Talking Point: Nintendo's Financial Results Tell a Tale of Two Systems and Bold Ambition
Posted by Thomas Whitehead
The company builds wealth amidst negative Wii U news
Nintendo has announced its first quarter financial results, which brought some notable headlines. The company made an operating loss, but ultimately posted a net profit; despite hardware and software business struggling overall, Nintendo had boosted its coffers by roughly 8.6 billion yen ($87.8 million / £57.7 million). It wasn't all bad, in other words, and it says much about the company that its net assets stand at 1,239,754 million Yen (up from 1,141,015 million Yen in the equivalent period last year) which equates to roughly $12.6 billion / £8.4 billion. That doesn't mean that Nintendo isn't under pressure as a business to improve and satisfy its shareholders, but it shows the war chest at its disposal is substantial enough to deal with rough times.
And these are rough times, overall. The 3DS is Nintendo's saviour at this stage, with the company even stating that the portable is now "gaining its sales momentum in the United States and Europe", a vital continuation of its enduring success in Japan. Those results have helped to bolster finances against an exceptionally weak quarter for the Wii U. No matter how you slice and dice it, or question what the "unit sales" actually represent, Nintendo is officially stating — against the same barometers that have given sales figures for multiple years in these financial reports — that there were just 160,000 systems sold in three months, between 1st April and 30th June.
And yet, Nintendo's yearly forecasts remain unchanged, therefore maintaining its ambitious unit sales predictions and projected profits. That is absolutely understandable in the case of the 3DS, showing strong sales — ahead of the last quarter but behind the equivalent Q1 of last year — in what's typically the year's least lucrative sales window, but a refusal to adjust the numbers for Wii U is a firm indication of the company's belief in the upcoming software lineup, as well as whatever promotions and surprises it has up its sleeve. We should also note that Nintendo hasn't been shy of slashing its projections in previous quarterly reports, making a habit of the practice throughout the last financial year; yet this time around it's stuck to its guns.
But as is rapidly becoming tradition here on Nintendo Life, let's really break down some of the numbers to get a better understanding of Nintendo's challenges ahead. The below figures show the Q1 sales and how much further each system has to go in the hardware and software stakes.
Wii U Yearly Sales Projections / (Q1 Results)
Hardware — 9 million units / (160,000) = 8.84 million in remaining three quarters
Software — 38 million units / (1.03 million) = 36.97 million in remaining three quarters
3DS Yearly Sales Projections / (Q1 Results)
Hardware — 18 million units / (1.4 million) = 16.6 million units in remaining three quarters
Software — 80 million units / (11.01 million) = 68.99 million units in remaining three quarters
These figures should be considered against the context of Q1 being the least lucrative of the year, but does at least show how much key shopping seasons influence yearly sales.
Plenty of progress to come for the Wii U, clearly, but it's been the case for a number of months that Nintendo's been strategically targeting the second half of the year and early 2014; in many ways — when looking at the software releases of Q1 — this quarter was a write-off. That doesn't make it right, of course, and questions will always be asked as to how the release schedule for the system was so heavily weighted to the latter part of the year, while stagnating sales have continued to damage the console's reputation and — perhaps more importantly — its position with retailers. Retail groups surely can't be blamed for hesitancy around the system, in light of those figures, and it's up to Nintendo to assuage concerns and bring them back on board.
The Wii U situation has, naturally, drawn parallels with the early days of the 3DS. The handheld was widely tagged as "doomed" in 2011, yet is now competing at the top end of hardware charts in multiple territories, and being widely praised in the process. While a direct comparison is fraught with inconsistencies and different circumstances, let's nevertheless — just because it's interesting — compare the early sales of the Wii U to those of the 3DS in its darkest days.
Wii U launch "quarter" hardware sales (launch to 31st December 2012) — 3.06 million units
Wii U second "quarter" hardware sales (1st January to 31st March 2013) — 0.39 million units
Wii U third "quarter" hardware sales (1st April to 30th June 2013) — 0.16 million units
3DS launch "quarter" hardware sales (launch to 31st March 2011) — 3.61 million units
3DS second "quarter" hardware sales (1st April to 30th June 2011) — 0.71 million units
3DS third "quarter" hardware sales (1st July to 30th September 2011) — 2.36 million units
Aside from the obvious discrepancies when comparing a home console with a portable system, the most telling comparison perhaps comes with the third "quarter" — accounting for the fact that the 3DS first quarter was only the launch weekend in Western territories — as it was in this period that Nintendo enacted a meaty price cut on the system. Although major titles such as Mario Kart 7 and Super Mario 3D Land were yet to come in Winter 2011, existing summer releases such as The Legend of Zelda: Ocarina of Time 3D (June 2011) and Star Fox 64 3D (September 2011) helped the system's fortunes alongside that drop in price. After the 2011 Holiday season the system's fortunes continued to improve, while 2013 has continued the momentum nicely; the impact of the price cut on overall sales can be debated, it's beyond question that it aided sales.
Of course, to date, there's been no suggestion of a price cut for the Wii U, yet its upcoming lineup of first-party content is bringing a substantial number of first-party titles in the coming 9-12 months, perhaps more than we saw on the 3DS in its equivalent period. From Nintendo's perspective, it clearly hopes to see the Wii U's fourth and fifth quarters showing the sort of substantial growth that we saw in the third quarter for the 3DS, but through software driven sales rather than a price cut. If we can be mischievous, however, the 3DS price cut was announced suddenly at the end of July 2011 (and enacted in mid-August), a couple of weeks after those second quarter sales given above; just because Nintendo says the option isn't on the table, doesn't mean that it won't become an option if there's enough pressure from investors or members of senior management. At the very least, Nintendo does state in its most recent report that it'll "strive to improve [Wii U] hardware profitability by reducing its costs", which means cutting manufacturing expenses as far as possible, as happened with the 3DS.
What we do see, from these results, is the extent of the Wii U's problems, but also a company still managing profits (if not operating profits, yet) and enjoying the success of the 3DS. By keeping its projections in place for another quarter, Nintendo is essentially admitting that the last three months delivered largely what it expected, or at least that's the impression it wants to give.
The next quarter will be important, of course, while Q3 — covering 1st October to 31st December — is absolutely vital for the Wii U in particular. A lot can change in a few months, especially with Nintendo.