As anticipated, there were no major surprises in G5 Entertainment’s Q2 2012 report, which was published this morning. Revenues of SEK 18.7m were up 7% versus Q1 2012 and 95% compared with Q2 2011. G5 comments on sales: “The management is seeing more pronounced seasonality in downloads and sales. In retail sales, Q4 is usually peak quarter. In digital downloads, however, such period is after holidays: January and February, and the most positively affected quarter is Q1. This effect is explained by a jump in the install base of smartphones and tablets following the holiday period. This results in increased usage, downloads, and purchases of apps. This effect cools off in Q2. Despite this seasonality, the group was able to keep Q2 revenue on the same level as Q1 revenue.”
Q2 2012 EBIT amounted to SEK 3.6m, which implied an EBIT margin of 19%. This was somewhat better than the company had initially guided for in its preliminary results release in early July, but was still significantly below the 33% level recorded in Q1 2012 and the 39% level recorded in Q2 2011. Company comments on margins: “Lower margins in Q2 are explained by the continuous effort of the management to build the company for the long term. As Q2 revenue was at around the same level as Q1 revenue, the group has further strengthened its development and QA work force, and increased investment in free-to-play games to be released in 2012 and 2013. The management expects that the growth of revenue in Q3 and Q4 will offset increased expenses”
We notice a slight change in tone when the CEO comments in the report that “the group will deliver on the previously announced goal of 87 MSEK, 30 MSEK operating result, and 3.2 SEK earnings per share for full year 2012.” This is a notch more optimistic, we believe, and is probably explained by the fact that more than 60% of 2012 are already in the bag. Looking beyond 2012, management maintains its goal to turn G5 into a company with 300 MSEK annual revenue and 100 MSEK operating result in a couple of years. Going forward, the management aims to keep the group’s long-term average revenue growth at 2010/2011 levels.
During Q2, G5 had negative cash flow of 1 967 KSEK as the company continues aggressively to invest for the long term and the management is maintaining the balance between profitability, cash flow and financing long-term growth. 12.5 MSEK of capital raised in August 2011 was committed to new game projects – licensed and sourced from 3rd party studios, and developed internally by the group. As these projects come to completion, recoupable royalty advances and contract payments become due in anticipation of game releases. As the group’s revenue grows, the management controls the cash flow by increasing or decreasing investment in new games. The management currently plans to continue actively investing and maintaining negative cash flow during the next two quarters, then returning to being cash flow positive on increased revenue from multiple new game releases. The balance sheet is very strong indeed and cash reserves on June 30th 2012 amounted to 15 556 KSEK.
G5’s freemium game “Virtual City Playground” continues to be a success following a major update bringing some long-expected new features to the game. As a result, the game has set new monthly sales record in June and then again in July, 11 months after its original release in August 2011. On iPad, the game has now been Top 10 Grossing Game in 100 countries around the world. G5 is committed to developing the game further on all platforms. In addition to large number of casual games in the pipeline for release in 2012 and 2013, the group has a number of free-to-play games in development for release in 2012 and 2013, and is dedicated to increasing its portfolio of free-to-play games further. G5 now has contractual relationships with over 60 game development studios from around the world. These studios are supplying casual and free-to-play games that G5 is going to publish, in addition to games developed internally by G5.
Long story short, the G5 case is in tact. Increased production expenses in Q2 bode well for several new game releases during H2 2012, amongst others the highly anticipated “Jumpster”. The company seems well on-track to deliver on its 2012 guidance and given the comments regarding “keeping the revenue growth levels from 2010/2011, we think it is time to slowly but steadily move our eyes towards next year’s earnings potential. 2010/2011 growth rates were around 100%, which in combination with an assumed EBIT margin of around 30%, a neutral financial net and a tax rate of 16% implies a 2013 EPS of around SEK 5.50. At SEK 33.10 the stock market is by now means taking the continuously large growth potential into consideration. As we have noted before, Glu Mobile, the only similar investment case listed on the stock market, currently trades around 30x expected 2013 earnings.