Financial · July 1, 2011

Square Enix Annual Report FY2011

Summary

The 2011 fiscal year marked a period of significant financial contraction and strategic pivot for Square Enix, characterized by a 34.8% decline in net sales to ¥125.3 billion and a net loss of ¥12.0 billion. This downturn was primarily driven by the underperformance of major console titles, the troubled launch of Final Fantasy XIV, and a sharp decline in the merchandising segment. To stabilize the business, management executed aggressive balance sheet reassessments, including ¥8.8 billion in goodwill write-downs related to the Taito and Eidos acquisitions and ¥4.4 billion in development cancellations. Despite these losses and a ¥37 billion bond redemption, the Group maintained a solid net assets ratio of 64.7% and a cash balance of ¥109.8 billion. The primary thesis of this period is a fundamental transition from traditional, fixed-price physical media toward a "network-centric" model. This strategy responds to the rise of smartphones, browsers, and cloud gaming, which have lowered hardware barriers and necessitated a shift toward freemium and pay-as-you-go revenue streams. To support this recovery, the company is refocusing resources on approximately 10 key franchises while streamlining its corporate structure, which included the liquidation of 11 companies and the consolidation of 34 subsidiaries, most notably the integration of Eidos and Crystal Dynamics. Geographically, Japan remained the dominant market, representing 83% of total net sales, though foreign ownership of the company reached a five-year high of 27.4%. Governance reforms were also implemented to separate board oversight from operational execution and to streamline shareholder meetings. Moving forward, the Group aims to recover brand value by embracing disruptive innovation and adapting to a transforming global industry ecosystem.

From the report

C o r p o r a t e P h i l o s o p h y To spread happiness across the globe by providing unforgettable experiences This philosophy represents our company’s mission and the beliefs for which we stand. Each of our customers has his or her own definition of happiness. The Square Enix Group provides high-quality content, services, and products to help those customers create their own wonderful, unforgettable experiences, thereby allowing them to discover a happiness all their own. M a n a g e m e n t G u i d e l i n e s These guidelines reflect the foundation of principles upon which our corporate philosophy stands, and serve as a standard of va lue for the Group and its members. We shall strive to achieve our corporate goals while closely considering the following: 1. Professionalism We shall exhibit a high degree of professionalism, ensuring optimum results in the workplace. We shall display initiative, make continued efforts to further develop our expertise, and remain sincere and steadfast in the pursuit of our goals, while ultimat ely aspiring to forge a corporate culture disciplined by the pride we hold in our work. 2. Creativity and Innovation To attain and maintain new standards of value, there are questions we must ask ourselves: Is this creative? Is this innovative? Mediocre dedication can only result in mediocre achievements. Simply being content with the status quo can only lead to a collapse into oblivion. To prevent this from occurring and to avoid complacency, we must continue asking ourselves the aforementioned questions.

s creative? Is this innovative? Mediocre dedication can only result in mediocre achievements. Simply being content with the status quo can only lead to a collapse into oblivion. To prevent this from occurring and to avoid complacency, we must continue asking ourselves the aforementioned questions. 3. Harmony Everything in the world interacts to form a massive system. Nothing can stand alone. Everything functions with an inevitable accord to reason. It is vital to gain a proper understanding of the constantly changin g tides, and to take advantage of these variations instead of struggling against them. We shall continue to work towards harmony and ser ve as an integral part of this ever-fluctuating system. In order to achieve ideal performance levels, we as individuals, shall aim for a mutual respect amongst our coworkers, remain conscious of the duties assigned us, and place an emphasis on teamwork. As a corporate organization, we shall work diligently to maintain an optimal balance culminating in the ultimate satisfaction of all our stakeholders, including customers, shareholders, counterparties, and employees. As a business entity, we shall contemplate what functions we are to perform within the realm of industry, while acting in a ma nner that ensures the mutual harmony and benefit of all parties within it. Finally, as a member of society, we shall comply with laws and regulations while fulfilling our civic obligations, including c ommunity involvement and environmental conservation.

the realm of industry, while acting in a ma nner that ensures the mutual harmony and benefit of all parties within it. Finally, as a member of society, we shall comply with laws and regulations while fulfilling our civic obligations, including c ommunity involvement and environmental conservation. CONTENTS Disclaimer Regarding Forward-Looking Statements Statements in this annual report with respect to the current plans, estimates, strategy, and beliefs of 01 Financial Highlights SQUARE ENIX HOLDINGS CO., LTD., and consolidated subsidiaries [collectively ”SQUARE ENIX 02 To Our Shareholders HOLDINGS”] include both historical facts and forward-looking statements concerning the future performance of SQUARE ENIX HOLDINGS. 08 Review of Operations Such information is based on management’s assumptions and beliefs in light of the information 09 Overview of Business Segments 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. 14 Corporate Governance Such factors include but are not limited to: [1] general economic conditions in Japan and foreign 19 Directors‚ Auditors and Executive Officers countries, in particular levels of consumer spending; [2] fluctuations in exchange rates, in particular the 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 19 Directors‚ Auditors and Executive Officers countries, in particular levels of consumer spending; [2] fluctuations in exchange rates, in particular the exchange rate of the Japanese yen in relation to the U.S. dollar, the euro and others, which SQUARE ENIX 20 Financial Section HOLDINGS uses extensively in its overseas business; [3] the continuous introduction of new products and 68 Corporate Data rapid technical innovation in the digital entertainment industry as well as SQUARE ENIX HOLDINGS’s ability to continue developing products and services accepted by consumers in the intensely competitive 69 Investor Information market, which is heavily influenced by subjective and quickly changing consumer preferences.

> **[Chart page]** This page contains visual data — view in PDF for the best experience. F i n a n c i a l H i g h l i g h t s SQUARE ENIX HOLDINGS CO.‚ LTD. and Consolidated Subsidiaries Years Ended March 31 Thousands of Millions of Yen U.S. Dollars 2007 2008 2009 2010 2011 2011 For the Year Net sales ¥ 163,472 ¥ 147,516 ¥ 135,693 ¥ 192,257 ¥ 125,271 $ 1,506,567 income Operating 25,916 21,520 12,277 28,235 7,325 88,101 income Recurring 26,241 18,864 11,261 27,822 5,390 64,830 Net income (loss) 11,619 9,196 6,333 9,509 (12,043) (144,841) At Year-end Total assets ¥ 215,679 ¥ 212,134 ¥ 213,194 ¥ 270,529 ¥ 206,336 $ 2,481,492 equity Total 129,461 147,034 147,318 152,680 133,558 1,606,230 Yen U.S. Dollars Per Share of Common Stock Net income (loss) ¥ 105.06 ¥ 81.85 ¥ 55.11 ¥ 82.65 ¥ (104.66) $ (1.26) equity Total 1,168.91 1,280.50 1,280.92 1,326.82 1,160.66 13.96 % Key Ratios Operating income margin 15.9% 14.6% 9.0% 14.7% 5.8% Recurring income margin 16.1 12.8 8.3 14.5 4.3 Return on equity 9.3 6.7 4.3 6.3 (8.4) ratio Equity 60.0 69.3 69.1 56.4 64.7 Notes: 1. For the convenience of readers, amounts in U.S. dollars have been translated using the currency exchange rates at March 31, 2011 of ¥83.15=US$1. 2. Total equity = Common stock + Capital surplus + Retained earnings + Treasury stock + Accumulated other comprehensive loss Operating Income Margin/Recurring Income Margin (%) Return on Equity (%) 25 15 20 10 15 5 10 0 5 (5)

sing the currency exchange rates at March 31, 2011 of ¥83.15=US$1. 2. Total equity = Common stock + Capital surplus + Retained earnings + Treasury stock + Accumulated other comprehensive loss Operating Income Margin/Recurring Income Margin (%) Return on Equity (%) 25 15 20 10 15 5 10 0 5 (5) 0 (10) 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 Operating Income Margin Recurring Income Margin

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Type: Financial

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