Update: Nintendo is projecting a 35 billion yen net loss for the fiscal year ending March 2014, a major drop off from the 55 billion yen profit that was projected in the latter half of 2013, which was already 45 billion yen off the projected profits at the beginning of current fiscal cycle. Several reasons for this loss have been presented, but chief among them is the the poor performance of the Wii U combined with the Wii U price cut. Previous estimations had never intended for their to be a price cut, so that has ate into some of the potential profits to be made off what did end up selling. Additionally, the 3DS under performed as well, despite almost hitting forcasts in Japan on the nose.
Here is Satoru Iwata’s opening statement, where he details all of the current financial ongoings:
Opening explanations by the President
at the press conference regarding full-year financial forecast
and dividend forecast modifications
January 17, 2014
Satoru Iwata, President
We would like to explain the modifications of the full-year financial and dividend forecasts announced today.
We revised our full-year consolidated financial forecasts for the fiscal year ending March 31, 2014 that we announced at the beginning of the fiscal year by estimating new net sales of 590 billion yen against the initially projected net sales of 920 billion yen, new operating loss of 35 billion yen against the initially projected operating profit of 100 billion yen, new ordinary income of five billion yen against the initially projected ordinary income of 90 billion yen, and new net loss of 25 billion yen against the initially projected net income of 55 billion yen. Foreign currency assumptions for the end of the fiscal year have been revised from 90 yen to 100 yen per U.S. dollar and from 120 yen to 140 yen per euro.
Revised consolidated unit sales projections are, as outlined in “Notice of Full-Year Financial Forecast and Dividend Forecast Modifications,” 13.5 million units of the Nintendo 3DS hardware and 66.0 million units of the Nintendo 3DS software, 1.2 million units of the Wii hardware and 26.0 million units of the Wii software, and 2.8 million units of the Wii U hardware and 19.0 million units of the Wii U software. There are no modifications to our initial projections for the Nintendo DS hardware and software.
As for the estimated annual dividend, if the actual consolidated financial results are in line with our modified financial forecasts, there will be no annual dividend per share. However, on the basis of our dividends paid in the last two years, we have set a minimum of 100 yen for the year-end and annual dividend per share for this fiscal year.
As year-end sales constitute an extremely high proportion of the annual sales volume in the video game industry and the annual financial performance of a video game company rests heavily on its performance in the year-end sales season, we put in place various promotional activities in order to promote sales and expand our audience in the year-end sales season of the previous calendar year. However, it is now expected that our sales will fail to meet our previous forecast by a large margin.
Giving a detailed explanation on our sales performance in and leading up to the year-end sales season by platform, Nintendo 3DS continued to show strong sales in the Japanese market. The unit sales for Nintendo 3DS in the previous calendar year amounted to approximately 4.9 million units, falling short of our aim of five million units by a small margin. However, as I explained before, given that every gaming device from the year 2000 onwards apart from Nintendo DS and Nintendo 3DS did not reach sales of four million units even in their peak years, we can say that the sales figure for Nintendo 3DS in the last calendar year was indeed very high. However, outside Japan, while its market share increased as we continued to release compelling titles throughout the year, Nintendo 3DS did not reach our sales targets in the overseas markets, and we were ultimately unable to achieve our goal of providing a massive sales boost to Nintendo 3DS in the year-end sales season. Using the U.S. market as an example, Nintendo 3DS became the top-selling platform in the last calendar year, according to NPD, an independent market research company, with its cumulative sales exceeding 11.5 million units; however, the estimated annual sales of the Nintendo 3DS hardware remain significantly lower than our initial forecast at the beginning of the fiscal year. In Europe, while the individual markets showed different results, France was the only market in which we experienced relatively strong sales, and we failed to attain our initial sales levels by a large margin in other countries.
Wii U sales, on the other hand, showed some progress in the year-end sales season as we released various compelling titles from the summer onwards, launched hardware bundles at affordable price points and also performed a markdown of the hardware in the U.S. and European markets; however, they fell short of our targeted recovery by a large margin. In particular, sales in the U.S. and European markets in which we entered the year-end sales season with a hardware markdown were significantly lower than our original forecasts, with both hardware and software sales experiencing a huge gap from their targets. In addition, we did not assume at the beginning of the fiscal year that we would perform a markdown for the Wii U hardware in the U.S. and European markets. This was also one of the reasons for lower sales and profit estimates.
We therefore modified our unit sales estimates in accordance with our performance in the year-end sales season and after the turn of the year, and the drop in software sales had the largest negative effect on our profit forecasts.
Also, yen appreciation against the U.S. dollar and euro, which on one hand affects dollar-based and euro-based sales positively, also increases costs incurred in foreign currencies when they are converted to Japanese yen. While the yen remained very strong for a sustained period of time, Nintendo made a concerted effort to pay more of its manufacturing costs in U.S. dollars in order to minimize its impact. However, as the era of the exceedingly strong yen concluded, our domestic business, which had been progressing at a relatively strong pace, has seen an increase in manufacturing costs, while our overseas business, which is yet to reach its full potential, has not fully benefited from the weaker yen yet. In terms of our profitability in the current fiscal year, therefore, we were unable to sufficiently take advantage of the weaker yen.
As for advertising expenses, and research and development expense forecasts, we made revisions to increase them by eight billion yen and 15 billion yen respectively from their forecasts made at the beginning of this fiscal year. We expect advertising expenses to increase due to the effect of the expenses incurred in foreign currencies to be converted into Japanese yen by using weaker yen rates. The estimated increase of research and development expenses is based on reflecting our ongoing enhancement of the development structure, and new research and development activities. These increases contributed to lowered estimated profit forecasts.
We expect that we will post ordinary income despite the operating loss situation. This is because we now assume that the yen will be weaker than our original assumptions at the beginning of the fiscal year, and re-evaluation of assets and liabilities denominated in foreign currencies owned by Nintendo Co., Ltd. at the end of the fiscal year as well as foreign exchange gains at the time of cash receipts and conversions of foreign funds into yen, among other factors, are expected to exceed the projected operating loss.
On the other hand, we expect to post a net loss despite expecting ordinary income mainly because we need to reverse deferred tax assets in relation to the losses carried over from the previous fiscal years mainly in the United States, as we can no longer expect our financial performance to recover in the current fiscal year.
We will provide more information on our short-term as well as mid-term prospects at the Corporate Management Policy Briefing to be held on January 30, 2014, which will take place in Tokyo a day after we announce our financial results for the third quarter.
These are all of the explanations about modifications of our full-year financial and dividend forecasts.
Forecasts referred to above are based upon management’s assumptions with information available at the time the announcement was made and, therefore, involve known and unknown risks and uncertainties. Please note that such risks and uncertainties may cause actual results to be materially different from the forecasts (earnings forecast, dividend forecast and other forecasts).
Summary: Wii U projections have changed from 9 million for the year down to 2.8 million. 3DS projections have changed from 18 million down to 13.5 million. Projections for 3DS software are down from 80 million to 66 million units, while Wii U software is down from 38 million to 19 million. Advertising and hardware investments are higher than expected due to the changing exchange rate values, and due to tax breaks in the United States market the last two years that have come due this year, combined with poor sales in Europe, have all lead to the net loss – Nintendo’s 2nd fiscal year net loss in the last 3 years, and only the 2nd time this has happened since Nintendo became a video game company in the 80’s.
Satoru Iwata expressed his concern and the need for change moving forward:
“We cannot continue a business without winning,” Iwata said. “We must take a skeptical approach whether we can still simply make game players, offer them in the same way as in the past for 20,000 yen or 30,000 yen, and sell titles for a couple of thousand yen each.”
What one can take out of this is that big changes at Nintendo are on the horizon. Whether that involves Iwata stepping down (which he doesn’t appear to be planning to do), or a massive change in strategy as suggested above (where they are considering selling cheaper games, which likely falls in line with tapping into the mobile phone and tablet market). There is also always the real fear for some that they could consider going third party in order to keep the value of some of their software products at their current prices, though the reality of such a move likely won’t be happening so soon. All eyes will be watching on January 30th, 2014. Nintendo will be announcing any possible changes to their managing goals and policies, which will go a long way into shaping Nintendo’s immediate and possibly long term future.
It may be a
surprise to some, but the big N has been forced to lower its sales
expectations for the Wii U,
something analysts had seen coming a while ago.The console manufacturer had previously expected to sell 9 million
copies this year, but has shaved down that number to 2.8 million, and is
now set to announce a net loss of 35 billion yen ($336 million). 3DS sales predictions have also taken a hit,
as the flagship handheld is expected to sell 13.5 million units, down from 18
“It is now
expected that our sales will fail to meet our previous forecast by a large
margin. We can no longer expect our financial performance to recover in the
current fiscal year.”
– Satoru Iwata
The lowered hardware prediction has also taken its tolls on Nintendo’s games sales. Software sales predictions for the calendar year have decreased; while Nintendo previously expected to sell 3.8 million games in 2014, they have cut that number in half and are predicting 1.9 million sold software units this year.
Source: Bloomberg Technology