Marketing

Plan

Financial Analysis
Group: MMK1 L Laura Jane Willen (117544) Esra Toker (117013)

Table of Contents
Introduction .............................................................................................................................. 2 1 Income Statement ................................................................................................................. 3 2 Analysis of Profit and Loss Account ....................................................................................... 4 2.1 Analysis of Profits ............................................................................................................ 4 2.2 Analysis of Costs .............................................................................................................. 6 2.3 Comparison of costs with Microsoft ............................................................................... 7 Conclusion ................................................................................................................................. 8 Appendix ................................................................................................................................... 9 Sources .................................................................................................................................... 13

Introduction
The Japanese company Nintendo is one of the leading companies within the gaming industry. Its latest market offering, the Wii-console, was released in 2006 and was sold over 70 million times around the globe. This financial report interprets given information to make a judgment of Nintendos position in the gaming market. This is done by comparing figures from the annual reports of 2006 until 2008 with those of two competitors: Sony Corporation and Microsoft Corporation. The numbers show the profits made within the company and give an insight into the corporate situation. The report consists of three main parts. The first describes the profits that were made in all three companies. The second part covers the cost structure of Nintendo whereas the third part draws a comparison with the cost structure of Microsoft. Research was done with the help of company.info which provided useful information on the companies as well as the annual reports. Other information was derived from literature on financial management.

1 Income Statement
The income statement provided by Nintendo on their website shows detailed numbers of profits and costs. All calculations made in this report are based on these numbers and figures. Numbers given in Japanese Yen () were converted into US Dollars ($) based on the average exchange rate of the respective year (see Appendix A).

2 Analysis of Profit and Loss Account

2.1 Analysis of Profits
The income statement of the Japanese company Nintendo Co., Ltd gives detailed information on profits and losses made during the managerial year of 2008 (1st April 2008 until 31st March 2009). It is divided into sales revenues and costs, which are weighed against each other to show if the company made a profit or loss. The company Nintendo made a profit of $2,5 billion in 2008. This was a 59.5% increase compared to the previous year and even a 194.1% increase from the profit made in 2006 (Nintendo, 2008). Its two main competitors are Sony and Microsoft. The companies are also active in the entertainment and gaming business and produce direct competing devices to the Nintendo Wii, namely the PlayStation 3 and the Xbox 360. The Japanese company Sony Corporation made a profit of $3,57billion in 2008. The increases from the preceding years were 232.9% and 236.0%, i.e. that the profit more than doubled compared to 2007 and 2006. (Sony, 2008) US-based Microsoft Corporation even made a profit of $17,68 billion in the year 2008. They managed to increase profits by 25.7% compared to 2007 and by 40.3% compared to 2006. (Microsoft, 2008)

Prots in $

Nintendo Sony Microso]

If the three companies are compared to each other, it becomes obvious that Nintendo made the lowest profit among the three in 2008. The profits made by Sony and Microsoft were 1.44 times and seven times higher respectively. Considering that all three companies improved their numbers over the last three years, it can be said that their newest releases were a success. When comparing the numbers of the different companies with each other, a vast difference can be noticed, especially between Nintendo and Microsoft. This becomes clearer when taking into consideration that the latter is the market leader within the computer business. Nintendo on the other hand mainly focuses on the gaming and console industry only.

2.2 Analysis of Costs

The amount of money that leaves the company is divided into costs and expenses (payments). Costs reflect the amount of money spent on using assets whereas expenses relate to the purchase of assets. Costs are usually spread over a period of time where the asset is being used. (de Boer, 2008) In the income statement of the company Nintendo the costs are divided into four types. The first one is referring to the selling, general and administrative expenses. The second deals with the non-operating expenses, the third is about the extraordinary loss and the fourth are the taxes. If the costs are summed up, the profit margin can be calculated. (Nintendo Co., Ltd, 2008) The sales revenue of the company was $16,724,230,000 in 2008. The net income was at $2,573,426,000. This means that the profit margin lays at 15.39%. (See Appendix B) To come to a conclusion, the different expenses were excluded from the sales revenues. In relation to turnover, the total of the first type is 12.7% with the highest expenses. Under this category the advertising expenses with 6.8% and other expenses, such as research and development (2.2%) are included. The next category with the non-operating expenses is in total 5.6% out of the turnover. Here the foreign exchange losses with 5.5% hold down the profit whereas interest expenses or sales discounts are almost not affecting the profit margin. Extraordinary losses are also not affecting the profit margin but the income taxes in total are at around 10.6% of the turnover. It can be said that there is an expense of proximately 29.5% in sum and it can be said that the taxes are holding down profit the most. As those are an inevitable cost, nothing can be done to reduce them. After that, the advertising expenses (6.8%) and then foreign exchange losses (5.5%) are positioned in the ranking.
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2.3 Comparison of Costs with Microsoft

The costs in the income statement of the competitor Microsoft are organized differently (see Appendix C). Here, the operating expenses, such as cost of revenue, research and development, sales and marketing, general and administrative expenses are listed. The sales revenue here was $60,420,000,000 in 2008 and this is almost four times more than the sales revenue of Nintendo. Consequently, the net income of this company is with $17,681,000,000 almost nine times higher than with Nintendo. (Microsoft Corporation, 2008) Although this is the case, the profit margin of Microsoft is 29.3%. This is almost 13.9% more than the profit margin that was calculated for Nintendo. This means that the costs structure of the Microsoft Company has to have a higher value. Whereas the research and development expenses of Nintendo made up 2.2% of the total turnover of the company, here the expenses for the research and development are 13.5% of the turnover. This means that there is an enormous difference in research effort between the two competing companies. The taxes of Microsoft are similar to those the Nintendo Company has to pay. The highest expenses are the sales and marketing (21.6%), which includes the export of the products. The total operating expenses of Microsoft are proximally 62.8% and this is almost twice of the operating expenses of Nintendo although this is without the tax rate. It can be said that the cost structure of Microsoft is a lot different compared to the cost structure of Nintendo. This can be seen especially with the profit margin of 29.3% whereas the profit margin of Nintendo is 15.4%.

Conclusion
The first analysis of the profits within the Nintendo Company showed that the profit margin grew within three years in an enormous way. This growth can continue in the future with further research and development. The comparison with two competitors, such as Microsoft and Sony has lead to the awareness, that the competitors, especially Microsoft gains much more profit than Nintendo. This is the case, because Microsoft deals with much more fields in the IT technology. The later focus on the costs gives also the cognition that the highest costs of Nintendo are the taxes. After this the advertisement expenses are holding down the profit most. In the competitors company Microsoft the costs are relatively higher than in the Nintendo Company. The difference of the profit margin of both companies shows the enormous trend. Microsoft has a profit margin of almost double than Nintendo has.

Appendix
Appendix A 2008 Nintendo: Sony: Microsoft: $2,487,213,191 (257,342,000,000) $3,570,593,238 (369,435,000,000) $17,681,000,000

Average exchange rate 2008: $1 = 103,466 2007 Nintendo: Sony: Microsoft: $1,479,353,223 (174,290,000,000) $1,072,257,353 (126,328,000,000) $14,065,000,000

Average exchange rate 2007: $1 = 117,815 2006 Nintendo: Sony: Microsoft: $845,629,507 (98,378,000,000) $1,062,568,229 (123,616,000,000) $12,599,000,000

Average exchange rate 2006: $1 = 116,337

Appendix B Selling, general and administrative expenses Advertising expenses Salaries, allowances and bonuses Provision for bonuses Depreciation (Thousand)$ %

1,139,773,000 6,82 200,807,000 6,584,000 34,050,000 370,000,000 1.2 0.04 0.2 2,21 0.05 2,20 12,72 0.000047 0.064 5,52 0.09 5,58 0,003 0,65 0,65

Research and development expenses (Note 6 B) Provision of allowance for doubtful accounts Other Total Non-operating expenses Interest expenses Sales discounts Foreign exchange losses Other Total Extraordinary loss

7,690,000 369,497,000 2,128,404,000 8,000 10,654,000 923,462,000 15,644,000 949,771,000

Loss on sales and / or disposal of noncurrent assets (Note 6 D) 511,000 Loss on valuation of investment securities Total 109,149,000 109,661,000

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 Income before income taxes Income taxes total Sales Revenue: Net Income: Profit margin: 15,39% $16,724,230,000 $2,573,426,000 4,337,757,000. 1,765,325,000. 25,94 10,56

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Appendix C Operating expenses: Cost of revenue Research and development Sales and marketing General and administrative Total operating expenses Income before income taxes Provision for income taxes Sales Revenue: Net Income: Profit margin:

(million)$ 11,598,000,000 8,164,000,000 13,039,000,000 5,127,000,000

% 19,2 13,51 21,58 8,49

37,928,000,000

62,77

23,814,000,000 6,133,000,000

39,41 10,15

$60,420,000,000 $17,681,000,000

29,26%

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Sources
Boer, P. de et al. (2008). Basics of Financial Management. Groningen: Wolters-Noordhoff. Microsoft Corporation. (2008) Annual Report 2008. Retrieved 31 April, 2010 from www.microsoft.com/msft/reports/ar08/downloads/MS_2008_AR.docx Nintendo Co.,Ltd. (2008). Annual Report 2008. Retrieved 31 April, 2010 from http://www.nintendo.co.jp/ir/en/library/annual/index.html Sony Corporation. (2008). Annual Report 2008. Retrieved 31 April, 2010 http://www.sony.net/SonyInfo/IR/financial/ar/2008/qfhh7c00000htn6x-att/SonyAR08-E.pdf from

Yearly Average Currency Exchange Rates. Retrieved 11 May, 2010 from http://www.irs.gov/ businesses/small/international/article/0,,id=206089,00.html

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