Mobile Gaming Companies: Managing FX Risk in Volatile Times
Covid-19 is having a mixed impact on online gaming companies. While important events are being cancelled across the world, consumers are looking for ways to entertain themselves as they are forced to stay at home, a positive for the industry. Meanwhile, volatility in financial markets, including foreign exchange markets, is adding complexity to the outlook.
In a special Kantox webinar, we reviewed the impact of exchange rate fluctuations, and we assessed how online gaming companies are coping with currency risk in a world where forecasts are less reliable and the need for flexibility becomes ever more pressing. The webinar concluded with a set of ‘best practices’ for FX hedging, with special emphasis on the benefits of FX automation.
As François Masquelier, Honorary Chairman of the European Association of Corporate Treasurers, noted during the webinar: “Currency risk is both financial and operational, and this is where technology comes to the rescue of top management.”
The nature of currency risk in the online gaming world
The chronology of a USD-denominated sales transaction for an online gaming company with ad revenue shows the double nature of currency risk:
- (1) the accounting gains and losses that inevitably arise between the moment the invoice is issued and the transaction is settled;
- (2) the transaction risk that occurs between the ad impression and the settlement.
The time span between each of these moments creates currency risk.
Take the case of online gaming firms with ad revenue, where 15 to 60 days can pass between the moment of the ad impression and the moment settlement takes place. For a EUR-based participant with USD 600,000 in ad revenue, a change in the EUR-USD exchange rate from 1.10 to 1.25 —from the moment of the invoice until settlement— would create a EUR 64,454 loss in terms of the value of the transaction.
The downside of current FX management practices
Many firms in the online gaming industry are taking an incorrect approach when it comes to managing that foreign exchange risk.
As Christophe Revault, Kantox’s FX Solutions Director, explained during the webinar, the most serious mistake is the failure, on the part of management, to take ‘ownership’ of the problem. In the hope that currency fluctuations will eventually compensate each other, managers often put profit margins at risk, as the recent sharp fluctuations in currency markets have shown.
The lack of transparency about FX fees, prevalent in the industry, creates another source of problems. For example, a EUR-based participant might receive USD in a bank account in EUR, not knowing what exchange rate and fees were applied in the conversion. The problem does not go away if the AdNetwork pays in EUR. While it is tempting to believe that FX risk is eliminated by receiving EUR, the reality is that the AdNetwork can apply conversion fees of up to 2.5%.
Finally, we also note widespread confusion in the industry about the nature of currency risk. This is a particularly important point. Invoices appear on the balance sheet as they are issued. Therefore, accounting gains and losses are there for all to see. Everybody, within the firm, is aware of accounting risk.
But the transaction risk that arises earlier with the ad impression is arguably even more important. Because transactions are priced long before the corresponding accounts receivable/payable show up on the balance sheet, they are less visible—even though pricing is a key determinant of profit margins.
If you’d like to find out more about the best currency hedging practices for the mobile gaming industry, check out our webinar on this topic.