Square Enix : Consolidated Financial Results for the Fiscal Year Ended March 31, 2012 (Japan GAAP)

Consolidated Financial Results (April 1, 2011 to March 31, 2012)

Analysis of consolidated business results

The Square Enix Group (the "Group") is continuing determined efforts to strengthen the competitiveness and profitability of its business segments of Digital Entertainment, Amusement, Publication and Merchandising.

Net sales for the fiscal year ended March 31, 2012 totaled ¥127,896 million (an increase of 2.1% from the prior fiscal year), operating income amounted to ¥10,713 million (an increase of 46.2% from the prior fiscal year) and recurring income amounted to ¥10,297 million (an increase of 91.0% from the prior fiscal year).

A discussion of results by segment for the fiscal year ended March 31, 2012 follows.

Digital Entertainment

The Digital Entertainment segment plans, develops, distributes and operates digital entertainment content primarily in the form of games. Digital entertainment content is offered to meet customer lifestyles across a variety of usage environments such as consumer game consoles (including handheld game machines), personal computers and mobile phones (including smartphones).

During the fiscal year ended March 31, 2012, the Group released major titles on consumer game consoles ("FINAL FANTASY XIII-2" [Japan, North America, Europe]; "DEUS EX: HUMAN REVOLUTION" [North America, Europe, Japan]), which favorably grew sales of packaged software. Regarding content on platforms such as browser and smartphone, an online simulation game called "SENGOKU IXA" in partnership with Yahoo! Japan, launched in August 2010 continues to post favorable results. Further, starting January 2012, services for a Mobage-based social game called "FINAL FANTASY BRIGADE" whose total registered users exceeded 2 million in March 2012 enjoys robust growth.

Net sales and operating income in the Digital Entertainment segment totaled ¥71,871 million (an increase of 11.9% from the prior fiscal year) and ¥12,602 million (an increase of 11.7% from the prior fiscal year), respectively.

Amusement

The Amusement segment consists of the operation of amusement facilities and the planning, development and distribution of arcade game machines and related products for amusement facilities.

During the fiscal year ended March 31, 2012, due to the softening market conditions, amusement facilities operations stagnated on sales during the second half of the fiscal year. However, the Group showed steady increase on operating income compared to the prior fiscal year from the efficiency in operations of amusement facilities and investment in machinery.

Net sales and operating income in the Amusement segment totaled ¥41,921 million (a decrease of 6.9% from the prior fiscal year) and ¥2,552 million (an increase of 17.2% from the prior fiscal year), respectively.

Publication

The Publication segment includes comic books, game strategy books and comic magazines.

During the fiscal year ended March 31, 2012, due to the completion of larger serial manga titles, monthly magazines and comic books stagnated on sales. On the other hand, the Group has been dedicated to developing network-based publication businesses including the Group's GANGAN ONLINE, a web-based comic magazine.

Net sales and operating income in the Publication segment totaled ¥11,335 million (a decrease of 13.1% from the prior fiscal year) and ¥2,575 million (a decrease of 19.6% from the prior fiscal year), respectively.

Merchandising

The Merchandising segment includes the planning, production, distribution and licensing of derivative products of titles owned by the Group.

During the fiscal year ended March 31, 2012, the Group continued to distribute and license items such as character goods and soundtracks based on the Group's own IPs while diversifying new opportunities for profit by strengthening its character goods lineup with additional products based on third party content and overseas expansions.

Net sales and operating income in the Merchandising segment totaled ¥2,767 million (a decrease of 8.3% over the prior fiscal year) and ¥742 million (an increase of 9.1% over the prior fiscal year), respectively.

(Consolidated forecasts)

The Group is prepared to meet the new business environment that is expanding its customer base through the proliferation of broadband networks and a wider selection of digital entertainment environment. The Group views this change as an opportunity to capture new profit sources and are making every effort to expand its financially well-established network related businesses to have the Group's attractive content enjoyed by an ever-growing number of customers.

In the current fiscal year ending March 31, 2013, the Group is focusing all efforts on a substantial earnings improvement.

Analysis of consolidated financial position

(i) Assets, liabilities and net assets

Assets

As of March 31, 2012, total current assets were ¥172,161 million, increasing by 4.8% compared to the prior fiscal year. This was mainly due to increases in content production account of ¥5,157 million and notes and accounts receivable of ¥2,957 million, respectively.

Fixed assets were ¥41,819 million, decreasing by 0.5% compared to the prior fiscal year. This was mainly due to a decrease in deferred tax assets by ¥621 million, offset by an increase in rental deposits of ¥469 million.

As a result, total assets increased by 3.7% to ¥213,981 million.

Liabilities

As of March 31, 2012, total current liabilities were ¥33,778 million, an increase of 18.5% compared to the end of the prior fiscal year. This was mainly due to increases in short-term loans of ¥3,914 million and accrued income taxes of ¥1,765 million.

Non-current liabilities increased by 0.5% to ¥42,906 million. The increase was mainly due to an increase in allowance for employees' retirement benefits of ¥747 million, offset by a decrease of ¥508 million in asset retirement obligation.

As a result, total liabilities increased by 7.7% to ¥76,684 million.

Net assets

As of March 31, 2012, net assets were ¥137,297 million (an increase of 1.6% compared to March 31, 2011). This was mainly due to net income of ¥6,060 million, dividend payments of ¥3,452 million, and a decrease in foreign currency translation adjustments of ¥767 million.

(ii) Consolidated Cash Flow

As of March 31, 2012, cash and cash equivalents totaled ¥110,116 million, an increase of ¥364 million compared to March 31, 2011. Cash flows during the fiscal year ended March 31, 2012 as well as the principal factors behind these cash flows are described below.

Cash flows from operating activities

Net cash provided by operating activities during the fiscal year ended March 31, 2012 totaled ¥6,786 million (a decrease of 54.2% compared to the prior fiscal year).

Income before income taxes and minority interests of ¥9,866 million, increases in inventories of ¥5,137 million and notes and accounts receivable-trade of ¥3,008 million, and depreciation and amortization of ¥5,039 million led to the overall provision of cash from operating activities.

Cash flows from investing activities

Net cash used in investing activities totaled ¥5,778 million (compared to net cash provided by investing activities of ¥30,407 million in the prior fiscal year).

Main factors are proceeds from collection of rental deposits of ¥1,084 million, payments for rental deposits of ¥1,492 million, and purchase of property and equipment of ¥4,620 million.

Cash flows from financing activities

Net cash provided by financing activities totaled ¥299 million (compared to net cash used in financing activities of ¥42,354 million in the prior fiscal year). The main factors are an increase in short-term loans payable of ¥3,791 million and cash dividends paid of ¥3,446 million.

Basic policy for profit distribution and dividends

The Group recognizes the return of profits to shareholders as one of its most important management tasks. The Group maintains internal reserves to enable priority to be given to investments that will enhance the value of the Group. Such investments may include capital investments and M&A for the purpose of expanding existing businesses and developing new businesses. The retention of internal reserves is done while also taking into account return to shareholders, operating performance and the optimal balance for stable dividends. The Group therefore strives to maintain stable and continuous dividends. The portion of dividends linked to operating results is determined by setting a consolidated payout ratio target of approximately 30%.

Regarding dividend payments for the fiscal year ended March 31, 2012, the Group projects annual dividends of 30 yen per share, including 20 yen per share to be submitted for resolution at the Board of Directors' Meeting planned for May 18, 2012.