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Thanks for posting this. I can't remember if Square's financials were available earlier or not (this info only goes up to March 2007), but fun to look through this again.

Square is doing better than most third party developers: they made a nice profit of $98 million last year in fiscal 2006. But although their sales were up significantly (31%), their profits were actually down as well by the same margin (32%). Square's net income actually dropped from $144.6 million to the aforementioned $98 million. So although it certainly wasn't a bad year, their profits were $50 million less than last year!

Square explains this with the typical PR:

"In fiscal 2007, the video game industry remained in a period of major transition. Our challenge in this period of time would be to transform ourselves to be capable in the new business environment, while maintaining sales and profits." (p. 3)

Square has actually done a pretty good job of this, as they've remained profitable. Most third parties have not been; in fact, just about everyone except Nintendo is losing money these days. (Although that's not as unsual as you might think; the video game industry has always been a high-risk environment.) The main reason Square has done OK is that they've wisely shifted resources from the console market to the handheld one (witness all those DS/PSP remakes and spin-off games.) While the sales breakdown in FY2006 was 88%/12% for consoles/handhelds, in FY2007 that split had changed to 68%/32%. Now that's a huge difference! Someone at Square made a VERY good call there, especially for the current Japanese market.

Square doesn't say where the higher costs come from, but my best guess is that they come from higher R&D expenses. That's where most of the other developers are seeing high costs this year, and it would certainly explain why profits are down. Although Square's done pretty well this year, I would definitely be concerned about their direction in the future, if this is the philosophy they are planning to adopt going forward:

"...we have no intention of relying solely on handheld game devices in the future. In fact, over the next few years we aim to put our resources in research and development of cutting edge technologies in the next generation consoles and personal computer (PC)." (p. 4)

If this is a serious statement and not just PR about "cutting edge" technology, expect Square to concentrate on PS3 and PC development. (Sony fans rejoice!) That seems suicidal from a financial standpoint, but it's the impression I get from reading their financial report.

On a related note, Square is projecting DECREASES in sales and operating income for next year (FY2008), and static profits (p. 20). I don't know if this is just them being conservative or not with the estimates... but it looks like they're expecting a not-so great upcoming year. Needless to say, I personally would not invest in this company right now.

Interestingly, Square still does 77% of their sales in Japan. American and European sales remain peripheral concerns to the company. That's something I didn't know... and makes those "Final Fantasy XIII on 360!" rumors look MUCH less likely to happen.

I look forward to seeing what the rest of you can pull out of these numbers. :)

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End of 2008 totals: Wii 42m, 360 24m, PS3 18.5m (made Jan. 4, 2008)