SQUARE ENIX HOLDINGS CO., LTD.
1Q FY2020/3 Financial Results Briefing Session Q&A
Date/Time: August 6, 2019 (Tue); 6:00-7:10 pm (JST)
Main speaker: Yosuke Matsuda, President and Representative Director
Q. What is your view of the strong performance by the Publication segment in 1Q, and what is your outlook for 2Q onward?
A. We previously relied heavily on major hit titles, but thanks to the popularity of digital media, including “MANGA UP!” and “GANGAN pixv,” we have begun to see more regular success with mid-sized titles. These favorable results helped to improve our earnings in 1Q, and we have strong expectations for our future earnings.
Q. You had expected net sales and operating income at the Publication segment to decline in FY2020/3. Is it fair to say that the strong start in 1Q exceeded guidance?
A. That’s correct. We hope full-year results will beat guidance.
Q. How will you improve sales of HD game titles after their initial launch phase?
A. We will generate more post-launch sales, especially via digital download, by further pursuing our multiplatform strategy, which includes offering games for PCs. Offering games in multiple languages is also an important means of driving additional sales. To give one example, we released the PC version of “OCTOPATH TRAVELER” in June this year and saw growth in downloads of the simplified Chinese version. Simplified Chinese will continue to be one of our language offerings given that demand seems to be broad and will allow us to extend beyond mainland China.
Q. Why did number of paying subscribers grow ahead of the release of the “FINAL FANTASY XIV” expansion pack in the MMO sub-segment?
A. We encouraged players to continue playing the game until the expansion pack’s release by continuously updating the game content. In addition, we built up excitement and engagement among players through a variety of promotional initiatives, including by hosting fan festivals.
Q. The figure you posted under “reversal of provision for sales returns” on your income statement is larger than it has been over the past five years. Why is that?
A. We reverse the closing entry for return provisions on a quarterly basis, but inventory in distribution channels was up at the end of FY2019/3 because we had released three major new titles during the course of the fiscal year. In keeping with that, we posted around ¥9.2 billion in provisions for sales returns at the end of the fiscal year, which made for a greater reversal figure in 1Q. There was a difference of around ¥2 billion between what we reversed (approximately ¥9.1 billion) and what we booked as provisions (approximately ¥7.1 billion), but price protection allowances and other returns measures undertaken in 1Q resulted in a reduction in sales by approximately the same amount, so there was no impact on our gross margin.
Q. Can you tell us about what has driven the growth in the content production account and where you expect it to be at the end of FY2020/3?
A. The growth is due to the progress we have made in our development efforts, including for major new titles slated for release in FY2020/3 and beyond, as well as new titles for next-generation consoles. While we will fully amortize the development costs of the major new titles we will be launching in March 2020, we will also be moving forward on our development efforts for major new titles to be launched in FY2021/3 and beyond. As such, we look for the size of the account to significantly exceed the current level at the end of FY2020/3.
Q. How much did the “FINAL FANTASY XIV” expansion pack contribute to 1Q earnings?
A. The sales contribution was limited as we only posted sales on the packaged games we shipped early. We amortized a portion of the content production account (cost of sales) commensurate with the number of expansion packs we expect to sell. We look to sell more via digital download than in boxes.
Q. What is the difference between the latest “FINAL FANTASY XIV” expansion pack and the previous one you released in FY2018/3?
A. We cannot make a direct comparison in terms of the quarterly earnings impact, as they were released in different quarters, with “STORMBLOOD” coming out in June 2017 and the new “SHADOWBRINGERS” pack coming out in July 2019. We are receiving excellent feedback on the latest pack and beating the number of paying subscribers we saw when we released the previous pack.