On Friday, Nintendo (TYO:7974) significantly lowered FY:14 guidance primarily to reflect weaker-than-expected year-end sales. Hardware sales were below expectations, which led to software sales weakness as well. For FY:14, Nintendo expects revenue of 590 billion yen, operating loss of 35 billion yen, and EPS of (195.50) yen versus prior expectations for revenue of 920 billion yen, operating income of 100 billion yen, and EPS of 430.10 yen. In addition, it was unable to take advantage of the weaker yen. It has adjusted its f/x assumptions to 100 yen/$1 from 90 yen/$1 and to 140 yen/1 euro from 120 yen/1 euro.
FY:14 3DS and Wii U units guidance cut sharply. For the 3DS, Nintendo expects hardware of 13.5 million (18 million prior) and software of 66 million (80 million prior). Japanese sales were roughly in-line, but international sales were below expectations, including in the U.S. and most of Europe. Nintendo expects Wii U hardware of 2.8 million (9 million prior) and software of 19 million (38 million prior). Wii U also struggled in the U.S. and Europe despite an improved game lineup and a September price cut, which put pressure on the top-line.
Nintendo also lowered dividend guidance. It expects to pay 100 yen/share, down from its prior expectation of 260 yen/share due to lower profitability expectations, and lowering our FY:14 estimates. We expect revenue of 590 billion yen and EPS of (196) yen versus 785 billion yen and 284 yen before. We are also lowering FY:15 estimates.
We expected a guidance revision given unrealistic prior expectations and YE weakness based upon NPD. As a result, our estimates were well below guidance. Nintendo previously guided to FY 3DS HW units growth of roughly 30 percent year-over-year despite cannibalization of handheld sales by gaming on smart devices. It had projected Wii U HW sales in 2H:14 to be nineteen times those in 1H:14.
The guidance cut appears to have forced a reevaluation of Nintendo’s business. According to Bloomberg, Nintendo CEO Iwata announced that the company is “thinking about a new business structure” and “studying how smart devices can be used to grow the game-player business.” We have long believed Nintendo should license its older IP for smartphone and tablet game developers, and see it is a lucrative opportunity that could restore profitability.
We are maintaining our NEUTRAL rating and 12-month price target of 12,000 yen. Our PT reflects a 10x forward EV/adjusted EPS multiple, and is a premium to its 8,000 yen/share in cash and investments.
Michael Pachter is an analyst at Wedbush Securities.