Thursday, April 26, 2007

Nintendo Upward Guidance A Certainty

Nintendo management has a penchant for significantly understating future sales, income and dividends. This characteristic is admirable and indicative of its innately conservative corporate culture that has thus far benefited Nintendo stockholders. The pattern of Nintendo lowballing its likely financial results is clear and strongly suggests that the fiscal 2008 forecasted sales and net income per share included in its April 26, 2007 press release are artificially low.

The fact is that the 2007 fiscal year financial results released on April 26, 2007 dwarfed the guidance given by Nintendo on May 25, 2006, July 24, 2006, October 3, 2006, and January 10, 2007. Its May 25th forecast stated it expected 2007 net sales of 600 billion yen, net income of 65 billion yen, and earnings per share of 508.15 yen. Nintendo actually reported 966.5 billion yen in net sales, 174.29 billion yen in net income, and earnings per share of 1,363 yen. The actual results for fiscal 2007, which ended March 31, 2007, therefore, far exceeded the forecast made 10 months earlier. In fact, net sales were 61.1% above guidance, while earnings per share and net income were 168% above Nintendo management’s forecast.

Similarly, actual 2007 net sales exceeded the July 24th upward revised forecast by 55.7, while earnings per share were 110% above forecast. Nintendo revised its guidance upward once again on October 3rd but those revised net sales and earnings were exceeded by 30.6% and 74.5%, respectively. On January 10, 2007 Nintendo again revised its guidance upward but it still exceeded its upward revisions in net sales by 7.4% and earnings per share by 45.3%.

It is readily apparent that Nintendo management’s forecasts are consistently too low. Accordingly, investors can expect that Nintendo’s actual financial results for its fiscal year ending March 31, 2008 will far exceed its guidance of 1.14 trillion yen in net sales and earnings per share of 1,368 yen. Furthermore, investors can expect to see at least three significant upward revisions in net sales and earnings per share by Nintendo management during the next eight months. Those revisions will likely be announced in July, October, and January.


Bronzecat said...

Do you think that Nintendos very conservative corporate culture can help the company in the long term?

Due to a complete relaunch of its product line could Nintendo expand its marketshare actually in a new market while loosing the old one.
One example being the fact that Nintendo factually lost nearly its complete marketshare in the console space for hardcore gamers for eg.

Ok we have new products and with them great sales but looking at Nintendos corporate culture can it really survive in the "very long" term?
An answer would be really appreciated!

The Good Doctor said...

As John Maynard Keynes said, "In the long run we are all dead."

Nintendo is far too conservative as evidenced by the nearly $8.2 billion in cash and deposits it held on March 31, 2007 and the $1.22 billion it has in equity capital. Fortunately, they have not used that cash to go on a spending spree buying companies it does not need.

Shareholders need to be concerned that such a large cash position could cause Nintendo to be caught napping by a bank failure. Furthermore, interest rates in Japan are virtually zero so that cash generates a poor return.

I estimate Nintendo's current market share at 19% of the total video game industry (hardware and software).

In 1992 its market share in Japan was 90-95% and in the U.S. it was 70%. At its current pace it should easily have 50% of the market by 2012.

Nintendo lost the game developers because the developers were forced to buy proprietary cartridges from Nintendo at exhorbitant prices in bulk. Nintendo also got the reputation of being arrogant and tough to deal with. It was essentially Nintendo's way or the highway.

Game developers naturally flocked to Sony in droves when the PS was introduced with its CD Rom system. The CDs cost developers a few pennies versus $20 for the Nintendo cartridges.

These factors and complacency by Nintendo caused it to fall from the lofty heights of 1992. Shareholders have to hope that Nintendo doesn't allow that to happen again. I am confident that they have learned their lesson.