Strong showing for Nintendo this quarter.
Nintendo Switch hardware, software and smart devices being the main contributors for growth.
It's clear that Nintendo still has some supply issues on the hardware side but it looks like they were able to boost production this quarter in alignment with the launch of Splatoon 2. I was expecting Nintendo to raise their hardware sales forecast and it looks like they've increased it from cumulative 12.74 million to cumulative 16.74 million by March 31st 2018. This suggests that Nintendo has sorted out the majority of supply issues and that they'll be able to achieve a huge holiday shipment this year that could potentially exceed 6 million units. Effectively it'd be selling like PS4 did in its first year.
Nintendo's software sales have been extremely impressive for first party titles with Zelda and Mario Kart now at 4.7m and 4.2m respectively. Splatoon 2 was the big release last quarter and is already off to a great start with 3.61 million units shipped. Splatoon was something special from Nintendo last generation and it was a great idea to let a younger team create a fresh game. The sequel is doing so much better and has led to an increase in amiibo sales last quarter too. It looks like Arms isn't on track to replicate that success. Whilst the game was of a high quality it looks like it didn't have the content people were looking for. Nintendo is projecting a software tie ratio of 3.3 games sold per Nintendo Switch. Right now software tie ratio is at 3.6 so I'm fairly certain Nintendo will exceed their software shipment forecast for the fiscal year.
Nintendo's smart device segment (Revenue from mobile games and licensing) has generated $340m over the past 12 months. This is extremely impressive given that Nintendo has only really introduced two major games in Super Mario Run and Fire Emblem Heroes. It's clear that Fire Emblem Heroes is the main revenue driver at the moment and is helping stem the decline that we would have seen had Super Mario Run been the only game released. It's clear at this point that the potential is there for NIntendo but they need to embrace mobile business models if they want to be successful. They can't expect to charge $10 for a game on mobile and expect long term recurring revenue. Ultimately I can see Nintendo building a $1bn annual segment if they play their cards right. Animal Crossing looks promising but I'm not sure if it'll monetise as well as Fire Emblem.
Download (digital) sales for Nintendo are up YoY, but still fairly low compared to competitors that are more established in the digital space. It looks like Nintendo is impressed with sales from Zelda's season pass though and I fully expect Nintendo to continue offering add on content through its games as a way to drive long term engagement and spend. I don't expect a huge boost in digital sales this year, but once Nintendo's paid online service rolls out we should see higher revenues from that segment. However, it is imperative that Nintendo get the online experience and value adds perfect so that they can offer an attractive service. So far they've failed on the online front when it comes to areas like voice chat or lobby's. Nintendo know that they can't offer a service on the same level as PlayStation or Xbox though, hence why it's priced as such.
Nintendo's approach to virtual console has been a weird one. Especially with how they handled the lifecycle of the NES Classic. It seems they only intended it to be a stop gap product for the holidays and therefore had only negotiated to manufacturer a certain amount. The SNES Classic launch hasn't gone as smooth as I would have liked but with a day 1 shipment of 1.7 million I think it's clear that Nintendo is at least trying to ensure supply for this is good. Hopefully consumers are still able to purchase one during the holiday gift giving season without too much trouble. The return of NES Classic is also a good move. Not sure what the issue with VC on Switch is, but it looks like for now Nintendo has found a way to monetise back catalog. A $70 product is more than most consumers spend on VC games (Wii/WiiU/3DS) and therefore Nintendo can generate more from each consumer than they would if they were to sell each game separately. I do imagine we'll get some VC support on Switch in the future, but not whilst these classic consoles are killing it.
Two other notes I want to mention.
1. Nintendo has spent nearly 3x more on advertising in the last 6 months than they did during the same period last year.
2. Pokemon Go continues to be a profit driver for Nintendo with
In terms of the future, this will be a solid year for Nintendo. They've created a great product that appeals to a broad audience, they've created a strong pipeline of games for the first 12 months and they've worked with third parties to bring classic titles to the console. I'm extremely optimistic on Switch and always have been since it was first unveiled. However, the hardest part will be to reach the core gamer on PS4/XB1 and the large number of casual gamers who have stuck to mobile.