Årets börskomet: ryskt dataspelsföretag
Exklusiv intervju med G5 Entertainments vd Vlad Suglobov.
Under finanskrisen kunde G5-aktien köpas för en börskurs på nästan 2 kronor. Sedan dess har aktien stigit till nästan 12 kronor på sistone, och ligger nu kring 10.
Realtid.se får tag på vd Vlad Suglobov.
What country are you from? How old are you?
– I'm turning 33 in a few days. I am born and raised in Moscow, and I still spend a lot of time in Moscow.
Where is G5 based?
– G5 group is listed in Sweden on Aktietorget (ticker G5EN) through its head entity G5 Entertainment AB. Our largest development office is located in Kharkov, Ukraine, and we also have some developers in Moscow.
Did you start G5? When? Why?
– I co-founded G5 group in Moscow in 2001 after graduation from Moscow State University.
– We were a bunch of guys with the desire to make games, and not much experience in this area, but we were learning quickly.
– We started making downloadable mobile games, and we released one of the first mobile games on Verizon Wireless in USA when they just launched their paid games service.
– The success of first games helped us build the team and build a name, and in 2005 we were contracted by Walt Disney to create The Pirates of the Caribbean mobile game.
– The game was a big success, and the contracts with Electronic Arts, THQ, Sony, and Konami followed.
– We made a number of games based on big brands like The Sims, Star Wars, Simpsons, etc, before we decided it is the right time to start developing and publishing original games.
– It was around the time when Apple introduced iPhone and then App Store.
– We stopped developing games for other publishers and focused on building our own publishing portfolio and brand.
– By the end of 2010, we are going to have over 50 games in our portfolio for iPhone, iPad, Sony PSP, Nintendo DSi, PC, and Mac.
How many employees does G5 have? What functions are they divided into? Where are the employees geographically?
– Counting employees and contractors, we are close to 70 now.
– Most of these people are in Khrakov, Ukraine.
– Most of our staff is involved in product development; game design, programming, creating artwork for games. Smaller part is management and marketing.
– We only started adding dedicated marketing staff in the beginning of 2010, so it was a quite dynamic process.
– We are also using contractors from around the world, our PR managers and writer are based in California.
Do you plan to hire more people? How many? When? For what function?
– We have announced that our goal for 2011 is to release over 80 games, compared to 30 games released in 2010, so we need to increase our development and marketing capacity.
– We are adding more programmers right now, primarily at our Kharkov location. We are also going to use the services of external studios, under our supervision, to achieve planned output.
– We are in a very good situation now: We have strong revenue growth, we are proftable with good profit margins, and we are cash flow positive, so we can grow organically while remaining profitable and cash positive. It's an amazing window of opportunity we're in, we really want to keep doing it.
What revenue do you expect for 2010? And the years ahead?
– Our previously released forecast for 2010 is revenue of 22 MSEK, with operating result of 9 MSEK and EPS of 0.97 Kr. For 2011, we issued the forecast of 40 MSEK revenue, with operating result of 15 MSEK and EPS forecast of 1.4 Kr.
How will you be able to reach that?
– If you look at our quarterly revenue growth in 2010, it is very impressive.
– In order to make 2010 forecast reality, we need to make less revenue in Q4 2010 than we made in Q3 2010! And our revenue in Q3 2010 was roughly double the revenue we made in Q1 2010. So the 2010 forecast is quite conservative.
– We can achieve it by continuing to do what we're doing - releasing more great games.
– As for 2011, consider this – the management aims to release 80 games in 2011, compared to 30 releases in 2010. This is almost three times as many games as we released in 2010.
– That's the plan – we see underserved demand and we will send more high quality products to the market.
– And the market is growing meanwhile, with more and more people buying iPhones and iPads. We will be releasing our next forecast update in the first days of January 2011.
– We release updates after the end of each calendar quarter, so at the end of Q4 2010, during the first days of Jan 2011, we are going to release an update.
What revenue growth level has G5 shown in the most recent quarters? Why? Are you satisfied with that level? Why?/why not?
– In Q3 2010, we had 6.5 MSEK revenue compared to 3.7 MSEK in Q1 2010. In dollar terms, we nearly doubled revenue Q3 2010 to Q1 2010, but the Swedish Krona strenthened during Q3 and undermined the achievement somewhat.
– Our revenue grows every quarter, so as we move into 2011 and start comparing 2011 results to 2010 results, our forecast for 2011 is going to look very realistic.
What result after tax do you expect för 2010 and the years ahead?
– Our current forecast for earnings per share for full year 2010 is 0.97 Kr. We are updating the forecast at the end of the calendar quarter, so expect an update in the first days of January.
How hill you be able to reach that? Do you for example have any operating margin target or any other target for your profitability? At what level? Why? How will you reach that? What profitability level (for example operating margin) has G5 shown in the most recent quarters? Why? Are you satisfied with that level? Why?/why not?
– For the period January-September 2010 we have profit margin (EBIT to revenue) of over 45%.
– Our profit margin is growing for the third consecutive quarter. Our profitability level depends on the mix of our publishing portfolio.
– When we release our own games on new platforms, we keep all revenue.
– When we take other studios' games to iPhone, iPad, and PSP - we share a part of the revenue with the studios.
– At the same time, we have games which sell for almost two years, with steady sales coming every month, so the revenue builds up as we release more and more games, and it gradually increases our profitability.
How would you describe G5's business model?
– G5 provides players with high quality casual entertainment wherever you are: on the go, at home, and in the office.
– We work to bring amazing casual games to the device that you are using, so you could play whenever you want to play: your smart phone, your tablet computer, your PC or your Mac.
– We sell games all around the world – modern day digital stores allow us to reach customers anywhere with minimal distribution costs and low environmental impact.
– We develop so called "casual games". There are games that appeal to widest audience: kids, adults, elderly people, men and women. What differentiates these games is that they are very easy to start playing, they are addictive, keep you engaged, and challenged as you progress through the game.
– We focus on so called Time Management and Hidden Object genres, and also Strategy genre, all of which I describe in more detail below.
Do you develop the games from scratch? How long time does it take?
– We distribute games as digital downloads from our site, and through electronic game stores like Apple App Store, Sony PlayStation Store, Nintendo DSiWare service, through other online portals.
– Making a game from scratch can take anywhere from 8 to 12 months, for a big game. Taking a game from one platform to another is usually accomplished in a few months. We do it fast and with high quality thanks to our great development team and Talisman technology.
Who is your customer for the games?
– We distribute games as digital downloads from our site, and through electronic game stores like Apple App Store, Sony PlayStation Store, Nintendo DSiWare service, through other online portals.
What price do they pay?
– Our games are very affordable. We charge between $2.99 to $9.99 (or local currency equivalent), depending on the game. And we always provide a free trial version which lets you try the game – either a few levels, or a limited period of time. If you like the game, you can purchase the full version with a few clicks.
How many games do you currently have in your "catalogue"?
– Right now we have 43 games across several platforms: iPhone, iPad, PC, PSP, Nintendo DSi. We have a very dense release schedule in Q4 2010, and our goal is to bring this number to over 50 before the end of the year. We just announced that the management goal is to release over 80 games in 2011.
What games are the most popular? Why? Can you describe those games? What do you do as a game player in those games?
– Most of our games are so called "Hidden Object" and "Time Management" games. We also develop and publish very popular Virtual City strategy game franchise. These three genres are the most successful for us, financially.
– Hidden Object games are similar to quest games from early PC era, but modern. Hidden Object games are much more enjoyable and easier to play: graphics are better, storylines are more engaging and game mechanics are made so that even people who never played this kind of games before can enjoy them instantly.
– In Hidden Object games your goal is to search for certain objects on the scene that is displayed on your screen. For example, you see a door to the mansion, and you need to get inside, so you search for a way to unlock the door. You notice a screwdriver laying on the floor, and you drag-and-drop it on the door lock - voila - the door is open, and you can get inside the house and continue advancing through the storyline. This is a very simple example, and there are more complex tasks, involving finding multiple objects and solving interesting puzzles.
– Time Management games are usually about managing some small business or other public operation. It is actually very fun! In our Supermarket Mania game and its sequel Supermarket Mania 2 you help a cute blonde girl Nikki to manage the store: you run around the store stocking shelves and helping customers to make sure everybody gets what he wants on time. Sounds simple, but with many customers and shelves you need to work out a certain strategy before you can successfully complete the level. The game is very easy to start playing, with the first levels being very simple to play, and you can start enjoying the game instantly, but as you move to further levels, it will become more and more challenging - just enough to keep you interested to finish the whole game.
– Our strategy game franchise is called "Virtual City". It is partly a strategy, and partly a time management game. This is one of my favorite games. It's a cross-breed between Transport Tycoon and Sim City game mechanics, but the interface is made very easy and intuitive, and we provide players with 50 pre-set scenarios, where they need to resolve certain tasks in a given city.
– In the game, you have to build certain structures, and then make sure the goods are transported between them so that the economy works. You need to organize logistics of production chains: you need to make sure that the grain is transported from the grain farm to the mill, then you take flour to the bakery, and when you also supply the milk to the bakery, the bakery produces cakes, which you need to supply to the shopping mall. And then you can transport citizens to the shopping mall, so they make purchases. By establishing these supply chains, and building housing, you improve the environment of your city, and you get higher population. You can then build entertainment buildings, set up some fireworks and make them happy. It's a fairly big part of the game that you need to find the balance between industrialization and maintaining high environment level, so you will need to plant trees, upgrade your production buildings, etc - otherwise people will leave the city.
What platform do your games use? Why?
– Our games are now available on iPhone, iPad, Sony PSP, Nintendo DSi, and PC platforms. We will be adding Mac platform in the near future, and we will support more smartphone platforms in 2011. We only distribute our games digitally. Our games are very affordable, and we can keep our prices low with digital distribution, when there's no need to pay for packaging and store shelves. There's also a positive environmental effect. We sell millions of games – imagine how much plastic, paper, and fuel is saved by using digital distribution compared to retail.
– To be able to develop our games for such a wide range of platforms, we have developed proprietary cross-platform technology called Talisman. This technology is a framework that abstracts the game logic from the technical details of the platforms it's running on. So once we have one game running on the platforms, we can bring all our other games to this platform.
What game user group do you focus on? (age and/or other characteristics?)
– This is an exciting part of developing casual games. When you look at the audience, it's the most diverse audience you can imagine. First, it's roughly 50x50 male/female. Women play a lot of these games. Men play a lot of these games too, even though some might not want to admit doing it. In terms of age, it's anywhere between 6 years old (my daughter plays our hidden object games all the time), and 70 years old. It's really amazing that by following certain rules while making a game you can make it enjoyable to people of different age. That's what we do. It's also interesting that game experience of our players is very different. Some are hardcore gamers who play casual games to take a break from World of Warcraft, and some are playing their first ever game on an iPad. And both enjoy the game. When we develop a game, we don't focus on any specific portrait of the player - we just make sure the game is intuitive, easy to start playing, and fun.
What is your own favourite game of G5's games? Why? Can you describe that game?
– In strategy games, my favourite is "Virtual City". I played a lot of Sim City and Transport Tycoon 15 years ago – when I had a lot of time to play games. Since then, I think these games were not moving in the right direction, and we tried to fix it in Virtual City. If you enjoyed Transport Tycoon or Sim City years ago, and then stopped playing these games – Virtual City is for you - you will get a lot of fun out of it. I describe how you play the game in more detail above.
What trends do you see for your type of games in the future? Do you have any upcoming launches of new games? When? Of what games? Any big selling games in particular that you expect? Why?
– We are releasing games very often. On PC, we just released Supermarket Mania 2 - the sequel to our best-selling time management game with many millions of downloads. On iPhone, we just released The Mystery of the Crystal Portal 2 - the sequel to the very popular hidden object game which spent over 1000 days in Top 10 charts of the leading casual game portals. The game has stunning graphics, and a lot of people are waiting to learn how the storyline of the first game continues. We also recently announced that we will bring all three games in Treasure Seekers franchise to iPhone and iPad. In November, we released the first game in the series, and it became our best-selling hidden object game. The second and the third parts will be coming out soon, we are confident these games are going to be very big sellers and will set new records for hidden object games. Overall, we have a strong iPhone/iPad lineup for 2011, including sequels to our most successful franchises.
– We have very good relationship with Apple, and we usually receive certain support from them – they often feature our games on the App Store. Sony and Nintendo are also very friendly with us, and Sony Computer Entertainment Europe also helped us promote games on the PlayStation Store.
– In the App Store, you can find our games in the charts in most territories, our games are especially popular in Europe. Overall, around 40% of our sales come from European countries, and around 40% from North America. Our biggest sellers, like Virtual City, were in Top 10 Grossing (by revenue made) Games charts of the App Store in tens of countries around the world.
What companies do you consider your competitors? What is g5's strenths and weaknesses in comparison with them?
– We see all major casual game companies competing in this space - I mean portable platforms like iPhone and iPad, including much larger companies than G5. So far, we have the largest offering of casual games on the App Store among all casual game publishers, and our games are technically superior. Our goal is to keep this leadership both through the number of games released and the excellent quality of our games.
What threats and opportunities do you see for G5 in the coming years?
– Our vision is that portable platforms will become the largest market for casual games in the next few years, and the opportunity is to ride this wave and get big quickly. G5 has proven that we are capable of making successful original casual games like Virtual City and Supermarket Mania, and we can successfully adapt and market games of other developers, like Mystery of the Crystal Portal and Treasure Seekers. Our portfolio is diversified so we don’t depend much on the success of the particular game. Threats are increasing competition on the market, increasing competition for quality content, and the ability to deploy new games fast enough. We are addressing all these risks: we have the largest casual games portfolio on the App Store among publishers, we have strong ties with the best casual game studios, most of which are based in Eastern Europe, and we are building up our development capacity to almost triple the output in 2011 compared to 2010.
How is G5's financial position?
– As of the end of third quarter - September 30th, our Current Assets were 6.5 MSEK. Current ration (Current Assets divided by Current Liabilities) was 3,34 - which means we have no problems with liquidity.
Do you have cash in the bank? how much?
– Cash at bank was 2.4 MSEK at 30 September, and accounts receivable were at 3 MSEK more. Accounts receivable become our cash flow within 2-3 months. We are adding cash to our bank account every month for the past six months, the positive cash flow is growing quickly, and this is going to continue into 2011. With the margins we have, we have enough positive cash flow to continue aggressive growth.
Do you have interest bearing debt? How much?
– We only have some short-terms liabilities in the normal course of business, but we don't have any long-term debt.
How many shares are there in G5?
– 7,419,574 shares
What is the company's market cap?
– Around 74 MSEK right now at around 10 Kr per share market price.
What do you think about the current level of G5's stock price? Is it correctly valued? Or is it too high/too low? Why?
– Our stock price at the current level of around 10 Kr is at roughly 10 P/E to forecasted earnings for 2010, and at 7 P/E to forecasted earnings for 2011. During 2010, we had to raise our forecast three times, and we have aggressive plans for 2011 – our goal is to release 80 games compared to 30 games in 2010. Personally, I think that current level is very attractive, and I recently bought more shares at current valuation – I'm investing in G5's vision. Assuming the forecast for 2011 is going to be delivered, and applying 15-20 P/E to projected earnings – which would make sense based on continuous high growth which is likely to continue, that's 20-30 Kr price range for 2011.
Are there any equity analysts analysing g5 and your share price? How many? From what banks/brokerage firms? What recommendations/target prices do they have for the stock?
– I saw some analyses on Axier and RedEye. These were usually saying we're undervalued, more or less repeating the same logic as shows above in determining possible price range in the future.
Who are the main owners of G5? Are you also an owner? What is your ownership level? What is your monthly salary? Do you have any bonus program as well? Option program or similar? What are the conditions for such programs?
– The founders and managers of G5 group are the largest owners and own approximately 28% of shares, with my personal share at around 9.7%.The remaining shares are distributed among several hundred of mostly Swedish investors, private individuals and companies – some of these are invested ever since we listed the group in Sweden in 2006. The management of the group, including me, has participated in new share issue when we raised additional capital in 2008. In the group, we have certain motivation bonus programs for staff, but these are cash payments which depend on the performance, we don't have any stock option plans or anything that can lead to dilution for the shareholders. G5 is profitable, cash flow positive, we can grow fast by reinvesting the profits, and we are still gong to have cash left.
Can there be any dilution for existing shareholders, for example through option programs or convertibles? How many shares of g5 can be added at most through that dilution? At what exercise prices?
At the moment we don't have any option programs in place, and no convertible debt outstanding. So there's no threat of dilution due to these reasons. In the past, we attracted capital to the company through new share issue. It was done with preferential subscription rights to the existing shareholders, and the result of that capital infusion was that company share went from 3,9 Kr at the end of 2008 to 10 Kr now. The management of the company also participated in that share issue, and we continue to be heavily invested in G5. It aligns our interests with the interests of investors. G5 is growing, profitable and cash flow positive, and we want to keep this situation going forward, it's the best combination for growing shareholder value.
Long term vision: What is your vision for G5 in 5-10 years time? What will the company look like then? How big will it be? What will be it's focus?
– We see major changes in how games are played. With the introduction of the latest smart phones and tablets, people are getting unprecedented computing power on the go, and this time the devices are convenient to use, and provide a lot of entertainment content at lower prices. More and more people will switch from using conventional phones to smart phones like Apple iPhone, and more people will use tablet computers in the following years. Eventually, the number of these devices will be larger than the number of PCs and game consoles. The market of casual PC games is worth hundreds of millions of dollars, but it's going to expand dramatically because of new platforms. It's more fun to play casual games on iPad than PC, and when you are on the go, you can still play games on your iPhone. This process of moving from PC to smart phones and tablet computers will happen for the next several years, and it can turn G5 into one of the leading companies among casual game publishers and mobile game publishers. We can get very big – I'm talking about hundreds of millions SEK in annual revenue – just by focusing on casual games for these new platforms. Casual games are going to be the most popular content on smartphones and tablet computers – because these games can be enjoyed by everyone.
Acquisitions: Does G5 plan to do acquisitions? What type? How large?
– This is not something we are looking to do in the short term, but we might be looking to do it when the situation is right, and there is a good fit. We would be interested in buying companies, or buying the assets of companies with successful casual game franchises which we could expand to other platforms and develop further. We have successful experience doing this. After acquiring Shape Games, we brought their games to iPhone, iPad, and other platforms, with great success.
Can you name companies you would like to buy?
– There is nothing we can talk about it at the moment, we are not having any discussions like that.
Or is there a probability that G5 will be acquired by another company?
– As one of the leading companies in the field, with the largest portfolio of casual games on the App Store, profitable, cash positive, with world-class development team and unique cross-platform technology - we are a ready-made monetization machine for casual games, so I'm sure a number of big companies would be interested to acquire or merge with G5 at some point in time. However, in 2010 G5 is showing the growth rate – in terms of revenue, operating result, and capitalization - which is impossible for larger companies. So from shareholder perspective, it is better for G5 to stay independent company as long as we can sustain such high growth rate. We are avoiding such discussions at the moment, although we can feel certain interest from other companies.
Is there any chance that we can meet and take pictures of you? Can we video record when you (or somebody else at G5) plays games from G5?
– I mentioned I'm leaving for two-week vacation tomorrow. I can make and send you some pictures if you want - let me know what would you like - me holding an iPad or something :) Same about video - I can make one with iPhone 4 and send it over to you, if that's ok with you.
Geographical strategy: In what countries are you selling your games today? What countries/regions give the most of your revenue? Why? What is your strategy for geographical expansion? What countries/regions are you focusing your expansion on? How?
– We sell games literally worldwide. Anyone, anywhere in the world can download our free games, and if she has a credit card – she can purchase the full version. 40% of our revenue comes from EU, 40% from North America, 20% from the rest of the world. We are focusing on EU and North America at the moment, and we want to have more pronounced strategy for Asia during 2011.
Investors are a bit afraid of Russia and the Russian mafia. One straight question: Have you ever been convicted for any crime? What crime? When? Where? Or has any direct or indirect owners to G5, or board members done anything criminal? Or do they have any connections to criminals like the Russian mafia? Does the Russian mafia have any influence over G5? Have you noticed the influence of the Russian mafia somehow? How? When? Where? Is there any reason for Swedish investors to worry about the Russian mafia or criminality around G5?
– Seriously? Is it a joke? We're making family-friendly games, Ian. We're programmers, game designers – nerds (with the exception of our Business Development Director Julia – she's not a nerd). I haven’t seen a single Swedish investor (and I've seen some since 2006, doing roadshows all around Sweden and meeting people in person) who would mention that he's afraid of Russian mafia and would ask me if I'm a part of Russian mafia. You're the first person who's asking. But I understand the concern – I've seen "The girl who played with fire" recently, too, it's scary indeed. I had to pay a couple of parking fines in my life, but otherwise the answer is "no" to all your straight questions.
– But tell me, do you really believe that I would answer "yes" if I was a part of mafia??
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