Square Enix Q3 2018 – Large Profits from Flat Sales

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Square Enix TYO:9684 are a strange company. I covered their Q1 results in August last year. The story for Q1 is much the same story as their Q3 results (nine-monthly) that have been recently published. The source of their profits is not so much in the release of new console games. These profits are primarily from their back catalogue and other divisions

The figures themselves are, again, not too dissimilar to Q1 in growth. In the nine-months ending December 2017, Square Enix have shown net sales of ¥188 billion. This is actually a year on year decrease of 1%. However, countering these figures is a huge year on year increase in profits of 57.2%. This was an increase from ¥21.4bn to ¥33.7bn.

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The figures also show that the company had a bad Q3 in general. Net sales fell from ¥83.7bn to just ¥56bn. Profit fell slightly, from ¥10.3bn to ¥7.9bn.

The Sales of Square Enix

Square Enix has a number of advantages that support the company during quiet times with no major new video game releases. Two in particular majorly benefit the company. The first is one of the better and more popular back catalogue of games available digitally. This has proven to be the companies saving grace during the current financial year.

As stated by the company "a decrease in the number of blockbuster titles resulted in net sales decline as compared to the same period of the prior fiscal year. On the other hand, strong high-margin download sales of previously released catalogue titles such as “NieR:Automata" have resulted in an increase of operating income, as compared to the same period of the prior fiscal year".

In addition to their back catalogue of games, the company has also seen significant success with their Massive Multiplayer Online Role-Playing Games (MMORPG's) as well as smart phone and PC browser titles. For their MMORPG's, the company have stated that "revenues from the latest expansions of “FINAL FANTASY XIV” and “DRAGON QUEST X” led to an increase in the number of paying subscribers and disk sales".

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Mobile and browser success has been attributed a number of games, including Final Fantasy Brave Exvius, Kingdom Hearts Union x and Dragon Quest Monsters Super Light to name just three titles. These games are performing strong globally, with these titles pushing both net sales and operating income on the back of increased royalty from in-game microtransactions.

The Benefits of Diversification

Diversification is the second major factor that benefits Square Enix. While core games make up the bulk of their sales and profits, the company has interests elsewhere. The largest of these is with the running of Amusement arcades, managed under the Taito brand. In addition to these, the company publishes manga under the Gangan brand. It also generates income through merchandising sales.

One issue for the company has been a fall in revenue from their amusement arcade business. While this was only a year on year fall of ¥1.5bn, it's something the company will look to avoid. This has been attributed to the decline in new amusement machine releases, while Square made a point of saying that performance has remained steady within their amusement business.

Fortunately, both publication and merchandising sales increased. Publication increased by ¥1bn year on year, with merchandising having an increase of ¥1.1bn. Despite these sales increases, income from these areas remained flat, with Publication only growing ¥0.1bn. Publication's increase was attributed to the large increase in comic book sales while Merchandise is a result of soundtracks and character figures from their own successful IP's. In addition to this is revenue raised from the selling of character figures of popular third-party IP's.

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Despite recent figures and trends, the company has retained the same forecasts for the financial year as were made during Q1. The company predicts total sales of between ¥240 to ¥260bn. Only the upper end of this range will surpass last years sales of ¥256.8bn. The large surprise is that profits haven't been adjusted, the original expectation of profits of between ¥25 to ¥30bn. In reality, the company is likely to far surpass that figure, already standing at ¥33.7bn.

The current quarter will only feature re-releases of older titles like Dissidia Final Fantasy NT, Secret of Mana and Romancing SaGa 2, as well as a new smaller title by the name of Lost Sphear. Essentially, the company will find revenue remains focused on older titles and the digital sales of these titles.

The next financial year, which could see the launch of the highly awaited Final Fantasy VII remake and Kingdom Hearts 3, will be the real area to watch the company. Should titles like these be released, it would undoubtedly result in a large increase of game sales. Should nothing be announced, it would see the company relying on an aging back-catalogue of titles.