Nintendo hits five-month low ahead of switch debut

Bloomberg

Nintendo Co. shares slipped to a five-month low after a cut in the company’s operating profit forecast indicated sales of its upcoming Switch console may not make up for weak demand for mobile games and the 3DS gaming device.
The stock declined 2.1 percent to close at 22,625 yen, the lowest since Aug. 30. The Kyoto-based company cut its full fiscal-year operating profit outlook by a third to 20 billion yen, while keeping its 470 billion yen revenue forecast intact.
The 3DS handheld device, which had helped Nintendo sustain earnings, is starting to sputter. Super Mario Run, the company’s first game for smartphones, had 78 million downloads, yet only about 5 percent of 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.
“The downgrade to their operating profit outlook was definitely a negative surprise,” said Satoshi Kurihara, an analyst at Tokai Tokyo Research Institute. “They’re still not completely serious about smartphone games. That means more than ever the spotlight is on the Switch.”
Still, a weaker yen and brisk holiday sales helped the game maker deliver net income of 64.7 billion yen for the quarter ending 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. Revenue for the quarter fell 21 percent to 174.3 billion yen.
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 Super Mario Run fell below the company’s expectations of a double-digit conversion rate. On Wednesday, he said the company will try to boost the game’s popularity by making the game less difficult and releasing new characters and features. A second mobile-gaming title, Fire Emblem, will be released Feb. 2.
Kimishima caused ripples in Tokyo’s markets on Wednesday after saying Nintendo could collaborate with more smartphone developers in the future. DeNA Co., its current partner for smartphone games, plunged as much as 11 percent, while shares of Colopl Inc. and GungHo Online Entertainment Inc., other makers of smartphone games, staged brief rallies.
Nintendo’s wobbly start in smartphone gaming is 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. Retailers have run out of new units for pre-orders, although that wasn’t enough to offset weak 3DS and mobile results, or support the operating profit outlook for the fiscal year.
“The smartphone gaming market, especially in Japan, has already matured,” said Tomoaki Kawasaki, an analyst at Iwai Cosmo Securities Co. “So having been ignored for a while, dedicated consoles are once again grabbing attention.”
While game consoles — including the Wii U — are usually sold at a loss early in their life cycles, the Switch will be profitable from the start, Nintendo said. “Based on the momentum of reservations, you can tell that there’s an understanding of how unique the Switch is,” Kimishima said. He said more than 100 titles are now under development for the new console, up from about 80 titles the company announced three weeks ago.
Nintendo is counting on Switch to replace not just the Wii U, but also the 3DS to some extent. Still, reception for the device has been mixed, with fans praising its design but criticizing its high price of $300. The biggest test is whether its core idea of portable and home gameplay will resonate with consumers. Tokai Tokyo’s Kurihara said Nintendo products always attract early skeptics, but usually succeed in the long-run.
“2017 is Nintendo’s most critical year in decades,” 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 $60 Christmas item being sold-out globally after going on sale last quarter. Nintendo said it sold-through 1.5 million units in the final two months of the year, twice as much as its Wii U console sold in the past nine months.
Nintendo also got a boost from the stronger dollar, which gained after Donald Trump’s U.S. 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 70 percent of its revenue outside of Japan.