Breaking Down Ubisoft’s H1 Earnings

Ubisoft Entertainment SA is under increasing scrutiny from investors as its stock continues a significant decline, closing at €14.18 ($15.80) on November 1. This represents a 53.8% drop from its 52-week high of €30.70 ($34.20) reached last November, and an 86.9% plunge from its all-time peak of €107.90 ($120.30) in 2018. Once a leader in Europe's gaming industry, Ubisoft is grappling with challenges that have eroded investor confidence.

The company's highly anticipated first-person shooter, XDefiant, failed to meet expectations, resulting in underwhelming engagement and missed revenue targets. Compounding these issues, Ubisoft recently postponed Assassin’s Creed Shadows, further dampening investor sentiment and raising concerns about the company's project management and strategic direction. Notably, Juraj Krupa of Slovakian hedge fund AJ Investments and Partners has called for the board to consider taking the company private, suggesting that such a move could provide the flexibility needed to address these challenges.

Investor scrutiny intensified this week as Ubisoft disclosed its first-half 2024-25 earnings report, revealing a decline in net bookings year-over-year. The report detailed the company's efforts to stabilize through cost-cutting measures and a renewed focus on legacy titles, while reaffirming its commitment to meeting annual financial targets.

Ubisoft’s Financial Struggles Persist as Cost-Cutting and Strategic Adjustments Take Center Stage

In its first-half fiscal 2024-25 earnings report, Ubisoft reported a steep 21.9% year-over-year decline in net bookings, which totaled €642.3 million ($683 million). While cost-cutting initiatives aimed at stabilizing the business are underway, challenges in core revenue drivers and rising debt present an uphill battle.

Ubisoft’s recent releases have fallen short of market expectations, adding to the company's financial woes. XDefiant, Ubisoft’s high-profile first-person shooter genre, initially showed promise, setting company records with one million unique players in its first 2.5 hours and surpassing eight million players in its debut week. However, by August, player engagement had waned significantly, with concurrent players struggling to reach 20,000 across platforms, according to Insider-Gaming. 

“XDefiant was behind expectations, and the team is working on improving hit registration and net code. Our game and service strategy remains a core pillar, with plans to expand Rainbow Six Siege and introduce Rainbow Six Mobile. We are reviewing strategic options to improve execution and deliver sustainable cash flows, but no further comments on strategy changes at this time.,” said CEO Yves Guillemot.

Adding to the setbacks, Star Wars Outlaws also underperformed, despite generally favorable reviews. 

The downturn in new game performance has intensified Ubisoft’s reliance on its legacy titles, a strategy that has yielded some positive results. Back-catalog games such as Rainbow Six Siege and the Assassin’s Creed series exhibited solid engagement, with back-catalog net bookings rising by 12% year-over-year. Player activity metrics were strong, with a 9% increase in playtime and a 6% rise in session days across Ubisoft’s legacy franchises. Digital net bookings also grew 12% year-over-year, reflecting sustained demand for Ubisoft’s established brands in the absence of substantial new game success. Over the past decade, the Assassin’s Creed series alone has generated approximately €4 billion, while Rainbow Six Siege has brought in €3.5 billion in consumer spending, underlining the enduring profitability of these titles.

Despite these successes, the company’s bottom line remains pressured. Ubisoft reported a net loss of €246.7 million ($262 million) in the first half of fiscal 2024-25, a sharp increase from a €34.3 million ($36.4 million) loss in the prior year. Free cash flow saw improvement, ending at -€126 million (-$134 million), a recovery from -€284 million (-$302 million) last year due to stricter working capital management. Ubisoft has also streamlined its workforce, reducing headcount to 18,666 by September 2024—a cut of more than 2,000 employees over the past two years.

Ubisoft’s cash reserves have dwindled as well, with cash and equivalents down to €933.1 million ($980 million) as of September 30, from €1.3 billion (~$1.38 billion) a year earlier. At the same time, the company’s non-IFRS net debt has climbed to €1.1 billion (~$1.17 billion), further straining its financial flexibility in an already challenging high-debt environment.

Looking ahead, Ubisoft projects third-quarter net bookings to reach approximately €380 million (~$405 million), a 39% increase year-over-year, and estimates fourth-quarter net bookings to rise slightly to around €900 million (~$959 million). To strengthen its position, Ubisoft will focus on core segments such as “Open World Adventures” and “Games as a Service” (GAAS) while scaling back non-core assets to bolster financial flexibility.

Guillemot addressed shareholders, saying, “We are deeply transforming Ubisoft to recapture the creativity and innovation that fueled our success, while improving execution and predictability. Adopting a player-centric approach is key. For instance, we’re refining Star Wars Outlaws based on player feedback, preparing for its Steam launch, the first story pack, and the holiday season.”

The company is also taking additional time to polish its next ambitious title in the Assassin’s Creed series, Assassin’s Creed Shadows, which Guillemot promises will deliver a “highly polished, exceptional experience on day one.”

Ubisoft CFO Frédérick Duguet added that Ubisoft is exploring non-core asset sales. “As part of our strategy to focus on Open World Adventures and GAAS-native experiences, we’re evaluating the sale of non-core assets to increase financial flexibility,” Duguet said.

In recent weeks, Bloomberg News reported that Tencent Holdings and Ubisoft’s founding Guillemot family are considering strategic options for the company’s portfolio, including a possible buyout of the Assassin’s Creed franchise.

Ubisoft’s Lagging Strategy Puts it on Shaky Ground Against Rivals

As it grapples with consolidating losses, Ubisoft Entertainment SA faces a daunting challenge in keeping pace with gaming heavyweights like Electronic Arts Inc. and Take-Two Interactive. Declining net bookings, elevated operating expenses, and mounting losses have pushed the French publisher into a defensive position. With a market capitalization of $1.98 billion, Ubisoft’s valuation looks modest next to EA’s towering $40.16 billion and Take-Two’s $28.59 billion, highlighting its struggle to remain competitive.

Ubisoft Entertainment SA reported EBITDA of €78 million (~$82 million) for the six months ended September 2024, underscoring its financial struggles compared to competitors. Take-Two Interactive, for instance, posted an EBITDA of €108 million (~$114 million) for just three months ending June 2024, while Electronic Arts reported a robust $557 million EBITDA for the three months ending September 2024.

Ubisoft EBITDA Comparison

Ubisoft’s revenue also underscores its challenges. For the six months ended September 2024, Ubisoft posted revenue of €672 million (~$706 million), with a trailing twelve-month (TTM) revenue of €2.14 billion ($2.25 billion). By comparison, EA generated $2.03 billion in just the three months ended September 2024, with a TTM revenue of $7.41 billion. Take-Two also far outpaces Ubisoft with €1.24 billion (~$1.3 billion) in revenue for the three months ending June 2024, and a TTM figure of €5 billion (~$5.26 billion).

Ubisoft Revenue Compared to Take-Two and EA

Despite achieving the highest gross margin among peers—86.61% for the six months ended September 2024, ahead of EA’s 77.48%—Ubisoft’s efficiency at the production level has not translated into profitability. Its operating margin of -40.45%, far below EA’s 21.48% for the quarter ending September 2024, reflects the impact of heavy administrative and operational costs on its bottom line. While Take-Two posted a -10.12% operating margin for the quarter ending June 2024 due to its acquisition of Gearbox Entertainment, it is positioned for growth—a luxury that Ubisoft appears to lack.

Ubisoft’s cash flow position also raises concerns. At September 30, 2024, the company’s cash and equivalents had declined to €933.1 million ($980 million), down from the previous year. In contrast, EA boasts a robust free cash flow of $2.19 billion, reinforcing its financial strength, while Take-Two’s cash flow stands at $1.08 billion, bolstered by recent acquisitions. As Ubisoft navigates rising costs and stagnant revenue growth, its financial flexibility is increasingly constrained.

Analysts see potential in Ubisoft’s recovery, though much of it hinges on a strong close to the fiscal year. Barclays and CFRA Research have both raised their price targets, with CFRA shifting its rating from Sell to Hold, signaling a tempered belief in the company’s potential for stability. Bernstein SocGen Group upgraded its stance as well, citing the recent buyout speculation involving the Guillemot family and Tencent, which has added a layer of support for Ubisoft’s shares.

Conversely, Deutsche Bank has taken a more conservative approach, downgrading Ubisoft from Buy to Hold due to ongoing challenges with net bookings and game delays, highlighting areas of operational risk. HSBC, though marginally raising its price target, maintained a Hold rating, pointing to uncertainty around Ubisoft’s ability to fully execute on its strategic initiatives. BMO Capital Markets, while slightly adjusting its price target, kept an Outperform rating, showing optimism around Ubisoft’s long-term prospects despite current headwinds.

As Ubisoft doubles down on its legacy franchises and core focus areas, it appears poised to stabilize its financial footing. Yet, with much riding on Assassin’s Creed Shadows and a critical Q4 performance, the path to sustained growth remains uncertain.

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