New Consoles Will Be Big for Ubisoft

The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.

We are upgrading our rating for Ubisoft shares to OUTPERFORM from NEUTRAL, and increasing our 12-month price target to 14 euro from 9 euro to reflect bullish guidance for FY:14, a better-executed release slate, and the upcoming launches of the next generation of consoles. Our revised price target reflects a market multiple of 16x our FY:14 EPS estimate of 0.88 euro.

Revenue growth driven by key franchises and continued digital growth. Q4 revenue was 175 million euro, compared with our estimate of  181 million euro, the consensus estimate of 174 million euro, and guidance of 159 – 179 million euro. Strong performers in FY:13 were Assassin’s Creed 3 (sell-in of over 12.5 million units, up from over 12 million units at Q3), Far Cry 3 (sell-in of 6 million units, up from over 4.5 million units), and Just Dance 4 (sell-in of 8.5 million units, up from almost 8 million units). For the year, the company had core gaming revenue of 928 million euro (up 60 percent y-o-y), casual gaming revenue of 328 million euro (down 32 percent), and online / digital revenue of 148 million euro (up 86 percent, and included in core and casual).

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EPS beat driven by a goodwill amortization add-back. 2H:13 pro forma EPS was 1.11 euro, compared with our estimate of 1.06 euro, and the consensus estimate of 1.07 euro. Ubisoft did not provide EPS guidance.

Much better-than-expected FY:14 guidance. We had expected Ubisoft to guide to flattish top-line growth and positive operating income growth. Actual FY:14 guidance for revenue of 1.42 – 1.45 billion euro and operating income of 110 – 125 million euro represents growth of 13 – 15 percent and 10 – 25 percent, respectively, which is particularly bullish for a console transition year. Growth will be driven by a number of factors, including five major titles as opposed to three in FY:13, new IPs for the next-gen consoles, and digital and online growth.

Ubisoft’s has executed well, and its release slate has become more predictable. FY:14 is the fifth consecutive year for Assassin’s Creed and Just Dance releases. In addition, Ubisoft will release a Tom Clancy game for a second consecutive year. We previously speculated that Ubisoft’s inability to provide detailed long-term release schedules and successfully adhere to them was the primary reason why its shares traded at a discount to some of its peers. We believe that the FY:14 guidance and release slate will appease these investor concerns to a large extent, and expect the trading discount to dissipate as the year progresses.

Michael Pachter is an analyst at Wedbush Securities. 

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