Wii U and 3DS Lag as Nintendo Posts $456 Million Operating Loss

Nintendo's recent fiscal report highlights the need for change.

May 10, 2014 at 1:00PM

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Source: Nintendo.com

Nintendo (NASDAQOTH:NTDOY) is in desperate need of change. The company's recently released fiscal report features an array of worrying indicators and highlights a need for reinvention. The Wii U console has been an unprecedented failure and has no real shot at a meaningful recovery. The 3DS has performed respectably, given that much of the casual gaming market has migrated to mobile, but the system is losing steam. President Satoru Iwata and company will attempt to turn things around through the introduction of new avenues and partnerships, but for now, things aren't looking so good.

With its latest fiscal report, Nintendo is posting its third consecutive yearly loss, unheard of in its history as a game maker. What's more, the $456 million operating loss is arriving instead of the estimated $1 billion yearly operating profit that had been promised by President Iwata. The company revealed a net loss of $228 million. Cash and equivalent liquid assets dropped from $4.7 billion to $3.4 billion. That said, the most worrying parts of the report aren't the bottom line figures.

Did President Iwata make good on his committment?
Nintendo's loss and depleted cash assets were easy enough to see coming. The company invested substantially in research, development, and marketing in the last year, and also initiated a $1.1 billion stock buyback around the time of its last quarterly report. These costly moves probably weren't planned around the time that Iwata implied he would resign if the company failed to meet his target of $1 billion in operating profit. The last fiscal year already saw Nintendo make major adjustments for an increasingly inhospitable future. The question is whether it can make the right moves to get back into fighting shape.

Wii U continues to drag Nintendo down
Nintendo's push into still-mysterious "quality of life" ventures arrives out of necessity. The company's initial guidance for the last fiscal year projected its Wii U console selling 9 million units. After months of disastrous sales, the company finally revised its projection to 2.8 million consoles sold in the year. The machine failed to meet even that meager mark, selling only 2.72 million units for the fiscal year. The extent to which the system has been marked down and propped up with software bundles means that Nintendo is still losing money on each net sale, and the situation isn't likely to get much better. As of March 31, Nintendo had shipped just 6.17 million Wii Us. As of April 6, Sony (NYSE:SNE) had sold over 7 million units of its red-hot PlayStation 4 console, despite launching it a year later than Nintendo's platform. 

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Source: Nintendo.com

Crushing the notion that Nintendo believes a Wii U comeback is possible, the company expects to sell only 3.6 million units of the console in the current fiscal year. This low figure comes despite the impending releases of Mario Kart 8 and a new Smash Bros. Nintendo expects to sell only 20 million units of Wii U software this year. For comparison, Mario Kart Wii sold more than 38 million copies on last generation's highly successful Nintendo console. 

The portable game is changing
Making matters even worse for Nintendo, sales of its 3DS handheld device have been falling off faster than the company predicted. The handheld sold 12.24 million units in the last fiscal year, failing to meet the revised target of 13.5 million units, which was down from the initial guidance of 18 million units. Given the rate at which 3DS hardware sales are falling off, the company's target of 12 million units sold for the current fiscal year seems high. Furthermore, the company expects 3DS software sales to remain consistent, despite the fact that this year's lineup pales in comparison to what was debuted last year. Nintendo's projections give a hint as to what its strategy will be for the remainder of the year.

Look for a new 3DS this year
Nintendo's projection for 3DS hardware sales suggests that the system will see a new revision sometime this year. While the company has both given and adhered to unreasonable targets in the past, the most recent batch appears mostly grounded in reality. As Sony and Microsoft battle it out on the home console front, Nintendo must inject momentum into its handheld business and ride out the Wii U disaster. Expect a new version of the 3DS to be announced around the E3 conference in June.

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Source: Nintendo.com

Nintendo's last life?
The disappointing state of Nintendo's gaming business endows its "quality of life" project with extreme importance. The company has lost relevance on the home console front, and dedicated handheld gaming is being eaten by mobile devices. Without the creation of a successful new revenue stream, Nintendo faces a bleak future.

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Keith Noonan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Jun 12, 2015 at 5:01PM

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