.99.

Nordic Investor: Finally, will there be any roadshow events during this fall similar to last year?

Vlad Suglobov: We are thinking about our options in this regard. As soon as something is decided, we’ll send out an announcement.

I am long G5 Entertainment and you should be too!

www.nordicinvestor.de

Glu Mobile rallies on takeover theme – is G5 next?

2 Sep

The Glu Mobile share had a nice run yesterday, advancing some 14% in an otherwise sluggish market. The share has been sold off briskly in the recent market turmoil falling by some 50% off its 2011 highs. I like the smartphone/table gaming story and following the poor share price performance over recent weeks I could also consider an investment in Glu Mobile. But I still stick to my conviction that everything that an investor gets in Glu Mobile, he/she gets also in G5 Entertainment – only better! However, if equity markets will come into a more stable phase soon, I see significant upside in Glu Mobile within a short time frame.

I think the main reason for yesterday’s share price rally was an article published by seekingalpha.com, once again highlighting the acquisition theme in the mobile gaming space. I totally agree with them when the emphasize that Glu Mobile is a major takeover target but again, G5 Entertainment is an even more obvious candidate!

The consolidation in the hot, mobile social gaming sector finally hit the mainstream financial press when a deal closed in this space for over $1 billion. That deal was Electronic Arts’ (ERTS) buyout of Popcap for $1.3 billion.  It is no surprise why Electronic Arts wanted a footprint in the mobile gaming space so bad that they outbid many suitors [Zynga (ZYNG) and China’s Tencent (TCEHY.PK)], , to win the day. As consoles become the past and mobile gaming devices (smart phones & tablets) become the future, EA had to swing for the fences and acquire a proven name in the mobile arena.  But the $1 billion questions in the season of Zynga’s much anticipated IPO to consider going forward are:

Why would Zynga join the Popcap bidding war and offer $1 billion cash?

Who will Zynga look to acquire next after failing to acquire Popcap?

First, why did Zynga want Popcap?

1. Zynga clearly wants to diversify from Facebook onto other platforms (iOS , Android and Windows Phone 7). According to reports, virtually all of Zynga’s $235 million in Q1 sales were attributed to the Facebook link.

2. Zynga wants to gain a foothold in China and Asia. This fact was reported by All Things Digital mobile gaming pro Tricia Duryee.

What company has major strengths in these two areas?

The quick answer is San Francisco based Glu Mobile (GLUU). Glu’s unique technology platform enables its titles to be accessible to a broad audience of consumers all over the world — supporting iOS, Android, Palm, Windows Phone 7 devices. Glu also has recently acquired major talent and assets by acquiring Griptonite Games and Blammo Games doubling their studio capacity.  And, Glu has a growing presence in China based on their 2007 acquisition of China mobile gaming company, MIG China Co. Ltd, gaining Glu a license to publish games on the platform of China Mobile Ltd.  Most recently, Glu has announced a partnership with TOM Group to develop an online, smart phone storefront community in Asia.  Another attractive aspect of Glu for Zynga is its mature penetration in the important “total cumulative installs” metric. According to Glu CEO Niccolo de Masi, he said in the Q2 2011 conference call:

“We are very pleased with the continuing momentum during the second quarter, as non-GAAP smart phone revenues accounted for over half of our total non-GAAP revenue for the first time,” stated Niccolo de Masi, Chief Executive Officer of Glu. “The combination of demand for newly launched and existing titles resulted in Glu reaching over 100 million total cumulative installs to date across smart phone platforms and social networking websites. In addition, we are very excited to have completed the acquisitions of two new studios – Griptonite and Blammo – which will both add significant scale to our product portfolio in 2012. The integration of these acquisitions will approximately double our internal studio capacity as well as add proven, casual, freemium DNA to our team.”

Seekingalpha argues as follows: If Glu has the assets and attributes that Zynga is looking for as evidenced by their interest and $1 billion cash failed offer for Popcap, what would they spend for Glu Mobile.  Consider that Popcap should sell at a premium to GLUU because of its greater user saturation and more mature games. GLUU will be a Popcap valued company before too long, but not yet.  Popcap sold out to Electronic Arts for $1.3 billion, or 13X its 2010 rev of $100 million and 10.8X its 2011 expected revenue of $120 million.  If GLUU sold at that kind of a Popcap valuation today, it would fetch $975 million (based on 13X its expected $75 million in 2011 rev), or $16.25/share (based on 60 million shares).  A much fairer buyout valuation for GLUU today would be 8X 2011 revenue or at a 40% discount to Popcap’s $1.3 billion buyout valuation. That would value GLUU at $600 million, or $10/share.  And if GLUU holds out and says “no” to buyout offers, then they will get closer to Popcap valuation levels as they organically grow. After all, in the most recent Q2 2011 conference call, Glu Mobile guided for 90% smart phone year over year revenue growth in 2012.

Whether Zynga buys GLUU or whether Glu Mobile goes it alone, investors have an interesting risk/reward proposition whichever direction GLUU decides to go.

Personally, I think this holds even more true for G5 Entertainment. “Worst case”, the company will be bought by a bigger competitor at a significant premium to today’s ridiculously low share price of SEK 21,50 (PER 11 on 2011 EPS!!!). Best case, G5 Entertainment continues to grow organically in a rapidly growing market – DOUBLE WHAMMY!

I am long G5 Entertainment – and you should be too!

www.nordicinvestor.de