The Discussion

2 months 3 days ago

With the last set of results out of the way it's now really time to look forward to the next year and beyond. Current gen is dying off quickly and next-gen is accelerating rapidly and we are starting to see some really exciting new ip to invigorate the industry.

Ubisoft have Watch_Dogs (which they are forecasting to the biggest selling new ip ever). Activision have Destiny (which they are forecasting to be the biggest selling new ip ever) and EA have Titanfall (which is the first new game of next-gen). Journalists recently had a chance to go hands-on with the game and the impressions were very exciting. Here are a few quotes, with links to the previews:

From my hands-on it is very clear that they have built upon their formidable pedigree, to deliver what is sure to be one of the stand out titles of this new generation

What they have with this game is the very definition of what new games should be as we move into new gen gaming

Make no mistake; this is an incredibly promising title. It's going to be torturous waiting for them to finish and get the game back in our hands.

This is the kind of game that gives you a new story to tell every time you play and I can’t wait to share them

It bodes well for a game when we leave a preview event wanting to play it again immediately

When you play a game for a couple of hours and are left with a real, burning desire to go back and play some more, you know it’s doing something right

There are plenty more but they are all similar. Oh wait! Hang on! I've made a HUGE mistake. Those aren't the previews for Titanfall, those are the previews for Evolve which had a hands-on event for journalists the day before Titanfall.

Yes, that's right, the game that Take Two bought for just $10m from the bankrupt THQ and which, frankly, I'd dismissed, absolutely blew away the journalists when it was show to them a few days ago. And what really struck me was that, even though Titanfall also impressed people when it was shown the day afterwards, I'd say that in general Evolve had an even better reaction than Titanfall.

That means I've had to totally re-appraise Evolve's potential. Previews can be mis-leading but, based on what we know now, Evolve is as exciting as Titanfall and Titanfall is very exciting indeed. And Evolve is available for PS4 too whereas Titanfall is only available on PC/Xbone so the potential market is far bigger.

So, I now have to add Evolve to my original list which means that all the publishers now have new ip coming out this year which they will all hope to be the start of a big franchise. Suddenly, Take Two's opaque release schedule isn't looking quite as bare as everybody (including myself) believed.

2 months 5 days ago

Well, despite my concerns, Ubisoft did manage to scrape in near the bottom of their forecast.  They talked about selling in "nearly" 10m copies of AC4 and expect to sell in another 1m units by their year end (March 31st).

I'm still not exactly sure how they managed to squeeze out those numbers but that takes care of this year and means everybody can now focus on FY2015 when the growth story is set to continue.

In terms of their big ip, they have announced Watch_Dogs, The Crew and Just Dance for FY15 and have said that there are 2 unannounced titles.  Clearly, one of them is AC5 but the big, big question is whether or not both of those unannounced titles are AC5.  What I mean by that is that they have said that for AC"5" there will actually be two different games - one for old-gen and one for new-gen.  I'm therefore left wondering if these are the two unannounced games and we now know their FY15 line-up.  Or do they also have Far Cry 4 or The Division up their sleeve?

My gut feel is that the two unannounced games are both AC and we now know their lineup and can start to think about how that looks.  Starting at the bottom, The Crew is going to be a modest seller and Ubi have said as much.  I forget exactly but I think they talked about 2-3m sales and that seems about right.  Hopefully it's a great game, and will get great reviews, but ultimately it's a new-ip driving games with a bit of a multi-player twist and that isn't going to set the tills alight.

Just Dance is a bit of a staple and I expect it to be pretty reliable but with a low RRP and thin margins it's becoming decreasingly important to Ubi's earnings as their other titles ramp up.

AC4 has put a shot in the arm of the AC franchise after the rather disappointing AC4 and also demonstrates the staying power of the franchise.  Selling 11m units, on the back of the disappointing AC3 and also at, possibly, the nadir of the console transition is a huge achievement and demonstrates the power of the AC franchise.  Ubi said this is now a reliable 10m+ unit franchise and I tend to agree.

Which leaves Watch_Dogs. 

Taking a page out of Activision's playbook Ubi said they expect this to be the best selling new ip ever (that's also what Activision said about Destiny).  Given the timing of the releases they could both be right but, rather cheekily, Ubisoft managed to mention that if Watch_Dogs is the best selling new ip ever it will take the title from ... Assassin's Creed.  You have to admire their style on that one.

Now, there's a reason why Assassin's Creed (released in 2007!) remains the best selling new ip and that's because, despite everybody moaning about sequels, that's what the majority of consumers like to buy.  Nobody really knows how consumers will take to new ip and even huge amounts of hype, stunning previews and reviews are not guarantees of success.

For that reason, I think FY15 is all about Watch_Dogs for Ubisoft and with it's Q1 release (April - June) we will know pretty quickly how their year is going to turn out.  Whereas investors may have previously waited anxiously for the holiday period I actually think this year it's going to be Spring which is the time to watch.  Very simply, if Watch_Dogs is a "success" then Ubi are a safe bet to make their full year numbers (non-IFRS profit of €150m) and I would have thought their value is going to soar.  If Watch_Dogs doesn't engage with consumers and fails then I can't see anything saving the year and then Ubi are back to a "jam tomorrow" message.  With that, I think it's going to be difficult to maintain their current value.

So, that's my take.  Time to focus on Watch_Dogs over the next 6 months and be guided on Ubi by it's likely success.  As things currently stand, I think the likelihood is that it will succeed and send Ubi's valuation higher.  But as we get more information, that view may change.

2 months 6 days ago

Ubisoft results tonight and I can confidently predict they'll be either good, bad or indifferent.

Joking aside, as I've been saying for quite a while now, I am quite bullish on Ubisoft's prospect for next financial year but am a little bit concerned that the current financial year may go from bad to worse. Specifically, I am not sure that Assassin's Creed 4 has sold enough for Ubisoft to make their revised forecasts and do worry they'll have to revise down (again) this current year.

They would then have to decide whether it was worth releasing South Park into a financial year that was already trashed since they would only have to delay it by a few weeks to move it into the next financial year where the revenues could do some good rather than throwing those revenues into a year that was already trashed.

So, I feel they'll either make numbers (somehow) or miss by a lot (because they'll also move South Park revenues out of this financial year).

Of course, how the market will react to the news is another matter since the US publishers post-results reaction has been pretty much totally based on what they said about the future (ignoring current performance) so even if they do announce a miss for this year it may not automatically mean the price will drop if they continue to talk about a rosy future.

Interesting times.

2 months 1 week ago

Take Two has been giving its investors a very hard time over the years.  There are a couple of very valid criticisms that can be thrown at this stock, the main one being the Board’s reluctance to share information on up and coming releases. 

But Take Two is also the subject of a whole mythology which I thought it would be worth exploring to see if its fact or fiction.

Let’s look at myth #1 – they are a one product company who only make money in GTA years.

Firstly, let’s look at the raw data.  The last full GTA release was in their financial year 2008 so let’s ignore that and see their eps since then (including this year’s GTA release).

This does, indisputably, show that Take Two makes a lot of money in GTA years, but it also shows that they do make money in non-GTA years, albeit a lot less.  But when you have a product which is the largest grossing entertainment product across any medium (film, music, game) it’s not surprising that it makes the lion’s share of your profits.

What is interesting is to compare Take Two to its natural peers (Activision and Electronic Arts), both of which have a share price far higher than Take Two.

What this shows, rather graphically, is just how important GTA is to Take Two.  It also shows that Take Two earnings are lumpy and inconsistent compared to the other publishers.  However, what it also shows is that Take Two earnings, while being highly variable, have some big peaks which the other publishers can’t get close to.  I haven’t included it on the chart but in 2008 they made over $2 eps which is way higher than anything the other publishers have achieved.

So, history tells us that Take Two does make money between GTA years although nothing like what it makes in the GTA years.

The next graph is really interesting but needs some explaining.  What I’ve done is to calculate the average eps for each company over the past n years.  So, on the right hand side, labelled 1 we have the average eps over the past year (i.e. this year’s forecast).  Next to it, labelled 2, is the average eps over the past 2 years.  And so on until we get the average eps for each company over the past 7 years.

What this shows is that, even going back 7 years, Take Two has made a higher average eps than either of its peers.  Of course, this results is massively affected by the huge earnings of GTAV this year but you can’t just ignore Take Two’s (and the industry’s) biggest product. 

And perhaps this is the real issue here.  Some people just discount GTA because it doesn’t create smooth earnings every year.  But the product has a massive effect on Take Two’s performance and, although not annual, is totally reliable.  Every full GTA release has been massive and the franchise only gets stronger. 

It probably wouldn’t be fair to leave without doing what is obvious and using the current share price of each of the publishers to recreate the graph above but in terms of p/e rather than eps.  What this shows is the following which, as a fundamental investor, is possible the most useful.

This looks at the current share price divided by the average eps over the past n years.  It’s no surprise that if you look at Take Two over the past year then it’s p/e is totally out of kilter with its peers.  Anybody would expect that.

What is more interesting is that even if you look at the p/e when compared to average eps over the past several years Take Two remains at a big discount. 

In summary, the myth about Take Two never making money apart from in GTA years appears to be fiction rather than fact.  The truth is that Take Two does make money in non-GTA year but never to the same degree.  The question really is whether or not GTA should be discounted from Take Two valuations since it is not annualised or if it should be spread through the non-GTA years in a method similar to above.  If you accept that GTA is a huge and reliable source of recurring revenues (albeit not annually) then Take Two appears to be on a big discount to its peers which is, arguable, undeserving.

Next myth I’m going to look at that Take Two have nothing in their pipeline because they haven’t announced anything in their results.  But that’s for next time.

2 months 2 weeks ago

Wow, but I think almost all of those revenues were made in Korea (the N American version shut down due to lack of interest). In general I try and ignore Korea because it's a market that only seems accessible to non-Western publishers but I was struck by the League of Legends revenue which is, I believe, far more international.

2 months 2 weeks ago

I thought it would be worth looking once again at the f2p (free to play) business model in light of some new stats that have just been released.

A report has been published by Superdata which gives the 2013 top ten in terms of revenue along with some other stats.  Click through for all the stats but here's the table.

F2P Top10 2013 (1)

It isn't exactly clear how they collated this information but I suspect they don't have access to the real numbers so these figures are just indicative.  However, even on an indicative basis, it is clear that there is serious money to be made from the f2p model.  Putting it into "real" terms then if you assume that a publisher would receive around $40/revenue for a boxed copy then you can see that for every $100m of revenue is the equivalent of selling 2.5m boxed units.

So, looking at the top ten, then the tenth best selling game is the equivalent of a 3m unit selling boxed game and the top game would be the equivalent of selling a whopping 24m units!

However, the top selling game is Korean and that's a market which is a long way from Western markets in terms of size (it's huge for digital games) and accessibility (Western publishers don't really access those markets).

But what we do have a model (f2p) which can, in some circumstances, be as significant as the boxed model for revenue and that's interesting.

The other interesting stat we have is from Riot (who develop League of Legends) which gives usage numbers.  The two stats that are interesting are that they have around 12m users active daily and around 67m active at some point each month.

If you assume that most of the users active daily are all paying users, say 10m, then if their annual revenue is $624m then each user is spending around $62/annum playing the game.  In jargon the AARPPU (average annual return per paying user) would be around $62 which is very high.  Double what World of Tanks talked about in the previous post which was just over a year ago.

With limited data points it is difficult to draw any hard and fast conclusions but what does seem clear is that the f2p model is one that is worth pursuing even for the largest publishers.

2 months 3 weeks ago

Ubisoft took everybody (including me) by surprise with their profit warning late last year which has led to an obvious weakness in the share price.

However, they do look quite good to deliver on their promise of €150m profit for FY15 with a very strong line up.  They will have the delayed games of Watch_Dogs and The Crew, Just Dance will zing along and Assassin's Creed will be split into totally separate games for old and next gen.  Although nothing has been announced I think there's a reasonable chance of another iteration in the Far Cry series (following on from Far Cry 3 which was a blow-out hit) but I expect The Division to slip into FY16 without causing any problem to the finances.  

That just leaves this year to navigate which is what I am spending most of my time thinking about because I do have a concern that they won't make numbers and have been focusing on AC4 sales.

AC3 (although selling hugely) didn't strengthen the franchise and I think there's been a knock-on effect for AC4 sales.  It's also been very tricky with current-gen falling away far quicker than most people forecast.  I don't think it's ever been in their public releases but Ubisoft have mentioned a few times that they expect AC4 to sell 10m units by the end of March, down about 23% from the 13m that AC3 sold.

We are starting to get some numbers through which is helping to put some shape on whether or not AC4 is going to achieve that.

In the UK where for calendar 2013 AC4 sold through 12% less than AC3 with 777k sold.  Although this looks, at first glance, like an excellent achievement it should be noted that there was very heavy discounting all across retail from mid-December which had a big impact.  So, although the number of units were only down 12%, the value will have been considerable more than that.

The UK is, very roughly, about 1/8th of the worldwide market which, if you extrapolate up, means that AC4 would have sold through 6.2m in 2013 worldwide.

In France, AC4 was down 27% on AC3 with 425k sold through.  I don't know what percentage France is of the worldwide market (it's the #3 market in Europe) so I can't extrapolate up but AC4 sold relatively better in France when compared to the UK than COD, FIFA or BF4.  However, given that France is Ubisoft's home territory that is probably to be expected.

Unfortunately, The US (the biggest territory) isn't so transparent any more now that NPD aren't giving number of units sold.  

In terms of chart position (for the whole year) we can see it was one place down on the previous year but so was everything else with GTAV taking top spot.  

What is more interesting is next-gen sales where it looks to have sold through 850k - 950k units (all figures have been "calculated" by neogaf forum members and are unconfirmed).  Since the US is very roughly half of worldwide that means AC4 sold through around 1.8m worldwide on next-gen in 2013 and, if there were 7.2m units of next gen sold in 2013 (4.2m for PS4 and 3m for Xbone) then that means about 1 in 4 people are buying AC4 for their next-gen console.

So, add it all up and you have AC4 sold through about 6m units worldwide in 2013.  If you assume that there may be 1m units in the channels then that means AC4 will likely have to have sold through about 9m units for Ubisoft to achieve their 10m sell-in figure which leaves about 3m units sell through Jan-Mar for Ubisoft to achieve numbers.

That seems a bit of a stretch even with next-gen continuing to sell well and leaves me slightly wary of what they may say on Feb 10th when they report their Q3 sales.  They will undoubtedly know by then whether or not they will be able to make numbers so I expect a confirmed steer from them on how the year will turn out.

This is the (potential) bump in the road that I see and makes me wary of Ubisoft until that is out of the way.  I do think after that then the way is clear for Ubisoft to be a great investment but I do wonder if it's best to keep the power dry for the moment.

3 months 1 day ago

I can't believe it's so long since I commented on Take Two given how much has been going on and the fact I follow it daily.

I suppose in some way the reason why I haven't commented is that, fundamentally, nothing has changed. The key facts around Take Two remain:

1. GTAV continues to sell astonishingly well, far exceeding expectations. Don't let anybody tell you otherwise, nobody forecast GTAV to sell this well. Even the most bullish forecasts didn't predict that this is now on track to be the best selling game in the whole history of video games. Obviously all the worries about it being current-gen, worries that people had lost interest in GTA, worries about the quality and so on were all wrong. But what is most significant is that even people who's only worry was whether Take Two would be able to make enough copies didn't think that it would sell this well.

2. The market has treated GTAV as an "exceptional profit", i.e. a one-off blip that has no relevance to the underlying value of Take Two. To repeat myself , if you look at Take Two's chart against it's peers (Activision, EA and Ubisoft) then there has been no pricing in of GTAV in the months leading up to it and no pricing in of the phenomenal success of GTAV since its launch. Whatever the underlying reasons for this, the conclusion is straightforward - the market hasn't priced in the success of GTAV.

3. In keeping with their policy of recent years, Take Two management haven't given out any meaningful details in terms of FY15 release schedule or earnings. At this point of town all they have said is that they will be profitable, and they've Evolve for Fall '15. The only other title that we know will be part of their release schedule is NBA 2K15.

Now, for a company with annualised franchises (Assassin's Creed, FIFA, Call of Duty) it may be okay to be a little bit vague about the up and coming schedule because you can make some safe assumptions. However, for a company without annualised franchises (i.e. Take Two apart from NBA 2K) then this is really weighing very, very heavily on the company valuation. It is almost without doubt that this factor alone is the reason why Take Two's stock price is refusing to budge because the argument of "GTAV is great but now we've got another 5 years of emptiness" is winning the day.

Take Two's policy is "we leave the announcement of titles to the marketing teams" but that clearly isn't good enough for investors and, to be honest, isn't good enough for a public company.

So, what could they say? They could confirm a GTAV for PC. They could confirm GTAV for next-gen. They could confirm WWE. They could confirm Read Dead sequel. They could confirm any of the ten titles that they say are in production for next-gen. They could confirm that there will be DLC for GTA. They could confirm the next full GTA will be within 3 years. They could confirm earnings for FY15 will be above $1/share. They could confirm the success of GTAO.

Of course, we don't know which of those (if any) are true so those are just examples of the sort of things that investors would like to hear.

Now, if none of those things are true then it's time to move on from Take Two because the bears have called it right and Take Two are a one product company which only comes out every 5 years.

However, it's probably worth speculating which may be true because once they are confirmed then it may be that Take Two is massively undervalued. Speaking personally then I am very confident that GTAV for PC will be in FY15 and although it's not going to be anywhere near as big as the console versions it will be significant when compared to almost any other title.

I think a GTAV for next-gen is also a 50/50 bet. By holiday 2014 there should be sufficient install base to make it worthwhile and also if they are working on a PC version then (with the new architecture) a next-gen version would share many technical similarities.

I don't think we'll see a Red Dead sequel until FY16 (but it would be nice, if somewhat unlikely, for them to confirm this).

I think we'll see one other triple-A title from Take Two this year. Perhaps Mafia.

I think GTAO will have some impressive statistics (in terms of number of players and so on) but will not be making meaningful money yet.

And lastly, but most importantly, I think we'll see earnings of over $1/share this year. If we can expect earnings of over $1/share in non-GTA years and then expect a full GTA every 3 years then that would give an average earning expectation of around $2/share, putting them on a p/e of under 10. This, I believe, would lead to a revaluing of the company to around double where it currently stands (and still be on a discount to its peers).

To be perfectly honest this is a point of view I feel I've had for a number of years and Take Two have consistently disappointed. For that reason it is difficult to be totally confident that, this time, they will finally get out of their cycle. However, the past isn't always a guide to the future and companies with far worse management teams than Take Two (in terms of their lack of interest in building shareholder value) have ended up achieving consistent success.

Removing the emotion and past disappointments I think there is very good reason to believe that Take Two may be on the cusp of a breakout. They have presumably learnt from their mistakes - in particular that you can't wait 5 years between full GTA releases. Additionally, they have almost unlimited cash resources to ensure their business plan is delivered (they have far more cash at the moment than they know what to do with). They also have a very impressive stable of non-Rockstar ip: Borderlands, Bioshock, Civilization, Mafia, NBA 2K, WWE 2K.

If I'm right, then Take Two's tight-lipped approach to the future presents a real buying opportunity, while being a massive frustration to existing holders. Unfortunately, I don't believe that (m)any of my speculations will be resolved at the next earnings call, in particularly, forecast earnings for FY15 but as things crystalise then so the share price should respond.

3 months 3 days ago

Here are the UK numbers which make fascinating reading:

Focusing on Ubi and AC4 then it is *only* 12% down on AC3 in terms of units sold.  That is slightly surprising but it’s had a big boost since the price was reduced to £22.49 which happened in mid-December on the PS3 and 360 version.  I don’t think any other territory discounted AC4 to that extent and no other game in the UK was discounted to that extent so I don’t know how much we can take from that “only down 12% figure” because it may be quite territory specific.

 I’m also slightly confused (looking back now) at how AC3 sold through 7m units by mid December 2012 (which is what Ubi said on the 12th December).  If AC3 sold through 886k in the UK in the whole of 2012 it means that the UK must be quite a bit less than 12% of the whole market because the 7m doesn’t include the last half of December sales.  Historically, the UK was about 17% of the worldwide market but with the collapse of high street retail I could believe it was down to around 12%.  But well under 12% for AC3?  Possible but it leaves me slightly confused.

Anyway, assuming that the UK is (at the bottom end) 12%, which seems a safer assumption, particularly with the level of discounting, then it means AC4 has sold through 6.5m.  Let’s say it needs to sell through 9m by the end of March for Ubi to book 10m of sales and you have another 2.5m units to go or about 200k per week.   Not impossible but not in the bag either.

 It still seems touch and go for Ubi but the UK number must move the balance further towards them making it and not needing to warn.

4 months 1 day ago

Since we’re well into (calendar) Q4 sales I thought I’d share my thoughts.

My bottom line is next-gen hardware great but all-gen software poor. PS4 and Xbone have done great numbers and I suspect are supply-constrained so the numbers are simply the amount that Sony/MS can get into the retail chain rather than an accurate reflection of consumer demand. Having said that, I think the Xbone has done well to sell as many as it has given it is big, expensive and a bit of a mess. The notion of 10m next-gen units by end of March seems pretty comfortable, particularly with the Xbone boost that should come with Titanfall.

On the software side then current-gen continues the trend and seems very soft. Next-gen seems a bit softer than some of the more bullish people thought it would be. I don’t think next-gen software sales are going particularly well. Looking at the big titles: CoD, Battlefield and Assassin’s Creed then I don’t think the next-gen is anywhere near making up for the current-gen weakness and I see all those publishers as looking at disappointing sales numbers.

Specifically on Ubi then I don’t think AC4 isn’t tracking anywhere near where they forecast. Looking at the UK chart for last week we have AC4(360) in 17th, AC4(PS4) in 24th place and AC4(PS3) in 25th place. AC4(Xbone) not in the top 40 skus. Contrast that with last year where you had AC3(360) in 9th, AC3(PS3) in 13th and it seems well down.

Not sure how accurate this is but November NPD for AC4 has been estimated at 1.1-1.3m units. November NPD for AC3 was 2.9m . Some AC4 sales were in October but the #3 selling game was around 800k units and AC4 was the #6 selling game so if you generously assume 600k then AC4 is tracking at around 1.8m against 2.9m for AC3. I guess Ubisoft will be hoping that AC4 has a longer next-gen tail and that it sells stronger through the 3 months of next year as the install base rises …. but I’m still thinking about 8m units for AC4 for this calendar year which is a long way short of Ubi’s 10m forecast.

Looking at the numbers then Ubi did €977m in H2 of last year (AC3 and Far Cry 3) and they are forecasting €702m for H2 of this year (AC4 and South Park?) and that’s to get to the low end of their forecast. From my rough estimates I can’t see how they are going to make those numbers given what we are currently seeing. *Very* roughly, if AC3+FC3 did 18m units then I’d estimate AC4+SP will do around 10m units. Pro-rata off last year’s H2 number that gives around €580m for H2 this year which leaves them about €120m short of forecasts. My assumptions need to be 20% wrong for them to make numbers which is possible but it’s very difficult to be confident about Ubi making their H2 numbers.

So, if I’m right then that would mean another profit warning is in the pipeline and they would have over €100m less cash than they anticipated!


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