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#G5 Entertainment: Write-down of unlockable portfolio

newlogoThings continue to go sluggish for our former darling G5 Entertainment. This morning the mobile gaming developer and publisher announced that it has decided to write off SEK 15.6m of capitalized development costs and advances to external developers as part of the transition to free-to-play (F2P) games.

The write-off corresponds to more than 50% of the total capitalized development costs and advances for unlockable games. The write-off has no liquidity effect, and the group’s liquidity position continues to be strong.

Vlad Suglobov, CEO, comments:

The performance of unlockable games in the market declined substantially in the first half of 2013. Even with a turnaround in Q4 2013 when G5’s unlockable portfolio revenue grew month-by-month, the performance of individual weaker games continued to suffer. The group’s regular assessment of its games portfolio (impairment testing) indicated a need for write-downs of a number of such games. The Board has decided to proactively write down those underperforming games, for a total of 10 MSEK.

The new market conditions for weaker unlockable games have also led the management to review the development pipeline and cancel a number of unlockable games on the way to the market, in favor of focusing resources on F2P games. These cancelations result in a write down of 5.6 MSEK.

These write-downs affect capitalized development costs and royalty advances on the balance sheet only, and have no liquidity effect. The group’s cash position remains strong and sufficient to continue investing in the growth of F2P games portfolio. While further write-downs may be triggered in the future depending on the performance of the unlockable games portfolio, the improving sales of the remaining unlockable games and the higher quality of these games reduce such risk.

The Board has elected to take these charges now as part of the ongoing transition from unlockable games to F2P games. The group’s F2P games portfolio have shown over 300% year-on-year revenue growth in Q4 2013 and accounted for over 60% of the company’s revenue in the quarter. Thanks to the outstanding performance of F2P games, the company has returned to approximately 39% year-on-year revenue growth in Q4 2013, and set new revenue records in the month of December and for the full quarter.

The full year 2013 report is going to be published on 24th February 2014. We decide to stay on the sideline going into the report as uncertainty around profitability is just too overwhelming at this point. While Q4 y-o-y revenue growth was promising and driven by strong growth of G5’s hit-game Secret Society, it remains a black box how the margins look for this game. We believe that the top grossing rankings are connected to high marketing costs, not the least during the competitive X-mas season. This could lead to a further disappointment of market expectations, in our opinion.

Nordic Investor

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