Nintendo (7974.JP / NTDOY.US)
[January 19, 2019]
* Preview of Nintendo FY3Q2019 Earnings Release *
[1.0] Nintendo Switch
[1.1] NS Hardware
- The haunting 20M hardware shipment guidance for the Fiscal Year ending in March 2019 is finally approaching to the end as both management and market will have relatively high confidence whether it can be reached as of third quarter results being released. The shipment target now rolls over to next fiscal year.
- If Nintendo maintains giving guidance on hardware shipment for next fiscal year, it becomes a little be tricky for them. This fiscal year the hardware traction is distorted by software pipeline/schedule making business shows more seasonality compared to historical pattern. The management was plagued by exacerbated seasonality and the guidance becomes kind of a challenge rather than a low ball which Nintendo is more familiar with. Nintendo probably will be reluctant to provide “aggressive” guidance but considering the signaling effect of guidance, Nintendo is unlikely to give a down or even a flat guidance. Best estimate for next guidance (FY2020) might be slight growth on last guidance(FY2019) and FY2020 guidance is the best estimate of hardware shipment.
- If Nintendo stops giving guidance on hardware shipment, the best estimate for FY2020 hardware shipment is the actual result of FY2019.
- Nintendo is likely to show how Nintendo Switch tracks / surpasses the pattern of Wii installed base again in their presentation material.
- Important line item and metric to observe are inventory level and days sales of inventory. Based on what we have know, both line item and metric should drop significantly but maintain at certain level to support the 20M guidance (this also depends on how many Nintendo Switch sales channel can absorb).
- According to what we have known about the software lineup, it seems the seasonality will be mitigated this year if the lineup is carefully scheduled and successfully executed.
- WSJ reported that Nintendo might release a “new version” of Nintendo Switch as soon as this summer. The term “new version” is very interesting because it has implication on product life-cycle, product trajectory and long-term ecosystem. New version might be a revision (Switch 2.0, tech improvement), upgrade (Switch +, tech upgrade), variation (Switch Lite, taking out features)… Timing is another issue, as the Nintendo Switch is only in year 3 of its life-cycle, it’s more likely Nintendo is taking a installed base perspective on this new version to grow the installed base rather than product trajectory / ecosystem perspective on strategic/product roadmap. Very understandable Nintendo wants to make the cycle of Nintendo Switch longer than typical console. The success of Nintendo Switch gives the company some time to think deeper so short-to-intermediate term their focus in public will be on lengthening current cycle.
- There are factors like software pipeline from 1st-Party, 3rd-Party and Nindie, household penetration (second Nintendo Switch) and mobility / social aspect that help Nintendo Switch keep some “momentum” in Year 3. That said, considering the competition, difference in product and ecosystem, and product life-cycle, Nintendo will keep pushing the hardware for the next few years. Tactics include but not limit to strong and steady software pipeline, better discovery and gamer acquisition for all 3rd Party on the platform, attractive bundle, thoughtful marketing/adverting, new version, and price discount (it’s reported that Nintendo’s policy for Nintendo Switch is not to be sold at loss. So bundle is more likely than price cut but it’s subject to the reduction of production cost). Sometimes two-sided platform with cross-side network effect working is thought of a conceptual flywheel. However, once the platform is designed with a particular business model and competes with other platforms in reality, platform holder will consistently look at both sides. Some might focus on the balance between supply side and demand side. What is dynamics for a platform where its business model is selling hardware to distribute digital content? For this business, installed base expansion is one question and how the keep the installed base engaged (manage the churn/keep retention) is another.
[1.2] NS Software
- Strong performance of Super Smash Bros. Ultimate, Pokemon Let’s Go Pikachu / Eevee and Super Mario Party as expected.
- Nintendo might be showing some data about the synergy between Pokemon Let’s Go and Pokemon Go.
- These three holiday season titles would help boost the Nintendo Switch overall tie-ratio (defined as software shipment in the quarter divided by LTD cumulative hardware shipment at the of quarter) in last quarter.
- Nintendo might show the sales of Nintendo Switch software is the fastest in its history. Maybe the company will revise software shipment guidance upward.
- See if there’s update on software pipeline and schedule. The current pipeline looks decent. New Animal Crossing and New Pokemon (Gen 8) are clearly highlights of 2019. They are both considered as system sellers.
- The adoption of Nintendo Labo is relatively weak but it still shows the potential of UGC and education value. Collaboration with education institutions is now Nintendo Labo’s go-to-market strategy.
- Unlikely but it would be great if Nintendo talk about the Nintendo eShop status (not just release digital sales related numbers) and how to further improve the discoverability / visibility / curation for developers on the platform.
- Finally the system is about to fully support Traditional and Simplified Chinese. More color on Mainland China business?
[1.3] NS Online
- Might further disclose some statistics (not sure whether Nintendo will release adoption data). In addition, Nintendo might mention that Super Smash Bros. Ultimate help fuel the adoption.
- See what kind of information about Dragalia Lost Nintendo releases.
- Mario Kart Tour release date might be announced. (Can this title leverage Niantic’s technology?)
- Fire Emblem Heroes is likely to sustain the stable performance.
- Super Mario Run and Animal Crossing Pocket Camp turns out to be more like marketing tools for customer awareness / engagement / reactivation.
- Probably reiterate 2-3 titles each fiscal year and partnership potential.
- The reporting style might indicate the potential of Smart-Device business.
[3.0] Nintendo 3DS
- Nintendo 3DS is in late stage of product cycle. As the gaming console is long term business, Nintendo is keep “supporting” it for a while. Contribution from Nintendo 3DS is will be less and less meaningful. While the price, form factors, game library seem to be good for onboarding younger audience, what really matters is still consumer behavior (in this case it’s probably those who potentially buy 3DS for the audience).
- Nintendo probably adopts wait-and-see strategy for this product to phase out while release some 1st Party games for show the “support.” Would be surprised if there is successor.
- Large installed base with rich library: might be suitable to try some monetization methods.
[4.0] Minor Stuffs
- What’s the result of this program with Scrum Venture? Any plan to keep doing this or collaborate with other partners?
[4.2] Relationship with Niantic
- Any plan to further leverage the relationship and their technology?
The other facet of Niantic’s business is the Real World Platform, which the company teased in the middle of last year.
Essentially, the Real World Platform will enable software developers to take advantage of the technology Niantic created for its own games. Developers will be able to use Niantic’s augmented reality tech, as well as the company’s secret sauce for multiplayer gaming and for connecting gameplay to real-world locations.
Finally, Hanke says that Nintendo and the Pokémon Company — the Nintendo joint venture that owns the trademark — have been very pleased with both “Pokémon Go” and “Pokémon: Let’s Go,” and are looking for more “synergies” between the game and the core franchise. That’s good news for Niantic, too, Hanke says.
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~ Corporate Events ~
- January 31 (Thu), 2019: FY3Q2019 Earnings Release
- February 1 (Fri), 2019: FY3Q2019 Business Briefing (TBA)