in Mobile Gaming

#G5 Entertainment: Mid-quarter update shows margins drop; CEO comments

G5 Entertainment released its preliminary numbers for January – September 2012 today:

“G5 Entertainment announces preliminary results for January-June 2012. Revenue during the period is estimated to be 35 MSEK (19.1 MSEK in Jan-Jun 2011), operating results: 9 MSEK (7.8 MSEK in Jan-Jun 2011). This corresponds to about 83% revenue growth and about 16% operating result growth compared to the same period of 2011. These numbers are preliminary, not reviewed by auditor, and are based on management accounts and download reports. The results of January-June 2012 will be communicated in the interim report due on 15 August 2012. The management keeps earlier communicated goal for full year 2012 of 87 MSEK revenue and 30 MSEK operating result. The group has a mid-term goal to achieve annual revenue of 300 MSEK and operating result of 100 MSEK in the next few years.”

This statement implies Q2 revenues of around SEK 17.6 m and an EBIT of 3.3m, implying a margin of 18.4%, i.e. significantly below the 33% recorded in Q1. We were both somewhat surprised by the topline but particularly by the EBIT line. CEO Vlad Suglobov was kind enough to shed some light on these issues:

Nordicinvestor: Q2 sales of 17.6m are basically unchanged from Q1 levels, despite your success in the download charts around the world with an increasing number of games throughout the quarter. Is it that big of a seasonality in Q2 vs Q1, i.e. the overall app market is that much slower while you are actually gaining ground?

Vlad: Q1 is seasonally strong every year. Q2 seems a bit sluggish when comparing to Q1 every year. This is natural and seasonal. There is simply less money being spent by users in Q2 compared to Q1, in my opinion. Q1 has boost thanks to many holidays and gifts which are often smartphones and tablets which people are eager to user after they receive such gifts.

 Nordicinvestor: regarding your margin: are you taking any one-off costs in the quarter? if so, what nature are they? a margin of 18% vs 33% in Q1 seems quite steep of a fall. any particular reason for this?

Vlad: Regarding the margin, while revenue stayed around the same, we continued to build the company for the long term. That’s why there’s pressure on margin. We should see further growth in revenue in 2nd half of the year which should offset the expenses and we should be back to “normal” margin of around 30%. Comparing Jan-Jun 2012 to Jan-Jun 2011 is especially difficult since in Jan-Mar 2011 G5 had initial big success in Q1 with its games without increased investment in building the company further which only started at the end of Q2 2011. That’s why margin in Jan-Jun 2011 was around 40%, so we are comparing to very high base.

To get back to our “normal” margin, we only need certain growth of revenue, which we plan to achieve with all the projects we have coming out in the 2nd half of the year.

All-in all, all seems on the right track. The company is set to grow by some 80-100% p.a. over the coming years. Management is taking some additional costs this quarter which burdens the margin but benefits growth. G5 Entertainment looks extremely attractive at these levels!

Nordic Investor

 

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