Square Enix Detail Where Their Losses Are Coming From

In a recent financial briefing, former Square Enix president Yoichi Wada discussed how Square Enix arrived at their sales forecasts for some of the biggest games they’ve released over the last 12 months. The three titles in question are: Sleeping Dogs, Hitman Absolution and Tomb Raider.

As previously reported, despite high sales, all three games sold below expectations in North America and Europe. Wada shares:

“Let’s talk about Sleeping Dogs: we were looking at selling roughly 2~2.5 million units in the EUR/NA market based on its game content, genre and Metacritic scores. In the same way, game quality and Metacritic scores led us to believe that Hitman had potential to sell 4.5~5 million units and 5~6 million units for Tomb Raider in EUR/NA and Japanese markets combined.

 

“Of course, we want to hedge risk in budgeting these units directly into the forecast, therefore we base the forecast on 80-90% of the total sales potential of each title. However, it is disappointing that our results fell below these marks.”

For reference, Sleeping Dogs has moved 1.75 million copies, Hitman Absolution 3.6 million and Tomb Raider 3.4 million.

Wada says that Square Enix’s revenue model is outdated and that the company’s selling capacity has been “far weaker than we ever imagined” in North America and Europe. As a result, Square Enix are incurring an extraordinary loss in an “effort to sort out items not achieving expected revenue levels, through scrapping those items and terminating production”.

Some of the content being scrapped was in development at studios in Japan. A loss of more than 2 billion yen originates from Japanese studios, where certain productions have already been halted and work scrapped. Additionally, Square Enix say that they recently launched a new division in the U.S. to develop casual games for phones, but were forced to close it down after things didn’t go well. The company expects a 1 billion yen loss as a result of its closure. Total losses resulting from this “Loss on Disposal of Content” at Square Enix amount to 4 billion yen.

A further loss of 3.5 billion yen is expected from “Loss on Evaluation of Content,” where Square will make downward revisions to their prospective yields for every game title and overhaul their business models. A 2 billion yen loss in this regard will come from Japan and 1.5 billion yen from Europe and North America.

Additionally, a company-wide loss of 2 billion yen is expected in relation to re-structuring Square Enix. In total, all of these losses amount to 10 billion yen.

While console game sales were sluggish, social games are showing “solid performance,” Wada says, with continuous growth in net sales. Square expect net sales from their Social Gaming and Others category to reach 20 billion yen in fiscal year 2013. Profit margins continue to improve steadily and Square say that their social game development teams exchange expertise with each other on a daily basis. Over the next year, Square plan to focus on providing social games to China and Korea, and gradually expand to the entire Asian region.

In the wake of the company’s losses, Wada will be stepping down as Square’s president. As previously reported, Yosuke Matsuda will be replacing Yoichi Wada as Square Enix’s new president.