Ubisoft Improves Earnings but Lowers Guidance, Vivendi Lurks

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Well, it'due south been a busy year for Ubisoft (EPA:UBI). Every bit we've been reporting in recent months (1, 2 and 3), the boardroom tussle betwixt the Guillemot brothers and Vivendi has made for an interesting backdrop to the company's progress towards its financial targets.

First for the high level numbers:

Q2 sales hitting €142.2m vs a target of €100m thank you mostly to digital revenues
Financial year non-IFRS operating income estimated to be €230m - €250m compared to previous target of €230m
For H1, Ubisoft reported an IFRS operating loss of €ninety.3m vs a loss of €117.4m last year
H1 total acquirement up to €281.4m euros, up from €207.3m last year
H1 margin came in at €226.4m vs €154.3m last year
Financial Yr revenue target has been decreased to €ane.61bn to €ane.67bn from about €1.7bn

Ubisoft (EPA:UBI) performance awkwardly shambling in the right direction

So a mostly positive prepare of numbers with the exception of the lowered forward guidance for the full year. This makes for slightly uncomfortable reading and continue the Ubisoft's history of not really hitting the mark when it comes to financial performance. I've reported previously that the firm has had years of highly mixed earnings quality and although it often makes hit games, it definitely feels like it could exist monetising them more than efficiently.

The total yr guidance hasn't been lowered by a huge amount, just it seems indicative of the situation Ubisoft oft finds itself in, namely that of existence a mixed bag performer which investors can't actually get a great handle on.

Upgrades, Downgrades

So against the earnings release, a number of analysts accept revised their recommendations on Ubisoft and once again it's a mixed bag.

Kepler Cheuvreux shifts to a Buy and raises its price target to €35 from €30
Jefferies reiterates its Buy rating but cuts price target from €42 to €39
Mizuho is currently Neutral on the stock with a price target revised down to €35
Natixis is Neutral on the stock and cuts its cost target from €36 to €34

Overall recommendations are definitely skewed towards a buy but the growth opportunity doesn't seem huge with a median price target of but under €40 and a mean of about €37.5.

Vivendi (EPA:VIV) Yet Lurking

As we reported earlier this year, the French media giant Vivendi has been edifice upwardly its stake in Ubisoft (EPA:UBI) and at final statement in July owned about 22.v% of the company. Many had been expecting the firm to push for a seat on the board at the shareholder meeting last quarter but the request never materialised formally although Vivendi did say that it would make sense given their interest in the company.

The firm has so far issued two denials that information technology intends to acquire Ubisoft in a hostile takeover with the latest statement coming on the twelfth of October from COO Stephane Roussel. Exactly what the cease game hither is for Vivendi beyond long term share buying corporate influence and majuscule appreciation is at present unclear.

Ubisoft's CFO said that they still have non received anything resembling a business plan aimed at creating value from Vivendi and that they have been a destabilising and unfriendly approach. Admittedly there is Guillemot family history with the firm which may exist colouring these comments somewhat.

The Recurring Model

Gaming is a difficult manufacture. Of course information technology is primarily a artistic ane and successfully creating a company which clocks in regular growth and gains is catchy when a firm is but as practiced or bad every bit its latest AAA success of failure.

The situation is farther compounded by the fact that try equally many might, the artistic/artistic process is not i in which results are guaranteed. As such, a successful formula and iteration/refinement is the proper name of the game as often equally it is in many other industries. The trouble is the formulae tin can grow stale.

Investors tend non to look for i hit wonders. Long term shareholders are by and large looking for capital appreciation, dividends, growth, a proven business organization model etc. In this sense, the gaming manufacture has very much succumbed to the realities of the business concern and financial world and been heavily focused on how to get its revenue stream more consistent. To that end, subscription based services and new content for existing successful titles are a key part of many gaming brands' revenue stabilisation strategy.

ten+ years of highly mixed earnings quality from Ubisoft...

In this sense, things seem to be working in favour of the publishers simply plainly to the detriment of brick and mortar retailers. Recent poor results from GameStop (NYSE:GME) in the US after poor launches and the increasing shift to digital delivery have seen its shares plummet past nigh 12% in the terminal few days.

Ubisoft'southward CEOS Yves Guillemot said:

The Coiffure, The Division and Rainbow Vi Siege each have more than ten million registered players, demonstrating that nosotros are finer executing our business development plan and moving towards an e'er-more recurring model.

Ubisoft Stock Performance?

With analyst consensus still skewing towards a buy, albeit with a somewhat reduced growth outlook, it's articulate that at that place are several factors at play here:

It feels like the stock has been buoyed on the footing of Vivendi'due south continuous buying over a prolonged period.

Some speculative investors were also likely hoping for a takeover bid to emerge from Vivendi, visible in the over 3% drop in the stock later Stephane Roussel's argument saying no hostile takeover was in the offing.

The market in general though still feels that Ubisoft (EPA:UBI) seems to be on the right path and its shares leapt up at marketplace open up today and are trading up about 8.5% at €31.51 on heavy trading with volumes about 5.25 times their 100 mean solar day boilerplate.

Overall information technology feels like the company is making progress towards its goals. Our previous assessment that if the company does well, Vivendi benefits every bit a shareholder but if it does poorly, Vivendi likely gets support to become more actively involved seems a two pronged positive in the medium term that bears out the bulk of analyst consensus.

One must proceed in mind though gamers can be a fickle bunch. If Ubisoft try to monetise their user base of operations too heavily, they may face a backlash, for the moment though they seem to exist walking the fine line between monetisation and user satisfaction reasonably well.