Third Quarter Financial Results Briefing Q & A

Third Quarter Financial Results Briefing for Fiscal Year Ended March 2009

- Jan. 30, 2009

Presentation by the President (Text) | Q & A

6	Tell me about your idea on stock buy-back. While I feel that your products are yet to peak, your company’s share price hit a limit low. When selling tendency in the stock market is encouraging another selling, if you do not purchase back your own stocks, it can dispatch the message that you consider the current stock is still high. So I’d like to confirm your opinion.
6	Iwata: As a matter of course, we regard whether or not we should buy back our stock as one of the options in our operations, so, we do not intend to exclude that option. On the other hand, however, I do not think that I should tell when we are intending to do so nor at which price point of our stock we should do so. We are making many considerations by keeping that as an option all the time. It is not my role, but the roles of everyone in the market, to comment on whether the current stock price is high or low. Therefore, please understand that the fact that we are not doing stock buy-back does today does not mean that our current stock price is at higher level than we think. With the most recent financial result announcement, I myself wish that the market can appreciate our stock price more.

Tell me about your idea on stock buy-back. While I feel that your products are yet to peak, your company’s share price hit a limit low. When selling tendency in the stock market is encouraging another selling, if you do not purchase back your own stocks, it can dispatch the message that you consider the current stock is still high. So I’d like to confirm your opinion.

Iwata:

As a matter of course, we regard whether or not we should buy back our stock as one of the options in our operations, so, we do not intend to exclude that option. On the other hand, however, I do not think that I should tell when we are intending to do so nor at which price point of our stock we should do so. We are making many considerations by keeping that as an option all the time. It is not my role, but the roles of everyone in the market, to comment on whether the current stock price is high or low. Therefore, please understand that the fact that we are not doing stock buy-back does today does not mean that our current stock price is at higher level than we think. With the most recent financial result announcement, I myself wish that the market can appreciate our stock price more.

7	I think how the stock market responded today against two consecutive downward modifications after nine successive upward modifications since April 2006 is, and I apologize if this is an inappropriate expression, like how Seattle responds to Ichiro Suzuki if he is out of hits in a few consecutive matches even if he keeps a batting average of above .300 and 200 hits every year. You showed us the data of actual hardware sales figures overseas and I thought software sales are increasing as well. I do not think your downward modification on total annual software – Nintendo and third parties’ – sales forecasts was really necessary. I would like to ask why you did not take this few percent of downturn as part of the error rang and announced a downward revision. One more thing, about the room for expansion overseas next fiscal year. I also think there is still room for expansion in figures when we see your comparison against PS2 or the total population. But there must be different scenarios in each territory. In Japan, all of us are playing on our cell phones on the train. In America, nobody sleeps nor plays on their cell phone on the train, but I see that they are using gadgets like iPod, iPhone, Blackberry or Kindle recently. I know your ways of promotion varies according to each territory. I would like to ask if specific strategy is necessary for each territory including software lineups.
7	Iwata: I thought we ought to make the downward modification public, as an apparent difference was seen between what we heard from our third parties on October 2008 and today. Some may think, “Why on earth would you do something disadvantageous?” But originally the idea of making modifications public is not to insist that something is possible when it is actually impossible, but to honestly disclose the current circumstances of our business in order to build trust between the people in the market in the long term, even if it may have a negative impact in the short term. This is my view of values on IR. Some may say, “Nintendo is too honest and that it’s not worth it to do this in this economic situation.” But if it continues and escalates, it might become inflated. I feel that the market evaluation today is very harsh and I regret having betrayed the expectation of many, but I am convinced that we need to announce the figures as is. And as you mention, there is a gap of cultures between countries. The gap in time that the DS took to expand the gaming population is largely caused by the gap of lifestyles, as you mention. In Japan, as the number of people who saw DS players in trains skyrocketed early on, its recognition spread extremely fast as it peaked the curiosity of even those who were not interested but wondered what the gadget was. In the United States, on the contrary, not only are passengers not sleeping nor using cell phones, many Americans do not regularly use trains and instead use their cars to commute. So their ways of how to spend time on the go differs, and as a result, how, when and where portable consoles are played in their daily life will also differ. On the other hand, we faced the same doubt years ago, when we launched software like “Donkey Kong”, “Super Mario Brothers”, “Pokémon”, “Nintendogs” or ”Brain Training”. Many were skeptic of these being accepted overseas. What Japanese people simply found interesting and favored was also welcomed overseas in many cases, with appropriate communication. Of course I don’t mean that all that Japanese people favor will be accepted overseas. What I mean is that with the essence of fun, what people find interesting can overcome culture and language gaps When I was trying to pitch “Brain Training” to our marketing people in the U.S. and Europe after the software had shown the strong sales in Japan, I never imagined that “Brain Training” would sell twice as much in overseas market than in the Japanese market. It was the same in the case of “Pokémon” where I was told by the local staff that this yellow, cute creature would never make it (It would never be accepted!) ” So my understanding is that culture gaps can be overcome. And I think what is necessary is not to change the product itself, but how we introduce and show the features. As we strive for the expansion of gaming population worldwide, we are also thinking of developing products that cater to the American or European markets. We are actually working on U.S. and Europe-originated Touch Generations products, which may have a smaller demand in Japan than overseas. I can not tell if it will go well or not at this moment. I think one or two of these initial trials will reach the market within this year. If they actually flourish, I think our strategy will have to take the next step.

I think how the stock market responded today against two consecutive downward modifications after nine successive upward modifications since April 2006 is, and I apologize if this is an inappropriate expression, like how Seattle responds to Ichiro Suzuki if he is out of hits in a few consecutive matches even if he keeps a batting average of above .300 and 200 hits every year.

You showed us the data of actual hardware sales figures overseas and I thought software sales are increasing as well. I do not think your downward modification on total annual software – Nintendo and third parties’ – sales forecasts was really necessary. I would like to ask why you did not take this few percent of downturn as part of the error rang and announced a downward revision.

One more thing, about the room for expansion overseas next fiscal year. I also think there is still room for expansion in figures when we see your comparison against PS2 or the total population. But there must be different scenarios in each territory. In Japan, all of us are playing on our cell phones on the train. In America, nobody sleeps nor plays on their cell phone on the train, but I see that they are using gadgets like iPod, iPhone, Blackberry or Kindle recently. I know your ways of promotion varies according to each territory. I would like to ask if specific strategy is necessary for each territory including software lineups.

Iwata:

I thought we ought to make the downward modification public, as an apparent difference was seen between what we heard from our third parties on October 2008 and today. Some may think, “Why on earth would you do something disadvantageous?” But originally the idea of making modifications public is not to insist that something is possible when it is actually impossible, but to honestly disclose the current circumstances of our business in order to build trust between the people in the market in the long term, even if it may have a negative impact in the short term. This is my view of values on IR. Some may say, “Nintendo is too honest and that it’s not worth it to do this in this economic situation.” But if it continues and escalates, it might become inflated. I feel that the market evaluation today is very harsh and I regret having betrayed the expectation of many, but I am convinced that we need to announce the figures as is.

And as you mention, there is a gap of cultures between countries. The gap in time that the DS took to expand the gaming population is largely caused by the gap of lifestyles, as you mention.

In Japan, as the number of people who saw DS players in trains skyrocketed early on, its recognition spread extremely fast as it peaked the curiosity of even those who were not interested but wondered what the gadget was. In the United States, on the contrary, not only are passengers not sleeping nor using cell phones, many Americans do not regularly use trains and instead use their cars to commute. So their ways of how to spend time on the go differs, and as a result, how, when and where portable consoles are played in their daily life will also differ.

On the other hand, we faced the same doubt years ago, when we launched software like “Donkey Kong”, “Super Mario Brothers”, “Pokémon”, “Nintendogs” or ”Brain Training”. Many were skeptic of these being accepted overseas.

What Japanese people simply found interesting and favored was also welcomed overseas in many cases, with appropriate communication. Of course I don’t mean that all that Japanese people favor will be accepted overseas. What I mean is that with the essence of fun, what people find interesting can overcome culture and language gaps When I was trying to pitch “Brain Training” to our marketing people in the U.S. and Europe after the software had shown the strong sales in Japan, I never imagined that “Brain Training” would sell twice as much in overseas market than in the Japanese market. It was the same in the case of “Pokémon” where I was told by the local staff that this yellow, cute creature would never make it (It would never be accepted!) ”

So my understanding is that culture gaps can be overcome. And I think what is necessary is not to change the product itself, but how we introduce and show the features.

As we strive for the expansion of gaming population worldwide, we are also thinking of developing products that cater to the American or European markets. We are actually working on U.S. and Europe-originated Touch Generations products, which may have a smaller demand in Japan than overseas. I can not tell if it will go well or not at this moment. I think one or two of these initial trials will reach the market within this year. If they actually flourish, I think our strategy will have to take the next step.

8	I would like to ask about your views on CSR. Recently, many companies are appointing CSR officers, and you have also taken some forward-looking steps by, for example, producing CSR reports. Because you are one of so-called fables companies and you are purchasing all the components of your products from the other companies, I imagine you have your own strict guidelines to check them. As environmental regulations get more strict, especially in Europe, how much financial and human resource do you think it will require to ensure these checks and guidelines are in place? How do you assess the current situation?
8	Iwata: Firstly, I would like to share with you what we think is Nintendo’s CSR. In our CSR report, I wrote that the CSR mission Nintendo is striving for is “To put smiles on the faces of everyone involved in Nintendo.” “Everyone involved in Nintendo” can be displaced as stakeholders. So our aim is to put smiles on everyone – from, of course, our customers to our stock holders, business partners, employees, to the local community. I continue to tell our employees that if it makes everyone involved in Nintendo smile, then that is something that we should do. If it doesn’t make them smile, then it’s not something Nintendo should do. This is my solution to express the substance of CSR as simply as possible. As our products are meant to be actually putting smiles on our consumers’ faces and it is apparently easy to understand, this explanation is widely favored and I also find it good. And of course, care for the natural environment must be considered there. As Nintendo conducts business globally, Europe seems to have the most strict environmental regulations, so if we meet those standards, we would also be meeting most countries’ standards. To this end, our special team is working internally on so-called Green Procurement. A single product consists of more than 1,000 parts and components, and we are supplied with them by various companies. Parts and components get revised so many times, and supplier companies claim that the iteration is the same in quality as the last one, but upon our inspection we have found that they contain different ingredients, even after the supplier’s checking process. So we have proactively created our own inspection process. Even though we do not directly manufacture our products, we are committing pretty large human resources for the evaluation of products or analysis on Green Supply by the Product Evaluation and Engineering Department in Uji Plant (Manufacturing Division). If you say that the fabless Nintendo is outsourcing everything in the manufacturing process and not doing anything, it is a complete misunderstanding. For your information, we have also implemented an “Iwata Asks” interview story project for recruitment. From an external point of view, there are some positions at Nintendo that are more easily understood than others. For example, product development is relatively easy to understand, but we also have officers working for debugs, packages designer, or Green Procurement as I mentioned. In order to present these harder-to-understand positions, we have a page called “Iwata Asks; What does it mean to work for Nintendo?” on our recruitment page, and one edition features officers from Product Evaluation and Engineering Department, who talk about green procurement. Please check it out if you are interested.

I would like to ask about your views on CSR. Recently, many companies are appointing CSR officers, and you have also taken some forward-looking steps by, for example, producing CSR reports. Because you are one of so-called fables companies and you are purchasing all the components of your products from the other companies, I imagine you have your own strict guidelines to check them. As environmental regulations get more strict, especially in Europe, how much financial and human resource do you think it will require to ensure these checks and guidelines are in place? How do you assess the current situation?

Iwata:

Firstly, I would like to share with you what we think is Nintendo’s CSR. In our CSR report, I wrote that the CSR mission Nintendo is striving for is “To put smiles on the faces of everyone involved in Nintendo.”

“Everyone involved in Nintendo” can be displaced as stakeholders. So our aim is to put smiles on everyone – from, of course, our customers to our stock holders, business partners, employees, to the local community. I continue to tell our employees that if it makes everyone involved in Nintendo smile, then that is something that we should do. If it doesn’t make them smile, then it’s not something Nintendo should do.

This is my solution to express the substance of CSR as simply as possible. As our products are meant to be actually putting smiles on our consumers’ faces and it is apparently easy to understand, this explanation is widely favored and I also find it good. And of course, care for the natural environment must be considered there.

As Nintendo conducts business globally, Europe seems to have the most strict environmental regulations, so if we meet those standards, we would also be meeting most countries’ standards. To this end, our special team is working internally on so-called Green Procurement.

A single product consists of more than 1,000 parts and components, and we are supplied with them by various companies. Parts and components get revised so many times, and supplier companies claim that the iteration is the same in quality as the last one, but upon our inspection we have found that they contain different ingredients, even after the supplier’s checking process. So we have proactively created our own inspection process.

Even though we do not directly manufacture our products, we are committing pretty large human resources for the evaluation of products or analysis on Green Supply by the Product Evaluation and Engineering Department in Uji Plant (Manufacturing Division). If you say that the fabless Nintendo is outsourcing everything in the manufacturing process and not doing anything, it is a complete misunderstanding.

For your information, we have also implemented an “Iwata Asks” interview story project for recruitment. From an external point of view, there are some positions at Nintendo that are more easily understood than others. For example, product development is relatively easy to understand, but we also have officers working for debugs, packages designer, or Green Procurement as I mentioned. In order to present these harder-to-understand positions, we have a page called “Iwata Asks; What does it mean to work for Nintendo?” on our recruitment page, and one edition features officers from Product Evaluation and Engineering Department, who talk about green procurement. Please check it out if you are interested.

9	I would like to ask you about the DSi business. It seems to have gotten off to a very good start from the beginning in Japan. I wonder what kind of people are the main customers, if new users are buying them or not, and how they evaluate DSi. Also, can you share the current capacity and future plans of DSi production. As for that, how do you think of the oversea launch period of DSi, transition from existing DS Lite, and the change on ratio of your production of DS Lite and DSi?
9	Iwata: Firstly, I would like to answer about the composition of DSi owners. Those who understood DSi earlier are, of course, those who actively gather information about video game industry. As these kind of people who already own DS start to try it first, they mainly account for the new owners of DSi at the early period. You might feel that the gaming population is not expanding at all if the same consumers are buying. But they may have a family whose members can be a recipient of their very own DS. So my understanding is that we must not stick to see just what kind of people have actually purchased DSi, but to measure how DS users would expand and how and what kind of people will be the owners of his or her own DS in the end. What I have talked about so far happened during nearly one month since the launch. In the second month, I mean December, more (various kinds of) people bought DSi. I have heard some reports like, “As expected, those who seem to know much and well about videogames came in to buy” in November and “much more various kinds of people are coming in to the store” in December, and those in the latter report are thought to be inactive to gather information of videogames; they did not see our websites beforehand, read the brochures in detail nor usually buy or read videogame magazines. These kinds of people came in and asked about the difference (between DSi & DS Lite) at retailers. After they learned the features of DSi, they were often grateful for the information, and gravitated towards the new DSi despite its higher costs and bought the DSi. And reports say those kinds of people are increasing. DS Lite is still maintaining a consistent amount of sales even after the launch of DSi. There are two reasons; one is because of DS Lite’s GameBoy Advance software functionality, and another is because DS Lite has more variation of colors. Others are buying DSi in high percentages. We also have reports of purchase by those who have never touched a DS. I will refrain from commenting on production capacity now, as the current number might get miscalculated by multiplying it by 12 as the annual amount. I would like to comment on it after it launches overseas and establishes momentum. I am imagining that launches of DSi overseas will be in the first half of the next fiscal year. As for change on production ratio of DS Lite and DSi, I would like to cite a historical fact that in Japan, DS Lite was more expensive than the original DS but the total demand converged on DS Lite very quickly. But in Europe, it did not happen so fast and these two had been sold together side by side for a long time. And in the Americas, as the total momentum of DS was very weak then, we had to set the price of DS Lite the same as the original. As a result, the demand converged on DS Lite early on. This time, considering the current foreign currency exchange rates, there is no possibility of selling DSi overseas with the same price as DS Lite at all. There will have to be a difference in price. With this price difference, I think that the DS Lite and DSi will be sold side by side in the Americas and in Europe, but I will not be able to comment on their ratio today as we have not announced the prices and we will have to see how people react to the announcement.

I would like to ask you about the DSi business. It seems to have gotten off to a very good start from the beginning in Japan. I wonder what kind of people are the main customers, if new users are buying them or not, and how they evaluate DSi. Also, can you share the current capacity and future plans of DSi production. As for that, how do you think of the oversea launch period of DSi, transition from existing DS Lite, and the change on ratio of your production of DS Lite and DSi?

Iwata:

Firstly, I would like to answer about the composition of DSi owners. Those who understood DSi earlier are, of course, those who actively gather information about video game industry. As these kind of people who already own DS start to try it first, they mainly account for the new owners of DSi at the early period.

You might feel that the gaming population is not expanding at all if the same consumers are buying. But they may have a family whose members can be a recipient of their very own DS. So my understanding is that we must not stick to see just what kind of people have actually purchased DSi, but to measure how DS users would expand and how and what kind of people will be the owners of his or her own DS in the end.

What I have talked about so far happened during nearly one month since the launch. In the second month, I mean December, more (various kinds of) people bought DSi. I have heard some reports like, “As expected, those who seem to know much and well about videogames came in to buy” in November and “much more various kinds of people are coming in to the store” in December, and those in the latter report are thought to be inactive to gather information of videogames; they did not see our websites beforehand, read the brochures in detail nor usually buy or read videogame magazines. These kinds of people came in and asked about the difference (between DSi & DS Lite) at retailers. After they learned the features of DSi, they were often grateful for the information, and gravitated towards the new DSi despite its higher costs and bought the DSi. And reports say those kinds of people are increasing.

DS Lite is still maintaining a consistent amount of sales even after the launch of DSi. There are two reasons; one is because of DS Lite’s GameBoy Advance software functionality, and another is because DS Lite has more variation of colors. Others are buying DSi in high percentages. We also have reports of purchase by those who have never touched a DS.

I will refrain from commenting on production capacity now, as the current number might get miscalculated by multiplying it by 12 as the annual amount. I would like to comment on it after it launches overseas and establishes momentum.

I am imagining that launches of DSi overseas will be in the first half of the next fiscal year. As for change on production ratio of DS Lite and DSi, I would like to cite a historical fact that in Japan, DS Lite was more expensive than the original DS but the total demand converged on DS Lite very quickly. But in Europe, it did not happen so fast and these two had been sold together side by side for a long time. And in the Americas, as the total momentum of DS was very weak then, we had to set the price of DS Lite the same as the original. As a result, the demand converged on DS Lite early on.

This time, considering the current foreign currency exchange rates, there is no possibility of selling DSi overseas with the same price as DS Lite at all. There will have to be a difference in price. With this price difference, I think that the DS Lite and DSi will be sold side by side in the Americas and in Europe, but I will not be able to comment on their ratio today as we have not announced the prices and we will have to see how people react to the announcement.

10	Does your downward-modification on Wii hardware sales from 27.5 million to 26.5 mean that you have one million Wii consoles in stock?
10	Iwata: No. This is an estimate made at this moment of Wii consoles to be shipped out of Nintendo by the period ending in March, according to our adjustment on production amount within the monthly limitation. In retrospect, we could have sold more units if we had adjusted to send over more Wii consoles allocated for Japan to other markets.

Does your downward-modification on Wii hardware sales from 27.5 million to 26.5 mean that you have one million Wii consoles in stock?

Iwata:

No. This is an estimate made at this moment of Wii consoles to be shipped out of Nintendo by the period ending in March, according to our adjustment on production amount within the monthly limitation. In retrospect, we could have sold more units if we had adjusted to send over more Wii consoles allocated for Japan to other markets.

Presentation by the President (Text) | Q & A

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