Are Wii U and 3DS Sales Dragging Nintendo Down?
Another miss to end the year. Revenue was 73 billion yen versus our estimate of 91 billion yen and consensus of 106 billion yen. Hardware revenue was 29 billion yen versus our estimate of 68 billion yen. Nintendo sold under 100,000 units of the 2DS in its second-quarter of availability, and had its worst month ever for 3DS sales. Publishing revenue was 43 billion yen versus our estimate of 23 billion yen. Sales for the DS, 3DS, and Wii exceeded our expectations, while sales for the Wii U were below. EPS was (273) yen versus our estimate of (282) yen and consensus of (271) yen.
FY:15 guidance appears unrealistic given 3DS Q4 hardware weakness and Wii U struggles. Initial FY:15 guidance is for revenue of 590 billion yen, operating income of 40 billion yen, and EPS of 169 yen. In FY:14, Nintendo had revenue of 572 billion yen, an operating loss of (46) billion yen, and EPS of (184) yen. We are lowering FY:15 estimates for revenue to 515 billion yen from 578 billion yen, for operating loss to (20) billion yen from 0 yen, and for EPS to (100) yen from 0 yen. We think hardware guidance is unrealistic without price cuts that would create additional margin pressure.
We believe Nintendo has an unrivalled collection of owned intellectual property that could be used to bolster financial results now that management is more open to the concept of licensing. In its results release, the company announced that, “Nintendo strives to utilize its abundance of character IP more actively, providing its IP with more exposure in places other than video games, while achieving a certain level of profit from its licensing business at the same time.” It is unclear how, when, or where Nintendo will license its content, so we are unable to model the FY:15 impact. However, we see licensing as a long-term driver of growth that could offset current handheld and console weakness.
Lifetime sales statistics highlight how poorly the Wii U and 3DS have fared compared to their predecessors. The current worldwide hardware installed base for the Wii U is 6.17 million, compared to the Wii’s 101.06 million, and for the 3DS it is 43.33 million, well below DS’ 153.99 million. Lifetime software sales for the Wii U are 32.28 million, compared to the Wii’s 895.22 million, and for the 3DS are 162.92 million, compared to the DS’ 943.98 million.
We are maintaining our NEUTRAL rating and lowering our 12-month PT to 10,000 yen from 12,000 yen. Our PT reflects an enterprise value of 500 billion yen, which reflects the value of Nintendo’s IP to a potential acquirer based on similar transactions.
Michael Pachter is an analyst at Wedbush Securities.