G5 reported revenue of SEK297m and EBIT of SEK39m (SEK30m adjusted for positive fx revaluations) which can be compared to our estimates of SEK317m and SEK31m, respectively. Gross margin was solid coming in at 68.1% and supported by continued growth of revenue from the G5 Store which saw 55% YoY growth and accounted for 13.5% of revenue in the quarter. The strong gross margin coupled with lower-than-expected UA costs (16.9% of revenue compared to our forecast of 19.5%), yielded an EBIT-margin of 10% (adjusted for positive fx impact) which was in line with our forecast. Cost control was also solid, with other opex seeing a sequential decline driven by lower R&D costs where the company highlighted potential for further efficiency improvement going forward.

G5 saw a larger-than-expected revenue decline than we expected during Q1 2024. This came both on the back of a sequential decline in Sherlock and the Jewels family games while Twilight Land continued to see limited revenue contribution as G5 works on optimizing monetization for the game. G5 commented that Twilight Land was released in a more early stage than what is anticipated for future releases, suggesting a quicker path to meaningful revenue for future game releases. Looking forward, the company remains committed to releasing 1-2 new games during 2024, although more likely in H2 rather than H1 2024. Furthermore, the company highlights that it sees seasonal challenges in Q2 and Q3 suggesting that growth will remain subdued in the short term. On the positive side, G5 saw a sequential increase in monthly active users (MAU) which could be first sign that the revenue decline is bottoming. The company also saw continued growth of revenue generated from the G5 store and although the sequential increase has slowed down, there is likely more potential which should support a continued improvement of the gross margin.

In summary, we take down our short-term growth expectations on the back of the report and we now expect a small sequential revenue decline during Q2 and Q3 2024. While we continue to forecast growth in 2025-26E, it will come from a lower base. As such, we also lower our estimates for 2025-26E with EBITDA coming down c9-10%. While we have been overly optimistic about G5’s growth potential, we believe the risk for further negative surprises is limited as comps get easier while there is also increased potential from new game releases. 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 SEK315 (SEK330) and our bull case is lowered to SEK510 (SEK530) while the bear case is unchanged at SEK130. The base case implies a valuation of c8x 2024-25E EBITDA, while the five-year average NTM EV/EBITDA is c7x. The table below summarizes the assumptions for the valuation scenarios.