Daedalic Entertainment has had its valuation slashed by €12–€14 million, reducing their profit forecasts and putting the future of The Lord of the Rings: Gollum developer into question.
As ResetEra highlights, the company Bastei Lübbe AG has put out a news release stating that they've taken some losses thanks to Daedalic Entertainment (of which they own 51%). Citing weak third-quarter performance and other factors, the developer's parent company has declared their business model "unsustainable."
Here's the crux of the issue as described in the news release:
The listed company Bastei Lübbe AG has to carry out impairment losses on its investment in Daedalic Entertainment in the amount of EUR 12 - 14 million, of which EUR 5 million is attributable to goodwill. Bastei Lübbe's share in the subsidiary amounts to 51 percent. Due to the weak business development in the Games segment, the Group is reducing its forecast for the year. The Management Board is therefore examining options for restructuring and realigning the business model in the Games segment, the smallest segment of the Group. The background to these measures is the business development in the third quarter of the 2019/2020 financial year and high investments in a new proprietary development of Daedalic Entertainment, which was not accepted by the market. Thus, the previous business model is proving to be unsustainable.
That's going to require a bit of a translation from investor speak. One of the key terms used here is "impairment losses" — what does that mean? Here's a definition from Investopedia:
In accounting, impairment describes a permanent reduction in the value of a company's asset, typically a fixed asset or an intangible asset. When testing an asset for impairment, the total profit, cash flow, or other benefit expected to be generated by that specific asset is periodically compared with its current book value. If it is determined that the book value of the asset exceeds the future cash flow or benefit of the asset, the difference between the two is written off and the value of the asset declines on the company's balance sheet[.]
In short, despite having some pretty good successes over the last few years, Daedalic Entertainment simply costs too much to operate. As such, the company that is the majority shareholder is going to have to make some cuts.
This problem may have existed for some time prior to this announcement. A look at Bastei Lübbe AG's 2017/2018 Annual Report [PDF] seems to echo the problems that they're addressing today:
With a sales increase of 28.0 %, the “digital” segment increased its sales revenues to EUR 11.0 million. The main growth driver was the Daedalic subsidiary with the successful games "The Long Journey Home" and “Shadow Tactics”. The EBIT achieved EUR -7.9 million compared to EUR -1.9 million in the previous year. The impairments of intangible assets at Daedalic and oolipo amounting to EUR 6.2 million are the main reason for the loss.
What Do Daedalic Entertainment's Troubles Mean for Gollum?
With The Lord of the Rings: Gollum in development, do these troubles at Daedalic Entertainment spell doom for the project? Well, that depends on what's causing the financial problems.
Unfortunately, neither the news release nor any past financial reports break down what exactly the problem is. There are a lot of possibilities which could include:
- Staff salaries
- Office/workspace costs
- License acquisitions
- Development costs
- ...or any number of other things
We won't know for certain what this means for the future of Daedalic's games, but this is essentially an announcement that things are going to be changing. We've already seen their real-time strategy game A Year of Rain get the ax; hopefully, they won't get hit too hard with the restructuring hammer.
What do you think is going to happen to Daedalic Entertainment? Do you think The Lord of the Rings: Gollum will be canceled? Let us know in the comments below!