Revenue fell, margins jumped, and the most useful number in the release had almost nothing to do with the Switch 2.
Three months ago, in May, I published a long deep dive on Nintendo in which I argued that the market was still pricing a growth inflection as a legacy hardware cycle. I framed it as a hypothesis rather than a thesis, precisely so that quarters like this one could do their job, which is to tell me where I am wrong.
Deep Dive: Nintendo ($NTDOY)
Nintendo is no ordinary company. Founded in 1889 as a playing card manufacturer, it’s a story of survival, reinvention, and unlikely triumph.
Today, Nintendo reported its first quarter of the fiscal year ending March 2027, and I want to walk through what the print actually says, what it says about the seven pillars I laid out in May, and where my view has shifted. The full Q&A is not out yet, as I write this (I have to catch a plane in around three hours from now), so the comments are largely based on the results and slides shared and the added explanations.
Net sales came in at 517.8 billion yen, down 9.5% year on year. Operating profit went the other way, up 150.5% to 142.5 billion yen, which lifts the operating margin from 9.9% to 27.5%. Ordinary profit more than doubled to 206.1 billion yen (close to 40% margins) and net profit rose 53.5% to 147.4 billion yen.
I think overall it’s an “okay” quarter; not more and not less.
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A 27.5% Margin That Is Really Closer to 18%
Two things flattered this print, and both are disclosed in plain sight. The first is roughly 300 million U.S. dollars booked as a reduction of cost of sales in connection with IEEPA tariff refunds.
“We recorded approximately 300 million U.S. dollars as a reduction of cost of sales in connection with refunds of IEEPA tariffs. The tariffs related to the refunds were primarily borne by the company rather than passed on to consumers through product prices.“
At the quarter’s average rate of 159.38 yen to the dollar that is about 47.8 billion yen, or a third of reported operating profit.
The second is currency, which added 39.0 billion yen to sales and about 22.2 billion yen to operating profit.
Strip out the refund and the operating margin lands near 18%. Strip out the currency help as well and you are in the mid-teens. Against 9.9% a year ago that is still a genuine improvement, and it is exactly the improvement the model predicts once hardware stops dominating the revenue mix. Hardware fell from 78.8% of platform sales to 55.3%.
First-party software climbed from 64.8% of software sales to 82.6%.
Digital reached 61.5%, up 2.2 points (but down from Q4; 67.2%), with digital sales up 90% to 132.7 billion yen.
On the refund itself: Nintendo booked it, and it intends to keep it. There is a class action in Washington arguing that the company should hand it back to the consumers who paid the tariff-inflated prices, and Nintendo’s lawyers filed a motion to dismiss in July, arguing that buyers “received exactly what they bargained and paid for.” I have no view on how a Washington court will rule. I do have a view on the accounting: this is a one-time item, it does not repeat, and anyone building a run-rate off Q1 needs to take it out.
Why Switch 1 Software Grew Four Times Faster Than Switch 2 Software
One line in this release stood out: Nintendo Switch 2 software sell-in grew 9.2% year on year to 9.46 million units. Nintendo Switch software, the nine-year-old machine, grew 38.6% to 33.81 million units. The old console outgrew the new one by a factor of four in its second year.
At first glance, this looks alarming.
Think about it for two minutes and it makes sense. A couple of reasons why:
Tomodachi Life: Living the Dream shipped 7.94 million units in the quarter and has now passed 8 million on a sell-through basis, and it is a Switch 1 title that runs beautifully on Switch 1 hardware.
Meanwhile the prior-year comparison for Switch 2 software is the launch quarter, when Mario Kart World was going out of the door inside hardware bundles by the million. Roughly 12.6 million Switch 2 software units were bundled with hardware across FY26. That is a brutal comp to lap.
So the mix looks odd for good reasons. What I take from it is something I have believed since before the Switch 2 launched, which is that the depth of the Switch 1 catalogue is an asset rather than a drag. Nintendo is still monetizing an installed base of well over 100 million people while it builds the next one. Annual playing users came in at 130 million for the twelve months to June, holding the level from last year. The company earns money from those users whether they have upgraded or not.
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