A Nintendo Co. Switch game console. (Photographer: Kholood Eid/Bloomberg)

Nintendo's Guidance Seen as a `Mockery,' Sending Shares Lower

(Bloomberg) -- Nintendo Co.’s muted forecast for its financial performance in the current fiscal year stunned investors and analysts, sending shares sliding.

The company’s stock tumbled as much as 5.1 percent after it forecast operating profit of 260 billion yen ($2.3 billion) this year, well short of the 350.2 billion yen average of estimates. Analysts were particularly befuddled by the forecast that it will sell 125 million new software titles, significantly below market expectations for 161 million and lower than all but one of 10 projections tracked by Bloomberg.

“The way they guided software growth, it’s a mockery of the whole guidance word and the process,” Atul Goyal, a senior analyst at Jefferies Group, said on Bloomberg TV. “The way they’re guiding overall software sales to grow only 5 percent after having 85 percent growth last year is unreal. It’s a joke.”

Goyal said Japanese companies including Nintendo are known for making conservative estimates at the start of each fiscal period. But even by those standards, President Shuntaro Furukawa’s projection stands out amid a blockbuster games lineup this year and expectations for stronger hardware growth, which drives software sales. The company could be wary of repeating last year’s mishap, when it issued bullish guidance but cut it later, which sent the stock plunging.

Nintendo's Guidance Seen as a `Mockery,' Sending Shares Lower

Shares have rebounded this year on optimism that a cheaper version of the Switch, a stronger pipeline of games and a potential entry into China will help overcome last year’s missteps and broaden Nintendo’s customer base beyond dedicated fans. But Furukawa tamped down those expectations after the results, saying the China launch is far off and there’s no plan to unveil a new Switch at the Electronic Entertainment Expo in the U.S. in June.

“As a general rule, we’re always working on new hardware and we will announce it when we are able to sell it,” Furukawa told reporters in Osaka. “But we have no plans to announce that at this year’s E3 in June.”

Analysts downplayed the comments, saying the company wouldn’t announce new hardware as it would cannibalize sales of the existing Switch. But they pointed to a drop in the company’s inventory as signs it could be clearing out existing stock to prepare for a new model.

Nintendo's Guidance Seen as a `Mockery,' Sending Shares Lower

Operating profit was 29.7 billion yen in the three months ended March, below the 36 billion yen expected by analysts. The company shipped 17 million Switch consoles last fiscal year and forecast 18 million for the current period, compared with analyst projections for 18.5 million. It sold 119 million software units last fiscal year, slightly below analyst projections for 121 million.

The Switch sports a stronger software lineup this fiscal year, with two new mainline Pokemon games slated by the end of 2019. New entries in the Animal Crossing and Luigi’s Mansion series are also scheduled for this year, as well as a remake of an older Zelda title. On Friday, Furukawa told analysts that software sales momentum was robust, raising more questions about why the company’s official guidance wasn’t in line with management’s comments.

“The forecast is quite conservative and leaves a negative impression,” said Tomoichiro Kubota, an analyst at Matsui Securities in Tokyo.

Shares of Nintendo had risen 32 percent this year prior to the results, compared with an 8.4 percent rise in the Topix index. The company announced it would pay a full-year dividend of 810 yen, higher than last year’s 590 yen.

Furukawa confirmed that Nintendo is working with Tencent Holdings Ltd. to sell the Switch in China, but said there’s no timeline for a launch. Shares jumped 15 percent last Friday after Tencent received the first of several regulatory approvals necessary for sales to begin.

“Our current applications are just for the hardware, but we’ll also need inspections of our software,” Furukawa said regarding the Chinese business. “We will need many more applications to the government and others, so from that perspective the launch period is still unknown.”

While demand for console gaming remains limited on the mainland, analysts say closer ties with the social media giant could lead to Nintendo releasing mobile titles in China, the world’s biggest gaming market.

Smartphone game revenue grew 24 percent in the latest quarter from a year ago to 12.7 billion yen. Nintendo plans to release two mobile games this summer: Dr. Mario World and Mario Kart Tour. Analysts have speculated that Mario Kart could become a billion-dollar grossing app if executed properly, but the company has delayed the title once and has yet to provide a single screenshot of the game. On Thursday, Nintendo confirmed it will begin a closed beta test of the app from May 22.

With no new 3DS titles scheduled for the coming year, the company is signaling the end for the eight-year-old handheld device. Revenue from the 3DS business was 63 billion yen in the fiscal year ended March, down 67 percent from the prior period.

Paid accounts for its online service exceeded 9.8 million, Nintendo said Friday. Digital sales which include online subscriptions jumped 95 percent to 119 billion yen.

The company could benefit from the highly anticipated Detective Pikachu movie, which launches in Japan May 3 and globally on May 10. Nintendo owns a significant stake in Pokemon Co. and recorded 6.9 billion yen of operating profit from that investment in the latest fiscal year -- most of it likely from Pokemon Go.

“We view results themselves as neutral but think the share price will continue trending upward for now,” Morgan Stanley analysts Masahiro Ono and Yui Yasumoto wrote in a report. They maintained their positive outlook due to the “potential to overshoot guidance based on the possibility of sales to China being added in over the course of the year.”

©2019 Bloomberg L.P.