Wednesday, March 19, 2014

CCP, Financial Reports, And the PS4

Over the past 48 hours or so some news has come out about the direction that CCP is traveling in its quest to diversify its income beyond EVE Online.  The first involved the release of CCP's financial report for 2013.  Not really such good news, because while revenues increased by $11.4 million (17.5%) and gross profit by $9.4 million (15.5%), the company lost $21.3 million in 2013 after posting a profit of $4.7 million in 2012.  CCP would have lost $30.4 million, but the company's accounts are good and apparently made $9 million from income tax.  In 2012 CCP only made $800,000 in tax subsidies.

So what happened?  To tell the truth, I don't know.  I see that research and development costs rose from $16.5 million in 2012 to $56.6 million in 2013.  In numbers that seem related, a non-current asset line item called "development cost" decreased by $20.6 million and retained earnings declined by $21.3 million.  Those numbers seem to match up so probably have something to do with each other.
 
Brighter financial minds than mine (which isn't a big bar to clear) indicate that CCP lost $21.4 million in assets due to something called "derecognition."  CSM Vice-Chairman Ripard Teg explained in a blog post on Monday:
"On page 22, you'll find CCP taking a 21.4 million USD "derecognition" hit. The note for that says the following:
During the year the company assessed its capitalized development assets and determined that a portion of those assets would likely not have future economic benefits. IAS 38 requires that such assets should be derecognized and removed from the balance sheet. The expense related to the derecognized assets are presented as part of research and development expense in the statement of comprehensive income.
"Translated into English: 'We've decided that some of the code that we capitalized development costs for is no longer likely to be a future income source.' As code goes from 'something that a programmer is working on' to 'something that's going to generate revenue for our business', you capitalize it, i.e. turn it into a capital asset that's going to generate revenue in future balance sheets. CCP is saying that the opposite is happening for some of their code.
"Therefore, that same 21.4 million USD then disappears as an equity asset on page 26. This essentially 'writes these costs off the books' and indicates that CCP no longer regards this code as a capitalized asset."
Now, Ripard continued on and not only stated that he knew exactly what was happening, but that the subject was NDA'd.  That didn't stop him from giving a heavy hint that the code in question belonged to DUST 514.   If he didn't break the NDA with that, he's about to fall over the line.  So in the interest of not losing New Eden's most prolific blogger, let's see if I can help pull him clear.

Looking further at the report, we see on page 17 that the derecognition hit did not involve Worlds of Darkness.  In section 5.1 of the financial report we see that the value of non-current assets in North America declined by less than $100,000.  Those in Iceland, on the other hand, declined by $21.2 million in 2013.  I'm assuming, of course, that no WoD code exists in Iceland while the DUST code in Shanghai counts toward the valuation in Reykjavik.

Now, before everyone starts freaking out, please remain calm.  Or stop celebrating, depending on whether you like or hate DUST.  Remember what Ripard wrote.  Yes, CCP has probably derecognized the value of the code as DUST has not come near the expected profit margin.  But just because CCP is writing the current DUST code off the books doesn't mean the game is doomed.  Has anyone considered that perhaps CCP plans to port the DUST 514 over to the PS4 after all?  One Icelandic-based game site thinks CCP will make the announcement at E3.  If so, expect the new code to go on the financial books sometime this year.

Of course, I'm not just making assumptions based on a source in the world's northernmost capital city.  My assumptions are also based on the news that came out of a Sony presentation at GDC last night.


Project Morpheus is Sony's virtual reality project that will connect with the PlayStation 4.  Sony came up with the name a week ago and the project is still in very early development.  In addition to EVE Valkyrie, Sony announced that Square Enix was creating a special build of Thief as well.

David Reid, for those new to CCP, is the company's Chief Marketing Officer as well as serving as the interim executive producer of EVE Online since last Fanfest.  He also revealed that the Shanghai studio will not convert from DUST 514 to EVE Valkyrie production.


So with PS4 development for EVE Valkyrie in the U.K., that leaves the PlayStation coders in China free to continue development of DUST.

Now, why would CCP wish to consider its continued investment in Shanghai?  For one thing, the Chinese government in January lifted the ban on the sale of foreign console platforms in the People's Republic first imposed in 2000.  Sony has wanted to crack into the Chinese market for a long time.  Having a free-to-play FPS like DUST would help work around the problem of pirated software that is rampant in the PRC.  In addition, Sony could boast of a locally developed product, which would gain favor with Chinese authorities.  And the Chinese authorities may wish to gain favor with Iceland.  The Chinese are interested in some of the natural resources in the Arctic and have come up with some pretty wacky ways to try to invest in the island nation.  An Icelandic company could actually grease the skids for Sony.

Finally, I have to wonder if the search for a new executive producer for EVE Online is about over.  David Reid also sent out this tweet last night.


If he doesn't have to do the "EVE Online thang," does that mean CCP has finally found a permanent replacement for John Lander?  I realize this post has probably asked more questions than it answered, but that's the nature of EVE.  Or at least, the little bit of it I cover.

8 comments:

  1. Something that intrigues me is Jester's insistence that it is something that needs to be announced now and that ccp is being foolish in not making the announcement.

    Why the need for speed? Why the delays ?

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  2. Financial reports have to be out on a set schedule. I suspect the issue is this:

    1) They are writing off the development costs of the DUST code base in 2013.
    2) They have a use for that code in 2014 that they haven't announced yet.
    3) Something about that use of the code is under NDA for CCP (as in, there's something they cannot tell the CSM).

    I think Noizy is on to something related to PS4 and/or China. Sony may have restrictions on marketing or release information.

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  3. It occurs to me that CCP is winding down the PS3 codebase for DUST and preparing a move to PS4. That doesn't mean that we'll see a PS4 build anytime immediately. Whether we do depends largely on whether CCP swallows their dislike of third-party engines and does the (relatively!) straightforward move from PS3 to PS4 on UNREAL, or whether they take advantage of the PS4's much more PC-like architecture to try putting their own engine underneath.

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  4. Re: "we see on page 17 that the derecognition hit did not involve Worlds of Darkness. In section 5.1 of the financial report we see that the value of non-current assets in North America declined by less than $100,000. Those in Iceland, on the other hand, declined by $21.2 million in 2013. I'm assuming, of course, that no WoD code exists in Iceland while the DUST code in Shanghai counts toward the valuation in Reykjavik."

    The code location might not be an issue. The IP might be what is considered the asset and that IP could be held at their HQ. Just because the programmers are in N.A. doesn't mean that's where the IP asset is. See also all the tricks you've probably heard about where all of Apple's juicy IP is considered to be held in their Irish (low tax) location.

    So I'd probably bet for the death of WOD. Jester wants them to say that swiftly so that someone doesn't think incorrectly that DUST is about to be killed - since that rumor itself might serious hurt DUST.

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    Replies
    1. I wouldn't count WoD out until I see Hilmar drive a stake through it's non-beating heart. CCP just posted an opening for a data base administrator specifically to work on WoD today.

      http://www.ccpgames.com/en/jobs/job-details.aspx?jobid=520

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  5. If you read at the bottom of page 23 it says the amortization in 2012 came form EVE online, for like 6 million, then lists EVE and DUST 514 for the 2013 amortization in the 20+ millions. Doesn't mention WoD amortization at all in that section.

    Also CCP still has to pay off the loan, they took out and that will eat up all their cash, as well as some of their back profit they have.

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  6. As long as ccp hasn't stated what this 20 millions is about it is all rumor. I think I have heard something about 4 out of 5 projects keep on running. Eve, DUST, Valkyrie, WoD ... what would be the fifth?

    Anyone heard anything form john landers mobile gaming department?
    And who is educated enough in financial stuff like that to explain what this numbers are standing for? I'm not thats for sure and an announcement from CCP would be better than speculation anyway.

    But writing off some stuff in an financial report doesn't mean a game has to die. CCP has to research in many directions and putting 60 million in to development and then writing off 20 million of those as losses is not that uncommon, I would guess.

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    ReplyDelete