Nintendo Q1 FY21 (NTDOY)
Nintendo gave us an early indication that sales were thriving at the early on set of the quarantine. We saw Animal Crossing New Horizon become a cultural zeitgeist that not only sold over 10 million copies in less than two weeks before the end of the fiscal quarter but broke into mainstream pop culture. We saw stories of the Switch along with Switch Lite being sold out at all retailers and we also saw Ring Fit Adventure become the new Tickle Me Elmo circa 1997.
What everyone wanted and needed during these trying times was comfort food in the form of gaming. There is no better option than the nostalgia infused console from Nintendo that features familiar faces and is accessible to almost everyone. The big question is would things normalize once Nintendo was able to get on top of their constrained supply chain issues or are we just looking at the tip of the iceberg.
There are plenty of numbers to dig into in their earnings report that can help emphasize that fact that sales remained strong through the quarter but nothing other than their net profit jumping over 540% versus the same time period the year earlier. Digging into the numbers we can see that net sales were only up a little over 100% which is great news but how were the profits so much higher than the sales.
Nintendo attributes this massive surge in operating profit thanks to an “increase in digital sales and a decreased ratio of selling, general and administrative expenses” Digital sales accounted for 101 billion yen which is half of what Nintendo made on digital sales in the entire previous fiscal year or 229% increase.
In terms on what software was selling, Animal Crossing managed to sell close to another 11 million units, which brings it to almost 23 million units, making it the second best selling Switch game since launch just behind Mario Kart 8 Deluxe and just ahead of Super Smash Brothers Ultimate. Six other first party titles managed to sell over a million including the aforementioned Mario Kart 8 Deluxe and Smash as well as Ring Fit, Breath of the Wild, Xenoblade Chronicles, and the newly release Clubhouse Games 51.
In a glass half full situation Nintendo's mobile game sector saw sales rise 32.7% which is great and brought the total mobile sales in the quarter to 13.2 billion yen. However, looking at the glass half empty, total sales for the quarter were 358 billion yen which means that mobile didn’t even account for half a percent of their total sales of the quarter. Off the top of my head, I don’t think Nintendo released any new mobile titles this past quarter but the point of mobile is to hook people in and keep them in the eco-system spending.
After looking at ATVI financials we can see that Candy Crush is still dominating the market as the top grossing app. Nintendo tried multiple variations on mobile pricing strategy but failed to break though in a large way. I feel that it could be time, if they haven’t already, to stop funnelling resources into mobile and focus them elsewhere in the company.
Forecasting the year ahead, Nintendo expects slightly lower figures than FY20 which ended with an Animal Crossing boom. Nintendo is expecting to sell 19 million units of hardware compared to the 21 million it sold in the previous fiscal and 140 million units of software compared to 168 million units. Trying to figure out what the means for the rest of the fiscal year, Nintendo either thinks that shelter in place will continue and sales of Switch will stay steady or they have some system sellers between now and March 31, 2021.
I mention this because even during a quarter which saw their sales spike, they are still only projecting Q1 to account for 29 percent of total hardware sales. Switch sales during Q1 came in at 5.51 and bring the total Switch sales to 61.44, meaning that any day it will surpass total sales of the SNES. How are they planning to sell 19 million units? Cadence of Hyrule and Pikmin 3 deluxe won’t move hardware and since those were the only two, first party games with concrete details, this means we have to be getting something big.
I can certainly understand how many gamers have been displeased with Nintendo so far this year. If you aren’t a fan of Animal Crossing or Paper Mario then things might feel a little dry so far in 2020 and looking ahead don’t look much better. I fully expect Nintendo to have some major titles this fall but as of right now we are in the dark. On top of this we haven’t had a full Nintendo Direct since September of 2019, we haven’t seen a mini retro console from Nintendo in almost three years and SNES online games have come to a drip feed. Although the majority of games that you would want to play launched with the service.
Given the year that 2020 has been so far, it is inevitable that we will eventually get another full Nintendo Direct. Coming up on the two year anniversary of Nintendo Switch Online, will we see anything new added to entice new users and keep existing ones? Next on the agenda for both retro console and NSO is likely the N64 which makes it unlikely that it will be both. I assume we will still get a big first party title from Nintendo and hopefully that comes in the form of the speculated 35th anniversary of Mario. However, if all we get is what we know about right now then I have to trust in the judgement of Nintendo as clearly they are doing something right based on their recent earnings report. Looking ahead, there are still many areas of opportunity for the company including a Switch Pro, increased digital sales, theme parks, toys and much more.