Ubisoft (OTC:UBSFY) will report 1H FY:14 (September) results on Tuesday, November 12 with a call at 9:15am PT (855-402-7762; webcast: www.ubisoftgroup.com/ir). We note that the company will be reporting Q2 sales and 1H earnings.
We expect results to be in line with Ubisoft’s pre-announcement. The company expects Q2:14 sales of over 210 million euros, compared with our estimate of 211 million euros, and consensus of 217 million euros. According to NPD data, Ubisoft sales were up 40 percent in Q2, suggesting the potential for upside to our and consensus estimates. We expect Ubisoft to maintain full year guidance in-line with its October pre-announcement. Last month, the company lowered its FY:14 guidance to reflect two game delays. Watch Dogs has been moved to Q1:15 from Q3:14, while The Crew has been moved to Q2:15 from Q4:14.
For FY:14, Ubisoft expects sales of 995–1,045 million euros and a non-IFRS operating loss of (70)–(40) million euros, well below prior guidance of 1,420–1,450 million euros and 110–125 million euros, respectively. The company attributed lower top-line expectations to f/x and the performance of already released games (such as Tom Clancy’s Splinter Cell: Blacklist and Rayman Legends). Ubisoft expects Assassin’s Creed to sell over 10 million units, compared to over 12 million units for its predecessor, a level that we feel will be difficult to achieve. It initiated operating income guidance for FY:15 of at least 150 million euros and for FY:16 of at least 200 million euros, highlighting strong earnings growth potential.
We believe the Watch Dogs delay will benefit the game’s performance and strengthen the brand’s staying power. Watch Dogs was delayed to maximize its full potential and ensure that it is a long-term pillar for the company, while The Crew was delayed to ensure that the game takes a lasting position in the driving segment. It believes that sales will be buttressed further by a greater supply of next-gen consoles next year. We believe that management was also concerned about the strong competition for wallet share Watch Dogs faced at the holidays from Grand Theft Auto V, Battlefield 4, and a new Call of Duty, among others.
We are maintaining our OUTPERFORM rating and 12-month price target of 14 euros. Our price target reflects a multiple of 13x our FY:15 EPS estimate of 1.07 euros. Despite Tuesday’s news, we remain fans of the company’s improving execution and management’s long-term vision, and believe Ubisoft will benefit from the stronger Watch Dogs franchise that should emerge from more development time.
Michael Pachter is an analyst at Wedbush Securities.