Nintendo sold tons of hardware combined (don't look only on wii u), and tons of first party games which have higher margins, AND they don't spend much money on marketing, so where is all the money you made?? they should have 2 billion dollars more in their cash!
Just look at the holiday season numbers, there was one week for example that they sold 1.8 million devices, combine, in one week!
where is all that money??
If you look at their financials you can see that cash is coming into the company. The company is forecasting cash to increase 46billion yen by the end of the fiscal year. There are a couple reasons they are losing money on an income level and why although they are selling a lot of units they aren't raking in profits.
1. Depreciation. They are in the middle of 2 new console launches which are capital investments. These get depricatied over some period of time. So the cash is already spent but it will affect income for a number of years in smaller and smaller amounts. I'm not sure what their depreciation cyles are but considering console lifes are about 7 years my guess is some sort of declining balance over 7-10 years. So both 3DS and WiiU are impacting this. This can be seen easily in comparing some numbers. This year 9 months ending this quarter was 8.1 billion yen in depreciation versus 6.9 billion a year ago. Looking at 3rd quarter 2008 at the height of DS/Wii it was only 5.5 billion. So a difference of almost 3 billion yen for something that has ZERO impact on cash which is what really matters.
2. Gross Margins. In 2008 gross margins were 42%. Now they are 23%. The price cut on the 3DS impacts this as does the decision to sell Wii U at a small loss. Nintendo has stated 3DS is back to profitable after only a few months. If they continue to get cost out margins will increase. Wii U on the other hand needs to get volume which should drive its cost down as well. If they can do that without lowering the price Gross margins will go up. If they have to drop the price then they may stay low and result in less profit.
3. R&D - in 2008 R&D was 27 million yen in the same period. Last year was 38 million and this 39 million. Developing new consoles is expensive and the years around launch are going to naturally have higher costs. That should cool down some over the next 2 years.
So even considering the doom and gloom Nintendo is bringing in free cash flow and should see that increase. 3DS is poised for a great year if they can get it moving in US/Europe. It's a beast in Japan. The software coming will help no doubt. Wii U hopefully can pick up steam once it gets some software because it's pretty abysmal.
One item that I think is hurting Nintendo right now can also be seen in their financial. In 2008 advertising was 100 billion yen in the 9 month period. Last year was 62.8 billion and this year is 49 billion. It seems crazy to me that they are spending less during a launch than they did at the height of Wii/DS. What little advertising they have done has been poorly done as well. It's not surprising then that neither system is doing well in the US which consumes heavily based on advertising. I really hope they are hitting reset on the marketing.