General Discussion - How is GGG doing financially - Forum - Path of Exile (2023)

I just wanted to do a very high level summary on the subject, especially for non-financial people. I chose a question and answer format. I hope this helps.

P#1:How is GGG doing financially?
Short answer:Extremely good!

Longer answer:
Things that stand out at GGG:
- are profitable (adjusted profit margin greater than 40%)
- has no debts (ignore the capital rent that is for the building)
- are cash-strapped ($93m NZD as of Sept 30, 2022 => approx $54m USD) relative to the size of their operations, which I estimate will require ~$35m per year (cash basis, not including tax cash income)
- have equally impressive retained earnings (REs), despite periodically distributing sizable amounts of cash (dividends) to their parent company
(to put some numbers in perspective: in 2022 they received $66 million in cash from customers, their net income was $49 million, they paid out $47 million in dividends that would go mostly to their parent company in China, their final RE still was $105 million)

The strength of its fin. the position is crazy. If for a second we assume that customers' cash is zero (i.e. no mtx sold, no other sales made) then they would still be able to run their normal course of business for at least 2 full years before experiencing any difficulties or having to issue some debt (other things being equal). It's not something you would see often in a company that is investing in growth and development.

P#2:How can I measure the amount of fin? support received from customers in a given year?
A:As a good indicator, use the "Cash Received from Customers" line from your Statement of Cash Flows (eg page 6 in your 2022 financial statements). Just remember, there will be other stuff hidden in there as well, like licenses and potentially any revenue sharing schemes they might be involved in along with streaming services, which aren't necessarily related to mtx purchases. Also keep in mind that GGG's fiscal year end is September, so its returns cover a 12-month period between October and September.

P#3:What has been the overall effect of customer support so far?
A:Judging by their finances, they have enjoyed a lot of support from their customers, far more than their operations and business development really require (see question #1 above). Simply put, if they had to, there wouldn't be a) huge cash balances reported on the balance sheet, b) huge dividends paid to parents.

P#4:Any concerns noted?
A:I would point to one: customer cash is down 17% year-over-year in 2021 and down 27% year-over-year in 2022. This suggests that clients are spending less on mtx at an increasing rate, but the money earned in 2022 still far exceeded what their normal daily operations required.

DISCLAIMER OF LIABILITY:
- The above represents my personal conclusions based on publicly available information which can be found here (in particular financial statements as of January 24, 2023): https://app.companiesoffice.govt.nz/companies/app/ui / pages / companies/1887410/documents
- As I've been mostly using cash, the concerns highlighted by Chris in the following section do not apply to this post: https://youtu.be/88N4s2qxRIM?t=5172
- Feel free to reuse/repost elsewhere

TL; DR, they don't need your support money as much as you expats probably do. In addition, Tencent is a father now. Congratulations!

Nice breakdown, OP. Deeply appreciated.

A quick and interesting read, I'm glad to see they're doing well (although I don't like any Tencent connections).

I'm curious (and don't have the accounting skills and time to do research) if this includes costs spent on PoE2 Dev or if they are handled in another account not listed in their source materials (or if this is not a known element).

"

death of darknesshe wrote:

Q#4: Any concerns noted?
A: I would point to one: customer cash is down 17% in 2021 year-over-year and down 27% in 2022 year-over-year. This suggests that clients are spending less on mtx at an increasing rate, but the money earned in 2022 still far exceeded what their normal daily operations required.

I wouldn't say they're doing very well after saying that...

In the business world, a company's observable financial history is more important than the actual cash on hand it has.

"

A: I would point to one: customer cash is down 17% in 2021 year-over-year and down 27% in 2022 year-over-year.

I need to save that for the next time someone comes along to argue that player retention has no financial impact. That's almost a 40% drop in revenue over 2 years.

"

ronin_of_the_northhe wrote:

...
I'm curious (and don't have the accounting skills and time to do research) if this includes costs spent on PoE2 Dev or if they are handled in another account not listed in their source materials (or if this is not a known element).

Short answer:In fact, PoE2 has been taken into account.

Longer answer:(I didn't want to go into details or technicalities, but I'll make an exception)

First, your fin. the financial statements have been audited, so it is safe to assume that they adequately capture and reflect their entire purpose. process.

We can see what they capitalized as part of Intangibles in 2022 on page 18, item nº 13 “Intangible Assets” - Accruals. They added $16 million in total capitalized costs. We don't have a breakdown of that amount, but I think we can assume that a large portion of that $16 million would be related to PoE2.

The same $16 million is reported on your Statement of Cash Flows (p. 6), which should read as "cash cash in 2022, related to your intangible assets", which is what I took into account in my original valuation . You cannot see the $16 million on your income statement as your operating costs are reported net, so the capitalized portion is hidden (doesn't mean it isn't there).

Lastly, there are legitimate ways to keep projects in development almost completely off the books to make a company's finances look better/sounder, but GGG doesn't need any of that as their claims are already great.

"

yam facehe wrote:

I wouldn't say they're doing very well after saying that...

In the business world, a company's observable financial history is more important than the actual cash on hand it has.

You're right, but I just wanted to stick to what's known and tried to stay away from any prospective conclusions as much as possible. So based on their historical data alone, as of October 2022 they have done extremely well.

This will be fascinating reading for the year ahead. The rest of 2023 will likely be pretty thin with the launch of D4 and continued PoE2 overhead, not even seeing monetization or returns until 2024. (And Exilecon, which costs a few million to install)

I think it's also worth noting that all cosmetics and mtx are carried over to PoE2, so it's hard to see a windfall there. I'm sure there will be new packs and bet boxes but as you pointed out your mtx returns are decreasing comparatively on comps.

Ultimately, Tencent owns GGG and while the Publci NZ report is needed, we have no idea what specific expectations Tencent has financially for GGG. It's all speculation, of course, but I very much doubt that a liquidity situation will directly translate to subsequent quarter performance or valuations. Basically, just because you have cash on hand doesn't mean it will perform well or be predicted.

My personal opinion would be that GGG is on a solid financial footing, but stormy times lie ahead, with much uncertainty and anxiety. The next 9 months to 2024 and the release of PoE 4.0 will be critical benchmarks in your future. I really wouldn't be surprised. From downsizing, CW resigning or working on another project, to significant changes to your monetization strategy if things go wrong.

In any case, interesting times await you.

BOM.