Ubisoft Entertainment Earnings Preview: Deep Stock Analysis

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

Ubisoft (EPA:UBI) will report 1H FY:13 (September) results on Tuesday, November 6 with a call at 9:15am PT (866-907-5923 or www.ubisoftgroup.com/ir). We note that the company will be reporting Q2 sales and 1H earnings.

Expecting revenue and EPS results below our estimates, as continued digital growth will likely be insufficient to completely offset sluggish packaged goods sales.  According to NPD, Ubisoft’s U.S. software sales in the September quarter were down roughly 40%, worse than the declines implied by our top-line estimate of €120 million (down 18%), consensus of €114 million (down 21%), and guidance of €110 million (down 24%). 1H:13 EPS will likely be below our estimate of €(0.50) and consensus of €(0.40). Sales will likely be negatively affected by the weakening dollar, which decreased ≈ 2% against the  euro in the quarter (Q2 average was 1.29$/€ vs. Q1 average of 1.26$/€).

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Ubisoft will likely maintain FY:13 guidance for revenue of €1.16 – 1.20 billion and current operating income of €70 – 90 million. Guidance should reflect a strong debut for Assassin’s Creed III, which has benefited from a robust advertising campaign and strong reviews (≈ 85 on Metacritic), and hype around the Nintendo Wii U, as Ubisoft has the strongest third-party presence on the system so far.

In September, Ubisoft held its Uplay and Free-to-Play Webcast event. From FY:11 to FY:13, total digital/online revenues are expected to grow from €38 million to €140 – 160 million, with FTP revenues growing from €3 million (1 game) to €50 –60 million (8 games). There are 37 million Uplay accounts, with over 50% on PC. Long-term, the company would like to have games that are playable on consoles, PCs, mobile devices, and tablets as well, not just individual devices.

In our view, Ubisoft’s share price continues to be hindered by an unclear release schedule, with recurring delays. Until it provides and adheres to a detailed long-term release schedule (including for Tom Clancy games), we expect Ubisoft’s stock to continue to trade at a discount to larger, more dependable peers.

Maintaining our NEUTRAL rating and our 12-month price target of €7. Our price target reflects a forward P/E of roughly 10x our FY:14 EPS estimate of €0.67. Our target reflects a discount due to dependence on a few games, concerns over the long-term popularity of the Just Dance franchise, and delays.

Michael Pachter is an analyst at Wedbush Securities.

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