Nintendo Q1 FY2022 Earnings Report Review

With both Sony and Microsoft recently releasing some great news about their hard to find, new, next generation consoles, the spotlight has now shifted to Nintendo to see how the company is faring with minimal releases, basically since the start of 2020.

Sony recently mentioned on the PlayStation Blog that the PS5 is the fastest selling console in the company’s history dating back to the early 90’s when the entered the gaming business. In just under 8 months, the PS5 has managed to sell over 10 million. In a different aspect of success, the Xbox Series consoles have also managed to sell quite well with estimated being around 7 million with most of their focus being on services such as Game Pass where they continued to see growth.

Would Nintendo have more magic up their sleeve with next to nothing new happening on the console in a major way to move hardware and software. Here is our review of Nintendo FY22 Q1 earnings report.

Year on Year

Comparing the financials of Q1 FY22 to the same time frame of FY21 was likely not going to be a favourable reference point as the pandemic had just begun. Nintendo had plenty of supply available on store shelves at the time and was in a good position to be ready for people to get back into gaming during the early months of the pandemic.

As the first quarter in Nintendo’s fiscal calendar covers April through the end of June, the release of Animal Crossing a few days prior to their first quarter combined with people staying home and looking for fun ways to pass the time, Nintendo was set up for success initially in 2020 before demand overtook supply. Would they be able to follow it up with a similar quarter a year later?

Key Takeaways

Considering that in the first quarter, the only big releases from Nintendo included New Pokemon Snap, which was a remake of a beloved N64 title and Mario Golf: Super Rush, which was a highly anticipated title but reviewed unfavourably, the sales figures are quite impressive still. When stacked up against the prior year software sales were down 10.2% but that is mainly because ACNH sold over ten million copies in Q1 FY21.

Nintendo sold an impressive 45.29 million units of software in Q1 FY22 compared to 50.43 million last year with New Pokemon Snap selling 2.07 and Mario Golf Super Rush selling 1.34. Mario Golf Super Rush was the first installment in the long running series since its 2014 entry on the DS and even though 1.34 doesn’t seem that big, this only includes six days of sales before the quarter ended. Mario Golf is a solid game to pick up if you plan to play with friends and family a lot.

Mario Golf Super Rush also has a chance at longer success considering that many of the issues with the game can be fixed with updates, which Nintendo has already confirmed are on the way. This includes the first free update that went live this week which includes the New Donk City course, Ranked Mode and a few other upgrades.

Older titles also continued to sell well as expected with Mario Kart 8 Deluxe selling another 1.69 million units bringing the total sales of that title to 37.08 million and Animal Crossing New Horizons selling 1.26 million bringing that title to 33.89 million, which are the two best selling titles on the Nintendo Switch by a large margin. On another note of older software continuing to sell well, Ring Fit Adventure is now the tenth best selling game on the Nintendo Switch with a very impressive 11.26 million copies sold.

First Party Nintendo Software

First Party software sales declined 10.2% from 82.5% to 72.3% compared to the first quarter of FY21, which is a good thing for Nintendo. Nintendo and their first party titles will always be what sets the company apart from the competition but increasing the reliance on third party software will go a long way for the company especially during major first party droughts which have been prevalent for a few years. Its huge third party titles like Monster Hunter Rise and the Switch being an Indie machine that saw games like Hades be released on console on the Nintendo Switch first.

Digital Sales

Digital Sales also declined from 55.6 percent to 46.9 percent of total software sold. Nintendo merchandise has always has a collector mentality and even for myself, I will purchase all Indies and third party titles digitally without hesitation but when it comes to first party titles, I have to own the physical copy of those. Whether or not it was real, a sealed copy of Super Mario 64 just sold for 1.5 million which seems wild to me because how many people owned that game and didn’t even think twice about it. Especially considering that it is less than 25 years old.

This is unfortunate for Nintendo as we have seen many other companies fully transition to a digital first business model and reap the financial rewards. There is much less cost involved with digital compared to physical for a multitude of reasons including material cost, printing cost, logistical cost and many others.

Switch vs Switch Lite Sales

One area that seemed interesting to me was that when compared to the first quarter of FY21, Nintendo actually sold more hardware of the original Switch model even though overall hardware sales were down. The Switch sold 3.31 million units this quarter compared to 3.05 million units last year. The reason for the drop in hardware sales of over 21% was because the Nintendo Switch Lite severely underperformed selling almost 57% less units. Switch Lite sales were only 1.14 million compared to 2.62 million.

Nintendo’s reasoning for the decrease in Switch Lite sales can be attributed to COVID-19 and the strain that the pandemic placed on the world, more specifically their supply chain. In the words of Nintendo “factors such as logistics delays caused by COVID-19 and the impact of the semiconductor shortage"

I think the logistical issues are part of the reason but I think there were less experiences that were tailor made for the Switch Lite such as Animal Crossing New Horizons. Looking ahead, Metroid Dread, which is releasing in October does seem like it would be a great fit for the Switch Lite but then again it might be an even greater fit for the new OLED model with a slightly bigger screen to see Samus better. I hope I am wrong but I don’t see Metroid Dread being a major system seller.

Share Buyback

Despite the declining price of the stock, there was some positive news for current investors. Nintendo is planning to buyback almost 2 million shares of the company or around 1.5% of the total amount of shares issued. In simple terms, if a company is doing well then it can repurchase some of its own shares, which essentially increases the value of the remaining shares because the earnings per share or EPS is now divided by less shares. Its a win win for Nintendo as well as they are also able to invest in themselves.

According to Nintendo “We have a strong cash position thanks to the Nintendo Switch business exceeding our own expectations and as a result have fortuitously gained a renewed opportunity to consider how to most effectively invest our cash in a variety of strategic and meaningful ways”

Nintendo has for a long time had a strong cash position, which is why in past years when systems like the WiiU weren’t massive hits, people were very uninformed to think that maybe the company would go the way of Sega. Nintendo would need a string of many systems like the WiiU underperforming to get to that point as they have plenty of cash on hand. Looking at their most recent balance sheet the company currently has over one trillion yen cash on hand, with a T. When converted to USD that works out to over ten billion dollars, which is a very impressive cash position.

Outlook

Although the earnings report is still pretty impressive unless judged against FY21 Q1, which was an obvious aberration of a quarter, that didn’t stop the repercussions from happening to the stock since most investors just see that profits are declining. This is despite the fact that the Nintendo Switch has now sold over 89 million units, making it the 7th best selling gaming console of all time. The Nintendo Switch is now only trailing the Wii, DS and Game Boy from Nintendo and overall behind the original PlayStation, the PS2 and the PS4.

If projections stay on track for Nintendo, they expect to sell another 21 million units of hardware, which in the past two years they have surpassed. This means the Nintendo Switch should easily overtake the original PlayStation and the Wii, putting it into the top five systems sold of all time. Saying that in a sentence seems crazy for how many things need to go right in so many different areas from logistics, software, pricing to accomplish this goal.

Projections for the rest of the year remain in place with a forecast for 25.50 million units of hardware sold and 190 million units of software sold.

Circling back to how it the negative earnings report has been affecting the stock price, Nintendo has seen its price per share drop drastically over the past month with some external forces as well with many still having fears of another wave of setbacks which could largely impact the companies ability to keep up with logistics. In just the past month, share price has dropped from a nearly all time high of 75.15 all the way down to 59.18 just one day post earnings release.

This is a nearly 20 percent drop in the stock price in what looks to be the second best selling year for the Nintendo Switch, which has the potential to be the best selling game of all time. If you assume that the Nintendo Switch remains on sale for two more fiscal years which would end on March 31, 2024 and the console continues to sell 20-25 million units per fiscal year, then that would put the Switch at around 160 million units sold which would surpass the PS2, which reportedly sold just over 155 million units,

At the time seemed 155 million sold seemed like it would never be beaten. Especially when you consider the fervor that surrounded some of these other systems at the top of the list. Everyone and their brother waited in line or bought a PS2 due to its inclusion of the cutting edge technological advanced DVD player. If something was ever to reach a higher sales figure it would absolutely need something revolutionary. Even the Nintendo Wii that will be passed in the next few quarters felt like black Friday all the time for the demand that followed that system around. It was accessible to everyone.

Nintendo and their share price are still well above the pandemic March 2020 low of 38, meaning that the company is still up well over 50 percent from that period and even still up around 20 percent during many of the months leading up to the covid stock crash in March 2020. If you're looking at the glass half full, then this is still great news, but a publicly traded company needs to keep beating estimates to keep the stock price going up. I don’t see any major surprises happening in Q2 for Nintendo but I can see a few potential titles that could sell much better than expected.

Granted, most investors of Nintendo aren’t hardcore games and seeing profits decline isn’t a good sign. Even looking forward from an investor standpoint, there is a new model, The Switch OLED coming in Q3, which is already usually the strongest quarters for most companies and it will boost sales but I think many investors are reading the room on the lukewarm reception that the Switch OLED received when it was announced.

Unless something else is surprise revealed on the software side, its hard to see too many system sellers when looking at the list of announced games coming in the rest of FY22. There are still some great titles but not many that can breakthrough to the mainstream level like a new Mario title or the sequel to Breath of the Wild 2 could.

Warioware, Metroid Dread, and Advance Wars Reboot Camp will also likely sell quite well with all titles likely becoming the best selling in their respective franchises but those not on the same level that ACNH or BOTW or MK8 is. Pokemon Brilliant Diamond and Shining Pearl, will likely sell in a similar fashion to the Let’s Go Eevee and Let’s Go Pikachu which were around 13.5 million to date as they are remakes of the popular DS versions. Pokemon Legends Arceus has a chance to be something special if they can deliver a great game as it is being developed by GameFreak and it has been compared to BOTW due to its vast open world. Although, it is not scheduled to be released until early Q4 if it doesn’t get delayed out of FY22 completely.

With shares being almost back to pre pandemic pricing, Nintendo buying back shares increasing value to the shareholders meaning that earnings will now be spread less thin and a future that looks bright. Bright in the way that the Nintendo Switch is on its way to becoming to the best selling console of all time, bright with software including the sequel to Breath of the Wild, a wholly original Mario title which has to be in development along with Mario Kart 9. Bright in the way that the improved Switch is likely going to land in 2022. These are all reasons why the road ahead looks good for the company especially with the recent pullback on the share price.