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Earnings Preview: Nintendo’s Last Decade & Why Its Bright Future Starts Now

 

It’s been a challenging few years for Nintendo, but that all changes today!

 

Well, technically tomorrow, when Nintendo Co Ltd $NTDOY is scheduled to shares its final quarterly earnings of 2016, along with its full year results ending March 30th. It’s the first earnings release that covers all the new ventures Nintendo is presently embarking upon, in particular its mobile initiatives and its latest console product, the Switch.

 

Exactly one year ago, I first wrote about Nintendo’s financial position. It wasn’t all doom and gloom, but it certainly wasn’t anywhere near ideal for gaming’s oldest and most recognizable company. I think that’s about to change, and I’ll tell you why.

 

Note that these are not adjusted for inflation, but rather are reported figures.

 

First, let’s set up the situation leading into tomorrow’s important earnings release. The couple of charts above show how Nintendo’s revenue and net income (i.e. profit) have fared during the last decade or so going back to 2006. Note that starting with this quarter, 2017Q4, these are estimates based on analyst consensus since these obviously haven’t been reported yet.

 

Technical jargon alert! These analyst expectations for this most recent quarter are: Revenues around ¥158 billion (~ $1.43 billion), with a Net Loss of ¥13.5 billion ($122 million).

 

Back to regular jargon? Both of these results would be nice improvements since the same time last year.

 

Now looking big-picture, the time frame here spans two “full” console cycles for Nintendo, the Wii in 2007 and Wii U in 2012, then of course the early days of the Switch which only released last month. There were also three handheld iterations during these years, if you count the tail end of the Nintendo DS that had versions release during 2006-2009, then Nintendo 3DS in 2011 and finally Nintendo 2DS in 2013.

 

You’ll notice the results recently have been somewhat soft since early 2011, even holiday sales had been trending down in recent years (these occur in Nintendo’s 3rd quarter). This can be mostly attributed to lackluster Wii U sales after its release in 2012, since to date these total only 13.56 million units which subsequently leads to lower software sales despite the console having some really quality games on it. Compare this to the crazy Wii sales at 101.63 million or even earlier consoles like GameCube at 21.74 million, and you’ll get a sense for how Nintendo’s console hardware business has been dragging it down recently. Luckily its handheld business has been propping up the company’s overall bottom line.

 

 

 

But alas! The oldest gaming company can in fact learn new tricks, and here are a handful of reasons why I’m mostly upbeat from this earnings release going:

 

  • Mobile software. (This is big.)
  • Switch sales momentum. (Even bigger!)
  • Old franchises, new games: Zelda, Mario, Pokémon, (potentially Metroid, Kirby, Star Fox and the list goes on.)

 

Its new back of tricks started last year with its foray into mobile games, starting with Miitomo in March 2016 though really reaching peak phenomenon with Pokémon GO last July. It has since released Super Mario Run and Fire Emblem Heroes, with plans for an Animal Crossing game slated for this year. When it comes to financial impact, Nintendo admitted that Super Mario Run came in below expectations but I believe that’s a byproduct of the company testing different pricing models for its mobile games. Once it settles into the mobile space from a monetization standpoint, I expect it to be quite lucrative and have an impact right away on its results this year.

 

Nintendo’s toe-dipping into mobile is all well and good, but we know it for being a company that makes great games for its own cool hardware. Think about the classics: the Nintendo Entertainment System, the Super NES, the Nintendo 64.. You get the picture. Though it’s been a while since these came out, Nintendo’s success has often hinged on it leveraging great hardware to create memorable experiences for all ages, and this is where the Switch comes in. I mentioned in a recent post the early sales success the hybrid console is having, so I won’t delve too much into the specifics, but suffice to say that I am confident Nintendo will hit us with some very positive figures and guidance when its earnings report is revealed tomorrow.

 

What would constitute “very positive”? According to Bloomberg, analysts on average are expecting that around 10 million Switch consoles will be shipped during April 2017 to March 2018. Personally, my expectation is in-line with this and I’ll even go as far to say that my personal prediction is 11 million will ship, bolstered by upcoming games like Mario Kart 8 Deluxe and Splatoon 2 but most importantly Super Mario Odyssey this holiday. Combine this with the likely 2 million units that shipped during March, and that number through this time next year could very well be 12-13 million. Which is essentially what the Wii U has sold during the past 5 years combined. So, increased sales in a shorter window equals a financial boon.

 

 

Still, platforms are nothing without software. And I remain fully confident in Nintendo’s first-party software line-up, which features some of the most well-established brands and characters in all of gaming. Just this year alone we’ve already seen a brand new Zelda game in The Legend of Zelda: Breath of the Wild and we’ll see a mainline Mario game in Super Mario Odyssey before the holidays. But going further, Nintendo has brands like Pokémon, Metroid, Kirby, Star Fox and more that are almost certain to be featured on Switch sooner rather than later, with some even expecting a Pokémon title to be brought to the platform this year.

 

This type of software portfolio is unparalleled in the games industry. Not to mention its development teams are super talented. So if Nintendo plays its cards right with quality new games from its oldest franchises, and gets them onto the Switch most importantly, the upside is significant. Software sells hardware. Plain and simple.

 

Now, don’t get me wrong, questions remain with the company. Especially when it comes to these areas:

 

  • Third party software support. This means companies other than Nintendo’s studios making games for its platforms.
  • Its handling of its back catalog. Right now, Nintendo’s sales platform for older games called Virtual Console is not available on the Switch.
  • The online subscription service that it’s developing for the Switch for release this year. This is an integral part of “modernizing” its offerings.
  • Plus the firm’s baffling decisions surrounding its novelty “mini” platforms the NES Classic and Famicom Mini, the former of which being discontinued for some reason and even when it was available, there were supply issues.

 

But it’s nothing that Nintendo hasn’t faced before. Shoot, it’s been around over a hundred years! In the context of its recent history, if you take this quarter and upcoming year, I think there is more to be optimistic about than the flip side. We’ll hear more about where its business is headed tomorrow, but I anticipate it will be pretty good news.

 

Are you as bullish on Nintendo as I am? Or taking a wait and see approach? Have you bought any of Nintendo’s products recently? If so, how do you like them? Feel free to leave a comment or shoot me a note on Twitter, where I often post daily about the games industry!

 

Sources: Nintendo Co Ltd, Bloomberg, NASDAQ, Tokyo Stock Exchange, Geek Insider

 

-Dom

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