The CCP 2016 Financial Statements were filed at the
Directorate of Internal Revenue on 10 April 2017. I have a obtained copy (they are available to
the Public) and discuss them below.
I have filled in the main numbers on my CCP
Financials (as published) page to allow a quick comparison of the Profit
& Losses, Balance Sheets and Cash Flows of prior years going back to 2008
(i.e. 9 years of numbers).
I have also created new page "CCP hf. ConsolidatedFinancial Statements for 2016" that recreates the 2016 accounts as near as
practicable to their original form to allow others to take the information and
analyse it themselves.
Summary
Revenues are up 31% to a new record high of $86m, pre tax
earnings are up 30% to a new record high of $24.6m, post tax earnings are up 4%
to a new record high of $21m (the lower % post tax earnings rise than revenues rise
is because CCP is back to paying tax again). Balance sheet is strong: $46m of Cash less
$21m of Borrowings; and the Development Costs look prudent. CCP is generating cash and using it to pay
down the debt.
It does seem that the problem years of 2013 and 2014 truly are
behind them.
In 2015 CCP had revenues from Eve Online only. In 2016 CCP had revenues in for Eve Online,
Valkyrie and Gunjack. That makes life
more complicated to work out how Eve Online is doing.
However, from my discussion below I suspect:
- Eve Online (excluding China) – I estimate sales have
fallen by 6.5% to $49.9m, back below 2009 levels. I.e. Eve Online remains in decline, though a
slowing rate of decline.
- That would indicate that the number of paying players had
fallen also by 6.5% to an estimated 370,000
- Eve Valkyrie has generated sales of $22m (I know, that
sounds a lot but read below)
- CCP is worth $271m . . . . . and if my thought process is correct then see below for what that means the CEO could be worth!
Revenues (and
estimating how Eve Online has done)
Revenues rose from $65.7m to $86.1m, a rise of 31%. Now, CCP does not give much away. For example, it only splits the revenue by
type of sale or geography. It does not
split the revenue by game. What CCP
discloses is shown below:
In all, I suspect there are seven revenue streams (really
six): Eve Online; Eve China; Dust 514 (now nil); Other Games; Eve Valkyrie; Eve
Gunjack; and Other Revenues.
We know that Other Revenues are $5.0m ($7.1m in 2015) – I
still have no idea what this refers to but at least we know how much it is.
I suspect Eve China is the Asian revenues. I also suspect the Eve China is included in
Royalties and Licences with the difference in “Other Games”. In 2015 that put $0.4m in “Other Games” which
is a trivial amount but in 2016 it was $3.0m which is more material. I suspect this may be related to Eve Valkyrie
or Eve Gunjack but for now we will leave it where it is.
I suspect Dust 514 no longer brings in any revenues.
So that leaves Eve Online, Eve Valkyrie and Eve Gunjack
to work out. Unfortunately we don’t have
much to go on except two pieces of information: 1) CCP tells us the Cost of
Sale of Each of the Revenue lines; and 2) CCP tells us the deferred
subscription Income (these are subscriptions paid in advance and presumably
only relate to Eve Online given Valkyrie and Gunjack are not subscription
games.)
So, we can use the above to estimate the Eve Online and
other Revenue lines.
Using the Cost of Sales data:
In the above table Eve Online Cost of Sales $3,498,518 in 2016 vs $3,749,661 in 2015.
I suspect Cost of Sales refers to affiliate commissions
etc that CCP pays to third parties for Eve Online sales. If we assumed that the proportional Cost of
Sales for Eve Online does not change each year then given we estimated last
year that the Eve Online + China Revenues were $58.2m then we can estimate the
2016 Eve Online + China revenues to be $54.3m.
And given we believe Eve China is $4.4m (=Asia revenues) then we can
estimate that the Eve Online revenues were $49.9m ($53.3m in 2015). That would mean that Eve Online revenues fell
6.5% and are below 2009 levels. See note
1 for details of this calculation at the bottom of this post.
Using the Deferred Revenue data:
In the above table Eve Online Subscription Deferred Revenues are $3,849,865 in 2016 vs $3,733,819 in 2015.
CCP sells Eve subscriptions in 1 month, 3 month, 6 months
and 12 month bundles. At the end of the
year CCP will have received payment from players who still have an element of
their subscription period to fall in 2017.
It is that proportion that is called “Deferred Revenues – Subscriptions”. If we assumed that the proportion of deferred
subscription revenues does not change each year and if we assume this all
relates to Eve Online (not China) then we can estimate that Eve Online revenues
increased by 3.1% to $55.0m. See note 2
for details of this calculation at the bottom of this post.
Either way, we are looking at Eve Online revenues in a
range of $49.9m to $55.0m. For now, I
will go with the $49.9m which feels more accurate given it is based on a
through year P&L number rather than an end of year balance sheet number.
If we went with that then we could then suggest that the
number of players in Eve Online declined again.
However, it has been a long time since we were given player numbers by
CCP. Last year I estimated Eve Online
had 396,000 paying players. If I assumed
paying players and Eve Online revenues were correlated then paying players would
have also fallen 6.5% to 370,000.
That then leaves us with Valkyrie and Gunjack to work
out. Again, CCP only tells us the Cost
of Sales and if I assumed that the Cost of Sales is proportionally the same
between Valkyrie and Gunjack then I can allocate the remaining Revenues between
those two games. That allows me to
estimate that Valkyrie had revenues of $20.4m whilst Gunjack had revenues of
$3.4m. See note 3 for details of this
calculation.
Now, I will say here and now that that feels high for Eve
Gunjack and Eve Valkyrie which would therefore suggest the Eve Online revenues
I estimate are too low. But if anyone
else can come up with a better way then let me know.
Now, as a final observation, there is something odd going
on in Deferred Income (discussed towards the bottom of the post) which may mean
that CCP recognised an additional $3m of sales for Eve Online that would have
historically sat on the Balance Sheet.
If that was the case then Eve Online would have had $3m sales less than
what I think above.
Operating Profits
Operating profits are the earnings before interest and
tax = Revenues less operating costs.
Operating profits rose 30% to $26.1m – another new record
high. The Operating Profit margin
(=operating profits / Revenues) rose to 30.3% (23.4% in 2015), another new high
and much more respectable.
That compares to Operating Profit Margin at Activision-Blizzard
(World of Warcraft, Call of Duty, Candy Crush etc) of 33% and Electronic Arts
of 31%. So just about inline with peers.
The difference between the operating profits and revenues
are:
Cost of Sales $6.8m ($4.3m in 2015) – I believe this
relates to commissions paid to affiliates and third party websites that sell
Eve Online subscriptions. It has risen
because it includes the Cost of Sales of Eve Valkyrie and Eve Gunjack as well
as the normal Eve Online, Dust 514 and Physical Products and eCommerce
R&D $17.9m ($16.9m).
This is always the interesting one given it was the R&D that nearly
took CCP over the edge in 2014. Now,
R&D is never an easy number to nail down.
For example, the $17.9m P&L cost in 2016 is actually $18.2m of
salaries (so people costs) less $12.0m of which is capitalised (so that is
stuff people are working on that adds value to the games which will play out
over the next few years) add $11.8m prior years R&D amortised (I.e. the
historic years R&D that is now being expensed into the P&L as it is
played out). In other words, the R&D
cost we see in the P&L is made up of some of this years costs plus a
proportion of historic costs and therefore it is quite messy and often not
comparable to the actual cash cost in a given year.
R&D is the medium term driver of revenues and so I
would always expect to see it in the range of 15 – 25% of revenues. To put this in perspective,
Activision-Blizzard spends about 14% on Product Development but CCP should be
growing faster than Activision-Blizzard and hence should be spending more on
R&D to add content to drive this growth.
Publishing $6.0m ($5.2m) which is 7.0% of revenues and has
been on a declining % of revenues since it peaked at 17.3% of revenues in
2011. I suspect this reflects a greater
focus on digital downloads compared to hard disc sales and therefore should
continue to decline.
Marketing $12.9m ($7.6m) – this is back up to 15% of
revenues compared to the old range of 15 – 20% in 2008 to 2014. It was cut back in 2015. Hence, it is back to a range I would
expect. Marketing is the here and now
driver of revenues and so I would always expect to see this cost in the range
of 15-20% of revenues. Again,
Activision-Blizzard spends about 14% on Marketing.
General & Admin costs $16.4m ($16.3m) - almost flat
on 2015 so indications of good cost control from CCP. These are all costs that are not in the above
and not interest or tax. In the big
scheme of things though they are high as a % of sales at 19% but still lower
than historic levels of 24 – 30%.
Activision-Blizzard General & Admin costs are a mere 8% of revenues
but this represents scale. The thing
about General & Admin is that it tends not to rise as revenues rise. For example, you only need one CEO if your
revenues are $100m or $500m or $1bn etc.
Hence, I would expect this cost as a % of revenues to decline from here.
Staff Numbers
Staff numbers by the end of 2016 was 359 compared to 330
at the end of 2015 – so it looks like CCP is back to hiring again. Compared to the peak of over 600 in 2010. In total CCP paid $28.3m in salaries compared
to $23.8m in 2015.
Tax
Nice to see that CCP is profitable enough to be paying
tax. Good news, when you think about it.
Cash generation
The buck stops here, companies live or die on this. In 2016 the CCP generated $10.7m cash from
its operations compared to $20.6m in 2015.
The $10m difference is due to spending $5m more on R&D and in 2015
there was a disposal that brought cash of $5.7m (World of Darkness).
In 2016 the cash flows all look underlying (i.e. there
are no one-offs which benefit or hit CCP that will not be repeated in 2017).
There is one odd change though, to do with Deferred
Income and it is discussed further down below and used to be linked to Plex. Had this oddity not occurred then the cash generation i suspect your have $5m better.
Borrowings
These were all restructured in 2015 and now the company
is repaying about $2.5m each year until 2020 and making a final $12m
repayment. That all looks doable
especially when we consider that the company has $46m in cash and is generating
cash from its operations.
That all said, the current borrowings of $20m does mean
that CCP is paying interest of $1.2m in 2016.
Balance Sheet
Pretty strong now.
Cash of $46m less borrowings of $21m is healthy.
There is also $18m of Development Costs sitting on the
Balance Sheet (that is staff doing work in prior periods that should hopefully
generate revenues in future years, as it does, that $18m is expensed through
the Profit & Loss account).
Furthermore, that Development Cost is quickly expensed through the
P&L – in 2016 $12m was added to the Development Cost on the Balance Sheet
and $12m was expensed through the Profit & Loss account. In other words, unlike prior years, the
Development cost on the Balance Sheet is being quickly and prudently expended.
Deferred Income
As highlighted above, there has been an odd change in
Deferred Income. Deferred Income relates
to cash CCP has received but for services provided in the future. One example is if a player bought a 3 month
subscription at the end of November – in this case the period of January and
February would be held on the Balance Sheet for December 2016 as Deferred
Income.
Plex was another example – if Plex was bought it
technically allowed a player to extend their playtime by 30 days at a later
period.
It appears that whilst the Subscriptions deferred revenue
is still there, the other two lines have almost gone to zero.
Now, this has implications for what we think Eve Online
revenues were. If we assume that the
same amount of Plex was bought
I used to think that “In-game purchases not yet consumed”
related to Plex. So I am not sure why it
has gone to zero!
I am all ears to any ideas on that one?!
Anyway, had all been as expected I wold have expected to
see that “In-game purchases not yet consumed” be at least $3m. Given it is not then that $3m would have
recognised as sales either in Eve Online or something else.
Shareholding of
CCP
Along with the Accounts comes the list of shareholders –
again, all publicly available information.
Now, I only have shareholdings for December 2014 and
2016. I don’t have it for December 2015
(I have the % holdings for 2015 but that does not all lend itself to accuracy).
It is interesting to look at who are the top 10
shareholders and how this has changed.
The above %s are worked out using the 9,012,556 shares in
issue. There are also 1,369,854 B Shares
in issue. I don’t know the terms of
these shares but if they proved to be “pari pasu” with the 9,012,556 shares in
issue then these %s would need to be worked out including the B Shares.
I don’t know who owns the B Shares though Nosy Gamer
suggests they are held by NP and NEA (looking at the 2015 % shareholder list I
suspect it is NEA only – but lets go with both for now). If that was the case then their total
shareholding would be 5,364,093 = 51.7% of the shares and therefore above the
crucial 50% level.
Nosy gamer has done more work on all this last December http://nosygamer.blogspot.co.uk/2016/12/the-newest-rumor-of-sale-of-ccp-games.html
Value of CCP
In all, 707,035 shares were purchases from existing
shareholders by CCP itself for a total value of $18,432,595. These were normal shares just like almost all
other CCP shares in issue. That implies
a value of $26.07 per share.
We know that there are 10,382,410 CCP shares in issue
which implies a value of $271m for CCP (I am assuming a B Share is worth the
same as the other shares).
That makes CCP worth 12.6x earnings or an EV/EBITDA of
6.3x (EV = Enterprise Value = Value of the shares less net cash in the company).
Worth saying that that compares to Activision Blizzard
which is on 26.6x 2016 earnings and an EV/EBITDA of 11.2x. There would be many reasons for this
difference such as Activision Blizzard’s better history of growth and more
product revenues streams etc – but, it does make the value of CCP at $271m more
believable.
And, lets get cheeky and assume this $26.07 value is
correct, we also know that the CEO owns 676,564 shares which makes him worth
$18m. Beers on the CEO then!
Notes
Note 1: the calculation I used was Eve Online + China
2015 Sales x Eve Online Cost of Sales 2016 / Eve Online Cost of Sales 2015 and
then take away the China Revenues.
[(53,310,928+4,892,557) x 3,498,518 / 3,749,661] – 4,444,570 =
49,860,590
Note 2: the calculation I used was Eve Online 2015 Sales
x Deferred Subscriptions 2016 / Deferred Subscriptions 2015. (53,310,928 x 3,849,865 / 3,733,819 =
54,967,816
Note 3: we know the total revenues are $86.1m and we know
or have estimated all other revenue lines as Eve Online $49.9m + China $4.4m +
Dust $0.0 + Other Games $3.0m + Other Revenues $5.0m. So that leaves us with $23.8m of revenues to
allocate. Hence, my estimate for
Valkyrie is $23.8m x Cost of Sale Valkyrie / (Cost of Sale Valkyrie + Cost of
Sale Gunjack) = $20.4m and likewise for Gunjack is $23.8m x Cost of Sale
Gunjack / (Cost of Sale Valkyrie + Cost of Sale Gunjack) = $3.4m.
