The Euro Vision: Can Ubi Live With The Big Boys?

Like a well-worn pair of slippers, so The Euro Vision finds itself settling down to another session pouring over the financial figures of French publisher Ubisoft. The headlines are full of joy, or joie de vivre as our French chums might say. Sales for the 12 months ending 31st March 2007 are at an all-time high of €680 million ($930 million), while net income is a stellar €40.5 million ($54 million), and at €0.95 ($1.30) per share, EPS compares well to FY04-05's highpoint of €1.40 ($1.40, historical dollar equivalent). Less well reported, but perhaps more important in the bigger picture however, is the fact that the company has now wiped out its debt. Its net cash balance is now €55 million ($74 million). So all seems well and good. Even gamers' very own industry analyst, Michael Pachter (a man never backward about coming forward), has modestly suggested shares in Ubisoft are "seriously undervalued, as the market does not appreciate the company's potential to grow faster than the market and deliver contribution margins in line with its peers." What Could Possibly Go Wrong? Well, I dunno. I'm just a journalist. But what has interested me is comparing Ubisoft's financials with those of the big four US publishers, EA, Activision, THQ and Take Two. After all, Ubisoft's forever sending out press releases telling us how it's the second biggest third party publisher in the US - something certainly not true in terms of base turnover - so let's see how it really measures up. Obviously, in terms of sheer firepower, EA remains a long way ahead of the competition. Its turnover is twice as big as the next biggest company, Activision, and around three times as big as Take Two, THQ and Ubisoft. But if you compare its market capitalisation (ie. its nominal worth calculated using its share price), EA extends its lead - it's three times bigger than Activision, around seven times as big as THQ and Ubisoft, and 10 times bigger than the currently very troubled Take Two. There is one financial measure in which Ubisoft leads the pack however. Earnings per share are an indicator of a company's profitability, and with an EPS of €0.95 ($1.30), Ubisoft's the leader of pack, being a third higher than THQ, five times higher than EA. (Activision had yet to release its EPS figures for FY07 as The Euro Vision went to press.) But, there is another merit that's worth considering in this context. And it's one that everyone understands, cold hard cash. One of the most remarkable developments in recent years is the amount of cash publishers have sitting around in what's known as cash and cash equivalents. For example, EA has $1.4 billion close to hand in bank accounts and other easily convertible investments. That's 44 percent of its annual turnover that's potentially available for CEO Larry Probst III to spend his evenings counting. Things are even more lucrative at Activision. Its CEO, Bobby Kotick, could spend his nights bathing in $945 million of used notes. That's 64 percent of the company's annual revenue. THQ's Brian Farrell has things marginally tougher. At $458 million, he could only play around with 45 percent of THQ's annual revenue, while whoever ends up longterm in the Take Two hotseat is positively brassic, with a mere $132 million, or 13 percent of annual revenues, available in cash and cash equivalents. So How Does Ubisoft's Yves Guillemot Measure Up? As already touched upon, Ubisoft's cash generation has been good over the past couple of years. It's paid off €74 million ($74 million, historical) of debt, turning it into a positive stash of €55 million ($74 million), but with cash and cash equivalents of €81 million ($109 million, or around 12 percent of turnover), the fact remains Ubisoft isn't in the same league as its healthy US competitors when it comes to the amount of money it has available to wield in the marketplace. And even if it banks the next couple of years of net income, it still won't be anywhere near the likes of EA, Activision or THQ. Of course, there's a sense that this doesn't matter. Ubisoft isn't the sort of company to shell out $100 million for the Harry Potter or the NFL license. Its success has come from edgy internally-owned IP such as the numerous Tom Clancy games (84 SKUs at last count), or the reinvented Prince of Persia games. Even its big movie licenses aren't really that big - for example Surf's Up, Open Season, and Teenage Mutant Ninja Turtles - the exception being King Kong, a deal struck on a more personal level between Peter Jackson and Michel Ancel. But, if it's really serious about becoming the number two publisher (or even number three or four), in North America, it will need to spend serious amounts of cash on pinning down licenses that can compete with Activision's James Bond, X-Men, and Spider-Man, THQ's Pixar, Nickelodeon, and WWE, let alone EA's NFL, NCAA, NBA, NHL, FIFA, Lord of the Rings, and Harry Potter. Sadly, the stark reality of not competing in this market is Take Two; a company built and almost killed on internally-developed IP. Gotta Be A Big Spender Indeed, looking through the financial tea-leaves, it's possible to see the one reason why EA remains king of this hill. As well as all the cash it spends on licenses, EA also regularly spends between a quarter and a third of its revenue on game development. The only company to spend more - the figure was 40 percent in FY05-06 - is Ubisoft. In many ways it's a good sign, and is reason we can begin to compare Ubisoft to companies such as Activision and THQ. Indeed, in almost every financial figure (apart from cash and cash equivalents), it measures almost exactly to THQ, making it a nominal equal third when it comes to the ranking of Western thirdparty publishers. (Incidentially, referring back to Monsieur Patcher's point, Ubisoft's Price/Earning ratio is 39, while THQ's is 34, suggesting either that Ubisoft isn't "seriously undervalued", or if it is, so is THQ.) Nevertheless, the fact remains, to be really successful, Ubisoft is going to have to spend less on developing its current slate of semi-hardcore games and more on making money on a different sort of games. Its current casual gaming push aside, this will involve competing with the big boys when it comes to license auctions, and then we'll really see how Ubisoft ranks. After all, even when you split them between Counter Terror, Special Forces and Black Ops, there are only so many Fronts you can deploy Tom Clancy games on. [Jon Jordan is a freelance games journalist and photographer, based in Manchester, UK. He's never ghostwritten a Tom Clancy game review, nor holds shares in any of the companies mentioned in this article.]