Though Square Enix recently sold Crystal Dynamics, Eidos Montreal and Square Enix Montreal to the Embracer Group, this was only phase 1 of its plans. MST Financial senior analyst David Gibson reported on a recent conference call that the Japan-based publisher held, discussing its recent financial results. The sale of Crystal Dynamics and Eidos was reportedly “driven by concerns that the titles cannibalized sales of the rest of the group and so it could improve capital efficiency.”
Following the sale, the publisher initially said that it would invest in AI, the cloud and blockchain along with better aligning its Tokyo organization with overseas publishing. However, it later noted that money from the sale wouldn’t be invested into NFTs and blockchain, instead strengthening its “core gaming business segment.”
Phase 2 of the company’s plan is the “diversification of studio capital structure.” As Gibson reports, “Rising development costs of making games means with 100 percent owned studios, they need to be selective and concentrate resources, which limits expansion. Another way is to be flexible with capital structure, so Square Enix is doing a studio portfolio review.”
“Some studios will remain 100 percent while others will change (equity method or JV), will also look to explore to expand the studio portfolio,” he continued. “Biggest impact is on EU/US studios around large titles, will be able to allocate resources mainly to Japan titles. So Square Enix is looking to sell stakes in its studios to others to improve capital efficiency. Right when others like Sony etc are buyers. I would expect Sony, Tencent, Nexon etc would be interested.”
However, what’s strange about selling stakes in its studios is that the company’s capitalized game development costs are running at $840 million. Following the sale of Eidos and Crystal Dynamics, “The company will have US$1.4 billion in cash and zero debt … which is plenty to fund expanded game investment and not sell down stakes in its studios,” says Gibson.
The stock price is up by 11.13 percent currently so it seems the market approves. How this will work in the long term remains to be seen. Of course, if a publisher like Sony were to invest in Square Enix, purchasing a stake in its studios, it wouldn’t be the strangest thing. It has invested in companies like Epic Games and Devolver Digital in the past.
Time will tell so stay tuned for more details in the future.
Square Enix (SE) – highlights from results conf call… strap on your boots, this is a doozy 1/10 #SquareEnix
— David Gibson (@gibbogame) August 5, 2022
1) Crystal Dynamics/Eidos (CD/E) sale was driven by concerns that the titles cannibalized sales of the rest of the group and so it could improve capital efficiency
— David Gibson (@gibbogame) August 5, 2022
2) Sale of CD/E is phase 1, phase 2 is diversification of studio capital structure
— David Gibson (@gibbogame) August 5, 2022
3) Phase 2 you say? Rising development costs of making games means with 100% owned studios, they need to be selective and concentrate resources, which limits expansion
— David Gibson (@gibbogame) August 5, 2022
4) Phase 2 – Another way is to be flexible with capital structure, so SE is doing a studio portfolio review.
— David Gibson (@gibbogame) August 5, 2022
5) Phase 2 = Some studios will remain 100% while others will change (equity method or JV), will also look to explore to expand the studio portfolio
— David Gibson (@gibbogame) August 5, 2022
6) Phase 2 – Biggest impact is on EU/US studios around large titles, will be able to allocate resources mainly to Japan titles.
— David Gibson (@gibbogame) August 5, 2022
7) Phase 2 = So SE is looking to sell stakes in its studios to others to improve capital efficiency. Right when others like Sony etc are buyers. I would expect Sony, Tencent, Nexon etc would be interested.
— David Gibson (@gibbogame) August 5, 2022
8) SE capitalized game dev costs are currently running at US$840m (content production account)
— David Gibson (@gibbogame) August 5, 2022
9) But post the CD/E sale the company will have US$1.4bn in cash and zero debt .. which is plenty to fund expanded game investment and not sell down stakes in its studios.
— David Gibson (@gibbogame) August 5, 2022
10) Extraordinary decision by management. Stock price likes it in the short term (+9% today) but longer term…. END #SquareEnix
— David Gibson (@gibbogame) August 5, 2022
