Digital Bros - Borsa Italiana

Transcription

Company Update
Digital Bros
Buy
Price at market close 25 September 2006: €4.0
(from Accumulate of 28 February 2006)
Initiation of Coverage: 22 May 2003
Production date: 26 September 2006
Steering Into MultiChannel
Giovanni d'Amico
Antonio Vizzari
Tel: +39 02 7292 9219 [email protected]
Head of Equity Research : Marco Annunziata
Company Update
Digital Bros
Buy
Price at market close 25 September 2006: €4.0
(from Accumulate of 28 February 2006)
Production date: 26 September 2006
Initiation of Coverage: 22 May 2003
Sector
Entertainment
Market Cap
€56.3m
Free Float
30.8%
Key Data
(€m)
FY05/06 FY06/07E FY07/08E FY08/09E
Group Net Sales
EBITDA
106.2
10.0
106.2
9.7
114.8
10.5
129.0
12.7
8.1
3.8
8.3
3.8
9.1
4.1
11.0
5.4
Reuters Code
DIB.MI
12Mth Range
€3.774.68
Steering Into MultiChannel
EPS
0.27
0.27
0.29
0.38
BVPS
DPS
2.14
0.08
2.33
0.08
2.55
0.08
2.85
0.08
2.0%
2.0%
2.0%
2.1%
14.6
25.0
14.9
14.0
13.8
14.7
10.5
29.5
P/BVPS
1.9
1.7
1.6
1.4
Digital Bros’ indepth knowledge of the Italian retailer
sector combined with its marketing and localisation
expertise, make it a reliable partner for major
international publishers. In addition, we believe Digital
Bros’ multichannel approach and niche publishing
strategy will enable the company to achieve synergies,
diversify revenue sources and curb business risks. Based
on these factors and our DCF valuation of €5.2 per share,
we have upgraded our stock recommendation for Digital
Bros to Buy.
EV/Sales
EV/EBITDA
0.7
7.7
0.7
7.7
0.6
6.9
0.6
5.6
›= Management
EV/EBIT
9.6
EBIT
Group Net Profit
Div. Yield
P/E
P/Free CFPS
9.1
8.0
6.5
Free Cash Flow
Net Financial Debt
(Cash)
Debt/Equity
Aftertax ROIC
2.2
20.7
4.0
17.8
3.8
15.0
1.9
14.2
0.69
11.8%
0.54
9.6%
0.42
9.8%
0.35
11.7%
ROAE
13.2%
11.9%
11.9%
14.1%
14.1
14.1
14.1
14.1
No. Ord Shares
›= Despite
Source: UBM estimates
Stock Performance
4 .8 0
4 .6 0
4 .4 0
D IG IT A L B R O S
4 .2 0
4 .0 0
3 .8 0
3 .6 0
3 .4 0
P R IC E R E L A T IV E T O M IB T E L
3 .2 0
S
O
N
D
is forging ahead with diversification,
aimed at integrating the core distribution business
with the more profitable businesses of publishing and
videogame content provision for all digital media
platforms. We believe this move will enable Digital
Bros to: i) improve and stabilize the revenue stream;
ii) increase profitability; and iii) reduce the risk of
disintermediation.
J
F
M
A
M
J
J
A
S
negative sector momentum due to cyclical
weakness, we expect Digital Bros to keep revenue
stable in FY06/07, thanks to the success of its
diversification process. The development of the
publishing business and the new kiosk channel are
likely to offset the weaker cycle in traditional
distribution in the current year. After which, the
cyclicality of the gaming industry, along with the
expansion of the publishing business, is expected to
favour a sound recovery starting 2007. Our 20062011
estimates point to growth in both revenue and
EBITDA of 8.3% and 11.1%, respectively (CAGR).
Source: Datastream
›= Our
1mth
Absolute %
0.4
Relative %
0.7
Average Trading Volumes:
3mth
2.1
7.7
12mth
10.7
18.3
10 (000s)
DCFbased valuation of Digital Bros (WACC
9.2%) produces an EFV of €5.2 per share, vs. our
previous valuation of €5.0 per share, showing upside
potential of 30% on the current market price. This has
prompted us to upgrade our earlier Accumulate
recommendation on the stock to Buy.
Giovanni d'Amico
Antonio Vizzari
Head of Equity Research: Marco Annunziata
Digital Bros – Production date: 26 September 2006
UniCredit Banca Mobiliare
Contents
›=1. Investment Case ........................................................................... 3
›=2. Valuation ...................................................................................... 5
›=3. Group Overview ........................................................................... 9
›=4. Market Overview ....................................................................... 18
›=5. Financials .................................................................................... 30
We would like to acknowledge with special thanks the contribution of Ragupathy Silvanmalai Periasamy in the
compilation of this report
2
1. Investment Case
›= Digital Bros boasts an established market share of 40% in the
videogame distribution business in Italy. The company has shown its
dynamism by recently acquiring new key licences, exploring new and
profitable distribution channels, such as kiosks, and expanding its
presence in the UK and France
›= Management is forging ahead with diversification, aimed at
integrating the core distribution business with the more profitable
activities of publishing and content provision. We expect this move
to enable Digital Bros to i) improve and stabilise revenue flow, ii)
increase profitability, and iii) reduce the risk of disintermediation
›= The new videogame industry cycle is expected to start in 2007, after
the launch of the three major newgeneration consoles from Sony,
Microsoft and Nintendo. Our forecast for Digital Bros points to an
acceleration in revenues and EBITDA at a CAGR of 8.3% and 11.1%,
respectively, between 2007E2011E
›= Our DCFbased valuation of Digital Bros produces an EFV of €5.2 per
share, versus our previous valuation of €5.0 per share, showing
upside potential of 30% on the current market price. This has led us
to upgrade our earlier Accumulate recommendation on the stock to
Buy
We like Digital Bros’
multichannel
distribution strategy
and its niche
publishing approach
›=
Italian coleader in
entertainment
software distribution
›=
Vertical and
horizontal
diversification
›=
Digital Bros is the Italian coleader in the growing – though cyclical – market of
videogames. The company’s indepth knowledge of the Italian retailer market,
combined with its marketing and localisation expertise, make it a reliable partner
for major international publishers. In addition, we believe Digital Bros’ multi
channel distribution approach and niche publishing strategy will enable the
company to achieve synergies, diversify revenue sources and curb business risks.
Based on our DCF valuation of €5.2 per share, we have upgraded our
recommendation on Digital Bros stock to Buy.
Digital Bros is coleader in the offline wholesale distribution of console and PC
videogames in Italy. The Group is in a good position to retain and possibly
strengthen its current market share of c. 40%, thanks to its widespread presence
and marketing and localisation expertise (mainly translation and cultural
adaptation), which have won it distribution deals with major games publishers
worldwide. However, the evolution of the group’s revenues is highly correlated to
the dynamics of the console videogame market (on which Digital Bros has a
predominant focus as opposed to PC videogames). The distribution business, which
generates around 85% of the group’s revenues and profits, has entered the
negative curve in its cycle, so the group’s sales in this area are likely to remain
weak in the next 12 months as consumers wait for the nextgeneration consoles
and videogames. In the longer term, we believe the expected growth in the
console market will drive both sector and group sales.
By leveraging its sector expertise, Digital Bros is pursuing upstream integration
(videogame publishing) and channel diversification (content distribution through a
digital TV platform and the internet) to boost sales and margins. Indeed, the
group is gradually expanding its operations from the traditional domestic
distribution business to international publishing. This move will give Digital Bros
the opportunity to rapidly expand its footprint in the European market, thanks to
3
its extensive sector knowledge and key partnerships, and diversify revenue sources.
The niche strategy crafted by Digital Bros aims to enable it to penetrate areas not
covered by its suppliers (key international publishers) and thus to avoid conflicts.
Finally, the healthy profitability of the publishing area is expected to offset the
slight decline in distribution margins.
Revenues and profits
fluctuate with
console market
trends
›=
Our FY06/07
forecast points to
stable revenues
despite a weak
market
›=
We have raised our
estimated fair value
to €5.2 per share
›=
Business risks
›=
4
FY05/06 saw Digital Bros post 18.7% growth in annual sales, sustained by the
growing console videogame market and the contribution from publishing and the
kiosk channel. The group generated net profit of €3.8 million in the year just
closing (yearend 30 June) vs. net profit of €4.4 million in FY04/05 (which included
positive deferred taxes of €1.6 million). At endJune 2006, net debt was broadly
stable at €20.7 million (€21.7 million at endJune 2005), thanks to the company’s
tight control on working capital and lower capital expenditure.
We expect the cyclical contraction in the console videogame market to penalise
the group’s sales in the shorter term, as consumers await the release of a new
generation of hardware. Nevertheless, our FY06/07 projections show stable
revenues (€106 million) and EBIT (€8.3 million, +2.1% yoy), thanks to the higher
efficiency of the distribution business and the progressive coming onstream of
publishing and the kiosk channel. Starting 2007, we expect the recovery in the
videogame market cycle to add momentum to revenue from distribution and
international publishing. Our estimates for the period FY05/06FY11/12 indicate a
6.3% revenue increase (CAGR) and a hefty rise in consolidated net profit from €3.8
million to €7.2 million. In terms of the group’s net debt, we are looking for a
progressive easing from €20.7 million in FY05/06 to c. €9.0 million at endFY11/12E,
thanks to stable CAPEX and growth in operating cash flow.
Our DCFbased valuation of Digital Bros produces an EFV of €5.2 per share, versus
our previous valuation of €5.0 per share, corresponding to upside potential of 30%
on the current market price. This has led us to upgrade our earlier Accumulate
recommendation on the stock to Buy.
A major risk in the videogame distribution industry is the threat of
disintermediation. Distributors might suffer on two fronts, first, if publishers
decide to manage distribution inhouse and, second, if a rapid penetration of
broadband access spurs the online download of video games. However, we do not
believe these factors pose a major threat to the distribution industry in Italy, given
that the distinctive and high fragmentation of the Italian distribution market,
combined with the relatively low diffusion of broadband – and the low
penetration of newgeneration consoles, the risk of downloading errors and the
scarce use of online payment processes – are likely to shield the distributors, at
least in the shortmedium term.
2. Valuation
›= Our DCFbased valuation of Digital Bros produces an EFV of €5.2 per
share, versus our previous valuation of €5.0 per share, showing 30%
upside potential on the current market price
›= This has led us to upgrade our earlier Accumulate recommendation
on the stock to Buy
›= While market multiples are scarcely meaningful, we underscore that
Digital Bros currently trades at a large discount to its peers, even at
our EFV
We have based our
valuation on the
company’s DCF, as
market multiples are
scarcely meaningful
›=
Our DCF
assumptions include
rolling WACC at
8.6%9.1% and
perpetuity of 2.5%
›=
Valuing Digital Bros is complicated by the fact that the group’s results fluctuate in
tandem with the cyclical trends of the console videogame market. This cyclicality is
reflected in the uneven evolution of cash flows in a DCF valuation and in the
group’s multiples. Moreover, no listed companies exist that are fully comparable
with Digital Bros’ operations, given the diversity of business mix and size. In our
DCF analysis, we have addressed this issue by assuming a normalized free cash flow
in order to assess Digital Bros’ terminal value. Market multiples have been used
purely as a control method.
Our projections assume that the group’s current c. 40% share of the Italian console
videogame market will remain fairly stable and that the top line (and thus
profitability and cash generation) will almost mirror the sector’s cyclical trends.
Our projections also assume the future renewal of the division’s most significant
deals with Konami, THQ, Disney BVG, SEGA, Square Enix, Electronic Arts,
Codemasters, Vivendi and Activision.
Our DCF valuation is based on the following assumptions:
›= CAGR in revenues of 7.6% in FY06/07E FY11/FY12E
›= CAGR in EBITDA of 10.3% in FY06/07EFY11/FY12E, an EBITDA margin of 10.3%
in FY11/FY12E, up from 9.1% in FY06/07E, and an average EBITDA margin of
10.0% in the period
›= CAGR in EBIT of 10.9% in FY06/07EFY11/FY12E, an EBIT margin of 9.0% in
FY11/FY12E, up from 7.8% in FY06/07E, and an average EBIT margin of 8.7% in
the period
›= CAPEX at a normalised level of c. 0.5% of revenues per year
›= a variation in working capital of between 1.6% and 5.3% of sales per year
›= a capital structure with equity covering 59% of capital employed in FY05/06
and 73% in FY11/FY12
›= a rolling WACC of between 8.7% and 9.2%, based on an unlevered beta of 1.3
(levered beta 2011/2012 at 1.4).
›= 2.5% perpetuity rate
The period of explicit estimates in our model spans a full cycle of the gaming
industry, which we have assumed will start in 2007 and last for five years. Digital
Bros is set to generate healthy cash flows in the weaker years of the cycle, as
5
flattish revenue will reduce the working capital requirement. We expect FY08/09
to FY10/11 to mark the recovery of the gaming market and boost Digital Bros’
revenue stream, with cash generation partly absorbed by working capital. At the
end of the successive cycle, we have assumed that Digital Bros will generate a
normalised annual free cash flow of €7.0 million (or 4.4% of sales) and have used
this estimate to compute the terminal value in our DCF model.
The key assumptions of our DCF model, as well as the outcome of our valuation
and sensitivity analysis, are shown in the following tables.
Figure 1. Digital Bros – Free Cash Flow Projections FY06/07E – FY11/12E (€m)
Revenues
Change % yoy
Ebitda
EBITDA margin
D&A
As % of Revenue
EBIT
Ebit %
Taxes
NOPAT
As % of Revenue
D&A
FY06/07E
FY07/08E
FY08/09E
FY09/10E
FY10/11E
FY11/12E
106.2
n.a.
114.8
8.0%
129.0
12.4%
144.9
12.4%
158.0
9.0%
153.5
2.9%
9.7
10.5
12.7
15.3
17.0
15.8
9.1%
1.5
9.2%
1.5
9.8%
1.6
10.6%
1.8
10.8%
2.0
10.3%
2.0
1.4%
1.3%
1.3%
1.3%
1.3%
1.3%
8.3
7.8%
9.1
7.9%
11.0
8.6%
13.5
9.3%
15.0
9.5%
13.8
9.0%
3.5
3.8
4.5
5.5
6.1
5.7
4.8
4.5%
5.3
4.6%
6.5
5.0%
8.0
5.5%
8.9
5.7%
8.2
5.3%
1.5
1.5
1.6
1.8
2.0
2.0
Capex
Change in NWC
0.6
1.1
0.6
1.8
0.7
5.0
0.7
7.7
0.7
5.3
0.8
1.8
Free Cash Flow
4.6
4.3
2.4
1.4
4.9
11.2
Figure 2. Digital Bros – Main Assumptions for WACC Calculation (€m)
FY06/07E
FY07/08E
FY08/09E
FY09/10E
FY10/11E
FY11/12E
Risk free rate
Risk premium
4.5%
4.0%
4.5%
4.0%
4.5%
4.0%
4.5%
4.0%
4.5%
4.0%
4.5%
4.0%
Levered Beta
Cost of equity
1.7
11.4%
1.6
11.0%
1.6
10.8%
1.6
10.8%
1.5
10.6%
1.4
10.1%
Loan margin
2.5%
2.5%
2.5%
2.5%
2.5%
2.5%
Pretax cost of debt
Tax rate
7.0%
33%
7.0%
33%
7.0%
33%
7.0%
33%
7.0%
33%
7.0%
33%
After tax cost of debt
4.7%
4.7%
4.7%
4.7%
4.7%
4.7%
Equity proportion
Debt proportion
65%
35%
71%
29%
74%
26%
73%
27%
73%
27%
73%
27%
WACC
9.1%
9.1%
9.2%
9.2%
9.0%
8.7%
Figure 3. Digital Bros – DCF Valuation Summary (€m)
Explicit Period FCF sum NPV
Terminal Value
Enterprise Value
91
NFP
Equity value
18
73
Equity Value Per Share
5.2
6
20
71
Figure 4. Digital Bros – Sensitivity Analysis
Perpetuity
1.5%
2.0%
2.5%
3.0%
3.5%
8.50%
8.75%
5.2
5.0
5.6
5.3
6.0
5.7
6.6
6.2
7.2
6.8
9.00%
4.8
5.1
5.5
5.9
6.4
9.25%
9.50%
4.6
4.4
4.9
4.7
5.2
5.0
5.6
5.3
6.0
5.7
9.75%
4.2
4.5
4.7
5.1
5.4
10.00%
4.0
4.3
4.5
4.8
5.2
Wacc
2.1
Market multiples
vary in tandem with
the cycle
›=
No listed
comparables
›=
Group multiples
The group’s multiples are not significant at present, due to the fact that the
financials still denote the startup phase of three out of four of the group’s
business operations. Even more critically, multiples oscillate in tandem with the
cyclical trends of the console videogame market, which means that these are likely
to hit a reasonable level only in the ascending part of the next cycle.
In addition, the group’s main listed competitors in the videogame distribution
sector are major global software publishers, some of which also manage
distribution internally. Given that their core business is publishing, and also taking
into account size, the results are not fully comparable with those of Digital Bros.
The publishing business is the only division for which a multiplesbased valuation
would be feasible. However, although there are numerous international listed
publishers, their brands, size, operations and track record are not sufficiently
comparable with those of Digital Bros.
Nevertheless, the table below compares Digital Bros with a group of publishers
and distributors and underscores the low multiples at which Digital Bros currently
trades.
Figure 5. Digital Bros – Peer Group
Country
Currency
Activision
USA
USD
Electronic Arts
USA
USD
15,597
10.0%
Germany
France
EUR
EUR
212
66
12.0%
4.8%
EM. TV AG
Infogrames
Take Two
Mkt Cap EBITDA margin EBITDA margin
(Loc Cur)
2006E
2007E
4,138
3.9%
12.0%
EBIT margin
2006E
1.4%
EBIT margin
2007E
10.9%
15.2%
0.2%
10.9%
12.9%
11.3%
4.2%
2.3%
5.0%
1.6%
USA
USD
1,038
7.6%
5.9%
10.6%
4.6%
Thq Inc
Ubi Soft Entert.
USA
France
USD
EUR
1,858
921
12.2%
19.6%
13.9%
24.6%
7.0%
3.0%
9.1%
7.0%
Gameloft SA
France
EUR
280
9.6%
17.5%
7.8%
15.5%
Japan
Japan
JPY
JPY
390
91
14.5%
14.0%
14.5%
n.a.
10.6%
10.4%
10.9%
10.7%
UK
GBP
370
14.0%
n.a.
12.1%
n.a.
Italy
EUR
744
3.6%
3.4%
3.5%
3.6%
Average
9.2%
13.1%
3.9%
8.2%
Median
11.0%
13.4%
3.9%
9.1%
9.1%
9.2%
7.8%
7.9%
Konami
Capcom
Sci Entert.
Esprinet SpA
Digital Bros (UBM
estimates)*
Source: JCF; UBM estimates
56
*Digital Bros data for 2006 are referred to FY2006/2007E; data for 2007E are referred to FY2007/2008E
7
Figure 6. Digital Bros – Peer Group Market Multiples
EV/EBITDA
06E (x)
Activision
77.4
17.0
EV/EBIT
06E (x)
n.a.
Electronic Arts
EM. TV AG
52.5
6.8
26.4
6.0
n.a.
19.3
Infogrames
12.2
4.9
n.a.
n.a.
n.a.
n.a.
Take Two
Thq Inc
n.a.
14.3
12.3
9.4
n.a.
25.0
14.6
14.1
n.a.
38.0
24.0
25.0
Ubi Soft Entert.
EV/EBITDA
07E (x)
EV/EBIT
07E (x)
18.7
P/E
06E (x)
128.7
P/E
07E (x)
32.7
36.6
15.7
n.a.
75.0
56.7
36.2
8.7
8.1
56.3
18.6
89.9
32.3
41.2
9.4
14.4
8.6
50.9
12.9
16.2
12.0
68.1
25.1
22.6
24.2
Capcom
n.a.
n.a.
n.a.
n.a.
23.5
20.7
Sci Entert.
Esprinet SpA
10.5
9.2
n.a.
8.2
12.1
9.6
n.a.
8.0
13.2
16.8
n.a.
13.5
Average
24.2
11.5
26.6
17.2
53.1
28.8
Median
11.3
9.0
19.3
15.7
38.0
24.6
7.6
6.7
8.9
7.8
14.6
13.5
9.5
8.5
11.2
9.9
19.5
18.0
Gameloft SA
Konami
Digital Bros @ market
price (€4.0)
Digital Bros @ EFV
(€5.2)
Source: JCF; UBM estimates
*Digital Bros data for 2006 refer to FY06/07E; data for 2007E refer to FY07/08E
Momentum is not currently at its best, given that the group is entering the
negative part of the console renewal cycle. Multiples oscillate in tune with the
financials, dependent on console market trends, and are unlikely to return to more
interesting levels until the ascending part of the cycle (starting 2007/2008E).
Figure 7. Digital Bros – Evolution of Multiples
Stock Market Ratios
Adj. P/E
FY05/06
FY06/07E
FY07/08E
FY08/09E
FY09/10E
14.3
14.6
13.5
10.2
8.0
EV/Sales
EV/EBITDA
0.7
7.6
0.7
7.6
0.6
6.7
0.5
5.5
0.5
4.7
EV/EBIT
9.5
8.9
7.8
6.4
5.4
8
3. Group Overview
›= Digital Bros, a leading Italian distributor of videogames, is carving a
position as an integrated group that covers a large part of the
videogame industry value chain, from publishing to distribution,
from localization to marketing
›= The group’s core distribution business continues to retain its lead
position in Italy with a multichannel distribution approach, while
the publishing business is the major driver of its diversification
strategy
›= In the New Media business area, the group has cemented
partnerships with some major media companies
›= Digital Bros aims to mitigate business risks and exploit opportunities
thanks to its diversification and internationalisation strategy, along
with a partnershiporiented approach in online gaming
Digital Bros is an
integrated group
that covers key areas
of the gaming
industry value chain
›=
Digital Bros, established in 1989, has a track record of more than 16 years as a
leading distributor and copublisher in the Italian market.
The group is structured into the following business units:
›= Italian Distribution (including the new Kiosk channel)
›= International Publishing and Distribution
›= New Media
Digital Bros is carving a position as an integrated business group with operations
in key areas of the value chain in the videogame industry. This shows clearly when
comparing the group’s operations – which range from publishing to distribution
and from localization to marketing –with the sector value chain.
Figure 8. Videogames Industry Value Chain
Developer
Publisher
Distributor
Retailer
Consumer
Source: UBM
9
3.1
Group structure
The group structure is outlined below.
Figure 9. Digital Bros – Group Structure
Source: UBM
Revenue mix
powered by core
distribution business
and a growing
contribution from
publishing and the
new kiosk channel
›=
Digital Bros’ distribution business is its major revenue driver, accounting for 85.8%
of total sales in FY05/06. The publishing business streams 8% of revenue, but is
emerging as the new driver of revenue growth. The kiosk channel generates 5.7%
of sales, while new media revenue accounts for 1%. Kiosk is an innovative area of
the distribution business with a coverage potential of more than 50,000 points of
sale across Italy.
Figure 10. Digital Bros – Revenues in FY05/06 by Business Unit
P ublishing
8.0%
New Media
0.5%
Distribution
85.8%
Kiosk
5.7%
Source: Company data
The group is carving a position as an integrated player in the digital entertainment
business; below we summarise the operations of each business unit.
Figure 11. Digital Bros – Strategic Business Units
Strategic Business Unit
Activity
Distribution
Publishing
CoLeadership in Italy with multichannel distribution approach.
Growth opportunities in international markets, in both publishing and
distribution
Content partnerships with online portals and media companies
New channel with broad scope for nationwide distribution
New Media
Kiosk
Source: UBM
10
3.2 Distribution: Digital Bros continues to be the
game leader with a multichannel distribution approach
Coleadership of
Italian distribution
market and direct
knowhow of the
final customer
through videogame
rack jobbing activity
›=
Digital Bros is the coleader in the Italian offline distribution of console
videogames with 40% market share. In our opinion, the new agreements recently
struck with Sega and Square Enix could further improve Digital Bros’ positioning.
Halifax, a business unit of the Digital Bros group, is the exclusive distributor of its
international partners’ catalogue and provides full logistics, sales and marketing
support. In 2005, the unit released a total of 300 titles and boasted seven best
selling titles out of the top 30 bestsellers. Halifax also provides localization services
for its titles under distribution, including marketing and game assets, packaging,
manuals and ingame dubbing.
Halifax is the exclusive distributor for two of Italy’s most popular game brands:
THQ’S wrestling series WWE and Konami’s Pro Evolution Soccer. In January 2006,
Digital Bros secured the exclusive distribution rights for Square Enix’s upcoming
release of Dragon Quest VIII: Journey of the Cursed King (PS2). Other major
international partners include Konami, THQ, Disney BVG, Eidos, Codemasters,
Electronic Arts, Activision and Vivendi Universal Games.
The DTI business unit of Digital Bros group is primarily a subdistribution service
provider to other publishers; it provides exclusive distribution to independent
retailers with sales and logistics support, customer relationship management,
accounting and market analysis.
Game Service, a Digital Bros group company operates mainly as a videogame rack
jobber and has agreements with 100 stores for the exclusive management of the
shelves for the sale of videogames. Digital Bros’ rackjobbing operations include
recent agreements with major supermarket chains such as PAM, Venix, and Metro.
This enables the company to acquire the direct marketing knowhow of final
customers, as well as quick feedback on the sell out of new titles.
Figure 12. Digital Bros – Distribution Revenues by Console FY05/06
Others
1%
Sony PSP
10%
NBA
10%
Nintendo DS
4%
xBox360
2%
xBox
3%
PS2
70%
Source: Company Data
11
Figure 13. Italian Gaming Market Top Selling Titles for PS2 JanMay 06 (Units)
Ranking
Publisher
Title
1
Konami
Pro Evolution Soccer 5
Est. Volumes (000s)
62.0
2
3
THQ
EA
Wwe Smackdown Vs Raw 2
Fifa 06
40.5
37.5
4
EA
Need For Speed Most Wanted
36.5
5
6
Take 2
Eidos
Grand Theft Auto: San Andreas
Lara Croft Tomb Raider: Legend
36.0
34.0
7
EA
Fifa Street 2
32.5
8
9
Empire
EA
Ford Racing 2
Il Padrino The Godfather
29.5
24.5
10
SCEE
Moto Gp 4 Platinum
22.5
The PS2 Blockbusters list shown in Figure 13 highlights the major sales records
achieved by Digital Bros:
›= In November 2005, Digital Bros spurred Pro Evolution Soccer 5 sales to a record
500,000 units, corresponding to revenues in excess of €20 million (revenues
generated in solely the first month after game launch).
›= In December 2005, Digital Bros achieved another record when it sold 250,000
WWE Smackdown vs. Raw, generating revenues of more than €10 million in the
space of one month.
Figure 14 and Figure 15 show the bestseller titles for Sony PSP and Nintendo GBA.
Figure 14. Italian Gaming Market Top Selling Titles for PSP JanMay 06 (Units)
Ranking
Publisher
Title
Est. Volumes (000s)
1
Take 2 Interactive
GTA: Liberty City Stories
24.0
2
3
Konami
THQ
Pro Evolution Soccer 5
Smackdown Vs Raw 2006
19.5
11.5
4
EA
Fifa Street 2
9.5
5
6
EA
SCEE
Need For Speed Most Wanted
Ridge Racer
8.5
7.5
7
SCEE
Medievil Resurrection
7.0
8
9
SCEE
Ubisoft
World Rally Championship
Prince Of Persia
7.0
6.5
Figure 15. Italian Gaming Market Top Selling Titles for Nintendo GBA JanMay
06 (Units)
Ranking
Title
Est. Volumes (000s)
1
Nintendo
Pokemon Smeraldo
30.0
2
3
Nintendo
Nintendo
11.0
9.5
4
EA
5
BVG
6
Nintendo
Pokemon Rosso Fuoco
Pokemon Zaffiro
Harry Potter e Il Calice
Di Fuoco
Narnia: Il Leone, La
Strega, L'armadio
Pokemon Rubino
7
Konami
8.5
8
Vivendi
8.0
9
Activision
Winx Club
Era Glaciale 2: The
Meltdown
Madagascar
10
EA
Fifa 06
7.0
12
Publisher
9.0
8.9
8.8
7.0
Kiosk, the new
distribution channel,
was launched in
2005 and has
nationwide scope
›=
Distribution business
competitive strategy
›=
Kiosk is the new and innovative distribution channel launched by Digital Bros in
FY05/06, when it accounted for 5.7% of total sales. It has a nationwide
deployment scope of 50,000 POS in Italy through which to increase revenues.
Digital Bros has entered a national agreement with RCS MediaGroup, which owns
La Gazzetta dello Sport and Corriere della Sera. In January 2006, Digital Bros
signed an exclusive agreement with Clearvison Ltd. for the distribution of the
official World Wrestling Entertainment DVD Collection in Europe.
In our opinion, the competitive edge and strengths of Digital Bros’ distribution
business lie in three areas:
›= Marketing and localization knowhow
›= Multichannel distribution approach
›= International expansion
The high fragmentation of the Italian videogame retail market deters most
international publishers from setting up their own distribution channel. Indeed,
the structure of the Italian market makes it more efficient and effective to use a
local distributor, such as the service provided by Digital Bros, thanks to its large
scale, capillary market coverage and its marketing and localization services.
Nevertheless, the fragmented nature of Italian retail markets complicates the entry
of publishers into the distribution business and Digital Bros has preferred to
reduce its dependency on the local retail market by pursuing a multichannel
distribution approach and investing in international expansion.
The group’s introduction of the kiosk channel is a part of its multichannel
approach. Kiosk provides an opportunity to improve the sales of PCbased games,
thanks to more accessible prices. In addition, Digital Bros has increased its
distribution presence in the UK and France and is currently looking to set up
channels also in Spain and Germany. This move will enable Digital Bros to enter
the largest European market, thus increasing critical mass and improving its
market power with the big publishers.
3.3 Publishing: strong growth in the domestic and
international markets
505 Games, the
videogame
publishing division
of Digital Bros, has
partnerships with
international
development studios
›=
505 Games is the videogame publishing division of Digital Bros. 505 Games
currently publishes games for the Play Station 2, Xbox, Nintendo DS, PSP and GBA
platforms. 505 Games buys titles mostly from Japanese development studios such
as Sony, Taito, Bampresto, and Agetec. In this area Digital Bros has established a
development partnership with Crave, a US company, to publish games for every
major gaming platform on the market. Digital Bros plans to release 45 new
videogames before the end of 2007, including titles for PS3, Microsoft Xbox 360
and Nintendo Wii. The agreement with Crave led recently to a US$3 million
exclusive distribution contract. This deal will enable Digital Bros to distribute eight
new videogames developed for PS2, PSP, GBA and Nintendo Wii in Europe, South
Africa and Australia.
The group has a direct sales presence in three key countries: the United Kingdom,
France, and Italy. The group has local partners in other countries, including Spain,
Portugal, Benelux, Switzerland, Germany, Austria and Eastern Europe. The
13
management team responsible for publishing activities boasts a strong
background in the sector and previous experience with leading publishers like
Electronic Arts, Activision, THQ and Codemasters.
Localization
experience combined
with niche
publishing
›=
Given that Digital Bros has already gained localization experience, niche
publishing is more likely to add strength to their production capabilities as a full
fledged publisher. Moreover, Digital Bros’ consolidated distribution and marketing
experience will help them to carve an enhanced position in the value chain.
3.4
Growth
opportunities in new
media through
content partnerships
with international
portals
›=
New Media
Game Media Networks, the online gaming business unit of Digital Bros, has a
strategic focus on developing content partnerships with major international mass
market media. The unit’s major partners include:
Mediaset Premium, a payperview television service available only on Mediaset’s
digital terrestrial platform. It is based on the payperview subscription model in
which users can choose the programs they want to watch or the game to play.
Digital Bros is selling three exclusive games through this channel on a €0.5 per day
subscription basis.
Digital Bros has entered into content partnerships with some online portals both
at home and internationally. In Italy, Digital Bros has entered into agreements
with online newspaper portals to provide the gaming channel in their websites.
Other agreements include the sale of Power Football (an online 3D multiplayer
game) through the website of M6.fr in France and gazzetta.it (run by RCS Group)
in Italy. Game Media Networks operates mainly in the IPTV, Digital TV and online
media marketplace.
Positioned to tap
future new media
opportunities
›=
New media opportunities make it possible to directly obtain the license from
developers and to publish the game online without the many complexities and
financial risks associated with physical production. Its publishing experience will
help Digital Bros to tap into future opportunities in new media content
partnerships.
3.5
The disintermediation process: shortterm threat?
By risk of disintermediation, we mean the threat of a shortening and an extensive
redesign of the industry value chain, which would not favor videogame
distributors, who would suffer on two fronts: if publishers were to decide to
manage distribution internally and if a rapid penetration of broadband access
were to sharply accelerate the online download of videogames.
14
Figure 16. Industry Value Chain
Developer
Publisher
Distributor
Retailer
Consumer
Publisher disintermediation
Internet channel disintermediation
Source: UBM
More specifically, disintermediation would be triggered by two events:
›= International publishers might decide to take over the direct control of the
distribution business, eliminating the use of a local wholesale distributor to
reach retailers.
›= The rapid diffusion of broadband internet connections and a fast penetration
of nextgeneration consoles1 making it easier for gamers to download
videogames online – might convince users to bypass physical retailers. Such a
scenario would enable the publishers to sell their videogames directly through
their website; this would lead to a shortening of industry value chain (Figure
16).
However, when it comes to Italy, the disintermediation risk is unlikely to have a
big impact on the structure of the distribution market, given that, in our opinion,
neither of these factors poses a reasonable threat in the shortmedium term due to
the:
›= Highly fragmented retail market
›= Low level of penetration of high bandwidth connections in Italy
Fragmentation of the
retail market should
prevent risks of
publisher
disintermediation
›=
Italy counts as many as 3,000 retailers and the market share of even the biggest
player is no higher than 15%. Moreover, the Italian distribution market is more
fragmented compared with other Western countries, given that the first five
Italian retailers hold 41% of the market compared with 68% in the US (see Figure
17).
1
PS3 will have an Internet connection to enable users to download and save on its hard disk music
and games from Sony’s vast library. xBox360 also has a broadband connection for accessing xBox
live services.
15
Figure 17. Italian Videogame Market – Cumulate Market Share of First 5 Retailers
80%
68%
70%
62%
55%
60%
50%
50%
41%
40%
30%
20%
10%
0%
US A
UK
France
Germany
Italy
Source: IDG, 2004
This high fragmentation implies that a wholesale distributor has to manage a large
number of relationships, mainly with small retailers. Moreover, order management
at the retail level is normally not automated or centralized, but typically handled
at the store level, even by major chains such as Auchan, Carrefour and
MediaWorld. Thus, publishers willing to internalize distribution have neither the
knowledge of such a fragmented market, nor the expertise needed to handle a
high number of orders, inventory management and credit collection.
Nevertheless, some international publishers (Vivendi Universal Games, Activision,
Atari, Ubisoft, EA) have established their own distribution channel in Italy. Others
like Konami, THQ, Codemasters and Buena Vista Games, have preferred to
outsource distribution to local players (Digital Bros). We believe that the tendency
of publishers to manage their own distribution will accelerate in sync with the
increasing concentration of the retail market; however, the distinctive structure of
the Italian distribution sector is likely to slow the pace of this process.
The scarce tendency to purchase videogames online in Italy is due to four major
inhibitors:
›= Low level of broadband penetration
›= Low penetration of nextgeneration consoles
›= Risk of downloading errors
›= Security concerns about online credit card payments
Relatively low
penetration of
Internet broadband
access a further
inhibitor
16
›=
The online downloading of videogames requires the user to have access to both an
internet broadband connection and a nextgeneration console with an internet
connection and a hard disk. In Italy, the penetration of broadband connections is
still low (see Figure 18), especially compared with other Western countries.
Moreover, at present, the only console that enables users to download videogames
online is the xBox360, whose installed base in Italy is still not relevant. In addition,
the download of a videogame demands both time and a roomy hard disk, yet
problems could still occur due to the residual risk of download errors. Not least,
Italians are reticent about using their credit card for Internet purchases.
Figure 18. Broadband Penetration in Europe
30%
25%
20%
24%
23%
20%
19% 18%
15%
15% 15%
13% 12%
11% 11% 11%
10%
10%
5%
5%
1%
re
ec
e
en
d
G
Irl
Ita
ly
Sp
ai
Po n
rt
ug
al
G
er
m
an
y
UK
Fr
Lu anc
e
xe
m
bo
ur
g
Au
st
ria
Ho
lla
nd
De
nm
ar
k
Fi
nl
an
Sw d
ed
en
Be
lg
iu
m
0%
Source: Commission of The European Communities, European Electronic Communications Regulation and
Markets 2005 (11th Report)
17
4. Market Overview
›= Despite its cyclicality, we believe the console videogame market is set
to expand in the longer term, thanks to the growing penetration of
consoles and the launch of higher value videogames
›= The gap between the Italian videogame market and the most
developed markets is expected to progressively shrink in the years
ahead
›= As of 2007, the gradual penetration of PS3 and Wii is likely to
accelerate the market, heralding a favourable trend in the new
videogame cycle. According to IDG, the Italian and European
markets will deliver a CAGR of 6.8% and 5.8%, respectively, in
2006E2010E
4.1
The Italian video game market: 2005 snapshot
The Italian videogame market recorded a 20% yoy increase to €650 million in
2005. Thanks to the launch of new platforms in the year (xBox360, PSP and
Nintendo DS), hardware volumes reached the record level of 1.6 million units, or
€290 million, marking a value increase of 50% and a 23% surge in volume. In
terms of software, 2005 saw videogame sales grow 8% yoy (+21% in volume) to
€360 million, despite a sharp dip in the average selling price (ASP), mainly due to
lower PCvideogame prices (Figure 19 and Figure 20 shows a detailed breakdown
of 2005 videogame sales in Italy). The market reception to the new handheld
consoles Nintendo DS and Sony PSP was highly positive, as were Sony
PlayStation2 sales, which continued their excellent performance through the year.
2005 was the best year (in terms of annual shipments) from the PS2 launch date
with 800.000 units sold (+11% yoy, with an installed base of 3.21 million), also
thanks to the xBox360 supply shortage during its launch phase.
Figure 19. Italian Videogame Market (2005)
Software
360 million
Source: IDG
18
Total market:
690 million
Hardware
290 million
Figure 20. Italian Videogame Market 2005 Sales by Platform
2005
Platform
yoy % chg
Units (000s)
PlayStation 2
xBox
xBox360
GameCube
GBA
DS
PSP
2005
yoy % chg
ASP (€)
€m
5,100
24%
191
16%
37
850
60
42%
n.a.
30
4
14%
n.a.
35
59
130
35%
5
43%
39
1,000
250
33%
n.a.
34
10
5%
n.a.
34
39
420
n.a.
20
n.a.
49
Total Consoles
7,810
38%
294
27%
38
PC Games
Total
2,780
10,590
10%
21%
62
356
36%
8%
22
34
Source: IDG
4.2
A fast growing market
Despite its relatively small dimension vs. other EU countries, we highlight that
during 2005 the Italian videogame market registered the highest growth rate as
clearly shown in Figure 21.
Figure 21. European Videogame Market – Yoy Growth Rate by Country in 2005
Italy
S pain
UK
France
Germany
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
Source: AESVI 2006
However, the Italian videogame market remains relatively small when compared
to other European countries, mainly due to:
›= Lower penetration of consoles and PCs in Italian households
›= Different consumer behaviours
›= Demographic reasons
›= Piracy
Despite these issues, we believe that the relative underdevelopment of the Italian
market is a temporary gap and that this will gradually shrink in the years ahead.
This section looks at the main reasons for the peculiar features of the Italian
market compared with Europe and the U.S., analysing its major trends and sector
structure.
19
4.3
Penetration of consoles and PCs
Figure 22. Console Penetration Rate* (Italy vs. U.S.)
45%
Figure 23. Active PC and Console Gamers (Italy vs. U.S.)
69%
80%
40%
40%
70%
35%
60%
30%
36%
50%
25%
40%
20%
30%
15%
7%
10%
20%
10%
5%
0%
0%
US A
Source: UBM on NDP and IDG data
The Italian
videogame market is
clearly
underdeveloped
compared with the
U.S. and the UK
US A
Italy
›=
*Penetration on population basis
Italy
Source: ESA, IDG
The Italian videogame market seems less mature and advanced than that in
America, in terms of the penetration rate of both consoles and active gamers (see
Figure 22 and Figure 23). The Italian market is less developed even when
compared to other European markets, as the charts below show clearly (see Figure
24 and Figure 25). Indeed, in Italy the PS2 by far the most used console on the
market – accounts for a mere 11% of the European installed base, well below the
UK, Germany and France (see Figure 26 and Figure 27).
Figure 24. European Videogame Market by Country (2005)
3,000
2,500
2,000
1,500
1,000
500
l
Po
rt
ug
a
n
Sw
ed
e
iu
m
Be
lg
N
et
he
r
la
nd
s
Ita
ly
Sp
ai
n
e
Fr
an
c
G
er
m
an
y
UK
0
Source: AESVI 2006
Figure 25. European Videogame Market – Hardware Penetration Rate* by Country
Console penetration rate
50.0%
Netherlands
83.0%
Netherlands
39.0%
Sweden
70.0%
Belgium
Germany
36.0%
35.0%
Germany
UK
65.0%
61.0%
France
30.0%
Belgium
57.0%
Sweden
Spain
30.0%
25.0%
France
Spain
50.0%
50.0%
Portugal
25.0%
Portugal
50.0%
Italy
21.8%
Italy
40.0%
Source: AESVI 2006
20
PC penetration rate
UK
*Penetration on household basis in 2005
Figure 26. European Videogame Market Hardware
Installed Base by Console (%)
Figure 27. European Videogame Market PS2 Installed
Base by Country (%)
xBox
11%
Italy
11%
Nordic
7%
Benelux
5%
Spain
14%
PS 2
51%
GBA
30%
UK
30%
Germany
15%
France
18%
GameCube
8%
Source: IDG
Source: IDG
4.4
Cultural
features
influence consumer
behaviour,
partly
explaining the gap
distancing Italy from
other international
entertainment
markets
›=
Demographic
reasons…
›=
Consumer behaviour
The gap that distances the Italian videogame market from the more developed
markets is mainly attributable to piracy and the cultural differences that influence
consumer behaviour, which ultimately determine their spending priority. In
addition, the relatively weak macroeconomic environment in Italy has undermined
discretionary consumption in the last few years.
A comparison with more developed markets shows that the UK, which has a strong
gameplaying culture similar to that of the U.S. is one of the most dynamic and
fastmoving in the world, with high rates of penetration and multiple console
ownership. As illustrated in the previous section (see Figure 24 and , the UK
accounts for a third of all Western European entertainment software sales, almost
twice the size of the next ranked, Germany.
In terms of demography, according to a survey by ACNielsen and AESVI, 46% of
men in Italy are gamers, while the percentage hardly reaches 28% among women.
This gamer “gender gap” shrinks substantially when it comes to the younger age
group, since, in this case, 80% of girls play videogames. In the UK, the gender gap
is smaller, but at the same time the portion of the population that play
videogames is higher (as shown in the graph below). This leads us to expect a
closing of this gender gap in the year ahead and the overall population
percentage of Italian gamers to increase.
21
Figure 28. Italian Videogame
Population by Gender
Market
Gamer
Figure 29. UK Videogame Market Gamer Population
by Gender
100%
80%
100%
28%
80%
46%
52%
65%
60%
60%
40%
40%
72%
54%
20%
48%
20%
0%
35%
0%
Men
Women
Non-Gamer
Mern
Gamer
Non-Gamer
Source: IDG
Italians spend less
on videogames
compared with other
European gamers
Women
Gamer
Source: IDG
›=
According to a survey by GameVision Europe, Italian videogame players show both
the lowest level of spending on games and the lowest average hours played per
week compared with other Western European players (see Figure 30).
Figure 30. European Videogame Market Playing and Purchasing Behaviour
152.1
160
140
120
116.9
112.8
100.9
94.3
100
86.1
80
60
40
20
9.7
12.2
France
Germany
9.1
8.2
12.4
10.9
0
Italy
Avg hours of gaming/week
Spain
UK
Europe
Amount spent on games in last 6 months ( )
Source: GameVision Europe, September 2005
4.5
Piracy: a risk likely
to soften with the
launch of the next
generation consoles
›=
Piracy
The Italian videogame sector is rife with piracy, an endemic problem that
undermines the industry’s development. Piracy was more evident in the first wave
of CDbased console diffusion (in the 90s), when it was a contributory factor in
weakening industry revenues and profitability. Despite the fact that piracy remains
an issue in Italy, technological developments should help to curb the spread of the
phenomenon.
Indeed, we expect the nextgeneration consoles to reduce copying and to make it
increasingly difficult for gamers to use illegal software. For example, Sony has
changed its next PS3 console from the DVD format, since DVDs are too easy to
pirate, preferring to equip the PS3 with a BluRay Disc, a nextgeneration optical
disc format designed for the highdensity storage of highdefinition video and
data. According to the Bluray Disc Association, the new disc format will be ultra
22
secure and safeguard against piracy, thanks to the contentprotection technologies
used during the mastering of every BDbased media.
4.6
Videogame market is
highly cyclical due
to the periodical
launch
of
new
consoles
›=
A highly cyclical market
The videogame market is highly cyclical, featuring periods of strong growth
followed by a rapid slowdown. The entertainment market oscillates in tandem
with the renewal pattern of the console hardware market, therefore, the length of
the industry cycle largely corresponds to the console lifecycle (historical average of
about five years). The market reaches its peak twothree years after the launch of
a new console (see Figure 31), in sync with the growth of the console’s installed
base, when console diffusion becomes efficient enough for the production and
distribution of good quality videogames.
The beginning of the cycle sees developers and publishers focus investments on
newgeneration videogames; strong investments lead to a drop in industry
profitability, given that the sales of the new console’s games are still not
sufficiently high to permit publishers to recover development, manufacturing and
marketing costs. As a result, the prices of videogames for nextgeneration consoles
are high in this phase, while demand gradually increases in line with installed base
growth. On the other hand, the prices of videogames for the old consoles suffer a
sharp downturn. The ensuing decrease in the revenue streamed by the old
videogame consoles due to the drop in the videogames’ ASP (Average Selling
Price) and shipments is not offset by the income generated by the videogames for
the new consoles as volume at the beginning of the cycle is still not sufficiently
strong.
Figure 31. Hardware Unit Sales (United States and Europe, million units)
14
PS3
12
10
8
xBox360
6
Gam e C ube 2
4
PS2
2
0
2004
2005
GameCube
xBox
2006E
2007E
2008E
GameCube2
Xbox360
PS 2
GBA
2009E
2010E
PS 3
DS
Source: IDG
The length of this initial phase depends on the market success of the new consoles
and on the availability and attractiveness of the new videogames. 2007 will mark
the expected end of the current industry cycle – which began in late 2000 with the
launch of PS2 – thanks to the two new consoles (Sony PS32 and Nintendo Wii)
slated for market rollout in late 2006. The new cycle is expected to peak in
2010/2011, based on the minimum sixyear run envisaged for the PS3. This last
cycle has endured six years from 2001 to 2006, while the one prior to that endured
five years, from 1995 to 2000, when PS1 was substituted by PS2.
2
Sony has postponed PS3 launch in Europe from November 2006 to March 2007, but has
confirmed a November launch in the US and Japan
23
4.7
Sector structure: the hardware (consoles)
The overall entertainment market is made up of consoles and PC and console
videogames.
Three global players
dominate the console
market=
›=
The console market is more concentrated than the software market, with three
global players (Microsoft, Nintendo and Sony) sharing the whole market between
them. Console developers play an important role in the entertainment industry,
given that the success of a platform has a strong impact on the volume sales of
videogames. The PlayStation 2 is by far the most popular videogame console. Sony
has sold more than 101 million units worldwide (see Figure 32 for the installed
base) compared with 24 million Microsoft Corp Xbox units and 21 million Nintendo
Game Cube units.
Figure 32. Worldwide Console Market PS2 Installed Base By Region (2005)
Asia, Others
38 million
USA
34 million
101 million
units
EU
28 million
Source: IDG
The table below shows the main features of both old and nextgeneration
consoles.
Figure 33. Features of Old and NextGeneration Consoles
Developer
PlayStation
Sony
1994 (JP)
US$299
CD player, memory card
GameCube
Nintendo
2001
US$199.9
GC optical disc player, dual analog sticks
xBox
PS2
Console
xBox360
PS3
Wii
Features
DVD player, hard disk drive, two analog
sticks, Communication: Ethernet
Nov 2000
DVD player, memory card, dual shock
Sony
US$299
(EU)
controller, Communication: Ethernet
Next generation consoles
Developer
Launch
Launch
Features
date
Price
DVD player, 20GB removable hard disk,
US$300
wireless controller, Communication:
Microsoft 4Nov05
US$400
Ethernet
Nov 2006
BlueRay HD DVD player, hard disk 20GB
(US, JP)
60GB, Bluetoothpowered motion
US$499
Sony
sensitive wireless controller,
US$599
March
Communication: Ethernet
2007 (EU)
Wii optical discs player, 512 MB builtin
19Nov06
flash memory, wireless controller with
Nintendo
US$250
(US)
motion sensor, Communication: WiFi
Microsoft
Source: UBM on company’s data
24
Old generation consoles
Launch
Launch
date
Price
Console
2001
US$299
PS2 leads the
console market in
Italy
›=
As shown in Figure 34, PS2 is also the bestselling console in Italy, accounting for
50% of total console sales. The leadership of PS2 in entertainment platforms
means that PS2 software accounts for about 49% of total Italian videogame sales
(2005 data). According to IDG’s projections, the PS2 installed base in Italy will climb
to 3.7 million units by the end of 2006.
Figure 34. Italian Videogame Market – Hardware
Breakdown
Figure 35. Italian Videogame Market Software
Breakdown by Platform
GameC ube
1%
GameC ube
2%
DS
13%
PS2
49%
PS2
50%
PC
26%
GBA
14%
xB ox360
2% xBox
5%
Source: IDG, 2006
GBA
9%
xBox360
1%
xBox
8%
PSP
4%
Source: IDG
4.8
Videogame industry
structure
DS
2%
PSP
14%
›=
Sector structure: the software (videogames)
The entertainment software industry revolves around videogames, which need to
be developed, published and distributed. The software sector is underpinned by
the following players:
›= The developer is the author of the game, i.e., the person who writes the plot.
The developer can either be an independent or work alongside the publisher.
›= The publisher acquires from the developer the right to use the game, produces
the physical support (CD or other software) and manages trade sales and
marketing. In some cases, the publishers are owned by the producers of the
hardware on which the videogames will be used (Nintendo, Sony, Microsoft).
›= The wholesale distributor channels the software to the retailers.
›= The videogame retailers range from small standalone specialist stores to
organised distribution chains.
Distribution is not
just about logistics
›=
In addition to the physical delivery of the software created by videogame
publishers to the retailers, offline wholesale distribution involves other value
added activities:
›= Game localisation: also defined as ‘copublishing’, is possibly the most
important task for the distributor, entailing the adaptation of the game to the
context in which it is sold, i.e. language dubbing and cultural adjustment, as
well as the translation of the game’s instruction manuals and packaging.
However, localisation is mostly carried out by the publisher.
›= Marketing: the distributor usually manages the marketing of the product for
the area in which it operates, often in collaboration with the publisher.
25
Marketing involves advertising and promotional campaigns aimed at the end
consumer (usually in specialist magazines) as well as trade marketing activities
and product packaging.
4.9
Sharper focus on distribution in Italy
The Italian videogame distribution market is made up of three large independent
distributors (Digital Bros, Leader and DDE) and a few international publishers who
have opted to manage distribution internally. Digital Bros is the market leader
with a 40% share, followed by Leader, with a similar market share, while the rest
of the market is split between the other players. Digital Bros focuses
predominantly on software for consoles, while Leader is more focused on PC
software. In contrast to the distribution market, the videogame retail market is
highly fragmented, as the table below shows clearly, where the biggest retailer
has a market share of about 15%.
Figure 36. Main Italian Videogame Retailers
Retailer
Mkt share
Media World/Saturn
EB Games
15%
9%
Auchan
8%
Coop
Carrefour
5%
4%
Top 5 retailers
Blockbuster
41%
2%
Pergioco
2%
UniEuro/PC City
Fnac
2%
2%
Others
Total
51%
100%
Source: IDG 2006
4.10 Market outlook: consoles
Market conditions
are expected to
improve worldwide
on the launch of Wii
and PS3 consoles
›=
The outlook of the videogame market is strictly dependent on the cyclicality
typical of the market, which is influenced by the introduction of newgeneration
consoles. Despite the waning sales of 128bit consoles (PS2, xBox, GameCube) which have now entered the final phase of their lifecycle IDG forecasts a boost in
2006 and 2007 console sales thanks to the November launch of Sony PS33 and
Nintendo Wii (see Figure 37). The console market is expected to add on about 20%
in 2007, with the fall in PS2 shipments more than offset by the strong penetration
of the new PS3 model.
3
The console substitution process has been delayed to 1Q07, as Sony has encountered problems
related to the mass manufacturing of the new PS3. Sony has lowered its target for the number of
PS3 units to be shipped to Japan and the US between the launch date and endFY2006 from the
previous four million to just over two million, as a result of problems in the mass production of an
electronic component of the new BluRay reader. While the consequent shortage of PS3 units over
Christmas might boost sales of competitors’ next generation consoles (such as Nintendo Wii and
xBox360), this temporary loss of market share should be offset by resilient sales of the PS2.
26
Figure 37. North America and Europe Game Console Shipment (million units)
60
25%
50.6
50
46.6
42.6
45.7
20%
42.7
15%
37
40
10%
30
5%
20
0%
10
-5%
-10%
0
2005
2006E
2007E
2008E
Cons ole s hipments (million units - lhs )
2009E
2010E
yoy change - rhs
PS3 and Wii launch
date
›=
Sony recently announced that it would delay the European PS3 launch to March
2007 from its original target date of November 2006. However, Sony did confirm a
November launch for the PS3 in both the U.S. and Japan. Sony plans to ship two
million PS3 by yearend, while Microsoft, which launched its xBox360 in November
2005, has a delivery target of ten million units.
Nintendo is set to launch its Wii console in North America on November 19, just
two days after the U.S. launch of the PS3. Wii is expected to debut in Japan on
December 2, with a similar launch date planned for Europe. Nintendo says it
expects to sell 6 million Wii consoles in the year to next March.
4.11 Market outlook: videogames
Launch of PS3 and
Wii expected to drive
recovery in
European videogame
market
›=
According to our 20062010E estimates, the European videogames market will
deliver a CAGR in sales of about 5.8%, hitting a peak in 2009/2010 in parallel with
the growth of the PS3 installed base (see Figure 38). As indicated in Figure 39, the
postPS3 launch contraction in PS2 videogame sales will probably be offset by an
increase in PS3 and xBox360 software sales. Figure 39 also shows that, unlike the
cyclicality of the videogame console market, the PC games market is less volatile
and that its size is expected to remain fairly flat in the next few years. If we focus
on purely console videogame sales, the CAGR 20062010E increases to 8.2%, higher
than the 5.8% expected for the European market, which includes PC games sales.
Figure 38. European Videogame Market PC & Console Videogames Sales (US$ m)
CAGR 2006E-2010E (5,8%)
9,000
8,000
6,530
6,531
2005
2006E
7,874
8,224
8,194
2008E
2009E
2010E
7,240
7,000
6,000
5,000
4,000
3,000
2,000
1,000
2007E
Source: IDG (April 2006)
27
Figure 39. European Videogame Market Software Sales by Platform (US$ m)
3500
3000
2500
2000
1500
1000
500
0
2004
2005
GameCube
PS P
DS
2006E
2007E
Wii
xBox
PC Game S W
2008E
2009E
PS 2
xBox2
2010E
PS 3
GBA
Source: UBM on IDG data (April 2006)
Italian console
videogame market
set to deliver a
CAGR of 8.7%
›=
As mentioned earlier for the European market, Italian videogame sales are also set
for growth in the next few years, fuelled by the increasing penetration of PS3 and
other nextgeneration consoles. The Italian market is likely to hit its peak in 2010,
when total videogames sales are estimated to reach US$561 million, delivering a
CAGR (20062010E) in sales of about 6.8% (+27.8% compared with 2005). We
underscore that after stripping the flattish PC components from overall market
sales, the CAGR increases from an estimated 6.8% to 8.7%. Figure 40 and Figure 41
outline IDG’s projections for the Italian videogame and console market.
Figure 40. Italian Videogame Market Videogames Sales (in US$ m)
600
550
500
515
537
2008E
2009E
CAGR 2006E2010E (6,8%)
561
479
407
442
431
2004
2005
2006E
450
400
350
300
250
200
2007E
Total s oftware s ales
Source: UBM on IDG data (April 2006)
28
2010E
Figure 41. Italian Videogame Market Console and Handheld Hardware Units
Sold (000s)
900
800
700
600
500
400
300
200
100
0
2004
2005
2006E
2007E
2008E
2009E
GC
Wii
PS 2
PS 3
xBox
xBox360
GBA
DS
2010E
PS P
Source: IDG
The UK and France
›=
In terms of the other EU markets, IDG expects videogame sales in the UK and
France to advance at a CAGR of about 6.9% and 4.0%, respectively, in 20062010E.
The UK is likely to power the largest videogame market in Europe with estimated
2010 sales of US$2.8 billion vs. US$561 million in Italy and US$1.4 billion in France
(see Figure 42 and Figure 43).
Figure 42. French Videogame Market PC, Console and
Handheld Videogames value in France (20052010E)
1,500
1,300
1,393
1,214
1,407
1,405
Figure 43. UK Videogame Market PC, Console and
Handheld Videogames value in UK (20052010E)
3,000
1,296
2,500
1,182
1,100
2,000
900
1,500
700
1,000
500
2,779
2009E
2010E
2,391
2,196
2,130
2005
2006E
500
2005
Source: IDG
2,826
2,665
2006E
2007E
2008E
2009E
2010E
2007E
2008E
Source: IDG
29
5. Financials
›= Digital Bros revenue stream evolves in tandem with the sector’s
cyclical trends. Our forecast for the FY05/06FY10/11 period points to
an 8.3% CAGR in revenue
›= The company’s gradual diversification into the publishing sector is
likely to have a favourable impact on the evolution of both revenue
and EBITDA, thanks to the robust profitability of this business
›= Deferring the PS3 launch from November 2006 to March 2007 could
have a positive impact on the videogame market in 2006, given that
we believe the delay in new console purchases will shift gamer
spending to videogames
›= Digital Bros profitability stands to benefit from the ongoing growth
of the publishing business, with our estimates indicating an increase
in the EBITDA margin from 9.1% in FY06/07E to 10.8% in FY10/11E
5.1
Digital Bros FY05/06
revenue of €113
million beat our
forecast of €104
million
›=
Revenue: FY05/06 results
Digital Bros announced gross revenue of €113 million in FY05/06 (financial year
end 30 June), well above its target of €96.5 million and our forecast of €104
million. This result was achieved thanks to higherthanexpected revenues from
the international publishing division (€8.5 million vs. the company’s indication of
€4.5 million) and the strong sales generated by the new kiosk channel (€6.1 million
although Kiosk was not included in the initial FY05/06 budget). In addition, the
deferred launch of PS3 (previously planned for November 2006 but recently
rescheduled for March 2007) has favoured PS2 videogame sales in the traditional
distribution area, thanks to the continued launch of new titles and the solid PS2
installed base. This enabled Digital Bros to report an 8.5% increase in distribution
sales, despite the negative price trend typical of the weaker phase of the cycle.
Figure 44 shows the breakdown of the revenue stream.
Figure 44. Digital Bros – FY05/06 Revenue Breakdown
Console videogames
PC videogames
Accessories and Hardware
FY04/05
FY05/06
% Change
79.9
8.2
90.2
6.7
13.1%
17.7%
2.0
1.2
38.7%
6.0
84.0
7.1
91.1
n.a.
8.5%
International Publishing
3.6
8.5
136.5%
New Media
Kiosk
0.7
0.0
0.5
6.0
27.3%
n.a.
89.0
106.1
19.3%
Discounts
Total distribution net
Group net revenues
FY05/06 distribution
revenue (+13%)
spurred by strong
volume growth
(+31%)
30
›=
An analysis of the volume and price effect implicit in the FY05/06 revenue increase
shows that Digital Bros was able to boost PS2 games volume to 2.2 million units,
24% higher than FY04/05. This was attributable to the larger installed base of the
console in the late development stage and more accessible prices, enabling Digital
Bros to exploit its extensive network and distribution power. According to IDG, the
installed PS2 hardware base in Italy advanced to 3.2 million units at end2005,
marking an increase of 800,000 units on 2004.
We also underscore the outstanding performance of PSP sales, which reached
288,000 units in FY05/06, corresponding to sales of €9.4 million and market share
of roughly 36% (UBM on IDG data). A full set of price/volume data is provided in
Figure 45.
Figure 45. Digital Bros – FY05/06 Distribution Revenue by Console– Price and
Volume Effect
(€m)
Nintendo GameBoy Advance
volumes (000)
prices (€)
Sony Playstation 2
volumes (000)
prices (€)
Microsoft Xbox
volumes (000)
prices (€)
Microsoft Xbox 360
FY04/05
FY05/06
% Change
8.5
293.6
8.8
331.8
4.0%
13.0%
28.9
63.7
26.6
62.9
8.0%
1.2%
1,803.7
2,238.8
24.1%
35.3
6.2
28.1
3.0
20.4%
51.5%
172.1
86.6
49.7%
35.9
0.0
34.6
2.1
3.6%
n.a.
volumes (000)
0.0
46.0
n.a.
prices (€)
Nintendo DS
0.0
0.0
46.0
3.5
n.a.
n.a.
volumes (000)
0.0
128.4
n.a.
prices (€)
Sony PSP
0.0
0.0
27.1
9.4
n.a.
n.a.
volumes (000)
0.0
287.9
n.a.
prices (€)
Other
0.0
1.5
32.6
0.5
n.a.
65.5%
126.7
28.6
77.4%
12.0
79.9
18.3
90.2
52.5%
13.0%
2,396.1
3,148.2
31.4%
33.3
28.7
14.0%
volumes (000)
prices (€)
Total Distribution Italy
volumes (000)
prices (€)
5.2
Basic assumptions
underpinning our
revenue projections
›=
Distribution: we
forecast a recovery
starting 2008 after a
weak 2007 due to
the cyclical effect
›=
Revenue projections
We have updated our projections to factor in the strongerthanexpected trend in
Digital Bros’ distribution business, thanks partly to the unexpected performance of
the kiosk channel and the favourable publishing results. Our projections for Digital
Bros’ revenue evolution starting in FY06/07 also assume that the transition to the
nextgeneration consoles will conclude in 2007, given the recent deferment to
March 2007 of the launch of Sony’s new Play Station 3 previously planned for
November 2006. We have therefore assumed that the trough year in the current
cycle of the videogames market will be 2007 and that the new cycle will hit its
peak in 20102011.
Our estimates indicate a fall of 5.7% yoy in FY06/07 net distribution revenue to
factor in the market’s cyclical effect. However, we believe the videogame market
will be favoured by the recent deferment of the PS3 launch from November 2006
to March 2007 because the delay in new console purchases will likely shift gamer
spending to videogames, therefore, the extended life of the widespread PS2 is
likely to help sustain videogame sales.
While our estimate for FY06/07 gross revenue of €92.6 million is broadly in line
with the company’s guidance of €92.0 million, we point out that the company’s
FY05/06 indications were largely surpassed.
31
Figure 46. Digital Bros – Revenue Projections FY06/07E – FY11/12E (€m)
2005/2006
FY06/07E
FY07/08E
FY08/09E
FY09/10E
FY10/11E
FY11/12E
106.2
106.2
114.8
129.0
144.9
158.0
Distribution
Publishing
91.1
8.5
85.9
14.0
89.8
18.1
101.2
20.7
114.2
23.2
125.1
25.1
New Media
0.5
0.8
1.0
1.2
1.4
Kiosk
6.1
18.7%
5.5
0.0%
5.8
8.0%
5.9
12.4%
6.1
12.4%
Group sales
of which:
yoy % change
153.5
CAGR
0611
8.3%
CAGR
0712
6.3%
118.6
26.9
6.5%
24.2%
4.5%
21.2%
1.6
1.6
26.1%
23.1%
6.3
9.0%
6.3
2.9%
0.6%
0.7%
Distribution
8.5%
5.7%
4.5%
12.7%
12.9%
9.5%
5.2%
Publishing
New Media
104.8%
62.9%
65.0%
51.1%
29.4%
33.1%
14.0%
22.1%
12.1%
16.9%
8.2%
11.2%
7.2%
9.0%
Kiosk
n.a.
9.2%
5.7%
1.5%
3.4%
2.5%
0.8%
Our 20062011 forecast indicates a CAGR of 6.5% in distribution revenue as Digital
Bros will be able to fully exploit the sector’s expected cyclical recovery in 2007
through 2011. The key revenue driver is likely to be console videogame sales, for
which we project a CAGR of 7.4% in FY06FY11E, fuelled by PS3 and PSP
videogame sales. On the other hand, PCgame sales are expected to slowly decline
(CAGR of 5.0%) on the back of the negative price trend in Italy.
International
publishing is the
true challenge for
Digital Bros
›=
International publishing is fertile terrain for Digital Bros and management is
currently implementing a copublishing niche strategy aimed at i) empowering
revenue diversification to counter the risk of disintermediation in the distribution
area, ii) increasing profitability, iii) exploiting larger and more advanced European
markets such as the UK, Germany and France, and iv) leveraging its good
relationships with the console vendors.
According to our estimates, Digital Bros will achieve a 65% advance in FY06/07
publishing revenue after 105% growth the year earlier thanks to its direct
presence in the UK and France, expansion in Spain and Germany and the
development of games compatible with all gaming platforms, both old and new
generation. Indeed, Digital Bros has already signed game agreements for PS2 (8
titles), PSP (4), Nintendo DS (16), PC (2), GBA (6) and, as from 2007, Sony PS3 (3),
Microsoft Xbox 360 (2) and Nintendo Wii (4).
The key releases in 2006 were PS2’s Magnacarta and The Bible Game, while the
major titles slated for 2007 are Rule of Rose and Wild Arms 4.
Our FY06/07E publishing revenue target of €14.0 million is well below the
company’s guidance of €17.0 million, while the result in FY05/06 was €8.5 million.
We highlight that Digital Bros’ management deems our target of c. €25.0 million
in 2011 to be overly cautious. Despite the company’s high potential in the
publishing market and the fact that results have so far surpassed management’s
indications, visibility remains low. Therefore, we prefer to adopt a cautious
approach in our estimates, which show a 20062011E publishing revenue CAGR of
24.2%.
Kiosk channel
powers high revenue
and margins
32
›=
Our projections for the kiosk channel indicate that revenue will remain broadly
stable at roughly €6.0 million per year. We point out that the volatility of this area
can be a key factor, as successful titles can fuel huge volumes, thanks to the
extensive kiosk network. The major revenue sources in the kiosk channel are
expected to be i) distribution of the DVD on the lives of the most popular wrestlers
(WWE Wrestling Megastar), and ii) distribution of videogames as addon sales to
Corriere della Sera and Gazzetta dello Sport, based on an agreement with RCS
Mediagroup.
In addition, Digital Bros plans to distribute “trivia” games based on quizzes about
popular movies and/or characters through Kiosk in 2007. These games can be
played either directly on the DVD or with the DVD remote control, making them
extremely easy to operate and accessible even to technologyadverse people.
Partnerships are a
key factor in
developing the New
Media business
›=
The new media initiative recently launched by Digital Bros is based on the
provision of specialised gaming contents to major international massmarket
media. This division is headed by the former managing director of Walt Disney
Television Italia, Mr Laurent Malek. Development of this business is closely linked
to the forging of partnerships with large media groups with hightraffic internet
sites or DTT channels. Digital Bros currently boasts agreements with Mediaset for
the DTT channel, Mediaset Premium; RCS (gazzetta.it); and M6.fr (RTL group).
While we believe the new media division has the potential to produce additional
good results, along with publishing, to create further value in the Digital Bros
business portfolio, visibility seems low, given the uncertainty on the evolution of
the “payperplay” model, both on the DTT platform and online. Therefore, our
cautious estimates indicate new media revenue of €0.8 million in the current year
(vs. €0.5 million in FY05/06) with a target of €1.6 million in 2012. Any new key
partnerships announced by the division could improve visibility and lead to more
ambitious targets.
5.3
Publishing and kiosk
fuelled Digital Bros’
profitability in
FY05/06
›=
Profitability
In FY05/06, Digital Bros’ profitability was buoyed by the hefty increases achieved in
the publishing business (EBITDA +57% yoy to €2.8 million), which enabled the
company to post an EBITDA margin of more than 30%, and the positive evolution
of the kiosk channel, which generated EBITDA of €2.5 million compared with a
zero result the year earlier. Nevertheless, EBITDA of €8.5 million reported by the
core distribution business retreated from €9.5 million in FY04/05. The waning
profitability of the distribution business is mainly attributable to the negative
trend of game prices, determined by the evolution of the market cycle. The
negative EBITDA of €2.2 million posted by the new media division was partly due
to nonrecurring items related to the disposal of the online gaming activity.
Digital Bros reported consolidated EBITDA of €10.0 million in FY05/06, up 15% yoy;
stable EBIT of €8.1 million; and a net profit of €3.8 million (12% yoy). The lower
net profit posted in FY05/06 was entirely due to the unfavourable comparison with
FY04/05, when Digital Bros booked positive deferred taxes of €1.6 million.
In terms of forward profitability, we expect the EBITDA margin to remain relatively
weak at around 9.0% in FY06/07E and FY07/08E, based on the expected bottoming
of the videogame cycle in 2007. After which, we expect the sector’s cyclical
recovery, combined with the growing revenue contribution from the highly
profitable publishing division, to spur an increase in the EBITDA margin to more
than 10% starting FY08/09E.
Prudently, we have assumed a stable contribution to EBITDA from the kiosk
channel (about €2.0 million per year), with the new media division achieving
EBITDA breakeven starting FY09/10E. Nevertheless, we underscore that both
33
businesses could reveal positive surprises in terms of EBITDAgeneration, in the
event the company strikes new partnerships that would boost revenue.
Figure 47 shows our full set of FY06/07 to FY11/12 projections.
Figure 47. Digital Bros – Income Statement Projections FY06/07E – FY11/FY12E (€m)
FY05/06
FY06/07E
FY07/08E
FY08/09E
FY09/10E
FY10/11E
FY11/12E
106.2
18.7%
106.2
0.0%
114.8
8.0%
129.0
12.4%
144.9
12.4%
158.0
9.0%
153.5
2.9%
10.0
9.7
10.5
12.7
15.3
17.0
15.8
Distribution
8.5
7.5
7.3
8.6
10.3
11.5
9.9
Publishing
2.8
3.2
4.1
4.6
5.1
5.5
5.9
New Media
Kiosk
2.2
2.5
1.4
2.1
0.8
2.1
0.5
2.1
0.1
2.1
0.0
2.2
0.0
2.2
9.5%
9.1%
9.2%
9.8%
10.6%
10.8%
10.3%
Group sales
yoy % change
EBITDA
CAGR
06 11
8.3%
CAGR
06 12
6.3%
11.1%
7.9%
13.2%
9.3%
15.6%
10.9%
of which:
EBITDA margin
Distribution
9.3%
8.7%
8.2%
8.5%
9.0%
9.2%
8.4%
Publishing
32.5%
23.0%
22.5%
22.3%
22.2%
22.0%
21.9%
New Media
Kiosk
440.0%
41.8%
179.7%
38.0%
79.1%
36.0%
40.3%
35.0%
6.3%
35.0%
2.9%
35.0%
2.4%
35.0%
EBIT
EBIT margin
8.1
7.6%
8.3
7.8%
9.1
7.9%
11.0
8.6%
13.5
9.3%
15.0
9.5%
13.8
9.0%
yoy change
0.6%
2.1%
9.8%
21.8%
22.0%
11.4%
7.9%
5.9
5.5%
6.3
5.9%
7.3
6.3%
9.3
7.2%
11.8
8.1%
13.5
8.5%
12.3
8.0%
yoy change
14.7%
6.3%
16.1%
28.6%
26.1%
14.7%
8.8%
Net profit
Net margin
3.8
3.6%
3.8
3.5%
4.1
3.6%
5.4
4.2%
6.9
4.7%
7.9
5.0%
7.2
4.7%
yoy change
12.3%
2.0%
8.5%
31.5%
28.0%
15.5%
9.8%
Pretax profit
Pretax margin
*The difference between the Group’s EBITDA and the sum of single divisions is attributable to Holding’s costs
5.4
Cash generation
Cash generation will become interesting as consolidated capital expenditure is
expected to remain low. However, the distribution business needs to invest in
working capital, while cash flow oscillates in line with group revenues and hence
with console software trends. For example, we expect a deterioration in the cash
flow yield in the positive years of the cycle, such as between 20082010, while the
weaker years, such as FY06/FY07E, have a lower working capital requirement, thus
boosting cash flow generation. Net financial debt was €20.7 million, as at endJune
2006, improving from €21.6 million at endJune 2005.
Figure 48. Digital Bros – Cash Generation Analysis
FY05/06
FY06/07E
FY07/08E
FY08/09E
FY09/10E
FY10/11E
Free Cash Flow (€m)
2.2
4.0
3.8
1.9
0.8
2.7
9.1
Free Cash Flow Yield
4.0%
7.2%
6.8%
3.4%
1.4%
4.9%
16.1%
34
FY11/12E
Figure 49. Digital Bros – Cash Flow Statement FY05/06 – FY11/12E
FY05/06
FY06/07E
FY07/08E
FY08/09E
FY09/10E
FY10/11E
FY11/12E
Net profit
3.8
3.8
4.1
5.4
6.9
7.9
7.2
D&A
Gross Cash flow
0.6
4.4
0.5
4.2
0.5
4.6
0.6
5.9
0.6
7.5
0.7
8.6
0.7
7.9
4.2
1.1
1.8
5.0
7.7
5.3
1.8
0.2
0.0
0.1
0.0
0.2
0.0
0.2
0.0
0.2
0.0
0.2
0.0
0.2
0.0
Change in working capital
Change in funds
Other non cash
Operating cash flow
Capex tangible
Capex intangible
Disposals
Change in financial assets
Other
Free cash flow
0.3
3.2
3.0
1.1
0.1
3.5
9.9
0.3
0.2
0.3
0.3
0.3
0.3
0.3
0.4
0.3
0.4
0.3
0.4
0.3
0.5
0.0
0.0
0.0
0.0
0.0
0.0
0.0
2.6
0.2
1.4
0.0
1.5
0.0
1.5
0.0
0.0
0.0
0.0
0.0
0.0
0.0
2.2
4.0
3.8
1.9
0.8
2.7
9.1
Dividends
Changes in equity
1.1
0.0
1.1
0.0
1.1
0.0
1.1
0.0
1.5
0.0
1.9
0.0
2.2
0.0
Other
0.2
0.0
0.0
0.0
0.0
0.0
0.0
1.0
20.7
3.0
17.8
2.8
15.0
0.8
14.2
2.3
16.5
0.8
15.7
6.9
8.8
CashFlow
Net Financial Position EOP
35
Figure 50. Digital Bros – Key Data
Market Data
Price Ord (€)
No. Issued Shares (m)
Total Market Cap (€m)
Key Figures (€m)
Total Group Revenues
yoy % change
EBITDA
yoy % change
EBIT
yoy % change
Group Net Profit
yoy % change
Net Capital Employed
Shareholders' Equity
Net Financial Debt (Cash)
Free Cash Flow
Operating Ratios (%)
EBITDA Margin
EBIT Margin
Aftertax ROIC
Asset Turnover
EVA® Spread
Leverage (x)
Debt/Equity
Debt/EBITDA
Debt/Free Cash Flow
Debt/Total Capital Invested
Interest Cover
EV Ratios (x)
EV
EV/Sales
EV/EBITDA
EV/EBITA
[EV/CE]/[ROCE/WACC]
Per Share Data (€)
EPS
yoy % change
Gross CFPS
Free CFPS
BVPS
DPS Ord
Per Share Ratios (x)
P/E Ord
P/Gross CFPS
P/Free CFPS
P/BVPS
Free Cash Flow Yield Ord (%)
Div. Yield Ord (%)
Source: Company data, UBM estimates
36
FY05/06
FY06/07E
FY07/08E
FY08/09E
4.00
14.1
56.3
4.00
14.1
56.3
4.00
14.1
56.3
4.00
14.1
56.3
106.2
18.7%
10.0
15.0%
8.1
0.6%
3.8
12.3%
50.9
30.2
20.7
2.2
106.2
0.0%
9.7
3.4%
8.3
2.1%
3.8
2.0%
50.7
32.9
17.8
4.0
114.8
8.0%
10.5
8.6%
9.1
9.8%
4.1
8.5%
50.9
35.9
15.0
3.8
129.0
12.4%
12.7
20.4%
11.0
21.8%
5.4
31.5%
54.4
40.1
14.2
1.9
9.5%
7.6%
11.8%
2.04
4.6%
9.1%
7.8%
9.6%
1.97
2.0%
9.2%
7.9%
9.8%
2.23
1.8%
9.8%
8.6%
11.7%
2.40
3.6%
0.69
2.07
9.22
0.40
3.67
0.54
1.83
4.42
0.34
4.13
0.42
1.43
3.92
0.29
5.03
0.35
1.12
7.47
0.26
6.49
77.8
0.7
7.7
9.6
0.9
74.9
0.7
7.7
9.1
1.2
72.3
0.6
6.9
8.0
1.2
71.6
0.6
5.6
6.5
0.9
0.27
12.3%
0.3
0.16
2.14
0.08
0.27
2.0%
0.3
0.29
2.33
0.08
0.29
8.5%
0.3
0.27
2.55
0.08
0.38
31.5%
0.4
0.14
2.85
0.08
14.6
12.3
25.0
1.9
4.0%
2.0%
14.9
13.0
14.0
1.7
7.2%
2.0%
13.8
11.8
14.7
1.6
6.8%
2.0%
10.5
9.2
29.5
1.4
3.4%
2.1%
Notes
37
Notes
38
Notes
39
All estimates and opinions included in the report represent the independent judgment of the analysts as of the date of the issue. It does not represent the
views or opinions of the management of UBM or any other company in or affiliated to the groups of which they form part. It is possible that individuals
employed by UBM, or any other such company or affiliate may disagree with the opinions in this report.
This document has been prepared by UniCredit Banca Mobiliare SpA (“UBM”), authorized by Bank of Italy to provide financial services.
UBM belongs to UniCredito Italiano Group; the related legal persons of UBM are the holding UniCredito Italiano (“UCI”) and the other Italian banks
belonging to UCI (“the Group”).
UBM and the Group have some interests or conflicts of interest relating to the analyzed Company :
•
under a Company’s specific mandate, UBM is a "STAR" Specialist for the security analyzed which requires research to be produced.
This document is being distributed by electronic and ordinary mail to professional investors and may not be redistributed, reproduced or published in whole
or in part.
This document is for information purposes only and is not intended as an offer or solicitation of an offer to sell or to buy any financial instrument.
Recipients should conduct their own investigation and analysis of the companies and securities referred to in this document and make their own investment
decisions without undue reliance on its contents.
Information, opinions, estimates and forecasts contained herein have been obtained from, or are based upon, public sources such as press and branch
publications, financial statements, current and periodic reports, as well as meetings and telephone conversations with company representatives believed by
UBM to be reliable. However, no representation of warranty, express or implied, is made, and no responsibility or liability is accepted by UBM, or any of
their directors, officers, employees or shareholders for loss or damage of whatsoever nature in any way relating to reliance upon this Information.
Information, which is not reflected in this document, may therefore be available to persons connected to UBM.
Coverage policy and frequency of reports and updates
A list of the companies covered by the UBM equity research team is available on request. It is intended that each of these companies be covered at least
once a year, in the event of key operations and/or changes in the recommendation. Companies for which UBM acts as Sponsor or Specialist must be
covered in accordance with the regulations of the market authority.
Valuation methodology
The UBM equity research team values the companies under coverage using a range of valuation methods, of which the most prevalent are: the discounted
cash flows method (DCF), dividend discount model (DDM), embedded value methodology, return on allocated capital, breakup value, assetbased
evaluation method and multiplesbased models (e.g. PE, P/BV, PCF, EV/Sales, EV/EBITDA, EV/EBIT etc). The analysts are nevertheless free to use alternative
official valuation methodologies, where deemed necessary.
Key to Investment Rankings:
This is a guide to expected total return (price performance plus dividend) relative to the total return of the stock’s local market over the next 12 months:
Buy expected to outperform the market by 10 or more percentage points;
Accumulate expected to outperform the market by 5 10 percentage points;
Hold expected to perform in line with the market, plus or minus 5 percentage points;
Reduce expected to underperform the market by 510 percentage points;
Sell expected to underperform the market by 10 or more percentage points.
Organizational and administrative arrangements to avoid and prevent conflicts of interest
Conflicts of interest arising between the activities in which UBM engages, are managed by legal and physical and nonphysical barriers (collectively referred
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Within the Group, the fund management and corporate, retail and private banking arms operate through different legal entities, which reinforces the
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In the case of equities execution by UBM, other than as a matter of client facilitation or delta hedging of OTC and listed derivative positions, there is no
proprietary trading.
Disclosure of publicly available conflicts of interest and other material interests, is made in the research.
Analysts are supervised and managed on a daytoday basis by line managers who do not have responsibility for Investment Banking activities, including
corporate finance activities, or other activities other than the sale of securities to clients
The remuneration of the analyst(s) responsible for covering the securities in this report is not tied to investment banking transactions or services performed
by UBM or by the Group.
Distribution of current UBM recommendations as at 30.06.2006
Accumulate
Reduce
Buy
Sell
15
1
13
0
% of total
31.9%
2.1%
27.7%
0.0%
Hold
14
29.8%
Not Rated
4
8.5%
Distribution of current UBM recommendations for companies where UBM has provided corporate finance services during the last 12 months as at
30.06.2006
Accumulate
Reduce
Buy
Sell
Hold
Not Rated
% of total
6.7%
0.0%
7.7%
0.0%
14.3%
50.0%
Distribution in UK
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Copyright (c) 2004, 2005 UniCredit Banca Mobiliare S.p.A. (“UBM”). All rights reserved. Any unauthorized use or disclosure is prohibited.
40
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Digital Bros - Borsa Italiana

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