Nintendo (7974.JP / NTDOY.US)
[January 29, 2019]
Note: Interview, Metriod Prime 4 & Exercise
[1.0] The Sankei News Interview
Nintendo president Shuntaro Furukawa had an interview with The Sankei News and it was released on January 25, 2019. Furukawa talked about strong performance during holiday season, pricing of Nintendo Switch, product development of Nintendo’s home console, the 20M Nintendo Switch shipment target, smart device business, and talent acquisition when the overall economy is doing well. We have already known most of stuffs Furukawa talked about so I only comment on those that I think have implications.
[1.1] Nintendo Switch
[1.1.1] Reiteration of 20M Nintendo Switch Shipment Guidance
Since it’s very close to the earnings release, we expect Nintendo will maintain the guidance number however the actual shipment was in the last quarter.
[1.1.2] Haven’t Considered Successor of Nintendo Switch so far
The keyword here is the “successor” (後継機種). Since Nintendo Switch is performing, Nintendo will expect the console has relatively long product life cycle. Therefore, it’s too early for Nintendo to either have clear idea or discuss the idea publicly on next generation home console when Nintendo Switch just starts its third year. That said, I still believe it’s very beneficial for Nintendo to have a product roadmap for the platform. Another point is that the “successor” is different from model revision / upgrade / variation. So the possibility of a different Nintendo Switch model for this year is still can not be ruled out.
[1.1.3] Haven’t Considered Price Cut for Nintendo Switch so far
Since Nintendo Switch is on track or probably meets Nintendo’s expectation, there’s no reason for Nintendo to consider a price cut in the first two years of Nintendo Switch’s product life cycle. However, Nintendo Switch did have bundles which effectively offered the hardware at a discount. We’re not sure whether Nintendo will adopt a direct price cut, do more bundles, or just do both in this holiday season.
Nintendo mentioned before that it’s would not sell Nintendo Switch below cost so how deep the price could be cut depends the cost reduction of the hardware.
[2.0] Restart of Metriod Prime 4 Development
Nintendo released a development update on Metriod Prime 4 on January 25, 2019 announcing that the current development was halted and that Nintendo decides to restart the development from the very beginning under Retro Studio.
The public feedback is generally positive for Nintendo’s transparency.
For restarting the a game development under different developer, I would expect anything capitalized in the original development should be recorded as a loss. So we might see an extraordinary loss on the income statement next quarter (or this quarter depending on the timing they reflect the economic reality of their business decision). The extraordinary loss should have less impact on the cashflow. Previous research and development expenses are unlikely to generate future benefit for the new development. Most of previous previous R&D on the project was wasted but it also depends on how well Nintendo can keep experience from those R&D. Delayed software launch means the contribution from the franchise is pushed back. Since Metriod is not as big as other system sellers, the overall financial impact is limited.
The change of leadership and strong performance of Nintendo Switch create rooms for more decisions like this.
[3.0] Exercise on Japan Shipment Estimation
If the Nintendo Switch in Japan follows previous patterns that cumulative shipment is around 7.5% higher than the cumulative sell-through, then Japan shipment of Nintendo Switch in calendar year 4Q 2018 would be around 1.84M. The Japan share of global shipment in the last quarter should drop significantly if the result of last quarter shows the possibility for Nintendo to achieve their guidance.
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