Ubisoft Entertainment: With video games selling far less, Ubisoft is in the middle of a stock market ordeal

(BFM Bourse) – The video game publisher has significantly downgraded its outlook for the 2022-2023 financial year, expecting an operating loss of around 500 million euros, and being cautious for the next financial year. The Group cited the unfavorable economic environment as causing the poor performance of its recent releases.

This is a big profit alert issued by Ubisoft. The video game publisher, disappointed by its recent commercial performance, has drastically lowered its forecasts for the 2022-2023 financial year and been cautious for the next financial year.

For 2022-2023, the financial year ending next March, the company now anticipates “net bookings” (i.e. sales adjusted for certain deferred income) to fall 10% over the course of the year, whereas previously it was expected to increase 10%. The operating profit forecast changed from a profit of 400 million euros to a loss of 500 million euros.

For the 2023-2024 financial year, the company expects an operating profit of around 400 million euros, a conservative amount as analysts expected the figure to be 482 million euros before this announcement, according to UBS. “Operating profit forecast for 2023-2024 is conservative, but management must now exercise caution given the many disappointments since the Covid period”, underlines Valentin Mory, analyst at independent research office AlphaValue.

Mario and the Rabbids are disappointed

This warning, which Invest Securities calls “severe”, is due to several factors. In particular, the disappointing sales of some games recently.

“We are clearly disappointed with our recent performance. (…) Despite the excellent ratings and player reception and ambitious marketing plans, we were surprised by the poor performance of Mario + Rabbids: A Spark of Hope in the last weeks of 2022 and early January. Just Dance 2023 also underperformed”, explained Yves Guillemot, co-founder and CEO of the company, quoted in the press release.

The company also pointed to deteriorating macroeconomic conditions, with soaring inflation hurting consumer spending. During a conference call with analysts, management pointed out that players are now focusing on the biggest brands at the expense of smaller brands, responding to a question from an analyst who underlined the success of the latest episode of the series. God of War (Sony) and call of duty (Blizzard Activision).

This disappointment and this new macroeconomic deal has left the company making a series of difficult choices. Therefore, Ubisoft decided to focus on its most important brand and stopped developing three unannounced projects. The Group will also depreciate 500 million euros of capitalized R&D. “This in particular reflects increased caution regarding the current challenging video game market and macroeconomic environment and the need to focus on fewer titles,” Ubisoft explained on this point.

New delay for Skull and Bones

The video game publisher has also announced a new delay (the sixth) of the game’s release. Skull and bonesbased on the world of piracy, now expected at the start of Ubisoft’s 2023-2024 fiscal year.

“In the context of inflation, players tend to cut back on their spending. They still love video games but are far more selective and wary of choosing great games that are beyond reproach. Ubisoft has been seen struggling to release titles of this type, leading to delays in games like Skull and bones Where Avatars“, explained Valentin Mory.

In total, the impact of the lower earnings expected by the group for the 2022-2023 financial year on operating profit amounts to around 400 million euros, Frédéric Duguet, chief financial officer of the group, told analysts. Adding the R&D depreciation of 500 million euros, we get a difference of 900 million euros between the new estimate and the previous estimate for the group’s operating profit.

Ubisoft has also decided to adapt its structure, announcing a reduction in its non-variable cost base of more than 200 million euros over the next two years. This reduction will be specifically “achieved through targeted restructuring, sale of certain non-essential assets”, the company said.

“Strategic Error”

On the Paris Stock Exchange, the action was wide open. Around 11:10 a.m., the title plunged 17.5%, posting the biggest drop on the SBF 120. At 19.7 euros, it was at its lowest level since early 2016. In a note published late Wednesday, Morgan Stanley anticipated a decline of this nature. , about 20%.

“This warning indicates that the company has structural problems and seriously undermines the company’s credibility with investors. It may be difficult to get it back in the coming months”, considers Valentin Mory.

“Ubisoft has great intellectual property and a great franchise, but they’ve fallen behind in their strategy of what players want to know about free-to-play and megabrands, namely games that are huge and nearly perfect (like Ragnarok God of War)”, added the analyst.

“This warning reflects the sector’s difficult environment, as well as strategic blunders. Current and future operating performance will reflect momentum. [une dynamique, NDLR] still complicated and very low visibility”, consider Investing Securities.

Ubisoft will have a release-rich 2023-2024 fiscal year, with plans for no less than four major triple A games (video game blockbusters), including, in addition Skull and bones, Assassin’s Creed Mirage and Avatar: Pandora’s Border. But “with a more selective cast, rolling out four major releases in the same year as Ubisoft’s plans for 2023-2024 poses the risk of cannibalization between titles”, cautions Valentin Mory.

Contrary to trend, TP ICAP Midcap maintained its buy opinion on the stock, judging that an “abscess has ruptured”. “Group warnings have historically been a good buy signal,” argued the financial intermediary. “Valuation is critical with respect to the group’s catalog and production capacity, an undeniable asset in a sector where concentration is far, far from complete. The availability of around 1.5 billion euros leaves no doubt about the group’s ability to bounce back,” he said.

Julien Marion – ©2023 BFM Bourse

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