Nintendo reported a 42 percent fall in quarterly operating profit as the yen's strength outweighed robust game sales, and the Japanese video game maker forecast a bigger-than-expected 12 percent profit decline this year, pressuring its shares.

Despite the slide in quarterly profit, Nintendo has fared much better than many other consumer electronics makers. Sony, for instance, is deep in the red, hit by the yen's appreciation, slumping demand and mounting restructuring costs.

Nintendo, vying with Microsoft and Sony, has weathered the financial crisis relatively well as consumers continue to spend on video games as affordable entertainment while tightening their purse strings for big-ticket items such as cars and TVs.

Nintendo said on Thursday it expected its operating profit, a reflection of a company's core earnings strength, to fall 11.8 percent to 490 billion yen (3.3 billion pounds) for the year to March 2010, around 5 percent below a consensus for a 517.4 billion yen profit in a poll of 25 analysts by Thomson Reuters.

It would be Nintendo's first annual operating profit decline in four years.

The company expects the DS handheld player to post a 4 percent slide in unit sales this year, in its first fall since the 2004 launch, while predicting flat sales of the Wii console.

At the net level, Nintendo forecast a 7.5 percent rise in profit this financial year to a record 300 billion yen, falling short of the market consensus of a 325.7 billion yen profit.

It is true these numbers are below market expectations. But they are not at all surprising as they tend make conservative predictions initially, Ichiyoshi Investment Management chief fund manager Mitsushige Akino said.

Having said that, a period of break-neck growth now seems to be behind them, he said.

Nintendo's operating profit has jumped six times over the past three years, driven by its twin growth engine of the Wii and DS, which have clearly outsold rival machines from Sony and Microsoft.

But Sony's PlayStation 3 sold more units than the Wii in March and April in Japan, raising the possibility that the company could be losing some of its growth momentum.

FIGHT BACK

In a potential move to reinvigorate its game machine sales, Nintendo plans to launch its highly anticipated Wii Sports Report software in June.

Also, software publisher Square Enix is set to release the latest installment of its blockbuster Dragon Quest role-playing game series for the DS in July.

Nintendo's January-March operating profit was 53.93 billion yen, down from 93.18 billion yen a year earlier. Sales fell 15 percent to 302.27 billion yen.

For the full year that ended on March 31, the company posted a record operating profit of 555.26 billion yen, up 14 percent.

Nintendo machines' unique features have shielded the company from fierce price competition that is plaguing the electronics sector worldwide.

The Wii's controller, which looks like a TV remote, allows users to direct on-screen plays by swinging it like a racket or sword, while players can use a stylus to operate the DS, appealing to those who find key pads unfamiliar.

Following the earnings announcement, shares in Nintendo, creator of iconic game characters Mario and Donkey Kong, closed down 0.1 percent at 26,600 yen, erasing gains made ahead of the news, while the benchmark Nikkei average was up 4.6 percent.

The stock has lost 21 percent since the start of the year, underperforming a 6 percent gain in the Nikkei.

(Editing by Michael Watson and Joseph Radford)

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