Review of Nintendo FY3Q19 Earnings Release

Nintendo (7974.JP / NTDOY.US)

[January 31, 2019]

* Review of Nintendo FY3Q2019 Earnings Release *

Bath & Manage

[1.0] Nintendo Switch (NS)

[1.1] NS Hardware

Nintendo managed to ship 9.41M NS in the last quarter (FY3Q19/CY4Q18). The global cumulative shipment of the console comes to 32.27M as of CY4Q18. Nintendo also revises down the forecast of NS from 20M to 17M for the fiscal year ending March 2019.  For reference, the pattern of NS shipment during this FY is as follow: 1.88M / 3.19M / 9.41M for FY 1Q19 / 2Q19 / 3Q19. Nintendo has shipped around 14.5M NS during the first three quarters which makes the new target of 2.5M in FY4Q19 quite reasonable and achievable. The guidance revision can be partially attributed to poor software lineup / schedule in the first two quarters.

The implication from forecast revision and Nintendo’s communication:

  • The revision was inevitable by the end of 2018 since FY4Q19 is unlikely to make up the shortfall from holiday season and the first two quarters in the original guidance.
  • If Nintendo wants to manage the market expectation, the new forecast should be conservative as no one at the company wants to revise down again in March or surprise the market in April.
  • The updated guidance will be the new anchor for next year guidance and expectation.
  • The reiterations of hardware target from Nintendo president Furukawa in the last few interviews might lower his credibility.

[1.1.1] NS JP Shipment Exercise 

I did an exercise on NS JP shipment estimation based on the sell-through numbers and historical patters. I expected the JP shipment was around 1.84M based on cumulative shipment being 7.5% higher than sell-through. It turns out that Nintendo shipped around 2.2M NS which makes the gap between cumulative shipment and sell-through widen to 13%. I can feel that Nintendo tried to push the NS shipment in its home country.

act shipment.png

[1.2] NS Software

As expected, Super Smash Bros. Ultimate, Pokemon Let’s Go Pikachu / Eevee and New Super Mario Bros. U Deluxe did well in the last quarter and Nintendo revised up the software shipment from 100M to 110M.

swsales

Thanks to system sellers in holiday season, the overall NS tie-ratio (defined as software shipment during the quarter divided by LTD hardware shipment by the end of the quarter) is back to trend. Given current software schedule, I expect the overall tie-ratio for FY4Q19 will be slightly higher than 1.1x. Lets’ see if Nintendo can schedule Animal Crossing to launch in summer to make the ratio less seasonal even though evergreen titles form the foundation of software sales.

tier

[1.2.1] Digital Sales

Digital sales is performing as well. Digital sales number including Nintendo Switch Online in first three quarters of FY2019 jumped by 38.7% compared to the whole year of FY2018. The proportion of digital sales has increased to 21.8%.

digitalsales

[1.3] Other Metrics

Both inventory and days sales of inventory (DSI) were both reduced to healthy level.

dsi_new.png

[2.0] Nintendo 3DS

As expected, Nintendo said it will continue to leverage the installed base and rich  library of Nintendo 3DS. That said, the contribution from the handheld console will be less and less significant.

dedicatedplatform[3.0] Smart Device

The performance of Smart Device was not impressive as the company is still experimenting in this space.

smart

(スマホゲームは)1回売って終わりではなく、お客さまとの関係を構築していくサービス運営型のビジネスだ。ゲーム専用機でやっていることと違うので、経験を積んでいる最中。さまざまなジャンルのゲームをお届けしたいと思っている。収益の柱を支える一つにしていきたい 

【直球緩球】スイッチ目標は維持 任天堂・古川俊太郎社長 – 産経新聞

That said, if they keep their mediocre reporting on smart device performance and communicate their mobile app focus like below, this business segment is not going anywhere in the foreseeable. Targeting by number of new apps per year is another sign that the company still has no direction in app gaming space. Maybe Nintendo has some update in the business briefing next day.

As we endeavor to develop future planned applications, we will also focus on continued service operations for applications that have already been released so that consumers can enjoy playing them for a long time.

[3.1] Mario Kart Tour Postponed to this Summer

In order to improve quality of the application and expand the content offerings after launch, the release date has been moved to summer 2019.

At least it’s a delay rather than a re-development like Metriod Prime 4.

[3.2] Dragalia Lost

If you see the advertisement after two month since launch like below, it’s probably not a good sign.

Still waiting for more details to be disclosed in the business briefing. However, we can get some colors from CyberAgent’s presentation.

drag

Power laws might also apply to mobile gaming so whether the uptick in January probably driven by cac depends on the fundamentals of gameplay and monetization.

[4.0] Overall Impression from this Earnings Release

Delays in Metriod Prime 4 and Mario Kart Tour, downward revision of Nintendo Switch shipment forecast and the conservative financial forecast make me feel Nintendo is enduring a transition period where it wants to bath and manage the expectation.

More color after business briefing.

~ My Relate Posts ~

~ Corporate Event ~

  • February 1, 2019: Business briefing

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