Welcome to Jester's Trek.
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.
You can follow along, if you want...

Monday, October 21, 2013

Ebb and flow

I've written twice before, both times in 2011, specifically about CCP's financial position.  In June of that year, looking at CCP financial statements, I predicted that they were going to run into serious trouble come October when their liquidity loan came due.  In October... well, I think every CCP watcher knows what happened to them in October, and if you don't you can go read about it.  It wasn't pretty.

If you're interested in some discussion of CCP financials, then go ahead and stay with me for a bit because I'm going to talk about them again.  But if you're not worried about it, feel free to skip to the next post.  tl;dr version: there's really not much to see here, and anyone telling you something different is wrong.

I wrote in those two pieces and in particular in the second one, businesses often maintain quarter-to-quarter liquidity through the use of short-term business loans.  There are various reasons having a large amount of cash on hand is not a good business strategy but the simplest reason is easy to understand: cash under your mattress is not out in the world making you more money.  You Christians out there may want to review the Parable of the Talents.

In an ideal business, you want to have enough cash on hand to maintain liquidity and pay your bills, with enough revenue coming in vis a vis your cost structure in to satisfy your investors.  As I covered in the October 2011 piece in particular, your investors issue you short term liquidity loans expecting a return on their investment and a sound financial strategy in place and being executed on.  If you can do these things, your investors can usually be persuaded to take their return as profit and then reissue you the loan for another period.

As I covered in 2011, at that time CCP appeared to be in danger of not having a good financial model to ensure a return on the investment of their investors, nor a solid cost structure relative to their revenue.  Their burn rate was entirely too high, resulting in a situation where they were in danger of running out of cash right when the loan came due.  Massive cost-cutting was the inevitable result.

Recently, CCP's most recent financial statements -- this time for 2012 and the first six months of 2013 -- have come to light.  I myself have had a copy of the first document for some time, reviewed it, was satisfied with what I saw, and went on with my life.  But in particular with the release of the June 2013 document, some bloggers and pod-casters out there are trying to make the case that CCP is again in financial trouble.  And as I said above, they're wrong.

Much of the focus is centered on the fact that in the first six months of 2013, CCP had higher operating expenses than in the same period in 2012.  And that's absolutely true: their burn rate is again spiking, with operating expenses some seven million U.S. dollars than in the same period last year.  In the same period, their revenue is also up, but only by about 4.5 million U.S. dollars.  There's also a good deal of attention being paid on $20 million U.S. in long-term financing and revolving credit liquidity loan that CCP took out this year, as well as another $20 million U.S. bond issuance last year at 7% interest per year with a maturity date of July 2017.  As a result of these loans, in June CCP had about $18 million cash on hand, plus access to the revolving credit facility for more cash if it's needed.

As I state above, there's nothing abnormal about any of this.  CCP is expanding so it's only natural to take out loans to finance these expansions.  They have the cash on hand to deal with monthly expenses, plus the line of credit to use to expand Valkyrie development if they choose to.  The key question: has CCP over-extended its financial position?  Are they in danger of having a liquidity problem?  Will they burn through all that money?

The answer in 2011 was "yes".  The answer in 2013 is "no", or at least "not for the foreseeable future."

The financial statements do show that CCP is running at a very slight loss right now, turned into a very slight profit through the use of tax credits they receive for operating businesses in the various locations in which they operate.  Counting these tax credits as putting the company in the black is perfectly valid: CCP remains profitable, though not as profitable as they were last year.  That's also consistent with the expansion they've been doing this year.

For a while about a decade ago, it was fashionable in the business world to refer to your lay-offs as "right-sizing": having the correct size staff and payroll structure to justify the costs of your payroll.  Businesses would justify lay-offs under the right-sizing banner until they learned that those laid off took absolutely no comfort from the business leaders laying off people to get the business to the right size.  That said, as a strategy it's still valid: businesses judge the size of their payroll expenses and set their staff sizes to match these projections.

And right now, CCP seems to be right in the sweet spot: their payroll expense feels very balanced in these financial statements.  Further, a finance guy looking at the statements would find a lot to be cheerful about.  During the period in question, CCP was in the run-up to the release of the Odyssey expansion, likely with the reduction in paid subscriptions that such periods always engender.  DUST was (and is) likely continuing to have revenue struggles.  World of Darkness and Valkyrie were (and are) not bringing in any revenue.  And yet with all of the expanding they were doing and even with CCP's revenue sources at relatively low ebb, the business still managed to break just about even.

This is good news: since expenses are unlikely to rise very much more, all things being equal, the only direction CCP can go here in terms of net profit is up.  It speaks of good overall financial management.

So all in all, there's therefore not all that much to be unhappy about.  We'll have to keep watching, of course.  CCP doesn't share financial information with the CSM so I have the same information you all have.  As I stated myself last month, Odyssey probably didn't do CCP too many favors on the subscription front but it's likely fair to say that was probably balanced by players taking advantage of dual character training.  That's not a sustainable revenue stream nor one that CCP should rely on -- it goes back to cannibalizing your existing customer base.  But overall, it's quite unlikely that CCP is in any immediate financial trouble.

To those of you who will bitch again that CCP should "dump DUST!" to save costs, I will say again that it would be irresponsible for CCP's C-suite executives to continue to rely on a single product to protect the livelihoods of the hundreds of families that depend on them.  Sticking with a single product, no matter how successful today, is long-term business suicide.  Even if DUST 514 continues to struggle, CCP can currently afford to continue to be patient.  In the meantime, they can hedge their bets with Valkyrie which I could easily see being a nice short-term burst money-maker, and a long-term money-maker if CCP can come up with a long-term wrapper for it.

So I go back to my tl;dr statement about CCP's finances: nothing to see here, move along.  If I see something that makes me think otherwise in future statements, I'll say so.


  1. Page 4 of the 2012 document says their revenue for the year was USD 65.3 million. At USD 15 per month that averages out to about 363,000 paid EVE accounts. I'm assuming the lion's share of their revenue comes from Eve Online. So it seems that's the upper bound on the average number of paying accounts per month for 2012. A far cry from the 490,000 "subscribers" claimed in the very next paragraph. This is just an observation, and not meant to be any great revelation about anything to anyone, but the actual number of subscribed EOL accounts, on average, is probably somewhere between 250 and 300 thousand. Their focus absolutely will be on increasing revenue in the coming years. It will be interesting to see how they go about doing that, given the near certainty that DUST has failed to boost revenue and the Incarna NEX store fiasco, likewise, has failed to meaningfully bring in any new revenue stream.

    Will continue reading the things now, but that's my immediate reaction from just the first few pages, thanks for posting these, Jester. I'm a numbers guy at heart. I'll resist the urge to make a whole bunch of wonky comments on the rest.

  2. I wonder wether you noticed that CCP is thoroughly "canibalizing" its player base since Incarna.

    Marketing costs are growing each year, and the marketing perceived by people with unsubbed accounts (like, me) is that CCP is more busy trying to get players back than getting new players. A particularly infamous move was offering "Power of 2" to a character just subscribed.

    Also, along this year, CCP has made some moves to gather cash by october, and also has announced Rubicon two weeks earlier than usual & coincidentally with the release in the USA of a competing game.

    So, is the CCP ship in trouble? Not. But they're making everything possible to not be in trouble. It's a "don't sink because you swim" over a "floating nice" situation. Likely Rubicon will spike PCU (the latest winter expansions have been consistently better than the summer ones, maybe due to the impact of Icelandic winrer on employee performance) but that means that Rubicon-2 wll not be that good.

    And I, as other players, really wonder what's in it for us with CCP Seagull's vision and why should existing players and non-players bother with it. Maybe someone is grossly overestimating the lure of building space empires, or thinking that what worked twice in the past (adding more real estate) will do the trick a third time.

    So far, I don't feel like paying CCP Seagull's dreams on expanding features I don't give a shit as they neglect or poop on the ones I enjoy. I'd rather pay a new Freelancer, even at the cost of losing all the investment made in EVE...

  3. ...huh. That "Icelandic winter vs. employee performance" comment is quite interesting. I'd never thought of that, but it's possible you might be on to something there. I'll have to noodle on it some.

    So far as I know, the only people who know Seagull's long-term plan with space colonization are Seagull and those above her in the company.

  4. As a professional money manager (I run $9b of mutual funds), I agree with your assessment. Despite running an apparent operating loss, CCP's financials are healthy. I agree on your comment about treating the tax incentive as operating income. Their R&D expense is lavish at about 1/3 of revenues, and admin expense is high. Neither is unexpected given that they are a private company. Were they public or under pressure they could easily cut both without affecting their business model.
    The balance sheet is pretty healthy. Free cash flow is -2mm compared with cash on hand of $18mm; that is many years of cash burn. Receivables days are 45, quite low for an international company. And the majority of their debt is in the form of a convert, which is a debt/equity hybrid.

  5. The part I don't understand is how can they have spent 1/3 of their revenues on R&D and have so little to show for it?

    Devs: If we had $20 million we could do a ton of cool stuff
    Mgmt: OK, here's $20 million, get to work!
    ...1 year later...
    Mgmt: Where is it?
    Devs: Where's what?

    1. I've never been involved with video game R&d but having seen the inner workings of oil field R&d i can tell you having nothing to show is not unusual.


Note: Only a member of this blog may post a comment.