Nintendo shareholders have had an interesting couple of days with the stock dropping on Switch sales guidance and now rallying following a very solid presentation by President Furukawa. During the financial presentation, Nintendo's president unveiled a new way to look at software sales attach rates on Switch called "Sales Per Hardware Unit." Because of the vast disparity in price points for games available on the eShop, it makes more sense to look at the cumulative dollar or yen sales for each Switch sold. It's truly a new way to take a look at attach rates, and has some analysts very excited for the future of Nintendo's revenue mix.
Nintendo President Furukawa explained the reasoning behind ther new Sales Per Hardware Unit metric at the financial presentation:
I’d now like to address the Nintendo Switch business from a slightly different angle. One conventional metric used in the dedicated platform business is the tie ratio, or the attach rate of software per unit of hardware. This is calculated by dividing the number of software units sold by the number of hardware units sold. However, with the rise in digital sales, we are witnessing the rapid sales growth of indie titles at a wide range of price points, and add-on content sales that cannot be counted with the number of software units sold. As a result, software attach rate calculated using conventional methods no longer adequately reflects the actual state of our business.
Instead, we would like to look at "sales per hardware unit," which is the overall sales for the platform divided by sales of the hardware itself. Note that this is calculated based on sales recognized by the company, and it differs from individual consumer spending.
With the vast array of price points for eShop titles that are hitting the store everyday, it makes sense to move away from reporting number of games sold. That number must be pretty big, considering how many indie games that many Switch owners have been buying. The big takeaway from the presentation was that Switch owners are spending more on games than Wii owners did at the same point in each console's life cycle. This is great news for the company as they have much higher profit margins on software. Making matters even better is the fact that digital software sales nearly doubled in Nintendo's fiscal 2019 from the year ago.
Nintendo (NTDOY) shares rebounded over 6% on the strong financial presentation. A number of analysts have also vocally called Nintendo's sales guidance for 2020 laughably conservative as the data doesn't back up the company's tepid sales guidance. This new way to look at sales is a refreshing bit of transparency from a rather secretive company. It appears that the fears around the Big N's financial results may be overblown.
At the time of this article, Asif A. Khan, his family members, and his company Virtue LLC had the following positions:
Long Nintendo via NTDOY shares
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