Shares of the Nintendo ADR (NTDOY - Free Report) closed up 3.6% on Tuesday after the storied Japanese firm reported earnings results for the June quarter. Nintendo posted $0.29 in earnings per share on $1.52 billion in revenues, comfortably surpassing market expectations.

By the Numbers

A key highlight from the report was Nintendo’s $273.23 million in operating profit, marking 88.4% year-over-year growth. This was made possible due to the sale of 17.96 million software units, equating to a 120.8% year-over-year surge. Hardware sales, namely from Nintendo’s roughly one-year-old “Switch” console, were disappointing (1.9 million units, down 4.4% YoY). However, the company is making up for it by selling a lot more games.

Nintendo remains heavily exposed to overseas markets, with 76.6% of total sales coming from outside of Japan. This is a slightly higher proportion than the 75.3% average of the previous fiscal year, reflecting solid overall health in Nintendo’s brand and market share.

Still, diminished hardware sales are concerning for Nintendo, especially considering industry rival Sony (SNE - Free Report) announced on Tuesday that it sold 3.2 million hardware (PS4) units during the same period, bringing its total unit sales to 82.2 million, dwarfing Nintendo’s 19.7 million.

But even with these results, Nintendo management reiterated its 20 million hardware sale forecast for the fiscal year, which would amount to a 33% year-over-year increase. While this is an important display of confidence, it could prove difficult to achieve, especially considering this year’s upcoming blockbuster game titles aren’t slated for release until October, November, and December, respectively. In other words, they may not come in time to help propel Nintendo towards its target. Moreover, Jefferies cut its estimates for the year to 15 million units from 18.5 million.

What Comes Next?

Although industry competition is tight, Nintendo’s results still reflect plenty of strength. The fact that game sales were as strong as they were is a good sign because there were no particular catalysts to support it. This means that when Nintendo does release its next set of all-star titles, we could see even stronger performance.

Nintendo is also trying to accomplish something different with Switch than what Sony is with its PS4. The Switch, although weaker in terms of hardware specifications, is designed to be portable, while its industry counterparts are not. In other words, it has a competitive advantage of its own.

The Switch was released in March of last year, meaning that it is far earlier in its cycle than the now five-year-old PS4 and Microsoft’s (MSFT - Free Report) Xbox One. Furthermore, the Switch has already surpassed its predecessor, the Wii U’s six-year total of 13.56 million units.

Outlook

While Nintendo still has plenty of work ahead, it doesn’t need to be Sony or Microsoft in order to be successful. It is a company that has the history and brand power to warrant extended investor observation. It may not be the perfect play, but overly bearish arguments also fail to do the company justice.

The next challenge for Nintendo is to build an exciting catalog of games to get consumers excited. Should it successfully do so, the market will take notice very quickly.

Investors should note that any JPY-USD currency conversions were made using a $1 = ¥110.54 average rate for the quarter, which Nintendo listed in its release. For EPS specifically, we converted the reported figure and divided it by 8 to account for the 8:1 ratio that the ADR trades at in relation to ordinary Nintendo stock. Also note that the other ADR (NTDOF) on the US OTC market trades at a 1:1 ratio, but sees significantly lower daily volume.