Nintendo Japan just published the official transcript of their earning report Q&A for Q3 FY2021. Since the official English transcript probably won't be published until Monday or Tuesday, I'm posting a machine translated version (with some minor edits from me) below in the meantime.
Furukawa admitted that sales of evergreen titles will start declining unless there are enough new hardware purchases. Hmm...
"We are going to keep this conservative forecast, but thanks for asking."
2022 will continue to be supply constrained.
The last sentence is the most interesting. It isn't clear if Furukawa is hinting at future backward compatibility, or talking about the launch window for the next hardware.
King shit
He's saying the right thing, but I'll believe it when they release more DLCs
Pushing back at the Bloomberg report of OLED profit margin yet again.
Is this why they killed Dr. Mario?
Q1: Please tell us about the trend of evergreen titles. Repeat sales of evergreen titles have increased more than in the previous fiscal year, but what is the reason for this? Are there many people who buy regular titles together with new titles when they are released? Or, when the Nintendo Switch (OLED model) is released, do many customers buy the OLED model along with the evergreen titles?
A1 Furukawa: Since the last fiscal year, the weight of evergreen titles (released before the last fiscal year) in software sales has been increasing. In the current fiscal year, there were nine titles released between April and December. In the current fiscal year, titles released before the previous fiscal year accounted for approximately 60% of our software sales (sell-through*) in major regions during the nine months from April to December. In the three months from October to December, the percentage was about 50% due to the strong sales of new titles.
As for the sales trend of evergreen titles, there were many cases where customers who newly purchased Nintendo Switch hardware chose an evergreen title as their second or third game. In addition, as the Nintendo Switch will soon enter its sixth year of operation, we believe that the percentage of new purchases will decrease, and that demand for multiple units within households and replacement demand for Nintendo Switch (OLED model) will increase. With these additional purchases and replacement demand, customers often already have evergreen titles, so we expect that the ratio of evergreen titles will decline unless there is a strong demand for new hardware purchases.
On the other hand, we believe that new titles can be purchased by both new Nintendo Switch purchasers and existing hardware owners. So as we offer a variety of hardware, we recognize that it is important to sell both evergreen and new titles.
Furukawa admitted that sales of evergreen titles will start declining unless there are enough new hardware purchases. Hmm...
Q2: What is your plan for the fourth quarter (January to March 2022)? Considering the strong sales of "Pokémon LEGENDS Arceus" and the release of "Kirby and the Forgotten Land" in March, the fourth quarter operating income forecast looks conservative. How much of the impact of "Pokémon LEGENDS Arceus" has been factored into the forecast?
A2 Furukawa: There are three main changes in our forecast, one of which is that we have lowered our hardware sales volume forecast from 24 million units to 23 million units, mainly due to shortages in the supply of semiconductor components, which will make it difficult to produce and sell the number of units that we had planned. On the other hand, we raised the software sales plan from 200 million units to 220 million units in consideration of the past sales performance. We haven't made any major changes to our sales plan for the fourth quarter. Thirdly, we have changed our assumed exchange rate for the US dollar from ¥105 to ¥110 per dollar.
Regarding the sales outlook for the fourth quarter, we have been able to procure hardware production with almost no problems toward the sales volume forecast of 23 million units for the current fiscal year. However there remains uncertainty in logistics, and delays continue to occur especially in logistics for overseas customers. Given these circumstances, it is unlikely that the hardware sales volume will be significantly higher than expected.
As for software, we have not significantly revised our plan for the fourth quarter, and we believe that there is room for a slight increase in sales depending on future trends. “Pokémon LEGENDS Arceus" was released just last week (January 28), and it has had a very good initial response. It seems that many people who have been playing other "Pokémon" titles on the Nintendo Switch and also people who are interested in this title that offers a new "Pokémon" experience purchased it. We hope that many customers will pick up this title. In addition, "Kirby and the Forgotten Land" is scheduled to be released in March, and by significantly increasing sales of our own titles, we will be able to achieve our plan.
"We are going to keep this conservative forecast, but thanks for asking."
Q3: What is the status of Nintendo Switch hardware production and sales? While I think shipments were high in the third quarter (October-December), I feel that shipments to the US were a bit weak. Is this because there was a delay in logistics? Also, do you see any different trends in material procurement for the next fiscal year?
A3 Furukawa: With regard to the production and sales of Nintendo Switch hardware, we were able to produce enough to meet demand during the first half (April to September), and we have enough inventory in stores around the world. As for the situation by region from October onward, including the holiday season when sales are at their peak, although Nintendo Switch (OLED model) is temporarily in short supply in Japan and Europe, production and supply of hardware was sufficient to balance supply and demand for the entire Nintendo Switch family. In the U.S., however, there was a shortage of hardware from the third week of November (Thanksgiving) onward, and in December the supply was unable to meet demand.
We have been reporting since the beginning of the fiscal year that the future is uncertain due to the tight supply and demand for semiconductor components, but there is no sign of any major changes in 2022, and the same situation will continue. Even under these circumstances, we were able to sell the same level of hardware during last year's holiday season as the previous year thanks to the cooperation of our partners. We would like to express our sincere gratitude to all of our partners for their cooperation. In the future, we will continue to produce as much hardware as possible and strive to supply enough to meet demand.
2022 will continue to be supply constrained.
Q4: I would like to hear more about the number of "annual play users" and how it compares to the 100 million Wii units sold. Is there any relationship with software sales trends? What kind of business decisions are you making based on the number of "annual players"? In a situation where the number of players is maintaining and expanding at a high level, is there a possibility that it will lead to a decision that it is better not to launch a next-generation console?
Furukawa: The number of "annual play users" is the number of customers who have launched game software at least once in a year among the Nintendo accounts registered on the Nintendo Switch console. It's a long term figure. The reason for looking at the number of "play users" over a long period of time is that our customers vary widely in terms of the frequency with which they play games and the number of software they purchase. Therefore, we believe that it is meaningful to present the status of our customers who play our game machines in this way in order to gain a better understanding of our business.
In making day-to-day business decisions, we use not only the annual number of players but also various other indicators to make business decisions from time to time.
As for the comparison with Wii, Wii and Nintendo Switch are game consoles with very different features, and the development of software and the way it is played are also different. In addition, the game industry and the environment surrounding our company have changed significantly since the launch of Wii in 2006, so although the cumulative sales volume of 100 million units is the same level, we are not making a simple comparison with Wii.
We believe that the large number of customers who play on the Nintendo Switch makes it easier for them to pick up new titles when we release them in the future. The fact that the number of Nintendo Switch users rose to a record high toward the end of last year means that the platform is entering its sixth year of operation with great momentum.
Looking ahead, it will be important to maintain and grow the (current) number of nearly 100 million "annual players", which will also be important when considering the next hardware rollout.
The last sentence is the most interesting. It isn't clear if Furukawa is hinting at future backward compatibility, or talking about the launch window for the next hardware.
Q5: What is your approach to the metaverse and NFT? You may already have worked on some aspect of this in "Animal Crossing: New Horizon”. Please tell us as much as you can about the metaverse, which has great potential for the future.
Furukawa: The metaverse is attracting the attention of many companies around the world, and we believe that it has great potential. In addition, as the metaverse is introduced in the media, software such as "Animal Crossing" is mentioned as an example, and I am interested in that sense.
On the other hand, it is not easy to define what kind of surprises and fun can be provided to customers by the metaverse at this point in time. As a company that provides entertainment, we place the utmost importance on how we can deliver fresh surprises and fun to our customers. If we can find a way to communicate our "Nintendo approach" to many people in an easy-to-understand manner, we may be able to consider something, but we do not believe that this is the case at this time.
King shit
Q6: What percentage of users purchased Animal Crossing: Happy Home Paradise, a paid add-on to Animal Crossing: New Horizon? Also, please tell us about sales trends and responses.
A6 Furukawa: We don't disclose the percentage of users who have purchased additional content for individual software titles, but digital sales in the third quarter were very strong, and one of the reasons for this was the strong sales of Animal Crossing: Happy Home Paradise, which is also available to subscribers of Nintendo Switch Online expansion pack. During the same period, we also released the last fighter in Super Smash Bros. SPECIAL Fighter Pass Vol. 2. By introducing large DLC of released software, the usage of hardware improved as a result. In the year-end sales season, the introduction of new software and such additional content boosted hardware sales, and sales of other software also increased.
He's saying the right thing, but I'll believe it when they release more DLCs
Q7: I would like to ask about hardware manufacturing costs. I believe that costs have risen a little due to the current shortage of semiconductors, but how much impact does this have on gross profit? Also, in the future, will you increase the number of units produced even if costs rise in order to secure production volume, or will you continue to produce while considering costs to some extent?
A7 Furukawa: It's been a long time since the Nintendo Switch hardware was released, and we've been reducing costs. However, costs have been on the rise in recent years due to the tight supply and demand for components. Little by little, this is having an impact on gross profit. However, if the current cost level continues in the next fiscal year, we expect the profitability of hardware to deteriorate compared to the current fiscal year. In addition, as we have already mentioned, the profit margin of the Nintendo Switch (OLED model) is lower than that of the conventional Nintendo Switch and Nintendo Switch Lite. Unless this situation dramatically changes, we do not expect profitability to improve in the next fiscal year onward. The cost increase will not affect our production plan, and we will continue to produce the necessary number of products to meet the demand.
Pushing back at the Bloomberg report of OLED profit margin yet again.
Q8: I think it's difficult to allocate development resources to mobile and IP-related business since you mainly develop for game consoles. But for example, Nintendo supervises and asks a third party to create mobile games. Do you have any plans to expand this field without using your own resources?
A8 Furukawa: In the mobile business, we are currently operating five titles, and we are also distributing an application called "Pikmin Bloom" through Niantic. Through the mobile business, we believe that we can have a certain effect of continuously exposing our IP to a large number of customers around the world. In addition, many customers who do not own our game consoles have downloaded our games. We feel that the mobile business is meaningful in that it allows us to contact new customers.
Nintendo's IP was born from games, and customers have strong affection and attachments to them as they actually play the games. It is not just the visual design, but the game experience itself that is the source of the value of the IP. Therefore, our basic policy is to respect the individuality of the IP so as not to damage the image and attachment of the customers. If we can do something in this way, we will develop it, but we are developing it with an emphasis on not destroying the image and attachment of our customers to the IP.
Is this why they killed Dr. Mario?
