Nintendo: 3Q16 Results Review

Welcome to the first-ever Art and Finance Update! These posts will provide brief updates and comments to stocks or themes we previously covered in our Finance Blog! You may see these pop up in lieu of a full blog or vlog post. In such cases, no major newsflow has occurred to change our opinion (assuming we had provided one) on the subject. Now, without further ado, let’s take a look at Nintendo’s 3Q16 results!

On 2 February, Nintendo posted 3Q16 (third quarter of fiscal 2016) financial results, shortly after we wrapped up our stock tutorial/analysis on Nintendo.

Nintendo 3Q16 Cover

Results Review

Nintendo posted 3Q16 revenues and gross profit which were weaker YOY (year-on-year), 18.4% and 2.4%, respectively, as WiiU and 3DS sales dropped 2.1% to 1.87M units and 28.0% to 3.6M units, respectively. Conversely, operating profit gained 6% YOY, indicating that management successfully kept a lid on operating costs.

Source: Company filings, Art and Finance

Source: Company filings, Art and Finance

Management maintained its full-year guidance of ¥570B. At 74.6% of full-year guidance (9M16, or nine months into fiscal 2016 revenue of ¥221.5B), the company appears likely to meet its revenue target, in our view.

Looking forward

Nintendo Japan-listed shares weakened 1.7% following earnings, with markets focusing more on the lack of NX-related news than NT (near-term) results. Kimishima did comment on Nintendo’s second smartphone project (following their first, social network Miitomo, which had disappointed the market), saying that it would feature intellectual property “known to everyone”. He also mentioned that the company was experimenting with virtual reality, but there are no plans to launch a product NT.

Some commentators criticize Nintendo’s hesitance to move into smartphones. The Wall Street Journal, for example, cited video-game maker Square Enix’s share price outperformance vs. that of Nintendo, largely due to SE’s quick adaptation to browsers and mobile, which now accounts for nearly 50% of its revenue.

On the other hand, some analysts believe Nintendo may be focusing on developing high-quality mobile gaming vs. an aggressive approach to monetization. In our opinion, this dovetails with the late Satoru Iwata’s comments that the currently-popular free-to-play model that relies on microtransactions for revenue “does not track with Nintendo’s identity”. In Iwata’s own words, “It’s even more important for us to consider how we can get as many people around the world as possible to play Nintendo smart device apps, rather than to consider which payment system will earn the most money.”

Only time will tell if Nintendo’s strategy will pay off.

Ramon Rodrigo Cuenca, CFA
Equities Analyst
Art and Finance

Categories: Consumer, Technology

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