Square Enix 2011 Annual Report Download - page 5

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While the rapid pace of change in the operating environment is ongoing, developments are in-line
with our prior expectations. Therefore, our basic strategy remains unchanged.
1. Globalization
2. Becoming “Network Centric”
3. Strengthening Own-IPs
I would like to discuss each of these strategic pillars later.
The Year’s Shortcomings
We did not have success from our new releases during the year.
Amid the intensification of competition in the console game software market, a polarization
has emerged between the very best games and those which do not earn a profit. Our mistake
was not reacting with sufficient regard to such an environment. We failed to thoroughly perfect
certain products in the rush to launch new IPs. The release of mid-class debut titles with an
intention to raise quality in future iterations can be seen as our failure. Further, we stumbled in the
launch of our “FINAL FANTASY XIV” online game, a title which held our utmost confidence.
Weakness was discovered in the management of the development organization. For this, we
must apologize to our customers and our shareholders. However, instead of giving up and shutting
down, we have renewed the team and are working hard to recover the FINAL FANTASY brand
and rebuild our presence in the MMORPG space. Progress is taking place at an extremely high
rate, and we are enthusiastic about the revival to “top-title” status in the near future.
Learning from these mistakes, we decided to concentrate our focus on approximately 10 new
and existing key franchises from the second half of the fiscal year under review. For these titles,
we have established a development system without compromise. As a result, we delayed the
launch of the upcoming “DEUS EX: HUMAN REVOLUTION” from the fiscal year under review
upon our decision to spend more time in further polishing the quality of the title.
The weakness of new releases, a stumble in “FINAL FANTASY XIV” and the delay of “DEUS
EX: HUMAN REVOLUTION” were the primary factors resulting in operating income of ¥7.3 billion,
substantially lower than forecast at the start of the fiscal year and the lowest level in our company
history.
Preparation for Recovery
First of all, at the time of preparing our year-end financial statements, we conducted a thorough
reassessment of our balance sheet.
From operating income of ¥7.3 billion to a net loss of ¥12.0 billion, excluding a foreign
exchange loss of ¥2.1 billion, there is a difference of ¥17.2 billion.
51% of this amount, or ¥8.8 billion, was the result of a goodwill write-down. The amounts of
goodwill previously recorded for EIDOS and TAITO were based on assumptions of industry conditions
at the time of their respective acquisitions. While the underlying value of each business continues
to be high, we decided it necessary to more conservatively value future earnings generation from
planned business models given the dramatic industry transformation.
Further, certain development cancellations and related losses amounted to ¥4.4 billion, or 26% of
03