G5 reported revenue of SEK327m which was 3% lower than our forecast of SEK338m. Revenue from G5 store continued to grow with a 20% sequential increase from Q2 2023 and it now represents 12% of revenue (up from 10% in Q2 2023 and 5% in Q3 222). The mix of own games and third party games remained stable at around 71% and together this supported a strong gross margin which came in at 68.1% while we forecasted 68.0%.

The company reported EBIT of SEK22m, which was below our estimate of SEK35m. However, adjusted for a write-down of SEK10.7m relating to the licensed game Hidden Epee not meeting expectations, the adjusted EBIT was SEK33m. EBITDA, which excludes the write-down, came in at SEK73m compared to our forecast of SEK74m. This was supported by UA costs coming in slightly lower than expected while opex excluding the write-down was close to our estimates.

The table below illustrates the Q3 outcome vs our estimates.

G5 continues to expect a new game release during Q4 which creates potential for improved growth in 2024E. While it is difficult to estimate what a new game can yield in terms of revenue, some of the games released in the last years can be a guidance. The release of Sherlock illustrates the potential of a very successful release where the game achieved revenue of around SEK25m 6 months after release. The game has since then plateaued at a quarterly revenue of around SEK70-80m. The company’s three Jewel games also represent strong release examples. Together, these games have generated a quarterly revenue of around SEK100m during 2022-23, implying an average of around SEK30m.

Using these games as guidance, we estimate that a successful new global game launch could add around SEK25-50m in quarterly revenue 6-12 months after it is released. With 1 game expected to be released in Q4 2023 and 1-2 in 2024, we estimate that new games can yield an annual revenue upside potential of around SEK50-100m for 2024E and SEK200-400m for 2025E. G5’s pipeline remains strong as well with 37 game ideas in evaluation and 8 in soft launch development supporting the company’s ambition to launch 1-2 games globally per year. While G5’s existing game portfolio of own games and third-party games is likely to see gradual decline, the new games should support a small total uptick in 2024 and continued improvement in 2025E as the chart below illustrates.

Looking into Q4, G5 expects stable performance in Q4 while it sees some potential for upside from positive seasonality. With Q3 being softer than expected, this implies a slower year-end than we previously expected. As such our 2023E topline have been lowered by 2% and EBITDA by 3%. While we expect improved growth for 2024-25E this comes from a lower based than before and with a slightly lower growth rate, we have lowered 2024-25E revenue and EBITDA by 5-7%. The table below summarizes key financials for 2021-25E.

While we leave our longer term base case assumptions largely unchanged, the lowered near-term estimates gives a slight negative impact on our valuation. Furthermore, we have also raised our assumptions for the risk-free interest rate from 2.5% to 3.0% which increase the discount rate from 10.5% to 11.0%. With these changes our new base case stands at SEK385 (SEK415) which implies an EV/EBITDA of 9x 2024E while the five year average has been c7x. We have also revised our assumptions for the bear case to reflect a more severe negative scenario and our new bear case stands at SEK190 (SEK260). The bull case is also lowered to SEK630 (SEK680) which comes on the back of the lower near-term estimates and the increased discount rate while the long-term assumptions are unchanged. The table below summarise key assumptions for the valuation scenarios.