Ubisoft Entertainment SA (UBI) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Ubisoft First Quarter Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Yves Guillemot, Ubisoft CEO. Please go ahead.

Welcome, everyone, and thank you for joining the call today. As we have said many times, the current environment for gaming, entertainment and tech industry is very favorable for owners of strong assets. The new partnership we announced today from one of our brands is another demonstration of the great value of our deep portfolio, sorry, of owned IP. This will significantly impact our financial performance this year. This partnership will also greatly enhance our medium-term mobile footprint, reflecting the powerful appeal of our brands for the fast-growing AAA mobile segment. It also provides our teams with more time to fully realize their creative vision, deliver high-quality experiences for our fans, while increasing our visibility for this year and next fiscal year. In parallel, and despite facing the ongoing production challenges that continue to impact the entire industry, our teams are fully dedicated to delivering Ubisoft's strongest pipeline of games and content in its history across general, business models and platforms. We are working out to design the most efficient working conditions to ensure both flexibility for our team as well as strong productivity in order to deliver great and memorable experiences to players and their communities. In the current uncertain economic environment, video games offer a strong value proposition with deep social interactions and one of the best value per hour metric for any form of entertainment. However, given the global context, it is more important than ever that we focus our energy and resources on delivering games with the highest possible quality while in parallel, optimizing our cost structure. Based on the strength of our pipeline and building on our talented teams, dependable assets and a solid balance sheet. We are entering a multiyear phase of significant top line growth and starting in financial year '24, significant progression of our operating income. I will now hand over the call to Frédérick. Frédérick?

Thank you, Yves, and hello, everybody. Our Q1 net bookings of EUR 293 million came out slightly ahead of our guidance of around EUR 280 million. The foreign exchange tailwind on our outperformance was limited to EUR 3 million. Net bookings were down 10% year-on-year as Q1 last year saw the release of Assassin's Creed Valhalla, Pharaohs DLC and the related impact from deferred revenues on the season passes. Our back-catalog stood at EUR 256 million, down 16% and MAUs were EUR 35 million, down 6% year-on-year. Rainbow Six Siege performed ahead of our expectations as the game starts to reap the benefits from the steady work our teams have been doing on the quality and quantity of the content release. This translated into stabilization of PRI, thanks to very strong DARPU and Battle Pass conversion. The Assassin's Creed brand also performed ahead of expectations on the back of a strong quarter from Odyssey, Origins and Valhalla. We saw a significant uptick in overall engagement with double-digit active player growth versus last year as players were excited by the beginning of the 15th year anniversary campaign of the brand. Roller Champion has been well received for its fun and dynamic gameplay. On both retention and revenues KPIs, the game is tracking ahead of Hyper Scape, and we have an extended post launch program to come. Total digital net bookings reached EUR 262 million, down 6% year-on-year, and represented 89% of our total net bookings. PRI stood at EUR 153 million, down 12% year-on-year and represented 52% of our total net bookings. Mobile amounted to EUR 36 million. The past few months have been active in terms of gameplay and game reveals. The Skull and Bones comeback provided the community with an extended game play walk through. The core strength of the game revolves around its unique combination of a gritty pirate fantasy, dynamic and action-packed naval combat as well as multiplayer features based on both co-op and PvP, that will allow for memorable moments with friends. Skull and Bones will release on November 8. Mario + Rabbids: Sparks of Hope also made its comeback with an October 20 release date. The community applauded the tactical aspect of the game and GameSpot described the upcoming game as "primed to surprise players all over the again, with a great degree of flexibility and more Mario like mechanics." The community is eagerly waiting its launch, which is one of the most anticipated Nintendo Switch releases this year. On the free-to-play side, we revealed the upcoming mobile title in The Division Universe, The Division: Resurgence that received positive player reception. With this title that is currently undergoing testing, we are bringing the Division franchise to a significantly larger audience. The quarter was also very active on our other free-to-play projects as the different testing phases for XDefiant, Rainbow Six Mobile and The Division Heartland took place throughout the world. We are pleased with the supportive player feedback gathered throughout these respective tests. Looking ahead, we set the date for our next Ubisoft Forward event on September 10. September will be an important month as we will also unveil the future of the Assassin's Creed brand. Today, we announced that Avatar: Frontiers of Pandora will now launch in fiscal year '24. This amazing global entertainment brand represents a major multiyear opportunity for Ubisoft, and we are committed to deliver an outstanding immersive game that delivers on the promise of transporting -- Avatar: Frontiers of Pandora. It will be one of the most beautiful video game we've ever created, enabled by our powerful Snowdrop Engine and led by our massive team. We expect the game to entertain for the years to come. We also decided to release in fiscal year '24, a smaller unannounced premium game that was originally slated for fiscal '23. Both of these decisions are a reflection of the ongoing constraints put on production across the industry, and we are working hard to adapt and redesign our workplace conditions and policies, to ensure both flexibility for our teams and robust productivity. All while keeping top of mind the objective of delivering the best experiences to players. We also announced today the licensing deal on mobile for one of our AAA brands. With this major partnership, we demonstrate again the great value behind our own IPs. On top of significantly enhancing our mobile footprint for the years to come, it will materially impact our P&L and cash generation this financial year. We will provide more details about this partnership in due course. At the full year level, we continue to expect significant top line year-on-year growth, now above 10%. The bigger driver of this growth will be the partnership. Growth will also benefit from the fact we expect our Escape Room games, Just Dance, Mario + Rabbids: Sparks of Hope and Skull and Bones to generate slightly more revenues than last year's fall. We will also have the impact from the releases of free-to-play titles and favorably impact from exchange rates. Additionally, we confirm today our non-IFRS operating target of EUR 400 million and positive cash flow from operations. This confirmation reflects the benefit of, first and foremost, the positive contribution from the partnership. Second, adapting our organization to current global economic uncertainties through cost optimization. And third, a positive exchange rate impact. Coming back to the sizable cost optimization I just mentioned, we are looking to reduce our structure cost growth for fiscal '23, and we expect them to come back to fiscal '22 levels by the course of fiscal '24. We also expect to maintain fiscal '24 cash R&D to fiscal '23 levels versus our prior expectation for slight growth. All this while continuing to expect a significant multiyear top line growth trajectory. This will be achieved through the stabilization of headcount by the end of fiscal '23 at the level of end fiscal '22, strict overall cost discipline and even more focus on our biggest development opportunities as evidenced by our decision to stop development of the Splinter Cell VR game, Ghost Recon Online and 2 other unannounced titles. All these elements offset the EBIT impact from the canceled games and from reduced top line assumptions across the board to take into account the more uncertain economic environment. Let me now share some additional financial elements for fiscal '23 as a consequence of these changes. We now expect our gross margin to be roughly flat due to the high margin impact of the partnership. We continue to expect P&L R&D to end up at the high end of about 35% to 40% range. And SG&A at the high end of about 25% to 30% range. We also continue to expect the gap between the cash R&D and P&L R&D to be lower than last year. Finally, we continue to expect positive cash flow from operations. Looking at Q2, we expect net bookings of around EUR 270 million, including a first limited benefit from the mobile partnership. As a reminder, Q2 of last year included initial physical shipments of Far Cry 6 as well as the release of Assassin's Creed Valhalla second DLC. Before I conclude, I would like to highlight 2 recent events. On the environmental side, Ubisoft has recently received the official target validation from the Science Based Target initiatives, confirming that Ubisoft's 2030 carbon reduction objective is in line with the goal to limit global warming to 1.5 Celsius degree. On the governance side, Ubisoft shareholders approved all the resolution on the agenda for its Annual General Meeting early July with approval rates above 95%. We would like to thank them for their steady support. Following this AGM, the Board now has an absolute majority of independent directors, 45% women and 3 employee representatives. We are now ready to take your questions.

[Operator Instructions] And the first question comes from the line of Kenneth Rumph from Jefferies.

I guess the question I was going to ask about the mobile deal, it sounds like we're not going to hear about today is, is there anything more you can explain about the nature of this? Does it relate to the Tencent deal? Or is something completely different? And clearly, it's important to your maintain profit forecast and to revenue. Is the game going to come out this year or it's a sort of prepayment for a future project? So whatever you can say about that, but I understand perhaps we need to wait. The other question is, perhaps you could comment on Avatar is being delayed because you feel more time -- you need more time to work on it, even though it's obviously already been delayed once? Do we now expect perhaps that it comes out with the next Avatar movie in December '23? And the second question, the other premium game. Which studio was this being developed in? Is it a new IP or related an existing IP?

So yes, regarding the mobile partnership. First of all, this is a major partnership. As mentioned, that it will allow us to increase our mobile footprint for the years to come. The partnership is built upon a sizable upfront component that will positively impact the P&L and cash generation of this fiscal year with a revenue share scheme for the future. So this is a licensing agreement on one IP that includes one game. And we will say more in the future. But what we can say is this is not a game that is planned for this year. So this is still unannounced game that will come in the future.

The delay, what we feel is that the Avatar brand can become a video game brand. And so because the potential is just enormous because there are also lots of movies coming and lots of actuality on that brand in the next few years. So we are treating that brand like video game brands. So we are putting all the energy of the team to make sure it is a fantastic game.

As for the other game that is a smaller game that was not announced, and we can't say more at this stage, but it's planned to come next fiscal year.

The next question comes from the line of Omar Sheikh from Morgan Stanley.

I just have 3 questions, if I could. So the first one is for Frédérick, on costs. Frédérick, you mentioned the sizable cost optimization plan. Could you maybe quantify what you are essentially are targeting for cost savings in fiscal '23. That would be helpful for the first question. And secondly, on the licensing deal, should we think about it this way that maybe the value or the kind of P&L impact you're going to see in 2023 for the licensing deal is basically at least in line with the profit you're expecting from Avatar and the AAA game that you delayed into next year? That's the second question. And then thirdly, the licensing agreement. I'm assuming it's not with Tencent, but I wonder if you could maybe just talk about where you are on the Tencent relationship, because I notice you didn't -- I mean, the involvement with the Rainbow Six game seems to be a bit less than you originally said. So can you just maybe confirm are you still working with them? Are you working with them on a number of games? Are you anticipating the release of some games via that partnership at some point in the next, say, 1 or 2 years?

Yes. Thank you, Omar. So on the costs, what we can say is that we have decided to implement sizable cost optimization that will have a meaningful impact in fiscal '23, meaning that's related to our early assumptions. We have decided to reduce the growth of our cost base in fiscal '23. We will be stabilizing headcount by the end of this fiscal year with the objective that our structure costs in the course of fiscal '24, will be back to the fiscal '22 levels. And with the other objective that our R&D investments will be flat in fiscal '24 versus fiscal '23, which compares with our prior guidance of small groups. As for the licensing deal, this is, as we said, a sizable positive element impacting the P&L. So we can say this is the biggest off-setting item that compensates for the games delays as well as the fact that we have decided to reduce our estimates on the top line across the board to reflect the fact that we are going into a more uncertain economic environment and also to offset for some accelerated depreciation that we decided to take related to delayed and canceled games. And on the other side, we are benefiting from the sizable impact from customer utilization as well as a positive impact from exchange rates.

And on Tencent?

Yes. On Tencent, we continue to do a lot of business with Tencent on mobile games, either in China or in the rest of the world. And there are plenty of activity. We plan to launch The Division on Tencent in China, and we are working very hard to make it again, that will be very strong in the Chinese market.

And related to [ Rainbow Six ] Mobile as we mentioned, the reception by the player community has been really strong. And the tests that we've been conducting since the reveal has been very supportive.

And they have great teams working on our coming projects.

We will now take the next question. Please stand by. And the next question comes from the line of Nicolas Langlet from BNPP Exane.

I've got 3 questions, please. The first one on the net booking guidance, just to be sure, are you confirming the plus 20% net booking growth for full year '23 or not? Because I can understand the licensing agreement can have quite a good impact on the adjusted EBIT, but the gap on the net booking seems quite wide. So are you confirming that? And if that's the case, what all you have said compared to the 2 games delayed? So that's the first question. Second question on the cash R&D. So I think until now you are expecting the growth of cash R&D this year, given what you have just said, that what sort of growth are you expecting? I guess it's lower than the previous guidance. And last -- and third question on the share of free-to-play you expect this year. Are you able to tell us roughly the net booking and adjusted EBIT contribution you expect? And last year, you expected free-to-play to be loss making or at best breakeven? Is it still the case this year?

Nicolas, yes, so first on net booking, what we're saying is that we revised our top line growth guidance that was above 20%, now to be above 10%. So that reflects the impact of game delays, mostly Avatar. At FX, as I said, the reduced assumptions we've taken on the top line across the board. And that is partially offset -- mostly offset by the size of the major partnerships from these upfront components as well as the impact of the exchange rates that are favorable. In terms of cash R&D, what we are saying is that we plan to have stabilization of R&D in fiscal '24 versus fiscal '23. While we previously assumed that it will be growing in fiscal '23. We are indeed reducing the growth, but it will still be a meaningful growth this year. And in terms of free-to-play, what we're saying is that the launch of our free-to-play would be material to the top line growth this year. And we assume in our guidance that on the EBIT side, the contribution will be very limited for the first year -- first fiscal year of operations.

Okay. But you still expect at least a small contribution from those games? And just when you said significant growth of cash R&D, are we talking about below or above 10% basically?

It will still be a significant growth, but we won't share any more detail at this stage.

We will now take the next question. And the next question comes from the line of Brian Fitzgerald from Wells Fargo.

Maybe clarification around the license deal. AAA brands, one IP, one game, not for this year. Is there a length to how long that licensing partnership is going to last? Is it multiyear, 3 year, 5 year? And then the second question, maybe broader. For a long time, we've accepted a narrative that gaming spend is relatively resilient during the recession because of that value proposition, low cost per hour of entertainment. At the same time, the model has been shifting to services or PRI. How resilient do you think in-game spend micro transactions will be as we enter a recession? Is that more at risk? Do you feel in a recessionary environment?

So on the -- thank you, Brian. So on the partnership -- so yes, we're talking about the AAA brand, including one game. Yes, this is a multiyear partnership. And what we should add is that this is a nonexclusive deal, meaning that we will be able also to develop our own mobile game on that IP.

On the second question, I think that the cost per hour remains very low for the video game industry. And so yes, we have also the streaming business that is also very competitive. But we feel video games will be a key component of the time spent by people during that period of more uncertainty.

It's a combination of very competitive value per hour, as you said, but also combined with this unique element of stronger interaction between players, more social experiences at scale. And that's where also the industry has made better over the course of the last decade since the financial crisis. So more than ever, and that's the focus that we have at Ubisoft to deliver very high quality together with strong cost discipline.

We will now take the next question. And the next question comes from the of George Brown from Deutsche Bank.

Just concerning the Avatar delay, what exactly were the restraints on production? Was it restraints on talent? Have there been higher attrition rates? Or is there something else? A little bit of color would be great. And then 2 questions on Skull and Bones. Can you give us any indication as to the level of preorders? Is it tracking where you would expect it to? And how does it compare to other games? And I guess, the same goes for Mario + Rabbids. And then secondly, just looking at competition later on in the year, there seems to be a lot of premium games coming out that were delayed by COVID and Skull and Bones, for example, is coming out at a similar time to God of War Ragnarök. So I'm just wondering how you're thinking about the possibility of increased competition going into the second half of the year?

Yes. Thank you for your questions. In fact, the Avatar delay is due to the fact that the working conditions are more difficult in the industry at the moment where people come to the office as often. So that has an impact, and it was the biggest impact.

So on Skull and Bones and Spark of Hope, we don't share an indication on preorders. What we can say is that we will be coming with the possibility for players to put their hand on the game on Skull and Bones. So that will be an important cost point because we have a unique take with this game on the naval combat and pirate fantasy and players will be able to see the value, depth and richness of this multiplayer and social experience that is really unique. And back to your last question, Skull and Bones will be targeted a different audience versus God of War because social and online would be core to the experience on top of being available on more platforms. As for my Mario + Rabbids: Sparks of Hope, we've seen that it's a highly anticipated Switch games in this platform that now accumulates more than 100 million units. So that should be a big game this year.

And for the competition, there are not that many games at the end of the year. Yes, God of War is a great game that we consider. But around that, there are not that many games during the end of the year. On Nintendo, there's only Pokémon. So Mario + Rabbids is really going to be one of the big games at the end of the year. Now also to come back to Avatar, as we want to make it a video game industry brand, it is important for us that we come with something that is perfect.

[Operator Instructions] I would like to hand back over to Yves Guillemot for final remarks.

So thank you very much for all your questions, and have a good day or evening. Thank you. Bye-bye.

Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect. Speaker, please stand by.