Cloud Imperium Games' 2022 Financial Report

Cloud Imperium Games released its annual financial report for 2022 yesterday on the first workday of 2024. I'm not sure if the move violated any timing requirements for financial reporting obligations. If so, the company can probably afford to pay any fines and legal fees. The report indicated CIG made $130.7 million in 2022.

Despite a 30% growth in income over 2021, the author of the report felt the necessity for explaining why revenue growth was not even higher. I'll add the actual language from the report.

The 2022 accounting shows that Cloud Imperium grew again with total income up 30% on last year’s record-breaking annual performance. The regular and improving game deliveries with increased playability and stability was a key part to our success in 2022, but unlike 2021 the performance was more consistent throughout the year. Also, departing from prior years leading up to 2022, the US growth in income was higher than that of the Rest of the World. It is difficult to draw direct conclusions for this shift but the instablity caused by the Russian-Ukraine conflict and the generally slower rebound of the European economy in 2022, compared to the US, seems likely to be a factor.

CIG has three main categories income: revenue, subscriptions, and other income. The income of $114.1 million reported is more than the previously reported $113.6 million reported at the beginning of 2022. The probable cause is accounting issues involving converting currency used to make purchases in the cash shop.

2022 continued the trend of record-breaking growth with revenue up 32% to $114M. This was fueled by a growth in player numbers and increased player time arising from regular content delivery early in the year and improved game stability throughout the full year. Subscriptions were up 6% to $5.3M and other income increased 21% to $11.4M, driven in part by the growth in UK development and the associated credits arising thereof.

If 2022 had a downside, it fell on the spending side. CIG has a history of spending as much money as it brings in, if not more. The company's spending rose 29% for the year to $129.4 million. 

Costs, including capex, also increased by 29%, although excluding capex, principally focused upon the new Rest of World offices, trading costs rose moderately (compared to income) by 18% in 2022. Nearly all cost categories were up on the previous year but overheads, external game development, and publishing operations, including customer servicing costs, were the main drivers for this increase in costs. Salaries and related costs for game development and support remained the highest spend category accounting for almost half of the total operational spend in 2022, and almost 60% when factoring in the growth in external game development costs, managed mainly through the US.

The CAPEX costs rose to $12.9 million in 2022. The report isn't a standard filing so I'll include exactly what CIG means when the term CAPEX is used.

This represents capital expenditure in areas such as hardware and software, fixtures, fittings, and on offices. Whilst it trends with staff numbers, it is also impacted by hardware renewals, server upgrades, and other security and infrastructure purchases.

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

Capex spending in 2022 was $12.9M, in part due to the headcount increase and the office and computer equipment required for those new staff members, but mainly as a consequence of the new offices in the Rest of World locations, where we have built fantastic ‘destination’ places to encourage in-office work and participation. Our projects are extremely complex and time-consuming to build and support, and it is important that we provide the best environment for our people to enjoy the hours of work being undertaken.

As an aside, the numbers within the financial report were within expectations. A year ago I predicted we would see CIG income of $128 million and outgoes of $126 million in 2022.

In 2022 the employee headcount ended the year 15% higher than at the beginning of the year. I'll include the description of the situation to help explain a major development that occurred in 2023.

Employee numbers increased by 112 (15%) to 860 worldwide by the end of 2022. The US headcount increased by 16 with a continuing rise in publishing, marketing, and community staff (+28) surpassing the reduction in development headcount (-15) as the US focused on certain development activities and managing more external development through Turbulent in Montreal. The Rest of the World headcount grew by 96 (18%) mainly in development with a focus upon Quality Assurance. Ten publishing, marketing, and community roles were also added and unsurprisingly the G&A support staff numbers increased commensurately in 2022. By the end of the year the Rest of the World represented 73% of the Global headcount (up from 70% last year) although the US now also managed over 150 dedicated people working with our internal development, publishing, and marketing teams through Turbulent.

That's right, in 2022 CIG contracted over 150 Turbulent employees to work on Star Citizen and Squadron 42. At the time, CIG considered the arrangement favorable for costs, as CIG's North American studios increased contracted development services.

These represent the costs of contracted services supporting game development work. For 2022 this increased by 24% to $10.8M. External services used by the Rest of the World reduced for the third year running to $1.3M, down 48% on 2021, as more work continued to be taken internally. However, the US continued in the opposite direction with a 54% increase in external development costs principally through the growth in services provided by our associated Canadian entity, Turbulent, which expanded its development resource considerably in 2022 in response to our growing requirements. External development managed through the US increased by $3.3M to $9.5M but this was more cost effective than growing our internal development teams in the high-cost locations housing our US offices.

I am not sure how much CIG paid for Turbulent last summer but apparently over $10 million/year in contracted services worldwide was a bit too much.

Finally I want to conclude with a couple of observations. As mentioned before, CIG turned a profit of $1.3 million in 2022. The amount is too small to trigger the automatic dividend disbursement mechanism so unless I find out from CIG's filings with the UK Company House we will see no drama on that front this year. 

Next, 2022 was the third consecutive year of profitability for CIG. The project ran in the red from 2015-2019, requiring CIG to find outside funding to keep the company alive without invoking layoffs. Looking at the available information from 2023, the winning streak may have ended last year.

Perhaps the biggest cause for concern is the cash reserve at the end of 2020 held less than 6 months of expenses. Theoretically CIG was supposed to use the outside investment money for marketing purposes, not as a general slush fund. I don't know how much money CIG plans to spend promoting the release of Squadron 42, but marketing can quickly cut into the reserves.

I do want to point out one final point. For those players who think their spaceship, vehicle, and clothing purchases from the cash shop completely pay for the development of the game, the yearly financial report once again shows the wrongness of that belief. In 2022, the cash shop paid for 88.2% of the development costs of the games. When subscriptions are included, the figure goes up to 92.3%. The rest of the money comes from things like investments, currency manipulation, and tax rebates. So when people complain about all the ships CIG sells, remember that the company is unable to sell enough ships to keep all the lights on in the offices around the world. Something to think about.