Talking Point: Nintendo's Lower Expectations Are No Surprise

Nintendo isn't doomed, though

Today Nintendo issued its third quarter financial results, showing where the company stands in terms of profits and sales. To get the positive out of the way and to avoid any confusion, the company is now projecting a net income profit of 14 billion Yen - over $150 million dollars at the time of writing. In summary, that should mean happy shareholders, along with Nintendo having more in the bank than it did at the end of the last financial year.

That's a big positive for the company, and perhaps something lost in our original article about the results; our focus drilled down onto operating income. The overall and most interesting revelation, in our view, is that Nintendo has switched projections for its operating income from an expected profit of 20 billion Yen (over $200 million) to a loss of the same amount; that represents missed targets. Yes, the company as a whole looks set to make a profit, but that's down to "exchange rate assumptions" and probably financial management arrangements that we won't pretend to understand. The reason that operating income is relevant is because it's a direct reflection of the nuts of bolts of Nintendo's business — selling video games and the systems on which they're played.

Here's what Nintendo had to say about sales so far and projections for the financial year results, before we get to detail - "The earnings forecast has been modified to reflect a lower-than-expected sales outlook based on the sales performance in the year-end sales season and afterward." However you slice it, Nintendo is admitting that its sales are going to be lower than hoped. This doesn't spell the apocalypse, far from it, but will serve as a reminder for Nintendo — though we doubt it was required — that big moves are needed in the 2013 to get Wii U, in particular, back on the track that Satoru Iwata and his colleagues expect.

What we've seen today is Nintendo cutting its sales projections across the board for its systems and related software, with Wii U grabbing the headlines. In the interest of clarity, below are the changes in projected financial year sales (up to 31st March) from Nintendo's second quarter results to those third quarter equivalents issued today.

Wii U:

Q2 hardware projection = 5.5 million units
Q3 hardware projection = 4 million units

Q2 software projection = 24 million units
Q3 software projection = 16 million units


Q2 hardware projection = 17.5 million units
Q3 hardware projection = 15 million units

Q2 software projection = 70 million units
Q3 software projection = 50 million units


Q2 hardware projection = 5 million units
Q3 hardware projection = 4 million units

Q2 software projection = 50.05 million units
Q3 software projection = 50 million units


Q2 hardware projection = 2.5 million units
Q3 hardware projection = 2.3 million units

Q2 software projection = 37 million units
Q3 software projection = 33 million units

Despite a net profit, as mentioned earlier, these are the figures that perhaps get to what we really need to know. It's important to keep context and not go off the deep end — as a company Nintendo is secure — but at the same time we shouldn't ignore the problems that these figures show. In the space of three months Nintendo has reduced expected sales in every hardware and software department, which accounts for the shift downward in its operating income projection.

While the 3DS could be doing better, particularly in software sales, it at least is on solid ground, with sales about to pass 30 million units. It's admittedly a little reliant on Japanese sales, with Nintendo's homeland contributing more sales than both The Americas and "Other" regions — including PAL territories — on an individual basis, a shift from the equivalent period in the last financial year when Japan contributed the least. Monster Hunter 4 is likely to see that continue, while a number of big releases such as Animal Crossing: New Leaf should help in the West — we'd also be surprised if a blockbuster title isn't unveiled for the Holiday season.

It's with the Wii U, described in the report as having a "negative impact on Nintendo’s profits", that the greatest challenge is faced. The bold target of 5.5 million units sold has now been reduced, with three million units sold up to the end of December. That's not bad in itself — though likely reflects units shipped to retailers, rather than sales to customers — but the scaling back of expectations does reflect an acknowledgement from Nintendo of low momentum. It expects to shift roughly one million units from 1st January 2013 to 31st March, which blows no-one away.

One of the answers to this problem is rather simple — games. Satoru Iwata acknowledged as much during the recent Wii U Direct, apologising for a perceived delay in new games from Nintendo, before promptly breaking out some major announcements, some of which should arrive in 2013. It seems that most Nintendo gamers got rather excited about the reveals, which bodes well for the company. We also feel that there are some games that could arrive in the next two months and provide a welcome bump in sales, some of which we listed in our biggest Wii U games of 2013 article posted at the start of the year. Some titles are unconfirmed or coming in the next quarter, but it'll be interesting to see whether releases such as Rayman Legends, Monster Hunter 3 Ultimate and, possibly, Wii Fit U lead to increased momentum for this year's results. The latter is a title that served Wii very well in the West, so if it arrives this quarter it could help to attract some Wii-upgraders.

Time will tell, both in terms of these remaining launch window releases and the big hitters coming in 2013. What today's results have done is show us an increasingly realistic Nintendo. Its financial reports have been characterised in the past couple of years with bold predictions, and on consecutive occasions estimates have been lowered with each subsequent report. Whether the continual downgrading of expectations reflects a decline in Nintendo as a business is all about perspective and opinion, but it's possible to argue that these revisions reflected adjustments for over-ambition. After dominating the industry with Wii and, particularly, the DS family, Nintendo was unsurprisingly optimistic for 3DS and Wii U.

There's no need for that optimism to stop completely, but today shows that Nintendo is moving towards lower targets to hit, perhaps in the hope that some can actually be beaten when the final results emerge in a few months time. Nintendo isn't in significant danger at this stage, we'd argue, but it's existing in a new reality and market, in which game console manufactures face unprecedented and diverse levels of competition from industries such as smartphones and tablets — tough economies worldwide also don't help. Despite this the 3DS is still selling and has an install base of nearly 30 million, in an age of many rival systems; Wii U faces its own challenges, but the recent Wii U Direct broadcast suggested that the big N's up for the fight.

Today's report showed that Nintendo has, as far as we understand it, cash and deposit assets of around $5.5 billion (that's a billion as 1000 million), with total net assets — which includes properties etc — listed as sitting at over $13 billion. While the Wii and DS levels of success will be extremely hard to repeat, Nintendo has the means and, it seems, reasonable expectations that should allow it to continue in the industry for a long time yet.

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