G5 Entertainment CEO-interview 3

2011-05-26 11:46, Edited at: 2011-05-26 11:53

G5 Entertainment is a developer of downloadable games for iPhone, iPad, Mac, PC and other portable consoles. The companies portfolio contained over 50 games at the end of 2010 and the goal is to release 80 more during 2011 including Games for the Android market.

General information:G5 Entertainment is a developer of downloadable games for iPhone, iPad, Mac, PC and other portable consoles. G5 actually has the largest amount of casual games on Apples App Store. The companies portfolio contained over 50 games at the end of 2010 and the goal is to release 80 more during 2011 including Games for the Android market. Compare this to Starbreeze for example that only has a handful of games and is planning to release 1 game during 2011. G5 also has positive cash flow and now long-term loans.

Q1 Report:The q1 report was rock solid. EPS (VPA) was 0,44 Sek for q1 and the cash flow was 3,1 Msek. G5 stated that they will make one release per week from now on and the probability for raising the forecast in the beginning of July was high.

Interview: Yesterday I send a couple of questions to Vlad Suglobov, the company CEO. I got the answers today.

Hi Vlad

I am happy to see that the extension of language translation has been a success for you in Asia. SMM2 has rely become a success in Asia and i hope you will continue to translate the games you develop to the app store.

1.Do you have any plans to further extend to more languages? For example Arabic, which is the 5th most spoken language in the world or Hindi the 4th and Portuguese the 6th?CEO:****We are going to be busy supporting Asian languages across our portfolio in the next few months. It only makes sense to support languages of the countries where Apple has major marketing presence.

2. How is the process of finding new personnel ongoing?CEO: It's going good.

3. When is ts3 coming to IPhone/Ipad?CEO: Very soon, please follow our news

4. Among your development of games you are developing 2 new games (100% G5), are they going to be in the casual game segment, can you give any hints of when they are to be released and what they will be about?. CEO: All games we develop are casual games, Time Management, Strategy, or Hidden Object. We develop more than two own produced games. Please follow our news for more information. But we do have new releases for 2011, of course_._ My comment: The own produced game gives G5 more income than the co-produced

5. There seems to be some negative views about you new salary bonus system. Can you explain why you have it and how it is formed, limit etc?CEO: We have this bonus system since Q2 2010 as a compromise between management's desire to not be underpaid, and the board's desire to tie any compensation increase to the company development. I think that the present system is a great deal for shareholders. This year, as always, the board will review the compensation and the bonus, and will adjust the system as needed for 2011 to ensure the successful development of the company and shareholder value, and the retention of the key staff members.****There's no limit on the bonus as of yet, but the board is going to put one on the bonus this year. The reason why there's no limit yet is that when the bonus system was put in place last year, there was no idea that the bonus might become "too big" one day. In fact, everyone who works at G5 has one or another form of a bonus tied to their performance. I believe this is a worldwide accepted practice.****The word "bonus" has got "bad" meaning recently with all those big guys on Wall Street taking away hundreds of millions of dollars when shareholders were losing money. It's the same word in case of G5, but the size of our bonus is so small in absolute terms and the company is making money and shareholders profited big time. It's hard to believe someone considers this a "bonus" in the same sense of the word. If there was an instance when a total compensation received by G5 officer would be disproportional to achieved result and/or above the market – this would be worth discussing. But it did not happen yet, and the board won't let this happen, so there's nothing to worry about.****I am a big believer in incentives. And good incentives can produce extraordinary results, like G5's result of 2010. My comment: I do not see any negative issues with this arrangement.

6. Have you seen any increase in downloads in q2 compared to q1 on IPhone/Ipad due to the release of the white IPhone and the Ipad 2 release in Asia? CEO: We have definitely felt an increase in the installed base of iPads_._ My comment: great information that confirms my own analysis of the sales figures and number of reviews for SMM2 the last two weeks compared to previous releases.

7. Do you think that the app game market will experience any mergers or acquisitions this year, since the market comprises of many small firms and a couple of big? CEO: My personal view is that the best strategy in the market right now is growing organically if you can do it at quick pace and without attracting extra capital (like G5 does). That said, I think consolidation is an ongoing process in this industry already. My comment: I believe that the consolidation will continue and that G5 will be interesting for a bigger company if they continue to grow like they have.

Valuation and future:

G5 is valued to a cash adjusted pe-ratio of 10 today at the stock price of 21,6sek. This I based on the companies EPS at 1,9 sek for this year. I am almost certain that this is to low EPS for the year and will not be surprised if the forecast will be revised already in the beginning of July. Keep in mind that the Apple market is growing and that G5 will release much more games from now on, including too android. Ok, the competition is rising as well but G5 has a solid customer base that now also includes the Asian market with the translation to Japanese and Chinese of their games. G5 I still my top pick of the year and for the forthcoming years. I think that the EPS might come up to as high as 3 sek this year and 4 sek next year. Then we will have stock prices of over 40 this year and 60 next year.

Good Luck!