I have filled in the main numbers on my CCP Financials (as published) page to allow a quick comparison to prior years.
I have also created new page "CCP hf. Consolidated Financial Statements for 2014" that recreates the 2014 accounts as near as practicable to their original form (omitting parts that are largely irrelevant for our purposes) and so to allow others to take the information and analyse it themselves.
A bit of background
Iceland, much like the UK and other countries, requires all companies (both public and private) to file their Accounts within a certain time such that they be kept on record and can be viewed by the public. There are good reasons for this which are beyond this post. For the UK, anyone can go online to Companies House, or private websites, and download a copy of any UK company for £1. In Iceland, you need to fill out a form and, for the required payment, they email you the accounts.
The 2014 CCP hf. Accounts can be found on the website of Directorate of Internal Revenue, click on the "+" sign beside the phrase "Gögn úr ársreikningaskrá".
And if you brush up on your Icelandic you can find the right form to fill in and the accounts will be emailed to you for a fee. Note, you need to navigate the Icelandic version of this site (google translated if required), the English version seems to bypass all the company data pages.
And so onto the 2014 Accounts
For the record, I maintain that Eve Online is a very profitable, cash generative and low growth game which is standing the test of time (up their with very few other games). Perhaps where CCP has fallen down is how it uses that cash on other projects - and 2013 and 2014 was all about cleaning up that mess.
Remember, we already had the accounts for the 6 months to June 2014, so the focus is on the 6 months to December 2014.
As a result of all the write-offs of Dust514 and World of Darkness, some general cleaning up of the Balance Sheet, and i suspect some accelerated amortisation of Eve Online Development costs, CCP reported a loss of $65.6m.
It is hard to separate out totally the write-offs to get an underlying feel of how Eve Online is doing - if i could, i greatly suspect we would see a nice profit. We won't really know until the June 2015 accounts are released by CCP.
If i had to estimate the underlying profits then i would add back:
- $29m write-off of Dust514 and World of Darkness
- $46m accelerated amortisation of Eve Online Development Costs (my estimate)
- $3m additional interest cost
. . . . . and that would give me pre-tax profits of $11m.
The feeling here is that CCP have rebased the company and Financial Statements back to something more conservative and solid. Which is sensible ahead of what looks like the recapitalisation of CCP, which is what i suspected back in April when CCP announced it was repaying its expensive Convertible Bond.
For what looks like a large loss, the company did actually generate a little cash in the year!
Full year revenues fell 10.6% to $68.6m. In the second half of 2014 revenues fell 19.9% when compared to the second half of 2013.
It has hard to know how much of these revenues were in China, personally i estimate strong Chinese growth from $1.8m in 2013 to $3.5m in 2014.
Broadly, all the gains in revenues made in 2013 were given back in 2014. Revenues in 2012 were $65.3m which is broadly where 2014 ended up.
Revenues fell in all geographies - so we witnessed a broad based pull back.
Don't forget that the US$ was strengthening against the Euro - so European sales will have this headwind against them.
The accounts themselves do not state the number of subscribers in Eve Online.
Now, working out what is linked to writing off Dust514 and World of Darkness and what is linked to Eve Online and Valkyrie is key to working out what is the ongoing underlying level of R&D and therefore what the profitability is of the rebased CCP business.
However, it is not clear in the Financial Statements but i can tell that not only has CCP written off all the Dust514 and World of Darkness but it appears also to have accelerated the amortisation of some of the Eve Online development. This may reflect the new policy of releasing content more frequently.
That is the only way for now i can explain Development Cost on the Balance Sheet being $13.6m. It has never been that low. Back in 2009 it was $37.6m. This may also reflect CCP just clearing the decks ahead of a recapitalisation.
(The $14.3m Carrying Amount includes a Trademark of $0.7m).
In the full year the company charged $86m to R&D. I am confident that $29m were write-offs (most likely Dust514 and World of Darkness). So what started in 2009 has no come to an end.
That leaves $57m. I greatly suspect most of that related to an accelerated amortisation of Eve Online Development costs.
In 2014, $7.9m of staff costs were capitalised (i.e. classed as Development Costs) vs $20.1m in 2013. I suspect that gives a good indication of the R&D cost going forwards. i.e. nearer $10m vs $17m we saw in 2012.
In the second half of the year the CCP cut back on Publishing and Marketing, taking down to 8.9% and 15.3% of revenues respectively (vs 11.4% and 18.1% in the second half of 2013) which perhaps reflects no more Dust514 and World of Darkness.
G&A (General & Admin) costs though went up to $19.8m (=28.8% of sales) - which is odd. Perhaps some of cost of the work done in relation to paying back the Convertible Bond is in there?
To put the re-focus of the company into perspective, the number of staff fell from 508 in December 2013 to 339 in December 2014.
In September 2013 CCP employed 553 staff and in December 2010 CCP employed 603 staff which was the start of the ramp up of employees for the Dust514 and World of Darkness development.
Technical accounting bit here: given the Convertible Bond was repaid early it had to be restated at $20m on the balance sheet vs the $16.7m it was held at before and this difference was put through the Finance Cost on the Income Statement. Hence, interest costs were about $3m higher than normal.
There has been a lot of cleaning up: some goodwill has been written to zero; the Development cost on the Balance Sheet has fallen from $72m to $14m (as discussed above); inventories written down to zero.
What that all means is that the Total Equity in the company has gone negative to the tune of $15.3m.
I would expect to see a capital reorganisation in the June 2015 Financial Statements to turn that back positive.
Working out the net debt of CCP is surprisingly hard but i estimate it was $12.4m in 2012, $15.9m in 2013 and $16.0m in 2014.
It looks like CCP generated a small positive cash flow of $238k in 2014 - not much else to say, things are messy this year. But if CCP has a lower cost of debt and some other costs come down then we may even get positive cash flows in 2015.
I was somewhat surprised to see no mention of the Bond being repaid in April this year. In my mind this is a key post balance sheet event - even though it occurred after 31 December 2014 there are plenty of indications in the Accounts that it was about to happen and, to me, some sort of explanation would add further clarity. So, The Accounts don't give any clue as to how the convertible bond was repaid - I.e. With new debt or new shareholders putting in new equity.
However, the Accounts also comes with the complete list of Shareholders attached which I can compare to the main shareholders listed in the September 2013 Prospectus which dealt with the Convertible Bond Placing.
As ever, to get an idea of how much Plex is sitting in hangers we look at the Deferred Income line in the balance sheet. As a reminder, CCP books Plex sold for US$ as revenues when it is finally converted into game time etc (I.e. used up). Otherwise, the cash received for the sale of the Plex sits in Deferred Income.
Also potentially sitting in Deferred Income is any Aurum bought from the Store - but I assume that the purchase of Aurum is used immediately.
See my reasoning in this post i wrote back in September 2014 for linking Deferred Income to Plex price movements.
Looking at the "In-game purchases not yet consumed" line indicates that the US$ value of Plex sitting in hangers has risen from $2.1m to $3.0m. If we assume each Plex costs $15 then that indicates the number of Plex sitting in hangers has risen from 140.5k to 197.7k (using the same methodology in December 2012 there was 71k Plex sitting in hangers).
In some ways this does not add much to the debate on the price of Plex though it does suggest a net 57,200 additional Plex were created in the last year (= Gross creations of Plex less Gross usage of Plex). In the first 6 months i estimated that about 13,000 additional Plex had been created and therefore this indicates the second half of 2014 saw more investor buying.