G5 Entertainment reported yet another margin miss in its Q3 2014 report this morning. Sadly, this overshadows the strong revenue growth of 104% y-o-y during the period.
Revenues of SEK 44,653m and an EBIT excluding non-recurring items of SEK 1,966m implied an adjusted EBIT margin of 4,4% – too little to silence critics and satisfy the market. Cash flow for the period was strong, however, and amounted to SEK 7,5m , leaving the company with a net cash position of >SEK 30m by the end of Q3.
For us, the main take away from the Q3 report is that it remains unclear as to what a sustainable profitability of G5’s business model will look like. Revenue growth is impressive but it comes with elevated marketing costs. Admittedly, adjusted for the non-recurring items, the company is earning money so one could argue that as long as you get more out of a player than it costs you to acquire this player it makes sense to continue to do so.
Nevertheless, despite the fact that G5’s blockbuster game Secret Society is performing very well, the company fails to deliver consistent results at the bottom line. It has so far failed to produce another game that comes even close to the success of Secret Society. We therefore decide to take a break and will continue to follow G5’s development from the sideline.