Nintendo 2013 Annual Report Download - page 22

Nintendo continues to pursue its basic strategy of Gaming Population Expansion by offering compelling products that anyone
can enjoy, regardless of age, gender or gaming experience.
During the fiscal year ended March 31, 2013, for the Nintendo 3DS hardware (3DS and 3DS XL), Nintendo 3DS XL, with screens
approximately 1.9 times larger than those of Nintendo 3DS, was launched as a new size variation of Nintendo 3DS. As regards the
Nintendo 3DS software, New Super Mario Bros. 2 marked a total of 6.42 million units in worldwide sales. In addition, the combined
total of the packaged and downloadable versions of Animal Crossing: New Leaf, a game in which the player character becomes
the mayor of a village and can enjoy customizing the village and communicating with other player characters, marked over three
million units in sales in Japan alone. As a result, the Nintendo 3DS system established itself as the leading platform in Japan. As for
the overseas markets, although evergreen titles such as New Super Mario Bros. 2 and Paper Mario: Sticker Star, released in this
fiscal year, and SUPER MARIO 3D LAND and Mario Kart 7, released in last fiscal year, became hit titles, they did not generate
sufficient sales momentum. The global sales of the Nintendo 3DS hardware and software were 13.95 million units and 49.61 million
units respectively.
Regarding Nintendo DS (DS, DS Lite, DSi and DSi XL), the latest titles from the Pokémon series, Pokémon Black Version
2/Pokémon White Version 2, reached a total of 7.81 million units in sales. However, the worldwide sales of the Nintendo DS
hardware and software were only 2.35 million units and 33.38 million units respectively due to an accelerated generational change
to Nintendo 3DS in the handheld device segment.
A new home console, Wii U, with which people can enjoy two-screen gameplay by utilizing a TV and the Wii U controller, Wii U
GamePad, was launched as the successor of Wii. As for the Wii U software, New Super Mario Bros. U and Nintendo Land, both of
which were released simultaneously with the Wii U hardware, sold 2.15 million units and 2.6 million units respectively. However, Wii
U was not able to maintain the initial sales momentum after the beginning of 2013 due to a delay in the development of
subsequent software titles. The worldwide sales of the Wii U hardware and software were 3.45 million units and 13.42 million units
respectively.
With respect to the Wii system, although Mario Party 9 sold over one million units, the worldwide sales of the Wii hardware and
software were 3.98 million units and 50.61 million units respectively, mainly due to few new title releases.
Net sales were 635.4 billion yen (US$6,759 million) of which overseas sales were 426.4 billion yen (US$4,537 million) or 67.1% of
the total sales. Owing to the fact that the Wii U hardware sales have a negative impact on Nintendo’s profits, the operating loss
was 36.4 billion yen (US$387 million). As a result of exchange gains totaling 39.5 billion yen (US$420 million) due to the
depreciation of the yen, ordinary income was 10.4 billion yen (US$111 million) and net income was 7 billion yen (US$75 million).
Overview
Listed below are the various risks that could significantly affect Nintendo’s operating performance, share price and financial
condition. However, unpredictable risks may exist other than the risks set forth herein.
Note that matters pertaining to the future presented herein are determined by Nintendo as of the end of the annual
consolidated fiscal period ended March 31, 2013.
(1) Risks around economic environment
•Fluctuation in foreign exchange rates
Nintendo distributes its products globally with overseas sales accounting for about 70% of its total sales. The majority of
monetary transactions are made in local currencies. In order to reduce the influence of fluctuations in foreign exchange rates, we
have implemented measures such as increasing purchases in U.S. dollars; however, it is difficult to eliminate the risks completely.
In addition, the Company holds a substantial amount of assets in foreign currencies, including cash and deposits without
exchange contracts. Thus, fluctuations in foreign exchange rates have a strong influence not only when accounts in foreign
currencies are converted to Japanese yen but also when they are revaluated for financial reporting purposes.
Risk Factors
(2) Risks around business activities
•Fluctuation of market environment and competition against other companies
Nintendo’s business is engaged in one segment of the broad entertainment field. However, its business can be affected by
trends in other segments of the entertainment field. If consumer preferences shift to other forms of entertainment, it is possible
that the video game market may shrink. The emergence of new competitors resulting from technological innovation could have
a detrimental impact as well.
In the video game industry, it may become even more difficult to be profitable due to large investments required in research
and development, and marketing. In addition, competition may intensify with large-scale companies doing business in the same
industry or in other segments of the entertainment field. As a result, Nintendo may experience difficulty in maintaining or
expanding its market share as well as sustaining profitability.
•Development of new products
Although Nintendo continuously makes efforts to develop innovative and attractive products in the field of computer
entertainment, the development process is complicated and includes many uncertainties. The various risks involved are as
follows:
a. Despite the substantial costs and time needed for software development, there is no guarantee that all new products will be
accepted by consumers due to ever shifting consumer preferences. Also, development of certain products may be suspended
or aborted.
b. While development of hardware is time-consuming, with technology continuously advancing, it is possible that the Company
may not be able to equip technologies required for entertainment. Furthermore, delays of hardware launches could adversely
affect market share.
c. Due to the nature of Nintendo products, it may become difficult to develop or sell the products as planned and the original
plan could differ to a large extent.
•Product valuation and adequate inventory procurement
Products in the video game industry have relatively short life cycles, and are significantly impacted by consumers’ preferences
as well as seasonality. Although production is projected based on the forecasted equilibrium point of supply and demand, it is
difficult to forecast demand accurately, which may lead to excess inventory. Obsolete inventory could have an adverse effect on
Nintendo’s operations and financial position.
•Overseas business expansion and international activities
In addition to Japan, Nintendo engages in business in the United States, Europe, Australia, Asia and other areas in the world.
Expansion of business to these overseas markets involves risks such as a) unpredictable enforcement or changes in laws or
regulations, b) disadvantages from emergence of political or economic factors, c) disadvantages from inconsistency of
multilateral taxation systems and diversity of tax law interpretation, d) difficulty of recruiting and securing human resources, e)
social disruption resulting from terrorist attacks, war and other catastrophic events.
•Dependency on outside manufacturers
Nintendo commissions a number of outside manufacturers to produce key components or assemble finished products. In the
event one or more of these businesses fail, Nintendo may have difficulty procuring key components or manufacturing its
products. In addition, suppliers may be unable to provide necessary components on a timely basis. A shortage of key
components could cause marginal decline due to higher costs, shortage of products and quality control issues. These issues may
impair the relationship between Nintendo and its customers.
Furthermore, as many suppliers’ production facilities are located overseas, potential production interruptions caused by
societal violence, natural disasters or any other accidents in the area could negatively affect Nintendo’s business.
•Business operations affected by seasonal fluctuation
A major portion of demand for Nintendo’s products is focused around the holiday season. Should Nintendo fail to release
attractive new products or supply hardware during that period, it would suffer unfavorable operating performance.
Analysis of Operations and Financial Review
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