Ubisoft Entertainment SA (UBI) Earnings Call Transcript & Summary

Welcome, everyone, and thank you for joining the call today. The video game industry is benefiting from a very strong momentum. It's by far the fastest-growing segment of entertainment and is driving incredible consumer engagement and social interactions. In this context, our strategy and competitive advantages continue to be fully validated by our strategy and competitive advantage. Recent industry announcements of consolidation and new platform launches have been a big event. The value of video game IPs has never been so strong, and these announcements highlight the importance of owning a deep and diversified portfolio of high-quality franchises. Thanks to these major assets, which we have built organically over more than 2 decades, Ubisoft has entered into fruitful partnership with the biggest technological and video game platform, who are all thrilled to onboard our content. At the same time, we continue investing to increasingly leverage our direct-to-player relationship. Over the past 10 years, we have built our proprietary online distribution and services ecosystem, our unique identifier across games and platforms and our unparalleled production capacity. These are formidable assets for strengthening this direct relationship from multiple entry points and business models. And with the introduction of Ubisoft Connect, we aim to offer players frictionless access and enriching experiences across our full catalog of games. This will expand discoverability, traffic and global engagement to ultimately provide meaningful value for our players, our teams and our shareholders over the coming years. The word now on new Ubisoft Connect. We announced last week that our existing ecosystem of players, of player services and loyalty programs, Uplay and Ubisoft Club, is expanding as Ubisoft Connect. This new ecosystem will be easing the transition between generation and platforms and will be the starting point for new services aimed at further contributing to more player-centric ways of entering our games. It notably lays the foundation that will enable our games and services to make cross-platform features a standard moving forward. As part of this commitment, full cross-progression across all platforms and services will be available for Assassin's Creed Valhalla, Immortals Fenyx Rising and Riders Republic. That means you will be able to start Assassin's Creed Valhalla on your PS4, continue it on Xbox Series X/S and complete the game on PC, PS5 or streaming platform. I now hand over the call to Frédérick for the review of our Q2 outperformance and of the details of our new full year target as we aim to maximize the quality and value of our games in the challenging production environment that we had highlighted in May and July. I will come back afterwards to detail the actions we are implementing to continue transforming our company culture. Frédérick?

Thank you, Yves, and hello, everybody. As I have mentioned in the past quarters, for the sake of comparability, I will base all my comments today before the new mobile reclassification rule to ensure a like-for-like comparison with fiscal '20. The reclassification amounted to EUR 11 million in Q2 and EUR 21 million in H1. Traffic and engagement reached record levels in H1. We had 100 million unique players across console and PC, on par with levels delivered during the full 2019 calendar year. It was also great to see that Q2 MAU levels ended up at 40 million, stable quarter-on-quarter. Net bookings in H1 reached EUR 733 million, up 15% at constant exchange rates, spurred by strong back catalog, up 35% to EUR 693 million and which represented 95% of our total net bookings. Our Q2 net bookings reached EUR 334 million, down 1% at constant exchange rates and significantly above our target of EUR 279 million. As a reminder, Q2 of last year benefited materially from early physical shipments linked to the release of Ghost Recon Breakpoint. Excluding this technical impact, Q2 is strongly up year-on-year. We delivered this better-than-anticipated quarter thanks to the continued appeal of our deep and diversified portfolio franchises; of our strong live services, notably with numerous updates in September; as well as some limited positive impact from confinement in North America. We continue to see overall very supportive industry trends with stronger levels of digital purchases and engagement than before the pandemic started. In this context, our back catalog net booking growth remained very strong at plus 28%. Rainbow Six Siege continued its solid performance despite stronger competition. Acquisition was solid, and engagement was slightly up year-on-year after seeing strong growth in Q1. Overall, the game delivered robust net booking growth in H1, supported by solid player acquisition progression and repeated monetization peaks. The team is hard at work upgrading the game to PlayStation 5 and Xbox Series consoles, leveraging the power of the new generation of consoles to offer a significant boost to performance with up to 4K resolutions and 120 frames per second. This upgrade to next-gen will be free for PS4 and Xbox One game owners. As we celebrate the game's 5-year anniversary, we are pleased to announce that Rainbow Six Siege has crossed the 65 million unique player mark and generated close to EUR 2.5 billion in cumulated consumer spending over its lifetime. Many of our games continued to perform very well over the quarter, including double-digit year-on-year net bookings growth for The Division 2, For Honor and The Crew 2, which continued to benefit from the strength of the live services. For its part, Assassin's Creed Odyssey witnessed very sharp increases in sell-through, daily player engagement and PRI over the past 3 months compared with Assassin's Creed Origins, respectively growing over 200%, 250% and 400% on a like-for-like basis. Ahead of the upcoming Valhalla release, the whole Assassin's Creed franchise enjoys the momentum that we had never seen before. Finally, the Just Dance franchise continued to strive, with net bookings more than doubling year-on-year. Let's now turn to Hyper Scape. The technical side of the game is very solid, and our Anvil engine is demonstrating its versatility by being a great tool to create action adventure RPG games like Assassin's Creed, competitive shooters with destructible environments like Rainbow Six Siege and now battle royale supporting 100 simultaneous players. However, the intense gameplay is proving today too challenging to reach a wide-enough audience yet. To address this, we have outlined the road map to broaden the game's reach. Q2 also saw the release of 2 mobile games, including Brawlhalla mobile, which has generated incremental activity in geographies where the PC and console versions of the game were less present. It is also worth highlighting that Brawlhalla on PC and console continued to perform extremely well with net bookings doubling year-on-year. Q2 total digital net bookings stood at EUR 289 million, up 19% and represented 87% of our total net bookings. PRI continued to be strong this quarter, reaching EUR 162 million and up 2% year-on-year, representing 49% of net bookings. Excluding the EUR 35 million from mobile, PRI on console NPC was up 9% despite a lighter release slate over the past 18 months and a tough comparison base that included a strong post-launch program on Assassin's Creed Odyssey. The strongest contributors to PRI this quarter were in this order: Rainbow Six Siege, For Honor and Assassin's Creed Odyssey, followed by Ghost Recon Breakpoint and The Division 2. Let me now go into the details of our first half earnings marked by record profitability. First, Slide 6 of our presentation. Our pro forma gross margin was up 3.7 percentage points to 89%, reflecting the 5-point progression of digital as a percentage of total net booking as well as lower gross margin last year due to one-off hosting cost. R&D was down 26% -- EUR 26 million and down 9 points. I will review the details in the following slide. Variable marketing expenses were down 4 points due to fewer releases in H1 of this year. At EUR 164 million, fixed structure costs were mostly stable compared to H2 of last fiscal. Turning now to Slide 7. P&L R&D was down 9%, driven by a 37% decrease in total depreciation due to a lighter release slate this semester. Total cash R&D was up 21% to support our future strong top line growth and the most ambitious lineup of the industry. Noncapitalized R&D is up 23% and reflects our growing investment in our live services and higher bonuses. Moving to Slide 8. The IFRS/non-IFRS reconciliation shows mainly 2 types of adjustments: first, the traditional stock-based compensation charge standing at EUR 32 million, flat versus last year; and second, we have booked a noncurrent goodwill amortization charge of EUR 36 million. Looking at our cash flow statement on Slide 9. Free cash flow stood at minus EUR 116 million versus minus EUR 71 million in H1 of last year. This EUR 45 million gap mostly reflects the EUR 42 million decrease of our cash flows from operations mostly due to the EUR 77 million increase of net income, which was more than offset by the EUR 150 million growing gap between cash and P&L R&D. To be noted that the first half was negatively impacted by EUR 25 million versus last year due to the timing of cash tax payments. Below the free cash flow line, we had EUR 16 million in acquisition related to deferred payments of past acquisitions. Finally, our employee-related share plan had a total impact of EUR 114 million on our cash situation. Overall, our non-IFRS net debt improved year-on-year at EUR 124 million compared to EUR 218 million last year and slightly up versus end March. Looking at Q3, we expect net bookings of between EUR 860 million and EUR 960 million, including an estimated EUR 10 million from the mobile reclassification. This will represent a significant increase versus last year and reflects the release of 3 AAA games over the quarter versus only one last year. We have not factored in any new impact from the renewed COVID-related restructuring. Watch Dogs: Legion was released today, and early reviews are solid with strong ratings, notably from IGN, Game Informer, GameSpot and PC Gamer. The game benefited from the additional development time with notably a deeper integration of the Play As Anyone innovation, adding more granularity to characters and more player abilities. The teams also made the experience more accessible with the intel system that suggests new additions to your team based on missing capabilities. All this aims to increase accessibility and engagement. The game is Ubisoft's first title to benefit from the ray tracing technology. Watch Dogs: Legion also includes very cool exclusive collaborations. First, Stormzy, the award-winning British musician, will be included in the game with a stand-alone mission. Second, El Rubius, one of the most important Spanish-speaking YouTuber with more than 38 million subscribers on his channel, will be included as a playable character in the game. Finally, the game will come with robust post-launch content to drive long-term engagements. The online multiplayer mode will be available on December 3 as part of the free game update and will bring the Play As Anyone innovation to the next level by introducing an online sandbox, including new missions, design, gameplay, a new PvP mode and dedicated progression and rewards. Plenty of additional features, free and paid, both solo and multiplayer, will be added in the future. Assassin's Creed Valhalla, which is said to be one of this holiday's biggest mainstream titles, will be launched on November 10. Previous and community interest indicators allow us to be very enthusiastic. This gigantic opus will leverage the popularity of both Assassin's Creed Odyssey and Origins, which are still benefiting from a very high level of engagement, respectively 2 and 3 years after the release, significantly expanding the brand's player base. For the first time ever in the franchise history, the game will be playable on consoles in 4K resolutions and 60 frame per second on PS5 and Xbox Series X. The game will be complemented by an ambitious post-launch content campaign, including a Season Pass with 2 major expansions. Additionally, all Assassin's Creed Valhalla players will have access to an extensive lineup of free seasonal content, including in-game events as well as new settlement buildings, narrative content, services and game modes. Discovery Tour, which was a successful way for players to learn Greek and Egyptian history, will come to Assassin's Creed Valhalla in 2021. Finally, we just announced a partnership with Netflix to produce multiple different series on the Assassin's Creed brand, demonstrating once again the growing strength of video game brands. On December 3, we will launch our ambitious new IP, Immortals Fenyx Rising, on PC consoles, including Switch and streaming platforms. In Immortals Fenyx Rising, players will explore a rich open world rich in Greek mythology and engaging puzzles narrated through the lighthearted banter of Zeus and Prometheus. The additional development time gave us the opportunity to improve navigation and exploration by adding more interactive elements to the environment, enhancing combat features and increasing customization options, including gear and abilities. Additionally, we were able to improve the realism of our creatures and characters. Previous and player receptions have been very positive and we think it will be the big surprise hit to close out the year. Just Dance is returning this year on 6 platforms. The massive success of the Switch with an increased mass market reach should be a strong driver for the game's performance. Building on last year's hugely successful TikTok campaign with the #JustDanceMoves generating 12 billion views, we will deliver an even more ambitious campaign with the goal of accelerating the brand's current momentum. Overall, beyond the very strong trends we have seen in terms of hardware over the past year, we are thrilled by the current strong player anticipation of the new generation of consoles. With this early positioning and very strong lineup, Ubisoft is ideally positioned to benefit from this exciting opportunity. Let's now move to our updated full year targets. As a reminder, in order to take into account the significant external challenges and uncertainties brought by the COVID-19 crisis, we introduced back in May a range to our financial targets. This range took into account the possibility that one of our AAA titles may be postponed to next fiscal year as well as the economic risk this unprecedented crisis was putting on overall consumption and on our business partners. Our initial range implied that the delay of one title will result in a non-IFRS operating income below EUR 500 million. Since then, market trends have continued to be very supportive and our back catalog has significantly outperformed versus our initial expectation. Our teams have executed amazingly with strong and regular updates for our live services as well as working on delivering the strongest lineup of the industry for the end of the year. In this context, we have decided today to move the 2 high contribution margin Q4 titles to next fiscal year. This will allow our teams to fully leverage the game's potential and will be very beneficial to the final phase experience. Our decision to give more time to Far Cry 6 can be fully attributable to the production challenges related to the COVID-19 crisis. For Rainbow Six Quarantine, as you know, we took advantage of last year's delay to extend the experience with a larger scope while optimizing polish. As I described earlier, this was also an opportunity on which Watch Dogs: Legion and Immortals Fenyx Rising capitalized. The development of Rainbow Six Quarantine is today progressing well. The team recently solidly delivered a major production gate with an intense core experience built upon unique co-op technical gameplay. This mandate of extending the experience, combined with the depth of a fully online game and in the context of the COVID-19 production challenges, is today requiring additional time, which will be used to enhance onboarding, progression and further polish. Rainbow Six is a powerful brand, and we want to ensure we are coming with the best possible experience to match players' high expectations and expand the franchise beyond Siege. We are, therefore, updating today our full year targets that remain well within our prior range at the non-IFRS operating income level despite pushing out 2 AAA releases. Our new assumptions take into account the slightly higher combined unit count for these 3 AAA titles and also include the high single-digit back catalog growth year-on-year versus our prior anticipation of down low single digit. We continue to expect digital and PRI to be above fiscal '19 in percentage of net bookings. Finally, our newly updated targets no longer reflect the safety margin on the risk on consumption related to the COVID-19 crisis as we are getting positive confirmation on video game demand by the end of the year. We are, however, keeping a safety margin related to the potential impact on our business partners. As a consequence on these moving parts, net bookings are adjusted to between EUR 2.250 billion and EUR 2.400 billion and non-IFRS operating income is now expected between EUR 450 million and EUR 550 million. The gap between the high end and low end of the range is explained by the safety net on our business partners at the bottom of the range as well as the higher unit count at the top of the range as we are entering the most important part of the year. In addition, with the recent unfavorable foreign exchange evolutions, notably with our euro-dollar assumptions moving from $1.13 to $1.16 for the full year, including $1.19 for the second half, we are seeing a negative impact of around EUR 50 million on net bookings and EUR 30 million on non-IFRS operating income. As a result, our newly communicated guidance is of net bookings in the range of EUR 2.200 billion to EUR 2.350 billion and non-IFRS operating income in the range of EUR 420 million to EUR 520 million. Being able to maximize the long-term value of our IPs while, at the same time, maintaining solid financial targets highlights the increasing recurring nature of our revenues, the current strength of our portfolio of franchises, confidence in our holiday's release slate and current supportive industry dynamics. As a consequence to these changes to fiscal '21, there are a few moving parts to next fiscal year. Fiscal '22 will, of course, benefit from the arrival of Far Cry 6 and Rainbow Six Quarantine on top of the previously announced release of Skull & Bones. We expect to release both Far Cry 6 and Rainbow Six Quarantine in the first half of fiscal '22. While the COVID-19 crisis remains a challenge for next year's production and it is important to remain prudent, we feel good about the progress of the 3 AAA titles. Conversely, with the postponement of the Avatar movie to December 2022, we have accordingly moved our Avatar game to fiscal '23. On the mobile side, we look to release our first game from our Tencent partnership and we expect to continue building our overall free-to-play offering in fiscal '22. Finally, we expect back catalog growth in fiscal '22, but to a lesser extent than initially expected, as fiscal '21 will see the release of 3 AAA titles versus 5 previously anticipated. Please also keep in mind the following consideration. The current adverse exchange rate effects will have a bigger impact in fiscal '22 than in fiscal '21 if they were to remain at current levels. And while we are more optimistic in the short term, it is important to remain prudent on the economic environment given the second COVID-19 wave we are observing in a number of geographies. In this overall context, we expect top line growth versus fiscal '21, and we look to provide more information on the full extent of next year's lineup in due course. I now hand over the call back to Yves.

Thank you, Frédérick. I would like to add a few words about how we are transforming our company's culture. Over the past few months, we have progressed on the action and the action plan outlined in July. More than 14,000 of our talents have participated in different forms of feedback. It provided us with a deep understanding of the situation on which we can build a better company and put our teams at the center of our transformation plan. We have notably put in place compulsory anti-sexist and anti-harassment training. 75% of our teams have already received this training, and we are well on track to reach close to 100% by the end of the year and the Content Review Committee to ensure that our group's content and product marketing is aligned with Ubisoft's value of respect and fairness. We are also very happy to announce today that we have finalized the recruitment of the VP Global Diversity and Inclusion. We look forward to introducing her soon. While much remains to be done, the testimonies we have gathered also showed a deep attachment to Ubisoft and the desire to defend the values of respect and benevolence on which the group was built. We are committed to that transformation and we must become exemplary on all these subjects. Before answering your questions, I would like to thank all Ubisoft teams for their focus and dedication during this challenging production time. Releasing 3 major AAA titles by year-end on so many platforms is an amazing achievement that should not be underestimated and may allow us to deliver a record performance. Our execution is strong. Our strategy of maximizing the full long-term value of our IPs continue to be fully validated by recent industry-related news. Our business is very robust, our confidence in our holiday release slate is strong and the industry momentum is highly supportive. We are now ready to take your questions.

[Operator Instructions] We'll take our first question from Nicolas Langlet from Exane BNP Paribas.

I've got 3 questions, please. The first one on the guidance cut. Are you able to quantify the net booking cut related only to Far Cry 6 and R6 Quarantine? Secondly on the full year '22 guidance. So if we take into account the inclusion of Far Cry 6 and R6 Quarantine and the delay of Avatar, how the full year '22 guidance compare with your previous assumption, knowing that before you were expecting a year-on-year growth compared to full year '21? And finally, a question on Assassin's Creed Valhalla. At this stage, do you think that game could monetize as much as AC Odyssey during the first year and over time? And if yes, what are the main additions you implemented in the game to support this higher monetization?

Thank you, Nicolas. So on the Far Cry 6 and Rainbow Six Quarantine, what we had said is that among the AAA titles that we had in terms of expectations for fiscal '21, Far Cry 6 had a higher expectation than Rainbow Six Quarantine. So that's what I can share with you today, and that is being reflected in our renewed guidance while we postpone them to next year. In terms of fiscal '22, so what we have in our assumption today is that we still rely on 3 to 4 AAA games. We rely on the growing back catalog relative to fiscal '21, but not to a lesser -- not to the same extent, knowing that we now have 3 AAA games in fiscal '21 as opposed to 5 impacting back catalog of next year. And we also took, as I said before, some elements of prudence related to the impact on general consumption in the medium term. We are very positive on the short-term consumption on video gaming. But considering the overall macroeconomic context, we need to be cautious on that -- stay on that point. And also, we've taken some prudence in terms of impacting our productions related to the vast majority of our developers still working from home. So we expect growth in fiscal '22 relative to fiscal '21, not to the same extent as we previously anticipated. On Assassin's Creed Valhalla, at this stage, we anticipate a very strong game, leveraging the recipe of Assassin's Creed Odyssey and leveraging the very strong momentum that we have on the brand as we significantly expanded the player base over the last 6 months across Odyssey and Origins. What we anticipate is that we will have a very strong ambitious post-launch program, and that will combine very well with our RPG mechanics on the game.

On top of that, we expect, even if it's -- we'll not have 5 games as on back catalog, we expect the 3 games we are launching this quarter to be very strong next year as well.

Okay. Okay. And just to come back on the comment on the full year '22 guidance, just to make sure. So in absolute term, all those delay and other elements are net positive, negative or neutral effect in absolute term?

So for fiscal '22, what we said is that we plan to grow relative to fiscal '21 and that's what we can say at this stage. We will give you more color in due course with the full extent of our lineup.

And now we're taking our next question from Robert Berg from Berenberg.

Three questions, please. First, on the delays. You're saying the games further away in Q4, including Rainbow Six Quarantine, which has already been delayed a couple of times. It needs more time. But the 2 games in the coming weeks still to come didn't need any more time. You've confirmed those dates today. Could you give us some comfort that these games will be ready with all the work-from-home issues? We saw this -- one of your peers delay a title very soon before the release. That's the first question. The second on Hyper Scape. It feels like a bit of a missed opportunity, at least so far anyway. If I remember rightly, one of your learnings from Ghost Recon Breakpoint was the game wasn't what the community wanted and there was a failing on the market research process. Maybe I'm wrong, but it feels like you're saying perhaps a similar issue here with a game that maybe wasn't what the majority of gamers wanted or could play. Do you feel like there's more you could do with regards to that process? And then on the guidance, maybe a clarification. In May, you effectively lowered or derisked unit expectations. This quarter, you're raising them back up again. Are we back to where we were before? Or are your unit expectations now above what you thought pre-COVID?

So on your first question, so yes, we had to take into account the impact of the COVID-19 on Rainbow Six Quarantine and Far Cry 6, knowing that both games are progressing very well. And that's why we're confident that they will come and be ready in the first half of fiscal '22. And we've been very happy and proud to be coming with 3 major games this quarter on top of Just Dance '21 while our developers were working from home.

Assassin's Creed -- and so Watch Dogs was launched today, and it's a good game, and we are coming -- we are already preparing for the launch of Assassin's Creed, which is coming in a bit more than a week. And so it's really on the way. And we see also for Immortals Rising -- Fenyx Rising that it's also gold and we will be on time also with these games. So all those 3 games will be at the launch period expected.

So on the units, yes, you're right. We had derisked the unit expectations. Back in May, what we said is that, yes, we slightly increased this -- the overall unit count for the 3 games to be released in Q3, and that reflects the positive views that we have on this game given the momentum, also taking into account the strong demand that is expected on the new generation of consoles. If we compare the high end of the range related to the low side of the range, we also took in consideration some safety net related to our business partners in the context of potentially more restrictive confinement impact.

You had a question also on Hyper Scape. So Hyper Scape, it's part of our free-to-play investment. It's -- what is very good, as Frédérick mentioned earlier, is that we have been able to develop on our engine the possibility to play with 100 players. Technologically, it has been a fantastic result. We are -- it's a long investment in the free-to-play and we think it's the first step, and you will see all the things that will make us become a very strong player in that environment. As on other investments we made in the past, like on PRI and so on, it takes a little bit of time, but we know we are on the right path.

And I'll be taking our next question from Omar Sheikh from Morgan Stanley.

I've got 3 questions as well, if I may. The first is on the delay again. Yves, you said that 100% of the reason for the delay was COVID. I wonder whether you could just be a bit more specific about what exact -- what part of the development process is being impacted and perhaps what are you doing in terms of mitigation. And then also on the delay, could you just confirm that -- if you didn't -- if you hadn't had COVID, could you have released those 2 games? That's the first question. Secondly was just on the '21 guide for this fiscal year. You mentioned in -- on back catalog that you included a high single-digit growth in back catalog this year, but you did over 30% growth in the first half. So I'm just wondering, should we consider that to be conservative? That's the second question. And then the third is on the '22 slate. So I mean, if you push 2 games from this year into next, then potentially you're pushing 3 games -- up to 3 games that you would have otherwise released next year into the following year. So I'm just wondering if you could give us a bit more color on whether there's any impact on the development process for those 3 games, up to 3 games, for fiscal '22. Is it being impacted by COVID as well? And also, is there any impact from the fact that you haven't had a Chief Creative Officer for the last few months? And is there any kind of impact on the development process from that, I guess, disruption?

Thank you. So for -- yes, those 2 games could have been launched without COVID, for sure. What we did on -- with the work from home, we had to organize the company differently, and we saw a certain number of difficulties during certain times -- certain periods in the creation of games. And so we have been working on those elements to improve the efficiency of the teams during those specific period in games -- in the creation of the games. And now we are seeing an optimization that is coming along, and we are learning, and we feel more comfortable with the work from home.

Yes. Yes. We had said back since -- back in May and July that it has had a significant impact on productivity across all our productions. And what we've been doing since then is that whenever we could have people getting back to the office, of course, we prioritize the teams for the tasks that were the most difficult to be done from home. So on your question on the back catalog for fiscal '21, yes, you're right. We had strong growth on the back catalog in the first half of plus 35%. What we see today is that we have a higher level of activity on our paid games on the back catalog than what we initially anticipated, and that's still valid and before -- and more than what we had before the pandemic started. So we also put some -- more back catalog already in the second half of the fiscal year. We haven't taken into account any potential impact of renewed COVID confinement -- COVID-related confinement measures. Now if we look at the evolution in terms of back catalog in the second half relative to last year, we need to consider that last year, we had a huge Q4 with the launch of the Warlords of New York, expansion for The Division 2 and a huge month of March with the impact of the very strict confinement impacting the month. If these assumptions ended to be too prudent, of course, that could be a potential benefit to our numbers.

On the Chief Creative Officer, the fact that we have 6 VPs around me is helping to take care of all the games we have underway. And so we have -- we are in a good position to really push the games to the level of quality we anticipated, in fact.

Okay. That's clear. And just to follow up on the '22 slate, if I may. Do you anticipate releasing a mobile game by the Tencent agreement in that year?

Yes. We anticipate to have our first game through the Tencent partnership to hit fiscal '22.

And now we're taking our next question from Nick Dempsey from Barclays.

Just first of all, you're referring to your business partners and some risk there and building that into your guidance range. I guess you're talking about physical retail due to lockdown. But what exactly are you assuming there in terms of the impact? And if lockdowns drive less physical purchases, can you get a benefit there in terms of margin as they shift to digital? Second question, you're pointing to work from home holding back production processes. Are you assuming that you have your teams back in the office at a particular point in 2021? Or could you also see delays to Skull & Bones, for example, if work from home continues for quite a lot longer? A final question, just another go at the FY '22 sort of commentary on the numbers. I think you said it will not be the same as previously anticipated. Just to kind of understand that, are you saying that the year-on-year growth in FY '22 versus FY '21 won't be the same as previously anticipated? Or was that an absolute comment that, clearly, FY '22 absolutely won't reach the implied level you said before?

So in terms of our physical retailers, we've seen that they've been very resilient since the beginning of the crisis. We've seen also that they had positive trends on the hardware, on the accessories, and we can anticipate that they will have a positive boost from the next generation of console launch. We've also seen that e-commerce has taken over on the delivery of physical goods. Now of course, we need still to be cautious as, of course, our big launches are also relying strongly on physical sales, and that's why we take this safety net. We keep this estimate in the low side of the guidance.

What we can say about the next-gen console is that they are -- they will certainly be in short supply compared with demand, and we are very happy that all our games for the end of this year are actually taking full advantage of those new consoles. And we expect next year to be a big year, a great year for next-gen consoles as well as the demand will be also extremely strong.

So on your second question, so we -- today, as I said, we have good visibility on the advancement of our 3 games, including Skull & Bones, Far Cry 6 and Rainbow Six Quarantine. The 2 of them are already planned for the first half. And we -- taking into account 3 to 4 AAA games, view for next year that there is some uncertainty relative to the timing by which we'll have our teams going back to the office. So in terms of the fiscal '22 growth related to fiscal '21, as I said, we still rely on the same slate of AAA titles in terms of numbers, the 3 to 4, like we originally anticipated. But because we have 3 games this fiscal year as opposed to 5, we're taking into account our back catalog still growing, is strongly growing versus this year, but we take lower back catalog assumptions in value in absolute terms. We also took into account the possibility that the foreign exchange rates might stay at the level where they are today. And if that happens, then that has also a negative impact related to our first original assumption.

And now we're taking our next question from Mike Hickey from The Benchmark.

Congrats on the quarter. Obviously, the virus influence here has created some challenges on the development side. But also, I think we're sort of, at the moment here, we're getting close to some potential vaccines that could sort of help us along the way. So I'm guessing -- I'm just sort of wondering if these vaccines, one or many, are approved and they're considered safe, would you require your developers or employees to take the vaccine to return back to the office? And I have a follow-up.

Yes. In fact, we are learning a lot from this crisis, and we see that a mix between going to the office and being at home is working perfectly well. So things will change to the benefit of the different parties. We think the -- our employees will have a better life, and we'll be able to also organize things in such a way that it will be also very strong for the company.

All right. The second question from me is you've seen Microsoft make a huge acquisition recently with Bethesda, a $7.5 billion deal. And of course, that studio now will add catalog and new games, I think day and date, to the Xbox Game Pass. And I think that subscription now, as we sort of go into new hardware, is north of 15 million. And I think they've also incorporated EA Play in those games. So when you think about some of the alternative business models that have taken shape this generation, do you think the sort of subscription that Microsoft has and their dedication to putting new content and to be the killer app, so to speak, for this next generation of hardware? And I guess, when you think about the sort of subscription from Microsoft getting sized and doing day-and-date releases, how does that sort of change your competitive profile when you look forward?

In fact, we are in a very interesting industry because there are now more and more forms to sell our games. And what we see is the quality of the experience remains a very important attraction point. So when you create exceptional games, people come and buy them where they are and in the form they want. And we will see more and more possibilities in the future to consume those games. So yes, Microsoft is doing a good job, and there are also lots of other ways to do a good business. And Sony is progressing extremely well as well with their way of doing things, which is different from Microsoft. And we have also Nintendo that has a completely different approach as well that is working fine. And on top of that, we see those 2 streaming platforms that are coming. And we think that with -- over time, they are going to grow the market from industry as well. So that is for the high-end machines. On the mobile, we are also seeing a good growth, and we will see games that will work on mobile and high-end platforms in the future. So there's a lot of possibilities to create high-quality games and to monetize them differently.

As you said before, these recent announcements confirm that there is high value in having a deep and diversified portfolio of brands and games of high quality, and we see that more platforms coming in the space are happy to differentiate themselves with high-quality content, and that's why we've been building a very strong partnership with all these big players. And we see that today, by building a strong direct-to-player ecosystem at Ubisoft, we are getting the most of this evolution. Also through our direct distribution platform, we are getting the benefit of this evolution. So in the future, we see a different business model coexisting: our paid games; different subscription models and being across platforms; and of course, more free-to-play across all platforms. So we are preparing ourselves to be winning with all these different business models.

And now we're taking our next question from Charles-Louis Scotti from Kepler.

I've got a couple of questions. The first one on Roller Champions. I didn't see any mention of Roller Champions either in the press release nor the slide show. Can you give us an update on this game? Then on your cash R&D spendings, that increased 21% in H1. This is above the 15% CAGR you provided at E3 2 years ago. Is it the new normalized level? Or do you stick to the 15% CAGR target? And then considering there is no release in Q4, shall we expect a significant working capital inflow this year and then a strong free cash flow generation?

So on Roller Champions, as you know, we showcased it during our -- last Ubisoft Forward event, and the game is progressing well. We're adding more and more depth into the gameplay and getting the most of the feedback that we had got during the closed alpha, and we're planning to have the game at the beginning of next year. In terms of cash R&D increase, no, there is no change in our road map -- investment road map. The first half was stronger in terms of evolution because we had to prepare for the launch of our big games coming, comparing with last year and also with the impact of higher bonuses. But when you look at the medium to longer term and taking fiscal '19 as a reference, yes, we pursue a strong investment program because we see that the opportunities are immense, the industry trends are very supportive, and we see a growing addressable market for Ubisoft. So we'll continue investing in these long-term growth opportunities and into our direct-to-player ecosystem. We believe that we can grow double digit on the top line year-on-year on average in the coming years, again, taking fiscal '19 as a reference, by expanding our portfolio of paid games through audience engagement, PRI and then margin expansion. And as you said before, we want to expand on the free-to-play model together with subscription; expand into more platforms, including mobile; and extend the reach in Asia and China. So that's why we believe that it's important to have a dynamic investment plan. Of course, in the context of a potentially long and severe economic recession, if some of these opportunities were not to materialize, we will adjust our investment pattern accordingly. So in terms of cash generation, we expect to have in Q4 Riders Republic and Prince of Persia. And we expect to have a stronger -- significantly stronger Q4 than last year because we have the momentum of the next generation of consoles and a much bigger slate of releases than last year. In terms of cash flow from operations, we expect it to be positive to solid for the full year.

Okay. And one follow-up question. Do you have, at this stage, leading indicators that could help us assess how successful will be Watch Dogs: Legion in terms of preorders or whatever?

So on Watch Dogs: Legion, as we said earlier in the call, we have strong ratings that are really supportive of our guidance. And we see that the momentum is good, but it's too early to give more indication.

And now we'll take our next question from Mike Ng from Goldman Sachs.

I was just wondering if you might be able to talk a little bit about the relative unit expectations for the games next year just in terms of rank order between Skull & Bones, Far Cry 6 and then Rainbow Six Quarantine. And then secondly, I -- sorry, I missed it when you talked about your PRI expectations for the rest of the year. I was just wondering if you might be able to reiterate that.

So we'll give you more color on the expectation for our games for next year in due course. What we had said before is that Far Cry 6 would be a bigger game than Rainbow Six Quarantine, both of them being ambitious games, and we take the benefit of the extra time to bring them at even a higher level. And Skull & Bones is progressing very well. In terms of PRI expectation for the rest of the year, we confirm our guidance that it will be superior to the fiscal '19 in percentage of net bookings. So it's superior to 32%. We've had a good momentum in the first half, and we expect that the 3 games -- 3 AAA games coming will also drive a stronger PRI.

And now we'll take our next question from Ken Rumph from Jefferies.

Three questions also, if I may. Firstly, we've talked about the effect of COVID on new game content. Can you comment a little bit on how it's affecting live game content, for instance, for Rainbow Six Siege, which has been so successful? Are you able to continue to generate the sort of frequent content that you've been doing recently? And likewise, for instance, you mentioned last year when you were talking about back catalog that Warlords of New York did so well for the division in the first quarter of the calendar year. What can we expect for other games in the back catalog in terms of additional content? Is that being affected? Firstly, what are the plans for the fourth quarter, for instance? And also, is that being affected in a similar way potentially by COVID? Second question was just an update on China. You mentioned the Tencent mobile game, but Rainbow Six Siege, for instance, being permitted. And finally, a longer-term question about cadence and kind of gaps between games and your big franchises like Assassin's Creed, maybe like The Division, like Far Cry. Given the kind of long post-launch period and the monetization you're making, clearly, we're expecting at least a year before another Assassin's Creed because it's not going to be next year. But what should we think about in terms of the kind of cadence of these big franchises in the future?

So on the first question, in terms of the live game content, yes, we've been very happy with the rhythm of content delivery. If you remember, we had to postpone some content delivery in the first quarter of the fiscal as we were impacted by the confinement. But since then, we have had a very good agility and cadence delivery. On Rainbow Six Siege, we've seen that the metrics are very healthy. And the team has been also focusing on top of the rest on delivering a next-gen version, which, as we said before, should bring a good boost to the overall experience and -- that will help us drive even more players into the game and potentially reengage lapsed players. So that's positive for the Rainbow Six momentum. But overall, we expect that the cadence that we've got on live games is here to stay for the rest of the year. On China, we -- so we -- in terms of Rainbow Six Siege, we believe we've done the job that is needed, but we're still waiting for the final approval to come. So in terms of cadence between the different franchises?

Yes. On that front, on Rainbow Six, we have done lots of changes, and now the game is ready to be approved. So we are just waiting for the number.

And in terms of cadence between -- for franchises between releases, it's true that we've seen that our live games are getting stronger and stronger in terms of retention, engagement and micro transactions and PRI overall. So that gives us, indeed, a high level of profitability and more recurring revenues. On Assassin's Creed, we are leveraging Odyssey's recipe, and we think that will come with a very ambitious and potentially longer post-launch program. So that should -- allows for the game to have a longer lifetime, like we've seen with Odyssey. That's all we can say at this stage in terms of cadence.

What we can say is that the teams have been able to adapt with COVID, and they organized the production -- their productions to make sure they could supply regularly the content they wanted. So as it is, the constant flow of content that is coming, they were able to adapt to make sure they could bring the content needed at a good pace, actually.

May I ask a supplementary question actually on Beyond Good & Evil 2, perhaps, because of a personal interest and then looking forward to the game and Michel Ancel choosing to retire? Could you comment perhaps on the kind of development progress there?

Yes, the game is progressing well. The world is really a fantastic world. As you could see -- or I don't know if it's -- as you could see, Netflix also decided to take that universe to create a movie with it. So there's a lot of progress in the team, and the game is coming along very well.

We're taking the next question from Tom Singlehurst from Citi.

Tom here from Citi. You've been very generous with your time. I've just got one question, really. If we go back 12 months, I suppose, at this stage last year, you delayed a whole load of titles, but the mechanics of that was you were just shifting sort of revenue and profit from 1 year into the next. With this delay, it feels like we're not quite getting everything back next year because, ultimately, there's the sort of knock-on effect in launches. I suppose the question is, can you guys just not do 4 or 5 AAA launches? Is that just beyond sort of the capability of the organization in terms of bandwidth? That's the question I'd be really interested in.

So sure, we can do. It's just when you have COVID, it's more complex. And what we are making sure is that we take enough time on each franchise so that we can polish the games and bring the highest quality possible. Rainbow Six franchise is a very strong franchise for the company so we want Quarantine to be at the highest level to take the franchise to another level. So that's why we didn't launch the 5 AAAs this year. But it's certainly a possibility for the company.

Perfect. And just one clarification. It's just one game that's being delayed from FY '22 to FY '23 in the form of Avatar. Is that the only shift in the sort of longer-term schedule?

So what I -- we said is that we postponed Avatar to fiscal '23, along with the date of the movie being moved there. Overall, today, we assume to have 3 to 4 AAA games in fiscal '22, including the 3 that we already unveiled.

It appears there are no further questions at this time. Mr. Guillemot, I'd like to turn the call back to you for any additional or closing remarks.

So thank you, everyone, for your questions, and have a nice evening or a nice day. Thank you.