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I'm your host, Jester. I've been an EVE Online player for about six years. One of my four mains is Ripard Teg, pictured at left. Sadly, I've succumbed to "bittervet" disease, but I'm wandering the New Eden landscape (and from time to time, the MMO landscape) in search of a cure.
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Monday, June 27, 2011

The realities of EVE

Sigh, LOL.  No getting away from EVE today.

Curious if CCP's sudden dive into "macro-transactions" was the result of financial trouble, some folks on Failheap Challenge that are familiar with Icelandic law drafted an accomplice to go into the local tax office and request a copy of CCP's public financial statements.  I'm not a lawyer, but apparently, even privately-held companies are required, in Iceland, to post these statements.

Want to see the report yourself?  Download it here.

I'm still going through it between my own business commitments this morning, but the statement is a tiny bit troubling.  Here's the tl;dr version:

CCP, as I said, is privately held, in this case by a group of investors.  Those investors purchased additional shares of the company on what was essentially a two-year loan in 2009.  That loan was funded to CCP early in 2010, and was presumably intended to fund DUST 514 development.  That loan comes due in October of this year, and is just under 12 million USD.  This in and of itself is no big deal; every company in the world maintains its liquidity with short-term loans from creditors.  CCP is no exception.  At the end of the loan term, those loans are repaid from your cash reserves to ensure viability, at which point, the same creditors will almost always reissue the loan.

In short, I give you 12 million dollars.  You put that money in a bank account somewhere, and use it to make a profit.  At the end of the two years, you get to keep the profit as long as you give me my 12 million dollars back, presumably with some profit for me.  Once you do that, I have the option of giving the 12 million dollars right back to you: you're a solid investment.  However, if you can't pay back the 12 million dollars on schedule, then I have to question the soundness of my investment.  Got it so far?

From the financial statement, CCP currently seems unable to pay off this loan due in October.  I can see only a little bit under six million USD cash-on-hand.  So, they don't have the cash-on-hand to repay this due loan.  How their investors would react to this is anybody's guess.  I'm not all that familiar with their investors.  What they bought with that money is a large code base (presumably the code for DUST 514 and WoD), but that code base isn't making them any money yet.  And my first impression is that they're burning through cash at a slightly faster rate than the 12 million USD two-year loan should allow them to, indicating this pattern is not sustainable even if they got an extension.

Anyway, still looking into it, but this was my first impression.

EDIT (27/Jun/2011): OK, as I was typing this and busy with other meetings, on FHC has come to the same conclusions I have, and has written a much more detailed analysis.  In particular, he had time to do the burn-rate calc that I didn't, and came up with an $8.6 million burn rate for last year.

EDIT #2 (27/Jun/2011): Let me be completely clear: CCP is a profitable company.  They're making a profit every year in this report, and are even getting very decent tax breaks (presumably from Iceland) which would allow them to continue being profitable.  They're just having a liquidity problem: they're burning through cash at a rate a bit higher than their profit, and as a result, have low cash-on-hand at any given moment.

EDIT #3 (27/Jun/2011): Also, keep in mind that with DUST's release being imminent, despite some comments I'm seeing on Twitter, this isn't going to sink CCP.  They could make up the cash reserve difference with a trivial number of DUST 514 sales, 200k copies if my math is accurate.  They may have already made up the difference.  Who knows if Sony paid them some amount of money for DUST PS3 exclusivity, after all...

This financial statement just reaffirms the belief that Incarna/DUST are bet-the-company moves by CCP.  Page 23 of the report confirms that they've capitalized a big chunk of their development costs.  Those are costs that would have to be written off the books if DUST fails.  That might sink CCP.  So DUST 514 must succeed.

6 comments:

  1. While you very well might be right, drawing conclusions with limited financial information is highly questionable. When companies get audited there's a lot more that goes into it then just reviewing the public financial statements. Any info on who the investors are? What the actual agreement was? Making assumptions without all of the information is bound to lead to erroneous conclusions. And really for what purpose?

    Drawing any conclusions about this without ALL of the information is an exercise in futility. And what's more, unless you do this sort of thing professional and have a lot of experience in this area (which you may), your conclusions really don't hold much water.

    It's not my intention to be harsh, or to flame you here. Your posts are always well thought out and a very good read. But while this may be a seemingly solid line of reasoning, its better left to accountants and lawyers that do this professionally on a daily basis. Frankly a video game blog is not a good format for financial analysis.

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  2. Yep, you're absolutely right, thus the multiple post-publishing edits. ;-) The more I think about this, the less of a major issue I think it is, *unless* the DUST 514 release crashes and burns.

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  3. 1st: Download not available. Sad panda.

    2nd: For CCP to succeed a FPS not named "Halo", "Medal of Honor", or "Call of Duty" has to succeed. And this coming from a company that is having issues not melting modern hardware with a patch that amounts to a man sitting alone in a room full of tears and ads. Glad I got into Perpetuum.

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  4. Location updated, but might move again:
    http://dl.eve-files.com/media/corp/Herschel/CCP_Financial_Statements_2010.pdf

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  5. Doesn't Note 16 imply that they had over $11 million USD or equivelent at the begining of the year. I don't think the $12 million will be a problem. Rather the only problem I see is that they are trending down on profit while trending up on revenue. This is not what investors like.

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  6. The Failheap Challenge thread is now at http://failheap-challenge.com/showthread.php?2403-Seriously-we-need-CCP-annual-report following a change of forum software.

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