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Well, it’s been a busy year for Ubisoft (EPA:UBI). As we’ve been reporting in recent months (1, 2 and 3), the boardroom tussle between the Guillemot brothers and Vivendi has made for an interesting backdrop to the company’s progress towards its financial targets.

First for the high level numbers:

Q2 sales hit €142.2m vs a target of €100m thanks mostly to digital revenuesFinancial year non-IFRS operating income estimated to be €230m - €250m compared to previous target of €230mFor H1, Ubisoft reported an IFRS operating loss of €90.3m vs a loss of €117.4m last yearH1 total revenue up to €281.4m euros, up from €207.3m last yearH1 margin came in at €226.4m vs €154.3m last yearFinancial Year revenue target has been decreased to €1.61bn to €1.67bn from about €1.7bn

Ubisoft (EPA:UBI) performance awkwardly shambling in the right direction

So a mostly positive set of numbers with the exception of the lowered forward guidance for the full year. This makes for slightly uncomfortable reading and continue the Ubisoft’s history of not really hitting the mark when it comes to financial performance. I’ve reported previously that the firm has had years of highly mixed earnings quality and although it often makes hit games, it definitely feels like it could be monetising them more efficiently.

The full year guidance hasn’t been lowered by a huge amount, but it seems indicative of the situation Ubisoft often finds itself in, namely that of being a mixed bag performer which investors can’t really get a great handle on.

Upgrades, Downgrades

So against the earnings release, a number of analysts have revised their recommendations on Ubisoft and again it’s a mixed bag.

Kepler Cheuvreux shifts to a Buy and raises its price target to €35 from €30Jefferies reiterates its Buy rating but cuts price target from €42 to €39Mizuho is currently Neutral on the stock with a price target revised downwards to €35Natixis is Neutral on the stock and cuts its price target from €36 to €34

Overall recommendations are definitely skewed towards a buy but the growth opportunity doesn’t seem huge with a median price target of just under €40 and a mean of about €37.5.

Vivendi (EPA:VIV) Still Lurking

As we reported earlier this year, the French media giant Vivendi has been building up its stake in Ubisoft (EPA:UBI) and at last statement in July owned about 22.5% of the company. Many had been expecting the firm to push for a seat on the board at the shareholder meeting last quarter but the request never materialised formally although Vivendi did say that it would make sense given their interest in the company.

The firm has so far issued two denials that it intends to acquire Ubisoft in a hostile takeover with the latest statement coming on the 12th of October from COO Stephane Roussel. Exactly what the end game here is for Vivendi beyond long term share ownership corporate influence and capital appreciation is now unclear.

Ubisoft’s CFO said that they still have not received anything resembling a business plan aimed at creating value from Vivendi and that they have been a destabilising and unfriendly approach. Admittedly there is Guillemot family history with the firm which may be colouring these comments somewhat.

The Recurring Model

Gaming is a difficult industry. Of course it is primarily a creative one and successfully creating a company which clocks in regular growth and gains is tricky when a firm is only as good or bad as its latest AAA success of failure.

The situation is further compounded by the fact that try as many might, the creative/artistic process is not one in which results are guaranteed. As such, a successful formula and iteration/refinement is the name of the game as often as it is in many other industries. The trouble is the formulae can grow stale.

Investors tend not to look for one hit wonders. Long term shareholders are generally looking for capital appreciation, dividends, growth, a proven business model etc. In this sense, the gaming industry has very much succumbed to the realities of the business and financial world and been heavily focused on how to get its revenue stream more consistent. To that end, subscription based services and new content for existing successful titles are a key part of many gaming brands’ revenue stabilisation strategy.

10+ years of highly mixed earnings quality from Ubisoft...

In this sense, things seem to be working in favour of the publishers but obviously to the detriment of brick and mortar retailers. Recent poor results from GameStop (NYSE:GME) in the US after poor launches and the increasing shift to digital delivery have seen its shares collapse by about 12% in the last few days.

Ubisoft’s CEOS Yves Guillemot said:

The Crew, The Division and Rainbow Six Siege each have more than 10 million registered players, demonstrating that we are effectively executing our business development plan and moving towards an ever-more recurring model.

Ubisoft Stock Performance?

With analyst consensus still skewing towards a buy, albeit with a somewhat reduced growth outlook, it’s clear that there are several factors at play here:

It feels like the stock has been buoyed on the basis of Vivendi’s continuous buying over a prolonged period.

Some speculative investors were also likely hoping for a takeover bid to emerge from Vivendi, visible in the over 3% drop in the stock after Stephane Roussel’s statement saying no hostile takeover was in the offing.

The market in general though still feels that Ubisoft (EPA:UBI) seems to be on the right path and its shares leapt up at market open today and are trading up about 8.5% at €31.51 on heavy trading with volumes about 5.25 times their 100 day average.

Overall it feels like the company is making progress towards its goals. Our previous assessment that if the company does well, Vivendi benefits as a shareholder but if it does poorly, Vivendi likely gets support to become more actively involved seems a two pronged positive in the medium term that bears out the bulk of analyst consensus.

One must keep in mind though gamers can be a fickle bunch. If Ubisoft try to monetise their user base too heavily, they may face a backlash, for the moment though they seem to be walking the fine line between monetisation and user satisfaction reasonably well.