How To Get A Star In Mario Kart Wii

The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.

On Wednesday, July 30, before market open in the west, Nintendo (OTC:NTDOY) will report Q1:15 (June) results. It will not hold a conference call or press briefing.

We expect Q1 results above consensus driven by the Wii U's better-than-expected performance. According to NPD data for the June quarter, Nintendo's software sales were up 20 percent year-over-year (we modeled down 30 percent), while its hardware sales were down 9 percent (we modeled down 14 percent), better than our expectations and the levels implied by consensus. No quarterly guidance was provided. Wii U outperformed Nintendo's other devices, due mainly to May release of Mario Kart 8.

We expect full-year guidance to remain largely unchanged, although we continue to believe it is unrealistic without hardware price cuts. FY:15 guidance is for revenue of ¥590 billion, operating income of ¥40 billion, and EPS of ¥169, above our estimates for revenue of ¥515 billion, operating loss of ¥(20) billion, and EPS of ¥(100). Although Wii U sales will benefit from the release of Super Smash Bros. later this year, we believe Nintendo will struggle to sustain recent strength as the release slate, particularly for must-have first-party titles, remains too inconsistent for the console to make a sustained push. In addition, the majority of the industry's must-have titles in upcoming months will be available on Microsoft and Sony hardware only. Also, 3DS and Wii demand continues to wane.

We do not expect Amiibo figurines to significantly impact Nintendo's outlook. Although Amiibo figurines should appeal to Wii U owners, the console's small installed base and $299 price point should mean consumer spending on Amiibo, at least at the outset, is unlikely to offset weakness in other parts of the business.

We continue to view FY:15 3DS hardware guidance as unrealistic. Q4:14 combined 2DS and 3DS hardware sales were 590,000 units in the second quarter of release for the 2DS, down from 7.76 million q-o-q. Q4:14 was the worst quarter ever for the 3DS in terms of hardware sales, and it was the first time sales had been below one million units since Q1:12, a quarter after its release. FY:14 sales of 12.24 million were down 12 percent from 13.95 million in FY:13. For FY:15, Nintendo expects to sell 12 million 3DS hardware units, down only 2 percent y-o-y at the low end.

Maintaining our NEUTRAL rating and our twelve-month price target of ¥10,000 per share. Our PT reflects an enterprise value of ¥500 billion, which reflects the value of Nintendo's IP to a potential acquirer based on similar transactions.

Michael Pachter is an analyst at Wedbush Securities.

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