Despite our warning early this week, we were still negatively surprised by G5 Entertainment’s Q3 2013 report which was published this morning. Investors reacted in panic and at the time of this writing, G5’s share is down some 17%, erasing basically all increase of the last 12 months.
We knew from the preliminary report that Q3 revenues were fown 9% compared with the same period last year, which was a combination of a tough comparison base and a declining trend within G5’s unlockable games portfolio. The unknown was the profitability and for the first time since Q4 2009, G5 reporting an operating loss. Even adjusted for non-recurring items such as the write-down of certain unlockable games (SEK 2.4m) and costs related to the ongoing relisting to Nasdaq OMX (which were not quantified), we believe EBIT was still negative. This is also what leaves us somewhat worried following today’s announcement.
G5 says that marketing spending increased substantially in connection with user acquisition for the blockbuster hit Secret Society. The game is G5’s best performing game ever and continues to reach new heights also going into Q4. Furthermore, the company incurred increasing supporting expenses in anticipation of new free-to-play games that are about to be released.
On a positive note, CEO Vlad Suglobov states in the report that it is worth noting that while Q3 2012 was the high point of 2012, the same is not true for Q3 2013. Q3 2013 is likely to be the low point of 2013 as G5 starts to go out of its transitional period towards more F2P focus. He also states that there has been positive momentum in the growth of revenue coming out of Q3 on the back of the ongoing growth of free-to-play games revenue and flat or slightly recovering revenue from unlockable games, with expected increase during the high season from late December to mid-February.
G5 mentions in the report that Q3 was the first quarter when revenue generated by F2P games exceeded the revenue generated by unlockable games. The company still does not disclose how much of the overall revenue comes from Secret Society but as we have stated in previous articles, we have reasons to believe that this game alone did account for roughly 50% of G5 sales during Q3 2013. This also cleary shows the potential of F2P games in general. www.thinkgaming.com publishes revenue estimates for the top selling games for iPhone in the US. Currently, spot number 20, generates around USD 40,000 a day, or SEK 264,000 at current exchange rates. Secret Society has been around spot 20 in the US on iPad for a large part of Q4 and while the iPhone is still estimated to generate somewhat higher revenue than iPad, the gap should not be too wide anymore and is closing quickly. SEK 264,000 annualised would imply revenues of SEK 96m alone, from one game in one country. This example clearly shows that G5 is up there when it comes to monetizing a F2P game. Now it is time to get more of its titles up there in the charts. It’s recently launched Stand o Food Empire, is slowly but steadily building an audience. The example of Secret Society taught us, however, that it takes months until a F2P game seriously climbs the charts. G5 is likely to launch additional F2P titles ahead of the holiday and has an outspoken goal to have a F2P portfolio of 10 titles by 2014 (currently 4).
It does not seem unlikely that at least one of these new and upcoming titles will be at least as successful as Secret Society, meaning annual sales of SEK 200m as a first step and the mid-term SEK 300m (management’s goal) are still within reach. It has, however, become much more unpredictable than in the past.
Finally, G5 stated in the Q3 report that it has in accordance with the decision by its Board made in early 2013, applied for a listing on Nasdaq OMX. Preparations for the listing are said to be ongoing. Hopefully, we can leave Q3 behind us now and start to look forward again. The next data points should be positive, including the relisting, new F2P game launches, the holiday season and the upcoming IPO of king.com