in Mobile Gaming

#G5 Entertainment: CEO comments

As we have commented on earlier today, G5 Entertainment announced this morning its preliminary numbers for its Q3 2012 and invited to an extra-ordinary general meeting in order to introduce a share-based incentive program.

Nordic Investor got hold of CEO Vlad Suglobov who commented on today’s announcement:

Nordic Investor (NI): Today’s numbers imply an EBIT margin of 27.5% during Q3. Can you break down the costs a bit more in order for us to understand where you experience the biggest inflation. Have production cost increased substantially from the 11.4m seen in Q2?

Vlad Suglobov (VS): For the breakdown on costs, you will have to wait until we release interim report on 15 November. As we continue to invest in new games and publish more games from other developers, you can expect that costs are going to go up across the board: marketing, development, product acquisition. We keep the balance to maintain healthy margin, but we prioritize the group’s strategic position and building the company for the long term, so you might see occasional hiccups. In a particular quarter, margin depends on numerous factors including how well the back catalogue and new game releases performed, what was the own/external games mix, how intensive was our investment in new games, whether or not we were adding more “infrastructure” positions like marketing and management, etc. 

 I think it is a bit myopic to overanalyze our margin in a particular quarter. We are not a huge corporation that reflects how well the global economy is doing. We are working towards building G5 into 300 MSEK / 100 MSEK revenue / operating result company in the next few years, and we try to focus on that. For the management, it does not matter much what is the result in one specific quarter. If you look at G5 over the past three years, there were better and worse quarters, but it does not matter in the end.

NI: Nice to see that you are re-iterating your FY 2012 guidance. As the numbers look after 9-months you would need to record an EBIT margin of almost 52% in Q4, which would be the highest level since Q3 2010. Besides a favourable topline development in Q4 (seasonally strong etc.) what makes you so confident that you will get such a leverage in Q4? are you considering to give a target for 2013 in connection with the Q3 report maybe?

VS: The goal for 2012 is a goal, and the result can be both above and below this goal depending on the performance of the games that we are going to release before the end of the year. We have some strong games coming out, so we did not feel like adjusting the goal.

Regarding 2013 goal, we have already announced our mid-term goal of 300 MSEK / 100 MSEK revenue / operating result in a few years. This is where the company is going.
NI: Then finally regarding your extra-ordinary general meeting. I understand the main purpose seems to be the share-based incentive program. Any particular reason why you want to push that through at this point? Any of your key staff who has left or threatens to leave? Will the share-based incentive program be on top of the EBIT-based bonus scheme you have in place or will it replace it?

(VS): The purpose of EGM is definitely to consider share-based incentive program in the company. As I understand, the board wants to make sure that key employees of the group have alignment of interests with the shareholders. Key employees of the group without share interest in the company can make wrong short-sighted decisions based on cash bonuses they have, or be distracted by opportunities outside the company. The idea then is to provide them with the ability to benefit from the appreciation of the company’s share and therefore have their focus more aligned with building mid-term value in the company. At the same time, the board wanted the program to be fair to the shareholders, hence high strike price of 250% from current level. Regarding the timeline – there is no particular rush, but the board felt it would be good to have this in place in 2012 already. The discussion started in early 2012, but it took some time to sort out the details, that’s why we do it now instead of AGM.

 I am not aware of any threats to leave or any key employees leaving G5.
 The board wanted C-level executives to participate in the stock incentive program. My understanding is that they felt it would be unfair to exclude hard-working top management that delivers good results from participation in the program. As I understand, this will be in addition to EBIT-based bonus program, which only makes sense. C-level compensation is supposed to have a fixed element (salary), a short-term motivation element (EBIT-based bonus with certain restrictions), and a mid-term motivation (stock based program). I think it is a well-balanced compensation package that would provide maximum alignment with shareholder interests. We have similar packages for all key employees of the group, with short-term cash bonus tied to their specific KPI, and it works really well.
Our conclusion: G5 Entertainment seems well on-track to become a SEK 300m revenue company within a few years time. We believe the company will earn an EPS of around SEK 5.20 next year, which implies a valuation of 6.5x 12m-forward looking earnings at current share price levels. The fact that the company proposes to set the strike price of the first incentive program at 250% from current levels, shows to us that they believe in their goals and that they are committed to achieve them.
Nordic Investor
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