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#Mobile gaming: Size matters $KING, #G5

Interesting article on www.cnbc.com on mobile gaming:

Make a mobile game that climbs near the top of the charts, and the dollars start flowing. In a big way.

For proof, look no further than the booming business that’s fueling casual game developer SGN. The maker of such titles as “Cookie Jam” and “Panda Pop” is poised to almost triple revenue this year to about $280 million from $100 million in 2014, according to Josh Yguado, president and co-founder of the Los Angeles-based company.  Critical to a breakout mobile game is having tens of millions of users download the app and play all they want for free, with a small percentage of fanatics paying for advanced features or to skip levels.

The 10 percent of paying SGN users are producing pretax profit margins for the company in the neighborhood of 20 percent, at a time when scores of heavily funded tech start-ups are burning millions every month for growth.

But just like hit-makers in other industries, the eternal challenge is staying power. In today’s world it requires creating multiple hits that become top 20 grossing games on iOS and Android.

Zynga was pummeled as gamers shifted from desktops to smartphones and has yet to recover despite a renewed focus on mobile. King.com, creator of the massively popular “Candy Crush” franchise, is trading below its IPO price from a year ago even though the company has produced successful follow-up games “Farm Heroes” and “Pet Rescue.”

SGN is steering clear of public markets for now and focusing instead on creating an arsenal of popular titles. “The market doesn’t seem to like casual game developers right now,” said Yguado, who previously worked at Fox and MTV. “We want a big enough portfolio so that there are no ups and downs or surprises.”

But the market is plenty big. In October, research firm Newzoo projected 2015 mobile game sales would climb 21 percent to $30.3 billion, overtaking console games as the leading segment. 

Yguado started SGN, in its existing form, in 2010 with MySpace co-founder Chris DeWolfe. By current market standards, the company has reached scale on very little capital, raising a little more than $25 million way back in 2010.

SGN’s big winner to date has been matching puzzle game “Cookie Jam,” which as of Friday ranked 21st on the iPhone among top-grossing games, 13th on the iPad and 14th on Google Play, and was named Facebook’s game of the year in 2014. “Panda Pop” is adding to the mix, ranking 32nd on Google and 47th on the iPhone.

But it’s the recently launched “Juice Jam” that Yguado is convinced will be the next smash hit. In its early days, the fruit juice-themed puzzle game is showing characteristics in terms of engagement and revenue that resemble “Cookie Jam.” Growth is strong enough that “Cookie Jam” will account for less than half of total revenue this year, Yguado said. “Once you create an established user base and a method for creating a successful game, it’s very replicable,” he said.

Sweden is not only home to Candy Crush maker King (listed in the US), but also G5 Entertainment (listed on Nasdaq OMX Small Cap). The casual game maker has been struggling with the transition from unlockable games towards a more Free-to-play dominated portfolio but seems to have managed the transition going into 2015. The big question mark remains behind the company’s ability to deliver profitability in-line with the “big guys”. In its most recent Q4 2014 report, G5 reported and adjusted EBIT margin of 5%, which compares to the King’s 36%.

Mobile gaming has become a matter of size. The big players can easily shed the case on user acquisition and still keep a high profitability. King, as an example, has three games among the top 10 grossing iPhone market in the US (the single most important market in the world). It is there where the serious cash is made. Simply spending money on user acquisition to keep your game among the top 100 grossing might deliver impressive topline growth (after all, the overall market for mobile gaming is still growing impressively), but the costs are eating up your bottom-line. Also, we believe there is little to no loyalty within the mobile gaming audience, meaning that once you stop spending on user acquisition, the player moves on to the next big thing that gets promoted everywhere.

We believe King is in an unique prime position and its strong balance sheet enables it to both grow organically but also by simply buying successful other franchises. Also, it’s valuation stands out as a bargain. Having just paid a dividend of around 6%, the share is trading at a 2015 PE-ratio of below 9%. 

Nordic Investor

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