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Alan Hsieh

Ubisoft Entertainment is a French developer and publisher of video games and other software. The company's best selling title in FY 2007 was Assassin's Creed, which sold 1.87MM copies in FY2007, placing it 9th in overall sales despite an end-of-year holiday launch.^[1] Ubisoft's gross margins (typically ~60%^[2]) surpass those of its competitors (~50%^[3][4]) because its development studios are located in low-cost areas. For example, its largest studio, Ubisoft Montreal, benefits from a large tax break given by the Canadian government.^[5] Ubisoft also has studios in regions such as China and Eastern Europe where it can pay lower salaries to its developers.

Ubisoft produced more games than its competitors when the Wii launched during the FY2006, and this boosted the company's revenues as the system beat expectations for sales and many other publishers were caught unprepared, without enough Wii-compatible games to meet demand. Ubisoft was one of the only major publishers to support the system, with 7 launch titles,^[6] as others focused on the competing Playstation 3 system by Sony (SNE). In FY 2007, Wii titles contributed 14% to Ubisoft's revenues, compared with only $65MM out of $3.091B of total revenues for Electronic Arts^[7], or 2.1%.

Ubisoft's franchise games are a large part of its financial success as well. It recently acquired exclusive license to all Tom Clancy related content^[8]. The Tom Clancy franchise has yielded hits such as Splinter Cell, Ghost Recon, and Rainbox Six, and the company is expected to continue publishing related titles. Other popular Ubisoft franchises include Rayman, Assassin's Creed, and Star Wars games.

Business Description

Ubisoft is the 2nd largest in-house development staff in the world with 19 studios in 14 countries. It divides its business into Development, Publishing, and Distribution segments.

• Development - This segment regards the in-house creation of games, and Ubisoft has a number of studios around the world

• Publishing - This segment promotes and publishes content.

• Distribution - This segment handles physical distribution for both Ubisoft and non-Ubisoft software, as well as related third-party hardware.

^[9][10]

Ubisoft earns more than 80% of its revenues through internally developed and published games. The externally developed publishing and associated distribution businesses exist as an associated appendage to the primary development business.

Game Portfolio

Several of Ubisoft's games have spawned several titles, establishing long-running franchises that have stayed popular across multiple gaming platforms.

For more information, please see Ubisoft's brands and titles website.

Financial Analysis

Ubisoft reports on a March 31st Fiscal year. Therefore FY 2007 refers to the period from April 1 2006 to March 31st, 2007, approximately CY 2006, rather than 2007. As such, many FY 2008 (CY 2008) figures are not yet available.

^[12]

For FY 2008, the company released the sales figure of €928MM^[14], with guidance on the operating margin of approximately 14%.^[15] This grows revenue 36% over the prior year figure (€680.3MM) and drastically improves margins from by 8%, from 6%. The revenue figure beats industry growth of approximately 26%.^[16] and it means the company expects its titles to perform well, including the Tom Clancy franchises, as well as the growth of the Casual games business from only €13MM in FY 2007 to €230+ in FY 2008.^[17] Margin improvements are implied when a title sells well due to a high percentage of fixed costs. The company's margins decreased in FY 2006, due to investment required in technology and development for the "next-generation" consoles (see Game Consoles Wars: Xbox 360 vs. PS3 vs. Wii).^[18] Since the initial investment, the company has expanded margins from 0.6% to 14%.

Platform Distribution

^[19][20]

Over FY2006 to FY2008, Ubisoft's revenue share contributions from the various gaming platforms have changed, in line with the rest of industry, as PC-gaming has become less of a contributor due to the competition from next-generation systems. In FY2008, portable devices also made considerable gains, to approximately 31% from 21% in FY2007.^[21][22] The decrease from approximately 16% share to 7% share actually implies a decrease in revenues for the PC segment, partially as a function of the shrinking market, as well as delayed PC releases for some of the next-generation console games, such as Assassin's Creed^[23]

Geographic Distribution

^[24][25]

Ubisoft's revenues are diversified by region, with almost an even split between North American and European revenues. This implies minimal market penetration in Asia, which the company has begun to address with more local development, such as studios in China, Singapore, and India announced in FY 2008.^[26]

Trends/Forces

Ideal margin structure due to development in lower-cost areas

Ubisoft built its first internal development studios in the mid 90’s, beginning with a studio in France and a studio in Romania.^[27] Since the establishment of the Development segment, it has targeted locations with highly-skilled but low-cost developers, planning on opening additional locations in China, Singapore and India in FY 2009 (CY 2008)^[28]. The lower salary expectations in these areas keep Ubisoft’s development costs low (in comparison with competition) since developer salaries are the primary component to costs. In addition, the company gains a tax benefit for its largest studio, based in Montreal, Canada.^[29] Since R&D costs are largely fixed per title, the company can reap benefits when a title becomes an exceptional seller, further boosting the margin structure, as R&D becomes a smaller percentage of the increasing sales figure.^[30]

Extensive support for Wii launch allowed for revenue upside, but also presented quality control issues

At the Wii’s launch in December of 2006, Ubisoft was the only major publisher to develop a full title portfolio with Nintendo, and it reaped the benefits of the consoles sales through CY2008^[31], as mentioned prior. This compares favorably with competitors such as Electronic Arts (ERTS), who failed to anticipate Wii demand, and saw growth expectations fall in the market until it reallocated development resources to the Wii.^[32] Competitors have not been standing still, however, with high-profile launches from Nintendo’s publishing arm through CY2008, and other competitors (ERTS, TTWO, ATVI) scrambling to develop Wii-compatible games. A problem for Ubisoft was that while it had a sufficient quantity of Wii games, it titles were not well received critically despite their strong sales in the holiday season. The company recognized in Q2, 2007 that many of its launch titles were of poor quality, indicating it was motivated to "get the games out the door" for the holidays, and promised to improve future titles to win back the hearts of gamers unimpressed by the first generation of Ubisoft titles for the Wii.^[33]

Minimal development for PlayStation 3 a potential liability if PS3 sales begin to pick up

Ubisoft's management expects strong sales of Wii and Xbox in North America, and strong sales of Wii and PS3 in Europe going into CY 2008 and 2009.^[34] However, historically, the company has not developed for the PS3, and had no exclusives for the PlayStation 3 until Q1 of 2008, with the upcoming title Haze.^[35] Revenues for PS 3 were 2% and 20% of total revenues in FY 2007 and FY2008, compared with 14% and 10% for Wii and 28% and 26% for Xbox 360 in the same periods.^[36] While the company is including PS3 for its major franchise launches such as the Tom Clancy games and Assassin's Creed^[37], special exclusive support for the PS3 does not appear to be an instrumental part of Ubisoft’s ongoing growth strategies the way XBox 360 has received exclusive treatment for a number of Tom Clancy titles.^[38]

Euro-denominated company with 45% of revenues in dollars^[39] is exposed to currency fluctuations

Dollar transactions are about 45% of Ubisoft's revenues^[40], which is nearly 50% for the euro-denominated company. The company estimates that a 1% decrease in the value of the dollar would affect operating income negatively by approximately 16MM EUR.^[41] In addition, the UK Pound also is a very significant part of revenues, contributing another 15%.^[42] As these currencies fluctuate, Ubisoft's Euro-denominated balance sheet is affected.

Competition

• Electronic Arts (ERTS) - Competitor EA owns over 20% stake of Ubisoft, a stake which the company considers "hostile", speculating that the competitor wanted to secure some stake in Ubisoft studios' developing for the next generation of consoles.^[43][44]
• Activision (ATVI) - This American based competitor was the strongest non-hardware publisher in CY 2007, with a number of well received titles (3 in the top 10), and large in-house development.
• Vivendi (EPA: VIV) - Owned by a french conglomerate, Vivendi Games publishes under Sierra (hits such as World in Conflict), and develops under Blizzard Entertainment, owner of the Warcraft franchise. Vivendi signed a deal in 2008 to merge its Blizzard brand with Activision's gaming business.
• Take-Two Interactive Software (TTWO) - Owner of the Grand Theft Auto franchise, and another significant in-house developer.

Market Share

Ubisoft's overall market share, measured in terms of revenues, is comparable to that of many of its competitors, with 7.2%^[45] share in FY 2008 in the US, and 9.5%^[46] in Europe. This is an improvement over FY 2007, which has shares of 6.7% in US, and 8.4% in Europe^[47].

</ref>Ubisoft FY 2008 Q4 Earnings call Transcript April 24, 2008</ref>

Regional market size was calculated from Ubisoft's regional revenue data^[48] and market share data^[49].

References

1. ↑ PGNx Media "NPD Group Reveals Best Selling Games of 2007" January 18, 2008
2. ↑ Ubisoft Press Release "UBISOFT ANNOUNCES RESULTS FOR THE FIRST HALF OF 2007-2008 FISCAL YEAR " November 20, 2007
3. ↑ MarketWatch Electronic Arts "Profitability Measures"
4. ↑ MarketWatch Activision "Profitability Measures"
5. ↑ Develop Magazine "Ubisoft Montreal to become world's biggest studio" February 9, 2007
6. ↑ IGN "Ubisoft's Seven Wii Launch Titles" August 3, 2006
7. ↑ Electronic Arts FY 2007 10-K "SEGMENT INFORMATION" pg. 104
8. ↑ License Magazine "Video Game Company Ubisoft Buys Tom Clancy’s Name" March 25, 2008
9. ↑ Ubisoft Q4FY2008 Sales Press Release, April 24, 2008
10. ↑ Ubisoft Q4FY2007 Sales Press Release, April 26, 2007
11. ↑ Ubisoft.com "Corporate Info - At a glance
12. ↑ Ubisoft.com "Key Figures: P&L" up to date till H1FY2008
13. ↑ Ubisoft.com "Key Figures: P&L" up to date till H1FY2008
14. ↑ Ubisoft Q4FY2008 Sales Press Release, April 24, 2008
15. ↑ Ubisoft Guidance Update, March 31, 2008
16. ↑ Ubisoft Q4 FY2008 Earnings Press Release, pg.4
17. ↑ Ubisoft Q4 FY2008 Earnings Press Release, pg.4
18. ↑ Ubisoft FY 2006 Investor Presentation Slideshow
19. ↑ Ubisoft Q4FY2008 Sales Press Release, April 24, 2008
20. ↑ Ubisoft Q4FY2007 Sales Press Release, April 26, 2007
21. ↑ Ubisoft Q4FY2008 Sales Press Release, April 24, 2008
22. ↑ Ubisoft Q4FY2007 Sales Press Release, April 26, 2007
23. ↑ Kotaku "Assassin's Creed PC Out In March, Brings Exclusive Content" February 6, 2008
24. ↑ Ubisoft Q4FY2008 Sales Press Release, April 24, 2008
25. ↑ Ubisoft Q4FY2007 Sales Press Release, April 26, 2007
26. ↑ Gamespot.com "Ubisoft orders Indian takeaway" April 15, 2008
27. ↑ Wikipedia.com "Ubisoft Romania"
28. ↑ Ubisoft FY 2008 Q4 Earnings call Transcript April 24, 2008
29. ↑ Develop Magazine "Ubisoft Montreal to become world's biggest studio" February 9, 2007
30. ↑ Ubisoft FY 2008 Q4 Earnings call Transcript April 24, 2008
31. ↑ IGN "Ubisoft's Seven Wii Launch Titles" August 3, 2006
32. ↑ Electronic Arts (ERTS)
33. ↑ Gamegrep.com "Ubisoft Apologizes for Poor Quality Wii Games" May 30, 2007
34. ↑ Ubisoft FY 2008 Q4 Earnings call Transcript April 24, 2008
35. ↑ PSXExtreme "Haze A Definite PS3 Exclusive, Ubisoft Made The Decision" April 7, 2008
36. ↑ Ubisoft Q4 FY2008 Earnings Press Release, pg.4
37. ↑ Ubisoft.com USA "PS3 Games"
38. ↑ Joystiq "Splinter Cell Conviction still an Xbox exclusive" January 23, 2008
39. ↑ Ubisoft Q4 FY2008 Earnings Press Release, pg.4
40. ↑ Ubisoft FY 2008 Q4 Earnings call Transcript April 24, 2008
41. ↑ Ubisoft FY 2008 Q4 Earnings call Transcript April 24, 2008
42. ↑ Ubisoft FY 2008 Q4 Earnings call Transcript April 24, 2008
43. ↑ Forbes "Electronic Arts lifts Ubisoft voting stake to 25 pct, owns 15.37 pct of capital" August 8, 2007
44. ↑ BBC "Games giant EA buys Ubisoft stake" December 20, 2004
45. ↑ Ubisoft FY 2008 Q4 Earnings call Transcript April 24, 2008
46. ↑ Ubisoft FY 2008 Q4 Earnings call Transcript April 24, 2008
47. ↑ Ubisoft FY 2008 Q4 Earnings call Transcript April 24, 2008
48. ↑ Ubisoft Q4FY2008 Sales Press Release, April 24, 2008
49. ↑ Ubisoft FY 2008 Q4 Earnings call Transcript April 24, 2008