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Nintendo released its third quarter earnings last week (PDF file). Unit sales over the holiday period were great but having to convert overseas purchases from foreign currency to yen wasn’t. Profits took a hit. It was all largely as expected. Same as the last quarter, mostly. There was one surprise: Unexpectedly, the company made a million unit downward revision on Wii unit sales projections for the full fiscal year and other adjustments to software expectations (DS Hardware was revised upwards).

nintendo unit sales forecasts 2008[click images to enlarge]

The downward revision on the Wii? ….rewind…Holiday sales were record setting. Just a few months ago, in October, the company had upped sales projections for the year ending in March by a million units to 27.5m Wii units. In August they’d increased forecasts as well. The growth was sufficient enough that it prompted company president Satoru Iwata to say in October it was “safe to say strong game demand is intact despite all the talk about the financial crisis.”

Now carving back the guidance to the prior number of 26.5 million units, even though a relatively small adjustment, begs the question of why.

Was it “A” – modeling errors in Nintendo’s finance department? Maybe “Option B” – a factor of inventory movement or production shifts? Or, are the shifts the result of the most obvious option, “C” – the economy. Did the economy finally apply a brake? Have the weak retail climate and diminished consumer spending started to knock the Wii off its pedestal of “must have” status?

Curious to figure it out and expecting “C”, Metue went to the numbers in search of confirmation. To facilitate the search, we pulled unit sales data across regions from Nintendo’s investor releases. We looked at Wii Hardware, DS Hardware, and software. In each category we compared year over year growth rates. We looked at this information for the first quarter (April to June), the first six months (April to Sept.), and the first nine months (April to Dec.) of Nintendo’s fiscal year. Each time slot was tallied independently and then the percentages viewed side by side.

year over year growth rate comparison Nintendo Q1 2008 Nintendo analysis 6 month nintendo sales yy 9 month nintendo analysis

The expectation fueling the approach was that if the new guidance was economically driven, the growth rate trends would show a deceleration as the year progressed and the economy worsened. We expected that the year over year growth rate for Wii hardware, for example, would be smaller for the cumulative three quarters than for the first two.

software impactThat is largely what we found with Wii software. Year over year sales growth in most regions dropped off for the combined three quarters versus the cumulative result of the first two. America’s sales for Wii software, for example, fell from 125% year over year growth for the first six months to 94% for the nine months including the holidays. While this could be due to the introduction, or lack thereof, of new titles, it was more likely economic.

With the Wii hardware, we expected to find the same result and be able to highlight it as the basis for the new revision. The numbers actually told a different story across all regions. As shown in the tables, sales trends in Japan, while down year over year from the start, actually appear to pick up momentum as the year went by. The Americas and Nintendo’s “other” category show a different pattern, but they don’t fall off from the addition of the third quarter either. Instead, the Americas and Other category drop from Q1 to Q2 but then accelerate marginally for the full nine months. Specifically, in the Americas, Q1 sales were up 73% year over year. Adding the second quarter shows the rate slowing to 48%. But adding in the holiday quarter brings it back up slightly to 51.4%.

What explains this? It’s not immediately clear. But it would seem Nintendo’s forecast adjustments are the result of something more complex than just an economy sales retreat. Here, while the economy may be having some impact, the alternate explanations of Option A and B (modeling and inventory management) may be factors too.

The assembled tables are posted here with this post. We welcome thoughts. Anyone with alternate interpretations, please chime in.

Source: Has the Economy Finally Caught Up with Nintendo?

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