SQUARE ENIX HOLDINGS CO.,LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥133.90B
• Operating Income: ¥27.28B
• Net Income: ¥10.07B
• EPS: ¥27.89

Income Statement

Balance Sheet

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend Information

Segment Information

Full Year Forecast

Disclaimer

This data was automatically extracted from XBRL files. Please refer to the original disclosure documents for accuracy.

AI Financial Analysis

Executive Summary

Verdict: Solid core operating performance with significant margin expansion, but bottom-line underwhelmed due to sizable extraordinary losses and a high effective tax rate. Revenue declined 15.0% YoY to 1,338.95, but operating income rose 28.8% YoY to 272.78, demonstrating strong operating leverage. Gross profit was 771.37, implying a robust gross margin of 57.6%, indicative of favorable title mix, digital ratio, or platform mix. SG&A was 498.59, keeping the SG&A ratio at 37.2% and enabling operating margin expansion to 20.4%. Ordinary income rose to 285.53 (+57.4% YoY), supported by 17.18 in non-operating income (including 12.45 interest income), and limited non-operating expenses of 4.43. Profit before tax fell to 184.96 from ordinary income of 285.53, implying approximately 100.6 in extraordinary losses (e.g., impairment/valuation losses), which weighed on net results. Net income decreased 14.5% YoY to 100.52, despite the improved operating and ordinary profit, highlighting the non-recurring drag below the operating line. The effective tax rate was elevated at 45.6%, further compressing net earnings for the quarter. Balance sheet strength remains exceptional: cash and deposits are 2,433.64 (≈59% of total assets), current ratio is 557%, and D/E is a conservative 0.23x. Interest coverage is extremely strong at 580x, underscoring minimal financial risk. DuPont analysis yields ROE of 3.0% (net margin 7.5%, asset turnover 0.327x, leverage 1.23x), constrained by a large cash position and one-off losses. Operating margin expanded by an estimated 692 bps YoY (from ~13.5% to 20.4%), but net margin contracted due to extraordinary losses and tax. Earnings quality cannot be verified (OCF unreported), introducing uncertainty on cash conversion. Forward-looking, the improved operating base sets a higher earnings run-rate if extraordinary losses normalize, but full-year outcomes hinge on H2 title cadence and whether one-time losses recur. Management’s capital allocation flexibility is high given the cash-rich balance sheet, though the calculated payout ratio (471.7%) suggests dividend optics could look stretched against interim net income. Key watch items include extraordinary loss disclosures, tax normalization, and the major title pipeline into H2.

Profitability Analysis

ROE decomposition (DuPont): ROE 3.0% = Net Profit Margin 7.5% × Asset Turnover 0.327 × Financial Leverage 1.23x. The largest change driver versus last year appears to be the net profit margin, which compressed at the bottom line despite substantial operating margin expansion. Business reason: approximately 100.6 in extraordinary losses (gap between ordinary income 285.53 and PBT 184.96) and a high 45.6% effective tax rate offset operating gains. Asset turnover remains low (0.327x), reflecting a sizable cash balance relative to revenue, characteristic of IP-driven publishers. Financial leverage is modest (1.23x), limiting ROE uplift from gearing. Sustainability: the operating margin improvement (to 20.4%) appears more recurring if driven by cost discipline, digital sales mix, and title mix; however, the extraordinary losses are by nature one-time, assuming no recurring impairments. If extraordinary losses normalize and tax rate reverts closer to historical levels, net margin and ROE should mechanically improve. Concerning trend flag: revenue declined 15.0% YoY while SG&A level remains high at 498.59 (37.2% of sales); we lack YoY SG&A, but the combination of lower revenue and higher operating profit implies positive operating leverage largely from gross margin/mix and cost control rather than SG&A growth outpacing sales.

Growth Assessment

Top-line contracted 15.0% YoY to 1,338.95, indicating a softer release slate or tougher comps. Despite this, operating income rose 28.8% to 272.78, with operating margin at 20.4% supported by a 57.6% gross margin. Ordinary income strength (+57.4% YoY) benefitted from higher operating results and interest income (12.45), reflective of the large cash position. The drop in net income (-14.5% YoY to 100.52) is attributable to extraordinary losses (~100.6) and a high effective tax rate (45.6%), not core weakness. Revenue sustainability will depend on H2 title launches, digital sales momentum, and live services monetization; the current cost base suggests room for continued margin resilience if mix remains favorable. Profit quality tilts toward core operations at the operating level; however, bottom-line volatility will persist if write-downs or valuation losses recur. Outlook: if extraordinary items abate and the release slate strengthens in H2, net income should converge toward ordinary/operating performance; conversely, a light pipeline or additional write-downs would cap earnings recovery.

Financial Health

Liquidity is exceptionally strong: current ratio 557.0% and quick ratio 546.9%, with working capital of 2,799.93. No warning on current ratio (<1.0) or D/E (>2.0); the D/E ratio is 0.23x, indicating conservative leverage. Cash and deposits are 2,433.64 versus current liabilities of 612.69, minimizing liquidity and refinancing risk. Maturity mismatch risk appears low given the predominance of cash and limited reported interest-bearing obligations (loan details unreported). Solvency is robust with total equity 3,338.20 covering assets of 4,096.53; financial leverage is modest at 1.23x. Off-balance sheet obligations are not disclosed here; absence of data prevents assessment of lease or content commitment exposures.

Cash Flow Quality

Operating cash flow is unreported, so OCF/Net Income cannot be calculated and cash conversion cannot be verified. Free cash flow is also unreported, limiting visibility into funding capacity for development, capex, and shareholder returns. Given the large cash balance (2,433.64), near-term funding capacity is ample, but sustainability of cash generation depends on pipeline monetization and working capital dynamics (receivables 311.88; inventories 61.63). No clear signs of working capital manipulation can be inferred from the limited data. Flag: OCF/Net Income < 0.8 cannot be tested due to missing OCF; earnings quality assessment remains incomplete.

Dividend Sustainability

The calculated payout ratio of 471.7% appears optically high relative to the reported net income for the period, suggesting dividends exceed interim net profit; however, detailed dividend cash outflow and OCF are unreported. With cash and deposits of 2,433.64 and minimal leverage, near-term dividend capacity is supported by the balance sheet. FCF coverage cannot be assessed due to missing OCF and capex data. Policy outlook depends on full-year earnings and capital allocation priorities; if extraordinary losses normalize and H2 earnings improve, payout optics should ease. In the absence of OCF/FCF disclosure, we cannot conclusively judge long-term sustainability; monitoring full-year payout against FCF will be key.

Risk Assessment

Business Risks:

• Hit-driven revenue model and dependence on successful title launches and live operations
• Content impairment or write-down risk (implied ~100.6 extraordinary loss this period)
• Platform dependency and digital storefront revenue-share changes
• Timing risk of development schedules affecting quarterly revenue cadence
• Regional mix and currency fluctuations affecting overseas sales and royalty income

Financial Risks:

• High effective tax rate (45.6%) compressing net profit
• Potential recurrence of extraordinary losses impacting bottom line visibility
• Concentration of assets in cash may depress ROE absent capital deployment
• Limited disclosure of interest-bearing debt and off-balance commitments

Key Concerns:

• Revenue declined 15.0% YoY despite strong operating profit, raising questions about pipeline breadth
• Approximately 100.6 in extraordinary losses reduced PBT materially
• Net income down 14.5% YoY versus strong ordinary/operating income, creating a divergence
• OCF and FCF unreported, obscuring earnings quality and dividend coverage
• Payout ratio calculated at 471.7%, potentially exceeding sustainable run-rate absent stronger H2

Investment Implications

Key Takeaways:

• Core operations strengthened: operating margin expanded to 20.4% despite a 15.0% revenue decline
• Ordinary income up 57.4% YoY, aided by interest income on a sizable cash balance
• Bottom-line weakness driven by extraordinary losses (~100.6) and a high 45.6% tax rate
• Balance sheet is exceptionally strong with cash of 2,433.64 and current ratio of 557%
• ROE at 3.0% is muted by low leverage, low asset turnover, and one-time losses

Metrics to Watch:

• Extraordinary gains/losses and their composition (impairments, valuations): target < 10 per quarter
• Effective tax rate normalization: monitor for a return toward historical levels
• H2 title pipeline and digital mix to sustain 20%+ operating margin
• OCF/Net Income ratio (goal ≥ 1.0) and FCF to assess dividend coverage
• SG&A ratio trajectory (currently 37.2%) versus revenue trend

Relative Positioning: Versus domestic gaming peers, the company exhibits superior balance sheet strength and solid gross/operating margins this quarter, but trails on ROE due to a large cash balance and bottom-line volatility from extraordinary losses; near-term performance will hinge on H2 release cadence and normalization of non-recurring charges.

Disclaimer

This analysis was auto-generated by AI. Please note the following:

• No Guarantee of Accuracy: The accuracy and completeness of this analysis are not guaranteed. For accurate financial data, please refer to the original disclosure documents published on TDnet or other official sources
• Not Investment Advice: This analysis is for general informational purposes only and does not constitute investment advice under applicable securities laws. It is not a recommendation to buy or sell any specific securities
• At Your Own Risk: Investment decisions should be made at your own discretion and risk. We assume no liability for any losses incurred based on this analysis