Ubisoft Entertainment SA (UBI) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Ubisoft First Half 2023 Earnings 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. Please go ahead.

Welcome, everyone, and thank you for joining the call today. We posted a solid performance this semester, outperforming our expectations, notably thanks to the strength of our back catalog driven by the Rainbow Six and Assassin's Creed franchises. This puts us on the right track to reach our EUR 400 million non-IFRS EBIT objective this fiscal year. This semester, we continued to transform Ubisoft. We are focusing our resources on our biggest opportunities while adapting our organization as identified by the newly announced Global Creative Office and our ongoing cost optimization efforts. During our recent Ubisoft Forward event, we revealed our most ambitious road map ever for Assassin's Creed brand, which received an incredibly enthusiastic response from fans. Our objective is to bring the brand to new heights by reaching a significantly wider audience with more platforms and business models. We are replicating this strategic template with our other major brands, starting with Rainbow Six and The Division in the near future. In September, with the objective of growing our business collaboration with Tencent as well as bringing stability to the company, we expanded our shareholding concert. This was essential to deliver on our full value creation potential with significant top line and operating income growth over the coming years. I will now let Frédérick detail our H1 performance. Frédérick?

Thank you, Yves, and hello, everybody. This semester, both unique active users and MAUs that stood at 36.5 million were stable versus H1 of last year. We delivered a solid performance, with H1 net bookings reaching EUR 699 million, down 3% year-on-year. Our Q2 net bookings came out at EUR 406 million, up 4% year-on-year, well above the EUR 270 million guidance. This overperformance benefited from the much stronger than expected revenues from our back catalog and, to a greater extent, from the faster recognition of revenues from the mobile licensing partnership announced in July. As a reminder, Q2 of last year saw material revenue from Far Cry 6 per shipment. Lastly, exchange rates had no impact on this overperformance. Operationally, we can notably highlight the strong performance this quarter from Rainbow Six Siege. That's after initial improvements in Q1. So net booking is up 18% year-on-year, with record RPU reflecting the high-quality content the team has been working on. The Assassin's Creed franchise also registered another excellent performance across Origins, Odyssey and Valhalla that once again exceeded expectations. Back catalog in Q2 was down 14% year-on-year, mostly explained by the release of Assassin's Creed Valhalla Second Year also in Q2 last year. Total digital net bookings reached EUR 380 million, up 37% year-on-year. PRI stood at EUR 269 million, up 54% year-on-year. Within PRI, mobile amounted to EUR 153 million compared to EUR 39 million in Q2 of last year. This significant revenue increase reflects the first revenue recognition linked to the mobile licensing partnership. Let me now go into the details of our first half earnings. First, you will find our non-IFRS P&L on Slide 6 of our presentation. Gross margin was up by close to 3 percentage points, reflecting a significantly higher proportion of digital, including the revenues linked to the mobile licensing partnership and recurring back catalog. R&D was up significantly. I will come back to that point in the following slide. SG&A was up a limited 4%, reflecting a EUR 22 million decrease of variable marketing expenses, which was more than compensated for by a EUR 33 million increase in structure costs. As already mentioned, our goal is to progressively bring our structure costs back to fiscal '22 levels by the course of fiscal '24. This means that fiscal '24 structure costs will be well below fiscal '23 levels. Please refer to our press release or presentation appendix for the full IFRS to non-IFRS reconciliation. Turning now to Slide 7. P&L R&D was up EUR 176 million. As expected and in line with the full year guidance, this reflects 3 elements. First, the acceleration -- accelerated depreciation linked to the additional time we have provided to some of our games as the standard practice. Second, the depreciation of capitalized R&D related to the cancellation of 4 projects that was announced in July. And finally, H1 P&L R&D was impacted by the fact that we released 8 major games on a 2-year rolling period versus only 6 on a 2-year rolling period last year, leading to a mechanical increase in depreciation. Total cash R&D was up 17% as expected. As a reminder, fiscal '23 will be the last year of meaningful cash R&D growth before it stabilizes in fiscal '24. Looking at our cash flow statement on Slide 8. With no major game being released this semester, free cash flow stood at minus EUR 110 million versus minus EUR 333 million in H1 fiscal '22. This mostly reflects the following impacts. On the one hand, the EUR 288 million favorable move in change in working capital requirements. It notably reflects the unwinding of the EUR 130 million increase in trade receivable at end of March 2022 versus March of the previous year, while last year's first semester was unfavorably impacted by Far Cry 6 early shipping and Assassin's Creed Valhalla Season Pass reversals. And on the other hand, the EUR 67 million decrease in cash flow from operations driven by the decrease in net income that was partially offset by the reduction in the gap between cash and P&L R&D. Non-IFRS net debt stood at EUR 331 million, slightly up versus last year, and cash and cash equivalents amounts to around EUR 1.5 billion, slightly up versus a year ago. We continue to expect to generate positive cash flow from operations this fiscal year. Looking at Q3, we expect net bookings of approximately EUR 830 million, up 11% year-on-year. The quarter will benefit from the release of Mario + Rabbids Sparks of Hope, Just Dance 2023 as well as additional content for our live games, including an expansion for Far Cry 6, major content update for Rainbow Six Siege and from additional very significant milestone from our mobile licensing partnership. Mario + Rabbids Sparks of Hope is critically acclaimed with an exceptional 97% recommendation score on Opencritic. Our ambition with this title is to reach a significantly large audience. On top of leveraging a massive installed base, we have an ambitious marketing plan alongside material support from Nintendo that will grow throughout November and December when the mainstream audience will be the most receptive. 80% of the marketing spend is still ahead of us. We expect the game to outperform its prior offers and to be a strong holiday performer. Today, we confirmed our significant net booking growth target for fiscal '23, expected above 10%. The second semester will be built on the following pillars. First element, the release of Mario + Rabbids Sparks of Hope, Just Dance 2023, Skull and Bones and the first free-to-play initiatives as well as an expansion for Far Cry 6 and additional content for our live games, including Rainbow Six Siege Year 7 Season 4. Second element, the significant impact from the mobile licensing deal, for which the clear majority of the upfront recognition will be booked in H2 fiscal '23. And third element, the favorable foreign exchange impact. We also confirmed our fiscal '23 non-IFRS operating income target of approximately EUR 400 million. On the cost side, we confirm our objective to stabilize our global head count by the end of fiscal year versus March 2022. This cost optimization program will deliver material cash and P&L savings related to our guidance assumptions, but a bigger impact will be delivered in fiscal '24 and fiscal '25. We are now ready to take your questions.

[Operator Instructions] And the first question comes from the line of Charles-Louis Scotti from Kepler Cheuvreux.

Yes. A couple of questions from my side. The first one, on the licensing -- mobile licensing agreement, any chance you can help us quantify the size of this agreement and whether or not you will have beat your guidance for Q2 if you had not accelerated the recognition of revenues during the quarter? Second question on the Q3 guidance, which is pretty optimistic, probably a beat. Is it fair to assume that most of the licensing -- mobile licensing agreement will be recognized in Q3? Or is it going to be equally spread between Q3 and Q4? And third question on the full year guidance, which implied EUR 540 million non-IFRS EBIT with only 2 games launched. How comfortable are you on this guidance? And you said that it will include some free-to-pay initiatives, so it would be nice if you could give us a little bit more color on the upcoming free-to-play initiatives. And finally, on the Rainbow Six Siege Mobile, can you tell us when do you plan to soft-launch the game and when we can reasonably expect the game to be out?

Thank you, Charles-Louis. So yes, we would have beaten our -- we will have beaten our Q2 guidance without recognizing by faster the mobile licensing agreement. As we said, we benefited from a much stronger performance on our back catalog primarily due to Assassin's Creed and Rainbow Six that was, as you -- as we mentioned, strongly growing versus last year. So yes, we clearly outperformed even without the impact of the licensing agreement. In terms of quantifying, as you know, it's confidential information for just competitive and sensitive reasons. As we said back in July, this is a sizable partnership. As we mentioned earlier, the majority of it will be recognized in the second half, but there was a good portion in the first half. And it's an important partnership for us, as we said back in July, because it allows us to expand our mobile footprint with one of our biggest brands. On the second question, so there will be, as I've just mentioned, the majority of the recognition of revenue in the second half, and that would be impacting Q3 and Q4. As for your third question, yes, we are comfortable to deliver on the EUR 400 million operating profit. In terms of the free-to-play initiatives, as this is in the very beginning of these launches, we included a very marginal contribution. So we don't depend on them to deliver on the EBIT guidance, to be clear. We've been very happy with the first results of the closed beta of Rainbow Six Mobile, and metrics are very supportive of the beta retention. And it was important with such an Android test to confirm that the game will be able to reach wide audiences, including emerging markets. And as for our other free-to-play initiatives, in terms of testing and development, they are also progressing very well.

And the next question comes from the line of Nick Dempsey from Barclays.

Yes. I've got 3 questions. So first of all, I may have missed it, but did you confirm that significant growth in net bookings was still 10% plus? Second question. So when I look at the EUR 830 million of guidance for Q3 and then back out what is implied for Q4 by 10% growth, gets just over EUR 800 million in Q4. Does that mean that you're expecting the release of Skull and Bones to deliver roughly the same kind of revenue as the release of Mario + Rabbids? Or are there free-to-play games helping in there? Are there other things that mean that Q4 can be roughly the same size as Q3? And the last question, can you confirm The Division Heartland and XDefiant are still lined up to land inside FY '23?

So yes, we do confirm that the significant growth of net bookings this year means to be above 10% growth. As for Q4, we expect Skull and Bones to be a key contributor of the quarter, so clearly bigger than Extraction last year, Mario + Rabbids still being the bigger game of the fiscal year. And we will, of course, as we said before, have the impact of the licensing agreement. And as for the free-to-play products, so we're still progressing well for -- to have some free-to-play games being launched by the end of this fiscal year, but we will confirm the real date whenever we finalize all the testing phases.

And the next question comes from the line of Nicolas Langlet from Exane BNP Paribas.

Yes. I've got 3 questions. First one, so the mobile net booking was around EUR 150 million in Q2 versus EUR 40 million in Q1. Is it fair to assume that the difference mostly comes from the licensing agreement? And secondly, what percentage of the full year contribution from the licensing agreement have you booked in H1 compared to H2? Second question, on the R&D expenses. Of the EUR 452 million in H1, how much is related to the cancellation of 4 games, so the accelerated depreciation of those games? And finally, on the cash R&D. So given you expect to stabilize the head count by the end of the year, is it fair to assume H2 to be fairly in line with H1?

So on the first question, yes, most of the difference is coming from the mobile licensing agreement. And as I mentioned, the clear majority of this agreement net booking recognition will be booked in the second half. On the R&D expenses, as I mentioned, there are 3 items that reflect the increase in expenses. Cancellation of 4 games is a key element of that, together with the fact that we accelerated depreciation related to games that we delayed and also, as I mentioned, the mechanical impact of the fact that we launched more games recently than 2 years ago. Can you just repeat, sorry, Nicolas, the third question?

Yes. On the cash R&D spending for the full year. So given you plan to stabilize the head count by the end of the year, should we extrapolate what you spent in H1 for H2?

So on the cash R&D, what we can say is that we plan for meaningful growth in the -- for the full year and has been the case as expected in the first year. But we plan to have R&D being stabilized in fiscal '24 versus fiscal '23.

And the next question comes from the line of Douglas Creutz from Cowen.

Just about the Far Cry 6 expansion you mentioned, is that something that's going to be scoped like New Dawn was for Far Cry 5? Or is it a bit smaller, like a normal DLC?

It's a bit smaller.

[Operator Instructions] And the next question comes from the line of Brian Fitzgerald from Wells Fargo.

A couple of questions. I wanted to know -- there's been a lot of impacts to the marketing channels with what Apple was doing in ATT. So I want to know what you're seeing with respect to player acquisition costs. Which channels are working for you most effectively right now? Is that changing dynamically? We heard from Snap and Google, and I think even Meta have pointed to softness in game ad budgets. So maybe you're getting better yields there in certain social environments. Can you talk about how your marketing is performing now?