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Sega returns to profitability thanks to London 2012, but its future in games is still in question

Sega hasn’t had a good year. The company’s made some promising announcements for fans. Phantasy Star Online 2 will make it to the US early next year, Yakuza 5 is on track to bring some much needed modernity to the series, and classics like NiGHTS into dreams… and Jet Set Radio are getting new life through HD remakes. For Sega Sammy, Sega’s parent company, and its shareholders though, 2012 has been a year of bad news and tough decisions, that make for an uncertain future in the video game business. The company reported earnings for the April to June quarter on Tuesday, and while the company has seen a return to profitability, its future as a game publisher is still in flux.

Sega’s numbers are promising at first blush. Revenues totaled just under ¥70 billion, approximately $893 million, marking a more than 7 percent increase over the same period in 2011. Net profits came to ¥2.5 billion, around $32 million, whereas the game publisher posted a loss of close to that amount one year ago.

It’s retail releases that continue to hurt Sega. “Weakened demand” for retail games in the US and Europe are still cutting into Sega, with just above 1 million total disc and cartridge-based game sales over the period. London 2012: The Official Video Game of the Olympic Games led sales.

Even with the Sega video game business seeing a boost, Sega Sammy’s Consumer Division that it’s a part of is still slumping. The division saw an operating loss of ¥1.5 billion, around $19 million, despite Sega’s profits.

So how did Sega turn a profit? Digital game sales are helping Sega survive, becoming such a significant part of the company’s business that Sega Sammy decided to open a new company, Sega Networks Ltd., to drive development in the digital market.

The real profit drivers were massive corporate restructuring and the cancellation of retail products. Sega announced in March that its last fiscal year was forcing it to boil its retail business down to only proven franchises like Sonic and Football Manager. Layoffs in the company’s North American and European offices, as well as hints that full operations like Sega France would be shut down, are helping Sega keep profits up enough to boost investor morale. Its games business is still sinking and there is no clear way for it to turn things around.

For old school Sega fans, go out and buy games like Binary Domain and Yakuza: Dead Souls. They are likely the last of their kind, the sort of big, strange Sega games that made the company’s reputation decades ago.