Vlad Suglobov, CEO of our top-pick G5 Entertainment, made his way to Stockholm in order to attend the extra-ordinary general meeting yesterday. He also took the opportunity to meet local investors.
The EGM, which was held yesterday evening, approved the proposal to issue no more than 160 000 warrants to executives and key employees in G5 (maximum 16 persons). Each warrant gives the holder a right to subscribe for one share in the company to a strike price amounting to 250% of the volume weighted average of the listed settled prices – during the period between November 1, 2012, and November 14, 2012 – according to Aktietorget’s stock exchange list for shares in G5 Entertainment. In case all warrants are exercised, at the most 160 000 shares may be issued, which corresponds to approximately 2% of the total number of outstanding shares. This seems to be a reasonable move at reasonable conditions. Share options increase motivation and help to both retain and acquire qualified staff. A strike price of 250% above current levels also shows that G5 is very optimistic about the future.
In his presentation to investors, Mr Suglobov reiterated his message given in the past, i.e. that G5 is well positioned in a fast growing market. Today, around 1bn smartphones are in use globally, a development which took 16 years to achieve. According to several market researchers, this number will have grown to 2bn over the coming 2 years only. There is also a significant shift away from PC to tablets.
Here is what we believe to be the highlights of the presentation:
- iPad accounts for the highest share of G5 revenues today, followed by iPhone and all Android devices combined
- G5 intends to grow its business to SEK 300m in revenues over a couple of years, maintaining a 30% EBIT margin. The company sees no reason why it should not be able to keep a growth rate in-line with the last 2 years (i.e. ca. 90%). The company will not communicate any EPS target for 2013, like it has done in the past, as the increased complexity and size of its operations has made such a task very complicated and inaccurate.
- Total staff has increased to around 125 since June. G5 decided to do the ramp-up more abrupt during Q2, which showed in the relatively lower margin during the quarter. Since June, G5 is operating with the same staff-level. There will be a need for additional staff in order to publish more games next year, however, the increase will be not significant.
- As of today, G5 cooperates with 80 studios and is continuously trying to increase that number. It has become easier as of lately to convince developers to publish their games on mobile platforms since more and more are struggling on the PC market and are better understanding the potential of mobile.
- G5 aims to get licenses for both iOS and Android. One of the reason why G5 has published many more games for iOS so far this year, is that developers usually want to penetrate that platform first as it is easier and requires less time. The conversion process to Android is more time consuming for them. G5 does, as a consequence, have a long pipeline of Android titles to be released.
- According to Mr Suglobov, G5 has a very promising line-up for the remainder of 2012, just in-time for the important Christmas business. Overall, focus is now on more high-quality games, while early 2012 was all about quantity.
- In general, free-to-play games seem to be high on the agenda of G5. They have been very successful with their first one (Virtual City Playground), while the second one (Jumpster) has so far not become a success. Virtual City Playground has had its best months in terms of sales in July 2012, despite being released initially in mid 2011. The average amount spent per user is around USD 15, with a conversion rate of 10%
- Jumpster has always been seen as an experiment for G5 and is developer-partner Vogat. The experiment is ongoing and both parts are open to adapt the monetization model in the future (could include in-app advertising or making the game unlockable).G5 released an update yesterday, including a Halloween theme for Jumpster.
- We also got the impression, that G5 is more open to enter new genres, outside the hidden objects and time management space. Jumpster has been such a move and the company is ready to explore further. Companies like BigFish and Glu Mobile have recently announced ventures into the mobile gambling space.
- We were once again impressed to be reminded that actually some 40-50% of 2012 revenues are expected to come from games released 1 year ago or older. This is a great proof of the long-tail of the games.
- M&A activity in the mobile gaming space is high and has even increased recently.
- Changing listing from Aktietorget to Swedish Small Cap seems to be on the agenda at some point in the future but no urgency. Focus is rather on growing the company.
It is hard to leave Mr Suglobov’s presentations without being impressed. G5 management’s execution in the fast growing industry is rock-solid. They are active in an interesting niche of the mobile gaming market, which allows them to publish many games at relatively low development costs. Hidden object games might not have the same appeal to hard core gamers but they have appeal to many people around the world and they are much cheaper to develop and publish compared with fancy 3D games etc.
We continue to be intrigued by G5 Entertainment. The company seems very well positioned to deliver on its revenue target of SEK 300m. Assuming 90% growth p.a. (in-line with recent history) this will be reality by 2014. At an assumed 30% EBIT margin, we believe G5 will be able to realize an EPS of >SEK 5 and >SEK 10 by 2014. We also continue to argue that a company that grows at the pace that G5 is doing and at such a profitability should be trading at at least 15-20x 12-months forward looking earnings. This would imply a reasonable share price of SEK 75 – 100 based on next years earnings and a share price of > SEK 150 based on 2014 earnings. As a comparison, US mobile gaming peer Glu Mobile is currently trading at 23x expected 2013 earnings, Zynga at 112x (!!!) expected 2013 earnings and Gameloft at 17x expected 2013 earnings. G5 Entertainment grows faster and is more profitable than any of these guys, by the way.
Of course, everybody has to make his or her on judgement but based on the known facts and current trends, we have made ours: We are long G5 Entertainment.