Final Fantasy XVI and Rebirth weren't enough to stabilize Square Enix's operating losses

Square Enix's latest yearly earnings results reflect the challenging environment of the games market, with multiple big games missing the mark for the Japanese games publisher.

5

According to the latest FY24 results, Final Fantasy XVI and Final Fantasy VII Rebirth have apparently fallen short of Square Enix's expectations--a phrase that gamers are used to hearing from the publisher. But it's a bit more nuanced than these games just outright failing.

Square Enix's business is separated into multiple segments. Digital Entertainment is one of these segments, which includes HD Games, MMO, and smartphone games. In the report, Square Enix CEO Takashi Kiryu says that the profits from the HD Games segment "did not meet our expectations." This isn't sales, though.

5

HD Games sales were actually up by 20.7 billion yen, or about $145 million, over last year. The FY24 period, which ran from April 2023 - March 2024, includes two major games in the HD Games segment: Final Fantasy XVI, which launched in June 2023, and Final Fantasy VII: Rebirth, which launched at the tail-end of the period in February 2024.

5

Kiryu admits that Rebirth's initial sales were "not as strong as expected."

So if sales are up, how could profits be down? Square Enix booked a big impairment charge--which could relate to a game cancellation or the reduction in perceived long-term value of a game project--to its HD Games segment. This negatively impacted profits. There's also the high amortization of games like Final Fantasy XVI.

Publishers typically amortize games--or recognize the cost of developing the game as an expense--over time.

However, Square Enix opted to pay off FFXVI's costs all at once rather than spread it over multiple quarters.

This expense recognition affected Final Fantasy XVI's profitability from the get-go. So it's not as simple as to say the game didn't sell well, but more apt to say that it's possible the game didn't sell well and/or the game was more costly to make than Square Enix hoped it would be. There's a combination of factors here.

The publisher hoped that profits from FFXVI and Rebirth would be better than they were, which in turn implies that sales missed the mark as well.

Interestingly enough, Square Enix actually sold millions more games in FY24 than it did in FY23. The company sold 26.32 million games in FY24, as opposed to 22.44 million games in FY23.

5

It's unclear exactly what kinds of expectations that Square Enix had for these games, but the combination of valuation reductions and lower sales ate into the publisher's profits for the period.

Square Enix has since made commitments to bring more of its games to all platforms, and Final Fantasy XVI just launched on PC. It's unknown whether or not FFXVI will cross over to Xbox at some point, but Square Enix wants to launch more titles on Microsoft's console, starting with Final Fantasy XIV.

Read Also: Xbox has an 'extremely low' userbase in Japan, but Square Enix will bring more games to Xbox

"Starting with today's announcement of Final Fantasy XIV coming in Spring 2024, and whenever possible, we're planning to bring our games to Xbox for players around the world to enjoy," Kiryu said in 2023.

However, that doesn't mean exclusivity deals with PlayStation will end entirely.

Check below for a transcript of what Square Enix CEO Takashi Kiryu said in the FY24 results briefing:

Net sales up, but profits down YoY despite major HD game releases, partly due to a YoY decline in MMO and Games for Smart Devices/PC browser sub-segment sales, and higher development cost amortization and content production account valuation losses

In the HD Games sub-segment, we released multiple new titles, including major titles such as "FINAL FANTASY XVI" and "FINAL FANTASY VII REBIRTH," but profits unfortunately did not meet our expectations.

Net sales in the MMO and Games for Smart Devices/PC Browser sub-segments were lower than in the previous fiscal year.

We resumed disclosure of operating income figures by sub-segment from FY2024/3.

The HD Games sub-segment booked net sales of ¥99.2 billion (up ¥20.7 billion YoY) and an operating loss of ¥8.1 billion (loss widened ¥4 billion YoY). Despite the release of "FOAMSTARS" and "FINAL FANTASY VII REBIRTH" in Q4,initial sales were not as strong as expected, in addition to which an impairment was made to the content production account, resulting in the operating loss.