IR Information

Corporate Management Policy Briefing / Third Quarter Financial Results Briefing
for the 74th Fiscal Term Ending March 2014
Q & A

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Q 1

I would like to know more about the new application for smart devices. Do consumers have to pay money to use it? Does this application generate profit itself in addition to promoting the existing hardware and software businesses? Or, does this application have a beneficial effect on increasing hardware and software sales? And, how do third-party publishers come into play? Additionally, I would like to ask you about your research and development expenses. Just focusing on the fourth quarter (January-March 2014), they will increase about 80% compared with the same period last fiscal year. Do you expect to continue to see similar expenses next fiscal year, or is it a temporary increase?

A 1

Satoru Iwata (President):

The goal of our application on smart devices is not to generate profit, at least in the short-term. The biggest point is to create consumer awareness and use that opportunity to have consumers know more about our information. As I mentioned in the presentation that people’s lifestyles have changed, we are beginning to see big generational differences in terms of how they watch TV and how often they interact with TV commercials. Consumers who acquired information only through TV or other mass media in the past now get their information through smart devices or the Internet. With the growth of the Internet, PCs and smart devices, as well as social media that enables you to see easily what others are saying, have become such important methods with which people gather information and make judgments. The key aspect is that Nintendo would like to establish a firm channel on smart devices through which we can connect with consumers. This channel will enable not only us but also third-party publishers to communicate all the fun content on Nintendo platforms to consumers. However, we cannot expect consumers to activate our application every day if we only establish a channel that is solely dedicated to advertising. We would have to make efforts to provide a channel for consumers that makes them entertained, pleased and happy in order to have them use our application frequently. The application market for smart devices is already extremely competitive, so it is generally very difficult to have consumers activate a single application on a continual basis. Perhaps it would not be too difficult to simply have people download our application and have them try it just once, but ensuring continued engagement is going to be challenging. We are determined to take on this challenge, fully understanding the situation in which we are going to place ourselves. Once we have established such an environment, however, we will be able to dramatically change the relationship between Nintendo and consumers. In addition, while we had no other choice but to use TV commercials in the past, we feel that adding such a new communication tool will be a cost-effective measure as a whole, so we are thinking about this issue in a holistic manner.

Regarding the research and development expenses for this fiscal year, many people seem to have been surprised by such a sudden increase and I heard from the IR team that they received many questions on this topic from financial analysts. Yesterday, I received the same question when we made our financial announcement at the Osaka Securities Exchange and answered that we decided to increase our forecasted expenses this fiscal year in order to tackle some of the areas that we feel we are not strong at, and this is an investment toward the future. I will not, however, go into detail about these specific areas since doing so does not benefit Nintendo or our shareholders. Please also note that the rise is unique to this fiscal year and it does not signify a general rise for and beyond the next fiscal year.

Q 2

You mentioned in your presentation your medium– to long-term plans, but I think that investors will not wait any longer unless the company returns to profitability in the next fiscal year. You indicated that the company aspires to move back into profitability, but, considering the current sales pace of Wii U, that seems very difficult to achieve. You mentioned that you would like to increase the sales volume, but I would like to know if it would be possible to change the company’s cost structure to turn a profit. Please explain to us once again how you plan to increase sales and change your cost structure to improve profitability.

A 2


The operating loss that we declared for this period is due to the current situation that the amount of expenses is disproportionate to the income, which is to say that we are incurring expenses as much as we did when our sales volume was high while sales have become low, especially in the overseas markets. In the Supplementary Information about Earnings Release of the Financial Results Briefing, there is a page named “Foreign Currency Transaction Information” where sales volumes in U.S. dollars and euros are shown. Consolidated net sales in U.S. dollars at the end of the third quarter were 2.3 billion in the previous fiscal year but are 1.7 billion in this fiscal year, and the net sales in euros were 1.4 billion in the previous fiscal year but are 1.0 billion in this fiscal year. This structure stems from the current situation where we see decreased sales volumes for Nintendo DS and Wii software and hardware which now have low R&D expenses, as they are already fully expensed, and low marketing expenses, as they require no new marketing activities, but have sold reasonably well over an extended period of time, while, on the other hand, the sales volume of the new platforms has not increased as much. Since we are spending the same amount of marketing expenses as before in such an environment, to explain what is happening, the ratio of marketing expenses to sales has increased rapidly. From this viewpoint, I believe the most effective way to improve profitability in the short-term is to change the way we spend money and focus on more efficient areas, an idea strongly connected to my presentation in which I mentioned that we would like to create ties with consumers through smart devices. On the other hand, a simple reduction of marketing expenses without any measures results in balanced contraction, as I mentioned earlier in my presentation. Therefore, the key point is to review the current marketing expenditure allocation, and spend more on areas where it is necessary to do so and thoroughly examine areas that are not cost efficient.

Regarding Nintendo 3DS, we did not sell as much as we expected in the last year-end sales season. Since we expected the sales volume of Nintendo 3DS to increase rapidly in the year-end sales season and saw signs that it would happen at the end of October last year, I mentioned at the second quarter Financial Results Briefing that we would aspire to deliver great results in the year-end sales season, but we are now reflecting on the fact that we could not achieve it. On the other hand, since Nintendo 3DS has an installed base of more than 40 million units globally as I mentioned earlier, we are now getting to the point where it is impossible not to turn a profit with our software business. We have many key titles to be released in this calendar year and we will strive to drive profits from these titles. Seen in this light, I believe the key profit-driver for the next fiscal year will be Nintendo 3DS. Regarding Wii U, it is not easy to make a significant profit with the current units sold. The price reduction of the hardware in the overseas markets represents a large amount of our total expenditure for this fiscal year, but based on the premise that we will not make such a reduction in the next fiscal year, I think our business can operate without such a negative effect on our profitability. Also, in this calendar year, we will release “Mario Kart 8” and “Super Smash Bros.” which are kinds of games that Nintendo has been particularly strong with in encouraging players to invite each other to play. Therefore, with these two titles as our main drivers, we would like to make sure that the markets will thoroughly acknowledge the value of Wii U, including the titles that we have released to date. Also, we will try to turn around Wii U and enrich the value of the GamePad, a point I mentioned earlier in my presentation. With regard to Wii U, it is not realistic to hope that it will sell 100 million units in the same product cycle as Wii. On the other hand, I believe it is never too late and it is possible to achieve a certain level of sales volume and a certain level of results with Wii U depending on how we write its scenario. Therefore, we would like to come up with a realistic scenario and turn Wii U into a platform that generates as much profit as possible.

Q 3

I would like to ask about the licensing business of character IP. I have the impression that the announcement about Nintendo’s future licensing business in digital fields indicates a major policy change, and so I would like to know your new policy on licensing-out in that field. For example, there have been a number of games on mobile devices that charge hefty fees to consumers, and I understand that Mr. Iwata had expressed his reluctance to charging such fees in the past, so under what policy are you going to go about your licensing business? Also, I would like to know if this licensing business will play an important role as Nintendo strives to post an operating profit in the next fiscal year or two.

A 3


Although I mentioned that we would work flexibly without considering past exceptions when it comes to our character IP licensing business, I am not saying that we will approve every single request. For example, we will judge, based on our own criteria, if that licensed product really leads to consumers’ smiles in the medium- to long-term, and if it is in direct competition with our core business. It is true that any company in the entertainment industry is, in a sense, competing for consumers’ attention, but I was not referring to that type of competition. What I meant was the kind of competition that directly threatens, for example, our integrated hardware-software business, and we will of course not license any products that, as a result of using Nintendo game characters, damage their public image. I believe companies around the world that own a variety of character IP have ideas of their own about their licensing businesses, and I think our licensing business would not be greatly different from them. In that sense, within a year, we will probably embark on various types of businesses that we didn’t conduct in the past, and actually there are projects we have already started working on with our clients, so please look forward to them.

Revenues from the licensing business, in a sense, depend on client companies, and hence I am afraid that if we first set a clear revenue target, we will be driven into licensing products that we should not license in order to achieve that objective. That’s why I will not set a numerical goal for this business. On the other hand, I believe, given the total value of Nintendo’s character IP that everyone recognizes, the day will come in the not so distant future when this character IP business contributes to Nintendo’s annual operating income to a certain degree.


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