Will the Wii U Sink Nintendo’s Ship?
On Wednesday, May 7, before market open in the west, Nintendo will report Q4:14 (March) results. It has not scheduled a financial results briefing.
We expect weak Wii U hardware sales to drive a miss. Our estimates are for revenue of 91 billion yen and EPS of (282) yen, versus consensus of 106 billion yen and (271) yen, and implied guidance of 91 billion yen and (275) yen. Q4 F/X rates were 103 yen/$1 and 141 yen/1 euro versus FY:14 assumptions of 100 yen/$1 and 140 yen/1 euro, helping results slightly.
We expect FY:15 guidance in-line with the company’s original expectations for FY:14. In April 2013, Nintendo provided initial FY:14 guidance for revenue of 920 billion yen, operating income of 100 billion yen, and EPS of 430 yen.
The company had confidence in the operating income figure, as according to NeoGAF, CEO Iwata implied in January that he would consider resigning if unable to achieve operating income of 100 billion yen in FY:14. Mr. Iwata has as yet to resign, and we expect him to guide to 100 billion yen of operating income once again, citing 3DS dominance in the handheld marketplace and an improving release slate for Wii U that could revitalize hardware sales. However, we expect Nintendo’s struggles to continue in FY:15. We note that its most recent operating income guidance for FY:14 is for a loss of (35) billion yen, well below the initial 100 billion yen guidance.
In January, Nintendo lowered FY:14 hardware and software guidance, highlighting its recent struggles. Guidance was lowered to 13.5 million 3DS (from 18.0 million previously), 1.2 million Wii (2.0 million), and 2.8 million Wii U (9.0 million). No DS hardware guidance was provided. Lowered software units guidance was for 66.0 million 3DS (from 80.0 million previously) and 19.0 million Wii U (38.0 million.) For the Wii, guidance was increased to 26.0 million from 20.0 million. DS software guidance was unchanged at 10.0 million.
It is clear to us that the Nintendo model of proprietary hardware supported by compelling proprietary software is broken. The software continues to be first rate, but the console hardware is not competitive. We don’t think Nintendo should exit the console hardware business, but think it should consider getting out of the Wii U business, and consider going back to the drawing board on consoles.
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 9,000 yen/share in cash and investments.
Michael Pachter is an analyst at Wedbush Securities.