It’s time for some Nintendo!
The latest of the big three console manufacturers to report this quarter, behind Microsoft and Sony, shared its fiscal 2023 second quarter results out of Japan earlier today.
I’d call it mostly upbeat, as both sales and operating profit experienced gains, yet it’s also dashed with cautionary signals and statistics. There’s upside, partially due to the yen’s continued weakness, while headwinds on the supply side and an aging life cycle show signs of a console business slowdown.
Headlines include how Switch passed yet another sales milestone this quarter while Splatoon 3 made quite the splash for consumers after its release in September. Especially in its local Japanese market.
On the hardware side, Nintendo Switch lifetime sales reached 114.33 million after the company shipped 3.22 in the three months ending September. It’s only the third home console to pass the 114 million mark. Still, Nintendo is somewhat uneasy about this portion of its business going forward, reducing in its annual unit sales forecast.
Splatoon 3 was the headliner for new software, shipping a whopping 7.9 million units in less than a month on market. That’s a record-setting launch for the franchise by a wide margin, plus the second fastest start of any Switch game this calendar year behind only January’s Pokémon Legends: Arceus.
Looking briefly at financial performance during the first six months of the current fiscal year, Nintendo’s net sales and operating profit rose 5% and under half a percent, respectively. While hardware unit sales are down 19% for the year so far, software sales are up almost 2% which shows the resilience of Switch buyers and reflects the ongoing appeal of Nintendo’s quality titles. Even amidst economic slowdowns and inflationary pressure.
Thus, executives decided to increase their forward-looking forecast for both net sales and profit metrics other than operating income, the latter of which kept constant. As the Switch pushes into the late part of its life cycle, Nintendo remains upbeat on consumers buying content for it, especially given the upcoming calendar including a sizeable impact from Pokémon launches this holiday season.
“Although software sales accounted for a larger percentage of overall sales for our dedicated video game platform business, and first-party software accounted for a larger percentage of overall software sales, the gross profit margin remained at the same level as the same period last fiscal year.” the company wrote in its slides. “This was due to the addition of Nintendo Switch OLED Model to the hardware lineup with its lower profit margin compared to other models, and the increase in component costs due to factors such as the semiconductor shortage.”
Check below the folder for a full dive into Nintendo’s business during Q2, including company guidance and my personal predictions for the annual period ending March 2023.
Starting with Nintendo’s overall performance, net sales for the six months bumped up 5% to roughly $4.91 billion. Focusing strictly on the quarter ending September, this was up 16% to $2.61 billion.
As has been the case recently for Japanese companies, there’s currently an outsized impact from currency fluctuations which hits those that operate globally even more than the average. Currently, around 72% of Nintendo’s business is outside of Japan. Because of this, the company said the impact of exchange rate changes on first half net sales was upwards of around $480 million. Backing that out, revenue for this time might even be down 5%.
Personally, I tend to stick with the gross number because currency impact is something that’s faced by all global companies. It’s still good to understand how much it’s affecting a company’s business when a given local currency is dropping as precipitously as the yen.
Alright, enough of this currency exchange rate lesson. Shifting now towards operating profit, this particular metric rose slightly in the first half to around $1.65 billion. Strictly for the second quarter alone, it amounted to $887 million which grew more than 18%.
Essentially this shows how both net sales and operating profit increased by double-digits during Nintendo’s second fiscal quarter.
What kind of product category mix was underlying this movement? Well, for Q2, software amounted to almost 60% of total sales compared to 55% this time last year. It follows that hardware sales dipped to 40%, down from 45%. This reflects the shift away from Switch console contribution as the cycle matures, plus the challenges of production the manufacturer and its suppliers have faced lately.
“While hardware unit sales declined by volume year-on-year due in part to the semiconductor shortage, overall hardware sales increased mainly due to the depreciation of the yen.” the company’s slides noted. “Looking at our mobile and IP related business, royalty income remained stable, but income from smart-device content declined.”
To better understand the quarterly movement in sales and profitability within a broader context, you’ll see the first two charts below illustrating this movement over time and the next two are annual figures. It was the second best quarterly output in the last decade plus. Twelve-month trailing numbers are moving back in a positive direction. Nintendo’s business is proving to be resilient, notably due to high quality game releases plus the aforementioned currency movement, plus hardware is still selling when it’s hitting retail. Not to mention, people that bought Switches during the pandemic still seem to be spending on games.
How do Nintendo’s latest numbers stack up to the biggest industry peers and their gaming businesses? While Tencent doesn’t report until later in the month, its latest annual revenue was $24 billion. Sony’s gaming business generated $20 billion, while Microsoft’s Xbox division topped $16 billion. Nintendo is up next, with its current annual sales figure at almost $13 billion. However, Nintendo’s profitability is vastly superior to PlayStation; the former has generated more than twice as much operating profit in the last 12 months, $4.43 billion compared to under $2 billion. PlayStation’s investment in the new PlayStation 5 line of consoles, the Bungie acquisition and ramping developments in software and virtual reality are chomping a serious chunk of its bottom line.
Nintendo’s hardware business is clearly slowing in terms of share and shipments, however there are a number of bright spots showing that Switch’s life cycle is far from complete. In fact, it’s going to hit major milestones in the near future.
During the first six months of fiscal 2023, Nintendo shipped 6.68 million Switch units. This is 19% lower than the same period last year, when it was 8.28 million. The drop can be attributed to the base model, which produced 2.23 million units against last year’s 6.4 million. Obviously the OLED model saw tremendous growth considering it launched in October 2021. As it replaces the base version, it now makes up over half of Switch’s total unit sales.
The lifetime unit sales of 114.33 million is up 21.46 million since September of last year, when it totaled 92.87 million. Switch has maintained its respective spot as the third best-selling home and portable console of all time. The popular hybrid is closing in on Sony’s PlayStation 4, the second best-selling home console in history, which ended production recently at just over 117 million. Even further, the 118.69 million of Game Boy and Game Boy Color is also in sight.
By the end of Nintendo’s financial year in March 2023, if not the holiday quarter, the Switch will occupy the second spot on the all-time list for both home and handheld hardware. What a run! And it’s not nearly done.
All of these are based on the number of units shipped to retailers by Nintendo. Additionally, the company shared some insight into how it’s selling-thru to consumers. Compared to the July to September time frame last year, Switch is selling-thru at the same rate. From what I can see on Nintendo’s slides, sell-through last year was roughly 3.4 million units of Switch in the quarter and just slightly less this time around. Even though shipments declined by roughly 15% this Q2.
This was attributed to demand being stable, and the introduction of Splatoon 3 alongside its more ongoing titles that still attract interest. That second part especially is the driver of Nintendo’s ongoing attractiveness to buyers, and investors, plus its financial performance. Consistent demand for its hardware products bolstered by key exclusives, especially as the technology gap with modern consoles continues to widen.
Speaking of games, Nintendo Switch software unit sales rose a bit in the six month period, moving up 1.6% to 95.41 million. For the quarter ending September alone, it was exactly 54 million. Compare that to 48.6 million in the same 3 months last year and this reiterates what makes the company so consistent.
On the fiscal year so far, Switch has seen 15 titles ship a million copies or more. Eleven of these so-called “million-sellers” are published by Nintendo itself while the remainder are via external partners. While this is down from 18 in the same period last year, it’s still a healthy amount of games hitting this coveted milestone.
Unit sales for Switch games lifetime have now crossed the massive 900 million milestone. To be exact, 917.59 million games have shipped for the console. That figure was at 681 million this time last year, meaning over 236 million games have sold in the past year. It’s hard to put these numbers in perspective, other than to say that’s a heck of a lot. While it won’t quite hit 1 billion this fiscal year, it will certainly eclipse that the following year.
In the new release realm, Splatoon 3 blasted its way onto the market in September with that 7.9 million copies sold number. That includes 5 million from Japan alone! To help put this in perspective, here’s how its predecessors started during their first respective quarters: Splatoon 2 sold-in 3.61 million in 2017 while 2015’s original Splatoon debuted at 1.62 million.
First month sales of Splatoon 3 are already more than halfway to the 13.3 million lifetime figure of Splatoon 2! It’s already among the Top 20 best-selling titles published by Nintendo on Switch to date, coming in at #18. It’s truly become one of Nintendo’s flagship entries, and the biggest commercial success of its new IP this generation.
The other new title showcased in Nintendo’s earnings was Xenoblade Chronicles 3. Since its launch in late July, it’s accumulated 1.72 million in units sales. While that might not sound like a lot in the context of other Switch games, this is an exceptional result for the Xeno universe. Back in 2017, its predecessor Xenoblade Chronicles 2 started with 1.31 million and was the top-selling title ever for developer Monolith Soft at the time. Now, Xenoblade Chronicles 3 has captured that crown.
In other record-breaking news, Kirby and the Forgotten Land sold-in an additional 2.61 million units during Q2, making its lifetime total 5.27 million. This is substantial because it’s now the best-selling mainline Kirby game of all time, outpacing the 3.98 million of 2021’s Kirby Star Allies. Keep in mind, this is a 30-year old franchise in collaboration between Nintendo and HAL Laboratory. What a fantastic success story!
Elsewhere, Nintendo Switch Sports is now the 20th best-selling Nintendo-published title on Switch, reaching 6.15 million units. Mario Strikers: Battle League passed the 2-million mark, settling at 2.17 million. Then there’s more impressive milestones from Mario Kart 8 and Animal Crossing: New Horizons, which seem to stand out every time I write an article on Nintendo. Mario Kart 8 zipped past the 48 million mark, somehow selling 1.59 million in the quarter to reach 48.41 million lifetime. Animal Crossing: New Horizons is the latest in the 40 million club, achieving 40.17 million to date.
This is where I like to provide updates on subscription numbers for Nintendo Switch Online or any sort of engagement statistics from the company. And now I can! Nintendo’s corporate briefing, updated a day after its earnings report, said that Nintendo Switch Online now has 36 million members. Compare that to 32 million in September 2021. Also, the company noted that the (frankly made up) metric of “Annual Playing Users” rose to 106 million. It was 104 million last quarter.
Considering the macro environment right now and pressure on consumers from areas like inflation and the appeal of other entertainment verticals, Nintendo’s Q2 performance was mostly promising. Especially when looking at the quarter on its own, rather than the six months, which revealed double-digit gains for important financial metrics. As Switch approaches its sixth birthday in the midst of various economic challenges, the console and its games still hold mass market appeal.
Alongside, Nintendo provided updated guidance for the remaining six months of its fiscal year.
The company now expects to generated 3% more, or upwards of $12.3 billion, in annual net sales. This would be a modest 3% decline compared to the prior year. It also maintained its operating profit target of $3.73 billion, indicating a 16% decline.
“While there is a gradual improvement in semiconductor and other component supplies and a recovery trend in hardware manufacturing for Nintendo Switch, taking into consideration production and sales performances thus far, we have modified the Nintendo Switch hardware sales units forecast for the fiscal year,” said the company’s slides. “By continually working to front-load production and selecting appropriate transportation methods in preparation for the holiday season, we will work to deliver as many Nintendo Switch systems as possible to consumers around the world.”
Thus, Nintendo now expects to ship 19 million Switch hardware units in the year ending March 2023. That’s down from 21 million it expected last quarter. For reference, it shipped 23 million in the prior fiscal year. Based on the 6.68 million already on market in the six months ending September, that leaves 12.32 million during the back half. Most of that will have to come during the holiday period.
My forecast last quarter saw 20 million on the lower end. Based on where supply has been and Nintendo’s conservative tilt, I’m formally pulling down to a range of 19.5 million to 20 million.
And no, I don’t expect its price to increase.
The company’s estimate for annual software unit sales remained the same at 210 million, which would be down from 235 million in fiscal 2022. As I wrote last quarter, I’m a bit skeptical it can reach this mark. Especially now that The Legend of Zelda: Tears of the Kingdom has a May release.
Mario + Rabbids: Sparks of Hope and Bayonetta 3 launched a couple weeks back, though both remain more niche than many of their counterparts or mainline entries. The real drivers will be, of course, Pokémon Scarlet and Pokémon Violet. The franchise seems immune to over-saturation and sells big on a consistent basis. I’m expecting a grand entrance for these, with a potentially record-setting start. Otherwise, Nintendo’s slate in the coming months is light. Even the Super Mario Bros. Movie isn’t out until April!
The last item I’d like to mention is Nintendo’s announcement of entering into a joint venture with long-time partner DeNA Co. Ltd. Both companies have collaborated on the technical side of Nintendo’s account system along with mobile offerings since 2015, and this latest venture will even be a Nintendo subsidiary due to its size and capital structure.
“Based on the expertise accumulated over the seven plus years and the experience of co-developing
multiple services based on Nintendo Account, Nintendo and DeNA will advance their partnership and
establish a joint venture company.” said the company’s announcement. “With the objective to strengthen the digitalization of Nintendo’s business, the joint venture company will research and develop, as well as create value-added services to further reinforce Nintendo’s relationship with consumers.”
I welcome this sort of team-up, and really anything that can bring Nintendo’s digital capabilities and online services closer to its competitors.
With that, this concludes my third big recap of the last couple weeks. What stood out to you with Nintendo’s latest announcement? Do you think it can meet or exceed its latest targets? Are you planning to buy a Switch or any games in the coming months? Drop a line her or on Twitter, I’m always down for a discussion!
Feel free to hop back over to my earnings calendar to stay current, as there’s plenty of action still to come this season. Thanks y’all for visiting and I hope everyone is doing well!
Note: Comparisons are year-over-year unless otherwise mentioned. Exchange rate is based on reported average conversion: US$1 to ¥133.93.
Sources: Company Investor Relations Websites.