Bloomberg News

Nintendo Plans $1.2 Billion Share Buyback After Wii U Flops (1)

January 29, 2014

Nintendo President Satoru Iwata

Satoru Iwata, president of Nintendo Co. Photographer: Tomohiro Ohsumi/Bloomberg

Nintendo Co. (7974) will spend as much as 125 billion yen ($1.2 billion) buying back shares after Christmas shoppers shunned its Wii U console and games featuring Mario and Zelda. The company rose in Tokyo trading.

The world’s largest maker of video-game machines will buy back as many as 10 million shares, or about 7.8 percent of outstanding shares, the Kyoto, Japan-based company said in a statement yesterday. Nintendo had about $8.6 billion of cash and equivalents and zero debt as of Sept. 30.

Nintendo shocked the market this month when it forecast a surprise annual loss, cut Wii U sales projections and said it’s considering a new business model. President Satoru Iwata, who’s taking a 50 percent pay cut, is under pressure to find a new hit product as casual players move to smartphones and tablet computers, and hardcore gamers flock to faster consoles from Sony Corp. (6758) and Microsoft Corp.

“Nintendo has valuable content such as Pokemon and Mario and making smartphone games would be a good option,” said Makoto Kikuchi, Tokyo-based chief executive officer at Myojo Asset Management Japan Co. “Nowadays people want to play everything on smartphones and tablets, it doesn’t have to be a game-only device.”

The Nintendo buyback follows the September death of Hiroshi Yamauchi, who ran the company for 53 years and had a stake of about 11 percent. The company expects his heirs will have to pay inheritance taxes and may have to sell shares.

Dividend Outlook

The company’s stock rose 5.8 percent to 13,630 yen in Tokyo at 9:14 a.m. Japan’s Topix stock index fell 2.1 percent.

“That won’t merit shareholders, that’s why we decided on the buyback,” Iwata said yesterday. “But that’s not all the reason. We’ve been rewarding our shareholders mainly through high dividends, but we cannot generate as much profit as we used to make.”

Nintendo’s move is a first step toward reassuring investors the company has a plan to fix its ailing home console business, said Ben Bajarin, an analyst with the consulting firm Creative Strategies Inc.

“The Wii U was just a flop,” Bajarin said. “They are working to correct it, and still believe their integrated strategy will work, but phasing it out elegantly may be the only way forward.”

Net income plunged 77 percent in the third quarter to 9.6 billion yen, according to figures derived from nine-month totals announced yesterday by the company. Operating profit fell 6.9 percent to 21.7 billion yen.

Salary Cut

The company booked a foreign-exchange gain of 48.1 billion yen in the three months ended Dec. 31.

Nintendo sold 2.4 million Wii U units in the nine months, the company said. Sony this month said it sold 4.2 million units of its PlayStation 4 since it went on sale Nov. 15, and Microsoft shipped more than 3 million Xbox One machines.

Iwata will cut his pay from February to June, and other company directors will take cuts of as much as 30 percent. The president has said he won’t step down after 12 years running the company, and has no plans to change managers in the near term.

“I’m concentrating my mind on how to rebuild Nintendo rather than how I would take responsibility when things don’t work out,” Iwata said.

The 54-year-old will discuss his strategy for “using smart devices” to jumpstart a turnaround during a press conference today in Tokyo. He didn’t elaborate. Nintendo is studying new ways to revive sales after previously ruling out licensing its franchise characters for online games or smartphone applications, Iwata said earlier this month.

Yamauchi Family

“The Wii U isn’t in good shape,” Iwata said. “We’ll discuss how we will handle smartphones. What’s best to do in a short term is different from what’s best for us in a medium term.”

Fourth-quarter sales will fall significantly following the end of the holiday shopping season, the company said.

When Iwata was appointed in 2002, he became the company’s first president from outside the founding Yamauchi family since it started selling cards in the late 19th century. Iwata subsequently tripled revenue by introducing such hits as the Game Boy Advance SP, the Wii and the Nintendo DS handheld player.

Yet the casual gamers who made Nintendo the leader of a $93 billion industry have abandoned the Wii U for cheap downloads they can play on a Samsung Electronics Co. (005930) Galaxy smartphone or an Apple Inc. iPad. The Wii U also lost its appeal to many dedicated gamers, who prefer the PS4 or Xbox One.

Revised Forecast

Since reaching an all-time high of 72,100 yen in November 2007, the company has lost more than 80 percent of its value.

Nintendo on Jan. 17 lowered its annual sales forecast to 2.8 million Wii U units from 9 million and halved its projection for Wii U game sales to 19 million units. The company cut its forecast for the 3DS handheld player by 25 percent to 13.5 million units.

“Business conditions are worsening, users are opting for rival hardware and smart devices, and fixed costs are high while sales are falling,” Masaru Sugiyama and Takashi Watanabe, Tokyo-based analysts for Goldman Sachs Group Inc., said in a Jan. 27 report. “We think a strategy upgrade is needed.”

They downgraded the stock to sell and cut Nintendo’s 12-month target price to 11,000 yen from 12,000 yen.

The Wii U’s price in the U.S. was reduced by $50 to $299.99 in September, while Nintendo kept unchanged the cost in Japan at a suggested 30,000 yen. Sony introduced the PS4 at $399 in November.

Further price cuts are unlikely to spark fresh demand for the console, Iwata said yesterday.

“It’s apparent to me that Wii U won’t ever gain traction as a successful platform,” said Sumito Takeda, a Tokyo-based analyst for UBS AG. “It’s better to use resources for the next product.”

To contact the reporters on this story: Mariko Yasu in Tokyo at myasu@bloomberg.net; Takashi Amano in Tokyo at tamano6@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net


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