Profit nearly halves at NZ’s largest video game firm, Grinding Gear Games

Grinding Gear Games co-foudner and CEO Chris Wilson. Photo / Dean Purcell

New Zealand’s largest video game company saw its profit nearly halve in 2023.

The West Auckland-based Grinding Gear Games - maker of the multiplayer fantasy game Path of Exile, played by millions worldwide - saw its after-tax profit for the year to September 30, 2023 fall to $28.4 million from the prior year’s $48.9m, according to documents filed with the Companies Office overnight.

Income tax expense was $11.1m vs the prior year’s $15.3m.

Revenue held steady at $83.4m from the year-ago $83.8m.

But operating expenses rose, and Grinding took a $6.5m hit on foreign exchange, versus a year-ago gain of $11.7m.

A $51.8m dividend was paid to majority owner Tencent, from $47.1m the year before.

“The big difference between the two years was that the US dollar moved in our favour last year and against us this year - which causes profit swings due to the value of our US-dollar cash reserves changing when measured in NZ currency,” co-founder and chief executive Chris Wilson told the Herald.

“We also ran a series of conventions to market our upcoming sequel, Path of Exile 2.”

Wilson was one of the gaming industry leaders who complained the sector was losing staff to Australia, where a 30 per cent tax rebate has been on offer for game developers since July 2022.

“We’re certainly tempted to open an office in Australia because of the significant game development tax subsidies over there,” Wilson told the Herald ahead of Budget 2023.

“Australian companies can offer so much more for the same position, paying for the difference out of their tax subsidies so that their profitability isn’t affected.”

But in the event, our Government came to the party, introducing a 20 per cent rebate for gaming firms in April last year (that is, half way through the FY2023 period that Grinding has just reported).

Grinding clocked its best-ever numbers during the pandemic, with an after-tax profit of $54.4m on $116m. Post-Covid lockdowns, the numbers have gradually slipped, mirroring a wider gaming industry trend, plus profit pressure in streaming as various leisure alternatives re-emerged.

The local video game industry had a five-year average growth of 26 per cent and expanded by 47 per cent in 2022.

But in the 2023 financial year it grew by just 7 per cent to $434m total revenue, almost all of it from offshore sales.

Tencent stake creeps up

Chinese social media and gaming giant Tencent bought a majority stake in Grinding Gear Games from Wilson and his cofounders in 2018 for an amount that was undisclosed but north of the Overseas Investment Office threshold of $100m.

The deal involved Tencent taking an 80 per cent stake up front, and over the next six years up to 100 per cent of the business, according to the OIA’s consent documents.

Tencent has been incrementally adding to its holding.

The latest Companies Office update, filed yesterday, has the Chinese firm with a 93.3 per cent stake, Wilson on 4.4 per cent and co-founder Jonathan Rodgers on 1.1 per cent.

Wilson has stressed that the deal involved core operations staying in West Auckland, were staff numbers have risen from 114 at the time of the deal to 185 today.

Chris Keall is an Auckland-based member of the Herald’s business team. He joined the Herald in 2018 and is the technology editor and a senior business writer.