Nintendo's Stellar Results - Bad for Video Game Publishers?

| About: Nintendo Co., (NTDOY)

kbroKey points from Kaufman Bros. analyst Todd Mitchell's recent note to clients (for a full-length .pdf version of this report, click here):

As expected, Nintendo (OTCPK:NTDOY) reported very strong F4Q07 results after raising guidance four times throughout the year. We think Nintendo's success portends poorly for the major video game publishers.

  • Nintendo hardware and software sales exceeded expectations. Nintendo sold 23.56 mln DSes and 5.84 mln Wiis in fiscal 2007 and reported selling 123.55 mln copies of DS software and 28.84 mln copies of Wii software in the period. This is significantly above original expectations for 16 million DSes and 6 mln Wiis and for 70 mln and 17 mln copies of software, respectively. Nintendo subsequently raised its guidance for hardware and software sales for both platforms four times during the year. In its latest projections, it expects to sell 23 mln DSes and six mln Wiis and software sales of 100 mln DS software units and 21 mln Wii software units.
  • Nintendo's hardware capacity is constrained for both platforms. Nintendo indicated that it is looking at ways to boost production of both DS and Wii hardware to meet global demand. Nintendo said it may boost its current DS production of 2.5 mln units a month and is looking at ways to expand Wii production which is still sold out in many markets, although management commented that it expects Wii shortages to continue well into fiscal 2008. Nintendo is currently forecasting that it will sell a total of 22 mln DSes in fiscal 2008 for a total of 62.29 mln, and it is projecting Wii sales of 14 mln in the period for a total of 19.84 mln. These are both generally higher than earlier consensus expectations.
  • Nintendo is dominating software sales on both of its platforms. Nintendo reported DS software sales of 123.55 mln copies in fiscal 2007 and Wii software sales of 28.84 mln copies for the period. We believe this is well over 50% software market share for both platforms with Nintendo titles consistently ranking among the top five sellers on both. DS software sales were driven by New Super Mario Bros. (sold 9.5 mln copies), Brain Age (sold 8.1 mln copies) and Nintendogs (sold 7.0 mln copies) in fiscal 2007. Pokemon Diamond and Pearl has sold over 5.2 mln copies in Japan and was just released overseas with strong demand. Wii software sales were dominated by The Legend of Zelda: Twilight Princess and Wii Sports, which is not bundled with the Wii overseas.
  • Nintendo's success with the DS and Wii bodes poorly for the publishers. The DS and the Wii are taking the video game industry by storm. Both appear to be bringing new gamers into the market. However, this may not be a positive dynamic for the major video game publishers. Nintendo has not only increased the size of the market, but it has also re-segmented it in its own favor, in our view. Nintendo is dominating software sales on its popular hardware platforms, leaving the publishers with a smaller slice of an only somewhat incrementally larger pie. Moreover, we feel that the likely shorter product cycles of Nintendo's platforms put the publishers in a permanent catch-up mode. We think the upcoming releases of Super Mario Galaxy and Metroid Prime 3: Corruption will highlight this phenomena this holiday season.