G5 reported revenue of SEK331m which was somewhat below our forecast of SEK347m. The second quarter is a seasonally slower quarter and the company commented that its growth is currently more impacted by seasonality as most games in its portfolio now are fairly mature. Revenue from own games was down marginally from Q1 2023 while revenue derived from G5 store increased to 10% in the quarter, up from 8% in Q1 2023 and 4.3% in Q2 2022. This yielded a gross margin of 67.4% which was in line with Q1 2023 but slightly lower than our forecast of 68.0%.

Opex was close to our estimates while exchange rate effects positively impacted results on operational assets resulting in EBITDA and EBIT coming close to our forecast. UA costs came in at SEK62m, representing 18.6% of revenue which was in line with expectations. Capitalized development costs were SEK24.5m, down from SEK28m in Q1 2023 and lower than our forecast of SEK29m.

The table below summarize the Q2 outcome compared to our forecasts.

While growth in Q2 was softer than expected, there is scope for improved growth looking forward. G5 comments that it has 36 game ideas in evaluation which is up from 26 in Q1 2023. Furthermore, it has 7 games in soft launch where it sees good potential in at least one game that potentially can be launched globally in late 2023. While the financial impact from a launch of a new game in late 2023 be seen in 2024, the growing number of game ideas under evaluation suggest potential for continued growth beyond 2024E as well.

An important ambition for G5 over the last few years has been to increase revenue from own games instead of licensed games where it has successfully increased the share from around 15% in 2016 to the current level of around 70%. Together with a reduction of fees on revenue generated from Microsoft store, the company has increased its gross margin from around 50% to the current level of around 67%.

During recent years, the company has also seen increased revenue from its own G5 Store which support potential for additional gross margin improvement. The share of revenue from G5 Store has increased from close to zero in early 2021 to around 10% in Q2 2023. While the mix will vary on a quarterly basis (new game launches will initially generate most revenue from 3^rd party stores) the trend is set to continue and the company comments that it could move closer to peers that have around 25% of revenue from own channels. This gives further support to our view that G5’s gross margin is likely to continue expanding.

In summary, we have slightly trimmed our topline forecast with c2% and EBITDA with c2-3% for 2023-25E. However, with clear indications of new games launching soon coupled with a growth in early-stage game ideas, we are more confident that G5 should see better growth during 2024E. Additionally, as 2023E will be a year with low growth, this will also mean easy comps for growth in 2024E. The table below summarizes key financials for 2021 to 2025E.

With limited changes to estimates, we leave our valuation range unchanged. The base case stands at SEK415 while the bull case is SEK680 and the bear case SEK260. Our base case implies an EV/EBITDA of 9x 2024E while the share currently trades at c3x 2024E and the historical range has been 3-12x NTM EV/EBITDA with a five-year average of 7x. The table below summarise key assumptions for the valuation scenarios.