Ubisoft Entertainment SA Outlook

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

Ubisoft (EPA:UBI) will report its fiscal Q1:14 (ending June) sales on Thursday, July 18 after the close of the French Stock Exchange (8:30am PT), with a conference call at 9:15am PT (dial-in: 866-907-5924 or at www.ubisoftgroup.com/ir).

We expect Ubisoft to report Q1 sales at, or slightly below, guidance. Our published estimate calls for sales of €75 million (down 43% y-o-y), compared to guidance of €70 million (down 47%). According to NPD, Ubisoft’s Q1 U.S. salesthrough May were down 64% due to the release of a Tom Clancy game last year. Strong digital growth in Q1 likely offset Ubisoft’s catalog weakness. The company guided to FY:14 digital sales of €237 million, up from €148 million in FY:13.

We expect FY:14 guidance to remain largely intact. Ubisoft guided to FY:14 revenue of €1.42 – 1.45 billion and non-IFRS operating income of €110 – 125 million, compared to FY:13 results of €1.26 billion and €100 million. Guidance includes five major releases in FY:14, versus three in FY:13. These five include Assassin’s Creed IV: Black Flag, Tom Clancy’s Splinter Cell: Blacklist, Watch Dogs, The Crew, and one unannounced IP. We think a downward revision is unlikely, as we think that guidance contemplates that Black Flag will underperform its predecessor (sell-in of over 12.5 million units), and we are confident that delays are under control.

In May, we upgraded Ubisoft shares to reflect improving execution and the greater predictability of its release slate. 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. In our view, Ubisoft’s earlier 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.

Ubisoft looks to be a leading next-gen player. Of the aforementioned titles, only Tom Clancy’s Splinter Cell: Blacklist, an August release, is a current-gen exclusive, at least for the time being. We expect sales of the PS4 and Xbox One to be much stronger from the outset than they were for Nintendo’s (TYO:7974) Wii U, benefitting Ubisoft.

Maintaining our OUTPERFORM rating and 12-month price target of €14. Our price target reflects a market multiple of 16x our FY:14 EPS estimate of €0.88. We continue to see upside to the current share price due to bullish FY:14 guidance, a better-executed release slate, and the launches of the next-gen consoles.

Michael Pachter is an analyst at Wedbush Securities.

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