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#G5 Entertainment: Cleaning up for 2014

newlogoAs we had come to expect, G5 Entertainments Q4 2013 report disappointed investors yet again with the negative highlight being a LBIT for the quarter. Even adjusted for non-recurring items related to the write-down of unlockable games and costs related to the ongoing relisting to Nasdaq OMX, the operating loss for the quarter amounted to SEK 2.6m. This overshadowed the fact that Q4 revenues of SEK 28.7m marked a y-o-y growth of 39%, a clear sign that the move towards F2P is successful. In fact, revenues from F2P games alone grew over 300% y-o-y and accounted for 64% of the total revenue in the quarter.

Commenting on the results, G5 Entertainment’s CEO Vlad Suglobov said that temporarily higher than usual costs for user acquisition and developer royalty expenses burdened. The level of user acquisition expenses was seasonally elevated to above 20% of total revenue. Going forward, G5 aims to keep it to around 15% of revenue. Royalty to developers in Q4 was above normal at 50% of revenue. It is expected tp return to return to the normal range of 30-40% going forward.

A clear positive were the outlook comments given in the report. G5 has seen substantial increase in revenue during and after the holiday period. Encouragingly, the post-holiday slide in sales that the group experienced in previous years has not occurred. January became a new record revenue month for G5 with revenues surpassing SEK 13m for the first time. Even better, average daily revenue in February has been higher than in January so far. Based on January and February sales to date, Q1 2014 is likely to become a new record quarter. Importantly, G5 adds that January and February to date are profitable and cash flow positive.

We are somewhat surprised by the lengthy relisting process as this has been much faster for other companies in the past. G5 stated yesterday that preparations for the listing are ongoing, including “implementing committees and structures in compliance with Swedish Corporate Governance Code”. Unfortunately, it remains unclear when the relisting will actually take place which is a clear negative, in our view,

Summing up recent events is a matter of seeing the glass half full or half empty. Despite two quarters in a row with negative adjusted EBIT, there are signs of hope that G5 can turn around the unsatisfying operational performance from 2013. With revenue levels approach new record levels in Q1 2014 and a management that seems dedicated to keep costs down, we find it highly likely that G5 will return to profitability in Q1 again. If the elevated user acquisition costs from Q4 have led to a higher player base that G5 can monetize on going forward, it was money well spent. Hopefully, one or two of the F2P games released during recent months will soon start to seriously contribute to the topline as well (It took Secret Society several months to do so). If G5 can manage to hold costs at reasonable levels and still have 2-3 games among the top grossing 30-50 in important markets such as USA, Japan, China and Germany, the future could once again be bright. We might just need to continue to be patient in order to see whether they succeed.

Nordic Investor

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