TOKYO Japan's Nintendo Co Ltd 7974.OS, hammered by a strong yen and waning demand, posted its lowest first-quarter operating profit in five years, but kept to its profit forecast for the year.
Income at the world's No. 1 game machine maker contracted to a level not seen since before the launch of its hit Wii games console in 2006.
The drag on its earnings came from a global game market downturn as gamers made do with older hardware and software, and an unexpected fall in currency values in the United States and Europe, which make up four-fifths of Nintendo's sales.
"The strength of the yen affected badly on the profit side," said Soichiro Fukuda, an analyst at Citigroup Global Markets in Tokyo.
Nintendo has had to cut prices and sacrifice margins to prop up sales as it competes against Sony Corp (6758.T) and Microsoft Corp. (MSFT.O) due to declining popularity for its aging handheld DS, Wii machine and videogames.
The Kyoto-based company, which stuck with its currency expectation, kept its forecast for operating profit to fall 10 percent to 320 billion yen in the year to March 2011. The market consensus was for 305 billion yen.
The Japanese game maker also left unchanged a prediction for full-year Wii console sales of 18 million units and DS sales of 30 million.
Citigroup's Fukuda predicts Nintendo will undershoot its forecast for the full year by 40 billion yen before earnings start to recover in the business year starting April 1 2012.
Analysts say the company, led by CEO Satoru Iwata, may start selling its latest DS in Japan by the year-end and overseas early in 2011. When it does it will face competition not only from Sony and Microsoft, but also smartphones and social networking site games.
Nintendo said its April-June operating profit slipped to 23.3 billion yen ($266.4 million) from 40.4 billion yen. The average estimate of two analysts polled by Thomson Reuters was 31 billion yen.
The company's earnings forecast in May had anticipated an average rate of 95 yen to the dollar and 120 yen to the euro. In April-June, the yen averaged 92 to the dollar and 117 to the euro.
In the United States, Nintendo's biggest single market, game industry sales shrank 8 percent last year to $19.7 billion even though Americans were spending an extra 42 minutes a week in January playing with their consoles compared with a year earlier, according to U.S. research company NPD.
In the first quarter, industry sales fell every month, including a 26 percent slump in April, according to NPD.
Helped by lower prices worldwide Wii sales in the three months rose to 3 million compared with 2.2 million a year ago. DS sales, however slipped to 3.2 million from 6 million.
Nintendo aims to lure those gamers to upgrade with the launch of a 3D capable DS, followed by a next-generation Wii, although it may be too late to bolster profit this business year.
Shares of Nintendo have fallen 21 percent over the past three months versus a 11 percent drop in the benchmark Nikkei .N225 average.
The game maker's shares closed down 1.5 percent at 24,620 yen on Thursday ahead of the earnings announcement.
(Reporting by Tim Kelly; Editing by Michael Watson and Valerie Lee)