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.