Nintendo (NTDOY)

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Weaker Yen Boosts Profit at Nintendo

6:12 AM ET 1/28/15 | Dow Jones
By Takashi Mochizuki

OSAKA-- Nintendo Co. reported strong earnings Wednesday, thanks largely to a weaker yen, but the video game maker lowered its outlook on operating profit as it struggles to compete in the smartphone age.

The Kyoto-based company, which has suffered three consecutive annual losses, also raised its profit guidance for the full year ending in March by half.

Still, analysts see limited growth potential ahead as people spend more time playing free games on smartphones, including on social networking sites. Nintendo President Satoru Iwata has resisted repeated calls to diversify its offerings away from traditional console-based games.

"The company needs to show it has growth in either its existing products or new products and it can sustain them despite competition for people's time from smart devices, social networking services and other online services," David Gibson, an analyst for Macquarie Capital Securities, said Wednesday.

For the three-month period through December, Nintendo recorded a net profit of Yen45.22 billion ($382.83 million), up from Yen9.6 billion in the year-earlier period, according to calculations by The Wall Street Journal. Analysts on average had expected a profit of Yen35.5 billion, according to data provider Quick. The firm will officially announce its figures for the quarter Thursday.

Nintendo said it now expects to earn Yen30 billion in net profit for the fiscal year ending in March, up from previous guidance of Yen20 billion. A weak yen accounted for a large part of the revision, bringing Yen51 billion in gains, mostly from a large sum of dollar- and euro-denominated assets held by the company. Analysts had previously forecast a full-year profit of Yen34.78 billion.

Nintendo cut its outlook on operating profit, which is less dependent on exchange rates, in half to Yen20 billion due to a more cautious view of sales of its handheld 3DS handheld system. It projected sales of 9 million units in the current year, down from 12 million previously. It also lowered its outlook on software sales to 61 million units from 67 million previously.

The market consensus for full-year operating profit was Yen39.47 billion.

Still, Mr. Iwata said the downgrade to operating profit is the result of a larger-than-expected impact from Nintendo's decision to delay the launch of new versions of 3DS in the U.S. and Europe, which provide 70% of the company's revenue, until early next month.

"It would be wrong to think 3DS sales are sagging because of smartphone games because the hardware did well in Japan--with the sales number as good as those from pre-smartphone days," Mr. Iwata said during a news conference.

Profit got a boost from strong sales of popular game titles, including Pokémon and Super Smash Bros., released during the third quarter. Sales of its flagship Wii U console, which are sagging at home, rose 29% on year for the full calendar year in the U.S., Nintendo's biggest market.

"We will enforce sales efforts of Wii U at home and of 3DS abroad," Mr. Iwata said.

Nintendo has shipped 5.7 million units of its new, game-compatible figurines called amiibo since their introduction in November. Analysts say the number was below expectations.

In light of the success of rival Sony Corp.'s PlayStation 4, some investors say beefing up network-based services is key for Nintendo to expand its customer base and achieve sustainable growth.

The company is expanding free-to-play games for its consoles, but popular characters such as Pokémon, Super Mario Bros. and Legend of Zelda won't be available, Mr. Iwata said.

Nintendo also plans to release its first smartphone app later this year, though Mr. Iwata has said it won't be a stand-alone game program but rather a communication platform to promote its products.

For the longer term, analysts will also focus on Nintendo's new health-care initiative, QOL, which stands for "quality of life." Mr. Iwata last year said the service would use a bedside sensor to monitor a user's body conditions and would improve quality of sleep. Much about the service hasn't been disclosed, including pricing plans and sales projections. Nintendo has said it will contribute profits from fiscal 2016.

It's too early to judge whether Nintendo's new initiatives--QOL, smartphone app and amiibo as well as "free-to-start" games--nurture sustainable growth, analysts say.

"We are still not optimistic about earnings trends in fiscal 2015 and believe it is too early for excessive expectations for a strategy change, " said Haruka Mori, an analyst at J.P. Morgan.

Write to Takashi Mochizuki at [e-mail]

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January 28, 2015 06:12 ET (11:12 GMT)

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