Mobile, MMO anchors Square Enix's FY19 earnings as HD gaming falls

Square Enix's latest financials show steady earnings and profit resiliency against COVID-19 disruption and weak yen exchange rates, but overall game sales are down year-over-year.

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Square Enix just announced its latest earnings report for FY19, and unlike Sony and Konami, the Final Fantasy-maker didn't see a profit slide. In the period ending March 31, 2020, Square Enix earned $196.37 million in profits, up over 10% from last year's strong surge in game releases. Net sales were down 4%, weighted by hefty dips in physical game purchases. Operating income jumped 33% to $301.37 million on the back of strong mobile/browser and MMO segment earnings.

• Net Sales - $2.396 billion (¥260.527 billion), down 4% YoY
• Operating Income - $301.370 (¥32.759 billion), up 33% YoY
• Profit - $196.375 (¥21.346 billion), up 10.2% YoY

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Overall game sales were down 32% from last year and managed to push 18.09 million across both physical and digital. Physical saw the biggest sales drop.

Square Enix FY19 game sales

• Total game sales - 18.09 million, down 32% YoY
• Digital sales - 10.83 million, up 1.4% YoY
• Disc sales - 7.26 million, down 54% YoY

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Disc-based games plummeted 54% YoY to 7.26 million, a dive that Square Enix attributes to lower sales of previous catalog games as well as a marked disparity in new game releases--it's been a fair bit since the publisher launched a fusillade of new games (Final Fantasy 7 Remake doesn't count since it was released after the FY19 period ended).

"Net sales down YoY due to high hurdle set by multiple major releases in FY2019/3. Weak additional sales of FY2019/3 titles, and valuation losses on content product account resulted in operating loss."

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As we take a closer look at Square Enix's three gaming segments, we start to see cracks in mainline gaming revenues. The company's HD Gaming segment did poorly this fiscal year and saw drops across the board.

Square Enix's total gaming operating income was up YoY, but the HD Games sub-segment, which accounts for big mainline releases like Final Fantasy games, was down in net sales and reported an operating income loss. Net sales of HD games was down a big 55% YoY to $386.384 million

Square Enix FY19 game segment earnings

• Net Sales Gaming - $1.736 billion (¥188.6 billion), down 7% YoY
• HD Games - $386.384 million (¥42 billion), down 55% YoY
• MMO Segment - $368.9 million (¥40.1 billion), up 48% YoY
• Smartphone/Browser - $978.840 million (¥106.4 billion), up 27% YoY

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As a result, HD Gaming operating income saw a loss of $55 million (¥6 billion) during FY19. Square Enix attributes this loss to weaker-selling catalog games throughout the year, and the big release disparity between FY18 and FY19.

"Net sales down YoY due to high hurdle set by multiple major releases in FY2019/3. Weak additional sales of FY2019/3 titles, and valuation losses on content product account resulted in operating loss," Square Enix said.

The MMO segment saw a sharp 48% rise in net sales YoY to $368.9 million driven by continual support and content for Dragon Quest X and Final Fantasy 14.

"Net sales, operating income rose YoY on release of "FINAL FANTASY XIV" and "DRAGON QUEST X" expansion packs, and monthly paying subscriber growth."

Square Enix's mobile and browser-based PC games are by far and large the biggest earner for gaming. This segment earned more than MMO and HD Gaming combined, pulling in $978.84 million with a sharp 27% uptick year-over-year. Smartphone/browser pulled in 56% of Square Enix's total gaming revenues during the year.

"Net sales, operating income rose YoY on strong performances by "Romancing SaGa Re;univerSe" and "DRAGON QUEST WALK."

The company warns COVID-19 could "significantly impact" its future business plans, and won't give any guidance for earnings on the current FY20 timeline, which should be off to a big start thanks to Final Fantasy 7 Remake's success.