Source: https://www.hd.square-enix.com/eng/ir/pdf/21q2outline.pdf
A couple of notes:
This is the Q&A for Square Enix's Q2 earnings release for the fiscal year ending March 2021.
Why Marvel's Avengers caused an estimated ¥7B operating loss in the HD Games sub-segment:
Forecasting profitability of Marvel's Avengers going forward:
How is that Nier smartphone game coming along?
Write-downs:
Why didn't they anticipate that Marvel's Avengers would underperform?
HD Games sub-segment is looking volatile...
How are you dealing with costs related to next-gen game development going forward?
Here comes a tough question:
A couple of notes:
The HD Games sub-segment saw sales rise YoY and a turn to profitability thanks not only to the release of major console titles such as "FINAL FANTASY VII REMAKE" and "Marvel's Avengers," but also to brisk sales of catalog titles and licensing income.
The HD Games sub-segment posted an operating loss as initial sales of "Marvel's Avengers" were lower than we had expected and unable to completely offset the amortization of the game's development costs. In the second half of the fiscal year ("2H"), we hope to make up for slow initial sales by offering ample additional content to grow our sales.
This is the Q&A for Square Enix's Q2 earnings release for the fiscal year ending March 2021.
Why Marvel's Avengers caused an estimated ¥7B operating loss in the HD Games sub-segment:
Q: I estimate that the HD Games sub-segment booked an operating loss of around ¥7 billion in 2Q. Would the sub- segment have turned a profit if sales of "Marvel's Avengers" had covered the amortization of its development costs? The loss seems too great to be explained solely by costs associated with that title outweighing its sales in 2Q. Are there any other factors we should assume contributed to the operating loss? Also, should we assume that there is still a fair amount of that title's development costs to be amortized in 3Q?
A: Absent factors associated with "Marvel's Avengers," the sub-segment would have been in the black. In addition to the amortization of that game's development costs, another significant factor associated with the title was the fact that we undertook a major advertising campaign at the time of its launch to make up for delays in our marketing efforts resulting from the COVID-19 pandemic. There is a certain amount of development costs still to be amortized in 3Q, but we want to recoup it by growing our sales going forward.
Forecasting profitability of Marvel's Avengers going forward:
Q: What do you expect the profitability of "Marvel's Avengers" to look like in 3Q?
A: Our intention is first and foremost to work to expand sales in order to improve its profitability.
How is that Nier smartphone game coming along?
Q: How would you assess the forthcoming smartphone game "NieR Re[in]carnation" at present, and when do you expect it to contribute to earnings?
A: Our current assessment is that our team has created a good game. We have not made an official announcement regarding a launch date, but the team is working hard on its development efforts to get the game to customers as soon
as possible. However, we believe that it is extremely important that we are able to ensure that the game is of a level of quality that will keep customers playing for a long time. As such, we will consider how to strike the best balance between speed and quality in order to finalize the launch date.
Write-downs:
Q: How much of a write-down is included in your cost of sales in this results release?
A: It was ¥1.1 billion in 1H.
Why didn't they anticipate that Marvel's Avengers would underperform?
Q: You say that initial sales of "Marvel's Avengers" were lower than you had expected. Were the reasons for that not something you could have anticipated and done something about?
A: We engaged in ample preparations ahead of the launch, but it is true that there were aspects in which we were wanting. We intend to leverage the lessons we learned from this experience in future game development efforts.
HD Games sub-segment is looking volatile...
Q: The quarterly earnings in your HD Games sub-segment strike me as highly volatile. What is your view on that?
A: We think of the totality of the Digital Entertainment segment rather than of the HD Games sub-segment in isolation. By this, I mean that we consider our ability to offset the volatility in HD games with stable recurring income from sources such as MMO and smartphone games. We therefore undertake our HD game development efforts with the expectation that there will be a certain level of volatility. However, it naturally goes without saying that we also intend to improve profitability within the HD Games sub-segment by promoting digital sales and other measures.
How are you dealing with costs related to next-gen game development going forward?
Q: If you ramp up your efforts to address the next generation of consoles going forward, it seems like the cost of developing HD games will be even greater than it is now. Will you be able to control earnings volatility with sources of stable recurring income other than HD games?
A: Cost inflation will be unavoidable if we maintain our traditional development style. We therefore need to strike a good balance in terms of overall development costs by sharing development resources, utilizing procedural content generation techniques, and automating quality assurance processes. In addition, we need to keep a close watch on the efforts of the development teams that will be making such initiatives a reality. We have been working to shore up our base of stable recurring earnings so that we will be able to continue to invest in the development of major AAA titles and in the creation of new IP. We believe that we have grown that base to a considerable level, but we will work to grow it further.
Here comes a tough question:
Q: One of your stated strategies is to use new IP to grow your customer base. I can see how that would result in major hits and misses. However, does digitization not give you the option of conducting multiple pre-launch beta tests and deciding whether to release the product based on the users' reaction?
A: That is a tough question. It is difficult to decide the scope of a beta test for a single-player action-adventure game or an RPG (role-playing game) because of the risk of spoilers. You cannot unveil the finished product too far ahead of launch. However, it is becoming increasingly important to offer beta tests and demo versions of games as part of pre-launch promotion efforts, so we will continue to explore what kind of pre-launch promotions fulfill our customers' expectations.
In regards to growing our customer base by creating new IP, I have to say that creating new IP is extremely challenging and that the difficulty involved has definitely increased. However, continuing to work to create new IP is essential to our further growth, so we will continue to do so. In addition, it is our intention to continue to expand our stable recurring earnings so that we will be able to stand up to that challenge.
