Nintendo's Handheld Keeps on Rockin'

Its DS portable game player sales are so explosive that Nintendo is on track to nearly double revenues in its just-ended fiscal year

New video game console releases have a way of creating mob scenes at retail outlets, at least with the hardcore gaming set. Yet when it comes to Nintendo's (NTDOY) portable DS gadget—introduced two years ago—the mania has never really ended.

The huge success of the DS handheld, plus a promising start for the more sophisticated Wii game console, is taking the Japanese company on the most enviable of earnings runs.

Nintendo keeps pleasantly surprising investors. On Apr. 5, Nintendo announced that its annual sales target for the 12 months ended Mar. 31 will now likely be $8.1 billion, rather than the previously projected $7.6 billion. The results are due to be announced Apr. 26.

Doubling Up

This upgrade comes only three months after the last one. Back then, in January, Nintendo raised its 12-month sales projection from $6.4 billion to $7.6 billion. "Sales growth overseas, which had been a lackluster segment, was a major factor," Nintendo President Satoru Iwata told reporters in Tokyo at the start of the year. To put this all into perspective, consider that in Nintendo's last fiscal year, sales were all of $4.3 billion—just over half what the company now projects for the year ended in March, 2007.

Nintendo didn't offer any formal earnings guidance, but did indicate that it expected to surpass its earlier forecast of $1.01 billion. Investors welcomed the latest news on the sales front. At the close of Tokyo trading, Kyoto-based Nintendo's stock was up 1.2% to $289, despite the wider market closing down. In the last 12 months, the company's stock price has doubled.

During that period, Nintendo launched the Wii game console, which is battling it out with Sony's (SNE) PlayStation 3 and Microsoft's (MSFT) Xbox 360. The launch, amid huge amounts of hype surrounding the Wii's innovative controller and games, was a big success.

Portable Powerhouse

In the weeks following its launch in November, the Wii console blew away Sony's PS3, thanks in part to Sony's failure to deliver enough new consoles to the all-important U.S. market. Nintendo had sold 1.1 million units of the Wii in the U.S. by late January vs. 687,000 PS3s during roughly the same period. "Nintendo Wii won the launch phase," noted Standard & Poor's equity analyst Clyde Montevirgen at the time (see, 1/26/07, "Nintendo Storms the Gaming World"). (S&P, like BusinessWeek, is a unit of The McGraw Hill Cos. [MHP]).

Yet for all the razzmatazz surrounding the Wii, analysts say it's Nintendo's DS portable that's behind the company's run of spectacular prosperity. Launched in late 2004, sales of the DS have long been outstripping Sony's PlayStation Portable and surpassed 30 million units—around three times more than the Xbox 360.

One big reason is that the DS has successfully reached customers who previously wouldn't look twice at a game console. In particular, quirky games like Nintendogs and the Brain Training for Adults series are proving hits with women and the over-35s (see, 8/1/06, "Handhelds, Mon Amour").

I Wanna Hold Your Handheld

Through the nine months ended Dec. 31, Nikko Citigroup analyst Soichiro Fukuda noted that "brisk domestic and overseas sales of the DS handheld" were the "principal factor behind substantial earnings growth" at Nintendo. Fukuda added that by the third quarter, Nintendo had already achieved 98.3% of the company's full-year sales target for DS software, compared to 72% at the same point a year earlier.

Nintendo indicated that its latest upward revision was for similar reasons.

The impact on the game industry shouldn't be underestimated. In 2006, Japan's video game market grew 37% to a record $5.3 billion, according to Enterbrain, which tracks the video game business in Tokyo. Hardware sales grew by 59.1% to $2.2 billion largely on the back of DS sales which had reached 8.9 million units in Japan by the end of the year.

The Nihon Keizai, a Japanese business daily, reported that the popularity of the DS also meant that handheld software accounted for 62.9% of game software sales—the first time handheld sales had exceeded console sales since figures had been recorded in Japan.

Creating the Game Market

With overseas DS sales also beating expectations, small wonder Sony is concerned. On Apr. 3, Sony cut the price of the PSP by 15% to $169.99 in the U.S. The PSP, despite being on the market longer, has sold only 7 million units, compared to 9.9 million DS units, according to NPD Group, a research firm.

And while the Wii's successful launch phase is in part due to similar factors, analysts say that it will take longer for console earnings to filter through to the bottom line. One reason is that with more than 30 million DS units now sold, handheld software sales are now a huge driver of sales and profits.

For the financial year just ended, Nintendo expected 100 million DS titles to be sold, double the previous year's number. Meanwhile, in Europe, Nintendo announced yesterday 39 new titles for the next quarter, compared to 25 last year. And because many of the best-selling DS titles, such as Nintendogs, are Nintendo titles, the profits go straight to the company's bottom line.

No Loss Leader

That's not to say the Wii won't soon start making a big impact on Nintendo's bottom line. Nintendo has targeted shipments of 6 million by the end of the financial year in March, although the company may have sold many more. However, David Gibson, an analyst at Macquarie Securities in Tokyo, says that from this month, Nintendo will begin ramping up Wii production from around a million units a month to 1.5 million. "This means that they could be selling over 17 million in a year," he says.

What's more, unlike Sony, Nintendo breaks even on Wii console sales and should soon start to make a small profit, even before the games-related earnings flood in. "They've hit the sweet spot—they've got both the handheld and the console," adds Gibson. From a profit and sales perspective, "this year is about the DS and next year is about the Wii." With Nintendo doing brilliantly in consoles and handhelds, the news going forward on the earnings front will be very sweet, indeed.

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