Nintendo says slack console sales to hit operating profit, weak yen to lift bottom line

Japanese video game maker Nintendo on Wednesday issued a profit warning with a silver lining—even as it sells fewer consoles, the sharp weakening of the yen means overseas sales will inflate its net income this fiscal year.

The home of famed game characters like Mario the plumber said sales of its 3DS handheld device came up short in the year-end holiday season amid intense competition. While operating profit still grew nearly 50 percent in October-December from a year earlier, the third quarter is Nintendo's biggest by far and it won't make up the shortfall by end-March.

"We've made some progress in profit but in many ways we didn't score perfectly," Chief Executive Satoru Iwata told reporters at a briefing in Osaka. Iwata is hoping to steer Nintendo to its first annual operating profit in four years.

Squeezed between console rivals like Sony and Microsoft on one side, and popular smartphone games on the other, Nintendo halved its operating earnings target for the fiscal year through March to 20 billion yen ($169 million) from 40 billion yen. Analysts on average had expected 36.6 billion yen, according to Thomson Reuters data.

Nintendo books over 70 percent of its sales outside Japan, and more than 40 percent in the United States. The sharply weaker yen—now worth about 15 less than this time last year against the dollar—inflates the value of sales overseas when translated back into the Japanese currency.

Nintendo books foreign exchange gains in its accounts separately from operating income. Boosted by those gains, it said it now expects a net profit of 30 billion yen this fiscal year, up from the 20 billion previously forecast, and a sharp turnaround from a net loss of 23.2 billion a year earlier.

Many of Japan's manufacturing companies have significant operations outside the country and are likely to see a positive impact on earnings from the yen's weakness. Separately Wednesday, camera and office equipment maker Canon Inc also reported a profit boost helped by the yen's slide.

For Nintendo, the foreign exchange gains may ease short-term pressure to overhaul strategy.

But analysts have called on Chief Executive Satoru Iwata to shift to focus on mobile devices and to allow its games to be played on machines built by competitors. He has resisted such pressure so far, pinning hopes on making hits out of games such as "Mario Kart 8."

The company's operating profit in October-December rose to 31.8 billion yen from 21.7 billion yen a year earlier. That, however, was helped by a significant drop in costs as it drew down existing inventory rather than manufacturing more consoles.

Sales of the 3DS console slid nearly 40 percent to 7.08 million in October-December compared with a year earlier, prompting the company to lower its full-year device sales forecast to 9 million from 12 million.

Nintendo's numbers also signal an effective loss warning for its fourth quarter. While its full-year target for operating profit stands at 20 billion yen, after the first nine months of the year operating income already stood at 31.6 billion.