Nintendo: Earnings Misses as Smartphones Take Market Share

Nintendo (NTDYO) missed Q1 earnings due to broad weakness in hardware and software sales. Revenue was ¥94 billion, compared with our and consensus estimates of ¥172 billion. EPS was ¥(200), compared with our estimate of ¥55 and the consensus estimate of ¥117.

The company significantly lowered FY:12 guidance for revenue to ¥900 billion from ¥1,100 billion, operating income to ¥35 billion from ¥175 billion, and for EPS to ¥156 from ¥860. 1H FY:12 guidance was lowered for revenue to ¥240 billion from ¥360 billion, operating income to ¥(50) billion from ¥20 billion, and for EPS to ¥(274) from ¥141.

We are lowering our FY:12 estimates for revenue to ¥900 billion from ¥1,100 billion, and for EPS to ¥153 from ¥878 to reflect the much lowered outlook. We are lowering our FY:13 estimates for revenue to ¥1,100 billion from ¥1,220 billion, and for EPS to ¥848 from ¥1,256.

Weak software and hardware sales continue to plague the company. Nintendo lowered its FY:12 units for hardware to 9 million (from 11 million) DS units, 16 million (no change) 3DS, and 12 million (from 13 million) Wii units. This reduced forecast is despite recent price cuts for all the consoles (3DS to $169 from $249 in August, Wii in May to $149 from $199, and DS Lite to $99 from $129 in June).

A large market opportunity may exist for the Wii U, but visibility remains limited on pricing and consumer interest. It is unlikely that Wii U is more powerful than its HD peers, in which case pricing will be the likely driver of sales. If Wii U is priced competitively with Xbox 360/Kinect bundles, we believe it has the potential to sell very well.

Despite a weak debut so far, we believe the 3DS has some potential to rebound due to a price cut to $169 (from $249), a number of applications and many strong software releases this fall. The just announced price cut should help drive sales, although profits will be negatively affected.

Michael Pachter is a video game analyst at Wedbush Morgan.

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