Yves Guillemot, chief executive officer at Ubisoft, stated: "Our strong first-half growth fueled a sharp rise in profitability. Based on our initial sales figures for the third fiscal quarter and thanks to the diversity of our game line-up, we are confident that we will be able to achieve the targets that we recently raised for full-year 2008-09, despite a highly competitive environment marked by the launch of numerous high-quality games. In addition, consoles are continuing to record robust sales levels, which represents a very positive sign for the video games industry for 2009.”

Sales for the first six months of 2008-09 came to €344.5 million, up 31.8%, or 38.3% at constant exchange rates. This performance was notably driven by the strong increase posted by both casual games, which represented 35.4% of total sales compared with 14.5% in the same period of 2007-08 and the distribution business, 12.4% of total sales versus 4.8%.

As mentioned in our first-half 2008-09 sales release, this product mix has a significant impact on the structure of Ubisoft’s income statement. Casual games generate lower gross margins than traditional games and require less R&D expenditure but have higher marketing costs. The distribution business has low gross margins but requires no R&D expenditure and in certain cases no marketing costs.

As a result of this product mix, gross profit – which amounted to €201.6 million in the first six months of 2008-09 versus €167.6 million in first-half 2007-08 – represented a lower percentage of sales than in the prior-year period, coming in at 58.5% compared with 64.1%. However, within each business segment (back catalog, casual games, distribution, franchises, new releases etc.) gross profit was either stable or up on first half 2007-08.

Current operating income before stock-based compensation totaled €33.0 million (9.6% of sales) versus €9.1 million (3.4% of sales) recorded in first-half 2007-08. This rise was attributable to a combination of the following factors:

• The €34.0 million increase in gross profit
• A significant reduction in R&D expenses due to sales growth and the product mix effect. These expenses represented 17.6% of sales in first-half 2008-09 (€60.7 million), down from 31.1% (€81.3 million) in the same period of 2007-08
• A rise in SG&A expenses to 31.3% of sales (€107.9 million) from 29.5% in first half 2007-08 (€77.2 million), which partially offset the two positive impacts above. Variable marketing expenses increased significantly to 15.0% of sales (€51.7 million) from 11.5% (€30.0 million) as a result of the product mix. As a percentage of sales, structure costs decreased to 16.3% (€56.2 million) from 18.7% (€47.2 million) in first-half 2007-08, reflecting the group’s strong sales growth

Ubisoft ended the period with operating income of €24.7 million compared with €12.5 million in first-half 2007-08. The first-half 2008-09 figure includes stock-based compensation amounting to €8.1 million (versus €4.0 million in the corresponding prioryear period). The first-half 2007-08 figure included a €7.5 million gain resulting from the favorable outcome of a lawsuit.

Net financial income came to €11.9 million (versus €12.6 million in first-half 2007-08), breaking down as follows:

• €1.7 million in financial income compared with €0.6 million in financial charges in first-half 2007-08
• €1.7 million in foreign exchange gains against €2.3 million in foreign exchange losses for the first six months of 2007-08
• An €8.5 million positive impact arising from Calyon's sale of the remaining Ubisoft shares it held through the Equity Swap3. Net financial income for first-half 2007- 08 included a €15.5 million positive impact from the Equity Swap

As a reminder, in first-half 2007-08 Ubisoft recorded €14.8 million under “Net gain from operations of discontinued business segment” when Calyon sold 4.2 million of the total 13.4 million Gameloft shares.

Net income for the first six months of 2008-09 totaled €24.0 million compared with €30.6 million in first-half 2007-08. Diluted earnings per share4 amounted to €0.48 versus €0.64. Excluding non-recurring items (i.e. the impact of the Gameloft share sale, the Equity Swap, the lawsuit, stock-based compensation and other factors), the net income figure would amount to €26.3 million and diluted earnings per share4 would represent €0.53, compared with net income of €4.7 million for first-half 2007-08 and €0.10 per share.

Main cash flow statement and balance sheet items Cash flows from operating activities came to a negative €68.9 million (versus a negative €42.6 million in first-half 2007-08), reflecting cash flow from operations amounting to a negative €52.6 million (compared with a negative €25.7 million in first-half 2007-08) and a €16.3 million increase in working capital requirement (on par with the rise in the first six months of 2007-08). These figures are the result of the traditionally seasonal nature of the company’s business as sales in the first half of the year represent less than a third of the annual total, and were particularly high at the end of September, whereas R&D cash flows – which are still increasing – are more evenly spread over the whole fiscal year.

At September 30, 2008 Ubisoft had a net cash position of €72.3 million compared with €149.5 million at March 31, 2008. The main movements during the period were as follows:

• The negative €68.9 million in cash flows from operating activities
• €12.3 million in purchases of tangible and intangible assets
• Business acquisitions totaling €6.7 million
• Proceeds from the issue of capital totaling €10.8 million following the exercise of stock options and employee rights issues
• A €0.2 million effect from exchange rate fluctuations

Third-quarter business review and confirmation of 2008-09 guidance

The third quarter of fiscal 2008-09 began against a backdrop of sustained market growth in terms of both console and games sales. The early part of this quarter was also marked by intense competition with numerous high-quality game releases as well as numerous sales promotions. In this environment, sales have begun solidly for Ubisoft’s Rayman Raving Rabbids® TV Party and casual games are outperforming expectations while Tom Clancy's End War™ got off to a slower start. As already announced, Far Cry® 2 has a solid performance in Europe and a softer one in North America. Shaun White Snowboarding turned in a solid early performance in North America, notably on the Wii™, while reporting a slower performance in Europe. At the same time, the initial indications for Prince of Persia® are very encouraging one week ahead of the game’s release. Consequently, the company is confident that it will be able to achieve its recently raised targets: sales of approximately €500 million for the third fiscal quarter and around €1,050 million for full-year 2008-09, as well as current operating income before stockbased compensation representing at least 13% of sales.

Recent highlights

1. Ubisoft acquires the assets of Massive Entertainment: Created in 1997, Massive Entertainment employs over 120 developers and was ranked as one of the top 50 best game studios in the world by Game Developers Research in 2008. The studio is worldrenowned for its expertise in the RTS genre and for the quality of its innovative proprietary technologies.
2. FarCry 2: Released for the Xbox 360, PS3 and PC, FarCry 2 reached one million units sell-through worldwide in less than 3 weeks of availability at retail. Two-for-one stock split: On November 14, 2008 Ubisoft carried out a two-for-one stock split. At that date the number of shares making up Ubisoft's capital totaled 93,403,910, each with a par value of €0.0775.
3. Acquisition of Hybride Technologies: Created over 15 years ago, Hybride is based near Montreal and employs 80 team members. The studio specializes in the creation of visual effects for cinema, television and advertising and its many projects include the movies 300, Frank Miller's Sin City, and Journey to the Center of the Earth. Ubisoft and Hybride will work closely together to share technology and develop tools in order to optimize the creation of both video games and special effects, offering gamers visual experiences that rival those of the cinema. At the same time, Hybride will continue to work actively with its movie partners while also bringing its expertise to leverage Ubisoft's intellectual property in the cinema industry.
4. Ubisoft opens two new studios: one in Kiev and one in Sao Paulo. The Kiev studio expects to build up a fifty-person team over the coming twelve months and staff numbers at the Sao Paolo studio are scheduled to reach 200 in the next four years.
5. Ubisoft acquires its first development studio in India, based in Pune: Set up in late 2006 by Gameloft, this studio has a team of 120 developers and testers who will initially focus on porting titles to handheld consoles and will reinforce Ubisoft’s testing teams. The goal is to become 200-people strong in 12 months’ time and to reach a team of 500 in the coming years.