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Ubisoft Financials Reveal Delays, Older Titles Coming to PSN/XBLA

by Rainier on Nov. 15, 2010 @ 1:21 p.m. PST

Ubisoft released its first-half of 2010-11 financial results revealing its income is up, but not enough to get itself out of an operating loss. Titles such as R.U.S.E and HAWX 2 preformed below expectation, while the new Ghost Recon and Driver titles have both been delayed once more.

Yves Guillemot, Chief Executive Officer, stated "Ubisoft continued to win market share during the first nine months of 2010. Our sales figure for the first half of fiscal 2010-11 was boosted by a greater number of releases of High Definition games, solid back-catalog sales and very positive revenue momentum from our digital activities. The market environment continues to be tough and, although our gross profit rose sharply, the increase was lower than we expected and we had to accelerate depreciations on certain released titles."

Sales for the first six months of 2010-11 came to €260 million, up 56.7% (or 46.0% at constant exchange rates) on the €166 million recorded for the same period of 2009-10.
Sales for the second quarter of 2010-11 totaled €99 million versus €83 million for the same period of 2009-10, representing an increase of 19.3% (12.3% at constant exchange rates).
Second-quarter 2010-11 sales were higher than the guidance of around €83 million issued when Ubisoft released its sales figures for the first quarter of 2010-11.

The second quarter saw the following:

  • Tom Clancy’s H.A.W.X. 2 and R.U.S.E. performed below expectations.
  • Solid back-catalog sales, led mainly by Just Dance.
  • A twofold increase in digital sales, propelled by the notable success of Scott Pilgrim on XBLA and PSN, as well as downloadable content (DLC) and sales of PC games.

During the first nine months of calendar 2010, Ubisoft continued to gain market share in Europe (8.4% versus 7.5% last year) and in the United States (5.2% versus 4.2%).

Gross profit represented a significantly higher percentage of sales in first-half 2010-11, coming in at 56.1% (€146.2 million) against 41.6% (€69.1 million) in the same period of 2009-10. This performance was achieved thanks to a greater number of higher margin Xbox 360 and PlayStation3 titles released, coupled with an improved showing from back-catalog games. The increase was not as high as expected due to the underperformance of certain High Definition games and returns from the Group’s merchandising activity.

Ubisoft ended the period with a €64.9 million current operating loss before stock-based compensation, marking an improvement on the €77.5 million loss recorded for the first six months of 2009-10. The first-half 2010-11 figure reflects the following combined factors:

  • A €77.1 million increase in gross profit.
  • A €50.3 million increase in R&D expenses, which came to €98.4 million, representing 37.8% of sales, versus €48.1 million (29.0% of sales) in first-half 2009-10. This rise was chiefly attributable to a greater number of titles released for the Xbox 360 and PlayStation3, accelerated R&D depreciation on certain titles released during the period, and a change in accounting method which resulted in the recognition of R&D depreciation in the first half of the year that is usually recognized in the second half.
  • A decrease in SG&A expenses as a percentage of sales to 43.2% (€112.7 million) versus 59.4% (€98.5 million) in first-half 2009-10:
    • Variable marketing expenses represented 21.5% of sales (€56.0 million) compared with 25.2% (€41.9 million) in the first six months of 2009-10.
    • Structure costs corresponded to 21.7% of sales (€56.7 million) compared with 34.1% (€56.6 million) in first-half 2009-10

Ubisoft is taking measures to adapt its structure to the major changes in the industry by reorganizing the roles and operations of its studios, which has resulted in the termination of certain projects. Consequently, the Company recognized €62.1 million in non-recurring reorganization charges in the first half of 2010-11. Those charges had a limited impact on cash flow.

Taking into account these €62.1 million non-recurring charges, Ubisoft recorded an operating loss of €133.8 million in the first six months of 2010-11, compared with €83.0 million in the same period of 2009-10. This figure also includes stock-based compensation of €5.4 million for first-half 2010-11 (€5.5 million in first-half 2009-10).

Net financial expense came to €1.7 million (compared with net financial income of €6.6 million in first-half 2009-10), primarily breaking down as follows:

  • €3.9 million in financial charges compared with €0.0 million in first-half 2009-10. This figure included €3.6 million related to the sale of tax carry-back receivables.
  • €2.3 million in foreign exchange losses, versus foreign exchange gains of €6.6 million in first-half 2009-10.
  • €4.7 million positive impact from the sale of 2.1 million Gameloft shares. Following this transaction, 7 million Gameloft shares are still recorded as part of the Equity Swap.

Ubisoft ended the first six months of fiscal 2010-11 with an €89.8 million net loss, representing a diluted loss per share of €0.93, versus a net loss of €52.0 million and a diluted loss per share of €0.54 in the first half of 2009-10.

Excluding non-recurring items and before stock-based compensation, the net loss would have amounted to €44.5 million, representing a diluted loss per share of €0.46, versus a net loss of €46.6 million and a diluted loss per share of €0.48 for the first six months of 2009-10.

Cash flows from operating activities came to a negative €129.8 million versus a negative €217.1 million in first-half 2009-10, representing a significant year-on-year improvement of €87.3 million. It reflects a negative €99.2 million in cash flow from operations (versus a negative €154.9 million in the same period of 2009-10) and a €30.6 million increase in working capital requirement (against a €62.2 million increase in first-half 2009-10).

At September 30, 2010, Ubisoft had net debt of €79.2 million. The change from the net cash position of €41.3 million at March 31, 2010 primarily reflects:

  • The above-mentioned €129.8 million net cash outflow from operating activities, which includes €8 million from the sale of the Gameloft shares.
  • The sales of tax carry-back receivables for €22.0 million.
  • € 13.3 million in purchases of tangible and intangible assets.

Yves Guillemot stated, "Ubisoft’s outlook is extremely encouraging for the upcoming Christmas period. Just Dance 2, launched in mid-October, is the Wii phenomenon of the moment, with sales up 75%. Assassin’s Creed Brotherhood has the potential to outstrip the exceptional performance of the previous episodes, with pre-orders up 25% over Assassin’s Creed II. The initial reviews have been extremely positive, praising the breadth of the single-player experience as well as the game’s revolutionary multiplayer mode. Both Just Dance 2 and Assassin’s Creed Brotherhood testify to the creative power of our teams and the impact of the promotional campaigns put in place by our marketing teams. Michael Jackson The Experience and Raving Rabbids Travel in Time are also expected to contribute to our success in the coming quarter, which looks set to see record performances. We are also encouraged by the very positive early performance of Kinect and the good showing of our games for this system, especially Your Shape: Fitness Evolved which is the best selling third-party game for Kinect in the United States."

Yves Guillemot continued, "For full-year 2010-11 we are standing by our targets of achieving sales growth, a return to profitability and positive cash flow generation, a significant improvement on 2009-10. Current operating income1 breakeven point is now estimated at around €960 million. Our cost structure has been impacted by accelerated write-downs recorded on titles launched in the first half of the year, fluctuations in exchange rates, growth of digital expenses, and a product mix more biased towards casual games, which require more marketing and royalty payments. Based on currently available information and taking into account the positive signs for the Christmas period and our significantly higher forecasts for the casual segment, we expect our sales to come in above €960 million for the full year."

Yves Guillemot concluded, "Ubisoft is now armed with a balance sheet that is better adapted to the requirements of the industry and we have a solid financial position as well as €280 million committed credit facilities. We are continuing to overhaul our studios roles, operations and structures in order to meet the new challenges in our industry and are focused on offering highly innovative and creative products, as well as on enhancing quality levels, releasing new iterations of our major franchises on a more regular basis, providing gamers with an ever-richer online experience and attracting a constantly growing number of casual gamers. The outstanding efforts of Ubisoft’s teams in these areas will enable us to fully leverage the numerous opportunities coming up in the High Definition, Casual and Online segments."

The third quarter will see the following main releases:

  • Assassin’s Creed Brotherhood for Xbox 360, PS3 and Facebook
  • Just Dance 2 and Just Dance Kids for the Wii
  • Raving Rabbids Travel in Time for the Wii
  • Michael Jackson The Experience for the Wii, NDS and PSP
  • Your Shape: Fitness Evolved, MotionSports and Fighters Uncaged for Xbox 360 Kinect

The Group expects third quarter 2010-11 sales of around €520 million, approximately 5% higher than in the third quarter of 2009-10.

Tom Clancy’s Ghost Recon Future Soldier and Driver: San Francisco, which were previously planned for release in the fourth fiscal quarter, will now be included in the 2011-12 line-up.

In the first nine months of calendar 2010, Ubisoft was the number 4 independent publisher in the United States with 5.2% market share (compared with number 4 and 4.2% one year earlier) and was number 3 in Europe with 8.4% market share (compared with number 3 and 7.5% one year earlier).

New credit facilities: Ubisoft has been granted new cash credit lines amounting to €70 million and expiring in May 2013, and has carried out no-recourse sales for €25.6 million worth of tax receivables due in 2016.

Sale of Gameloft shares: In the first half of 2010-11, 2.1 million Gameloft shares were sold for €8.0 million, resulting in a gain of €4.7 million.

Acquisition of Quazal: Ubisoft has acquired Quazal Technologies, a leader in the creation of multiplayer middleware and services for video game developers. These solutions are integrated in the development of the majority of Ubisoft’s key titles, including Assassin's Creed Brotherhood, which was named “Best Online Game” at E3 2010. This acquisition guarantees Ubisoft a solid technology that will help it attain the ambitious objectives of its online strategy.

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