Sunday, December 27, 2020

Cloud Imperium Games 2019 Financial Statement

On Christmas Eve's Eve, Cloud Imperium Games released a financial statement covering the year 2019. Now, some might find wonder if the maker of Star Citizen and Squadron 42 has something to hide. For purposes of this post, who cares? We have information and perhaps most importantly, graphs. So let's dig in.

First, the report is not a formal financial report. The numbers are dumbed down for the average person to read. Hopefully that includes the folks in the r/StarCitizen sub-Reddit, but only time will tell. In the words of CIG's Chief Financial Officer Simon Elms:

It is that time of year again to set out our Accounting for the 2019 Financial Year, adopting the same format as prior years and following the same simple cost accounting rules. This means without the requisite formats and disclosures required in our financial statements and without revenue recognition adjustments or intellectual property amortization entries.

The aim of the Accounting continues to be simplicity and understandability for the average reader, showing “income,” net of sales taxes, as invoiced or accrued, and costs as incurred, adding capital expenditure as “spent.”

But using the numbers our auditors have reviewed and verified as part of their audit work relating to this financial year.

Perhaps now is a good time to explain what a capital expenditure (CapEx) is. According to Investopedia:

Capital expenditures (CapEx) are funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, technology, or equipment. CapEx is often used to undertake new projects or investments by a company. Making capital expenditures on fixed assets can include repairing a roof, purchasing a piece of equipment, or building a new factory. This type of financial outlay is also made by companies to maintain or increase the scope of their operations.

What CIG is doing sounds like the company is trying to make accounting practices designed to satisfy tax laws more understandable. Going back to the Investopedia article, the difference between capital and operational expenditures is:

Capital expenditure should not be confused with operating expenses (OpEx). Operating expenses are shorter-term expenses required to meet the ongoing operational costs of running a business. Unlike capital expenditures, operating expenses can be fully deducted on the company's taxes in the same year in which the expenses occur.

In terms of accounting, an expense is considered to be CapEx when the asset is a newly purchased capital asset or an investment that has a life of more than one year, or which improves the useful life of an existing capital asset. If, however, the expense is one that maintains the asset at its current condition, such as a repair, the cost is typically deducted fully in the year the expense is incurred.

With an explanation of CapEx out of the way, the next subject is Cloud Imperium's overview of 2019. I'll quote the section in full:

The 2019 accounting shows Cloud Imperium continued on its growth path with another record-breaking year for new customers and community engagement. The additional security afforded by the minority investment received in 2018 allowed the group to plan and invest more for the future with a much needed upgrade of its UK offices and the acquisition of a minority stake in Turbulent Inc, Star Citizen’s Online and Publishing platform partner, to further strengthen and secure that relationship. 2019 saw an increase in the “nuts and bolts” infrastructure of the business to accommodate the planned growth, and a step up in the Community and Marketing operations, particularly in the UK, with a very successful CitizenCon being held there this year.

Towards the end of the year, the 2018 investors exercised their pre-agreed option to extend their investment, adding a further $17.25M to the Group’s reserves to pave the way for further expansion and funds to market and promote the ground-breaking projects we are undertaking.

Financial documents often tend to put the best spin possible on a company. Before examining negatives, though, looking at the positives is in order. After all, CIG did have a record-breaking year for income generation.

Source: Cloud Imperium Games, captured 26 Dec 20

Overall, Cloud Imperium Games raised $60.7 million in 2019, a 24.1% increase over 2018. The amount brought in by pledges increased by 26%, from $37.8 million to $47.4 million. CIG defines the "Pledges/Counter" amount as:

This line is taken directly from our daily published Funding Stats Counter, showing the net receipts from our backers and customers. However due to exchange differences and small items that are not included in the counter, such as collected shipping costs on physical goods, the counter does not completely represent all revenue received. Other than subscriptions (referred below) these differences are included in the final income line, to give an accurate representation of total revenue received.

CIG raised an additional $13 million in subscriptions, partnerships with hardware and software vendors, sponsorship income, currency exchange differences, and other items.

The unspoken part of CIG's financial report is the rate at which the company burns through its funding.

Source: Cloud Imperium Games, captured 26 Dec 20

CIG described the above chart as follows:

This represents capital expenditure in areas such as hardware and software, fixtures, fittings, office refurbishment and build out. It is heavily influenced by staff numbers and hardware renewals as well as server upgrades and other infrastructure costs required for the efficient deployment of the game.

Whilst this is capital in nature, it is included in this accounting as it represents an outlay for the materials required to develop and publish the game. Since the total capital expenditure amount is included here, we do not list the depreciation portion of such expenditure subsequently in the cost.

Combining the information from the income and spending charts leads to some conclusions that CIG and/or Star Citizen fans may not like.

CIG's spending continues to outstrip funding. In 2019, CIG increased spending by 25.4%, up to $70.4 million. In 2018, CIG's spending exceeded revenue by $7.2 million. In 2019, the difference expanded to $9.7 million. So the record income could not keep up with the record outgoes.

The fans no longer totally fund the project. Through the end of 2019, CIG had raised $260.8 million in pledges (game & ship sales) and an additional $18.1 million in subscriptions. The $278.9 million from fans fell $38.3 million short of the $319.9 million CIG spent on developing and marketing Star Citizen and Squadron 42 through the end of last year. 

CIG is reliant on outside investors to complete the project. Pledges and subscriptions were not CIG's only source of income. When adding in all other sources excluding outside investors, CIG raised $317.2 million during its first 7 years of existence. As mentioned previously, CIG has spent $319.9 million through the end of 2019. What is keeping CIG in the black at this point is the combined investment of $63.25 million into CIG by Clive and Keith Calder. Presumably, CIG used $2.7 million of the Calder's funds to keep the Star Citizen/Squadron 42 project running in 2019.

CIG will need to raise at least $150 million to $200 million more from the end of 2020 to complete Star Citizen and Squadron 42. I tend to underestimate CIG's spending on the Star Citizen project. At the end of the first quarter of 2020, I estimated that CIG had spent almost $320 million, a figure that CIG reached at the end of 2019. If the 2019 gross burn rate of almost $6 million/month remains constant, CIG will spend between $210-$220 million in the years 2020-2022, assuming the game launches at the end of 2022. But with the November announcement that CIG & Turbulent are launching a new studio to support Star Citizen, the burn rate is likely to increase.

Source: RobertsSpaceIndistries.Com captured on 26 Dec 20

Besides the need to raise staggering amounts of money to complete the games under development, does the financial information published by CIG tell the reader anything useful going forward? Nothing solid, I'm afraid. With the pledge amount in 2020 at approximately $70 million, any type of cost containment puts CIG in much better financial shape. But the question going forward is whether CIG can hold expenses down while continuing to raise large amounts of money from players. But we won't know the answer to that question until CIG publishes 2020 financial data at the end of 2021.

Wednesday, December 16, 2020

Travelling Through A Bad Neighborhood

December has not been a good month for me in real life. Escaping into video games doing mindless tasks helps get my mind off things. When I mean mindless, I mean something that takes very little attention. I started extracting one of my alts from Triglavian space and I stopped someplace in XIX space. I had a little trouble concentrating.

Monday night I decided to get my alt back home to Heimatar. I logged into the game in the system of V-4DBR in Detorid. 

The Way Home

I started with the idea of using wormholes to get home. The system had a signature, so I probed it down and found a wormhole. I jumped in, bookmarked the hole, and flew off and established a bookmark. Easy peasy. Then I looked up the wormhole name in Dotlan, J145510. Another first for me in EVE. I'd never been in a Class 6 wormhole before. I didn't know they'd open directly to k-space. 

I started probing down signatures and found two wormholes, including the one I'd entered the system through. So I warped to the unknown wormhole ... and it wasn't there. I guess the owners were doing a little cleanup. Knowing the inhabitants were actually busy and alert, I decided to go back to Detorid. On my way out of the hole, I took a screenshot to record the activity. 

Back to k-space

Two Tempests and a Naglfar. Plus whatever cloaky strategic cruisers were providing support. Leaving the hole was probably wise, especially since my ship had no weapons.

Next, I went looking for signatures and jumped into B-5UFY. The only signature in system was a relic site. Normally I would have ran the site, but I wanted to get done that night. The next system, PQRE-W, didn't contain any sigs.

At this time, I was two jumps out of Wicked Creek and decided to find out just how empty null sec really is. So, in empty systems, I jumped gate to gate. In systems with another pilot, I went ahead and would bounce to a belt before jumping through.

The trip was pretty uneventful. I only saw one ship, and Ares, on a gate. The Gallente interceptor decloaked first and was aligned and warping off by the time I dropped my cloak. I did see Tank CEO fly through a system after I bounced to a belt. Tank CEO is a legendary figure from the beginning of EVE who had a classic, carebear encounter. Selecting the shortest route didn't run me into any obvious problems, although I did adjust my route to avoid R-3FBU in Scalding Pass. I didn't want to run into anyone from Warlords of the Deep. Some might remember the alliance from Alliance Tournament XIII, where they were stripped of the title due to collusion with Camel Empire.

Overall, an interesting way to spend a couple of hours, even if all I did was fly home.

Tuesday, December 1, 2020

The October 2020 Monthly Economic Report

Trying to write about EVE Online's monthly economic report is a bit of a challenge. The posts can read very much alike after a few months. I didn't produce one last month due to that problem. But the end of 2020 has some similarities with the second half of 2019. 

In 2019, a massive nerf to null sec PvE preceded the launch of WoW Classic in August 2019. The slowdown in activity as players returned to the classic game not only helped slow revenue growth for the third quarter but led to a 16.4% decline in quarter-over-quarter (QoQ) revenue in the fourth quarter of 2019 as well. In 2020, nerfs to null sec income such as the Dynamic Bounty System, the updated Encounter Surveillance System are too new to show up in the statistics, though the effects of the ore/mineral redistribution are now visible. And delays in software releases meant that the new WoW expansion Shadowlands didn't release until last week. To top off the comparison, one of the most anticipated games of the past two years, Cyberpunk 2077, goes live on 10 December.

First, let's look at the money supply. In the past, I've just looked at the change. October's 1.4% increase doesn't necessarily mean players face inflationary pressure. A more accurate indicator of inflation due to CCP's monetary policy is the amount of ISK per character or ISK per actual player. But what the fluctuations in New Eden's money supply can show is player engagement.

The key statistic determining whether the money supply increases or decreases over the course of a month is the active ISK delta. The formula is:

Active ISK Delta = (ISK on characters returning to EVE) - (ISK on characters leaving EVE) - (ISK removed from characters by CCP)

When a large amount of players leave EVE without a corresponding number of players returning to EVE, the ISK supply decreases. When players are satisfied with the game, less ISK leaves the game and the ISK supply rises. And when a major event like an expansion or some other significant content drop occurs, current players stay, former players return, and the value of the active ISK delta is a positive number, thus expanding the money supply more than just the normal faucet vs sink calculation.

One other fact about the active ISK delta is relevant to the following analysis. An account is considered inactive for purposes of the money supply if the player does not log it in for 30 consecutive days. So, for example, if a player left EVE to play WoW: Shadowlands, the player won't count as leaving the game until December.

Looking at the active ISK delta really shows the difference between a major null sec war and 2019's Blackout. With both the war and Blackout beginning in July, August was the first month players leaving the game would impact the money supply. In August 2020, the active ISK delta was -15.3 trillion ISK, compared to the -43.1 trillion figure in August 2019. Overall, the average active ISK delta from August - October 2020 was -18.3 trillion ISK. During the same three months in 2019, the average was -44.5 trillion ISK. By itself, this metric would lead me to believe players were more satisfied with EVE in 2020 than with the version on Tranquility in the summer and early autumn of 2019.

Anyone reading the monthly economic report should take away that something happened to mining in October. The full history economic indicies graph (see above) shows that the mining price index (MPI) hit an all-time high in October. But I find interpreting the indices a little easier when I look at the ISK values inside the indices.

The value of the mineral price index jumped 44.7%, from 10.9 trillion ISK to 16.1 trillion ISK. One should remember that a jump in value does not mean the amount mined increased 44.7% as well. According to another part of the MER, mining increased far less.

Looking at the regional data (minus Triglavian space), the value of the ore mined in known space rose from 27.3 trillion ISK to 28.7 trillion ISK. The 5.1% increase doesn't quite match up with the increase recorded in the MPI.

Where the mining is occurring is more intriguing than the amount. The value of null sec mining declined 6.1% (down from 13.2 trillion ISK to 12.4 trillion ISK). That decline, however, was more than offset by an increase of 2.2 trillion ISK in Empire space. I can't help but wonder how much of the increase was a result of null sec empires mining for isogen & nocxium in low sec.

Looking at the mineral and ore data reminded me of a statement from a dev blog in March.
"As announced recently, New Eden is entering a period where resource distribution is being re-balanced. It has been decided, in cooperation with the CSM, to give an update on how and why this decision was made. As detailed above, it was concluded that the economy of EVE is in an unsustainable state. A healthy economic environment where players can find opportunities by making interesting choices is the goal. One of the key pillars of EVE is that loss has meaning and a state is being reached where loss is not meaningful anymore for veteran players."
The ore and mineral data from October 2019 & October 2020 show the progress CCP made in making loss more meaningful. The value in the ore mined year-over-year remained similar, with 29.8 trillion ISK in ore mine in October 2019 and 28.7 trillion ISK in ore mined in October 2020. However, the value of the MPI rose from 5.3 trillion ISK in October 2019 to 16.1 trillion ISK in October 2020. One key piece of information to note is that the EVE economy still was feeling the effects of Blackout and the loss of players last October.

Finally, New Eden is showing the first signs of inflation on the markets. While the value of the goods that make up the Consumer Price Index (CPI) decreased for the fifth consecutive month, the CPI index rose for the second month. Since August, the CPI has risen from approximately 91 to 95 while the value of the goods in the index declined by 2.7% in the same period. 

However, that decline includes the real money trading (RMT) tokens such as skill injectors & extractors. For purposes of evaluating the in-game economy, I have argued for years that those items should not count toward the CPI. When those items are removed from the calculations, the value of the goods in the Consumer Price Index actually rose 3.8% compared to September. Or to put the matter another way, the decline in the value of the RMT tokens sold is obscuring the effects of the resource distribution changes.

At the end of the day, I think the data shows that EVE Online is in better shape to handle the launch of a major new game than it was in August 2019. I do reserve the right to change my mind when CCP releases the November MER. At that point, we will have a better idea what the impact of the additional nerfs introduced in November had on players. Because with the November release of WoW: Shadowlands and the 10 December release of Cyberpunk 2077, players will leave the game. The question, though, is how many?