Ubisoft Entertainment SA (UBI) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Ubisoft update 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 on such a short notice. We are clearly disappointed by our recent performance. We are facing contrasted market dynamics as the industry continues to shift towards mega-brands and long-lasting live games, in the context of a worsening economic condition affecting consumer spending. Despite excellent ratings and players' reception as well as an ambitious marketing plan, we were surprised by Mario + Rabbids: Sparks of Hope underperformance, particularly in the final weeks of '22 and beginning of January. Just Dance '23 underperformed as well. In this context, we have had to update our revenue expectations with more prudent [ assumptions ] for this year as well as for the coming years. As a consequence, we are taking new meaningful decisions that are needed to continue adapting our organization, to further strengthen our execution and to ensure we both deliver amazing games as well as great value creation. While many challenges lie ahead of us, the industry's long-term prospects remain promising. And I am convinced Ubisoft is well positioned to benefit from its momentum, thanks to the strength of our teams, brands, production capacity, technology and balance sheet. Our back-catalog remains very healthy with notably a robust activity from Rainbow Six Siege, great momentum from our Assassin's Creed games and generally solid performance from our live gate. With the decisions we announced today, we want to push even more on our strategy to transform our biggest brands into truly global phenomenon with multiple offerings across platforms and business models and to build long-lasting live games. While these investments have yet to be released, they will ultimately generate significant value creation with strong top line and operating income growth over the coming years. I will now let Frédérick detail the actions we are taking today and review our financial targets update.

Thank you, Yves, and hello, everybody. The context Yves presented has triggered a full review of our revenue prospects leading to increased cautiousness and lower revenue expectation over the coming years as well as a set of strategic and operational measures. This increased cautiousness, together with the significant investment that resulted from lockdown and the new working patterns that both had a profound impact on productions across the industry over the past 3 years, leads us to engage into a set of measures dedicated to strengthening our long-term growth and value creation prospects. First, ensure all our energy is focused on building among the most powerful brands and live services in the industry. As a consequence, we decided to cancel 3 unannounced projects on top of the 4 already canceled last July. This will allow us to progressively increase our share of investment behind the development of our biggest franchises, starting with Assassin's Creed, Rainbow Six, Far Cry, The Division and Ghost Recon as well as into the strengthening of our live services. Second, depreciate around EUR 500 million of capitalized R&D concerning upcoming premium and free-to-play games and the newly canceled titles. This notably reflects the increased cautiousness on revenue related to the current challenging video game market and the macroeconomic environment as well as the necessary increased focus on fewer titles. Finally, adapt our organization to a more challenging environment with an expected net reduction of our non-variable cost base of more than EUR 200 million over the next 2 years in order to be more competitive and efficient. This will be achieved through targeted restructuring, divesting some non-core assets and usual natural attrition. Non-variable cost base includes all structure costs and R&D cash investments and exclude elements such as performance-based royalties or profitability bonuses. This base is estimated to a projected amount of around EUR 1.8 billion in fiscal '23. We have also revised our expectations for Q3 and the year, and provided an initial target for next fiscal year. We now expect Q3 net bookings at approximately EUR 725 million, mostly driven by the underperformance from new releases and, to a lesser extent, from partnership and our back-catalog casual mobile games. Regarding Q4, we have announced today that Skull and Bones will now be released early fiscal '24. The additional time already provided to the game has been supportive to the overall quality, and we believe the extra time will enable us to have more time to showcase the game's progress and build awareness. All this considered, we are revising our full year targets. Full year net bookings are now expected to be down at least 10% year-on-year versus our prior expectation of at least 10% growth. This primarily reflects the previously mentioned impact from our fiscal '23 new releases, which combines the postponement of Skull and Bones and the underperformance of our Q3 launches as well as, to a lesser extent, the impact from partnerships and softer back-catalog on casual mobile games. Full year non-IFRS operating income is now expected at around minus EUR 500 million versus around EUR 400 million previously. This reflects 2 points: first, around EUR 400 million impact from the expected lower net bookings in fiscal '23; and second, depreciation of capitalized R&D of around EUR 500 million I mentioned earlier. Finally, we are introducing today our fiscal '24 non-IFRS operating income target of around EUR 400 million, reflecting necessary prudence in light of the current changing environment, while still expecting a strong top line growth. As you said, we can rely on a strong balance sheet with around EUR 1.5 billion in cash and cash equivalents after reimbursing the EUR 500 million bond expiring at the end of this month. We believe our fast and decisive reaction and our additional cost optimization measures should help us navigate the current challenging economic environment and enter the coming years with a linear organization. We are now ready to take your questions.

[Operator Instructions] We will now take the first question. It comes from the line of Charles-Louis Scotti from Kepler Cheuvreux.

Yes. I have one question on your full year '23/'24 target. Can you give us a little bit your assumption behind this EUR 400 million target, especially on the free-to-play upcoming games? When should we expect those free-to-play against to be released? And don't you think that this target might be a little bit aggressive considering that the upfront negative impact of free-to-pay release on earnings initially?

Thank you, Charles-Louis. Yes. So we believe we have taken the right level of cautiousness. It's too early to provide more details on fiscal '24. You know already the free-to-play games that we have unveiled. What we are planning is to launch several free-to-play games from our biggest franchises next year.

So it means that...

And overall we are -- sorry?

This means that no free-to-play games. Is there mobile or PC expecting to be released before the fiscal year end, March 2023?

Indeed. And fiscal '24 will be relying on rich and strong lineup overall. We have already communicated about Avatar: Frontiers of Pandora, Assassin's Creed Mirage, Skull and Bones. And there will be other premium unannounced games including a large one.

Okay. And just one quick follow-up question on the EUR 200 million cost savings over the next 2 years. Can you have an idea about the phasing of this cost savings between this year and the next one?

We won't provide any more detail today. So we'll keep you updated along the way as we complete each and every milestone.

We will now take the next question. It comes from the line of Nick Dempsey from Barclays.

I've got 3 questions. So first of all, just on the EUR 200 million of savings. Do you have an idea of the cash restructuring charge that you will need to take out those savings so that we can capture that? Second question, you previously referred to a kind of standard revenue growth going forward of above 10%. That's what you've been aiming for in terms of what you've been investing in cash R&D. You've clearly got some revisions about how you're thinking about your business in the market. Can you give us any indication of what you could now hope for in a normal year in terms of top line growth? And third question, I mean we've seen some pretty big successes from Call of Duty and God of War in the last couple of months. The macro environment doesn't seem to be impacting the spending on those games. Is it that when the consumer is stretched, they just go for the largest games, the ones they're most excited about and that's causing the problem? Or is there some other difference between those 2 games and what you have been experiencing?

So on the first question, we'll provide more detail at a later stage. In terms of the future growth that we envisage, we see that we have, as we said in the past and that's still very true, the richest pipeline of products in the company's history with big games coming in the future years. We mentioned that we have taken an increased level of cautiousness, but we still rely on strong growth coming in the future years as our strategy is really adapted to where the market is going.

And yes, on the concentration of the games, what we can see is, yes, when there is more pressure, people go for the biggest brands, and they don't go to the small ones.

We will now take the next question. It comes from the line of Nicolas Langlet from BNPP Exane.

So I've got 3 questions, please. The first one, Mario + Rabbids Sparks of Hope. So can you tell us how the game is performing compared to the previous title? Do you understand what went wrong? And what is the plan to support the game in the coming quarters? Second question, are you able to split the EUR 500 million R&D depreciation between the free-to-play and the console games? And are there other projects in your pipeline currently under review? Or you think you have now cleaned the portfolio? And finally, can you tell us what is the contribution you expect from the licensing agreement this year? And whatever the amount you plan to book has changed compared to the previous quarter?

First, what we can say about Rabbids is that the game is extremely -- is really well appreciated by players. We are getting community rating that is excellent. We feel that the game is going to do good numbers over time, but the beginning was not at the level we expected.

So on the depreciation and R&D, Nicolas, we won't provide any more detail at this stage. What we said is that it's a balance of accelerated depreciation across premium and free-to-play games. Indeed, that includes, of course, impact from canceled games. And if we look at the extra depreciation beyond console games, we have taken [ accelerated ] depreciation on future to-be-launched games as well as on already launched games. Very -- we have made a thorough review. So we believe that we have made the right decision. Of course, we'll continue monitoring the market evolution, but we believe that what we concluded and what we're announcing today is the right level of depreciation. In terms of the contribution of licensing agreements, there is no change to what we said before.

We will now take the next question. It comes from the line of Thomas Singlehurst from Citi.