SQUARE ENIX HOLDINGS CO.,LTD. FY2027 Q1 Earnings Report

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Executive Summary

The most important point this quarter was that both revenue and earnings achieved triple-digit growth, driven by major titles, with the earnings growth rate substantially exceeding the revenue growth rate. Revenue was ¥784.2B (+32.3% YoY), Operating Income was ¥170.1B (+88.6%), Ordinary Income was ¥187.7B (+172.4%), and Net Income was ¥132.5B (+175.5%). The primary drivers of earnings growth exceeding revenue growth were operating leverage resulting from a portfolio shift toward highly profitable titles in the Digital Entertainment Business and restrained growth in SG&A expenses.

Factors Affecting Performance

【Revenue】Revenue was ¥784.2B, up +32.3% YoY. By segment, Digital Entertainment led company-wide growth with revenue of ¥499.6B (63.7% of total, +51.8% YoY), followed by Publishing at ¥72.6B (+11.0%), Merchandising at ¥46.1B (+22.3%), and Amusement at ¥170.9B (+3.8%). The expansion of Digital Entertainment’s revenue mix was the central factor behind the increase in revenue.

【Profit and Loss】Operating Income was ¥170.1B (+88.6%), and the Operating Income margin improved substantially to 21.7% from 15.2% in the prior year. The gross profit margin was broadly flat at 56.3%, indicating no major change in the cost structure. The primary factor behind the margin improvement was SG&A expense growth of +11.1%, which was substantially below revenue growth of +32.3%. Ordinary Income was ¥187.7B (+172.4%), boosted by a ¥7.7B foreign exchange gain and ¥7.1B interest income, increasing the amount added to Operating Income. Net Income was ¥132.5B (+175.5%) after recognition of ¥56.0B in income taxes and other taxes. The difference between Ordinary Income and Net Income (-29.4%) was attributable to the increased tax burden, while the impact of extraordinary items—¥1.0B in extraordinary income and ¥0.1B in extraordinary losses—was limited. Revenue and earnings increased.

Segment Analysis

Digital Entertainment led the company with revenue of ¥499.6B (+51.8%), Operating Income of ¥155.8B (+91.8%), and a profit margin of 31.2%, reaching 63.7% of total revenue. Publishing maintained the highest margin among the four segments at 34.6%, with revenue of ¥72.6B (+11.0%). Merchandising secured high profitability, with revenue of ¥46.1B (+22.3%) and a profit margin of 33.8%. Amusement remained at a lower level than the other segments, with revenue of ¥170.9B (+3.8%) and a profit margin of 11.2%, reflecting a relatively slower growth pace in terms of utilization rates and cost structure. The high concentration of profits in Digital Entertainment indicates that developments in the future title pipeline could have a significant impact on overall performance.

Key Financial Indicators

【Profitability】The Operating Income margin of 21.7% improved by +648bp from 15.2% in the prior year, while the Net Profit margin also rose by +880bp to 16.9% from 8.1%. The gross profit margin was broadly flat at 56.3% versus 56.4% in the prior year, and the improvement in profitability was primarily attributable to a decline in the SG&A expense ratio to 34.6% from 41.2%.【Cash Flow Quality】Cash and deposits remained substantial at ¥2,596.9B, while accounts receivable increased to ¥358.1B from ¥304.8B in the prior year, and inventories increased to ¥65.7B from ¥59.2B. The impact of working capital expansion on capital efficiency requires close monitoring.【Investment Efficiency】ROE of 3.7% was primarily attributable to the substantial improvement in the Net Profit margin. Total asset turnover remained low, reflecting a structure in which abundant cash holdings constrain asset efficiency.【Financial Soundness】The Equity Ratio was high at 82.3%, up from 79.6% in the prior year. Current assets of ¥3,633.3B substantially exceeded current liabilities of ¥615.4B, indicating a conservative and robust financial foundation.

Cash Flow Analysis

As the statement of cash flows has not been disclosed, cash trends are assessed based on changes in the balance sheet. Cash and deposits decreased to ¥2,596.9B from ¥2,760.5B in the prior year, but remained substantial, accounting for 60.3% of total assets. Accounts receivable increased to ¥358.1B from ¥304.8B, while inventories rose to ¥65.7B from ¥59.2B, respectively, indicating that the expansion of working capital associated with higher revenue is delaying cash conversion. Meanwhile, income taxes payable and other taxes payable declined substantially to ¥40.3B from ¥161.3B in the prior year, and the timing of income tax payments may have been a short-term source of cash outflow. Accounts payable increased to ¥192.9B from ¥171.9B, with the use of payment terms partially offsetting the impact on cash efficiency. Overall, the expansion of working capital accompanying higher revenue and the timing of tax payments are the key factors affecting cash trends, while the company retains ample cash and deposits to absorb these fluctuations.

Quality of Earnings

The core source of recurring earnings was Operating Income of ¥170.1B, while the impact of non-recurring items was minimal, with extraordinary income of ¥1.0B and extraordinary losses of ¥0.1B. The primary components of non-operating income of ¥17.8B, equivalent to 2.3% of revenue, were a ¥7.7B foreign exchange gain and ¥7.1B in interest income. The reversal from a ¥2.1B foreign exchange loss in the prior year contributed to the increase in Ordinary Income, although foreign exchange factors are highly volatile and include a transitory element. Net Income of ¥132.5B was approximately -29.4% below Ordinary Income of ¥187.7B, primarily due to the recognition of ¥56.0B in income taxes and other taxes. As an indicator of the profitability of the core business, it is appropriate to focus on the trend in the Operating Income margin, which is less affected by non-operating items. Its level of 21.7% itself reflects improved competitiveness in the core business.

Earnings Forecast and Guidance

Progress against the full-year plan was 26.3% for Revenue, 34.7% for Operating Income, 38.3% for Ordinary Income, and 42.7% for Net Income (Net Income progress is measured against the company’s plan of ¥310.0B), representing a pace above the simple progress rate of 25%. In particular, progress for Operating Income and Net Income substantially exceeded the plan, with contributions from highly profitable titles in Q1 and temporary foreign exchange and interest income creating a first-half-weighted structure. The company maintained its full-year plans of Revenue of ¥2,980B (+0.1% YoY), Operating Income of ¥490.0B (-10.5%), and Ordinary Income of ¥490.0B (-24.0%), representing a broadly flat to declining earnings outlook. Despite the high quarterly progress, neither the earnings forecast nor the dividend forecast has been revised. The performance of the new title lineup toward the second half and the normalization of the temporary tailwinds in the first half will be the key areas for monitoring future progress.

Shareholder Returns

The company’s full-year dividend plan is ¥43.00 per share, after taking the stock split into account, implying a Payout Ratio of approximately 50% against forecast EPS of ¥85.99. This reflects the October 2025 stock split, under which 1 share was split into 3 shares, and comprises a second-quarter-end dividend of ¥18.00 and a year-end dividend, totaling ¥43.00 annually. The dividend forecast has not been revised. Given the financial foundation of cash and deposits of ¥2,596.9B and an Equity Ratio of 82.3%, liquidity available to fund dividends is substantial, supporting the sustainability of the dividend policy. No data on share repurchases has been disclosed, so the evaluation is based only on the Payout Ratio rather than the Total Return Ratio.

Risk Factors

1. Segment concentration risk: The Digital Entertainment Business accounts for 63.7% of the revenue mix and an even higher proportion of Operating Income, creating a high degree of dependence on the hit cycle of major titles. If growth in this business slows or title launches are delayed, the impact on company-wide performance would be relatively substantial.

2. Working capital expansion: Accounts receivable increased to ¥358.1B from ¥304.8B in the prior year (+17.5%), while inventories increased to ¥65.7B from ¥59.2B (+10.9%). Although these increases were below the revenue growth rate of +32.3%, the management of collection periods and inventory accumulation will be key areas of focus going forward.

3. Volatility in non-operating income and expenses: The ¥7.7B foreign exchange gain that boosted Ordinary Income represented a reversal from the ¥2.1B foreign exchange loss in the prior year. Depending on foreign exchange market trends, the positive effect could diminish or reverse from the second half onward.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (it_telecom)

Profitability and Returns

Profitability substantially exceeded the industry median, with both the Operating Income margin and Net Profit margin ranking in the upper tier of the industry.

Growth and Capital Efficiency

The Revenue growth rate also exceeded the industry’s upper IQR of 16.9%, indicating a favorable position within the industry in terms of growth.

※Source: Compiled by the Company

Key Points from the Financial Results

1. The expansion of the revenue mix of the highly profitable Digital Entertainment Business led the improvement in the Operating Income margin to 21.7% from 15.2% in the prior year. The fact that restrained SG&A expense growth (+11.1%) was below revenue growth (+32.3%), resulting in operating leverage, was a key highlight of the financial results.

2. Full-year progress was well above the simple progress rate of 25%, at 34.7% for Operating Income and 42.7% for Net Income, confirming a first-half-weighted structure. The company has not revised its full-year plan of ¥490.0B in Operating Income (-10.5% YoY), and second-half results will provide a basis for assessing consistency with the strong progress in the first half.

3. The increases in accounts receivable and inventories reflect working capital expansion accompanying higher revenue. The pace of cash conversion will be a key point in evaluating future cash efficiency.

Theoretical Share Price (Reference Value)

Sensitivity: ¥978–¥1,034 at Cost of Equity ±1%, and ¥1,005–¥1,006 at ω±0.1.

Notes:

• Net assets as of the quarter-end are used (there is a time lag relative to the full-year forecast).
• As net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Calculation model: Residual Income Model (Ohlson-type; explicit 5-year fade) / Interest rate reference month: 2026-07 / Mechanically calculated value based solely on publicly disclosed data; this is not a forecast of the market share price or a recommendation of any specific investment action, and does not predict or guarantee future share prices.)

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This report is an earnings analysis document automatically generated by AI based on XBRL earnings release data. It does not recommend investment in any specific security. The industry benchmarks are reference information compiled by the Company based on publicly disclosed earnings data. Investment decisions should be made at your own responsibility, after consulting with professionals as necessary.

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