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Monday, 9 May 2022

The Rise in the Subscription Price

Much has been said but my take is quite simple.

CCP is loss making for now

When i look at look at the CCP accounts for the year to 2021 in this post, it is clear that the business is loss making.  It lost $8m this year vs a loss of $2m the year before.  Before tax the loss was $12m (CCP gets a tax credit) vs a loss of $4m the year before.

Wage pressures on developers are going up everywhere including gaming.

But CCP needs to become profitable again like any company

So, something has to be done.  The losses are also cash flowing out of the door.

Now, i don't know the profits from Eve Online vs the costs of expanding into new games but i am pretty sure the revenues from Eve Online are around $54m.

Lets assume for now the cost base is not tackled.  So to cover those losses before we even think about wage pressures needs revenues to be around $66m from Eve Online (and thats me ignoring any costs directly )against those revenues.

That $12m rise is a 22% rise in Eve Online revenues.  The player base will never rise 22% in one year so the only near term lever to pull is price and a straight 30% gives room for some players leaving and this years wage pressures.

And there will be pressure from the Pearl Abyss management

There is another reason of course.

CCP is now owned by Peal Abyss in Korea and they paid around $425m though it looks to me that was $225m at the time and $200m if certain earnings achieved in 2019 and 2020 (which appears not to have occurred) - so only $225m paid.  Might even have been only $200m.

(the earnout required profits of over $25m in 2019 and over $40m in 2020).

In the Accounts of Pearl Abyss that $225m is split between the CCP assets and the rest if called Goodwill / Intangible Assets which sits on the Pearl Abyss balance sheet unless it has to be written off.  and a $190m write off would not look good.  In fact, it would look very bad and would not be taken well by their shareholders.

Looking into the 2021 Report & Accounts they say that there was no need to make any write downs and therefore that assumes that somehow CCP can get the cashflows over the next few years back to strongly positive to justify all this.

The summary calculation is that taking their assumptions of a WACC of 11.4% and terminal growth rate of 2% then CCP needs to grow earnings by at least 30% pa for the next 5 years to stand any hope.

Of course, other CCP games could come through and expansion into China could also come through.  There is more to CCP than Eve Online.

Rushed price rise suggests pressure already there

The Pearl Abyss Q1 2022 results are due on 12 May - that may have been the pressure for CCP to announce its price rise and therefore the apparent haste in the announcement.

It may have been pressure from the Auditors on Pearl Abyss to demonstrate they can justify the carrying value of CCP (i.e. the goodwill / intangibles on their balance sheet).

Who knows.

. . . . . . . .the only thing we do know is that CCP needs to return to a profit, and fast.

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