Ubisoft entertain: With video games not selling well, Ubisoft is in the midst of a stock market ordeal

(BFM Bourse) – The video game publisher has significantly lowered its outlook for the 2022-2023 financial year, expecting an operating loss of around 500 million euros, and is cautious for the next financial year. The group cited the adverse economic environment as having led to poor performance of recent releases.

This is a resounding profit warning issued by Ubisoft. The video game publisher, disappointed by its recent commercial performance, sharply lowered its forecast for the 2022-2023 financial year and expressed caution for the next financial year.

For 2022-2023, the fiscal year that ends next March, the company now expects “net bookings” (ie, sales adjusted for certain deferred revenues) to fall by 10% within a year, whereas it was previously expected to increase by 10%. Operating profit forecasts range 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 figure as analysts had expected a figure of 482 million euros before this announcement, according to UBS. “The operating income forecast for 2023-2024 is conservative, but management should be cautious given the many failures since the Covid era,” underlined Valentin Mory, analyst at the independent research office AlphaValue.

Mario and Rabbids failed

This warning, described as “severe” by Invest Securities, is due to several factors. Notably, the disappointing sales of some recent games.

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

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

These failures and this new macroeconomic deal led the company to make a series of difficult choices. So Ubisoft decided to focus on its most important brands and to stop the development of three unannounced projects. The group will also reduce 500 million euros of capitalized R&D. “This significantly reflects the increased caution associated with the current challenges of the video game market and the macroeconomic environment as well as the need to focus on fewer titles”, Ubisoft explained at this point.

New postponement for Skull and Bones

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

“In an inflationary context, gamers tend to reduce their spending. They still favor video games but are more selective and vigilant by choosing good games that cannot be blamed. Ubisoft is obviously struggling to release this type of title, which leads to postponements of games Skull and bones where Avatar“, explained Valentin Mory.

In total, the impact of lower revenues expected by the group for the 2022-2023 financial year on operating profit amounts to around 400 million euros, Frédéric Duguet, the group’s chief financial officer, told analysts. By adding 500 million euros of R&D depreciation, we get a difference of 900 million euros between the new and previous forecast 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, the sale of some non-essential assets”, the company said.

“Strategic mistakes”

On the Paris Stock Exchange, the action largely unscrewed. Around 11:10 am, the title fell 17.5%, posting the biggest decline in the SBF 120. At 19.7 euros, it was at its lowest since the beginning of 2016. In a note published on Wednesday evening, expected Morgan Stanley is the downfall of this kind. , about 20%.

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

“Ubisoft has great intellectual property and great franchises, but they’re behind in their approach to what players want to know about free-to-play and megabrands, that is, huge, close to perfect games (as God of War Ragnarok)”, added the analyst.

“This warning reflects the difficult environment of the sector, as well as strategic mistakes. The operating performance today and in the recent future will show a momentum [une dynamique, NDLR] is still complex and visibility is very low”, Invest Securities considers.

Ubisoft will experience a 2023-2024 financial year rich in releases, with at least four big triple A games (video game blockbusters) planned, including, in addition to Skull and bones, Assassin’s Creed Mirage and Avatar: Pandora’s Box. But “with more selective players, the launch of four big releases in the same year as Ubisoft plans for 2023-2024 poses the risk of cannibalization between titles”, warns Valentin Mory.

Bucking the trend, TP ICAP Midcap maintained its buy opinion on the stock, judging that the “abscess has broken”. “Group warnings are good historical buy signals,” argues the financial intermediary. “The valuation is critical with regard to the group’s catalog and production capacity, undeniable assets in a sector whose concentration is far, far from over. Having about 1.5 billion euros does not leave without doubt about the group’s ability to bounce back,” he said.

Julien Marion – ©2023 BFM Bourse

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