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Wednesday, 26 March 2014

CCP - 2013 Results

The CCP 2013 results are out - not the full Report & Accounts where we can learn all about subscribers etc - only the financial statements.

  • Revenues up 17.5% to $76.7m
  • Large write-off of $21.5m Research & Development work
  • EBITDA [earnings before interest, tax, depreciation and amortisation] (ignoring this write-off) rose 20.5%
  • Operating losses of $8.0m, ignoring this write-off
  • Post tax profits of $0.1m thanks to a tax credit., ignoring this write-off
  • Net cash spent during the year of $2.6m
  • Net debt rose to $16.5m
  • Net debt to ebitda 1.0x (vs covenants of 1.5x)

Revenues up most since 2009: Against what i was expecting the Revenues where slightly less than hoped, though after a rise of +7.1% in 2010, +10.2% in 2011 and no rise at all in 2012 then a rise of +17.5% in 2013 is most welcome.

Revenues in CCPs largest market, the US, rose 11.6% to $37.4m whilst Europe showed a much faster growth of 17.9% to $29.6m.

We don't yet know how much came from China though Asian sales rose from $2.4m in 2012 to $5.2m in 2013 - i would assume c75% of that is from China (Australia is not counted as part of Asia).  We know that Chinese subscriber numbers doubled over 2013.

Most costs under control: Most of the costs such as Publishing, Marketing and G&A seem to be under control.  In fact, G&A (General and Admin - so read as all costs not associated directly with programming, marketing, publishing, selling) was actually down 1% which is very impressing given the rise in revenues.  It looks like salaries in G&A fell by almost $1m from $9.8m to $8.9m which suggests some lay offs.

Profitable only because of a tax credit and tax to be deferred: CCP has a subsidiary based in the US state of Georgia which has a film tax credit which can be sold to third parties.  This year this generated $3.5m income (vs $2.5m in 2012).  The remaining $6m benefit came from the tax to be deferred into future years on underlying losses and the R&D amount written-off.

Drama in the R&D department: The two stand out items were the write-off of R&D of $21.5m and the increase in underlying R&D from $16.5m to $35.1m, as shown in the table below:

From the notes in the statement we know that the write-off of $21.5m occurred in Iceland (sort of suggests Eve Online or Dust514 related).  We can but speculate what this related to but personally i would put it down to either World of Darkness being canned (this has programmers in Iceland?) or much of the Dust514 capitalised costs being written-off - the latter is looking likely.  The accounting rules only allow R&D costs to be capitalised if the profits from the sale of the product over future years are expected to cover these capitalised costs.  We will learn more when the full Report & Accounts come out but i am leaning towards an accelerated write-off of Dust514 capitalised costs - more below.

The general rise from $16.5m to $35.1m is due to Dust514 coming online and so those prior capitalised R&D costs are now being amortised.

In 2012 the amortised R&D related almost entirely to Eve Online = $11.2m.  Therefore, the increase in amortisation to $25.4m reflects the inclusion of Dust514 for 6 months only.

In the first 6 months of the year, the amount amortised was $7.6m which related to Eve Online and therefore that would indicate that the full year amount for Eve-Online $15.2m.  This would suggest that 6 months of Dust514 amortisation was $10.2m ($25.4m - $15.2m).  Hence, the indicated full year rate for Dust514 is $20.4m.  Therefore, the annual amortisation charge would now be $15.2m + $20.4m = $35.6m.

Firstly, that is a very high annual amortisation amount for Dust514 ($20.4m) and feels like CCP has decided to accelerate the write-off period (they can choose to write-off the capitalised costs in anywhere from 1 to 6 years).

Secondly, the entire remain capitalised R&D is now $59.6m vs an underlying P&L R&D cost of $35.6m pa - that suggests that the entire amount would be written off in under 2 years.  However, the Eve Online costs that are being capitalised i suspect will be written-off over the full 6 years and so i suspect most of the remaining $59.6m is now Eve Online / Valkyrie related and so i would be expecting a much lower R&D cost in the P&L going forwards.

In all, i suspect CCP has decided that a large amount of the capitalised Dust514 R&D is unlikely to be covered by future profits from Dust514 hence the write-off and all the R&D spent in 2013 on Dust514 was put straight through the P&L.  Note, this is not the same as saying Dust514 will be scrapped - just that prior costs can no longer be justified.

Hence, i suspect the Dust514 related R&D as at June 2013 (i.e. before it was reduced) was $10.2m + $21.5m = $31.7m at the upper end to $21.5m at the lower end.

None of this R&D written-off is cash related in 2013 - it instead relates to cash that was spent in the years leading up to 2013.

What is cash related though is the $30.5m salaries pa spent on R&D people (for that i assume programmers etc).  In 2013 $20.1m of that was capitalised - it will be interesting to see what will be capitalised in 2014.

. . . . . . as a final comment, the convertible bonds which are listed on the Nordic Nasdaq did not move an inch - infact, as far as i can tell, not a single bond has been bought or sold since they listed in June 2013.


  1. some nice analysis! Appreciate the work. I bet there are quite few people interested in financials but without enough time/knowledge to dedicate.

  2. hot damn, better write up than Jester's. Query: Does this mean it was a "loss"? or a bad idea being written off as a loss?

    1. It merely means that the costs put into the project will no longer be covered by the profits from that project - and therefore yes, the project did make a loss. In itself, that indicates that the project is going down the road to being a "bad idea" - that cash spent in the past could have been put to better use to make profits elsewhere.

      All depends on how it goes from here - do CCP throw more money at it, change its direction etc or is it scrapped.