Union Securities Research Team

research@unionsecurities.ch

June 18, 2019

Video Game Publishers – E3 Recap

The 2019 E3 (Electronic Entertainment Expo) trade

event took place in Los Angeles last week.

It was an opportunity for players in the video game

industry to present new games and hold press

conferences and investor meetings to outline their

strategy.

The event failed to provide a catalyst for a rebound of

the sector but provided some insight into the next

console generation coming for Christmas 2020.

Hot topics were:

New Game launches and the production pipeline,

The shift to digital downloads and game

streaming, following the introduction of Google

Stadia and a partnership in cloud and AI between

Microsoft and Sony,

In-game digital content fatigue and the impact of

Fortnite and free-to-play games,

The E3 showed that the new Games pipeline is relatively

poor in 2019. R&D expenses and capitalized

development costs remain high pointing to a slate a new

games launches in 2020, in line with the release of next-

generation consoles at the end of 2020 (PS5 and Xbox

Scarlett).

Video Game Publishers – E3 Recap

June 18, 2019 2

Actor Keanu Reeves introducing CD Projekt Cyberpunk 2077 game at E3

UbiSoft streaming services presentation at E3

Video Game Publishers – E3 Recap

We continue to believe 2019 is a year of adjustment for

the industry to:

review their cost base,

refocus their product portfolio,

accelerate the move to digital distribution and

cloud gaming,

get ready for the next-generation of consoles.

Our key investment thesis for the industry remains valid:

A strong top-line growth driven by mobile and

increased consumer interest in video games;

Improving margins through digital sales, cloud

gaming, and increased monetization of existing

franchises;

A reasonable valuation and some potential M&A

within the industry or from players interested in

expanding their content offering (Alphabet,

Facebook, Tencent, Verizon, Vivendi, Disney,

Microsoft, Sony, Amazon, etc…)

Expect a sharp rebound in sales an earnings in the

coming quarters on the back of new product launches,

cost cuts and low guidance from publishers.

-> Stay Long Video Games Publishers

June 18, 2019 3

Microsoft Keynote

Electronic Arts FIFA Volta

Video Game Publishers – E3 Recap

Activision failed to provide any meaningful information.

The increased monetization of Call of Duty remains the

company largest opportunity in particular through a

mobile version of the game.

New games should be announced in November at

BlizzCon 2019.

Activision will invest in marketing at King (Candy Crush)

to re-energize the brand.

Ubisoft New games such as Ghost Recon:Breakpoint

were well received but the announcement of the Uplay+

subscription failed to convince investors.

The 15% increase in R&D also raised some questions on

profitability

Ubisoft stock fell following the recent sale of shares by

the founding family whose stake has dropped below 18%

(and 25% of the voting rights). The move is likely linked

to personal projects rather than a lack of faith in the

company (only one year ago, the family blocked a

takeover attempt by Vivendi).

June 18, 2019 4

Activision - Daily

Ubisoft - Daily

Video Game Publishers – E3 Recap

Electronic Arts introduced FIFA Volta, a street soccer

mode designed to attract new players while the Star

Wars Jedi: Fallen Order will be the major holiday release.

One big unknown remains the progress of Fortnite

competitor Apex as significant revenue contributor.

Take Two seems to have the best pipeline with the Red

Dead online version coming this summer and the

potential to leverage NBA 2K in a cloud version.

In addition to the Xbox Scarlett, Microsoft announced

60 games including 14 coming from the company’s

internal Xbox game studios. It also announced a test

phase this Autum of a new xCloud streaming service.

While gaming represents only 8% of Microsoft revenues

(about $10bn p.a.), it represent a strong growth

opportunity for the Tech giant to be both a leading

content provider as well as a leading platform for gaming

publishers.

Microsoft is one of our core Global Leaders holdings

June 18, 2019 5

Take Two - Daily

Electronic Arts - Daily

Video Game Publishers – Comp Sheet

Description

NameMkt Cap

($bn)

Revenue

($bn)Sector Sub-Industry

Country

NameCurrency

Microsoft 1014.9 110.4 Information Technology Systems Software UNITED STATES USD

Activision Blizzard 34.9 7.5 Communication Services Interactive Home Entertainment UNITED STATES USD

Electronic Arts 27.6 5.0 Communication Services Interactive Home Entertainment UNITED STATES USD

Take-Two Interactive 12.4 2.7 Communication Services Interactive Home Entertainment UNITED STATES USD

Ubisoft 8.3 2.1 Communication Services Interactive Home Entertainment FRANCE EUR

Konami Holdings Corp 6.8 2.4 Communication Services Interactive Home Entertainment JAPAN JPY

CD Projekt SA 5.2 0.1 Communication Services Interactive Home Entertainment POLAND PLN

Square Enix Holdings Co Ltd 3.9 2.4 Communication Services Interactive Home Entertainment JAPAN JPY

June 18, 2019 6

Valuation Value Creation

NameEst. PE - 12M

Fwd

Est. PE - 24M

Fwd

Est.

EV/EBITDA

Est.

Price/Sales

Est.

EV/SalesEst. RoE

Trailing

ROE

Trailing

ROIC

Sales

Growth (3y

avg.)

EPS

Growth (3y

avg.)

LT Exp.

EPS

CAGR

Asset

Turnover

Microsoft 26.1 22.7 15.8 7.4 7.0 37.0% 40.1% 23.2% 5.9% 22% 13% 48%

Activision Blizzard 19.4 16.7 12.7 5.2 4.9 11.9% 16.4% 13.9% 18.3% 165% 7% 40%

Electronic Arts 19.9 17.9 12.5 5.3 4.4 24.4% 20.5% 16.6% 4.2% -3% 13% 56%

Take-Two Interactive 24.6 22.0 14.4 4.6 4.0 18.7% 18.9% 11.8% 25.2% na 9% 67%

Ubisoft 21.2 18.5 7.4 3.2 3.3 29.9% 11.1% 6.8% 10.0% 5% 36% 61%

Konami Holdings Corp 19.0 16.6 8.5 2.7 2.2 12.9% 12.9% 18.4% 1.9% 60% na 71%

CD Projekt SA 24.7 14.5 17.8 14.1 13.7 41.2% 10.8% 10.8% -23.1% -31% na 34%

Square Enix Holdings Co Ltd 18.1 15.2 7.5 1.5 1.1 10.7% 9.3% na 7.6% 1% na 99%

Video Game Publishers – Comp Sheet

Cash Flow Generation

Name

Est.

Dividend

Yield

Dividend

Payout

Ratio

FCF Margin

(3y avg.)FCF Yield

Est.

Gross

Margin

Est. EBIT

Margin

Est. Net

Margin

CFO to

Sales

Microsoft 1.5% 45% 30% 3.3% 65% 34% 28% 40%

Activision Blizzard 0.8% 15% 27% 4.6% 72% 34% 27% 24%

Electronic Arts 0.0% 0% 30% 5.1% 77% 31% 27% 31%

Take-Two Interactive 0.0% 0% 23% 6.2% 57% 21% 19% 32%

Ubisoft 0.0% 0% 42% 12.9% 85% 22% 17% 53%

Konami Holdings Corp 1.5% 46% 12% 3.7% 39% 20% 13% 19%

CD Projekt SA 0.1% 92% 41% 0.4% 74% 65% 50% 37%

Square Enix Holdings Co Ltd 1.2% 29% 6% na 46% 11% 8% 5%

June 18, 2019 7

Analyst Recommendations Risk Profile

Name CoverageConsensus

Rating (0 to 5)

Consensus

Target PriceTarget %

ATM

Implied Vol

3 M

90%

Implied Vol

3 M

Debt to

Assets

Microsoft 39 4.7 143.18 8.1% 22.4% 25.7% 34%

Activision Blizzard 35 4.3 53.38 17.0% 37.1% 39.1% 15%

Electronic Arts 35 4.3 112.23 21.0% 35.4% 37.3% 11%

Take-Two Interactive 24 4.8 121.50 10.1% 35.6% 37.4% 0%

Ubisoft 17 3.9 82.20 24.6% 39.8% 42.2% 41%

Konami Holdings Corp 15 4.3 5896.36 14.9% na na 5%

CD Projekt SA 16 3.8 233.16 13.9% na na 0%

Square Enix Holdings Co Ltd 14 4.3 4330.91 25.7% na na 4%

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June 18, 2019 8

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