2010 Annual Report

2010 Corporate Philosophy 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. Management Guidelines These guidelines reflect the foundation of principles upon which our corporate philosophy stands, and serve as a standard of value 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 ultimately 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. 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 changing tides, and to take advantage of these variations instead of struggling against them. We shall continue to work towards harmony and serve 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 manner 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 community 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 HOLDINGS”] include both historical facts and forward-looking statements concerning the future 02 To Our Shareholders performance of SQUARE ENIX HOLDINGS. 08 Review of Operations Such information is based on management’s assumptions and beliefs in light of the information currently available and, therefore, involve risks and uncertainties. Actual results may differ materially from 09 Overview of Business Segments 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 countries, in particular levels of consumer spending; [2] fluctuations in exchange rates, in particular the 19 Directors, Auditors and Executive Officers 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 rapid technical innovation in the digital entertainment industry; and [4] SQUARE ENIX HOLDINGS’s ability 64 Corporate Data to continue developing products and services accepted by consumers in the intensely competitive market, 65 Investor Information which is heavily influenced by subjective and quickly changing consumer preferences. Financial Highlights SQUARE ENIX HOLDINGS CO., LTD. and Consolidated Subsidiaries Years Ended March 31 Thousands of Millions of Yen U.S. Dollars 2006 2007 2008 2009 2010 2010 For the Year Net sales ¥ 124,473 ¥ 163,472 ¥ 147,516 ¥ 135,693 ¥ 192,257 $ 2,066,397 Operating income 15,470 25,916 21,520 12,277 28,235 303,474 Recurring income 15,547 26,241 18,864 11,261 27,822 299,039 Net income 17,076 11,619 9,196 6,333 9,509 102,206 At Year-end Total assets ¥ 213,348 ¥ 215,679 ¥ 212,134 ¥ 213,194 ¥ 270,529 $ 2,907,669 Total equity 120,993 129,461 147,034 147,318 152,680 1,641,022 Yen U.S. Dollars Per Share of Common Stock Net income ¥ 154.65 ¥ 105.06 ¥ 81.85 ¥ 55.11 ¥ 82.65 $ 0.89 Total equity 1,094.50 1,168.91 1,280.50 1,280.92 1,326.82 14.26 % Key Ratios Operating income margin 12.4% 15.9% 14.6% 9.0% 14.7% Recurring income margin 12.5 16.1 12.8 8.3 14.5 Return on equity 14.9 9.3 6.7 4.3 6.3 Equity ratio 56.7 60.0 69.3 69.1 56.4 Notes: 1. For the convenience of readers, amounts in U.S. dollars have been translated using the currency exchange rates at March 31, 2010 of ¥93.04=US$1. 2. Total equity = Common stock + Capital surplus + Retained earnings + Treasury stock + Valuation and translation adjustments Operating Income Margin/Recurring Income Margin (%) Return on Equity (%) 25 25 20 20 15 15 10 10 5 5 0 0 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 Operating Income Margin Recurring Income Margin 01 Yoichi Wada President and Representative Director 02 To Our Shareholders I am grateful to our shareholders for the opportunity to present shown in Figure 1. Unfortunately, U.S. and European publishers the Company’s annual report for the fiscal year ended March 31, have seen profits wiped out and the largest Japanese game 2010. companies have only narrowly avoided losses. It’s worth noting that the difference is only based on business diversification at On a consolidated basis, net sales for the fiscal year ended Japan-based game companies while U.S. and European game March 31, 2010 totaled ¥192,257 million (an increase of 41.7% companies have focused on home gaming software. In other from the prior fiscal year), operating income amounted to words, this figure shows that the home gaming business alone ¥28,235 million (an increase of 130.0%), recurring income was is unsustainable as it stands today. ¥27,822 million (an increase of 147.1%) and net income So, what is the next key pillar? reached ¥9,509 million (an increase of 50.1%). Although we have achieved the highest profit ratio among The Company’s operating income ratio was 14.7% and Japanese, U.S. and European peers, this is surpassed by the return on equity (ROE) was 6.3%. profit ratios of certain major Asian game companies. We set dividends applicable to the fiscal year ended March 31, Naturally, the remarkable local growth rates in their home 2010 at ¥35.00 per share. This amount includes a special countries as well as supportive government policies have been dividend of ¥5.00 yen per share to commemorate the achieve- positive factors. More importantly, however, I believe this trend ment of record-high earnings and represents a consolidated shows a shift to business models centered on networks. payout ratio of 42.3%. We face significant challenges as we must simultaneously As I have mentioned before, the game industry is in the work to both maintain profitability in our current businesses and midst of revolutionary change. This has become even more transform our Group by quickly identifying changes in the apparent in the latest earnings reports from game companies business ecosystem. (Figure 1). I would like to discuss the fiscal year under review from Despite the often touted shift in game industry leadership these two important perspectives. from Japan to the U.S. and Europe, actual corporate results are Figure 1 Net Sales and Recurring Income of Major Game Companies Recurring income Billions of yen *Figures are operating income except Japan GAAP companies. Tencent 80 70 60 NHN 50 40 SQUARE ENIX SEGA SAMMY Shanda 30 NetEase 20 NCsoft KONAMI 10 CAPCOM NAMCO BANDAI Games 0 TECMO KOEI THQ Ubisoft Activision Blizzard -10 Take-Two Electronic Arts -70 100 200 300 (-63.1) 400 Billions of yen Net sales Notes: (1) The currency exchange rates on May 19, 2010 were ¥92=US$1, ¥113=EUR€1, ¥0.08=KRW, ¥13=RMB. (2) The data for Japanese companies and for EA, THQ and Ubisoft is as of March 31, 2010; Take-Two is as of October 31, 2009; and for the others is as of December 31, 2009. Sources: SQUARE ENIX, Bloomberg 03 To Our Shareholders The Year’s Record Profit: Broad-Based Success the market, computer games and network communications In the year under review, sales and profit reached record levels, have already pervaded virtually every part of the world. Based while nearly all business segments showed increased profit. on this, the whole world has become game companies’ target Furthermore, sales across all geographic segments of Japan, market. The only choice available to individual companies in the North America and Europe achieved record levels (Figures 2 - 4). industry is where to set up content development and marketing operations to best serve global markets. Key Factors to Enter the Next Growth Stage For us, we have chosen the path of complete globalization.

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