JAN. 28, 2015 • For the three month period ending December 31, Nintendo Co. Ltd. posted a net profit of ¥45.22 billion ($382 million), up from ¥9.6 billion ($81 million) during the same period last year. By the end of its fiscal year next March, the gamemaker expects to realize ¥30 billion ($253 million) in net profit for the entire fiscal year. For the nine months ending December 31, net profit was ¥60 billion ($507 million). But when it comes to operating profit, the annual figure is substantially lower at ¥20 billion ($169 million). Yet Nintendo’s revenue for the quarter actually decreased to ¥271 billion ($2.3 billion), nearly a 10% fall from the holiday quarter in 2013. One reason is that worldwide 3DS units sold fell from 7.7 million during the holiday quarter in 2013 to 5 million in 2014, while Wii U units sold during the period dipped to 1.91 million from 1.95 million. More positively, Nintendo says it has sold more than 5.7 million Amiibo toy figures since last November. Sales of Pokémon Omega Ruby/Pokémon Alpha Sapphire on the 3DS were 9.35 million units for the fiscal third quarter. Super Smash Bros. sold 6.2 million units on the 3DS and 3.4 million units on the Wii U. Mario Kart 8 for the Wii U sold 4.8 million units during the holiday period. Overall, profits came in large part thanks to the weaker valuation of the yen, which bolsters the value of North American and European sales.

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Impact: Hit hardware equals huge profits for Nintendo, but right now the company does not have a hardware hit.  So the fact that Nintendo can turn what appears to be a decent profit with declining sales seems to speak volumes about the potential of the traditional video game hardware/software model.  It may also address those commentators that would like to see Nintendo become a multi-platform software provider.  DFC Intelligence has been critical of Nintendo’s lack of a strategic vision, but believes that releasing Nintendo IP for other devices such as tablets would not be in the company’s best interest.  That being said the fact that Nintendo showed a significant profit does little to address the core underlying concerns.

First, much of the profit is due to issues around the weak yen and making money off Nintendo’s large pool of current assets.  Nintendo has about $10 billion in current assets including nearly $5 billion in cash.  That alone is earning significant money for the company, yet the reality is they need to put those assets to better use.  The problem Nintendo faces is they need compelling new hardware. 

The new 3DS XL is nice but only a baby step forward.  The truth remains that the entire 3DS line is not a huge improvement over the DS portable systems.  Nintendo needs to look at having a new portable hardware line that can compete more directly with tablets.  On the console side there is simply not much that can be done for the Wii U to sell more hardware units.  It looks like the Wii U will end up selling less than the GameCube, which was previously Nintendo’s lowest selling console system.  The Wii U is simply a deeply flawed system, starting with its dependency on a tablet-based controller that is prone to break and is virtually un-replaceable.

There is a huge opportunity for Nintendo to really innovate in creating new hardware.  The challenge is the company could be in a downward Catch-22 spiral.  They need to cut costs and focus on the bottom line to appease investors.  The challenge is Nintendo needs to come out of its shell and start using its large pool of assets to start to innovate and truly invest in the future.  Short-term profits tell us little about how the company will truly be able to get on its feet again and actually move forward.