Nintendo results undeline need for ‘switch’ success

Bloomberg

Nintendo Co. reported quarterly profit above projections and increased its outlook for the year, but anemic sales highlighted how important it is for the company’s new Switch console to succeed.
A weaker yen and brisk holiday sales helped the Kyoto-based game maker deliver profit of 64.7 billion yen ($569 million) for the period ending in December, exceeding analysts’ average projection for 20.5 billion yen. For the fiscal year, profit will be 90 billion yen instead of the previously forecast 50 billion yen, Nintendo said in a statement Tuesday. Still, revenue for the quarter fell 21 percent to 174.3 billion yen, while the full-year outlook was kept at 470 billion yen.
The company’s 3DS handheld device, which had helped the company sustain earnings, is starting to sputter. Super Mario Run, Nintendo’s first game for smartphones, had 78 million downloads, yet only 5 percent those opted to pay $10 for the full version. The company also revealed that Animal Crossing, an upcoming smartphone game, will be delayed. All of this means that there’s little room for mistakes after the next-generation Switch console rolls out in March.
“There’s no denying Switch must be the earnings driver,” said Tomoaki Kawasaki, an analyst at Iwai Cosmo Securities Co. “All the existing consoles have peaked. The smartphone gaming market, especially in Japan, has already matured. So having been ignored for a while, dedicated consoles are once again grabbing the attention.”
Operating profit missed projections, at 32.3 billion in the quarter compared with analysts’ projection for 33.4 billion yen. The company also cut its full-year forecast for this measure. Nintendo shares in Germany fell as much as 6.7 percent amid low trading volumes.
Pokemon helped Nintendo stay on track in the latest period. Pokémon Sun and Pokémon Moon, new titles released for the 3DS in November, sold well. These were preceded by the summer blockbuster hit Pokemon Go, which helped reignite interest in the battling pocket monster franchise.
“Pokemon did exceptionally well,” Nintendo President Tatsumi Kimishima told reporters after the results. “But we’re also trying to sell more of other titles and weren’t able to do that.” The company’s long-awaited entry into smartphone gaming also disappointed. Kimishima said the proportion of people opting to buy the game fell below the company’s expectations of a double-digit conversion rate. A second mobile gaming title, Fire Emblem, will be released Feb. 2.
That’s putting the focus squarely on the Switch, which goes on sale March 3 and will seek to fuse home and mobile gaming. Nintendo said it expects to sell 2 million units by the end of March, with analysts predicting about 10 to 11 million units in the 12 months after that. While game consoles are usually sold at a loss early in their life cycles, the Switch will be profitable from the start, Nintendo said.
“You can tell customers have huge expectations based on how Switch reservations are doing,” Kimishima said at a briefing.
“We want to increase production as much as we can.”
Nintendo is counting on Switch to replace not just the Wii U, but also the 3DS to a certain extent. Still, the reception so far has been mixed, with fans praising its design but bemoaning its high price of $300. The biggest test is whether its core idea of portable and home gameplay will resonate with consumers.
“2017 is Nintendo’s most critical year in decades. The Switch changes more for Nintendo than many people think,” said Serkan Toto, founder of Tokyo-based consultant Kantan Games Inc. “
Sure, the 3DS still exists and gets support from Nintendo, but chances are the numbers will never be this high again.”
The miniature remake of the classic NES console also helped in the last three months of 2016, with the popular Christmas item being sold-out globally after going on sale last quarter. Nintendo sold 196,000 units in the US at a price of $60 during November, researcher NPD reported last month.
Nintendo also got a boost from the stronger dollar, which gained after Donald Trump’s US election win in November.
The company said it expects the yen to trade at 110 yen per dollar, compared with a previous outlook for 100 yen. Nintendo generates about three-fourths of its revenue outside of Japan.