G5 Entertainment har på kort tid blivit ett av de hetaste gamingbolagen i Europa, 2017 var men det mest snabbväxande bolaget i hela Europa, Afrika och Mellanöstern-regionen. Bland ägarna hittar vi bland annat Swedbank Roburs fond NyTeknik. För nytillkomna intressenter för aktien rekommenderar vi att läsa vår sammanfattning om bolaget, som du hittar här: G5 Entertainment. Vi kommer framöver att publicera flera intervjuer med relevanta människor i branschen och kommer då alltid att redogöra när vi äger aktier i bolaget det skrivs om, vilket är fallet i G5. Men låt oss presentera vår första gäst i bloggen, Vlad Suglobov, grundare och VD för G5 Entertainment!
1. First off, can you describe who you are and how you ended up starting G5 Entertainment?
– Computers and making games were my passion from an early age. I worked in one of the first Russian game development companies as programmer during my university years in Moscow, and once graduated, we started G5 together with some colleagues. To be honest there was one year in my life when I worked on projects other than games, in a year preceding the founding of G5 in 2001, and that certainly had an impact as I realized during that year that I didn’t really want to do anything other than games at that point in time. I was 23 when G5 Entertainment was started.
2. Since those days, much has obviously happened. What is the current state of G5 Entertainment and where do you think you will be in three to five years?
– We are doing quite well, in fact the G5 share has become the highest appreciated share among all publicly listed video game companies in 2017. Our revenues grew at CAGR of 68% during the last 5 years and our earnings have rebounded strongly after the transition to F2P games, and our profit margins are growing. We have a strong team of almost 400 employees working on improving our existing games and making new ones and we have a lot of plans. As our goal is to prioritize growth, we obviously want to be much bigger in 3-5 years, but we also want to do it profitably with no dilution to shareholders. We are not a small company anymore but we have plenty of room to grow before we approach the size where mobile game companies usually start having issues with growth, I would put that at $2B/year, and we have closed 2017 with $135M in revenue and 120% year-over-year growth.
”We are not a small company anymore but we have plenty of room to grow before we approach the size where mobile game companies usually start having issues with growth, I would put that at $2B/year, and we have closed 2017 with $135M in revenue and 120% year-over-year growth.”
3. You target a very specific niche in the gaming industry. Can you tell us more about that niche and the logic behind that choice?
– From the very beginning G5 Entertainment had more success with casual genres than anything else we tried doing, and I think it took us some time to realize that and give up trying to do anything else. Around 2006 we were getting into PC casual games, and we made internally and also acquired some such games in the hidden object, puzzle, and time management genres. When the iPhone came out we brought our portfolio to iPhone and then Android and then we built up the portfolio through making more games and licensing similar games through other developers. By analyzing who is playing and paying (most importantly) we realized there was this particular age/gender segment of women 35+ that stood out for hidden object games that became our largest genre by revenue. Since then we tried to leverage our existing audience as much as possible and make games that they would like. This audience is very loyal to the games they like and they are good payers and don’t try to circumvent the monetization. We have very high average monthly revenue per paying user, arguably one of the highest among casual game developers. We got quite good at understanding the tastes of our audience and we continue making our games with them in mind although some of our recent games like Pirates & Pearls are more universal in terms of the audience.
4. Many people generally have trouble with the concept of user acquisition costs (UA costs). How does G5 Entertainment invest in UA and what is your general strategy with marketing? What are your plans for UA going forward?
– It’s a simple concept essential to any consumer business. There’s your average cost of acquiring a customer (CAC) and your average lifetime value of a customer (LTV). In the case of a coffee beverage company, it’s how much a company needs to spend on advertising to attract a new customer and, respectively, how much coffee this customer would purchase over her lifetime from this business. In our case, it’s how much we have to spend on advertising to have someone download and run our game, and how much we expect this person to make in virtual goods purchases (paying for boosts, unlocks, etc.) within the game in the next months and years (hopefully) that they will be playing this game. It has to make sense, CAC needs to be much lower than LTV for the business to grow organically, i.e. for revenues from existing customers to pay for acquiring new customers that in turn will generate revenue to acquire even more customers. Of course, we have some App Store, word-of-mouth and viral marketing going on at the same time (like random walk-ins and recommendations for the theoretical coffee beverage company), so we don’t have to pay for every customer we are getting. But we spend on advertising like any other consumer company would do. And in our case, we actually have the technical ability to track how much a particular customer or a particular cohort of customers have spent in the game and we can compare that to how much we paid to acquire them and make decisions on whether we want to spend more or less in this particular advertising channel.
”Our goal is to use UA to deliver gradual revenue and earnings growth year over year.”
If you understand this part you can get to the next one: the money we spend on marketing today is recouped gradually over some months as acquired players move through the game and some of them monetize, and after we have recouped the initial investment, we start making profit on the marketing investment. This leads to some lag in our quarterly reports. If we dramatically increase UA spending in one quarter it would reduce the profit margin but would also increase the revenue to the new level where in the following quarters we can get back to higher margins and higher earnings in absolute terms. Our goal is to use UA to deliver gradual revenue and earnings growth year over year. If we reduce the UA spend we can raise our profit margins but we prioritize long-term growth if we see the opportunity to do UA profitably, so we would choose to grow rather than show the best profit margins we can. I’ve written so much on the subject in our year-end and annual reports that I suggest that anyone who needs more information on the topic to read those.
5. One thing that we have noticed is your success on the Asian market. Generally speaking, many western companies have had trouble conquering this market. How did G5 Entertainment capture market share in Asia so quickly?
– We have found a way to reach our target audience and we have discovered that they really like some of our games, specifically Hidden City. We are one of the few Western developers that are successful in Japan, for example, and I think we have discovered that at least in Japan, casual players and our audience specifically are underserved by local companies and western games can have success if you can reach your target audience in a profitable way and if you can develop a product with universal appeal. We did not really do anything specifically to make the game appeal to customers in Japan or Asia overall, it is just a great game, appealing to the core values of our target audience.
6. You have recently settled a dispute concerning one of your top games The Secret Society. Can you tell us a bit about how that might impact G5 Entertainment going forward?
– The Secret Society game that we have acquired has been a strong performer for us, it has grossed over $100M to date and still has a loyal audience. What we would like to do is grow the game’s monthly sales from the current level. There are some things that need to be done and improved in the game, and we are working on that. We have already taken over the development and our internal team has already released one content update across all platforms. Because this is our own game now and we don’t pay any royalty, the success of the game can translate to higher profit margins. Should the game become a large percentage of our monthly revenue again, the impact on our profit margins can be substantial.
7. The game Hidden City is currently your main resource of revenue. What are your plans for the game going forward?
– As we have recently announced, we have the rights to indefinite extension of the term and G5 and the developers have just extended the term until 2024. Both G5 and the developers believe the game can continue to grow and perform and this is our mutual goal. It is great to have star games in the portfolio, and in the F2P model we seem to always have a game that is performing better than the pack and driving the bulk of revenue, but the leaders usually change once in a while. We hope that our next star game, when/if that happens, will outperform the success of Hidden City.
8. Other than your top games, you also have a couple of games in soft launch that are grossing quite good. What is the general idea behind doing a soft launch and what parameters are you looking to tweak during it?
– As I mentioned, for us the key parameters are engagement and monetization. We want to see players stick with the game and monetize regularly. We have some benchmarks that are genre-specific, and we want to see new games perform on target or ideally above target. Every new game we launch is integrated with our analytics system and the behavior of players is analyzed. If targets are not met, we make changes, tweaks and add content with the goal to achieve or exceed the benchmark performance. We also want to see UA being profitable, and there’s a whole process around fine-tuning that “front end” performance and part of the equation. The reason soft launch period can be quite long is because we must analyze user behavior over a long time. If you want to know how users will perform in your game 1 year after they started playing, there’s really no way to tell until you wait 1 year. If your game is bad, you’re going to know earlier, but if it’s good, you still can’t be certain until you actually see people play and monetize over that period of time.
9. In your opinion, what are G5 Entertainments biggest risks and what are the biggest possibilities?
– Risks are the same as for other listed game companies. What if the sales peak for current games and new games are not as successful? This question is hanging equally over all game companies but maybe less so in our case when we have a portfolio approach and leaders of our portfolio change every few years, and we don’t rely on a single game or a single brand. Then there’s competition, there’s a risk for any game company that competitors are going to prevail in its core market. Then there’s technology risk, what if there are big changes like the ones that iPhone started when it came out (even though I don’t think this is likely to happen any time soon)? I think we have a track record of adapting well to the changes in the market, changes in the technology, and competing successfully against much larger companies, every time coming out bigger and stronger from every challenge. I think this proves that it’s not a coincidence or a one-time thing and that we have a very capable management team and a company overall and if we stay focused and do our best and aim higher there’s no reason why they can’t continue to perform.
”I think we have a track record of adapting well to the changes in the market, changes in the technology, and competing successfully against much larger companies, every time coming out bigger and stronger from every challenge.”
– The possibilities are quite exciting. So far, we have two games that have grossed over $100M to date. There’s possibility to repeat that success with more games. There’s possibility to take the revenue per game even higher. There’s possibility to grow in Japan and in China, which together with USA are three largest game app markets in the world. There’s possibility to continue growth in USA and EU and rest of the world as well. There’s a little more distant possibility to put more effort into new developing markets with great potential like Brazil and India. There’s pretty much unexplored advertising revenue opportunity, as we don’t serve any ads to our players right now. Then there are other genres that we can go into that appeal to our core audience, for example Match-3, which is a huge and also fast-growing part of the overall market. Pursuing all these opportunities will take time, there’s no specific timeline, but it’s on our radar and we are working on it, while we continue to grow very fast and expand our profit margins with the games we already have.
10. Last but not least, why should our readers invest in G5 Entertainment?
– It’s difficult to find a fast growth company like G5 on a public exchange. We are one of the fastest growing companies not only in Sweden or Nordics but in the whole EMEA region. If you look at our private competitors, some of them are really good companies, some of them may be growing even faster, but you can’t invest because they are private and they won’t go public ever or until the fast growth phase is over. If you look at other listed companies in our peer group, quite often they were VC-funded and brought public when most of the growth curve was already behind them. After all, what is the point of sharing fast growth with public investors when you can keep it to yourself? G5 is quite a unique case. The company went public very early in its lifetime at a small size, which is unusual, and has altered its strategy since then and came across this growth opportunity which did not even exist in 2006 when we went public. Because of this unique history of G5 Entertainment, investors in the public markets had, and continue to have, the opportunity to participate in the fast-growth phase of the company. You should of course mind the valuation which can go up and down irrationally but pay attention to fundamentals and peer comparisons. G5 can be a great opportunity if it fits your risk profile and the moment is right. The underlying market is forecasted to grow for years ahead, G5 Entertainment has a strong proven management team and marketing team and a track record of using UA in a smart way to deliver growth in revenues and earnings. Then there’s leverage in the business model that allows us to expand profit margins as we grow. And, last but not least, our games are great, try them out or recommend to someone who fits our target audience profile and see what they think.
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