Ubisoft Entertainment — Interim / Quarterly Report 2010

Nov 15, 2010

Ubisoft® reports first-half 2010-11 results

• First-half sales up 57% to €260 million
• Improved financial results:
• Current operating loss¹ : €64.9 million
• Net loss excluding non-recurring items¹ : €44.5 million
• Studios' roles and operations reorganization : €62.1 million non-recurring charge
• Net loss: €89.8 million
• Update on expected performance for full-year 2010-11 and the games release schedule.

Paris, November 15, 2010 – Today, Ubisoft released its sales and earnings figures for the six months ended September 30, 2010.

In € millions	H1 2010-11	%	H1 2009-10	%
Sales	260.5		166.0
Gross profit	146.2	56.1%	69.1	41.6%
R&D expenses	(98.4)	-37.8%	(48.1)	-29.0%
Selling expenses	(81.9)	-31.4%	(65.4)	-39.4%
General and administrative expenses	(30.8)	-11.8%	(33.1)	-19.9%
SG&A expenses	(112.7)	-43.2%	(98.5)	-59.4%
Current operating income/(loss)1	(64.9)	-24.9%	(77.5)	-46.7%
Operating income/(loss)	(133.8)	-51.4%	(83.0)	-50.0%
Net income/(loss)	(89.8)	-34.5%	(52.0)	-31.3%
Diluted earnings/(loss) per share (in €)	(0.93)		(0.54)
Diluted earnings/(loss) per share before non-recurring items and stock-based compensation (in €)	(0.46)		(0.48)
Cash flows from operating activities	(129.8)		(217.1)
R&D investment*	189.9		169.7
Net cash/(debt)	(79.2)		(67.3)

Key financial data

* Including royalties but excluding future commitments.

¹ Before stock-based compensation.

Yves Guillemot, Chief Executive Officer, stated "Ubisoft continued to win market share during the first nine months of 2010. Our sales figure for the first half of fiscal 2010-11 was boosted by a greater number of releases of High Definition games, solid backcatalog sales and very positive revenue momentum from our digital activities. The market environment continues to be tough and, although our gross profit rose sharply, the increase was lower than we expected and we had to accelerate depreciations on certain released titles."

Sales

Sales for the first six months of 2010-11 came to €260 million, up 56.7% (or 46.0% at constant exchange rates) on the €166 million recorded for the same period of 2009-10.

Sales for the second quarter of 2010-11 totaled €99 million versus €83 million for the same period of 2009-10, representing an increase of 19.3% (12.3% at constant exchange rates).

Second-quarter 2010-11 sales were higher than the guidance of around €83 million issued when Ubisoft released its sales figures for the first quarter of 2010-11. The second quarter saw the following:

• − Tom Clancy's H.A.W.X.® 2 and R.U.S.E.™ performed below expectations.
• − Solid back-catalog sales, led mainly by Just Dance®.
• − A twofold increase in digital sales, propelled by the notable success of Scott Pilgrim on XBLA and PSN, as well as downloadable content (DLC) and sales of PC games.

During the first nine months of calendar 2010, Ubisoft continued to gain market share in Europe (8.4% versus 7.5% last year) and in the United States (5.2% versus 4.2%).

Main income statement items

Gross profit represented a significantly higher percentage of sales in first-half 2010-11, coming in at 56.1% (€146.2 million) against 41.6% (€69.1 million) in the same period of 2009-10. This performance was achieved thanks to a greater number of higher margin Xbox 360® and PlayStation®3 titles released, coupled with an improved showing from back-catalog games. The increase was not as high as expected due to the underperformance of certain High Definition games and returns from the Group's merchandising activity.

Ubisoft ended the period with a €64.9 million current operating loss before stock-based compensation, marking an improvement on the €77.5 million loss recorded for the first six months of 2009-10. The first-half 2010-11 figure reflects the following combined factors:

• A €77.1 million increase in gross profit.

• A €50.3 million increase in R&D expenses, which came to €98.4 million, representing 37.8% of sales, versus €48.1 million (29.0% of sales) in first-half 2009-10. This rise was chiefly attributable to a greater number of titles released for the Xbox 360® and PlayStation®3, accelerated R&D depreciation on certain titles released during the period, and a change in accounting method which resulted in the recognition of R&D depreciation in the first half of the year that is usually recognized in the second half.

• A decrease in SG&A expenses as a percentage of sales to 43.2% (€112.7 million) versus 59.4% (€98.5 million) in first-half 2009-10:

• − Variable marketing expenses represented 21.5% of sales (€56.0 million) compared with 25.2% (€41.9 million) in the first six months of 2009-10.
• − Structure costs corresponded to 21.7% of sales (€56.7 million) compared with 34.1% (€56.6 million) in first-half 2009-10.

Non-recurring reorganization charges

Ubisoft is taking measures to adapt its structure to the major changes in the industry by reorganizing the roles and operations of its studios, which has resulted in the termination of certain projects. Consequently, the Company recognized €62.1 million in non-recurring reorganization charges in the first half of 2010-11. Those charges had a limited impact on cash flow.

Taking into account these €62.1 million non-recurring charges, Ubisoft recorded an operating loss of €133.8 million in the first six months of 2010-11, compared with €83.0 million in the same period of 2009-10. This figure also includes stock-based compensation of €5.4 million for first-half 2010-11 (€5.5 million in first-half 2009-10).

Net financial expense came to €1.7 million (compared with net financial income of €6.6 million in first-half 2009-10), primarily breaking down as follows:

• €3.9 million in financial charges compared with €0.0 million in first-half 2009-10. This figure included €3.6 million related to the sale of tax carry-back receivables.
• €2.3 million in foreign exchange losses, versus foreign exchange gains of €6.6 million in first-half 2009-10.
• A €4.7 million positive impact from the sale of 2.1 million Gameloft shares. Following this transaction, 7 million Gameloft shares are still recorded as part of the Equity Swap.

Ubisoft ended the first six months of fiscal 2010-11 with an €89.8 million net loss, representing a diluted loss per share of €0.93, versus a net loss of €52.0 million and a diluted loss per share of €0.54 in the first half of 2009-10.

Excluding non-recurring items and before stock-based compensation, the net loss would have amounted to €44.5 million, representing a diluted loss per share of €0.46, versus a net loss of €46.6 million and a diluted loss per share of €0.48 for the first six months of 2009-10.

Main cash flow statement and balance sheet items

Cash flows from operating activities came to a negative €129.8 million versus a negative €217.1 million in first-half 2009-10, representing a significant year-on-year improvement of €87.3 million. It reflects a negative €99.2 million in cash flow from operations (versus a negative €154.9 million in the same period of 2009-10) and a €30.6 million increase in working capital requirement (against a €62.2 million increase in first-half 2009-10).

At September 30, 2010, Ubisoft had net debt of €79.2 million. The change from the net cash position of €41.3 million at March 31, 2010 primarily reflects:

• The above-mentioned €129.8 million net cash outflow from operating activities, which includes €8 million from the sale of the Gameloft shares.
• The sales of tax carry-back receivables for €22.0 million.
• €13.3 million in purchases of tangible and intangible assets.

Outlook

Full-year 2010-11

Yves Guillemot stated, "Ubisoft's outlook is extremely encouraging for the upcoming Christmas period. Just Dance 2, launched in mid-October, is the Wii phenomenon of the moment, with sales up 75%. Assassin's Creed Brotherhood has the potential to outstrip the exceptional performance of the previous episodes, with pre-orders up 25% over Assassin's Creed II. The initial reviews have been extremely positive, praising the breadth of the single-player experience as well as the game's revolutionary multiplayer mode. Both Just Dance 2 and Assassin's Creed Brotherhood testify to the creative power of our teams and the impact of the promotional campaigns put in place by our marketing teams. Michael Jackson The Experience and Raving Rabbids Travel in Time are also expected to contribute to our success in the coming quarter, which looks set to see record performances. We are also encouraged by the very positive early performance of Kinect and the good showing of our games for this system, especially Your Shape: Fitness Evolved which is the best selling third-party game for Kinect in the United States."

Yves Guillemot continued, "For full-year 2010-11 we are standing by our targets of achieving sales growth, a return to profitability and positive cash flow generation, a significant improvement on 2009-10. Current operating income¹ breakeven point is now estimated at around €960 million. Our cost structure has been impacted by accelerated write-downs recorded on titles launched in the first half of the year, fluctuations in exchange rates, growth of digital expenses, and a product mix more biased towards casual games, which require more marketing and royalty payments. Based on currently available information and taking into account the positive signs for the Christmas period and our significantly higher forecasts for the casual segment, we expect our sales to come in above €960 million for the full year."

Yves Guillemot concluded, "Ubisoft is now armed with a balance sheet that is better adapted to the requirements of the industry and we have a solid financial position as well as €280 million committed credit facilities. We are continuing to overhaul our studios roles, operations and structures in order to meet the new challenges in our industry and are focused on offering highly innovative and creative products, as well as on enhancing quality levels, releasing new iterations of our major franchises on a more regular basis, providing gamers with an ever-richer online experience and attracting a constantly growing number of casual gamers. The outstanding efforts of Ubisoft's teams in these areas will enable us to fully leverage the numerous opportunities coming up in the High Definition, Casual and Online segments."

Sales for the third quarter of 2010-11

The third quarter will see the following main releases:

• Assassin's Creed® Brotherhood for Xbox 360®, PLAYSTATION® 3 and Facebook®
• Just Dance® 2 and Just Dance® Kids for the Wii™
• Raving Rabbids Travel in Time™ for the Wii™
• Michael Jackson The Experience for the Wii™, Nintendo DS™ and PSP™
• Your Shape™: Fitness Evolved, MotionSports™ and Fighters Uncaged™ for Xbox 360™ Kinect

The Group expects third quarter 2010-11 sales of around €520 million, approximately 5% higher than in the third quarter of 2009-10.

Update on the games release schedule

Tom Clancy's Ghost Recon Future Soldier™ and Driver® San Francisco, which were previously planned for release in the fourth fiscal quarter, will now be included in the 2011-12 line-up.

¹ Before stock-based compensation.

Significant events

Market share: In the first nine months of calendar 2010, Ubisoft was the number 4 independent publisher in the United States with 5.2% market share (compared with number 4 and 4.2% one year earlier) and was number 3 in Europe with 8.4% market share (compared with number 3 and 7.5% one year earlier).

New credit facilities: Ubisoft has been granted new cash credit lines amounting to €70 million and expiring in May 2013, and has carried out no-recourse sales for €25.6 million worth of tax receivables due in 2016.

Sale of Gameloft shares: In the first half of 2010-11, 2.1 million Gameloft shares were sold for €8.0 million, resulting in a gain of €4.7 million.

Acquisition of Quazal: Ubisoft has acquired Quazal Technologies, a leader in the creation of multiplayer middleware and services for video game developers. These solutions are integrated in the development of the majority of Ubisoft's key titles, including Assassin's Creed® Brotherhood, which was named "Best Online Game" at E3 2010. This acquisition guarantees Ubisoft a solid technology that will help it attain the ambitious objectives of its online strategy.

Contact Investor Relations Jean-Benoît Roquette Head of Investor Relations + 33 1 48 18 52 39 Jean-benoit.roquette@ubisoft.com

Disclaimer

This statement may contain estimated financial data, information on future projects and transactions and future business results/performance. Such forward-looking data are provided for estimation purposes only. They are subject to market risks and uncertainties and may vary significantly compared with the actual results that will be published. The estimated financial data have been presented to the Board of Directors and have not been audited by the Statutory Auditors. (Additional information is specified in the most recent Ubisoft Registration Document filed on June 30, 2010 with the French Financial Markets Authority (l'Autorité des marchés financiers)).

About Ubisoft:

Ubisoft is a leading producer, publisher and distributor of interactive entertainment products worldwide and has grown considerably through a strong and diversified line-up of products and partnerships. Ubisoft has offices in 26 countries and has sales in more than 55 countries around the globe. It is committed to delivering highquality, cutting-edge video game titles to consumers. For the 2009-10 fiscal year Ubisoft generated sales of € 871 million. To learn more, please visit: www.ubisoftgroup.com.

© 2010 Ubisoft Entertainment. All Rights Reserved. Ubisoft and the Ubisoft logo are trademarks of Ubisoft Entertainment in the U.S. and/or other countries.

APPENDICES

Breakdown of sales by geographic region

	% Sales	% Sales	% Sales	% Sales
	Q2 2010/11	Q2 2009/10	6 months 2010/11	6 months 2009/10
Europe	39%	46%	39%	48%
North America	52%	48%	52%	41%
Rest of world	9%	6%	9%	11%
TOTAL	100%	100%	100%	100%

Breakdown of sales by platform

	Q2 2010/11	Q2 2009/10	6 months 2010/11	6 months 2009/10
Nintendo DS™	10%	24%	7%	23%
PC	2%	12%	6%	17%
PlayStation®2	1%	3%	0%	2%
PLAYSTATION®3	31%	17%	22%	15%
PSP™	6%	6%	5%	5%
Wii™	29%	25%	23%	22%
XBOX 360™	20%	11%	36%	14%
Autres	1%	1%	1%	2%
TOTAL	100%	100%	100%	100%

Breakdown of sales by business line

	Q2 2010/11	Q2 2009/10	6 months 2010/11	6 months 2009/10
Development	98%	66%	98%	73%
Publishing	4%	22%	2%	20%
Distribution	-2%	12%	0%	8%
TOTAL	100%	100%	100%	100%

Title Release Schedule

3 rd Quarter (October – December 2010)

ASSASSIN'S CREED® BROTHERHOOD	Xbox 360™, PLAYSTATION®3
BATTLE OF GIANTS® DINOSAURS STRIKE	Wii™
BIG BOND THEORY	iPad
BLOODY GOOD TIME™	PC, XBLA
CRYSTAL SHUFFLE	iPhone
CSI: CRIME SCENE INVESTIGATION™: CRIME CITY	Facebook
CSI: CRIME SCENE INVESTIGATION™: FATAL CONSPIRACY	Xbox 360™, PLAYSTATION®3, Wii™, PC
CSI: CRIME SCENE INVESTIGATION™: UNSOLVED!	Nintendo DS™
FAMILY FEUD® DECADES (US)	Wii™
FIGHTERS UNCAGED™	Xbox 360™ Kinect
GIRLS LIFE™ CLOTHES AND ACCESSORIES (EMEA)	Nintendo DS™
HOLLYWOOD SQUARES (US)	Wii™
IMAGINE® FASHION STYLIST	Nintendo DS™
IMAGINE® RESORT OWNER (US)	Nintendo DS™
JUST DANCE® 2	Wii™
JUST DANCE® KIDS (US)	Wii™
MICHAEL JACKSON THE EXPERIENCE	Wii™, Nintendo DS™, PSP™
MOTIONSPORTS™	Xbox 360™ Kinect
PAYUTA® & THE ICE GOD	iPad
PETZ® CATZ® PLAYGROUND (US)	Nintendo DS™
PETZ FANTASY™ MOONLIGHT MAGIC (US)	Nintendo DS™
PETZ FANTASY™ SUNSHINE MAGIC (US)	Nintendo DS™
PETZ NURSERY™ 2 (US)	Nintendo DS™
PRINCE OF PERSIA THE SANDS OF TIME™	PSN
PRINCE OF PERSIA THE TWO THRONES®	PSN
PRINCE OF PERSIA® TRILOGY (EMEA)	PLAYSTATION®3
PRINCE OF PERSIA WARRIOR WITHIN®	PSN
RAVING RABBIDS TRAVEL IN TIME™	Wii™
SHAUN WHITE SKATEBOARDING	Xbox 360™, PLAYSTATION®3, Wii™, PC
THE AMAZING RACE™ (US)	Wii™
THE SETTLERS® OF TANDRIA	iPad, iPhone
TOM CLANCY'S GHOST RECON® PREDATOR (US)	PSP™
TOM CLANCY'S GHOST RECON®	Wii™
TOM CLANCY'S H.A.W.X.® 2	PC, Wii™
WHO WANTS TO BE A MILLIONAIRE™ 2010 (US)	Wii™, Nintendo DS™
YOUR SHAPE™: FITNESS EVOLVED	Xbox 360™ Kinect

Consolidated income statement

In thousand of euros	09/30/10	09/30/09
Sales	260 544	165 957
Cost of sales	-114 360	-96 870
Gross Margin	146 184	69 087
Research and Development costs	-98 406	-48 070
Marketing costs	-81 888	-65 393
General and Administrative costs	-30 775	-33 104
Current operating income	-64 885	-77 480
Fair Value Variation	-1 360	0
Other operating income and expenses	-62 130	-3
Stock-based compensation	-5 378	-5 501
Operating income	-133 753	-82 984
Net borrowing costs	-3 944	66
Net foreign exchange losses	-2 334	6 637
Other financial income and expenses	4 582	-100
Net financial income	-1 696	6 603
Share of profit of associates	46	125
Income tax	45 627	24 230
Profit for the period	-89 776	-52 026
Earnings per share
Basic earnings per share (in €)*	-0,95	-0,55
Diluted earnings per share (in €)*	-0,93	-0,54
Weighted average number of shares in issue (*)	94 387	94 080
Diluted weighted average number of shares in issue (*)	96 862	96 682

(*) After stock split.

Consolidated balance sheet

ASSETS	Net	Net
In thousands of euros	9/30/10	3/31/10
Goodwill	104 774	106 498
Other intangible assets	540 396	526 383
Property, plant and equipment	35 497	31 800
Investments in associates	440	393
Other financial assets	3 463	3 613
Deferred tax assets	86 500	65 884
Non current assets	771 070	734 571
Inventory	46 742	47 973
Trade receivables	43 890	68 748
Other receivables	65 213	89 159
Other current financial assets	28 298	33 271
Current tax assets	10 971	25 080
Cash and cash equivalents	125 366	185 316
Current assets	320 480	449 547
Total assets	1 091 550	1 184 118

LIABILITIES AND EQUITY	9/30/10	3/31/10
In thousand of euros
Capital	7 324	7 320
Premiums	519 284	512 444
Consolidated reserves	237 949	285 380
Consolidated earnings	- 89 777	- 43 672
Equity (Group share)	674 780	761 472
Minority interests
Total equity	674 780	761 472
Provisions	2 220	2 215
Employee benefit	1 855	1 710
Long-term borrowings	21 917	22 548
Deferred tax liabilities	26 008	32 921
Non-current liabilities	52 000	59 394
Short-term borrowings	183 780	121 784
Trade payables	104 825	144 499
Other liabilities	67 738	93 617
Current tax liabilities	8 427	3 352
Current liabilities	364 770	363 252
Total liabilities	416 770	422 646
Total liabilities and equity	1 091 550	1 184 118

Consolidated cash flow statement for comparison with other industry players

In thousand of euros	9/30/10	9/30/09
Cash flows from operating activities
Consolidated earnings	-89 777	-52 027
+/- Share of profit of associates	-46	-125
+/- Amortization of game software	144 290	41 410
+/- Other amortization	10 962	7 656
+/- Provisions	2 296	215
+/- Cost of share-based payments	5 378	5 501
+/- Gains / losses on disposals	41	17
+/- Other income and expenses calculated	3 291	9 619
+/- Costs of internal development and license development	-175 658	-167 152
CASH FLOW FROM OPERATIONS	-99 223	-154 886
Inventory	-694	5 034
Trade receivables	24 944	289
Other assets	-4 878	-43 880
Trade payables	-22 568	-12 794
Other liabilities	-27 401	-10 877
+/-Change in working capital from operating activities	-30 597	-62 228
TOTAL CASH FLOW GENERATED BY OPERATING ACTIVITIES	-129 820	-217 114
Cash flows from investing activities
- Payments for the acquisition of property, plant and equipment and other intangible assets	-13 376	-5 328
+ Proceeds from the disposal of intangible assets and property, plant and equipment	61	12
- Payments for the acquisition of financial assets	-7 444	-8 634
+ Repayment of loans and other financial assets	7 625	8 695
+/- Changes in scope	-173	0
CASH USED BY INVESTING ACTIVITIES
	-13 307	-5 255
Cash flows from financing activities
+ New finance leases - Repayment of finance leases	44 -99	129 -28
- Repayment of borrowings	-755	-633
+ Proceeds from shareholders in capital increases	323	4 131
+/- Sales / purchases of own shares	-217	-95
+/- Tax Carry back receivables sold	21 886	0
CASH GENERATED (USED) BY FINANCING ACTIVITIES	21 212	3 547
Net change in cash and cash equivalents	-121 915	-218 822
Cash and cash equivalents at the beginning of the fiscal year	64 978	176 890
Impact of translation adjustments	584	-2 916
Cash and cash equivalents at the end of the fiscal year	-56 353	-44 850

Consolidated cash flow statement

In thousand of euros	9/30/10	9/30/09
Cash flows from operating activities
Consolidated earnings	-89 777	-52 027
+/- Share of profit of associates	-46	-125
+/- Depreciation and amortization	155 252	49 066
+/- Provisions	2 296	215
+/- Cost of share-based payments	5 378	5 501
+/- Gains / losses on disposals	41	17
+/- Other income and expenses calculated	3 291	9 619
+ Income tax paid	- 45 627	- 24 230
Inventory	-694	5 034
Trade receivables	24944	289
Other assets	39 071	6 382
Trade payables	-22 568	-12 794
Other liabilities	-19 791	-33 229
+/-Change in working capital from operating activities	20 962	-34 318
TOTAL CASH FLOW GENERATED BY OPERATING ACTIVITIES	51 770	-46 282
- Income tax paid	-5 932	-3 681
NET CASH GENERATED BY OPERATING ACTIVITIES	45 838	-49 963
Cash flows from investing activities
- Payments for the acquisition of intangible assets and property, plant and equipment	-175 658	-167 152
+ Proceeds from the disposal of intangible assets and property, plant and equipment	-13 376	-5 328
- Payments for the acquisition of financial assets	61	11
+/- Other cash flows from investing activities	-7 444	-8 634
+ Repayment of loans and other financial assets	7 625	8 695
+/- Changes in scope (1)	-173	0
CASH USED BY INVESTING ACTIVITIES	-188 965	-172 408
Cash flows from financing activities
+ New finance leases	44	129
+ New borrowings	30	43
- Repayment of finance leases	-99	-28
- Repayment of borrowings	-755	-633
+ Proceeds from shareholders in capital increases +/- Sales / purchases of own shares	323 -217	4 131 -95
+/- Tax Carry back receivables sold	21 886	0
CASH GENERATED (USED) BY FINANCING ACTIVITIES	21 212	3 547
Net change in cash and cash equivalents	-121 915	-218 824
Cash and cash equivalents at the beginning of the fiscal year	-64 976	-176 890
Impact of translation adjustments	584	-2 916
Cash and cash equivalents at the end of the fiscal year	-56 355	-44 850