Square Enix's HD Games segment just got a sizable ¥5.7 billion write-down, and outright mentions a $31 million disposal cost for a new Luminous Productions game.
Like many games publishers, Square Enix has been disrupted by COVID-19. Due to the virus, the company shipped and produced less copies of Final Fantasy 7 Remake than expected, leading to 3.5 million sales at launch, less than the original projections. Square Enix president Yousuke Matsuda says he's happy with the game's performance, but notes the disk sales missed revised internal estimates. This reduction came after a 36% drop in game sales volume in FY19, which in turn led to a whopping 55% drop in total HD Games revenue throughout the year.
These disruptions--and more--have prompted Square Enix's recent $52 million write-down in its content production account. This specific area of business includes games currently in development.
Companies do write-downs to help offset expenses when assets are expected to drop in value. So why did Square Enix do the write-down? It was likely because it cancelled--or at least massively adjusted--a new Luminous Productions project.
"In the fiscal year ended March 31, 2019, the Group posted a loss on disposal of content of an extra ordinary loss due to the in-depth review of the business strategy for Luminous Productions Co., Ltd., a wholly-owned subsidiary.The loss comprises ¥3,425 million in loss on disposal of content production, ¥170 million in impairment loss on intangible assets and ¥41 million in other expenses," reads a section in the financial report.
For perspective, a ¥3.245 billion loss equates to roughly $31.5 million. The rest of the write-down is from weaker-than-expected game sales throughout FY2019, a period which included Dragon Quest XI S: Echoes of an Elusive Age.
Square Enix still aims to hit its ¥40 billion operating income target in FY2020, likely driven by Marvel's Avengers, Final Fantasy 7 Remake, and other yet-to-be-released titles. But Mr. Matsuda cautions investors that COVID-19 impacts could disrupt development further, and in turn throw off the target. No yearly forecasts were given as a result.
(Special thanks to ResetERA user Desertstrike for clarification on the earnings.)