How is GGG doing financially

Just wanted to put together a very high-level summary on the subject, mainly for non-financial folks out there. I chose a Q&A format - hope this helps.


<<< 2022 fiscal year-end >>>

Q#1: How is GGG doing financially?
Short Answer: Extremely well!

Longer Answer:
Things that stand out about GGG:
- they are profitable (adjusted Profit Margin of over 40%)
- they have no debt (ignore their capital lease which is for the building)
- they have been sitting on large piles of cash ($93M NZD as of Sep 30, 2022 => roughly $54M USD) relative to the size of their operations which I estimate to require ~$35M / Year (cash basis, not including cash income taxes)
- they have equally impressive Retained Earnings (RE), despite periodically distributing sizeable amounts of cash (dividends) to their parent
(to put some numbers into perspective: in 2022 they received $66M cash from customers, their net income was $49M, they paid $47M in dividends which would mostly go their parent company in China, their ending RE were still $105M)

The strength of their fin. position is insane. If, for a second, we assumed that cash from customers is zero (ie. no mtx is sold, no other sales occur), then they would still be able to sustain their normal course of operations for at least 2 full years before experiencing any difficulties or having to issue any debt (other things equal). Not something one would frequently observe in a business which is investing in growth and development.

Q#2: How can I gauge the amount of fin. support received from customers in a certain year?
A: As a good proxy, use line "Cash received from customers" from their Cash Flow Statement (for example, page 6 in their 2022 fin. statements). Just remember, there will be other things buried in there as well, like licenses, and potentially any revenue sharing schemes they may have engaged in together with streaming services, which aren't necessarily tightly correlated with mtx purchases. Also recall that GGG's fiscal year-end is September, so their statements cover a 12-month period between October & September.

Q#3: What has been the overall effect of customer support so far?
A: Judging by their financials, they have enjoyed a tremendous amount of support from their customers - way way way in excess of what their operations and business development actually require (see Q#1 above). Put simple, if they were in need, there wouldn't be a) huge cash balances reported on balance sheet, b) huge dividends paid to parent.

Q#4: Any concerns observed?
A: I would point out one: cash from customers was down 17% in 2021 YoY, and then further down 27% in 2022 YoY. This suggests customers have been spending less on mtx at an increasing pace, however, the cash realized in 2022 was still well in excess of what their normal day-to-day operations required.


<<< 2023 fiscal year-end update >>>

- GGG are still sitting on a pile of cash ($61M NZD as of Sep 30, 2023)
- GGG still have no debt, and there’s no need to issue any
- players kept showering GGG with cash (cash from customers was up 7.8%, free cash flow was up 70% vs prior year)
- GGG are still paying hefty dividend which mostly goes to their parent company in China (total dividend was $52M NZD – roughly twice the amount of their net income). Because who needs cash when there’s so much, right? :)

So, everything still looks pretty rosy in the rear-view mirror.


DISCLAIMER:
- The above represents my personal conclusions based on publicly available info which can be found here (in particular, Fin. Statements as of Jan 24 - 2023, Mar 6 - 2024): https://app.companiesoffice.govt.nz/companies/app/ui/pages/companies/1887410/documents
- Since I have mostly been using cash basis, the concerns highlighted by Chris in the following session don't 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 anywhere near as much as you probably do, Exiles. Also Tencent is a parent now. Congrats!

Nice breakdown, OP. Deeply appreciated.

An interesting quick read, glad to see they're doing good (even though I don't love any connection to Tencent).

I'm curious (and lack by the accounting skills and time to look into) if these include the costs being spent on PoE2 Dev, or if those are handled in another account not factored into your source materials (or if that's not a known element).

oh good I've been up nights wondering these things now I can sleep

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MorsExTenebris wrote:

Q#4: Any concerns observed?
A: I would point out one: cash from customers was down 17% in 2021 YoY, and then further down 27% in 2022 YoY. This suggests customers have been spending less on mtx at an increasing pace, however, the cash realized in 2022 was still well in excess of what their normal day-to-day operations required.

wouldnt say theyre doing extremely well after saying that...

in the business world, the observable financial path of a business is more important than the actual onhand cash it has.

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A: I would point out one: cash from customers was down 17% in 2021 YoY, and then further down 27% in 2022 YoY.

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

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Northern_Ronin wrote:

...
I'm curious (and lack by the accounting skills and time to look into) if these include the costs being spent on PoE2 Dev, or if those are handled in another account not factored into your source materials (or if that's not a known element).

Short answer: PoE2 was indeed factored in.

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

Firstly, their fin. statements were audited, so it is safe to assume that they capture and appropriately reflect all of their fin. transactions.

We can see what they capitalized as part of Intangibles in 2022 on p.18, item#13 “Intangible Assets” - Additions. They added $16M in total capitalized costs. We aren’t provided with a breakdown of that amount, but I think we can assume that a large chunk of those $16M would be related to PoE2.

The same $16M is reported on their Statement of Cash Flows (p.6) which you should read as “cash out the door in 2022, related to their intangible assets”, which is what I did factor into my original assessment. You can’t see the $16M on their Income Statement as their operating costs are reported as net amounts, so the capitalized portion is obscured (doesn’t mean it’s not there).

Lastly, there are legit ways to keep projects that are in development almost completely off books in order to make a company’s financials look better/stronger, but GGG doesn’t need any of that as their statements are already excellent as they are.

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yamface wrote:

wouldnt say theyre doing extremely well after saying that...

in the business world, the observable financial path of a business is more important than the actual onhand cash it has.

You're right, but I only wanted to focus on what’s known, and tried to stay away from any forward-looking conclusions as much as possible. So, purely based on their historical data, as of Oct 2022 they had been doing extremely well.

This will be an fascinating read next year. The remainder of 2023 will likely be very lean with the launch of D4, and the continued PoE2 overhead which wont even see monetization or returns until 2024. (And Exilecon which costs a few million to put on)

I think it's also worth noting that all cosmetics and mtx carry over into PoE2, so it's hard to see a dramatic windfall there. I'm sure there will be new packs and gamble boxes for sure, but as you pointed out, their mtx returns are dwindling comparatively in comps.

Finally Tencent owns GGG, and while the Publci NZ reporting is required, we have no idea what specific expectations Tencent has for GGG financially. It's all speculative of course, but I doubt highly that a liquidity situation translates directly to subsequent quarter performances or evaluations. Basically just because you have cash on hand, doesnt mean you performing well, or are forecasted to do so.

My personal take would be that GGG has a solid foundation finacially, but stormy times ahead, with much uncertainty and anxiety. The next 9 months, pushing into 2024 and PoE 4.0 release are going to be critical benchmarks in their future. I wouldn't be shocked at anything really. From downsizing, to CW stepping down or working on another project, to significant changes in their monetization strategy if things go poorly.

Either way interesting times await.

Well.