Ubisoft. "UBIsurfs on the cycle wave at full speed INDEPENDENT RESEARCH. Video Games Fair Value EUR21 (price EUR13.00) BUY

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1 INDEPENDENT RESEARCH "UBIsurfs on the cycle wave at full speed Video Games Fair Value EUR21 (price EUR13.00) BUY Coverage initiated 9th September 2014 Bloomberg Reuters UBI.FP UBIP.PA 12-month High / Low (EUR) 15.2 / 8.2 Market capitalisation (EURm) 1,387 Enterprise Value (BG estimates EURm) 1,306 Avg. 6m daily volume ('000 shares) Free Float 88.5% 3y EPS CAGR Gearing (03/14) 2% Dividend yields (03/15e) NM YE March 03/14 03/15e 03/16e 03/17e Revenue (EURm) 1,007 1,487 1,736 1,997 EBITA EURm) Op.Margin (%) Diluted EPS (EUR) EV/Sales 1.4x 0.9x 0.7x 0.5x EV/EBITDA 4.5x 2.0x 1.6x 1.2x EV/EBITA NS 7.4x 5.3x 3.7x P/E NS 12.5x 9.7x 7.9x ROCE Price and data as at close of 5th September UBISOFT ENTM. STOXX EUROPE /09/14 Source Thomson Reuters We are initiating coverage of with a Buy recommendation and a Fair Value of EUR21.0. In a cycle start-phase, the group should benefit from its in-house development strategy (high operating leverage) and see margins widen (momentum from new consoles and ramp-up of online segment). Given the quality of the group's AAA games portfolio and weaker than expected competition, we clearly see a positive scenario (guidance exceeded in 2014/15e and 2015/16e). In our view, boasts one of the best line-ups in the industry. As of this year and for the first time, its earnings are mainly set to be driven by two engines (Assassin s Creed and Watch_Dogs) and not only Assassin alone. As these are the most profitable, if all the other releases actually go ahead, the group should exceed its targets by far. On our estimates, it could even take the liberty of postponing The Crew (the only candidate for postponement since it is a new brand), without jeopardising its guidance and thereby gaining ground for its 2015/16 current EBIT target. We are adopting a Buy recommendation and have a FV of EUR21. The share is particularly attractive with EPS growth of 62% between 2014e and 2016e, and a discount of 50% vs the average of the two previous cycles. We believe investors should start to take positions in as of now in order to play earnings growth (>=guidance) and upbeat sector newsflow (return to growth in packaged games, ramp-up of digital segment). 's competitive advantages lie in: 1/ its internal development team (8,000 developments, or 85% of headcount), 2/ its competitive cost structure 3/ its early positioning in new consoles (low competition in first two years), 4/ the quality of its games line-up (the group boasts the second-best line-up, after Activision Blizzard), 5/ its ability to transform intellectual property into recurring franchises, 6/ its search for niche growth segments (online, cinema, TV series, books, derivative products etc.). Analyst: Sector Analyst Team: Richard-Maxime Beaudoux Gregory Ramirez 33(0) Dorian Terral rmbeaudoux@bryangarnier.com r r

2 Simplified Profit & Loss Account (EURm) 31/03/12 31/03/13 31/03/14 31/03/15e 31/03/16e 31/03/17e Revenues 1,061 1,256 1,007 1,487 1,736 1,997 Change (%) 2.2% 18.4% -19.8% 47.6% 16.8% 15.0% lfl change (%) 3.9% 13.5% -16.9% 41.7% 16.8% 15.0% EBITDA EBIT (97.9) EBIT adjusted (75.3) Change (%) 150% 102% -182% -333% 26.5% 20.5% Financial results (6.0) (5.0) (1.0) Pre-Tax profits (87.6) Tax (10.8) (27.1) 22.1 (58.1) (73.3) (89.1) Profits from associates Minority interests Net profit (65.5) Restated net profit (59.0) Change (%) 203% 127% -197% -289% 29.0% 23.4% Cash Flow Statement (EURm) Operating cash flows Change in working capital 46.5 (24.6) (37.2) (16.3) (8.7) (9.1) Capex, net (376) (400) (454) (481) (521) (599) Financial investments, net (24.3) (9.7) (28.6) Dividends Other Net debt (83.1) (104) 14.8 (80.3) (215) (384) Free Cash flow (15.9) (9.4) (206) Company description Publisher, developer and distributor of video games, mainly positioned on consoles and PCs Shareholders (%) Guillemot family 10.2% FCPE Ubi 0.8% Entertainment 0.4% Free float 88.5% Source: Company Data; Bryan, Garnier & Co ests. Balance Sheet (EURm) Net fixed assets Investments Deffered tax assets Cash & equivalents current assets Other assets Total assets 1,099 1,257 1,339 1,477 1,687 1,934 L & ST Debt Provisions Deffered tax liabilities Others liabilities Shareholders' equity ,065 1,243 Total Liabilities 1,099 1,257 1,339 1,477 1,687 1,934 Capital employed Ratios Operating margin Tax rate Net margin ROE (after tax) ROCE (after tax) Gearing Pay out ratio Number of shares, diluted 97, , , , , ,343 Data per Share (EUR) EPS (0.62) Restated EPS (0.55) % change 203% 117% -192% -288% 28.7% 23.4% BVPS Operating cash flows FCF (0.00) (0.00) (0.00) Net dividend Source: Company Data; Bryan, Garnier & Co ests. 2

3 Table of contents 1. Investment Case Valuing margin expansion DCF of EUR Peer comparison of EUR Historical forward multiples at EUR Simulation of takeover at cycle peak: EUR A successful start to the cycle Two engines securing guidance Assassin s Creed, the flagship franchise And Watch_Dogs, the new back-up brand Scenario 1: guidance clearly exceeded Scenario 2: taking the liberty of postponing The Crew Bryan Garnier stock rating system

4 1. Investment Case The reason for writing now We are initiating coverage of with a Buy recommendation and a Fair Value of EUR21.0. After an excellent start to the year, the share has lost 14% since the month of June due to market movements amplified by sluggish newsflow pending major releases at the end of the year. Investors should take positions as of now to play the upgrade to guidance during the year (outperformance expected in the two most profitable brands, momentum in new cycle and support from online segment). Valuation The share is trading on attractive multiples, whether in absolute terms or relative to peers. Our FV of EUR21 is derived from the average between a DCF calculation (EUR19), peer comparison (EUR19) and historical multiples (EUR25). The share is trading on an average discount of 50% to multiples seen during the two previous console cycles, whereas the current generation could even warrant a premium given its digital component (highly profitable growth). Catalysts For the second time in its history, should generate positive EBIT margin in its H1 thanks to Watch Dogs (publication on vember 04, 2014). Since the new consoles are already out, the share price is set to be influenced by major games releases (Assassin s Creed and Far Cry 4 in calendar Q4). The group should see its margins grow in coming years, driven by the up-phase in new console cycle and ramp-up of online segment in its sales mix. Difference from consensus We believe the consensus is too low in view of the AAA games line-up announced (Watch_Dogs, two Assassin s Creed games and Far Cry 4). And if takes the liberty of postponing The Crew until next year (which would not undermine its current guidance and would enable it to gain ground for the following year's figure), the 2015/16 consensus would be too low. In our scenario, we expect guidance to be exceeded for the next two years (thanks to Assassin s Creed and Watch Dogs this year, and Assassin s Creed and The Division next year). Risks to our investment case 1/ Disappointing sales of consoles and games, 2/ postponements/cancellations of major games, 3/ higher development costs (fixed cost business), 4/ competition in prices rather than the quality of games, 5/ currency risk (primarily the dollar). 4

5 2. Valuing margin expansion We are initiating coverage of with a Buy recommendation and a Fair Value of EUR21. Our valuation stems from an equi-weighted average of a DCF calculation of EUR19, peer comparison of EUR19 (discount of 30% relative to peers, due to a one year delay in online segment) and historical forward multiples of the past two console cycles of EUR25 (excluding the Internet bubble). Since the start of the year, the share has gained 26% in absolute terms and outperformed the CAC Mid & Small by 8%. Over 2 months, the share has suffered from uncertainty specific to the stock (no upgrade to full-year guidance despite Q1 figures 16% higher than guidance) and a lack of newsflow in the sector. The share looks attractively valued to us, especially since newsflow should gradually improve (calendar Q4 accounts for around 50% of annual sales in the sector) and the group's prospects are rosy. In coming years, should see its margins widen thanks to momentum in new consoles (cycle peak expected in 2016e) and the rising weight of online games in its sales (from 24%e this year to 50%e in less than five years). Finally, since equipment is increasingly connected and publishers are now focusing more on the digital segment (higher recurring sales with better margins than packaged games), average multiples over the 2013/19e cycle could even prove to be higher than during the two previous ones. Fig. 1: Overview of various valuation methods (price on 05/09/14) EUR Valuation/share Potential on current price DCF 19 46% Peer comparison 19 46% Fwd multiples (2 previous console cycles) 25 92% Equi-weighted average 21 62% Simulation based on a take-over bid scenario % 2.1. DCF of EUR18.9 Our DCF valuation is based on the following assumptions: A CAGR in 2014/2023e sales of 12.9% at constant currency, namely in line with that of the previous cycle (+13.0%). This assumption seems cautious to us in view of the new console cycle underway (players expectations are high since the previous cycle lasted eight years vs. five historically) and the high growth in online segment. Current EBIT margin after stock options of 11.8% in 2014e (vs -7,5% in 2013), primarily on the back of leverage from Watch_Dogs and the two episodes of Assassin s Creed, followed by an increase prompted by robust hardware sales (PS4 and Xbox One) which should end up being felt in software sales, with a peak of 15.5% in 2018e, then a stabilisation at 6.9% from 2019e to 2023e (group historical average +150bp since the new cycle should have the backing of digital segment. Our estimates include stock-option costs of EUR12m. Change in WCR in line with sales growth. Net investment spending estimated at 32% of sales in 2014e and then stable at 30% between 2015e and 2023e (excluding acquisitions), primarily made up of R&D costs. 5

6 A corporate tax rate of 33.3% on average from 2014e to 2023e. A discount rate of 8.80%, with an indebted beta of 1.0 (in line with the Technology sector beta), a risk premium of 6.00% and a risk-free rate of 2.80%. A growth rate to infinity of 2.0%. Fig. 2: Discount rate calculation % Long-term rate 2.80 Market risk premium 6.00 ß (x) 1.00 Return on capital 8.80 Since the group has a net cash position, the discount rate corresponds to the cost of capital at 8.80% Fig. 3: Discounted cash flow model EURm 2014e 2015e 2016e 2017e 2018e 2019e 2020e 2021e 2022e 2023e Sales 1, , , , , , , , , ,387.0 Yoy change 47.6% 16.8% 15.0% 10.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% Current op. profit after SO As % of sales 11.8% 12.8% 13.4% 14.7% 15.5% 6.9% 6.9% 6.9% 6.9% 6.9% Tax rate 34.3% 33.8% 33.4% 33.2% 33.0% 33.0% 33.0% 33.0% 33.0% 33.0% Op. profit after tax Deprec., amort., provisions Cash flow from operations Net financial & tangible investments Change in WCR Free cash flow Discounted free cash-flow Total discounted FCF Discounted terminal value Net financial debt Minority interests, Long-term investments 4 Overall valuation 2,017 Number of shares (millions) 107 Value per share ( ) 18.9 Fig. 4: Sensitivity to discount rate and terminal growth rate WACC (%) Terminal growth rate 7.8% 8.3% 8.8% 9.3% 9.8% 1.0% % % % %

7 2.2. Peer comparison of EUR18.7 Our sample is made up of direct peers, namely traditional game publishers/developers who are shifting towards the digital segment: 1/ Activision Blizzard, which remains a dead cert in the sector, boasting outstanding fundamental performances (best margin in the sector) and a healthy mix (60%e exposed to consoles/40%e to online). The group has managed to conquer all segments with its strong brands (Call of Duty, World of Warcraft, Skylanders, Diablo, Starcraft and the new bran Destiny) and boasts one of the best games line-ups this year (Destiny and Call of Duty: Advanced Warfare especially); 2/ Electronic Arts, which is the benchmark in war, sports and car-racing games and is the most exposed to the digital sector (58% exposed to consoles and 42% to online segment), but which has had quality problems in recent years and has a very weak line-up this fiscal year (no Battlefield or Need For Speed episodes planned in 2014); and 3/ Take-Two, which boasts the best development quality in the sector (its Rockstar studio is the benchmark in the open-world game and its 2K studio is recognised in sports games), but it is often subject to games postponements (Evolve is now expected next fiscal year) and is virtually mono-product (its results are very dependent on the release of GTA, the first opus of which was released at the end of 2013 on old-generation consoles and is expected on new consoles and PC at the end of 2014). We have applied a discount of 30% to since we consider that it is still lagging its peers by around one year in terms of the online segment ( is set to generate digital sales of around 24%e of its sales this year, vs. 33%e for the average of its rivals). Fig. 5: Multiples of 's direct peers (price on 05/09/14) x Market cap. EV/sales EV/Current PE local currency (m) 2014e 2015e 2014e 2015e 2014e 2015e Activision Blizzard Inc. 17, Electronic Arts Inc. 11, Take-Two Interactive Software 1, Median (after a 30% discount) Entertainment 1, Premium +/ discount - (%) Sources: Thomson Reuters; Bryan, Garnier & Co ests. Taking into account the average of 12m forward multiples (six months over 2014e and six months over 2015e since has a split financial year ending on 31st March) of EV/sales, EV/EBIT and P/E multiples in our sample, we value the share at EUR 18.7 share Historical forward multiples at EUR24.8 The share mainly reacts to events concerning both: 1/ Its sector: the console cycle, video game trade fairs (there are four major fairs a year), competitive intensity, macro-economic conditions (especially in the casual segment i.e. the general public) and M&A activity in the sector. 2/ Its specific news: releases/postponements of its main games, acquisitions of teams, technologies, brands and licences. In the table below, we have calculated the average valuation of based on multiples over the past two cycles in home consoles (excluding the Internet bubble). We believe this is a minimum level since consoles are increasingly connected and growth is more profitable), the new cycle should have high multiples. 7

8 Fig. 6: Forward multiples of two previous console cycles EV/Sales EV/EBIT PE Last 2 console cycles' historical average (excl. the Internet bubble) Weighted average for multiples for 2014e and 2015e Premium +/discount - vs. historical average (%) Sources: Thomson Reuters; Bryan, Garnier & Co ests. Fig. 7: EV/SALES (12m FWD) Fig. 8: EV/EBIT (12m FWD) Fig. 9: PE (12m FWD) 3.00 EV/SALES Average of the 2 prev. Console cycles EV/EBIT Average of the 2 prev. Console cycles PER Average of the 2 prev. Console cycles nov.-03 mai-04 nov.-04 mai-05 nov.-05 mai-06 nov.-06 mai-07 nov.-07 mai-08 nov.-08 mai-09 nov.-09 mai-10 nov.-10 mai-11 nov.-11 mai-12 nov.-12 mai-13 nov.-13 mai nov.-03 mai-04 nov.-04 mai-05 nov.-05 mai-06 nov.-06 mai-07 nov.-07 mai-08 nov.-08 mai-09 nov.-09 mai-10 nov.-10 mai-11 nov.-11 mai-12 nov.-12 mai-13 nov.-13 mai nov.-03 mai-04 nov.-04 mai-05 nov.-05 mai-06 nov.-06 mai-07 nov.-07 mai-08 nov.-08 mai-09 nov.-09 mai-10 nov.-10 mai-11 nov.-11 mai-12 nov.-12 mai-13 nov.-13 mai-14 Source: Thomson Reuters The share is trading on 2014e and 2015e multiples that we consider as very undemanding attractive, whether in absolute terms or relative to historical multiples. It shows an average discount of 50% relative to the two previous console cycles: EV/sales of respectively 0.88x and 0.68x (vs historical level of 1.10x): EV/EBIT of 7.5x and 5.3x (vs historical average of 6.4x); and P/E of 12.5x and 9.7x (vs historical average of 32.0x). We have applied these historical multiples to our estimates for for fiscal year 2014/15. This method value the share at EUR24.8. te that our Fair Value of EUR21 implies the share would be trading on the following average 12 month forward multiples: 1.3x EV/sales, 10.7x EV/EBIT and 17.9x P/E, i.e. 17% below the historical average of the past two hardware cycles Simulation of takeover at cycle peak: EUR34.3 In general, takeovers of traditional console publishers take place during the second or third years after the launch of the consoles (time needed for the potential buyer to assess which group is benefiting from the cycle). Since takeovers in the sector need to be friendly in order to succeed, we believe that could seek a takeover during the cycle peak. Based on multiples seen during recent major transactions or attempted buyouts in the sector, we believe an offer for could go ahead on the following multiples: EV/sales of 2.3x year N and 2.2x year N+1, P/E of 31.0x year N and 25.9x year N+1. Fig. 10: acquisition multiples during next cycle peak x Ev/Sales (n) EV/Sales (n+1) PE (n) PE (n+1) Acquisition multiples m fwd implied valuation for (EURm) 3,729 3,587 's valuation per share ( ) Based on assumptions for the next two years (6 months in 2014e and 6 months in 2015e), the share's valuation works out to EUR34.3, pointing to upside of 38% relative to the past two consoles cycles and 164% to the last share price. 8

9 3. A successful start to the cycle For the first time in its history, management has committed itself to targets for the next two fiscal years (2014/15 current EBIT >= EU150m and 2015/16 >= EUR200m), in a particularly rare move for the sector. Since these targets were given very early on (end of 2013, when Watch_Dogs was postponed), we believe they are based on a fairly cautious line-up (excluding risk games) and reasonable quantities. The two intellectual property games Assassin s Creed and Watch_Dogs this year (Assassin s Creed and The Division next year) should help the group reach its guidance at least since these are the biggest two contributors to the year and have pretty much the same operating leverage. We see two positive scenarios taking shape in 2014/15e: 1/ either clearly exceeds its targets, since its AAA games catalogue is of high quality and competition is weaker than expected, 2/ or it takes the liberty of postponing a game, which would not undermine its guidance and would enable it to gain ground on its 2015/16 current EBIT target. Fig. 11: Profitability rate of scenarios envisaged for 2014/15 Scenario 1 Scenario 2 Probability rate 80% 20% We have factored scenario 1 into our model since it seems to be the most likely (based on the games line-up announced by the group). It is optimist (without being a blue-sky scenario) given that seems to have got off to another good start with this cycle, although this time, solely thanks to the quality of its games portfolio (which is even healthier than the excellent timing it had on the various consoles during the previous cycle) Two engines securing guidance Assassin s Creed, the flagship franchise In addition to Assassin s Creed: Unity, which is set to be released for the new consoles (Xbox One and PS4) and PCs on 11th vember in NA and 13th vember in EMEA, will launch Assassin s Creed: Rogue for the older generation consoles (Xbox 360 and PS3) at the same period. The first game is a genuinely new episode that takes place during the French Revolution and is not restricted since it has been designed solely for the new generation. The second game takes place during the Seven Years War in NA and is a spin-off of the series that enables it to continue to benefit from the robust installed base of older-generation consoles. Both games combined should help generate unit sales as high as those seen for the previous episode (11m est.). Fig. 12: Sell-in sales of previous opuses in the Assassin s Creed franchise Assassin s Creed opus Week 1¹ 4 weeks At end-december Fiscal year (31/03) AC I AC II AC: Brotherhood AC: Revelations AC III AC IV AC Unity + Rogue 11.0 ¹ sell-through sales 9

10 In our view, the two episodes represent EUR90m est. in development costs (EUR70m for Unity since it was developed by the studio in Montreal and EUR20m for Rogue which was developed in Sofia) for EUR60m est. in marketing costs (lower budget for new console customers since these are early adopters who are very well informed about what's new). With 11m est. in unit sales, 10% of which in the digital segment (7m est. for Unity and 3m est. for Rogue), the two episodes should generate overall sales of EUR352m est. with current EBIT before SO of slightly less than EUR70m est. (around 20% margin). We estimate breakeven point at 3.8m units before marketing costs and 6.3m afterwards. Fig. 13: Breakeven point for two AC episodes combined EURm Development costs 90 Marketing costs 60 Game price 32 Gross margin (%) 75 Sales required for the game to be profitable 200 Breakeven (m units) 6.3 In this type of game, operating leverage is very high since the game is developed in-house. This is a far more beneficial and profitable strategy (better control of game and its contents) than paying dearly for licences and using third-party development studios. Indeed, beyond this breakeven point, EBIT margin before SO rises to 52%, since the additional units require the same manufacturing costs, but no R&D spending, which has been fully amortised (although the group generally pays out bonuses) and lower marketing costs (since the game is already a success and creates its own word-of-mouth advertising, thereby halving marketing costs). Fig. 14: Average EBIT margin before SO on two AC games combined (base 100) Sales 100 Gross margin 75 R&D costs -26 Margin before overheads and sales costs 50 Advertising and marketing costs -17 Margin on direct costs 33 Fixed structure costs -13 Current operating margin 20 Fig. 15: EBIT margin before SO on two AC games, above breakeven (base 100) Sales 100 Gross margin 75 R&D costs -2 Margin before overheads and sales costs 73 Advertising and marketing costs -9 Margin on direct costs 65 Fixed structure costs -13 Current operating margin 52 This franchise has been annualised for several years. Developers master the gameplay and games mechanics very well. The two episodes for this year therefore do not seem to be at risk. 10

11 And Watch_Dogs, the new back-up brand Watch_Dogs is an open-world game, in the Mature category (for users aged 17 and above) and was released on 27th May. It plunges the player into an adult world that is dark and violent (sex and drug scenes etc.) like the famous Grand Theft Auto (GTA) by Take-Two, except that Watch_Dogs has a real scenario. The hero is Aiden Pearce, a professional hacker faced with a global conspiracy in an interconnected company where all electrical/electronic networks are managed by a central computer (CTOS). He therefore needs to develop the skills necessary to act on his environment and obtain information on the people surrounding him. We estimate development costs for the game at EUR85m (in development since initial budget of EUR60m and EUR15m est. since it took a further six months to manage persistent bugs and polish the game) and marketing costs at EUR60m est.. On our estimates, breakeven point is 3.5m est. units before marketing and 6m after (i.e. close to that of Assassin s Creed). Fig. 16: Breakeven point for Watch_Dogs EURm Development costs 85 Marketing costs 60 Game price 32 Gross margin (%) 75 Sales required for the game to be profitable 193 Breakeven (m units) 6.0 stated that sell-through sales during the first week of sales of Watch_Dogs totalled 4m while sell-in sales over Q1 (to end-june) totalled 8m. Given its high quality and robust momentum, the game should not incur strong price cuts before the release of GTA V on new consoles (calendar Q4). The game should benefit from the release of the Wii U version during the Christmas season and a likely extension by the end of the year (new missions, new cars, weapons etc ). We are forecasting 10.5m units over 2014/15 (likely range of 10m-11m units, almost 15% of which online), which should generate EUR336m est. in sales with current EBIT before stock options of almost EUR65m est. (19% margin). Beyond breakeven point, its current EBIT margin stood at slightly more than 52% est.. Fig. 17: Average operating margin before SO of Watch_Dogs (base 100) Base 100 Sales 100 Manufacturing cost -25 Gross margin 75 R&D costs -25 Margin before overheads and sales costs 50 Advertising and marketing costs -18 Margin on direct costs 32 Fixed structure costs -13 Current operating margin 19 11

12 Fig. 18: EBIT margin before SO of Watch_Dogs above breakeven point (base 100) Sales 100 Manufacturing cost -25 Gross margin 75 R&D costs -3 Margin before overheads and sales costs 72 Advertising and marketing costs -9 Margin on direct costs 63 Fixed structure costs -13 Current operating margin 50 t failing in the launch of this new brand is extremely important for in order to be able to transform the franchise and provide a fresh source of growth for the Assassin s Creed franchise. In all, its postponement was necessary and fairly smart, especially since six months later, players had finished playing with GTA V and the installed base of new consoles was larger. This was the first game of its type to be released on the two generations of consoles and PC since GTA V only came out on Xbox 360 and PS3 (32.5m units on Xbox 360 and PS3 in sell-in terms over the year, or 30m est. in sell-through sales). Further out, once the game has become widespread, we believe that Watch_Dogs could become a higher potential franchise with better extension possibilities than Assassin s Creed (cinema, derivatives products etc ). As such, if well installed, one of its episodes could exceed 15m units over the year. te that very few games exceed 10m units in the industry and among these, only Grand Theft Auto and Call of Duty have managed to cross the 20m barrier in terms of units sold Scenario 1: guidance clearly exceeded If releases all of the games it has announced this year, it will have one of the best AAA games line-ups in the industry in 2014 (we expect marks over 80% since developers are very used to the new consoles which have a PC architecture and facilitate porting between themselves). Indeed, Watch_Dogs was released last May with no direct rival (GTA V by Take-Two was available on older generation consoles at the end of 2013 and will not come onto new consoles and PCs before Q4 2014), and is continuing to sell well. Far Cry 4 is to benefit from the postponement of Battlefield: Hardline by Electronic Arts and Evolve by Take-Two; The Crew should benefit from the absence of Need For Speed by EA; and finally Assassin s Creed will have an episode that should clearly make the most of the power of the new consoles (Unity on Xbox One, PS4 and PC) and another one for older generation consoles (Rogue to have an installed base of >160m Xbox 360 and PS3). Fig. 19: Breakdown of our 2014/15 sales estimate Games for FY14-15 Platforms Units (m) Price ( ) Sales ( m) % of sales Assassin's Creed: Unity + Rogue PS4, Xbox One, PS3, Xbox 360, PC % Watch_Dogs PS4, Xbox One, Xbox 360, PS3, Wii U, PC % Far Cry 4 PS4, Xbox One, Xbox 360, PS3, PC % The Crew PS4, Xbox One, Xbox 360, PC % Packaged sales of AAA games % Casual games % Digital sales % Other games & B2B % Total 1, % 12

13 Fig. 20: Breakeven point in AAA games in the 2014/15 line-up In volume (m units) Total sales (packaged + online) % of online sales Breakeven point after marketing costs % of sales volume above breakeven Assassin s Creed (Unity + Rogue) % 6 45% Watch_Dogs % 6 43% Far Cry % 3 50% The Crew % 2 20% All of the important games should be profitable: the two episodes of Assassin s Creed and Watch_Dogs should be the largest contributors this year (24%e and 23%e of sales respectively, the games have the highest operating leverage), followed by Far Cry 4 (13%e of sales and set to benefit from success of previous opus), then Just Dance 5 (representing virtually all of the sales in the casual gaming segment and likely to suffer from a lack of native cameras on new consoles, hence the switch to tablets and mobile phones with Just Dance w). Dance games are profitable but not as much as AAA games given the royalties to be paid for the songs. Finally comes The Crew (5%e of sales, we expect a level just above breakeven). Digital sales should grow by 80% and be profitable despite a still loss-making free-to-play segment this year (no breakeven before next year at the earliest). Fig. 21: Main Profit & Loss items from e EURm 2010/ / / / /15e Cons. Guid. 2015/16e Cons. Guid. Sales 1, , , , , , ,400 1, ,612.5 Lfl change (%) Gross margin , ,319.5 As % of sales Current op. profit before SO >= >=200 As % of sales Op. profit after SO As % of sales Attributable net profit As % of sales Adjusted net profit As % of sales Net cash Sources: Bryan, Garnier & Co ests; company consensus (05/08/14). In all, we are confident that the group can exceed its guidance since earnings are mainly set to be driven by two major games over the next two years (Assassin s Creed and Watch_Dogs in 2014/15, and Assassin s Creed and The Division in 2015/16), as well as the upward phase in the consoles cycle and growth in the online segment within the group's mix. Over the two years combined, we are forecasting current EBIT before SO of EUR422m est. and FCF of EUR230m est.. We don t rule out that the 2015/16 target be achieved as of this fiscal (current EBIT before SO >=EUR200m). 13

14 3.3. Scenario 2: taking the liberty of postponing The Crew Since has provided guidance for two years, we believe that if one of its major games outperforms it could decide to postpone a game. The Crew would be the most logical choice since it is a new brand (considered as a potential risk) positioned in a segment that has not yet managed to penetrate (car racing). In contrast, the Far Cry and Assassin s Creed franchises do not seem to be at risk since the teams are well established in their developments and dedicated the majority of the show at Gamescom to them. On our calculations, the absence of The Crew would not undermine targets for the current year (sales of at least EUR1.400bn and current EBIT before stock-options of at least EUR150m). Guidance for 2014/15 would therefore be reached without being clearly exceeded, but would help strengthen the possibility of reaching our 2015/16 forecast (in this year, The Crew could be profitable and not only slightly above breakeven). Fig. 22: Breakdown of our 2014/15 sales estimate without The Crew Games for FY14-15 Platforms Units (m) Price ( ) Sales ( m) % of sales Assassin's Creed: Unity + Rogue PS4, Xbox One, Xbox 360, PS3, PC % Watch_Dogs PS4, Xbox One, Xbox 360, PS3, Wii U, PC % Far Cry 4 PS4, Xbox One, Xbox 360, PS3, PC % Subtotal % Casual games % Digital sales % Other games & B2B % Total 1, % Fig. 23: Main Profit & Loss items without The Crew EURm 2013/ /15e Cons. Guidance 2015/16e Cons. Guidance Sales 1, , , ,400 1, ,612.5 Lfl change (%) Current op. profit before SO >= >=200 As % of sales Op. profit after SO As % of sales Source: Company consensus (05/08/14). If our scenario materialises, it would be far more likely that clearly exceeds its guidance for next year rather than for this year. Especially since we expect higher growth in games sales (packaged and online) next year (+19% over the calendar year in 2015e vs +13% in 2014e). As such, the current consensus of analysts would be too high for 2014/15 but too low for 2015/16. 14

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