“Other OPEX” was higher than expected mostly due to increased development and marketing cost. We took a conservative stance after the all-time high user acquisition costs (UAC) last quarter, however as a percentage of sales UAC was at more normal levels in Q4.
The rising star
Jewels of Rome is already the second-largest revenue contributor in the portfolio (above 15% of total revenue in January 2020). We believe a large amount of UAC was invested in the game in Q3, and a positive ROI (Return of Capital) can be achieved in 3-18 months. This is a large interval, but it is an industry-standard for games in the Match-3 genre. This type of game has a much longer LTV (Lifetime Value) than for example Hidden Object games.
The high monthly growth in Jewels of Rome is according to us a positive signal that the UA-investments are starting to pay back at a good pace. The monetization metrics is therefore likely in a good shape in the game. If the game continues to show healthy growth in the first half of 2020, this game can be the next star that many investors have been waiting for.
However, as we wrote in our last research update the Match-3 genre is much more competitive (and of course many times larger) than the Hidden Objects genre. It is therefore very uncertain how profitable a relatively small game company as G5 can be in this space in the long run. For example, Rovio has problems to show profitably sustainable monetizing in its Match-3 Angry Birds games. The mobile game company KING has been the dominant player in Match-3 games with its game Candy Crush since its release almost eight years ago. Candy Crush Saga generated USD 1.5 billion according to data research firm Superdata in 2019, which according to the same source made it the second-largest mobile game in 2019 (close to number one at USD 1.6 billion from Honour of Kings).
More diversification on its way
G5 is broadening its portfolio and now has games in four different genres. As we wrote six months ago, we also believe the company has raised the quality standard in its games. Today, for example, we tested “Wordplay: Exercise Your Brain” which we believe is a fresh new and fun entry in a new genre. Although word-puzzles games often struggle with low monetization (for example MAG Interactive) we believe this type of games is good for the diversification in the game portfolio. With five new games in the pipeline for 2020, the company will have many shots on goal this year as well.
G5 communicated an outlook in the report, which we believe is one main reason for the sharp drop in the share today. The company expects a profit margin at the lower end of the historic range before the negative result in Q3 and Q4 2019. With many games in soft-launch and mainly Jewels of Rome as the big revenue driver, the guidance is in line with our previous estimates. We will likely only do minor estimate changes in our upcoming research update.
Notes from the year-end report 2019
The company released five new games in 2019 and plans to release five new games in 2020. In the fourth quarter, G5 returned to profitability adjusting for the SEK -5.7 M write-down on our Solitaire Tour game. The write-down is explained later in the report due to more focused investments in time and money; “We are conscious of how we spend our money both in user acquisition and development and are increasingly tougher on underperforming games. We will even halt investment in a game if we feel the money and - more importantly - time and focus, would be more wisely spent on other opportunities. An example of this tougher approach is our Solitaire Tour game. We stopped investing in the game and put it into harvest mode in the fourth quarter. We’ll continue to prune our portfolio going forward and put the money to work where we think we can get the best return.”
Jewels of Rome
In 2019, the company started to see the results from its investment in self-developed games growing 8 percent year-over-year in the fourth quarter and now almost 30 percent year-over-year in January, powered by Jewels of Rome.
Since launch, Jewels of Rome has delivered double-digit sequential growth every month. In the fourth quarter, it was responsible for well over 10 percent of the group’s revenue. In January 2020, its contribution to the group’s revenue was already above 15 percent, and it has already achieved higher monthly revenue than Mahjong Journey – G5’s previous most successful internally developed game – ever delivered.
Games available in app stores worldwide:
Hidden Treasures is showing good results so far and is demonstrating the potential to be a profitable product.
Wordplay: Exercise Your Brain is our latest game launched on pre-order in December and available for download worldwide since January. Wordplay takes us into a popular new genre and early results look promising.
To be released worldwide:
Jewels of Mahjongwas initially released in soft launch over the holidays and showed positive results, so the game is going to be launched globally very soon. It is a game in the evergreen mahjong solitaire genre where we also have Mahjong Journey, one of our top-sellers and one of the top-grossing games in this genre in the world.
Match Town Makeoverrequires more work, but eventually, the game is going to be released globally in 2020.
G5’s outlook for 2020
G5’s goal in 2020 is to return to year-over-year growth while maintaining profitability and positive cash flow.
However, G5’s investments in the workforce are putting pressure on short-term margins due to increased fixed costs. This pressure is going to ease with the growth in revenue generated by the games released late last year and those that will release in the coming months. CEO Vlad Suglobov also wrote that the company is committed to responsible, reasonable, and efficient marketing in 2020 to deliver growth and a positive profit margin.
Vlad Suglobov does not expect outstanding profit margin in the first half of the year, most likely at the lower end of the historic range before Q3 and Q4 2019. However, in the second half of the year, he hopes that with own games taking off even more, profit margin expansion is possible. The result depends on how well own games are going to perform in 2020, as they allow for higher gross margins than before.
The company continues to be financially strong and the board plans to propose a dividend of SEK 2.5 per share, in line with last year.
2019 was about optimizing our larger development teams and in 2020 G5 will start to benefit from the hard work.
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