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No. of Recommendations: 5
This was another bad quarter for Nintendo. You could argue this quarter was worse than the last one, because it was a little below their reduced expectations following 2Q and now a further reduction has been issued. But it wasn’t all bad news.

The good news is there are now three titles that have sold over a million copies on the 3DS and the new system is ahead of where the DS was at this point in its life. In addition, third party developers have noted this uptake and are coming on board to release more titles shortly (Nintendo will let them announce their own titles, so no specifics), the bad news is the price cut they took to get those units moving has been painful. You’ll see that in the numbers below.

Financials	in MM of JPY			
Income / Cash Flow 2012-Q3 2011-Q3 YoY %
Sales 340,428 444,830 -23.5%
Gross Income 99,085 171,624 -42.3%
Op Income 40,939 104,401 -60.8%
Net Income 21,922 51,569 -57.5%
EPS 171.43 403.26 -57.5%
Shares Out (MM) 127.88 127.88 0.0%
EBITDA 42,638 106,117 -59.8%
TTM-CFO NR 159,164 -
TTM-Capex NR 8,557 -
TTM-FCF - 150,607 -

Margins     	2012-Q3	2011-Q3	Change		
Gross Margin 29.1% 38.6% -9.5
Op Margin 12.0% 23.5% -11.4
Net Margin 6.4% 11.6% -5.2

Balance Sheet	2012-Q3	2011-Q3	YE-2011	YoY %	
Acct. Rec. 163,540 212,761 134,933 -23.1%
Inventory 67,618 69,309 92,712 -2.4%
Acct. Payable 199,305 236,893 246,947 -15.9%
Cash & Inv 927,622 1,074,791 1,171,076 -13.7%
ST-Debt 0 0 0 -
LT-Debt 0 0 0 -

-There’s really not much positive to take away from those numbers. We’ll get the cash flow numbers with the full year results, but op income and EBITDA are a pretty good guide there.

-It’s interesting to note that in 2011 the 3DS has outsold what the DS did in Japan in 2010 and by a good margin, but the 3DS has failed to do the same in other countries. There’s more on this in the presentation linked here and the trends in the US and Europe have improved, but the turnaround came too late to make a big difference this year in the US and EU. Japan normally favors handheld units over the home units, but the difference is bigger than I would expect. The product is a huge hit in Japan now.

-That link also has a very good overview on the state of the video game market.

-Next year the 3DS will no longer be sold at a loss (lower cost of components going forward, mostly).

-The pain of marking down the price of the 3DS is felt at three levels above: In the revenues from lower selling prices, as a write-off of inventories (lower of cost or market value), and the stronger yen (particularly against the euro) became more painful at the lower price point.

-The earnings forecast for the year ending in March-2012 are now (in MM of JPY): 660,000 (vs. 790,000) in sales; -45,000 operating loss (vs. 1,000 op income); net loss of -65,000 (vs. -20,000). The change is due to the stronger yen and a lower unit sales forecast.

-The final version and details of the Wii U will be shown off in June at E3 with a launch to take advantage of the holiday season. Iwata (the CEO) also announced that there will be a NFC chip (card reader) in the Wii U tablet. The rumors I have seen on this mention it might work with cards and figurines for games, and for payments, too. That’s an interesting angle and takes Nintendo back to its roots in cards. It will also be compatible with the new online Nintendo Network. The idea here is that games sold by themselves will still be as detailed and enjoyable as ever, but those looking for additional challenges will be able to pay for them.

-The Nintendo Market will also bring the company to App Store model with the ability to sell titles digitally online and send them directly to devices. They’re ready to do this with their own titles and working out the details with third party software makers.

We knew last quarter that the remainder of this year wouldn’t be pretty and it’s playing out as expected in that regard. There are definite signs of improvement in the 3DS eco-system, though, and that’s a positive that should help in 2012. As will the launch of the Wii U, which is the real catalyst we have to look forward to. For now we remain a buy, but this one will be watched closely to determine if any status changes are necessary.

Metrics & Ratios                In MM of JPY             As of      1/30/2012
Local Share Price
OSE:7974 10200
US Share Price OTCPK:NTDO.Y 16.63
Valuation Metrics 1/30/2012 3/31/2011 3/31/2010 3/31/2009
Market Cap 1,304,359 2,873,453 4,002,745 3,638,340
Enterprise Value 376,815 1,798,828 2,891,346 2,526,315
EV/EBITDA 6.9x 7.9x 8.1x 4.2x
P/E NM 33.6x 15.4x 17.2x
P/OCF 16.7x 36.8x 25.0x 12.6x
P/Book 1.1x 2.2x 3.2x 3.1x
Debt Coverage
Total Debt/Equity 0.0% 0.0% 0.0% 0.0%
Total Debt/EBITDA 0.0x 0.0x 0.0x 0.0x
EBIT/Int. Expense 0.0x 0.0x 0.0x 555510.0x
Yield 0.9% 2.4% 4.1% 5.7%
Coverage (OCF) #DIV/0! 131.0% 83.7% 79.0%
Payout Ratio (NI) 0.0% 131.8% 58.7% 81.5%
Data provided by S&P CapitalIQ

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