Square Enix pays off Final Fantasy XVI's dev costs, causes Q1 profits to drop

Square Enix's net profits and operating income plummet by over 65% and 78% respectively as the publisher pays off Final Fantasy XVI's development costs.

1 minute & 36 seconds read time

Square Enix's kicks off a new fiscal year with plummeting operating profits and net profits, but there's a good reason for this significant drop.

Square Enix pays off Final Fantasy XVI's dev costs, causes Q1 profits to drop 2

Square Enix's Q1 FY24 report gives key updates on the status of the Japanese publisher. The company saw a strong uptick in net sales, delivering 85.669 billion yen ($592.619 million) primarily due to the Digital Entertainment segment, which benefited from the performance of Final Fantasy XVI, MMO revenues, and multiple smartphone/PC games. Net sales grew +14.4% year-over-year on a yen basis and +7.7% YoY on a USD basis.

That's where the good news really stops, at least insofar as numbers. Square Enix's Q1 operating income and net profits were down heavily during the quarter. The publisher reported operating income of 3.097 billion yen ($21.423 million), representing a nearly 80% year-over-year decrease, and total net profits were also down by 65.7% to 18.355 billion yen ($43.58 million).

Per MST Financial senior analyst David Gibson, a partial reason for this drop is that Square Enix opted to fully expense Final Fantasy XVI's development costs during the Q1 period. Once a game is released, the development costs are moved to the expense account, and developers and publishers will typically pay off these costs over a multi-year period. This is a process called amortization, and Square Enix notes that Q1 operating income was down "partly due to amortization of development cost."

Rather than follow the trends, Square Enix has instead chosen to pay off FFXVI's costs outright, which means that all future subsequent game sales will be profitable.

Taking a look at Square Enix's income statement reinforces this analysis.

In Q1'24, Square Enix paid 49.144 billion in cost of sales, a dramatic increase over Q1'23's COGS of 30.237 billion yen. This indicates the total costs of operating games and game services, as well as the costs involved with shipping etc.

Selling, general and administrative (SG&A) expenses were also up to 33.427 billion yen, and this includes the amortization value of Square Enix paying off FFXVI's development.

All-told, Square Enix spent 82.571 billion yen on expenses in Q1'24 against its 85.669 billion in net sales, which is why the operating income and net profits were so low for the quarter.

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Derek joined the TweakTown team in 2015 and has since reviewed and played 1000s of hours of new games. Derek is absorbed with the intersection of technology and gaming, and is always looking forward to new advancements. With over six years in games journalism under his belt, Derek aims to further engage the gaming sector while taking a peek under the tech that powers it. He hopes to one day explore the stars in No Man's Sky with the magic of VR.

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