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G5 Entertainment: Some thoughts ahead of Christmas

Christmas is only a few days away and all of us are looking forward to share the holidays with family and friends.

Christmas is also a period of joy for app developers as downloads usually skyrocket when millions of people unpack their new iPhones, iPads, Samsung Galaxies, Kindle Fires etc. and want to fill them with content. Last year, Christmas was a smash-hit for G5 Entertainment. According to a press release issued on January 3rd 2011, G5 recorded more than 1 million downloads at one single day (December 27th). Overall in Q4 2010, the company recorded downloads of estimated ca. 3 million in total. Back than the company had some 44 games on the market, primarily for iOS.

So what should we expect for 2011? A lot has happened during 2011, both on the market in general and in G5 in particular. Since June, the company is also publishing its games for Android, a market which is experiencing even faster growth than Apple’s iOS. New devices such as Amazon’s Kindle Fire have entered the market with success and G5 is active even here. G5’s number of total games released has more than doubled compared with last year and a professional marketing expert has been hired to promote the games.  On November 15th, G5 management reiterated its revenue guidance of SEK 47m for the full year 2011. The company also stated that day that at the end of October 2011 ” the total number of downloads of G5 games on iOS and Android (not counting update downloads) surpassed 28 million.” Of those, 3 million downloads were recorded in the month of October alone.

Given the company’s performance  during the first nine months of 2011, management’s guidance implies expected Q4 2011 revenues of slightly below SEK 15.8m. Is that a realistic number? We think it is; if anything there should be upside potential. Here is why:

  • In Q3 2011, G5 reported revenues of SEK 12.1m and the estimated number of downloads during the quarter was some 8 million. This implies a revenue-to-download ratio of 1.51; i.e. every download generated around SEK 1.51 for G5. This is down from 2.74 in Q2 and 2.73 in Q3 as Android started to lift the overall download level as of Q3 but Android conversion rates are underperforming those on iOS.
  • We know that in October, G5 recorded some 3 million downloads. Assuming a steady level of downloads in November, the total number of downloads would be 6 million for the period of October-November. If G5 wants to reach the SEK 15.8m in revenues it has guided for in Q4, it means that it would need to generated some 4.5 million downloads during the month of December, assuming an unchanged revenue-to-download ratio versus Q3 of 1.5. The total number of downloads in Q4 would then be 10.5 million. Remember, on December 27th 2010 alone, G5 recorded 1 million downloads so 1.5 million downloads for the entire month of December 2011 does not look too ambitious given the fact that the overall game portfolio is more than twice the size of last year.

We will be wiser in early January, when G5 will come with its mid-quarter update. I’m confident that G5 will deliver on its guidance for FY 2011 and if they manage to meet their 2012 targets as well, the sky will be the limit.

Merry Christmas to everybody,

Nordic Investor

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