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

Preview of Nintendo FY3Q19 Earnings Release

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).

dsi

  • 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.

tieratio

  • 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.
  • 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.

[2.0] Smart-Device

  • 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

[4.1] Nintendo Switch + Tech Program 

  • 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?

An article at Business Insider on January 16, 2019:

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.

~ My Related Posts ~

~ Corporate Events ~

  • January 31 (Thu), 2019: FY3Q2019 Earnings Release
  • February 1 (Fri), 2019: FY3Q2019 Business Briefing (TBA)

 

Kyoto Day 1 – Dec. 6, 2018

The second day I took a train from Kobe to Kyoto.

After checking in Hotel The Celestine Kyoto Gion, I had late lunch at Mametora Gion which specializes in small dishes cuisines. The environment there was quite comfortable in terms of distance between tables and interior styling & lighting. As it is supposedly to be, the presentation of dishes was great and taste was ordinary ( for me, the taste of this kind of cuisine is never the highlight in the dining experience).

The restaurant of my first dinner in Kyoto was a local store recommended by the concierge of hotel. The food was edible but not delicate as its clientele base is probably the neighborhood round southern area of Kenninji. The area might be one of the most densely populated of Michilin-starred Japanese restaurants in the world but ordinary restaurants are still viable since there’s demand for casual dinning to be met.

As usual, I had gyoza at Senmonten (泉門天) as my main late-night snack in Kyoto. I also had ramen at Tenkaippin as supplementary but it turned out that I’m not a fan of their style.

The release of Super Smash Bros. Ultimate / Special (JP) is the highlight of this trip. As expected nothing special happened on Hanamikoji Dori in Gion.

I was so bored in the hotel that I watched live streaming gameplay of SSBU on Youtube. While I think  gaming is one of my tracking industry, this was my first time to watch live streaming gameplay. To my surprise, it’s quite satisfying and healing to watch the gameplay when the host is shown as anime-style character with cute voice in tandem with facial / body expression.

I will further explore the economics on gaming, eSport and video / music streaming after going back to Taiwan.

Kobe Day 1 – Dec. 5, 2018

The touch screen of my iPhone went dead just when I was checking in my luggage.

So no Google map and photo this trip…

I had beef steak at 麤皮(aragawa) and shabu-shabu at すきやきしゃぶしゃぶ 神戸牛石田. Both were good. Price at 麤皮 was relatively high probably because of special beef used (三田牛).

I stay in Hotel La Suite Kobe Harborland. I might write a review on this hotel without my photo later. Only by telling from the hotel name, you can imagine this is a Japanese-Western style hotel with spacious rooms that probably have harbor view.

One thing about not having cellphone is that you probably acquire information from other media (in my case: I’m about to finish reading a book)