Pearl Shi

Executive Summary

Square Enix Holdings is a Japanese medium-sized video game company that was established in 1975 and unified under the brand “Square Enix” in 2003. It operates mainly in the US, Europe, and Japan, within four business segments: digital entertainment, amusement, publishing, and merchandising, though it is mainly in the digital entertainment industry. Square Enix designs and develops PC, mobile and video games, operates amusement facilities, publishes comics, magazines and books, and sells licensed secondary works and merchandise.

The qualitative perspective of Square Enix highlights strategy, corporate culture, and marketing techniques to show how these components work together to sell the brand. Square Enix has a strong differentiation strategy that gives it a competitive advantage, consisting of unique activities like purposeful long development time for trademark high quality products, a professionally and socially responsible reputation in upholding its mission statement, and largely popular franchises. Its two marketing techniques, the polymorphic business model and word of mouth in the gaming community are its two most powerful methods of selling products effectively, beating its competitors’ bestsellers in revenue by far. Square Enix’s passionate, fun, high-performance, and recreation-encouraging corporate culture serves to reinforce the effectiveness of its strategy and marketing techniques.

The quantitative perspective of Square Enix looks into profitability ratios to show the Square Enix is financially healthy. Net income fluctuates back and forth from positive to negative net incomes, and all of the ratios reflect this, but this is not concerning. Square Enix chooses certain years to focus on game development, so costs those years exceed sales because not many new titles are released; the years with net gains in income are years with more new titles released. Return on Assets, Return on Equity, and Net Profit Margin ratios indicate that while Square Enix is not the most effective profit-generating company, it is in the middle of the industry in terms of effectiveness, and has room for improvement. Earnings per Share and Book Value per Share indicate that Square Enix has normal figures for a medium sized company in its firm, though its high development costs do keep it from having higher returns for investors in the short-term.

Investing in Square Enix is a smart move in the long-term, even if it does not seem to be a lucrative venture in the short-term. US GDP has only been growing since the 2008 depression, which means higher demand for luxury goods like video games, and the global video game market has been expanding rapidly as well due to increase in sales of game consoles and mobile games. Not to mention, Square Enix has much potential for expansion of operations of any kind; if it were to create the “next big console” or decide to expand into other industries when it had more capital, with its solid base of devoted customers, it would no doubt be able to generate high returns for shareholders. In addition, if considering the near-future (by 2017), the ideal time to invest in the company would be right before it released its most popular franchise’s long-anticipated title Final Fantasy XV, which has been in development since 2005.

Table of ContentsIntroduction 1

Qualitative Analysis 1Strategy 2

Marketing 3

Culture 4

Quantitative Analysis 5

Return on Equity 7

Return on Assets 7

Net Profit Margin 8

Earnings Per Share 9

Book Value Per Share 9

Recommendation 11

Appendices 12

Appendix A 12

Appendix B 14

Appendix C 17

Appendix D 18

Appendix E 19

Works Cited 20

Introduction

Statement of Purpose

The purpose of this paper is to analyze Square Enix Holdings in the short-term (within the last three years) quantitatively and qualitatively, and to inform the reader that this company is worth the investment long-term.

Company Information

Square Enix (or "Square") is most well-known for being an exceptional Japanese video game developing company. It operates in four business segments: digital entertainment, amusement, publishing, and merchandising. Square Enix is engaged in the design, development, sale, publication, licensed sale and operation of PC, mobile, and video games, amusement facilities and equipment, comics, magazines, books, secondary works, and merchandise.

Criteria for Investment

In this report, the claim that Square Enix is worth investing in the long-term will be justified by its innovative and passionate corporate culture, differentiating company strategy, its mission statement, effective marketing methods, and through financial ratios, such as Return on Equity, Return on Assets, Book Value per Share, Earnings per Share, and Net Profit Margin.

Roadmap

In understanding why Square Enix is a worthwhile investment, the reader will be introduced to the company with a brief overview of its history, followed by a qualitative and quantitative analysis of the company. The qualitative perspective will give essential and holistic background information on Square Enix through description of its strategies, marketing techniques, and corporate culture. The quantitative perspective will utilize Square Enix’s measurements of Net Profit Margin, Return on Assets, Return on Equity, Earnings per Share, and Book Value per Share ratios, to indicate the overall financial health of the company. Together, these two perspectives will paint a picture for the reader to qualify Square Enix as a wise investment in the long-term. With this context in mind, a recommendation about investing long-term will be made, and reasons and prospects given for why investment in Square Enix is encouraged.

Qualitative Analysis

Company History

Square Enix was established in Tokyo, Japan, on September 22, 1975. It was originally known as the Eidansha Boshu Service Center Corporation, but changed its name to Square Enix after merging with Enix Corporation, Enix Products Co., Ltd., and Konika Enix Co., Ltd. in 1989. Since then, Square has been acquiring wholly-owned subsidiaries, and in 2004, it applied a new management system to and renamed subsidiaries in Europe and North America to unify its brand

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name under "Square Enix" for the global market. Square has been getting involved in more joint ventures, establishing wholly-owned subsidiaries, and producing their popular game franchises at a steady pace (“Corporate History”).

Strategy

Square Enix is a company that utilizes differentiation strategy to stand apart from other video game developers. Strategy is the creation of a valuable position involving a unique set of activities and a sustained competitive advantage. Companies with a good strategy, therefore, can perform activities that are so customized to their specific corporate culture or circumstances that it is very challenging for competitors to mimic effectively. As an industry leader in the next generation of gaming, Square Enix has infamous lengthy project times for developing games to meet optimum quality standards of high definition graphics, a period of waiting time which fans widely tolerate. In fact, its most popular franchise sequels, Final Fantasy XV and Kingdom Hearts III have been works in progress since 2006, and are still highly anticipated! (Alwani) Square certainly has a set of activities characteristic of itself only, such as coding games from scratch in combination with these high quality standards and steady development times, fostered by the company’s culture of relentless innovation and creativity. Square has built an unshakable and growing fan base of lifetime customers, set the standards of realistic game graphics in its industry, and carried its brand as recognizable, luxurious, and reliable. These outcomes are all due to its strategy of trademark high quality products, a professionally and socially responsible reputation, its polymorphic business model, and largely popular game franchises, which contribute to its immediate success and its investment potential for the future.

Square Enix's does intend to uphold its corporate philosophy, and conveys the company's mission statement of duties to provide high-quality products and act as a responsible member of society. "[Our goal] is to spread happiness across the globe by providing unforgettable experiences. [We] provides high-quality content, services, and products to help customers create their own unforgettable experiences, thereby allowing them to discover [their own] happiness" (Corporate Philosophy). Management is said to follow its three guidelines of professionalism, creativity, and harmony, which trickle down to employees’ conduct. "Professionalism" consists of ensuring optimum results, displaying initiative, developing expertise, remaining sincere in the pursuit of goals, and upholding disciplined pride in the company's work. The “creativity” or innovation part pertains to the company's high standards, or discouragement of mediocre performance, the status quo, and complacency. The third guide, "harmony," urges understanding and taking advantage of changing tides in the industry, respect amongst coworkers, conscientiousness of duties, and the value of teamwork. In addition, Square Enix is also a prime example of a company that supports the stakeholder theory. As a corporate organization, Square pledges to "maintain optimal balance of satisfaction between all [customers, shareholders, counterparties, employees, etc.] As a member of society, Square Enix upholds that it will comply with laws while fulfilling civic obligations, including community involvement and environmental conservation" (“Corporate Philosophy”). In other words, Square upholds its

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pledge to all stakeholders by producing products of utmost quality for customers, providing full benefits to employees (healthcare, vacation, maternity leave, etc.), working arduously to earn the most income possible to maximize shareholders’ returns, and by being socially responsible in the community, among other actions. For example, in terms of ensuring utmost quality when developing games, "Square Enix always has a specific procedure for game design," Gamasutra reports after an interview with lead producers Tsuchida and Shiraishi (Boyer). In order, the plot, characters, art of the game, and features (the game's battle systems, field maps, and cutscenes) are designed. These projects utilize teams of about 200 people, and Square prefers to code from scratch (a "unique activity" which contributes to its outstanding and uniquely breathtaking graphics, but also lengthy development duration). However, all good strategies are accompanied by trade-offs, and Square sacrifices the possibility of more frequent game releases at the expense of quality. Another aspect in which Square upholds its mission statement is through social responsibility, such as charity. According to Arcade Sushi, Square Enix offers the "Humble Bundle," where all proceeds from three selected games go to Make-A-Wish and GamesAid, children's charities that assist terminally-ill and poor children. (Weld)

Marketing

Square Enix uses two approaches to marketing that are highly effective: its polymorphic content business model and word of mouth in the gaming community. As reported by Eurogamer.net, Square Enix's first strategy is a business model called "polymorphic content," a term coined by the company to mean the development of franchises on multiple platforms of media. Square Enix's best-selling polymorphic projects include franchises such as Compilation of Final Fantasy VII, Code Age, World of Mana, and Ivalice Alliance series, series that may have started as games or comics and ended up as animation or movies. Fullmetal Alchemist (FMA) is the company's largest comic best seller, with 64 million copies sold worldwide since mid-2014, and proves that polymorphic content is an effective way to market Square Enix products (“Digital Entertainment and Amusement Businesses Related IPs”). Producer Kouji Taguchi even revealed that FMA's Volume 1 sales skyrocketed from 150,000 copies to 1.5 million copies after the first animation of the series aired. Then, prior to the second animation, each volume in the series sold about 2.1 million more copies. At times, Square will even make continuations of the same game within a franchise if they feel it is popular enough, such as for Final Fantasy XIII, which had two sequels, XIII-2 and XIII-3. Yoichi Wada, previous CEO of Square Enix, faithfully depicted the business model in an interview with gameindustry.biz: "It's very difficult to hit the jackpot, as it were. Once we've hit it, we have to get all the juice possible out of it" (Oli). This is evidently a business model that is very effective for Square Enix, because fans love to see their favorite games or comics in different mediums and flock to buy them. Additionally, sales figures prove that after a new medium (i.e., animation) of a series is added, it sparks old interest in fans and positively influences revenue for multiple older mediums within the same franchise (i.e., comics).

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In comparison, the second marketing strategy, word of mouth, is a strategy that is not to be underestimated. For instance, Square Enix decided to create the online Slime Knights community to harness the power of word of mouth and form a devoted fan base for its popular series, Dragon Quest, before it was debuted in the United States. The beta version of the game and free game assets were released to the community, and members participated in creative activities that showed their passion and generated anticipation for the game's release. Members within the role play gaming (RPG) community tend to share tips and hints with one another, so this transfer of information became the fundamental source of the marketing power of word of mouth. Dragon Quest VIII was ranked in the top 10 games of that year, and the Slime Knights have over 14,000 members, with roughly 30% recruited by others. More than 40% of the community reserved a pre-order copy of the game, influencing retail outlets to order more copies of the game for the release date (“Square Enix: Dragon Quest Slime Knights”). Clearly, both the polymorphic content business model and word of mouth marketing strategy are powerfully effective for Square Enix's revenue-generating goals, and show that the company is capable of large-scale effective advertisement of products.

When compared to rivals in the digital entertainment industry, such as industry leader Sony, Square Enix seems like a dwarf next to the giant multinationals; however, there are good reasons Square is not on par in revenue with the industry giants. Sony actually co-publishes many Square Enix games because Sony creates the console system on which many games in the industry are played: PlayStation 1, 2, 3, and 4. Sony also has its corporate legs in multiple other industries, including other electronics, hardware, software, and coding, and therefore is not a good comparison standard. Compared to a company its own size, or its “real” competitor Konami, Square Enix's best-selling games completely trump Konami's; Square Enix's bestseller Final Fantasy franchise has sold 110 million copies of the games worldwide, while Konami's best-selling Winning Eleven has only sold about 36 million copies (“Top 10 in Sales – Konami”). Other competitors, including Jakks Pacific, Tomy, and Mothercare Plc, which come much closer in numbers to Square Enix’s annual net income, do not compare either in terms of quality of products nor in terms of bestsellers’ earned sales revenue; when considering its actual close rivals, Square Enix appears to be far more superior in both areas (“Competitors”).

Culture

Culture is the formation of shared basic assumptions and beliefs based on common experiences shared by a group or an organization. Organizational culture affects how members of the organization will think, feel, or act, and it forms the basis of group identity. According to glassdoor.com, actual Square Enix employees describe the corporate culture of the company as fun, energetic, passionate, recreational, and relaxed (i.e., nice lunch room and game room). In fact, managers encourage relaxation and recreation because they believe it is key to creativity and productivity. So it seems, if Schein’s iceberg model was used to understand Square Enix’s culture, an artefact (or surface characteristic) could be Square Enix's emphasis on the importance of recreation and relaxation. The value (or belief) that comes along with this artefact is the fact the Square Enix managers believe stress relief is needed for productivity and quality work. The

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underlying assumption would be that it is acceptable to relax and have fun in the game room at work, as a necessity for the kind of work done at Square. Employee reviews from glassdoor support this statement: the culture takes place with other employees who are equally-passionate gamers, in an inviting work environment while indulging in free food and goodies, in the lunch room and game room, with friendly and helpful leaders, with useful documentation during projects, and while contributing to high quality products with opportunity for professional growth (“Square Enix Review”). Square’s culture is particular to its line of work, and encourages employees to do unconventional tasks (recreation) to produce the best products (high quality games).

Square Enix's strategic positioning gives it a sustained competitive advantage, and include the activities of taking its time to develop high quality products, enact its professionally and socially responsible reputation, and implement strong marketing strategies, like the polymorphic business model for largely popular game franchises, and gaming community "word of mouth" for introducing games into a market. Square strategizes by performing these particular activities, activities that would not work in other companies without identical work ethic, high-quality standards, Square Enix's professional and team-based culture, and uniquely popular franchises.

Quantitative Analysis

General Information about Square Enix and its Industry

As a temporary development, within just the last four years after 2011, Square Enix has been fluctuating between net gains (positive net income) to net losses (negative net income) repeatedly, and these fluctuation show in all the financial indicators listed above. According to Square’s 2014 Financial Report, this is mainly due to a loss (of about $14.3 million) from evaluation of content being booked as an extraordinary loss as a result of work-in-progress game titles (“Income Statement”). In other words, every time new games are released, their sales counter game developing costs; so, if one year net income is negative it either means that not enough games were released to cover the development costs of works in progress or finished goods, or not enough sales revenue was earned to cover those same costs. For Square Enix, it is often the first case more than the latter (since earning enough sales revenue has never really been an issue).

The indicators used to analyze Square Enix’s financial health will be Return on Equity, Return on Assets, Book Value per Share, Earnings per Share, and Net Profit Margin. Based on these indicators, Square Enix seems to be in much better financial condition than some of its competitors. Companies like Mothercare Plc have been struggling with consecutive years of net losses from 2011-2014; other companies, such as Konami, have been able to uphold positive figures, but each year, the indicators’ numbers are declining in a downward trend as their net incomes approach a net loss. Still, there exist other competitors, such as Jakk Pacific or Shanda, that fluctuate back and forth in negative and positive net income like Square does, though with much larger and more instable fluctuations as their numbers are larger (“Competitor Comparison

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Report”). Another thing that should be kept in mind is that Square Enix’s earnings are all in Japanese Yen (JPY), but have been converted to dollars here (to be compared with the rest of the industry), so the values seem small. This is because 1USD is approximately equal to 119.7JPY, so it is evident that the USD is worth more than JPY.

It should also be noted from Table 1 (below), a table showing sales revenue growth in the global video game market annually, that the global video game market has increased in total revenue by about $32 billion since 2012, meaning the market has been growing by impressive amounts. This spur of growth is mainly due to two segments of the industry: (1) video game consoles and (2) mobile games. Brian Blau, research director at Gartner reported, "This growth [of mobile gaming demand] is fueled by healthy premium mobile device sales globally and a desire by consumers to play games on these multifunction devices that are capable of displaying increasingly sophisticated game content [at a relatively cheaper price to console gaming]" (R. Gartner). This growth in the gaming market is complemented by increase in US GDP, as seen in Figure 2 (below), which means improving economic conditions lead to higher income, and more consumption of luxury goods, or video games, in the US. (Littlestone)

Table 1. Video Game Market Revenue, Worldwide, 2012-2015 (Millions of Dollars)Segment 2012 2013 2014 2015Video Game Console 37,400 44,288 49,375 55,049Handheld Video Games 17,756 18,064 15,079 12,399Mobile Games 9,280 13,208 17,146 22,009PC Games 14,437 17,722 20,015 21,601Total Video Game Market 78,872 93,282 101,615 111,057Source: Gartner (October 2013)

Figure 2: US GDP Trends (2003-2014)

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Source: Littlestone

Financial Indicators

Return on Equity

Net Return on Equity = Net Income after tax / Shareholder’s equity

2014 2013 2012

Net ROE (%) 3.15% (6.59%) 2.88%(Appendix C, "Competitor Comparison Report")

The company’s Return on Equity ratio (ROE) is the amount of net income returned as a percentage of total shareholder's equity, or the dollar amount in returns for every $1 invested from equity. ROE shows investors how profitable a company is for the owner of the investment, and if a company employs its equity effectively and profitably (“Return on Equity").

As one can see from the table, Square's Enix's ROE has been fluctuating with positive and negative values, in accordance with the net income gains and losses (because ROE’s formula depends on net income). In 2012, ROE was at 2.88%. In 2013, ROE fell by 9.76% and was a negative 6.59%. (2013 was a year of net loss.) In 2014, ROE increased by 9.39% and was at 2.88% (Appendix C). These fluctuations are not a sign of instability, but rather a clear indicator of which years Square has designated to focus on game development and not release as many games, and which years Square designated for new releases. It can be said that this is the main reason for the fluctuation, because ROE fluctuates by increase or decrease of 9% each time ("Competitor Comparison Report").

Return on Assets

Net Return on Assets = Net income after tax / Average total assets

2014 2013 2012

Net ROA (%) 5.36% (10.73%) 4.49%(Appendix C, “Competitor Comparison Report”)

Return on Assets ratio (ROA) is the measurement of profit that a company earns as a percentage of all assets (including all debt and equity) averaged, or quite literally, the amount of profit made per dollar of all of Square Enix's assets ("Net Return on Assets (ROA)"). For example, in 2014, for every $1 of asset spent, $0.05 was generated as net income. ROA displays the company's ability to use its assets to generate profits efficiently, before any leverage (using debt to generate profit instead). Both of types of assets are used to fund Square’s operations, and ROA gives investors an idea of how effectively the company its assets into net income. The higher the ROA,

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the better, because this means that the company is earning more money for less of an investment. 

Square Enix’s ROA jumped from 4.49% in 2012 to a negative 10.73% in 2013, a 16.09% decrease. Then from 2013 to 2014, ROA increased by 15.22%, returning positive as 4.49% (Appendix C). Square Enix may not be the best at generating net income from small amounts of investment (generating efficiently), and it utilizes quite a bit of its assets for being a small-medium sized company in its industry, but it does an excellent job recovering most of its lost assets with profit during the next year. Readers must also keep in mind that for their most popular franchises, game development time is 3-5 times longer than the average game sold in the market, which means higher expenses over the long-term. With its upcoming releases of Final Fantasy XV and the expansion of the global gaming industry, Square Enix will likely make enough sales revenue that its net income will just stay positive each year, and will just increase and decrease in net gains. However, as noted before, Square’s fluctuations are not abnormal in its industry, as Jakk Pacific and Shanda face similar positive-negative fluctuations, and have higher stock prices than Square. While Square’s ROA is not the highest in its industry, it has room to improve its asset-generating-profit efficiency, and has many opportunities to improve in the near future.

Net Profit Margin (%)

Net Profit Margin = Profit (after tax) / Revenue

2014 2013 2012

Net Profit Margin (%) 4.96% (9.47%) 4.74%(Appendix C, "Competitor Comparison Report")

Net Profit Margin ratio shows how profitable a company’s operations are, and is calculated as net profits (taxes already considered) divided by total sales revenue. It is basically the amount of each sales dollar left over from revenues after all expenses have been paid, or the actual real profit made from operations. The higher the net profit margin, the more efficient a company is at converting sales into actual profit within its industry, if compared to other competitors (“Net Profit Margin”).

Square Enix is in the middle range of numbers in its industry with its net profit margin figures. It is able to generate $0.04 in real profit (after all expenses and taxes have been accounted for) for every $1 of sales revenue earned, when net income is positive ("Competitor Comparison Report"). This is impressive considering Square can generate $0.05 per $1 of asset expensed, meaning really $0.01 is lost to pay for expenses and taxes for every dollar of asset utilized. (This statement can be made because assets include all liabilities and equity.) However, just because Square Enix’s profit margin is not the highest in the industry, does not mean its performance in the industry should be taken lightly; Square sacrifices much time and opportunity for more frequent releases for its higher quality standards, sometimes making costs increase at a greater rate than sales, it leads to a lower profit margin. This may be an indication that costs need to be

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under better control during game development, or costs need to be cut and processes that can be more efficient should be made more efficient.

Earnings per Share

EPS = (Net Income - Dividends on Preferred Stock)/ Weighted Average of Outstanding Shares

2014 2013 2012

EPS (from the 4th quarter of each year)

$0.48= ¥57.28

($1.00)= (¥119.19)

$0.44= ¥52.66

(Appendix D, “Consolidated Financial Results”)

Earnings per Share (EPS) is a market prospect ratio that measures the portion of a company's profit allocated to each outstanding share of common stock, which is why preferred stock is deducted from net income. Earnings per share is yet another indicator that shows how profitable a company is on a shareholder basis, and is measured in the currency the company utilizes on its financial statements; it is important because it helps to determine the price of the company’s stocks. The higher the EPS, the better, because higher EPS means higher profits for a company to distribute to its shareholders (“Earnings Per Share – EPS”).

Square Enix’s EPS shifted from $0.44 in 2012 to negative $1.00 in 2013, a $1.48 decrease. From 2013 to 2014, EPS then increased by $1.44, from negative $1.00 to $0.44. This means at the end of 2012 and 2014, $0.48 and $0.44 would be distributed to each share of stock if all profits were distributed to all stocks at the end of the fiscal year (Appendix D). Compared to a company of similar size and net income, Konami, Square Enix’s EPS has very similar figures; Konami’s EPS were $0.30 (2012), $0.10 (2013), and $0.40 (2014) during the fourth quarter of that year ("Earnings Per Share for (KNM)"). This helps to indicate that although Square’s EPS is not too high, its earnings per share are in healthy financial condition because they are similar to other companies’.

Book Value per Share

BPS = Value of Common Equity / # of Outstanding Shares

2014 2013 2012

BPS $9.26= ¥1,107.64

$8.83= ¥1,057.08

$9.97= ¥1,193.17

(Appendix E, "Book Value per Share")

Book Value per Share (BPS or BVPS) is the minimum value of a company's equity per share. The actual definition of book value is the measure of all of a company’s large assets: stocks,

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inventory, bonds, property, equipment, etc. Companies with more capital, equipment, or property (i.e., a railroad company) will have higher BVPS that companies with little, like video game companies such as Square Enix (“Definition of Book Value Per Share”).

From 2012 to 2013, Square Enix experienced a $1.14 decrease in Book Value per Share, as BVPS fell from $9.97 to $8.83. Then from 2013 to 2014, there was a $0.43 increase in BVPS, from $8.83 to $9.26 (Appendix E). However, book value of equity per share can still sometimes be used to determine whether or not a stock is undervalued in the short-term, but should not be used as a sole indicator. Undervalued stock is when the share price falls under the intrinsic price of the stock, and they are considered “good buys” because the stock price usually returns to a price better suited for its company’s financial status after a certain time period. In this case, Square’s share price ($21.52 from Figure 1) is currently higher than its BVPS ($9.97), so its shares do not seem to be undervalued (“Square Enix Co Ltd Stock Price”).

Figure 1: Square Enix Current Stock Price 11:42PM (US) 4/21/15

This is about $21.52.(Source: Google Finance)

Here, it is essential to understand the stock price chart. Figure 1 shows Square Enix’s stock price fluctuations within the day April 22, 2015, and the current stock price at that moment (11:44PM), which is about $2152 or 2,075JPY. Since stock price is always changing, and the

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investor only really obtains a snapshot of the price, so it is wise to consider and observe trends in the1-month and 1-year trend charts, as 1-day is only useful for checking the current price.

Recommendation

Square Enix is definitely worth investing in, especially in the long-term. To clarify, Square Enix has strong potential for expanding into other industries, developing into a larger-scale game company or becoming a leader in its industry in the near future, among other possibilities. Within the last four years, it has had fluctuating trends in annual net income, but this is only due to funding work-in-progress game titles, and evaluation of new content (“Income Statement”). Based on the qualitative analysis, Square Enix utilizes its unique corporate culture and marketing strategies to differentiate itself from its competitors. Its company values and norms of high performance standards, encouraged recreation, innovative creativity and teamwork, or its impressive polymorphic business model and word-of-mouth gaming community marketing, prove that Square Enix completely overshadows its fluctuating and seemingly unstable profitability ratios found in the quantitative analysis, which only accounts for the last three years anyway. These fluctuations are based on Square's capital being focused, one year, completely on game development, and then in the next, games are released and the company makes a net gain and covers the costs of previous game development.

Though it may not seem like a profitable venture at present, investing in Square Enix would be a wise decision in the long-term, considering Square Enix is already known as an industry leader in digital entertainment, with its breathtaking in-game graphics, high quality products, and its well-known franchises and brand. If Square decided to break into the game console industry, or expand into other electronic-related industries, which is very likely within the next decade, no doubt its permanent and growing fan base would follow by loyally purchasing these innovative products. In addition, as one will note from Figure 2, the US economy has been improving in terms of GDP growth within the last decade, matching its 2003 GDP after the heavily damaging recession in 2008. With this gradual upturn in the economy comes higher consumer demand for luxury goods, which in turn increases demand for video games and other entertainment. In addition, the global video game market has only been expanding, as observed from Table 1 in the quantitative section, especially due to growth in console gaming (with new consoles developed every few years) and growth in smartphone and tablet gaming. Investing in Square Enix in the long-term, either by buying a stock within the next two years or waiting for the opportune moment within the next decade (i.e., when Square makes a popular franchise exclusive to its own new gaming console), is ideal (Gartner).

As one can also see from Square's stocks in Figure 3, Square Enix recovered from its lowest dip in stock price in early 2013, and currently prices are trending upward gradually. In investing, it is important to try to predict when stock prices will reach an all-time high some time before it happens, and avoid low dips, like the one in 2013. It is also important to know that Square Enix is working on its most-anticipated game of the decade in its most popular franchise, Final

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Fantasy XV, which had sold 1 million copies of its demo worldwide in the release of Final Fantasy Type-0 HD within the first month in 2015 (Alwani). The official release date of XV has not even been officially announced, but the company predicts it will be released within the beginning or middle of next year, so at the end of 2015 would be a good time frame to consider buying Square Enix stock for a possible “all-time high price,” if one were searching for a long-term investment in the near future. Otherwise, it would be wise to keep an eye out for if Square released the “next big console” or announces they have enough capital for a large project.

Appendices

Appendix A: Square Enix Consolidated Balance Sheet (2011-2014)

03/2011

03/2012

03/2013

03/2014

Current assetsCash and deposits 111,12

6111,49

5100,41

8115,36

7Notes and accounts receivable 15,474 18,431 30,226 22,110Short-term investment securities － － － －Inventories － － － －Merchandises and finished goods 2,992 2,343 2,376 2,013Work in progress 287 738 47 700Raw materials and supplies 427 573 357 433Content production account 19,890 25,047 15,805 20,556Deferred tax assets 4,493 5,022 5,438 4,819Income taxes receivable 6,907 6,396 2,223 288Other 2,821 2,236 2,279 7,465Allowance for doubtful accounts (120) (124) (136) (151)

Total current assets 164301

172161

159035

173604

Non‐current assetsProperty and equipment

Buildings and structures 17,617 16,645 17,875 18,016

Accumulated depreciation

(12,771)

(12,414)

(11,619)

(12,296)

Buildings and structures (net) 4,846 4,231 6,256 5,719

Tools and fixtures 10,840 11,147 12,558 13,062Accumulated depreciation (9,031) (9,245) (8,885) (9,240)Tools and fixtures (net) 1,808 1,902 3,672 3,822

Amusement equipment 19,948 19,601 20,014 20,222

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Accumulated depreciation

(17,643)

(17,008)

(17,804)

(17,830)

Amusement equipment (net) 2,304 2,593 2,209 2,392

Other 188 193 169 129Accumulated depreciation (99) (127) (109) (87)Other (net) 89 65 59 41

Land 8,277 8,102 7,964 7,939Construction in progress 2 288 5 1Total property and equipment 17,328 17,183 20,169 19,917

Intangible assetsGoodwill － － － －Other 10,324 10,121 10,940 10,835Total intangible assets 10,324 10,121 10,940 10,835

Investments and other assets

Investment securities 386 598 493 701Long‐term loans － － － －Guarantee deposits 12,316 12,785 10,121 9,746Construction support deposits － － － －Claims in bankruptcy － － － －Deferred tax assets 1,082 460 1,229 1,125Other 1,280 1,341 1,150 1,495Allowance for doubtful accounts (683) (672) (631) (809)Total investments and other assets 14,382 14,514 12,363 12,259

Total non‐current assets

42,034

41,819

43,473

43,012

Total assets 206,336

213,981

202,509

216,617

LiabilitiesCurrent liabilities

Notes and accounts payable 7,777 9,220 8,653 11,563Short‐term loans 1,338 5,253 5,726 6,852Long-term borrowings due within one year － － － －Current portion of corporate bonds － － － 35,000Other accounts payable － － － －Accrued expenses － － － －Accrued income taxes 2,269 4,034 1,499 2,980Accrued consumption taxes － － － －Advance payments － － － －Deposits received － － － －Provision for bonuses 1,453 1,200 966 1,771Provision for sales returns 1,780 1,545 4,319 4,609Provision for game arcade closings 487 260 256 251

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Deffered tax liabilities － － － 3Asset retirement obligations 63 2 3 3Other 13,332 12,258 15,989 17,472Total current liabilities 28,504 33,778 37,414 80,508

Non‐current liabilitiesCorporate bonds 35,000 35,000 35,000 －Provision for employees' retirement benefits 3,061 3,808 4,714 －Net defined benefit liability － － － 4,425Provision for directorsʹ retirement benefits 266 234 244 178Provision for game arcade closings 590 584 468 383Deferred tax liabilities 2,577 2,605 1,655 1,978Asset retirement obligations 657 149 800 807Other 534 523 574 658Total non‐current liabilities 42,687 42,906 43,457 8,432

Total liabilities 71,192 76,684 80,872 88,940

Net assetsShareholdersʹ equity

Common stock 15,204 15,204 15,204 15,368Capital surplus 44,444 44,444 44,444 44,607Retained earnings 82,711 85,320 68,153 71,298Treasury stock (859) (861) (862) (870)Total shareholdersʹ equity 141,50

1144,10

8126,94

0130,40

4Accumulated other comprehensive income (loss)

Unrealized loss on revaluation of other investment (14) 124 57 253Foreign currency translation adjustments (7,929) (8,696) (6,911) (4,780)Remeasurements of defined benefit plans － － － 432Total accumulated other comprehensive income (loss) (7,943) (8,572) (6,853) (4,094)

Stock acquisition rights 814 977 652 348Minority interests in consolidated subsidiaries 771 783 897 1,018Total net assets 135,14

3137,29

7121,63

6127,67

6Total liabilities and net assets 206,33

6213,98

1202,50

9216,61

7

Square Enix’s consolidated balance sheet is shown to allow readers to see the company’s financial condition for 2012-2014. Many of these numbers were used to calculate ratios, such as common stock, total assets, work-in-progress, etc.

Appendix B: Square Enix Consolidated Income Statement (2011-2014)

Millions of yen 03/11 03/12 03/13 03/14

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Net sales 125,271

127,896

147,981

155,023

Cost of sales 75,846 76,268 98,788 94,481Gross profit 49,424 51,627 49,192 60,542Reversal of provision for sales returns 4,046 1,706 1,551 4,672Provision for sales returns 1,779 1,502 3,927 4,458Net gross profit 51,691 51,831 46,817 60,756Selling, general and administrative expenses

Packaging freight charge 2,336 1,812 1,867 1,848Advertising expense 7,935 7,258 12,309 7,913Sales promotion expense 67 63 100 59Allowance for doubtful accounts － 67 － 36Compensation for directors 596 541 607 572Salaries 12,534 12,195 14,105 14,148Provision for bonuses 1,408 1,814 1,483 2,193Net periodic pension costs 1,135 1,288 1,484 1,088Provision for directors’ retirement benefits 15 13 12 17Welfare expense 1,463 1,523 1,710 1,846Rental expense 1,782 1,616 1,554 1,652Commission fee 4,228 4,621 7,588 9,596Depreciation and amortization 1,903 1,000 2,091 2,512Other 8,956 7,298 7,984 6,726Total SG&A 44,365 41,118 52,899 50,213

Operating income (loss) 7,325 10,713 (6,081) 10,543

Non‐operating incomeInterest income 95 136 100 116Dividends received 36 4 9 6Foreign exchange gain － － 1,620 1,798Rental income 24 17 14 18Support fees received － － － －Facilitiesʹ installation cooperation fees － － － －Investment profit on equity method － － － －Miscellaneous income 190 127 114 210Total non‐operating income 347 286 1,858 2,150

Non‐operating expensesInterest expenses 59 61 98 93Commission fee － 100 53 52Foreign exchange loss 2,149 536 － －Stock issuance expenses － － － －Loss on disposal of inventories － － － －Loss on write‐offs of content － － － －

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production accountLoss on inventory revaluation － － － －Stock issuance expenses － － － －Corporate bond issuance expenses － － － －Loss on write‐off of advance license payment － － － －Investment loss on equity method － － － －Miscellaneous loss 73 3 3 13Total non‐operating expenses 2,282 701 155 159

Recurring income (loss) 5,390 10,297 (4,378) 12,534

Extraordinary gainGain on sale of property and equipment 1 － 2 2Gain on sale of investment securities 0 48 8 24Gain on divesture of business － － － －Gain on sale of stocks of subsidiaries and affiliates － 192 － －Reversal of allowance for doubtful accounts 94 － － －Reversal of allowance for retirement benefits － － － －Reversal of allowance for game arcade closings － － － －Reversal of allowance for legal proceedings － － － －Gain on forgiveness of debts － － － －Gain on reversal of subscription rights to shares 125 46 445 35Gain disposition foreign currency translation 317 － － －Gain on liquidation of subsidiaries and affiliates － － 76 －Compensation income － － － 351Other 94 18 120 －Total extraordinary gain 633 305 653 413

Extraordinary lossLoss on sale of property and equipment 1 30 58 7Loss on disposal of property and equipment 621 352 213 130Impairment loss 8,853 130 939 158Loss on write‐offs of bad debts － － － －Loss on evaluation of investment securities 175 － － －Loss on sale of investment securities － － － －Loss on disposal and write‐downs of assets － － － －Severance payments associated with business restructuring

－ － － －

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Evaluation loss on shares in affiliates － － － －Loss on liquidation of subsidiaries and affiliates 136 － － －Adjustment loss with mobile business － － － －Accelerated amortization of goodwill － － － －Provision of amortization of consolidated adjustment account

－ － － －Extraordinary loss on inventory write‐offs － － － －Provision of allowance for doubtful accounts － － － －Provision for game arcade closings 311 78 60 153Loss associated with business restructuring － － － －Acquisition costs － － － －Legal settlement payment － － － －Loss on adjustment for accounting standard for asset retirement obligation

462 － － －Loss on content 2,074 － － －Loss on disposal of content 2,398 93 3,696 －Loss on evaluation of content － － 4,834 1,725Loss on disaster 570 － － －Other 398 55 1,407 607Total extraordinary loss 16,007 741 11,210 2,783

Income (loss) before dividends distr

(9,983) 9,862 (14,934) 10,164

Dividends distribution from silent partnership (tokumei-kumiai) (12) (4) 13 26Income (loss) before income taxes and minority interests (9,970) 9,866 (14,948

) 10,137Income taxes–current 1,738 3,763 957 2,807Income taxes for prior periods － － － －Refunded income taxes (2,249) (50) － －Income taxes–deferred 2,594 79 (2,208) 715Total income taxes 2,083 3,792 (1,250) 3,522Income (loss) before minority interests (12,054

) 6,074 (13,697) 6,615

Minority interests income (loss) (11) 13 17 16Net income (Loss) (12,04

3) 6,060 (13,714) 6,598

The income statement is prime indicator of how much money a company is making, and the net income at the very bottom of the statement is how much Square Enix makes after all expenses

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and taxes. Net income is important in calculations of profitability ratios, and profitability in general is useful information to people interested in investing in stock. One can also trace the heavier expenses in game-development years and differentiate them from the years focusing on new releases, based on sales revenue earned and net income after expenses.

Appendix C: Square Enix and Competitors’ Net Profit Margin, ROA, ROE Mergent Data (2012-2014)

Year: 2014Company Name Net

Profit Margin %

ROA % (Net)

ROE % (Net)

Jakks Pacific Inc. 2.66 4.25 14.67Konami Corp 1.76 1.19 1.7Mothercare Plc -3.79 -8.63 -102.41Shanda Games Ltd - - -Square Enix Holdings Co Ltd 4.26 3.15 5.36Tomy Co., Ltd. 0.3 0.3 0.96VTech Holdings Ltd. 10.71 21.84 35.42

Year: 2013Company Name Net

Profit Margin %

ROA % (Net)

ROE % (Net)

Jakks Pacific Inc. -8.52 -10.73 -30.29Konami Corp 5.83 4.05 5.98Mothercare Plc -2.94 -6.48 -39.46Shanda Games Ltd 36.55 23.98 65.52Square Enix Holdings Co Ltd -9.27 -6.59 -10.73Tomy Co., Ltd. -3.96 -4.59 -14.6VTech Holdings Ltd. 10.89 21.8 35.85

Year: 2012Company Name Net

Profit Margin %

ROA % (Net)

ROE % (Net)

Jakks Pacific Inc. -15.72 -17.86 -34.79Konami Corp 8.66 7.15 11.21Mothercare Plc -11.3 -24.16 -68.03Shanda Games Ltd 23.78 13.82 29.23Square Enix Holdings Co Ltd 4.74 2.88 4.49Tomy Co., Ltd. 1.96 2.92 7.59VTech Holdings Ltd. 10.75 21.38 34.79

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These are video game competitors of Square Enix that are close in net income. Bigger industry giants, like Sony, were not considered because they are in multiple other industries. Here, the important trends to note are the positive-negative, constantly-positive, and constantly-negative ratio trends between each year. These ratios tell readers how much net income fluctuates, and in accordance to the companies assets and equity.

Appendix D: Consolidated Financial Results, including Earnings per Share in JPY

(2012-2013)

(2013-2014)

Here, Square Enix’s Earnings Per Share is the important takeaway, as seen in the quantitative section. These other financial ratio can be considered, as they are from the consolidated financial report the Square Enix shows its potential and existing investors.

Appendix E: Square Enix Book Value per Share (2012-2014)

Financials (2012-2014)2012-03 2013-03 2014-03

Revenue JPY Mil 128,100 145,605 155,237Gross Margin % 40.5 32.2 39.1Operating Income JPY Mil 10,713 -6,081 10,543Operating Margin % 8.4 -4.2 6.8Net Income JPY Mil 6,074 -13,697 6,615Earnings Per Share JPY 52.55 -119.19 57.19Dividends JPY 30 30 30

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Payout Ratio % 57 52.4Shares Mil 115 115 115Book Value Per Share JPY

1,107.64 1,057.08 1,193.17

This table shows BVPS of Square Enix from 2012-2014. These are also some quick facts interested investors can look at.

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