Nintendo Earnings: Everything You Need to Know

The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.

Nintendo Q3 EPS beat.  Revenue was ¥342 billion, compared with our estimate of ¥345 billion and the consensus estimate of ¥414 billion. Software sales were above our expectations, while hardware sales were below. EPS was ¥333, compared with our estimate of ¥73 and the consensus estimate of ¥186. EPS exceeded our expectations from cost control and large foreign exchange gains.

FY:13 top-line guidance lowered to a more realistic level. Nintendo (7974.JP) decreased guidance for revenue to ¥670 billion (only 3% y-o-y growth) from ¥810 billion and for operating income to a loss of ¥20 billion from a profit of ¥20 billion, but increased EPS guidance to ¥109 from ¥47. The poor Wii U debut likely contributed to lowering of expectations.

Units guidance was lowered across the board, with the steepest cuts to Wii U hardware and software.  Last quarter, we viewed Nintendo’s FY:13 Wii U hardware guidance of 5.5 million units as disappointing, while we viewed its software guidance of 24 million units (implying an  attach rate of over four) as unrealistic. Both figures ultimately proved to be unrealistic, as hardware guidance now stands at 4 million units, and software guidance at…

16 million units. In our view, current releases for the Wii U are unimpressive (as reflected in the low SKU count and reviews), and with no Nintendo first party software  releases in January or February, the Wii U’s prospects are not likely to improve during this fiscal year.

We have lowered our expectations for revenue growth in FY:14 as Wii U sales will likely be insufficient to improve Nintendo’s long-term outlook. After selling 3 million units in Q3, Nintendo expects to sell only 1 million in Q4, likely reflecting softening demand and game delays. The timing of FY:14’s big releases should be of paramount concern to management as Wii U software sales will likely be negatively impacted by the presence of the new consoles from Microsoft and Sony.

We continue to believe Nintendo must lower its cost structure to allow profitability at lower revenue levels.  In our view, the company’s top line is likely to remain weak for several years, and its cost structure is stubbornly high.

Maintaining our NEUTRAL rating and our 12-month price target of ¥10,000, a premium to Nintendo’s ¥9,000/share in cash and investments, giving it modest credit for brand equity.

Michael Pachter is an analyst at Wedbush Securities.