Monday, February 5, 2024

How Much Does CIG Need To Sell In 2024

In 2023, Cloud Imperium Games, makers of Squadron 42 and Star Citizen, sold a record $117.4 million in goods recorded on the Roberts Space Industries funding page. But did that make 2023 a good financial year for CIG? And what type of sales does CIG need in 2024 to remain financially stable? For the second year in a row I will attempt to answer those questions. Just remember, I have no inside information and am not a financial expert. I have just covered video game company finances, in particular CCP and Pearl Abyss, for over a decade. 

Cloud Imperium Games releases a financial report on its website approximately one year after the conclusion of a year. For example, the report for 2022 was released on 2 January 2024. Also, as of the time of composing this article, CIG had still not submitted its 2022 financial accounts to the UK Companies House. Still, my speculation in February 2023 of CIG's financial performance was fairly accurate. My rough calculations showed CIG with $128.6 million in total income with $124.7 million in spending in 2022 (Yes, I should have stuck with my first answer). The actual totals were $130.7 million in income and outgoes of $129.4 million.

A year ago I thought CIG needed to record between $128.6 million and $134.6 million, or a year-over-year increase of between 13.2% to 18.5%, in sales. I based the estimated required 2023 sales figure on my estimate for CIG's spending in 2023 of between $143.4 million to $149.6 million.

Now to estimate the amount this year. As mentioned before, the number of job postings at the end of 2022 indicates plans to increase CIG's workforce 15% in 2023. Capital expenditures should decrease a bit, but the world is now undergoing a period of high inflation. I will assume spending will increase 15-20% in 2023, meaning the company will spend an estimated $143.4 million to $149.6 million. 

As mentioned above, CIG only recorded $117.4 million in sales, meaning my initial estimate puts CIG's losses in 2023 between $8.8 million and $21 million. A pretty wild swing, and one which assumes the company didn't make any major changes. CIG did make a major change, acquiring Turbulent Media Inc for an undisclosed amount in May.

How did the acquisition of Turbulent affect CIG financially? First, how much did CIG pay for Turbulent? My valuation of the Canadian company is based on the best information I could find about Turbulent's 2022 revenue without paying money to the government of Quebec, $17.9 million. But was the amount in US or Canadian dollars? The sites I visited didn't say.

I wound up choosing Canadian dollars based on the following passage in the 2022 report:

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.

Converting the $17.9 million to US dollars, the total revenue in 2022 was $US 13.2 million. Based on what I could tell was the percentage of Turbulent staff working on CIG projects, the Quebec company receiving approximately 70% of its income from CIG seems the best answer.

If the value of a company is 3 times income, that would place the value of Turbulent at $39.6 million. Due to a deal in 2020, CIG already owned a 25% share of Turbulent. The amount left for CIG to purchase falls to $29.7 million.

Looking through the filings at Companies House, the co-founders of Turbulent, Marc Beaudet and Benoit Beausejour, received a combined total of 30,120 shares of CIG stock. Using the valuation of CIG of $496 million used in the Calder's initial investment in CIG, each share is $42.23, bringing the remaining amount CIG owed down to $28.4 million.

So, how much did the Turbulent acquisition cost CIG in 2023? If my theory is correct, nothing. If I am correct, CIG offered up the sales of Squadron 42 as collateral and do not have to begin payment until either sales of the single player game start rolling in or a set term, like 5 years, whichever comes first. I should add that CIG as of the end of 2021 had a loan arrangement with Coutts based on repayment when CIG received anticipated funds. By my estimates, the loan should be repaid after the sale of 1 million units after sales of Squadron 42 reopen. 

The only additional costs are the costs of employing the 160-200 Turbulent employees, which I roll into other calculations.

A possibly overlooked factor is how much additional revenue did Turbulent contribute from non-CIG sources. CIG was not Turbulent's only client. If I'm correct in my assumptions, then Turbulent earned approximately $4 million from non-CIG clients in 2022. Assuming the same level of income in 2023, and prorating the amount for the period CIG owned 100% of Turbulent, I will add an additional $2 million to CIG's "Other income" category for both 2023 and 2024. I'm granting some income in 2024 due to contracts that run past the end of 2023.

CIG Revenue, 2012-2022, from 2022 financial report

With the analysis of the Turbulent acquisition complete, the next topic is CIG's total revenue for 2023. Looking at the CCU Game dashboard, CIG racked up $117.6 million in sales in 2023 that registered on the funding dashboard page. Barring adjustments, analysts know the amount of the largest revenue category. But what about the other two categories, Subscriptions and Other Income? After looking at the data from 2018 to 2022, neither category corresponds at all with the regular sales. Which means I will use the 5-year average growth for each category: 11.7% for subscriptions and 17.8% for other income. I will also add an additional $2 million to the Other Income category for revenue brought in by Turbulent's non-CIG business. Using those figures, total income for 2023 comes out to $138.9 million broken out as follows:

  • Sales: $117.6 million 
  • Subscriptions: $5.9 million
  • Other income: $15.4 million

CIG Outgoes, 2012-2022, from 2022 financial report

Now for a much more difficult subject, CIG's expenses. I normally just base growth estimates on a company's headcount. If headcount is expected to rise 10%, I expect overall costs to increase 10%. But I also realize CIG moved into new office space in Manchester, UK and Frankfurt, Germany in 2021 and 2022, increasing costs for both years. To try to account for the temporary rise, I took the average amount of money spent per CIG employee from 2018 to 2022, converted to constant 2023 US dollars.

Information extrapolated from the 2022 financial report

The five-year average was $143,000 per employee, rounded up. CIG's estimated outgoes for 2023 were $157.3 million. According to my latest estimate, CIG experienced a loss of $18.4 million in 2023.

If I am close to correct, CIG experienced its biggest one year loss in its 12-year history. As a reference, the two previous years with the biggest financial losses, 2018 and 2019, combined for losses of $16.9 million. We will find out for certain when CIG releases the 2023 financial report in either December 2024 or January 2025.

However, I don't have the luxury of waiting another 11-12 months for the final data to make my initial estimate for 2024. First, I need to estimate CIG's spending for the current year. I will make a large assumption and predict CIG will not increase employee headcount in 2024. In addition, I will assume an inflation rate of approximately 4%, making spending per employee jump up to $148,000, with one exception. I expect CIG to engage in a large marketing effort for Squadron 42 in 2024, so I am adding an additional $11 million to the Publishing Operations, Community, Events & Marketing portion of the budget. The amount represents a 30% increase in that section of the budget. Total estimated spending for 2024 is $173.8 million.

The exercise is almost complete. The last two numbers required to estimate the value of goods CIG needs to sell in the cash shop are Subscriptions and Other Income. To calculate the numbers, I'll use the same constants as I used to estimate the values for 2023. The numbers add up to $24.4 million.

  • Subscriptions: $6.6 million
  • Other income: $17.8 million

My best estimate to the question, "How much merchandise does CIG need to sell in order to break even in 2024?", is $149.4 million.

When I finished all my calculations, I thought the numbers were way too high. But then when doing one of many sanity checks, I realized $149.4 million means CIG needs to increase sales by 27%. What is the average increase in sales from 2019 to 2023? 27%. In other words, the average yearly increase in sales.

I also need to make one final point before ending the post. If CIG either releases Squadron 42 in 2024, or begins selling pre-orders beginning with CitizenCon in October, sales of 1 million to 1.5 million units should make up for any revenue shortfalls in CIG's traditional revenue sources.

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