G5 Entertainment

Research note


G5 Entertainment: Higher expectations in Q4

(Correction in estimate Q4 2017)
(UPDATED with comment on MyTona-news)

G5 Entertainment will publish its revenue for Q4 2017 at the beginning of January 2018. However, since daily "top grossing" statistics are available, it is possible to get a relatively good picture of the outcome already. We believe revenues will increase by about 25% compared to Q3 2017 and will amount to about SEK 335 million. However, we believe the company has invested relatively heavily in User Acquisition (UA) which is expected to squeeze the EBIT-margin to around 8-10%.

The game portfolio's absolute biggest contributor is Hidden City. At the same time, the United States and Japan represent at least 70% of total revenues. For this reason, it is absolutely most interesting to look at the average top-grossing rankings for this game in the US and Japan. On iPhone, Hidden City has climbed from 100 to 84, and on iPad, the game has climbed from 64 to 38. (http://www.g5info.se/). According to our estimates, this can mean revenue growth of about 35% for Hidden City.

G5 Entertainment's own game seems to have climbed up to the second place in the games portfolio with strong development on smartphones. As for "The Secret Society", we see a drop of about 10-15% which should mean that the game now only contributes about 8-9% of total revenue compared with 10% in Q3 2017. The overall self-developed games portfolio has climbed around 10%.

The top-grossing numbers should mean that the total Q4 gaming portfolio has increased its revenues by around 25%. This should mean revenues of approximately SEK 335 million compared to our previous estimate of SEK 287 million.

Looking at Q4 2016 the EBIT-margin dropped from 10% to 4% between Q3 and Q4. During Q4, the company always invests a lot in UA due to the holiday season. We do not think the EBIT-margin will be 4% this time. This is because its portfolio with self-developed games where royalties are avoided is expected to give an EBIT-margin boost, while the company has a natural leverage in the business model. We, therefore, expect EBIT to be around our previous estimate of SEK 30.4 million (EBIT-margin 9%).

We will also raise our estimate for Q1 2018 and maintain the previous growth rate in 2018, which will increase our motivated DCF value in our base-case scenario to SEK 397 (previously SEK 357).


Settlement in MyTona-dispute

A press release was G5, and MyTona has agreed to dismiss their claims pursuant to the terms of the settlement was announced on December 21. G5 is acquiring all rights to the “The Secret Society” game on all platforms in exchange for cash consideration, as well as additional contingent revenue share payments, being paid over the course of the next year. G5 shall be taking over all support and development of the game going forward. G5 estimates that the total consideration to be paid to the MyTona parties may be worth up to US $6.5M or more, depending on the performance of the game.

The press release is, of course, god news, this is an uncertainty that has probably pushed down the stock price recently. Our estimated royalty to MyTona in 2017 is about USD 5 million. The deal, therefore, sounds real good in our opinion.  However, it will not considerably change our estimates for 2018. The cost will be higher in 2018. However in 2019 and forward royalty cost for this games will be zero if we read the press release correctly, which likely will have a positive impact on EBIT-margins. The most important thing will be how the company manage to take the game “The Secret Society” to the next level. 

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