Nintendo's Digital Sales Are Gaining Traction

Nintendo (NASDAQOTH: NTDOY) has engineered an impressive comeback over the last few years with the Switch console. The Japanese game maker's latest results were mixed, with unit sales of Switch hardware coming in just shy of management's fourth-quarter guidance. However, Nintendo made up for the slack in hardware sales with better-than-expected sales of games. 

Nintendo's fiscal fourth-quarter results: The raw numbers

Metric Fiscal Q4 2019 Fiscal Q4 2018 Year-Over-Year Change
Sales $1.82 billion $1.78 billion 2.2%
Net income $226 million  $40 million 465%
EPS $1.88 $0.33 469%

Data source: Nintendo.

What happened with Nintendo this quarter?

  • For fiscal 2019 (which ended in March), Nintendo sold 16.95 million units of the Switch hardware, slightly lower than management's goal of 17 million units. However, sales of games (which generate better margins than hardware) were strong, finishing the year at 118.55 million units sold, above management's target of 110 million. 
  • For the fourth quarter, Nintendo sold 2.46 million units of Switch hardware and 23.91 million units of software. For the year, hardware and software unit sales of Switch increased 12.7% and 86.7%, respectively. 
  • Hardware revenue made up 58.4% of total sales for fiscal 2019, compared to 65.4% in fiscal 2018. 
  • Full-year sales of 3DS hardware fell 60.2% year over year, while its software unit sales dropped 62.9% year over year. 
  • Full-year digital revenue, including downloadable versions of games on Switch and subscription revenue from Switch Online, soared 95% year over year to more than $1 billion. 
  • Digital sales as a percentage of Nintendo's total sales are now 24.8%, up from 17.3% in fiscal 2018. 
  • In fiscal 2019, Nintendo generated $412 million (46 billion yen) in profit from mobile games, representing an increase of 17% year over year. Mobile games made up 24% of net income over the last year. 
Four young men and women holding a Nintendo Switch controller.

Image source: Nintendo.

What management had to say

Nintendo Switch enjoyed an acceleration in sales during the holiday quarter of 2018, and the pace is not slowing down. 

In Nintendo's financial results briefing, President Shuntaro Furukawa said, "To sum up the sales status for Nintendo Switch itself, growth in hardware sales after the turn of the year has not peaked, but rather continues to pick up speed." 

He added, "Sell-through of first-party Nintendo Switch titles has remained good, with both new and previously released titles performing well even after January subsequent to the holiday season, and ultimately exceeding last year's Q4 growth by 50%." 

Looking ahead

Despite the momentum management cited, executives gave a conservative outlook for fiscal 2020, with net sales expected to grow 4.1% year over year and net income forecast to be down 7.2% from fiscal 2019. The company's goal is to sell 18 million units of Switch and 125 million games for the system in fiscal 2020, which doesn't represent much unit sales growth over fiscal 2019.

However, Nintendo plans to keep the mobile sales momentum going with two more titles releasing this summer, Dr. Mario World and Mario Kart Tour

Also, Nintendo is working with Chinese tech giant Tencent to release the Switch in China. Nintendo didn't provide a date for the launch, but investors will want to keep their eye on this development, because management specifically pointed out that future sales from China are not included in Nintendo's fiscal 2020 earnings guidance. 

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John Ballard owns shares of Nintendo. The Motley Fool owns shares of and recommends TCEHY. The Motley Fool recommends Nintendo. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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