Corner Turned?

It's been a week of mixed fortunes for Nintendo, with the company publishing financial results which were far worse than expected, alongside 3DS sales results which were far better than most people dared to hope. Behind those headline figures, however, a very different reality lurks.

It's tempting to look at the figures and assume that they indicate a corner being turned by the company, which has been beset with problems this year - largely focused around the lacklustre launch of the 3DS, against a background of continuing cyclical decline in the fortunes of the Wii. Rough financials are to be expected in such a climate, but the 3DS' strong sales should be a ray of hope for the future, suggesting better times to come for the venerable industry stalwart.

Taking a closer look at the figures and their context, however, suggests a slightly different picture. The reality is that Nintendo's financials aren't remotely as bad as they first appear, with the company's fundamentals continuing to be remarkably strong - but equally, the 3DS' sales aren't remotely as good as they first appear, and suggest that the new handheld is a long way from being out of the woods.

Let's look first at the financial figures, which saw Nintendo - a company which until fairly recently had never dipped into red ink in its century-long history - announcing a ¥70 billion loss. Fairly shocking stuff, although not remotely as bad as Tokyo-based analysts had expected - the Nihon Keizai Shimbun, Japan's equivalent of the Financial Times, had predicted a ¥100 billion loss.

Yet once you consider the context, suddenly things don't look so bad. One factor that's vital to bear in mind with Nintendo's financial results is that the company holds an absolutely vast treasure-chest of overseas assets - a "warchest" which essentially ensures that the company is in a position to fight back in the event of a product or platform failure, but which can also become a millstone around the neck of its financial results when currency fluctuations impact on its value. Those same currency fluctuations can also massively devalue Nintendo's overseas sales.

The company holds an absolutely vast treasure-chest of overseas assets

To describe what has happened to the Japanese Yen in the past 24 months or so as "currency fluctuations" is to understate matters. The Yen has soared to record heights, with each agonised convulsion of the world's financial systems sending more and more investors scurrying away from the beleaguered Euro, Dollar and Sterling to the relative safety of Japan's currency. The devastating earthquake in March actually drove values even higher, as currency investors anticipated that the Japanese government would have to repatriate Yen in order to pay for reconstruction (I'll let you draw your own conclusions based on that regarding the nature of human being that engages in currency speculation).

The net result is that the Yen is trading at historically high values, making Japanese exports incredibly expensive and - from Nintendo's perspective - making its overseas investments look vastly less valuable than they used to be. For a company reporting in Yen each quarter, a billion-dollar investment in US Dollars is now only worth two thirds as much as it was a few scant years ago. The dollar value hasn't changed - it may even have grown nicely - but on the balance sheet filed with Japan's financial authorities, the investment has shed around $350 million in value.

As the world's markets have writhed around like a dying animal over the past few years, that factor - the Yen valuation of Nintendo's overseas assets - has become a more important part of its quarterly financials than the performance of any of its products. Moreover, the Yen's strength in the past year or so has also hit Nintendo in a second way. The company essentially "buys" its products in Yen, acquiring components and paying for labour costs in the Japanese currency (although much manufacturing also happens in China), and then sells them in Dollars and Euros. As a consequence, while consumers haven't seen price cuts to consoles like the Wii, Nintendo has seen its revenues from sales of the console slashed. The impact is twofold; it reduces Nintendo's income while also hammering the firm's ability to remain competitive through price-cutting.