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#G5 Entertainment: Buckle up

newlogoMobile gaming developer and publisher G5 Entertainment is scheduled to report its Q3 2013 report on Friday, November 15th. Despite the fact that the company has already announced its preliminary Q3 sales number in early October, we expect a bumpy ride this week for the share price.

The preliminary sales number was a major disappointment. At slightly below SEK 22m, sales declined by some 9% compared with Q3 2012. The comparison base was a tough one, since Q3 2012 was boosted by an extra-ordinary performance of Virtual City Playground, but the decline came nevertheless as a negative surprise given the successes that Secret Society has had during Q3 2013. The game has had top grossing positions both on iPad, Google Play and recently also on iPhone, but still it was apparently not enough to offset the subdued development for G5’s unlockables portfolio. It has become very obvious now that the company cannot only rely on its blockbuster game Secret Society if it wants to keep growing.

What’s not known about Q3 so far is G5’s profitability. Here, another disappointment could be waiting for investors as a large part of Q3 sales was related to Secret Society, a game which is not G5’s IP, i.e. revenues are shared with the original developer. What could be counteracting are the capitalized development costs. It is impossible to guess what they will amount to during an individual quarter but they might boost margins just enough to not dip below the 30% EBIT margin level.

Following the preliminary numbers, the G5 share got hammered down to SEK 35 before bouncing back. It is currently trading at around SEK 43. While the negative sales development is known to the market and should be priced into the share price, we have seen similar trading patterns in G5’s past, i.e. falling twice on the same news (or going up for that matter). We are also worried that the Q3 margin could be an additional disappointment for investors.
We believe the only thing that can save the party on Friday is the long-awaited announcement of the relisting to Nasdaq OMX. However, it might just be a bit too early for that. So you better buckle up!

Nordic Investor

 

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