Ubisoft 2003 Annual Report Download - page 42

The risks, in order of importance, are as follows:
1.7.1 Risk related to delays or
a poor launch when releasing
a top game
In an intensely competitive and highly seasonal industry that
is increasingly driven by the need to release “hit” products,
any announcement of a delay in the launch of an anticipated
product can have a negative impact on the group’s share
price, revenue and future earnings. The difficulty of antici-
pating precisely how much time will be needed to develop a
game may delay its release.
In a market made cyclical by the emergence of new technologies
and penalized by a short product lifespan, it is essential that
games be given a proper launch. The term “target” is appropriate
in many senses.
Some games may not immediately achieve their anticipated
success. Some may make only a minor impact upon their
release, and then find success later on. By the same token,
once a title has gained recognition, the company can release
follow-up products whose success can be predicted.
Ubisoft has revised the focus of its product catalog so as to
generate innovative, captivating games. The company pays
particular attention to the quality of its own brands and
maintains control over the design/development/duplica-
tion/manufacturing/delivery chain in order to guard against
inaccurate projections regarding a product's release.
Like all publisher-distributors, Ubisoft is prey to economic
cycles. However, the company has acquired the marketing
and sales resources it needs to boost the profile of its products.
1.7.2 Risk arising from the termination
of a licensing partnership
Each year, Ubisoft signs various partnership contracts, often with
prestigious partners – Disney, for example. This has enabled the
company to increase its sales significantly and, at the same time,
to broaden the scope of its sales catalog. In this way, Ubisoft can
use the high profile it has already achieved to ensure that each
game has excellent sales potential.
The termination of several of these partnerships for a variety of
reasons – either at Ubisoft’s initiative or that of its partners –
could have a negative impact on the company's future revenue
and operating income, insofar as this impact may not be offset by
new licenses with other partners.
Since licenses accounted for just 11% of the company’s sales as of
March 31, 2004, this risk is much reduced.
1.7.3 Risk related to computer security
In spite of the numerous integrated security systems
deployed, Ubisoft is not totally protected from malicious
intent and various other computer problems.
Information is a strategic resource of considerable value, and
must therefore be protected in an appropriate manner.
The use of security measures in information systems protects
information from a wide array of threats in order to ensure
business continuity, limit damage and guarantee results as
effectively as possible.
Security measures are aimed at guaranteeing the confiden-
tiality, integrity and availability of information.
1.7.4 Dependence on customers
The company has no significant dependence on customers
that could affect its development plan.
Ubisoft's distribution network is increasingly centralized. In
fact, in most European countries as well as in the United
States and Japan, distribution is centralized, and Ubisoft delivers
its products directly to local retail chains, which in turn
redistribute products to their stores. Only the smallest
independent retailers are supplied through distributors or
wholesalers, mainly in France and Italy.
Most sales are made to so-called "major accounts”. The risk
of non-payment by these clients is relatively low. Moreover,
the main subsidiaries (representing more than 85% of sales)
are covered by credit insurance.
Ubisoft's 10 largest customers account for 45% of the
group's pre-tax sales.
1.7.5 Dependence on suppliers and
subcontractors
The company has no significant financial dependence on suppliers
or subcontractors that could affect its development plan.
Ubisoft and its subsidiaries primarily use the services and products
of such suppliers as integrators (printers who produce the
manuals and package the products; diskette and CD-ROM suppliers
who provide these media and subcontract their duplication; and
assemblers) as well as firms that supply technology and provide
licensing or maintenance services within the relevant business
context.
The company is, however, dependent on manufacturers to some
extent. Like all publishers of console games, Ubisoft purchases
game cartridges and media from console manufacturers;
procurement is therefore dependent on production of the
media. For PC games, there is no specific dependence.
FINANCIAL REPORT
2004
42
1.7
Risk Factors