G5 reported revenue of SEK317m for Q4 2023, which was c5% lower than our forecast of SEK332m. We had forecasted a sequential improvement on the back of positive seasonality while the company instead saw a sequential decline driven by soft performance by its older games portfolio. The company comments that it saw stable performance from its active portfolio and strong performance from the licensed game Hidden City. While revenue from G5 Store continued to increase in the quarter, the soft performance from own vs licensed games yielded a lower-than-expected gross margin which came in at 67.6% while we expected 68.5%.

On the back of the soft topline and lower-than-expected gross margin, the reported EBIT of SEK10m was well below our estimate of SEK35m. The deviation also stems from higher-than-expected opex which came in at SEK104m while we expected SEK88m. However, this was largely due to negative currency effects from a lower USD/SEK which impacted opex with around SEK14m in the quarter and adjusted for this opex was close to our expectations. The table below summarize the outcome compared to our forecasts.

G5’s growth has been lower than we expected during 2022-23 which has been partly due to a weak market but also due to a lack of new games being released. The lack of new games being released is partly due to the new development funnel which means that games that are not deemed to have good growth potential are not launched globally. The target is to release 1-2 new games globally per year and one new game, Twilight Land, was launched globally in late 2023. The game has seen positive reception initially with a gradually improving position on gross ranking lists in mobile app stores. The company also comments that the game is doing well at attracting and retaining new users while monetization is not fully developed. As the game mechanics are similar to other games in G5’s existing portfolio, the company is confident that it will be able to improve monetization which should yield growing revenue from the game in the coming quarters. Furthermore, the company reiterates its target to release 1-2 new games during 2024 supporting growth in later in the year and in 2025.

While we continue to see potential for improved growth from new games, the company saw a softer than expected growth from its existing portfolio in Q4 and in particularly from its games that are in the harvest category (Old Games). Games in the active category (New Games), like Sherlock and the Jewels family, saw stable performance in Q4, although we had expected some growth as Q4 is typically seasonally strong. While a stronger overall mobile games market could support growth for the existing portfolio in 2024, we have adopted somewhat softer growth assumptions for G5 in 2024. The chart below illustrates the development of G5’s different game portfolio categories in 2020-26E.

In connection with the Q4-report, G5 announced that it has carried out cost optimizations by a reduction of 60 employees (7% of total FTEs). The company comments that it has been able to do this by using more generative AI while also adding that the closed positions were found in development as well as sales and administration. Based on reported staff costs for 2022 (SEK329m with 961 employees by year-end) we estimate that this can lower the cost base annually by around SEK20-30m. Furthermore, the company also expects amortizations to gradually come down during the year which will have a positive effect on EBIT. However, this only partly mitigates the negative effect from our topline forecasts which are cut by 5% for 2024-25E, and as such, our EBIT estimates for 2024-25E are cut by c14-18%. The table below summarizes key financials for 2022-26E.

On the back of the reduced estimates, we have lowered our valuation range. Our new base case stands at SEK330 (SEK385) while our bull case is lowered to SEK530 (SEK630) and the bear case to SEK130 (SEK190). The base case implies a valuation of c7-8x 2024-25E EBITDA, while the five-year average NTM EV/EBITDA is c7x. The table below summarizes the assumptions for the valuation scenarios.