Action Audit: Revenue Is Not Profit

By | 09/29/2023

Every time we see the hyper connected, online, games community discuss the very unfortunate event of layoffs, I’m reminded of a very real problem when it comes to gaming discussion:

Revenue is not profit, and people often confuse the two financial metrics because they don’t know what they actually mean. “How can we have layoffs when the games industry is generating billions of dollars in revenue?”

Revenue is generally the money / cash generated from business operations.

Profit (or operating profit) is what’s left over after operating expenses have been removed from revenue.

Furthermore, net income (aka “the bottom line”) is what’s left over after taxes and all other miscellaneous cashflows are taken into account.

Why does any of this matter? It matters because we’re in a period of large video game companies (ex: publishers) experiencing record high revenues without record high profits. Layoffs, and other cost cutting procedures, are based on the result (or lack thereof) of the company to generate profit from revenue. It doesn’t matter if a company has record breaking revenues if profit is falling, or worse, profit is negative for multiple quarters. (Please be aware this is a simplified version of revenue and profit. There are special cases where a company can be profit negative but cashflow positive due to GAAP.)

The latest news out of Epic Games is a prime example of a company where the cost base is too high, and margins are too low. Revenue is important, but if the company isn’t generating a profit from that revenue, it might as well be worthless. Ultimately, cashflow is king.

Topic for another time: The rampant over-spending & investments that occurred at game producing companies during the Covid years (2020-2022). The rampant spending during that time period is one of the main factors that led to the current situation of layoffs and lower profits.