Ubisoft Entertainment SA (UBI) Earnings Call Transcript & Summary

Thank you, everyone, for joining today's fireside chat with Ubisoft's CFO, Frédérick Duguet; and Head of Investor Relations, Jean-Benoît Roquette, with whom we're going to discuss Ubisoft's growth strategy and content pipeline along with broader trends in video games and interactive entertainment. My name is Mike Ng. I cover Ubisoft along with the rest of the video game publishers here at Goldman, and I'll be moderating our session. We have 40 minutes inclusive of audience Q&A. [Operator Instructions]

So first, Frédérick, thank you very much for joining us and being on the call today. Ubisoft, like many other video game publishers, have seen increased engagement following stay-at-home measures around the world. In addition, there's a lot in the development pipeline with 5 AAA games planned this year and 3 to 4 AAA games next year. So to start off, can you talk a little bit about the current momentum in the business and Ubisoft's key strategic objectives over the next few years?

Yes, sure. Thank you, Mike. Hello, everybody. Yes, so in terms of momentum, you're right, we've got very strong momentum in Q1 and that was a record quarter, benefiting from the lockdown impact as well as from the depths of our back catalog as well as from expanding live services with our major franchises doing very well. As we said back in July, we started with very strong engagement levels in July with the benefit of the Ubisoft Forward event impact. And now we're happy to come with a very big content for the second half of the year. We've been very encouraged by the warm reception of the 2 Ubisoft Forward events, so that bodes well for the year. Looking to your question, on the longer term, we see that we have nice profitability. We continue growing double digit on the top line. So we expect to grow faster than market in the medium to longer term with an improvement in terms of operating margin over time. We -- the first objective is to continue growing in terms of audience, engagement and PRI across consoles and PC. One key purpose here is -- key objective for us is to continue expanding multiplayer games with more competitive games, with more social games in the portfolio. We think we can go into new segments with new IPs and complement our premium business model with free-to-play and subscription. So that's for console and PC. We think we can grow in terms of the agent territories at a higher pace. And we think that the next generation of console will bring us a nice boost. Beyond that, we think it's the right time now for us to expand our console and PC franchises to mobile with game plays closer to the AAA types of experiences, and that's where our Tencent partnership plays a key role there. And beyond that horizon, we think that longer term, we are preparing ourselves for which -- what we think to be the next revolution, which will be beyond streaming, which will be cloud computable.

Great. That's a really fantastic overview, and I really want to dive deep into a lot of those things. Maybe to start off, can you just talk a little bit about the elevated level of engagement that we've seen to date compared to pre-pandemic levels? What are the most recent engagement trends you're seeing as shelter-at-home mandates continue to be lifted? For instance, you mentioned on your last earnings call that engagement in Europe was beginning to wane. Do you continue to see geographic disparities in game engagement?

Yes. Yes, we do. It's true that Q1 was positively impacted by lockdown effects across the board, but with diminishing effects in Europe and Asia in June. And we said back in July that we would expect a positive, if I may say so, impact from lockdown in North America until end of July. And when you look at the U.S. market, it had an explosive growth. Full game sales were growing beyond 45% in the marketplace versus last year. Growth in the European and Australian business market were strong as well, but not to the same extent, between 25% and 30% on full game sales. And excluding the new releases, knowing that there was very few last year, back catalog sales grew 15% on these geographies. So not to the same level as we had seen before the lockdown, but still stronger -- strong dynamics. And in August, you've seen that the U.S. market was not as strong as in July, but still very solid overall. As for us, specifically in terms of engagements, it's not that easy to isolate the impact of lockdown related to the strengths of our business. Knowing that in July, as we said, the Ubisoft awards event together with very strong promotions on our major franchises, led us to have the engagement level in the third week of July similar to what we had seen at the peak of the lockdown end of March. So that's why we had a stronger beginning of July.

Great. And just moving on to the development progress. You noted in the upcoming guidance that there was always a possibility of delaying 1 of the 2 games in fiscal 4Q, which I assume is Rainbow Six Quarantine or Far Cry to fiscal '22. First, could you just provide us an update on the development progress of those 2 games? And then second, could you talk a little bit about how developer productivity has been impacted, if at all, due to the work in home -- work-from-home environment?

Yes. Yes, we reported expecting to release 5 AAA games this fiscal year. In terms of development, we are making progress. We're working very hard actually to make these 2 titles coming in Q4. Back to what we said in May, it's true that the transition to work-from-home had an impact across all our productions. Since then, we have implemented satisfactory technical solutions in the area of motion captures, video recording, localization, play tests because it's more difficult to manage confidentiality with players being at home rather than in the studio, so that's a sensitive element, and that's needed to have, I mean, regular feedbacks to the development team. So that's an area of focus. So -- and as we said back in July, we still have a vast majority of developers being work-from-home. So even though we have found technical and good solutions, it still puts a significant pressure on productivity. And yes, as we said, we preferred to postpone a game because we want to make sure that it has sufficient publishing time. We will do it without hesitation because we know it's so critical for us to have a quality execution for the long-term value of the game.

Can you talk a little bit about the competitiveness of the holiday season. So Ubisoft has 3 AAA titles to be released in the December quarter: Watch Dogs: Legion on October 29; Assassin's Creed Valhalla on November 17; and Immortals Fenyx Rising on December 3. There are obviously some notable competing titles, Cyberpunk and Call of Duty are ones that come to mind. But does the competitiveness of the holiday season concern you at all as you launch your titles into this holiday slate?

You're right, Michael. Competition will be very strong in this quarter, and that wasn't expected. And we know that this is a very deep quarter in terms of consumption usually. And when we look at the last decade, we've had between 60 million to 75 million of units being sold in this quarter. So depending on the quality of the offering, there is some elasticity in terms of demand for high-quality titles. So that's the key purpose we must and we want to come with very high quality at launch. Remember, the way we managed Assassin's Creed Odyssey in front of Red Dead Redemption 2. That's really important for us to come with a high quality at launch. Assassin's Creed Valhalla actually is being moved forward from November 17 to November 10 because we were happy to see Microsoft willing to have a great flagship title for them at the time when Hello was not there. So we benefit from an even more marketing from the first party. That's good for the game. The game has been coming on a strong trajectory from day 1 with a spectacular review. Watch Dogs: Legion is coming with a very promising features. So we need to deliver a very smooth and fun and deep game play, and that's the purpose there. And Immortals Fenyx Rising is an interesting new approach for us, going for a slightly younger audience, with a Switch and platform approach, so we think -- with no Nintendo game actually coming in this quarter. So it means we're recovering this very good title for a very deep quarter in terms of consumption with Thanksgiving and Christmas.

Great. And I think that's a great segue into discussing some of the individual titles. So let's start out with Assassin's Creed. To your point, it's going to launch with the new Xbox. The Assassin's Creed Valhalla trailer had over 100 million views in its first 10 days, which made it the most viewed trailer in Ubisoft history. Can you talk a little bit more about your expectations for Valhalla, whether in absolute numbers or relative to other titles in the Assassin's Creed franchise?

Yes. You're right, the review was spectacular, as I've just said. So 100 million active player viewed -- views, but actually more than 400 million accumulated views. So it's been a very important review. By far, the biggest in our history. I think it goes well actually to what we have said back in November, we want to come with a stronger element of marketability with our games. And the way we executed this review was remarkable. We might have been benefiting from people being at home with more views, but still, the execution of the review put the game on a great trajectory from day 1. We will leverage the dark age brutality, if I may say so, from England. So it should play well and resonate very well with really -- notably the North American players. We're coming with a strong epicness. And each time we did well on epicness, the game did very well over the last decade. So that's an important element. We think we're coming with an even more dependable narrative with stronger activities, raids, side quests and activities around the base settlement. So we think we'll bring more activities in the open world so that we -- and the quality of playtime will be even better beyond the standard 40 hours of playtime. So it seems to be coming well. And we have reasonable ambitions [ for the future to come ].

Great. And let's talk a little bit more about the Assassin's Creed franchise as a whole. There's a lot of really great momentum in the business. Just last quarter, I think you guys posted a 60% year-over-year increase in the Assassin's book -- Assassin's Creed franchise in terms of bookings growth. What are some of the key characteristics that continue to drive engagement and PRI for Assassin's Creed? And are some of the new features that you introduced for Odyssey applicable to Valhalla in terms of RPG elements? And could you just remind us, what your plans are for the Assassin's Creed franchise as a whole? Is that a biannual release cadence?

So yes, the key recipe that has worked very well has been refine over 2 iterations. And the implementation of RPG with Origins was really strong. We doubled playtime per player at the time. And then we materially increased playtime even further by refining RPG on Odyssey, adding the customization of the ship on top of the customization of the characters, with super optimized monetization, not being intrusive, with a much more massive post-launch program than on Origins. We combined very strong high-quality paid DLCs with strong markets with episodes being embedded into that, combined with free content coming in very regularly. So this is this full recipe that has worked very well with Odyssey and so that's what we want to leverage with Valhalla. And on top of that, as I said, we want to make the quality of the playtime beyond the 40 -- the first 40 hours even of high quality. So we'll see how it works. And again, the element of brutality of the Dark Ages of England is something that has been worked further relative to Odyssey.

Great. And I do want to talk about one of the new titles that you guys have launched, which is Hyper Scape, which had really strong Twitch viewership at the onset of the technical tests. Can you talk a little bit about your long-term expectations for the Hyper Scape franchise and what you've learned so far from the technical test and early engagement from users?

It's -- Hyper Scape is a good quality game. It's a long-term endeavor for Ubisoft because we have a high-quality team there and a great technology. We are qualified for a stronger and long post-launch program. We're coming with new features quarter after quarter and improvement that -- on specific elements that were not present at launch. We are coming on a huge segment, very competitive. So the whole purpose we are working after is to convince players and cohort of players in France time after the time that we have a differentiated enough offer so that players can have different and fun experiences when moving to Hyper Scape after having tested also about the royale games. So if we are successful in doing so, we can take a nice share of the segment, and we will continue working and improving the accessibility of the game over time. That's a key element to work.

Great. And then could you just talk about Ubisoft's broader free-to-play initiatives? Do you see free-to-play opportunities for some of your biggest -- bigger franchises like Rainbow Six or Assassin's Creed in the future?

So in terms of free-to-play strategies, it's also a long-term endeavor for Ubisoft. We're investing meaningfully across console, PC and mobile. And we think that -- we noted on console and PC that not only that's an important way for us to continue growing audience and engagement and then PRI, and we know that the hit ratio is not as high as on premium games. So we are adjusting our investments to that element. And we should consider this approach the same way we did for live services. Meaning that at the time, we had started with The Crew, we learned fast and then expanded meaningfully into live services in the following year. So the more we learn, the faster we learn, the more we will increase investments as we go. It can be with new franchises and a little bit to go after different segments, including younger audiences than what we have on premium games. It can also be an expansion of existing franchises, [indiscernible] in terms of franchise expansion. As for Rainbow Six Siege, the game is in great shape. We need -- we have to consider that, actually, we are going progressively closer to free-to-play every year as we continue decreasing the price of the main game over time and we continue to broaden the audience. So as long as this strategy works well, we should continue and not move Rainbow [indiscernible].

Great. So let's take a step back and talk about Ubisoft as a whole and get out of the weeds of some of the individual titles. When we benchmark Ubisoft's EBIT margins relative to peers, there's roughly a 10 percentage point gap when we compare it to somebody like an Activision or Electronic Arts. It seems like it should be a meaningful margin expansion opportunity. Would you talk about what you see as some of the key drivers to this margin gap? And what Ubisoft would need to do to close that gap?

Yes, you're right. It's a meaningful, actually, top opportunity. We -- when we analyzed the gap versus our key competitors, we were oversimplified. I would say that 3 quarters of the gap comes from the difference in PRI. And the remainder comes from the difference in terms of properties being sold in the first fiscal year release on our AAA games. So we want to progress on both fronts. But of course, the best return on investment for us is to continue accelerating our growth on the PRI side. If it's the mobile, remember that we came 6 years ago from below 5% to 26% from net booking in fiscal '19. We still believe we can get up to or around 40%. So we are halfway in the journey and, that's why, I said before that we have a strong focus in expanding our portfolio into more multiplayer. We did a great job in expanding the RPG. And in multiplayer, we can go even further in terms of multiplayer, especially on the competitive side of it, and especially with more element of social layers inside and outside the game. And that's also why we believe that free-to-play at some point in time can complement that in a nice way. We think that there is a nice margin opportunity. Of course, year-on-year, you can have margins going up or down depending on the mix of releases versus back catalog, new IPs versus established franchises. And we also want to ramp up progressively on free-to-play. So it's not going to happen overnight. But yes, we think that the medium to longer-term horizon is for a better operating margin.

Great. And can we talk a little bit more about the current environment? We spoke a little bit about the competitiveness of the holiday, but what are some of the other factors that you see at play that could affect demand and sales outside of content alone? For instance, how will the console cycle or some of the macroeconomic challenges that we're seeing in the broader environment affect demand for video games and Ubisoft's products?

Yes. So far, we've benefited from stronger engagement on the video game side. So -- so far, so good on that side. And we still need to look at what general consumption is going to be during the critical period of Thanksgiving and Christmas. And so that's -- so far, we still have good signals, but we still need to see the very impact of potential recession for gamers. We know that our problem is usually to protect their spending in video game, and we think that we have a more resilient business model and industry wide, but also at Ubisoft level to go through potentially difficult economic times, but that's something that we need to watch out. Specifically for us in Q4, we look at particularly the retail side of the business. So far, we've seen e-commerce exceeding our expectations by far. We've seen hypermarkets and supermarkets doing well at the time of the lockdown. We still need to look at the specialties carefully, of course, because at the time of Thanksgiving and Christmas. So far, they have done well, but we have not gotten to the specific period where retail is so important. Last year, 45% of our sales on new releases were coming from retail. It was 55% the year before. So we still see a good momentum in terms of digital shift. But even -- and we can expect this digital momentum is here to stay and might even accelerate. But it's still too early to say to what extent the retail side of this business will be as strong as it used to be to support our retail launches.