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G5 Entertainment: CEO Q&A ahead of Q3 report

Soon it is time for fast growing mobile gaming developer G5 Entertainment to report is Q3 2011 results. On November 15th, we will get an update on how the expansion efforts are proceeding. Nordic Investor has been in touch with G5 Entertainment’s CEO Vlad Suglobov in order to get a heads-up on recent developments. Here are the main take-aways:

Nordic Investor (NI): How much of your revenues is in US-Dollar or US-Dollar related currencies (e.g. RMB)? The SEK has weakened by some 3% when looking at the average SEK/USD rate for Q3 compared with Q2 and the USD has continued to strengthen during Q4 so far. This should be positive for your earnings, shouldn’t it?

Vlad Suglobov (VS): We are still at around the same equal distribution of revenue among US, EU, and Asia and the rest of the world as I announced at investor presentation in June – about 30-35% come from each major region. We are not really following currency fluctuations. With the growth we are experiencing it doesn’t really matter if there 1% or 2% more or less. We prefer to focus on more important things like making sure our games are great. That said, I believe we are well diversified when it comes to currency changes due to revenue spread among regions of the world, so it’s a good thing.

NI: I was happy to see the recent announcement of “Youda Survivor” to be released on November 17th. On a more negative note, I guess this implies that you will not publish any game next week, doesn’t it? Do you still feel comfortable that you will be able to publish 80 games during 2011? Any bottlenecks that have incurred in your development process?

VS: Yes, in this particular case we will not be releasing anything on this particular week. But I wouldn’t say it’s a negative thing. We are obviously busy with something else. Last year’s holiday season and what followed was very successful for us, so we really want to prepare well this year and try to repeat the success we had. Stay tuned for more news. As of 80 games in 2011 — like I mentioned before, our focus has changed a bit, and we are working towards a goal of releasing one game every week. This might take some more time to achieve and have a smooth flow of games, and there may be empty weeks or weeks when there will be more than one game released on different platforms – don’t get scared, it’s all good. We don’t have any particular bottlenecks in the development process, but as you can imagine setting up the development of so many games is a challenging task. We are working on it.

NI: Regarding your co-operation with HipSoft: Can you comment on why HipSoft has decided to break its co-operation with Glu Mobile? Built-a-lot 1 and 2 have been published for iOS by Glu Mobile. Will you publish all the remaining 4 versions of the franchise? Any idea of the approximate time horizon – Q1 or Q2 2012 maybe?

VS: I can’t say on Hipsoft’s behalf but I think G5 has an audience which is much better fit for Hipsoft games than the audience of Glu. So when Hipsoft guys approached us, we were happy to work with them. And yes, we are going to publish games 3, 4, 5, and 6. Regarding the horizon – follow the news.

NI: Following the HipSoft announcement, with how many studios to do you have a partnership at this point? How do you go about finding new cooperation partners? Any plans to start partnerships with Asian studios in order to cater more to the Asia demand?

VS: It’s more studios than before. Like I mentioned in the reports before, we are signing up new partner studios every month. And we definitely know where to find good casual game development studios. We were one of the casual game developers a few years ago, too. These guys know us from before. We don’t have any plans to work with Asian studios or make games specifically tailored for Asian audience. We see that our games are already popular in Asian markets, it doesn’t feel like we really have to do something special for these territories. If a game is good and addictive, it’s good and addictive. One thing about casual games is that they appeal to everyone. That’s as in “everyone”. Asian people included.

NI: Your current guidance for 2012: How many games do you expect to release in order to reach a topline of SEK 87m?

VS: Like I mentioned a few times now, we’re thinking in slightly different terms now. We want to release one game a week on iOS and one game a week on Android. We will get there eventually. This is not about the quantity. This is about being a service to our users and providing them a good game every week. Our average revenue per game in the first months of sales continues to grow. And we are going to work on increasing our revenue per game further. It means better games, better marketing, more platforms and stores, better monetization. We can’t scale up the number of game releases indefinitely, it makes no sense. We know how to increase revenue per game.

NI: Do you feel that you are able to recruit enough qualified developers at this point? Would it be an option to buy a complete development studio in order to increase your capacity?

VS: I feel that we are able to get people as we need to. There is always a feeling we could do even more if we had even more smart people, but there’s always a limit to how fast one can grow without losing control. So we are starting to rely more on work with external studios, it’s a better scalable model. We are going to maintain a certain balance between using in-house developers and using services of external studios. We don’t have plans to buy any studios at the moment.

NI: Your tax rate: How long is it sustainable to pay a tax rate of less than 15%? Is there any special set up that enables you to pay lower taxes? What would you consider to be a reasonable long-term tax rate for G5?

VS: Virtually all our operations are outside Sweden. Our tax rate is a combination of tax rates of different territories where we have operations, and it works out this way on average. It is sustainable as long as we’re not changing our structure much. It might go up and down a bit depending on how much profit which subsidiary makes in their particular corporate tax rate zone, but overall I’d expect it to stay the same.

NI: How are the plans proceeding regarding your change of listing? Should we expect a change rather in H1 2012 or H2 2012?

VS: I think it’s a bit too early to consider or discuss this given the condition of financial markets.

Conclusion: We feel it is very comforting to see an upbeat CEO Suglobov. G5 Entertainment’s operational development seems to continue as planned and we are optimistic that the company will deliver on its guidance. We do, however, argue that G5 Entertainment would be well-advised  to change listing sooner rather than later if it wants to increase shareholder value. A move to NasdaqOMX’s Small-cap list would add further credibility to the case and institutional micro-cap funds could start to consider investments in the company. “Aktietorget” is a great option for start-ups and companies at an early stage of their development, but its reputation as a stock exchange is “mixed” at best. This is also partly an explanation why G5 Entertainment’s share is trading at an extremely low valuation. I am convinced that owner “Traction” is well aware of this issue and will push for such a move as well. Either way, it will not be sustainable in the long-run that the G5 share is trading at a 12m forward PE-ration of 6.7x.

I am long G5 Entertainment and you should be too.

Nordic Investor

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