GFINITY PLC (LON:GFIN)
28 October 2019
Tech and Media Gfinity - Building on leadership in esport
52-WEEK HIGH 9.38p Continued growth 52-WEEK LOW 3.25p Gfinity (LON:GFIN) is a world leader in the fast-growing market for PRICE 3.80p esports. The company designs, develops and delivers full end-to-end esports MARKET CAP MLN £18.22 solutions. This includes bespoke content, tournament and event solutions for commercial partners via the company’s proprietary online platform, live broadcasting studio events, and content distribution solutions. Distribution Share Price includes the Gfinity community platforms that provide the company with its own online media channels attracting millions of consumers each week and which are building a fast-growing revenue stream.
These capabilities allow Gfinity, through its strategic client management process, to connect clients across four main segments (games publishers, sports rights holders, media companies, and commercial brands) to a growing audience of around 900 million competitive gaming fans globally. Gfinity’s client base includes some of the world’s most recognisable brands.
The company recently reported full-year (FY) June 2019 results in line with Major Shareholders the upgraded trading update issued in July. Revenue grew 82% year-on-year, and the company made further progress towards its objective of EBITDA Charles Street Intl Holdings - 23.6% (underlying earnings) break-even by FY 2021. The strong results reflect Nigel Wray 7.4% strategic initiatives undertaken by the new executive team since 2018 (details Alden AS - 3.7% p4). Post period end, Gfinity raised additional capital of £5.25mln (gross), Primary Index AIM H1 end Dec leaving the company well capitalised heading into 2020. The results release Next Key Announcement 2019 also included further details of the expanding revenue generation model. Revenues are derived from four different types of contract – (1) Consultancy fees; (2) Service delivery fees; (3) Advertising directly to the Gfinity Company Information Community platforms; and (4) Shared content and commercial rights to the Address: 35 New Bridge Street, London EC4V esports programming that Gfinity creates. Historically Gfinity essentially 6BW operated a binary revenue model, either providing a service for a fee or Website: www.gfinity.net creating own-label programming while bearing 100% of the cost and risk. The company is increasingly seeing a shift towards the risk and reward sharing model of shared commercial rights, as well as the consultancy and community Analyst Details opportunities. In this report we examine the future potential revenue mix. Ed Stacey Financial metrics and valuation [email protected] We are forecasting revenue growth of 67% per year for Gfinity for the period 2019-2022e, versus a trend growth of 20% for the esport industry. This represents a continuation of the company’s gains in market share. In this report, we examine how revenue growth supports Gfinity’s progress towards its target of a 15-25% EBITDA margin.
The following table summarises our financial forecasts for Gfinity. The adjusted EBITDA figure represents earnings before interest, tax, depreciation and amortisation (EBITDA), excluding charges for share-based payments and other non-cash items. Based on these forecasts, the shares are trading on a FY June 2022e enterprise value/sales ratio (details p17) of only 0.47x, and we argue that this could offer 2x to 4x upside for shareholders on a three-year view.
Year end Jun 30 2019 Current 2021 2022
Revenue £M 7.9 14.4 26.3 36.8 EBITDA (£M) (8.6) (4.9) 0.7 4.7 Net cash/ (debt) £M 0.6 0.6 1.1 5.2
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Overview Garry Cook, executive chairman. Cook has served as head of Global Brand for the Gfinity is a leading global player in the fast-growing market for esports and Ultimate Fighting Championship (UFC), as chief executive officer for Manchester City Football competitive gaming entertainment – spectator viewership of video games via Club, and as president of Nike’s “Brand Jordan” internet streaming, television, and live arena events.
The company delivered 82% revenue growth in the financial year to June 2019, for the second consecutive year. We are forecasting 67% growth annually for Gfinity Graham Wallace, chief executive officer. for the period 2019-2022e compared with a growth trend of 20% for the industry. Wallace is a chartered accountant and has held The following chart shows our growth forecast for Gfinity versus the industry senior executive positions with Viacom Inc, trend. MTV Networks Europe and IMG Media, as well as having served as chief financial officer and then chief operating officer at Manchester City FC and as chief executive at Rangers Football Club.
Gfinity revenue growth versus industry trend
Source: Industry revenues from NewZoo, Gfinity forecasts from Proactive Research
The global esport market is on course to exceed US$1bn for the first time in 2019. Growth in the market is driven by: • A growing enthusiast base, with some 450 million esports fans worldwide (900 million for the broader category of ‘competitive gaming’ viewers), including 200 million who describe themselves as ‘regular’ viewers. • Games publishers paying to create tournaments featuring their game to create a buzz about their product. Involvement in esports drives engagement with their games, extends the life-cycle of the game and drives additional sales of downloadable content (an important factor for publishers). • Rights-holders such as sports brands (The Premier League, Formula 1, NBA) paying to create esports tournaments that bring their brand to a wider demographic. In particular, it addresses the key strategic challenge of reaching a younger demographic (see p6).
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• Media companies paying for esport content to drive viewership. • Brands wishing to participate as sponsors and advertisers, to connect with a hard-to-reach market of younger consumers. This includes an increasing proportion of ‘non-endemic’ brands, meaning brands whose product is not related to gaming. Gfinity occupies a unique position within the esport market landscape, offering a true end-to-end solution, encompassing a tournament hosting platform, content creation, and distribution.
Gfinity's offering
Source: Gfinity
These capabilities allow Gfinity unrivalled connectivity with the consumer base, for clients within the four main stakeholder segments in the industry – games publishers, sports rights holders, media companies, and commercial brands.
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Gfinity connects stakeholders across the esport landscape
Gfinity delivers events and tournaments for third parties via its proprietary technology platform and also manages live arena events such as the recent 2019 Event hosting, online and live event. F1 New Balance Esports Pro Series events at the Gfinity Arena, and the Call of Content creation Duty World League event in May 2019 at the Copperbox Arena (Olympic Park, London). Major tournaments managed by Gfinity include the Formula 1 Esports Series on behalf of Formula 1 and the ePremier League on behalf of the Premier League.
In addition to event management and hosting, Gfinity offers content creation. This includes the production of programming both for live streaming of events and for “shoulder content”. The shoulder content will become a big part of the overall media offering, as esports fans are big consumers of interviews, playing tips, and other off-field content.
The addressable customer base includes games publishers, rights holders (such as F1 and the Premier League), and other commercial partners. These customers want tournaments as (a) a source of revenue for themselves via media rights, advertising and sponsorship, and (b) as a promotional tool for their game or their franchise.
Historically (including 2019) the biggest element of the revenue model has been service fees – the customer pays a fee to have Gfinity arrange and host the event or tournament. In future, Gfinity intends to build on its recent successes in securing content partnership deals, whereby Gfinity and the customer each receive a share of the end market revenues. We examine this transition in more detail on p11-12.
New revenue drivers increasingly Other revenue drivers important In addition to its event management and content creation capabilities, Gfinity has two other significant revenue opportunities – consultancy, and the Gfinity community. We consider these on p9.
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New phase of growth
Financial performance in 2019 reflects In 2018 Gfinity implemented a substantial rotation in the senior executive team. management changes and new priorities Significant appointments included:
Garry Cook was appointed as executive chairman in May 2018. Cook previously held high-profile roles as chief executive officer (CEO) for Manchester City Football Club, the president of Nike’s “Brand Jordan” and head of Global Brand and International Market Development for the Ultimate Fighting Championship (UFC).
Graham Wallace (now the chief executive) joined the company as the chief operating officer (COO) in July 2018. He is a chartered accountant and has held senior executive positions with Viacom Inc, MTV Networks Europe and IMG Media, as well as having served as the chief financial officer (CFO) and then COO at Manchester City FC and as chief executive at Rangers Football Club. Wallace became CEO of Gfinity in October 2019.
John Clarke joined the board in September 2018 and was subsequently made Global Brand and Marcomms officer. He has previously held senior executive positions at Heineken NV, American Express and Burson-Marsteller PR.
In addition to the senior executive hires, the company remains very focused on harnessing and directing the talents of a dedicated team of younger staff who are fully immersed in the esports world.
Key priorities for the re-organised Gfinity have been defining clear and deliverable revenue opportunities and aligning the cost base with these opportunities.
Timeline so far
Gfinity is still at an early stage in its growth journey, and we believe that the components are in place to support continued robust growth. The following timeline summarises some of the key events so far.
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Timeline
Source: Proactive Research
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The global esport market Esport is an established global industry, and growing rapidly. The following chart shows the industry’s growth, splitting the revenue streams into five categories.
A growing market
Source: NewZoo
In the current market, the revenue value of esport is captured by various types of entity: • Tournament/event organisers • Games publishers operating their own tournaments • Professional teams via their own sponsorship and shoulder content deals • Distributors such as video streaming services and media outlets Demographics
Market growth in the esports sector is underpinned by a broad and growing demographic base of esport enthusiasts. The following pie chart shows the esport viewership characteristics within the European and US markets.
Big viewership for esport in the 21-35 age
Viewer demographics range
Source: Industry sources
Traditional sports viewership on linear TV: The 21-35 demographic is particularly important to sports rights holders. This middle aged advertising market is harder to reach through televised sport:
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• The average age of Premiership Football TV audience - 43 • The average age of F1 TV audience – 51 • The average age of Major League Baseball TV audience - 57 (Figures from MarketWatch).
To reach a younger audience, sports rights holders are increasingly keen to project their brand via esport events as an alternative to conventional televised sport.
Conclusion on the market:
The esport market benefits from a large and fast-growing viewership, driving revenue growth from media rights, merchandise, advertising, sponsorships, and fees from publishers and rights holders. Gfinity has been successful in harnessing the underlying growth trend and also in expanding its value capture within the space.
Major events in esport
Some developments during 2019 have elicited a new level of interest in esports from mainstream news media. Examples include:
The Fortnite world championship creating teenage millionaires and offering a larger total prize pool than Wimbledon - https://www.bbc.co.uk/news/ technology-49146644
A rapidly evolving ecosystem of new business models in the esport space - https:// www.ft.com/content/826cf294-e04a-11e9-b8e0-026e07cbe5b4 Gfinity’s revenue opportunities – ongoing strong growth, and a broadening revenue mix Service delivery fees have historically Gfinity derives revenue from four different types of contract: been the biggest revenue driver. Consultancy revenues and community are Consultancy fees growing. Risk/revenue sharing to become a Gfinity provides consultancy services to third parties to assist them in developing major driver their esports strategies.
We believe this was a very small source of revenue in FY 2019. The company has now signed two major deals, and we expect that consultancy will become a more significant revenue source in the 2020-2022 period.
Service delivery fees
Gfinity offers end-to-end execution of an esports project, from online tournament execution to content creation and distribution. The payer is typically a games publisher (EA Sports, Codemasters, etc.) or rights-holder (e.g. F1, Premier League).
In FY 2019 service delivery fees were the dominant source of revenue for Gfinity, accounting for most of the group's revenues, and generating a positive gross margin.
Shared/owned content and commercial rights
This is the same type of product offering as service delivery fees, but with a different revenue model. Instead of receiving a fixed fee from the tournament originator (games publisher, rights holder), Gfinity becomes owner or co-owner of the content and shares the commercial rights.
In FY 2019 shared/owned rights made a material revenue contribution, although significantly smaller than service delivery fees. We believe that shared/owned rights made a negative contribution to gross profit, due to a high weighting towards wholly-owned content (no cost is passed on to partners), which will
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become a diminishing component in future. Gfinity is increasingly including a share of commercial rights in the service deals that are undertaken, allowing the company to capture a share of the upside from the value of these programmes in the form of media rights and sponsorships, and also some ancillary streams such as ticket sales and merchandise. In this way we expect shared/owned rights to make a growing and profitable contribution to the group in the 2020-2022 period.
Community
The Gfinity community platforms – RealSport101 and Gfinity – offer brands and publishers access to a growing engaged community of 20mln gamers. These have been used as a vehicle for gaining an understanding of the esport audience base, but have now reached a scale where they can begin to generate their own revenues, via ad-serving and site take-overs.
We believe this was a minimal source of revenue in FY 2019. The company now has a growing revenue stream from advertising and played a high-profile role in the launch of the new GRID game from Codemasters in the form of a site take-over of Gfinity’s RealSport101. We expect the community revenue stream to become more significant in the 2020-2022 period.
The following schematic illustrates how we believe the four stand-alone revenue streams will evolve through to FY 2022. We compare their 2020-2022e growth rates versus our expectation for gross margin contributions (2022e), and the relative scale of the revenue streams in 2022e.
We are forecasting a 42% gross margin for the group in 2022e, with differing contributions for the different revenue streams, compared with a 13% gross margin for the group in 2019. We provide some additional analysis of profitability improvement on p16-17.
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Bubble size indicates 2022e revenue contribution
Source: Proactive Research
In FY 2022 we are forecasting that service delivery fees and content partnerships will remain the two largest revenue drivers, but with the balance shifted towards content partnerships.
We next consider the drivers behind this mix shift. This follows a proactive strategy by Gfinity to seek a higher degree of revenue-sharing versus straight fee income.
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The strategic mix shift – more content partnerships
Going forward we believe that there is an important growth opportunity for Gfinity in the media rights market. This is a growing segment of the overall esports market, illustrated in the following chart.
Media rights versus overall esport market growth
Media rights growing faster than the wider esport market
Source: Proactive Research
Esports already have a huge audience via internet media, larger than many Traditional media coverage growing. mainstream sports, but are still at an early stage in gaining share on traditional Online streaming of esport under- broadcast media. We believe that during the next few years, as evidenced by the monetised. Sky ePremier League coverage, esports will continue to gain more mainstream media coverage. Moreover, we believe that the online audience is significantly under-monetised by the industry, and we expect revenues to begin to catch up with viewing figures in the coming years. Therefore the media rights growth comes from both traditional broadcast media and online streaming.
In order to gain a greater share of the media rights revenue stream, Gfinity intends to shift its business model from being primarily a fee-based service provider to becoming more of a revenue-sharing partner. Under the fee based model, the service provider (Gfinity) operates under cost-plus type arrangements with the rights holder as payer. As a risk-sharing partner, Gfinity will leverage its capability to bring esport content to wider markets, and therefore benefit from an expanded revenue opportunity. The following schematic summarises.
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Service provision versus partnership model
Source: Gfinity
We believe that the risk-sharing model offers an exciting potential revenue Unique capabilities underpin Gfinity's multiplier for Gfinity. The company’s technology platform is critical in delivering revenue opportunity world-class content, and this gives Gfinity strong leverage to negotiate future deals on a revenue-sharing basis. Gfinity’s competitive position is underpinned by: • A unique combination of capabilities to deliver end-to-end esports solutions • Major strategic client relationships • Proprietary technology platform • An engaged consumer base communicating directly with the company via the Gfinity community platforms • Credibility established as a delivery partner to some of the world’s most recognised brands over recent years. In summary, we believe that future growth will be driven by: • Building on the success of the F1 and ePremier League deals, and potentially expanding these contracts • With F1 and ePremier League as proof of capability, winning other franchised tournaments • Building on partnerships with major games publishers • Gaining revenue-sharing exposure in the media rights to tournaments, using the shared commercial rights model • More commercial brands entering the esport space as advertisers, seeking to connect with a difficult-to-reach consumer demographic. Major existing clients
To give some concrete examples of the different revenue streams, we provide an overview of the existing client base.
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Clients within the current revenue mix
Source: Proactive Research
The F1 esport Series and ePremier League have been major successes for the company: F1: A benchmark programme for Gfinity Formula 1
The inaugural season of the F1 Esport series began in September 2017, under a partnership between Formula 1 and Gfinity. The second season concluded early this year, having achieved a total of 20 million views across platforms. In addition to the size of the audience, the series also helped connect a younger audience- base to the Formula 1 brand (70% of viewers were under 34 years of age), which is important given that the real-world Grand Prix series has a TV viewership with an average age of 51 years. Formlua1 has renewed its partnership with Gfinity for a third series, which began in the third quarter of 2019.
Grand final illustrated mass appeal via The ePremier League online and TV broadcast audience The inaugural ePremier League began in January 2019, managed by Gfinity. The competition allowed players to compete to become the official representative of their chosen Premier League club, with all 20 clubs participating. The final took place in March 2019 at the Gfinity arena in London. The event was live on Sky TV over two days, with similar deals across multiple countries.
We argue that these kinds of “franchise” events for real-world sports outfits offer a significant commercial attraction compared with other types of esport, in terms of longevity. Some video game franchises have a relatively short shelf- life. A tournament like the ePremier League, by contrast, could be expected to run for decades – the Premier League is not going to go out of fashion. Becoming the incumbent provider for these types of event could become a valuable market position for Gfinity.
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Furthermore, with big global names such as Formula 1 and the Premier League selecting Gfinity, we believe the company is now better placed to win further sports-related esport events.
Other major clients included in the schematic New projects include examples of the The London leg of The Call of Duty World League was held at the Copperbox newer types of contract Arena, Olympic Park London, in June 2019, with Gfinity as tournament host. This was a content partnering deal with Gfinity engaged on a revenue-sharing basis.
The Twitch Prime Crown Cup was commissioned by Amazon to celebrate Amazon Prime day. The event took place at the Gfinity Arena and featured celebrities including Rio Ferdinand, Harry Kane, Alex Scott and Robbie Williams. This was a service delivery fee contract structure.
The Qatar esports WEGA Global Games will be held alongside the football world cup in Qatar in 2022 and will feature a range of different esport events. Gfinity will be providing consultancy services to the tournament’s originator TRUXTUN Capital. This is a consultancy project.
The new GRID game from Codemasters was released in October 2019. The game’s launch was supported by tailored content on Gfinity’s RealSport101 platform. This is a community project. Competitive landscape Gfinity has a unique breadth of offering – tournaments delivered via a proprietary online platform and live arena events management, ability to produce programming and to distribute, and an online community platform; however, there are various entities that compete with Gfinity in one or more of these business offerings. The primary differentiator for Gfinity is its ability to produce world-class live content from its studio in London as well as shoulder content. There is no one else offering full end-to-end services and Esports studio broadcasting. The benefit of this is an essentially fixed cost base but the ability to realise multiples of value on the content.
We divide the competitors into four categories:
Head-to-head competitors
There are few companies that compete directly with Gfinity across the board. The only name that we consider a true like-for-like competitor is ESL, formerly known as Electronic Sports League. ESL has an online platform and a real-world arena to host events and tournaments.
We understand that ESL is more focused on solely-owned content rather than partnering or fee-based projects. This is in contrast to Gfinity.
Event operators
There are some operators that can produce and distribute content, and host events in a live arena, but which lack their own online platform with which to host major online tournaments. One example is OGN, a Korean broadcaster focused on gaming content and esports. Another is VSPN, the largest esport organiser in China.
These operators compete with Gfinity in some aspects of the business but lack the full suite of capabilities that Gfinity can offer.
Integrated publishers
In January 2016, Blizzard Entertainment acquired MLG (Major League Gaming) for US$46mln, giving Blizzard a platform to create tournaments for its own
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games. The biggest tournament is the Overwatch league, which recently sold tournament streaming rights to Twitch for US$90mln for two years.
We understand that other games publishers have attempted to build their own esports platforms in-house, but have generally ended up continuing to use third party specialists.
In summary, games publishers can potentially use their own platforms to compete against specialists like Gfinity; however, we believe that to build a platform organically would take 1-2 years, and investment of US$50-100mln; for any publisher wanting to obtain a platform by acquisition, there are few remaining options in the market. Financial dynamics We next consider some of the key financial metrics for Gfinity.
The company has stated an ambition to achieve EBITDA margins of 15-25% and gross margins of 30-40%. The company has exceeded gross margin break-even in FY June 2019 and we are forecasting EBITDA break-even in FY June 2021. The following chart shows our forecasts for EBITDA and gross profit.
EBITDA and gross profit progression
Gross profit turned positive in 2019, EBITDA expected to exceed breakeven in 2021e
Source: Proactive Research
We note that cost Investment has been front-loaded and primarily has been deployed developing the tech platform. We believe that the company now has Gross profit driven by scale, maturity, and the operating expenditure (opex) base it needs to scale revenue significantly, mix and opex is likely to stay below the company’s guidance range of £10-12mln, meaning that incremental revenues drop through strongly to profit.
In terms of analysing what is driving the increases in gross profit in our forecasts, we can break this down into three categories: • Revenue growth at constant gross margin, i.e. the uplift in gross profit if Gfinity revenue increases in line with our forecasts, but with no increase in gross margins. • Improvement in the gross profit margin within each of the four stand-alone revenue categories (p9), based on benefits of scale and maturity. • An improved mix between the four revenue categories, with service delivery fees (lower gross margin, in our view) making up a smaller proportion of the total. The following chart shows how each of these drivers affects gross profit in our forecasts through to 2022e.
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Drivers of increasing gross profit
Source: Proactive Research
This increase in gross profit, together with limited increased in administrative/ central costs, drives our forecast for EBITDA break-even exceeded in FY June 2021 and 12.7% adjusted EBITDA margin by FY June 2022e. Valuation Valuation looks very cheap on EV/Sales Looking out to FY June 2022e, the shares are currently valued on an enterprise value (EV)/sales ratio of 0.47x. The calculation is as follows, taking into account our forecast of an additional £5mln equity raise during FY 2020.
EV (current) = Current market cap - FY June 2019 net cash
= 18.7 + 0.6 = £19.3mln
Revenue (2022e) = £36.8mln
EV/sales = 19.3/36.8 = 0.52
We argue that in any industry sector, a company delivering double-digit EBITDA margin and strong double digit growth tends to trade on an EV/Sales of at least 1-2x, implying 2x to 4x upside to the current share price for Gfinity.
We acknowledge that there is not a significant listed esport peer group to allow us to gauge what an esport industry EV/Sales multiple should look like. Nonetheless, we believe that if the company can maintain its current trajectory of improving financial metrics, then there is substantial upside for shareholders on a 2020-2022 timeframe.
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