Outlook: Ubisoft Well-Positioned for Improved Profitability
Ubisoft will report fiscal Q3:14 (ending December) sales on Monday, February 10 after the close of the French Stock Exchange (8:30 a.m. PT), with a results call at 9:15 a.m. PT (dial-in: 855-402-7762 or at www.ubisoftgroup.com/ir).
We expect Q3 sales at or slightly above the high-end of the guidance range, driven by new releases Assassin’s Creed IV: Black Flag and Just Dance 2014. Our current estimate is for sales of 535 million euro (down 33 percent year-over-year), versus guidance of 500 – 540 million euro (down 33 – 38 percent).
According to NPD, Ubisoft’s retail sell-through in the U.S. tracked down 39 percent for the quarter; however, NPD does not measure sell-in (what the company guides to), and it does not capture digital sales, which totaled 71 million euro in 1H:14, up 29 percent year-over-year. Our conviction is further strengthened by the fact that management provided sales guidance after the current-gen
releases of Q3’s two big games after initial sell-in and reviews were known.
We expect FY:14 guidance to remain largely unchanged. Even if Q3 sales exceed expectations meaningfully, we expect management to remain conservative about future performance given the current-gen weakness in the marketplace caused by the two next-gen console launches in November. Ubisoft previously guided to FY:14 sales of 995 – 1,045 million euro and a non-IFRS operating loss of (70) – (40) million euro.
Longer-term, we think that Ubisoft is well-positioned for improved profitability. We expect management to maintain guidance for operating income in FY:15 of at least 150 million euros and in FY:16 of at least 200 million euros. The October delays of Watch Dogs and The Crew out of FY:14 should benefit the financial performance of both games, as Ubisoft has given itself more time to maximize full game potential. Also, it has avoided a crowded release slate at the end of CY:13 that could have provided limited mind share for Watch Dogs among consumers.
We expect Ubisoft to announce release dates for key games on its call, and to provide visibility into its FY:15 lineup. Management is very investor-friendly.
We are maintaining our OUTPERFORM rating and 12-month price target of 14 euros. Our price target reflects a multiple of 14x our FY:15 EPS estimate of 1.02 euros. Despite the October pre-announcement, 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.