Didn’t Think of That. Should Have.

Thanks to yesterday’s ANON posting the link to some more current financials.

Ok so CCP’s cash situation is a little weird.  Quite a bit weird actually.  CCP took about 40 million in loans and bond issues (the bonds at a 7% for a 5 year note) 8 million of which they haven’t touched.  At the end of the year they were down 18 million from where they started in cash.  That’s not fun.

I understand why they are at where they are.  They are spending a bunch on R&D for existing products, and a bunch MORE on development for other products, (in 2012 this would have been Dust and WoD) and they have a lot overhead on their admin expenses, but they aren’t out of line for the number of employees they have.  The problem is they are trying to become a bigger company, and borrowing money to get there.

The problem is I still don’t like their cash situation.  Last year Dec 31 they had 3.6 million.  This year they borrowed 32 million, had an operating profit of 2.8 million, and ended up with 20 million in cash.  A lot of the other 18.4 million probably went into Dust.  That amount *should* be dropping off some, and will be tempered somewhat by the 5 people now paying for Dust.  The problem is CCP is putting themselves in a bind.  The note rate is hardly friendly, and they will have to have 20 million on hand when they come due to pay them off, not to mention the 7% per annum.  That hit will come in 2017.  In 2016 they have to pay back the rather friendlier 20 million (of which they haven’t touched 8 mill) which they should be current on in interest.  

So where they stand right now is problematic.  They have to cut costs quite a bit, mostly in R&D, which limits future growth, in Admin expenses, which just seem high when laid against the revenue they are generating, and in development costs, which ran them another $24 million this year.  At the bottom line they lost 1.5 million dollars a month in 2012.  If they hadn’t borrowed money in 2012 they’d have been out of money before the end of March.  I’m guessing they actually spent a lot less in the first half of the year, and put up some big bills towards the end of the year after figuring out their financing, but still, averaging at a loss of 1.5 million a month before figuring in the money you borrowed isn’t a good way to pay your bills.  Especially when gross profit for the YEAR came up only $800,000.  

CCP has to begin operating at a profit without relying on financing.  And they have to do it soon.  They need to come up with a way to increase cash on hand quite a bit in the next 4 years, they also have to operate, and decide how they will operate in the future, and frankly it looks like they stink at it.  They have to either get Dust working at a profit or put it out of its misery.  They have to take a serious look at WoD and decide if they can do it without killing what they have right now.  I’ll say again what I said a couple years ago.  EvE makes money.  It doesn’t make a lot, it isn’t terribly sexy, but it makes money.  It would make more even on paper with a reduced staff (I imagine a lot of the overhead goes away without the teams working on Dust and WoD) and while I don’t doubt that these are good people doing their best, the company doesn’t look like it can afford them.  Not unless they can get Dust making money NOW and/or get WoD out the door and making money before 2016.

I'm using it every time I can

I’m using it every time I can

About Corelin

An Eve playing Fool who occasionally writes about the shenanigans he and his minions get up to.

Posted on October 7, 2013, in CCP Hijinx, I was RIGHT!. Bookmark the permalink. 27 Comments.

  1. Tl:Dr – corelin doesn’t like CCP spending money on dust and WoD because he doesn’t think they will make money (mainly because he isn’t going to play them) and wants more spaceships.

    • Alternately because Dust can barely scrape together a PCU count of 4000 and I’ve seen WAY too many MMOs fail in the last 5 years to be anything but nervous about WoD being the exception to the rule. I think it’s a lot more likely to be the next Project Copernicus than the next WoW. CCP and EvE would be unlikely to survive a failure on that scale, especially with Dust being practically DoA.

      What’s more important is the TIME aspect. These games have to not only succeed but they have to do it FAST and they have to do it in a dramatic enough fashion that they make CCP enough cash to repay the debts they will owe. I have tried Dust, I play Planetside 2. I will try WoD but how good will it be, how many will play it, and how long will they have with it making money to make back what it has cost them?

      • Keep in mind that when Eve started it had a miserably low PCU as well. And the company was in debt. And their publisher closed shop leaving them on their own. This all happened before Eve even received it’s first “expansion”.

        Dust and WoD have the next 4 years to prove themselves, so I wouldn’t abandon them just yet. Persistence seems to be CCP’s thing.

      • I think the only problem is there is no easy way to track how much the players of DUST are spending on the game. I personally know of many players who have admitted spending hundreds on DUST so far, and do not sound like they will be stopping. It is hard to just dismiss DUST on low player counts when EVE also has low player counts, yet makes money.

  2. Why couldn’t they just get another loan closer to 2016?

  3. Is this continued fallout from pre-summer of rage/economic crash diversification/spending spree? They bet BIG on DUST and WoD, at the expense of their only revenue generator.

    DUST flopped from the standpoint of ROI, and I don’t think they can turn up profits on DUST; consoles, and therefore console games, have a limited shelf life. I’m not sure how they expected to derive profit from a single-platform F2P game, or how they can turn up profitability as the PS3 gets cannibalized by its big brother.

    A PC release might (MIGHT) squeeze a little more out of the DUST rock, bring in EvE players who are uninterested in consoles, and keep the game alive as the PS3 market share withers. It makes sense, too. Whenever things are slow in your EvE alliance, you can see mumble channels for LoL/etc. inflate while people wait for the next rageping. Why not a DUST channel? Even bored solo-mentality players who get tired of running Level 4’s might like to try it if it was on the same platform, and at least it would keep them connected to the EvE universe, and therefore less likely to unsub out of complete boredom.

    WoD I haven’t heard jack about in forever; I was under the impression that they gave up.

  4. Valkyrie 🙂

  5. Damn if I had more time I would add some details … quickly scanning the annual report and the bond prospectus (http://en.fme.is/media/lysingar/CCP-master-FINAL.PDF) it does not look that bad.

    Given the receivables turnover, you could probably add that to cash relatively risk-free in the first place. Also, they have a 10 Million USD revolving credit facility, but I’m not sure if that is used right now. The 12 Million term loan is also to be repaid in steps.

    And interest on the bonds is starting January 2014. So it’s not one large liquidity blob. They must actually be pretty sure to be making these numbers, as they ask for a convertible price as high as 32$ compared to the 20-25$/share exercise prices for the ESOP and expect investors to dig it. (lol, Himar was so ashamed of what happened 2011 that he deferred 100k USD annual wages until 2012 … or whatever happened)

    What I do find interesting is the drop in revenue coming from Europe and if that’s a precursor to what will happen in the US. I’m not a specialist in the gaming industry, but didnt the whole F2P thing start in Europe a bit before the US? Could this come to the US as well? Someone got a clue?

    Oh, and someone got 100,000 USD so I can get going on this thing?
    I’ll double it!

  6. The statement period runs from 1 January 2012 through 31 December 2012. The Dust 514 open beta started on 23 January 2013. So we don’t know what CCP’s earnings are from Dust microtransactions. At the least, presumably the costs of keeping Dust going are less than the development costs.

    CCP is sitting on a huge potential cash cow that for some reason they can’t or won’t touch: player-made cosmetic items. Team Fortress 2 is still printing money for Valve even though it is wholly free to play, because Valve gets 75% of the price of every cosmetic item sold in the world’s best hat simulator. And the market for virtual hats has never been better.


    All CCP’d have to do is establish the criteria for submissions, and assign one or two people to vet them before they go live. Then sell them for a small fraction of the Monocle’s going price, and they’ll be in business. The demand for more character customization options is there, but CCP has failed to capitalize on it.

    • I think to make good money they have to have character avatars interacting more, not to mention they are still scared shitless about another Incarna backlash. I agree it would be a great way to add some revenue fairly cheap, but I don’t think CCP will do it for quite a while.

      • The avatar portraits are already large and detailed enough to show a good deal of cosmetic items, including hairstyles, tattoos, eye-wear, masks, shirts, jackets, vests, dresses, hats, and monocles. Players in Ragnarok Online went to absurd lengths to obtain rare hats, the only way to customize their sprite-based characters. Ditto for players in other games. Despite rhetoric to the contrary, judging by the variety seen in EVE character portraits, EVE player are hardly different in that regard.

        The Summer of Rage wasn’t about cosmetic items or microtransactions. It was about being blatantly treated as cash-cows, and about CCP selling ships and items directly to players for absurd amounts of cash. Had CCP stuck solely to cosmetic items, better yet selling blueprint copies rather than items themselves, and had it chosen a saner pricing strategy and offered more variety of items, no-one would have cared much. Hell, most people don’t care about Ishukone Scorpions; just would have been nice if it was done in the open.

        Then again, the NEX store interface is absolutely awful, and does not scale well past more than about a dozen items. So perhaps CCP is working on a new interface before adding more items. The current NEX would make a great example of how _not_ to design an online storefront. Ditto for the character creator’s clothing and hair selectors.

    • I think it was CSM6 who argued to CCP that they should shelve all of the unreleased NEX store cosmetic items until they had a clear strategy to use them with. And so they sit gathering virtual dust on some dev’s HDD two years later.

  7. You really, really, really should reread page 28, most of the information you present about CCP’s liability structure is simply incorrect.

    For starters CCP didn’t borrow 32m this year (the bank loan is old!) and they won’t have to pay back the 12m bank loan in 2016 (as they are already in the process of paying it back, the last installment in 2015/16 will be 2.6m).

    Please read before making confident-sounding statements that other people won’t doublecheck. This is not rocket science.

    • Ok, the bank loan is old. How about the balloon payment in 2017? Just gonna gloss over that little hump? And all those numbers assume they don’t touch the 8 million sitting on the sideline (which I referenced) what if they touch that? Hell at Libor + 3.5% it doesn’t sound too awful compared to a 7% bond that you never know who you will have to pay it back to.

  8. Some things I forgot to mention but will later: Valkyrie should be a cash cow, improving things a bit. Money is also “cheap” right now, meaning that if you can afford to borrow and need to borrow, now is the time to do it. Just not sure CCP can afford it.

  9. Well, Valkyrie better be a damn good and profitable game then hadn’t it?

  10. I hear a number of voices here that sound like they’re pretty decently conversant in financial analysis, but I’d certainly warn people that it can be very complex to understand the state of the company from a statement like this. Heck, I’ve got an MBA (not focused on finance) and I’d be cautious about reading through these – you’ll want not just the 2012 one but several years in a row to get context (and not just the old columns in the charts), and you’ll want to spend a lot of time grinding through them. Even worse, the global financial situation now is pretty weird compared to what we’ve seen for the past 20 years or so. I’d have to really think about whether I thought a LIBOR+3.5% debt was good or bad right now, for instance, not even getting into the whole scandal around LIBOR itself.

    So those of your who know how to read these things, I’d recommend that you state up front why people should trust your analysis. Do you work for a mutual fund in real life, are you an COO or CFO, or are you a serious but amateur investor?

    • I’m an accounting student, and banker. The girlfriend is an accountant. And to stave off all the jokes, yes we are both Jewish.

      I’m by no means an utter professional, and if we have a genuine CPA in the audience that wants to take a crack at it they are more than welcome to do so, send it to me, send it to EN24, send it to TM.com. I think these issues need to be raised and if I’m certainly not the MOST qualified to do it, I’m also far from the LEAST qualified. That is: you may not agree with me line by line, you may disagree strongly, but I think that it would be hard to dismiss me out of hand on something like this.

      To give you an idea on this I’m batting 1.000 right now on these. Last time I wrote one was in 2011 back in June. I predicted that by October things would be worse than bleak and I was right. I wish I hadn’t been, but I was. Things are nowhere near as bleak in any avenue as back then, but they sure aren’t bright and sunny.

      • Thanks, that adds a lot of weight to it.

        Perhaps I’m still annoyed from the ongoing Rubicon bitter-gripes where non-programmers are proclaiming their opinions on how easy all these features are to code up, test, apply art, etc.

      • I worked for a venture capital funds for 5 years and did commercial due diligence of small and medium media companies. Currently doing a Ph.D in economics.

        Yeah my last thorough balance sheet analysis was two years ago or so as well… but if you don’t have to do it for a living it’s kinda interesting again.

        I am really tight on time as I have to finish a publication, but I would be happy to be the “peer reviewer” of someone’s analysis and discuss it.

  1. Pingback: Money Matters | uglebsjournal

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