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As WP's managing editor, I edit review and preview articles, attempt to keep up with the frantic pace of Rainier's news posts, and keep our reviewers on deadline, which is akin to herding cats. When I have a moment to myself and don't have my nose in a book, I like to play action/RPG, adventure and platforming games.


Ubisoft Sales Up, Profits Down, Outlook Bright

by Judy on June 28, 2006 @ 4:11 p.m. PDT

Ubisoft today released its 2005-2006 annual results for the fiscal year ended March 31, 2006. At €547M, sales were up 3% from the previous fiscal year. Profits, however, declined over 50%, from €24.7M to €11.9M, due to research and development for next-gen titles and increased marketing costs during the console transition. The initial investment has already begun to pay off, as next-gen titles composed almost 30% of their sales for the fiscal year.
  • Ubisoft attains the position of 4th largest independent publisher (excluding Japan)1, with sales up 3% in a market down 3%.
  • Current operating income in line with revised objectives: €3.1 M before stock based compensation.
  • Net income: €11.9 M.
  • Gearing: decreased from 24% to 17% in a period of very high investment.
  • Objectives for 2006-2007 and 2007-2008: acceleration of growth and increased profitability thanks to a strategy of anticipated investments on new consoles.
On March 31, in millions of euros   2005/2006 2004/2005 Key elements of the consolidated income statement (IFRS) Net sales €M 547.1 532.5 Gross Margin % 65.9 66.5 Current Operating Income before stock-based compensation €M 3.1 39.0 Current Operating Income € 0.4 33.5 Net Income €M 11.9 24.7 EPS € 0.63 1.39 Key elements of the consolidated balance sheet Net Debt €M 65.3 74.4 Gearing % 17.0 24.0

Yves Guillemot, CEO of Ubisoft said: "Ubisoft has achieved a solid performance during this fiscal year, gaining new market shares and increasing its sales in spite of the 3% decline in the video game sector. Thanks to our R&D efforts and our early positioning on new generation consoles, we have already achieved almost 30% of our sales from next generation in fiscal year 2005-2006 and in the fourth quarter, we attained 20% of market share on the Xbox 360. 2005-2006 was also marked by the success of the game Peter Jackson’s King-Kong : The official Game of the Movie, which enabled us to jump into the film licensing market with 4.5 million units sold. Finally, during this period of high investment, Ubisoft has continued to improve its financial position and can therefore accelerate its growth and pursue its development."

Main elements of the income statement:

  • Gross margin maintained at a high level thanks to the success of titles for the new consoles.
  • Major R&D efforts to take full advantage of the substantial growth expected from the new consoles market.
  • Temporary rise in marketing expenses: a necessary step of the transition phase.
On March 31 2005/2006 2004/2005   In millions of euros As a % of sales In millions of euros As a % of sales Net Sales 547.1 100.0% 532.5 100.0% Gross margin 360.7 65.9% 354.2 66.5% R & D expenses 170.4 31.1% 157.6 29.6% Sales, marketing, G&A expenses 187.2 34.2% 157.6 30.0%

Current operating income before stock
based compensation

3.1 0.6% 39.0 7.3%

Sales increased 3%.

The gross margin was steady at a high level (65.9%) thanks to the performance achieved on high margin next generation consoles (75% on average compared with 57% on average for old generation consoles).

Pre-tax operating profit stood at €3.1 M before stock based compensation, in accordance with forecasts revised on January 26, 2006 on publication of third quarter sales. The fiscal year was marked in particular by:

  • The €12.8 M increase in R&D expenses aimed at supporting the strategy of growth and acquisition of market share for the new consoles;
  • The €18.4 M increase in advertising expenses needed to reach the mass market target for old generation consoles. This increase had been scheduled in order to attain a higher sales objective than was actually achieved. The old generation console activity, as previously announced, has in fact declined more rapidly than anticipated.

The financial charges amount to €9.1 M, broken down as follows:

  • €10.3 M in financial expenses, of which €1.7 M in application of IFRS standards for compound financial instruments;
  • €6.3 M in exchange losses;
  • €7.5 M positive impact linked to the "equity swap" .

The contribution of equity accounted companies amounted to €19.1M, and is broken down as follows:

  • €0.7 M representing the share of the results of Gameloft
  • €2.6 M corresponding to a dilution profit
  • €15.8 M in capital gains on the sales of securities.

Net income amounts to €11.9 M, i.e. a net income per share of €0.63. It benefits from a net tax credit of €3.3 M, which is broken down as follows:

  • a tax credit of €3.2 M linked to the negative pre-tax profit for the fiscal year;
  • research tax credits in the amount of €2.5 M;
  • taxation of €2.4 M on capital gains from sales of Gameloft SA securities.

Main cash flow and balance sheet elements:

Net debt on March 31, 2006 was €65.3 M, €9 M lower than the previous fiscal year. It shows a gearing of 17%, compared to 24% at March 31, 2005.

This improvement reflects:

capital increases in the amount of €41 M deriving from the conversion of convertible bonds and the exercise of share subscription warrants;
sales of Gameloft SA securities in the amount of €23 M;
offset by a strong increase in investments, principally in production and brand acquisitions (+ €55 M, i.e. an increase of +37%) in order to take full advantage of the substantial growth anticipated in the new consoles market.

  • Outlook

Yves Guillemot said:"2006-2007 will be a new year of transition with the arrival of Sony's PS3 and Nintendo's WII consoles. We forecast a sales growth of between 5% and 10%, despite a global market which should decrease by 7%, thanks to the launch of 5 new high-potential brands, including:

  • Assassin's Creed awarded the Game Critics : Best of E3 for Best Action / Adventure game;
  • Red Steel which will be an exclusive launch title for the Nintendo Wii;
  • Heroes of Might and Magic, already released during the fiscal year, and ranked N°1 in PC sales in the UK, France and Germany upon launch.

Current operating income before stock based compensation is expected to improve and represent between 3% and 4% of total sales for 2006-2007. We confirm our sales objective for the first quarter of 2006-2007 at approximately €60 M."

Yves Guillemot continued:"2007-2008 will be a year of strong recovery for the sector and we should once again outperform the market, whose growth is expected to approach 17% for the year. The investments made in the last two years will enable us to launch 5 new brands and new Hollywood licenses. In this context, the pre-tax operating profit before stock options should show a very strong improvement".

Yves Guillemot concluded: "We will pursue our offensive strategy of investment in new consoles in order to continue to grow faster than the market thanks to the creation of new brands and to our entry into new games segments. We will thus be able to take full advantage of the strong upturn in the sector predicted for 2007-2008 onwards".

Notable Events of the Fiscal Year

April 2005

  • Opening of a new development studio in Quebec, Canada, complementing that of Montreal.

May 2005

  • Conclusion of a syndicated credit agreement of €100 M.

July 2005

  • Capital gains of €15.8 M before tax realized on the transfer of 5,155,000 shares of Gameloft SA, reducing shares held from 27.57% to 19.9%.

August 2005

  • Peter Jackson’s King Kong: The official Game of the Movie elected best PlayStation 2 game at the Games Convention in Leipzig, Germany.

September 2005

  • Co-publishing and distribution agreement with Hip Interactive Europe for the launch of Rugby Challenge 2006.

October 2005

  • Over 99% conversion of the July 1998 convertible bond. This transactionstrengthened the Group’s equity capital by €24 M.

December 2005

  • Success of sales in the United Kingdom: Peter Jackson’s King Kong: The Official Game of the Movie topping Christmas week sales.

January 2006

  • Publishing agreement with 4Kids Entertainment and Mirage Group for thedevelopment and distribution of a game based on the Teenage Mutant Ninja Turtle license, to launch at the same time as the animated feature film;
  • Agreement with Square Enix to distribute Dragon Quest in PAL territories;
  • Conclusion with Capcom of a distribution agreement for 3 AAA PC titles (Resident Evil 4, Onimusha: Demon Siege, and Devil May Cry 3: Dante’s Awakening).

February 2006

  • Agreement signed with Shaun White, six-time gold medal winner at the X Games and Olympic Snowboard Champion at the 2006 Winter Olympics in Turin, to create a game based on his snowboarding exploits, expected for 2007.

March 2006

  • Stunning success of Tom Clancy’s Ghost Recon Advanced Warfighter on Xbox 360 which sold 360,000 units in the first week of launch;
  • Acquisition of all intellectual property rights for the Far Cry franchise as well as the CryEngine license.

May 2006

  • Ubisoft and Touchstone join forces to bring the "Lost" universe to life. Developed by the award-winning Montreal studio, the game will be available on portable and salon consoles as well as on PC in 2007.
  • Ubisoft increases its capital by €24 M thanks to the 97% conversion of share subscription warrants into shares allocated in May 2003.

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