G5 Entertainment

Research note


G5 Entertainment: No reason to panic

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G5 Entertaimment's Q4-report had a lower EBIT than we expected. The seasonal pattern was exactly the same as last year's Q4-report and the EBIT-margin slightly higher. We have no reason to make any major changes in our estimate regarding the EBIT-margin during the next quarters in 2018.

Monthly active players have now reached nearly 9 million, while monthly revenue per user (MAGRPPU) has increased to respectable USD 42.7. The increase in MAGRPPU can be explained in the company's strong position in Japan. The CEO also clarified that G5 owns at least a 50% market share in the game genre Hidden Objects, while the company is the 65th largest mobile game publisher. G5's wholly owned game Mahjong Journey has increased in popularity during the year, thus gaining a third place in terms of revenue from Mahjong Solitaire games on mobile.
Estimate vs Actuals: 
The largest difference is found in User Acquisition Cost (UAC), which accounted for 34% of total revenue compared with our 28% estimate. We estimated that the UAC margin would be at the highest level ever in the company's history, but it turned out the company was even more aggressive than we thought. CEO Vlad Suglobov explains in the report very educational how the company deliberately looks at EBIT before UAC to determine optimal investment in growth. If you look at previous patterns in the company's history with regard to investment in growth and how this has paid off in the future in terms of earnings per user, we are confident that the "return on investment" will remain at an advantageous level even this time around.
The royalty cost was better than our expectations, giving a gross profit, which was 8% above our estimates. This means that the wholly owned games yielded higher revenues than we expected. From Q1 2018, "gross profit" will increase even more due to "The Secret Society" is now fully owned by G5. Amortization of the investment made on the game, where the majority is the acquisition, will take place continuously for 24 months. 
A favorable "return on investments” and an increased share of revenue from wholly owned games will likely increase the EBIT margin to 9-14% in 2018. 

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