Outlook: We’re Fans of Ubisoft
December quarter sales were at the midpoint of the guidance range. Q3 sales were 520 million euros versus. our estimate of 535 million euros and guidance of 500 – 540 million euros. Top sellers included Assassin’s Creed IV Black Flag (sell-in of almost ten million units), Just Dance (six million), and Rocksmith 2014 (one million). The top performing consoles included PS3 (28 percent of sales), Xbox 360 (27 percent), and Wii (11 percent), as well as the new next-gen consoles, PS4 (12 percent) and Xbox One (9 percent).
Assassin’s Creed and Just Dance both exceeded our sales expectations in adifficult console transition period. This time last year, Ubisoft announced sell-in for the former’s predecessor of over twelve million units and for the latter’s of nearly eight million units. In our view, the sales declines were moderate considering the spending uncertainty caused by the console refresh. Sales of the new Assassin’s Creed exceeded that of its predecessor over the first six weeks of the new CY.
Management tightened FY:14 guidance towards the low end of prior ranges. Revised FY:14 guidance is for sales of ≈ 1,000 million euros and non-IFRS operating loss of ≈ 65 million euros, compared with prior guidance for sales of 995 – 1,045 million euros and non-IFRS operating loss of 70 – 40 million euros. Revised guidance reflects lower-than-expected sales for Rocksmith, current-gen, and digital, as well as f/x. Initial Q4sales guidance is 187 million euros versus prior implied guidance of 161.7 – 251.7 million euros.
The company continues to have strong expectations for FY:15. It maintained its non-IFRS operating income target of at least 150 million euros, driven by five major titles, including Just Dance, The Crew, and Watch Dogs, with no comment about FY:16. Management believes consensus FY:15 sales estimate of roughly 1,500 million euros is too high, implying operating margin will be greater than 10 percent.
We are lowering our FY:14 estimates to reflect guidance. We are lowering our sales estimate to 1,000 million euros from 1,050 million euros and our EPS estimate to (0.34) euro from (0.28) euro. On Monday, management disclosed its tax rate would be closer to 45 percent than the 30 percent it guided to before, as it cannot use R&D credits in a loss period. We are lowering our FY:15 estimates for revenue to 1,400 million euros from 1,650 million euros for high-level comments, and for EPS to 1.00 euro from 1.02 euros for different tax and cost assumptions.
We are maintaining our OUTPERFORM rating and 12-month price target of 14 euros. Our price target reflects a multiple of 14x our FY:15 EPS estimate of 1.00 euro. We remain fans of the company’s improving execution and management’s long-term vision.
Michael Pachter is an analyst at Wedbush Securities.