Thursday, August 11, 2016

Oh Yeah... GW's Financials Are Out...

by SandWyrm

With all of my preparations for Gencon, and general busy-ness elsewhere, I completely missed when GW released its financials for the year. If you were expecting any sort of big surprise on the financial end, you'll be disappointed. Sales & profits are down a bit (like each of the last few years), and dividends were cut. So you know... Same old same old. Nothing has changed in the long-term trends. Sales are up a little bit in North America & Asia, and down everywhere else. Royalties are back up (covering some for weak sales), and they've somehow found more operational expenses to cut to slightly increase their Operating Profit. Yawn...

The most entertaining bits though, as always, are in the chairman's introductions.

Now, GW was a bit sneaky, and their Investor Relations Page actually has two links to very similar-looking "Annual Reports"; both dated July 25th. But the first link is just a press statement that looks like a full report, while the second is the actual full report with more interesting ramblings from Tom Kirby, GW's current CEO Chairman.

Here's the gist of it (from the actual report):

There's Trouble With The Board
"The board spent a day recently debating the fact that many proxy votes were cast against it. They were mostly aimed at the remuneration policy (a very fashionable topic these days), the non-executive directors who have served ‘too long’ and, me, the chairman on numerous counts."
So some institutional investors have raised concerns that reached the board (and thus had to be addressed), but the board was able to mostly ignore them. Kirby goes on to defend what he thinks defines an effective board looks like, and how they measure their effectiveness.
"We do all these and take every point very seriously. We comply. The line where some will disagree with us is this one: creates a performance culture that drives value creation without exposing the company to excessive risk of value destruction. We do not have LTIPs or any bonus schemes for senior management. We do have payment schemes designed to encourage store managers to sell more, and we have a company wide scheme that allows all employees to share in profitable growth. It rewards ALL employees not just the chosen few. Both schemes are designed to enhance value. LTIPs and bonuses for senior staff are deemed to be necessary by some to encourage value creation, but more, to ensure longevity of staff and help with succession planning. These are not needed at Games Workshop4. Our executive directors both have around 20 years service with the company. Their likely replacements have been here a similar length of time (well over 10 years). And, yes, they will be internal appointments. In fact, we see 10 years as the running-in period. I suspect these schemes are needed in businesses that have an eternal merry-go-round of executives who appear and disappear with monotonous regularity. They are not needed at Games Workshop, and I trust they never will be. Furthermore I believe they are fundamentally self-serving and disastrously value destroying. Nothing leaves a sourer taste in the mouth than executives lining their own pockets and claiming it is for the long term good of the business before moving on to their next golden handshake clutching their golden parachute."
That sounds good and all, but what about Tom Kirby and his large stock holdings? Isn't he just waiting to retire with his golden parachute?

Anyhow, my take-away is that the institutional investors want to see some new blood on the board, and GW is doing its best to avoid any kind of external hire that might upset the status quo of their slow downward spiral into irrelevance. They only want to hire internal people who are so wedded to GW's way of doing things that they haven't jumped ship yet.

It continues...
"An effective board should not necessarily be a comfortable place. Challenge, as well as teamwork, is an essential feature. Diversity in board composition is an important driver of a board’s effectiveness, creating a breadth of perspective among directors, and breaking down a tendency towards ‘group think’.
We believe we do comply with the intent of this paragraph, whilst acknowledging some may think we do not.
We fully agree that ‘group think’ is a bad thing. We fully agree that challenge is an essential ingredient in an effective board, as is teamwork. We do not agree that diversity for its own sake is the answer. We believe that each director must be independent of mind. To imply that someone is not independent minded because of time served or sex or ethnicity or religion or whatever else is false."
Now this is an interesting exchange. The institutional investors are asking for more "diversity" on the board. But how is "diversity" defined in their context? Kirby (or his writer) makes a very eloquent statement about how independence of mind is more important than sex/ethnicity/whatever, but is he just dodging a request for more independence in THINKING by re-framing the request in the politically-correct context of only race/sex?

My gut says that the investors want more diversity in thinking, through more outside hires (whoever that might be). That they're sick of GW's very apparent group-think that's fostered by them only having 10-20 year company veterans making decisions. Diversity in THAT context might mean hiring some people from other game companies, other industries, or perhaps some of the the countries  they do business in, in order to gain fresh perspectives on what they're doing right, and where they're falling down. To call this an issue of race/sex seems like an artful dodge on Kirby's part. Either that, or he's unable to understand the difference.
"Only independence of mind counts. There are no proxies, no quotas that get around it. Rubbish directors are rubbish directors. The fact that they allow boxes to be ticked on arcane lists doesn’t make them effective. Good, independent minded directors are as hens’ teeth, gold dust. We have six. Including me."
So Mr. Kirby... How might this "Independence of Mind", assuming your board has any, present itself? Might it not manifest in changes to how your company operates?

Wouldn't a board with some fresh perspectives see opportunities where your cloistered group currently sees only threats? Such as with 3rd party garage plastics and 3D printing, which you've decided to fight with legal actions instead of co-opting into new business opportunities?

Might not a board with an independence of mind see the slow decline of GW as a bad thing, and investigate the benefits of bringing your "high quality" production capabilities to things like well-written game rules and ready-to-play miniatures/terrain and 3D printed bitz that would capture new customers?

You've pretty much maxed out the quality of your plastic molds, and have achieved levels of detail in your models that are, if anything, starting to be intimidating (rather than inspiring) to your average hobbyist. Can you develop a machine that will assemble and paint a simple mini to a minimum tabletop standard? That would be an evolution in quality that would attract MANY more customers.

"The IP Play"
"Over the years we have been exhorted by some to develop our revenue stream by ‘leveraging’ our IP. Using our great imagery we could do all sorts of lucrative and exciting value-enhancing (i.e. take private and re-float) deals. Actually, what they really mean is: do a movie!
Yeah, because Marvel did some movies and they flopped so horribly that... Oh wait, Disney ended up buying them because even the so-so ones are fantastically profitable!
We have never NOT done licensing deals, as you can see from the steady stream of royalties we earn; it’s just that we believe we must do them on our terms and not prostitute the business to any and every deal that comes along. If we do a movie (along with the concomitant abandonment of the toy rights6) it will be on terms that do not compromise our business. It isn’t likely.
And how exactly would selling the rights to a movie company to make 40K movies, and earning a nice revenue stream from their productions (as well as more publicity for your games) be a bad thing? You micro-managed that one movie you did on the cheap, and it was garbage.
Long term owners will notice a big increase in royalty income this year. Have we sold out at last? No, it’s just that working closely with the myriad app developers, and being more precise with the terms we offer, we have increased the number of ‘computer’ games in the market."

Ok, maybe that's not fair, since that PoS came out in 2014. But what about this abomination...

This one was released just yesterday and is already being marked down by Steam.

But I guess you guys have never actually played a good game like Shadow of Mordor...

And that's only a very early development trailer. The actual game looked and played much better.

And then there's Alien:Isolation, which better captures the feel of sci-fi horror that an Eisenhorn game should have. Because I've read the books, and that game that you licensed doesn't feel at all like them. But maybe that's because Dan Abnett was the writer on Alien:Isolation. :)

Also notice how hard it is to kill enemies in both games (go to the YouTube page for the A:I walkthrough and look at the Android encounters). 

The main character in Shadow of Mordor is pretty powered up in that sample above, and it's still no easy thing to jump into an group of Orks and take them out. You have to block blows, stun a guy, turn around, block a few more hits while getting in a few jabs, and only when your sword is powered up by a chain of hits can you actually dispatch a grunt with a single blow. Otherwise you'll be hacking on them for 5-10 minutes if they don't overwhelm you first by calling in reinforcements.

So maybe part of increasing your board's mental diversity might include hiring someone with a video game background to ensure that you're making deals with quality studios, and that the final product isn't a PoS? Because while there have been some good 40K/WHFB games over the years, the duds far outnumber the successes. Meaning that unlike a Marvel movie or a licensed Lego game, your audience doesn't automatically trust that they'll get something worth the money they're paying for it.

Strategic Report
"Games Workshop's ambitions remain clear: to make the best fantasy miniatures in the world and sell them globally at a profit, and it intends doing so forever. This statement includes all the key elements of what we do and why we do it that way. All of our decision making is focussed on the long term success of Games Workshop, not short term gains."
So where is the long-term success? Where is the growth in customers, sales, and profit that at least beats the rate of inflation? Because I'm not seeing it!

This is not the 1980's and 1990's anymore. Having "The Best" miniatures in the world means having them be both beautiful, and ready to play with out of the package. 

Most gamers would say "Good Enough" to minis like this.
The whole assembly/painting "hobby" thing is a relic of a time when there were no other options available. It's cool for those who still enjoy it (as I sometimes do), but very few kids coming into gaming in the age of X-Wing are going to even consider buying 50-80 overpriced models that they have to assemble and paint themselves before they can even play the game. They just don't have the same mindset that the 30 and 40 year olds do.

Hell, I still assemble/paint Flames of War models occasionally (time is precious these days), but I haven't bought a piece of packaged terrain in 5 years that wasn't fully painted and ready to play with out of the box, and I'm 3D printing the rest (automated assembly). Where does that leave your crappy terrain that costs the same but requires hours of labor to enjoy?
"We measure our long term success by seeking a high return on investment. In the short term, we will measure our success on our ability to grow sales whilst maintaining our core business operating profit margin."
So where is the growth in sales? Where's the growth in gross profits? You can't keep cutting operating costs to boost your "operating profit margin" forever.
The way we go about implementing this strategy is to recruit the best staff we can by looking for the appropriate attitudes and behaviour each job we do requires and identifying the value that job brings.
Instead of seeking people with the qualifications to design and produce the products that your former customers want to buy.
It is also important that everyone we employ has a real desire to learn and has a great attitude to change.
Uh huh...
Our Academy offers all of our staff both personal development and management skills training. It is also worth noting it's not what you know at Games Workshop it's how much you contribute to our success that we value."
So how are people who don't necessarily know anything supposed to contribute to the value of your business? How are people who get-along-at-all-costs supposed to champion the changes you need to make to your business?

This is exactly the type of insular attitude that your investors are railing against. Maybe next year they'll be mad enough that you can't ignore them (and your customers) anymore.


  1. You know what's worse than not having diversity on a board of directors? A terrible tone-depth defense of not having diversity on your board of directors. Especially when that wasn't even the question posed.

    Own goal.

  2. I'm with you on everything except the games, I've bought every GW game except storm of vengeance and they've been across the board good to fantastic. In fact, Eisenhorn: Xenos is among the best mobile games I've played, up there with ported titles like Xcom and KotOR. I think GW has been pretty much nailing their video game releases up to now (though I've got grave doubts about eternal crusade and I don't have any interest in their MOBA)

    1. Well, as a friend of mine, who bought the game, put it: "...if you're looking at it as a game you may be right. As a novel adaptation, it's excellent so far."

      Maybe the mistake is releasing it as a PC game (where the expectations are higher), but there are a LOT of bad customer reviews on it, and it being marked down 27% on day 2 of its release is a big red flag for me.

      But really, did you buy that tower defense game from 2014? Was it really good compared to say... Plants vs. Zombies?

    2. Yeah, I mean my favorite games these days are usually by Telltale, so I love a game that is a player controlled movie as much as anything else. It comes down to expectation, I find a decent chunk of the AAA game market to be warmed over recycled crap (though I'm very excited for no man's sky).

      And no, I skipped storm of vengeance because, well, it was awful. But Carnage, Space Hulk, Death Watch, Warhammer Quest, Space Wolf, Talisman: Horus Heresy, Horus Heresy: Drop Assault and Armageddon were all solid games within their genre and platform. They weren't all the most innovative (drop assault in particular was a clone of boom beach but even it added some new real time elements) but each one was compelling and well worth a little time from the player. They aren't console titles, the mobile titles are native games that fit their platform and are still some of the best games around. Even Regicide was a really fun take on chess, worthy of the classic Star Wars chess

    3. Regicide is awesome. I'm Krakenborn on it, by the way.

  3. The whole "ready to play is the future" bit is a bunch of shit, really. For a lot of people I know, the only reason they get into the game at all is for the painting and the miniatures themselves. If GW turned out some Mage-Knight quality drek, it would not improve their business any. In fact, the whole reason my kids are into the game is because they saw me turn lumps of grey plastic into something near lifelike. They started with building and painting. It's part of what makes miniature games different from video games. The whole instant-gratification mindset "I gotta have this and I gotta have this now" goes completely against what makes miniature gaming worth doing in the first place. If prepainted, lower quality crap is the future, then I don't care if GW loses all it's customers and dies an ignoble death, because the hobby won't be worth sustaining at that point.

    1. Personally, I think that it's in their power to cater to both types of player. The pre-paints would draw in those who normally wouldn't consider playing, but then they'd want to be "grown up" too and do the hobby side more.

    2. I agree wholeheartedly with Teun135, but your correct in your reply doesn't have to be an either/or decision. One foot in each camp would be a good move I think.

    3. Knowing a lot of people that like painting in modeling in miniature gaming is not surprising. It's a self selected group.

      There are lots of people that like games that don't like painting and modeling. And younger people aren't into the hobby stuff like they used to be.

    4. That's a key point... We're self-selected groups. As part of your group, you don't notice all the kids that come into a store, get excited by looking at a game, and then shuffle out when they see the money/hobby requirements.

      But they see X-Wing and they gobble that stuff up. Seriously, talk to some X-Wing players sometime. Very few have any experience with "normal" wargames at all.

  4. I've been waiting for your thoughts and in some senses they mirror my own.

    I found the one line in the middle that in the later half of the year age of sigmar sales were higher than fantasy had been for years. I wish they showed more numbers.

    I think Kirby needs to go. His comment about not wanting movies because there might be other 40k merchandise. Ye gods, space marine plushies and bobbleheads will kill the miniature market. Ffs you want more exposure to your IP so more people funnel into your business.

    I said on your last post "This new CEO seems to trying to slowly turn the ship. He lady report talked about building alliances with retailers and something seems to be improving there. He's identified the high turnover of managers which whilst obvious might actually be addressed.
    Unlike Kirby who seemed oblivious there are signs here of an attempt to make this business work. I'm hoping his next report talks about customer feedback and then the company may turn around."

    So yeah no talk on customer feedback. No further talk on alliances with sales partners. They do have a company Facebook page, and actual campaigns. And this rerelease of the black reach spruees as cheap models in target (?) Is intregueing. I don't think it's a bad idea, use old plastic sprues as cheap models, and the more detailed plastic sprues as premium ones.
    Of course the new tactical squad and fire warrior sprues are so similar you couldn't.

    Lastly with the terrain I disagree - prepainted is easy and I have a heap of it. But that gw stuff looks much better after it is painted. Yes it's a time factor, but for the 40k terrain I think it's worth it.

  5. You make some very good points about the state GW is in. The avenues they've taken for modernization seem like backwards steps, while other companies embrace change and a competitor's success and utilize them to spring forward.

    I've always been a fan of games that are ready upon opening, which is why I love this prepainted resurgence. Hobby emphasis games and prepainted aren't mutually exclusive as others have pointed out. I may have gotten into tabletop gaming for the hobby part, but sometimes I want to just buy something and play it. You can have both, as Fantasy Flight is proving by their announcement for RuneWars.

    Fantasy Flight is a great example. X Wing's popularity proves that people want to buy into gaming that doesn't require a hobby devotion, but it doesn't stop them from making Mansions of Madness and RuneWars models. They have a game for all appetites. Diversification leads to success.

    1. Excellent points... Having moved almost 100% to FFG games in X-Wing and Armada recently I find myself missing the GW stuff less and less. Still have WAY too much of it, but my "hobby time" has all but disappeared as my career progressed, so other than repainting the few ships for my X-Wing Squadrons and Armada fleets, I no longer have the time to assemble and paint massive armies...

      Do I think that a pre-assembled and possibly pre-painted 40K would work? Probably... Honestly, my own painting is "basic" at best, and I still have a 3rd Ed Fleshtearers force that was done in the quick and dirty "3 color minimum" to get on the tables for the tournaments back then... Pre paints would beat the heck out of the horde of unpainted grey plastic/metal... But if it is not done well, like say Rackham? That game died horribly going from some of the best minis to... Well, not... I would not want to see that happen to 40K... 'course, just my opinion and as I have not actually played or bought anything GW in several editions...

  6. The one correction I'd make here is that Kirby is not the current CEO. He's a non-executive Director, and Chairman of the Board of Directors, but Kevin Rountree is the current CEO, and has been since the start of 2015.

  7. This echoes exactly with the sales course I was given by GW (in Nottingham) in the early 2000s. "We're the best at what we do, we will always be and you will do it this way or not at all".

  8. I think GW is making better decisions these days. The issue of new blood is valid, but it is no guarantee of improved thinking. There's nothing sadder than seeing new people come in with the goal of making a profit at the company's expense.

    Does that mean directors should be in-bred? No. But the issue isn't what GW should do in theory, it's what they do in practice. For me, if the existing directors can keep GW in business another 20 years, making the kind of products they've made in the past few years, then the issues raised are irrelevant.

    Time will tell which of us, outside observers, have the best crystal ball. I hope that GW's recent decisions begin to improve company revenues.

    1. I do see some better decisions coming out of GW, but they're tiny baby-steps, and their mistakes (Sigmar) undo much of their good. What they need are major changes of focus, not some slightly better prices here, and some rules/FAQ improvements there. That speaks of some low-level management clues being learned, but that the top level execs still have no idea what they're doing.

      It's also worth pointing out that the institutional investors (who Kirby is addressing) have a different view of what a "good decision" is compared to past and present customers though.


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