Financial · July 1, 2006

Square Enix Annual Report FY2006

Summary

Fiscal year 2006 marked a period of aggressive structural expansion and strategic pivot for Square Enix, defined primarily by the acquisition of Taito Corporation. This consolidation drove net sales up 68.5% to ¥124.5 billion, as the company integrated Taito’s amusement and arcade operations into its traditional software portfolio. Financial performance was further bolstered by the record-setting global releases of *Final Fantasy XII* and *Kingdom Hearts II*, which shipped over 3.6 million units. However, despite record revenues, operating income fell 41.4% to ¥15.5 billion. This decline was attributed to a challenging transition in the console lifecycle, the underperformance of second-tier titles, and significant impairment hits, including a ¥3.9 billion write-down of goodwill related to the U.S. subsidiary UIEvolution. The acquisition of Taito fundamentally altered the corporate balance sheet, increasing total assets to ¥284.3 billion and necessitating the issuance of ¥50 billion in corporate bonds. While the new Amusement segment added substantial scale, it initially faced operating losses due to high investment costs and sluggish arcade sales. To mitigate these pressures, management initiated a divestment of non-core assets, such as Taito’s karaoke-on-demand business, and implemented a strategic shift toward "community management." This vision emphasizes multi-platform content delivery, network-compliant entertainment, and the application of game technology to non-entertainment sectors like education and IPTV. Geographically, Japan remained the primary revenue driver, accounting for 87% of sales, though the company noted significant growth in the Asian digital content market. The ownership structure also underwent a notable transformation, with foreign investment rising from 4.46% to 19.65% over a two-year period. Moving forward, the company aims to stabilize its expanded operations by targeting a 20% operating income ratio, focusing on cross-platform middleware development and the strengthening of global human resources to navigate the risks associated with next-generation hardware transitions.

From the report

C% C SQUARE ENIX CO., LTD, TH SQUARCCNIX www.square-enix.com/ ANNUAL REPORT 2006 PRINTED WITH S OY INK Printed in Japan

Net Sales by Business Segment Years Ended March 31 Net Sales Ratio Net Sales (Billions of yen) Games (Offline) 36.9% 2005 2006 9.5% 0 10 20 30 40 50 Net Sales Ratio Net Sales (Billions of yen) Games (Online) 12.6% 2005 2006 13.5% 0 4 8 12 16 20 Net Sales Ratio Net Sales (Billions of yen) Mobile Phone Content 4.1% 2005 2006 11.2% 0 2 4 6 8 10 Net Sales Ratio Net Sales (Billions of yen) Publication 7.8% 2005 2006 10.3% 0 3 6 9 12 15 Net Sales Ratio Net Sales (Billions of yen) Amusement 33.0% 2005 2006 0 10 20 30 40 50 Net Sales Ratio Net Sales (Billions of yen) Others 5.6% 2005 2006 162.6% 0 2 4 6 8 10 Contents Disclaimer Regarding Forward-Looking Statements Statements in this annual report with respect to the current plans, estimates, strategy, and beliefs Financial Highlights 01 of SQUARE ENIX CO., LTD., and consolidated subsidiaries [collectively ”SQUARE ENIX”] include both historical facts and forward-looking statements concerning the future performance of SQUARE ENIX. To Our Shareholders 02 Such information is based on management’s assumptions and beliefs in light of the information Review of Operations 08 currently available and, therefore, involve risks and uncertainties. Actual results may differ materially from those anticipated in these statements due to the influence of a number of important factors. Corporate Governance 12 Such factors include but are not limited to: [1] general economic conditions in Japan and foreign countries, in particular levels of consumer spending; [2] fluctuations in exchange rates, in particular the Directors, Auditors and Executive Officers 13 exchange rate of the Japanese yen in relation to the U.S.

rs include but are not limited to: [1] general economic conditions in Japan and foreign countries, in particular levels of consumer spending; [2] fluctuations in exchange rates, in particular the Directors, Auditors and Executive Officers 13 exchange rate of the Japanese yen in relation to the U.S. dollar, the euro and others, which SQUARE Financial Section 14 ENIX uses extensively in its overseas business; [3] the continuous introduction of new products, and rapid technical innovation in the digital entertainment industry; and [4] SQUARE ENIX’s ability to Corporate Data 65 continue developing products and services accepted by consumers in the intensely competitive market, which is heavily influenced by subjective and quickly changing consumer preferences. Investor Information 66

SQUARE ENIX CO., LTD. and Consolidated Subsidiaries Years Ended March 31 Thousands of Millions of Yen U.S. Dollars 2006 2005 2006 For the Year Net sales ¥124,473 ¥ 73,864 $1,059,619 Operating income 15,470 26,438 131,695 Net income 17,076 14,932 145,370 At year-end Total assets ¥213,348 ¥131,695 $1,816,198 Total shareholders’ equity 120,993 108,933 1,029,997 Yen U.S. Dollars Per Share of Common Stock Net income ¥ 154.65 ¥ 135.63 $ 1.31 Total shareholders’ equity 1,094.50 988.19 9.31 % Key Ratios Operating income margin 12.4% 35.8% Return on equity 14.9 14.5 Shareholders’ equity ratio 56.7 82.7 Notes: For the convenience of readers, amounts in U.S. dollars have been translated from yen at the exchange rate prevailing in the Tokyo foreign exchange market as of March 31, 2006 of ¥ 117.47=US $1. Operating Income Margin Return on Equity % % 50 60 40 40 30 20 20 0 10 -20 0 -40 -10 -60 2001 2002 2003 2004 2005 2006 2001 2002 2003 2004 2005 2006 Former ENIX Former SQUARE SQUARE ENIX Former ENIX Former SQUARE SQUARE ENIX Notes: 1. Return on equity = Net income / Average shareholders’ equity 2. The former ENIX did not prepare consolidated financial statements for the period in FY2000. The former ENIX figures for this period are, therefore, disclosed on a non-consolidated basis. 3. Return on equity for FY2003 has been calculated using the simple addition of the former ENIX and the former SQUARE’s shareholders’ equity as of the end of the previous period.

Pages: 68
Words: 38,026
Format: PDF
Type: Financial

Topics

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I<sup>am </sup> pleased to present the SQUARE ENIX annual report for fiscal 2005, ended March 31, 2006, to our shareholders and other stakeholders. In fiscal 2005, on a consolidated basis, net sales rose 68.5%, to ¥ 124,473 million, operating income declined 41.4%, to ¥15,470 million, recurring income decreased 39.9%, to ¥ 15,547 million, and net income climbed 14.3%, to ¥ 17,076 million. The operating income margin was 12.4%, and return on equity (ROE) was 14.9% in fiscal 2005. When we inaugurated SQUARE ENIX, I’ve laid out the actions to be taken as follows. The first two fiscal years were to be largely devoted to building up strength and stamina. Our primary focus for the third year —the year under review—and fourth year was to modify our physique. In addition to accomplishing structural reforms, we would work toward a significant leap forward through the completion of our new structure in fiscal 2010. In fiscal 2005, we met the challenges of a changing operating environment and the change of the industry structure by preparing a stronger than ever product lineup. FINAL FANTASY XII and KINGDOM HEARTS II became record-setting game titles in the industry during the fiscal year under review, while the release of the computer-generated imagery (CGI)-animated film FINAL FANTASY VII: Advent Children gained considerable attention in both the United States and Japan for its unprecedented success. Although our major products performed as strongly as anticipated, changes in the operating environment were even harsher than initially expected, and therefore other products were unable to mirror our major-product successes.

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