Ubisoft Entertainment SA (UBI) Earnings Call Transcript & Summary

Welcome, everyone, and thank you for joining the call today. Ubisoft delivered an excellent second quarter well above target. Activity was mostly driven by the performance of our back catalog. Thanks in particular to the remarkable growth of Rainbow Six Siege in an overall competitive environment for first-person shooters. I want to pay tribute to the exceptional level of commitment from our teams who have done amazing work on this game to develop top-quality content across all platforms. The signing of new partnerships also contributed to the overall quarter performance, confirming once again that Ubisoft is one of the most sought-after partners in the industry with highly recognized brands and assets. We are also pleased with the sales momentum demonstrated by our 2 new releases, which marked the successful return of Ubisoft IPs among the major game launches of the industry. The Assassin's Creed Mirage and The Crew Motorfest teams, respectively, led by Ubisoft Bordeaux and Ivory Tower have done a wonderful job to prepare the release of these new opposites. And the response from the community and fans have been fantastic. October saw the finalization of a major agreement with Activision Blizzard which will grant Ubisoft the perpetual streaming rights for Call of Duty and all other current Activision Blizzard Console and PC titles as well as those releasing over the next 15 years. The cloud gaming market has strong potential, and Ubisoft can play a leading role in its realization. This deal will enable us to deliver even more experiences to more players across the world, than ever before. One of the cornerstones -- it is one of the cornerstones of our strategy. Looking ahead in the context of a dynamic premium console and PC market, our current positive momentum builds confidence for the rest of the year, as well as the next fiscal year. We are excited to bring our future lineup to players and to deliver on our strategy and continue reaching larger audiences and building an increasingly recurring business, thanks to major brands and live services. I will now let Frederick detail our H1 performance.

Thank you, Yves, and hello, everybody. We delivered a record H1 and Q2 performance. H1 net bookings reached EUR 822 million, up 18% year-on-year. In terms of activity metrics across console and PC, unique active users stood at 94 million, slightly up, while MAUs at 36 million were slightly down year-on-year. On the engagement side, session days were up this semester, driven by an increase in the intensity measured as session days per active user. Our Q2 net bookings came out at EUR 555 million, up 37% year-on-year, well above the guidance of around EUR 350 million. Around half of the overperformance this quarter reflect the underlying strength of both our new release and our back catalog as well as to a much lesser extent, the higher-than-expected pre-shipments driven by our decision to release Assassin's Creed Mirage one week earlier than originally planned. The other half of the overperformance reflects our capacity to monetize our back catalog and its high-quality brands through partnerships with a view to increasing the audience penetration. This quarter was marked by the successful launch of The Crew Motorfest, the highest rated title in the series. The game set a record for the franchise in terms of total unit sell-through, overall consumer spending and season pass adoption rate for the opening week. Since its release, it has outperformed The Crew 2 in terms of acquisition, activity and monetization metrics. Assassin's Creed Mirage was released on October 5, and therefore, generated pre-shipments that were booked in Q2. The game release was successful and met with a very positive community reception, thanks to back-to-the-roots experience that celebrates and builds on the 15-year legacy of the franchise. Players praised the return to stealth and parkour game play and the carefully constructed and beautifully rendered 9th century Baghdad city. During its first week, the number of players was in line with past successful launches, such as AC Origins and AC Odyssey. It was also the biggest Ubisoft new gen launch in terms of unit sales during the period. To date, the game is performing in line with our expectations. These 2 successful launches took place in a growing and competitive market with numerous high-quality new releases. The performance of our titles in this context provides comfort on our visibility for the remainder of the fiscal year, and again highlights the relevance of our strategy to focus on our major brands and on lasting live games. Back-catalog in Q2 was up 80% year-on-year, mostly explained by an underlying overperformance as well as by our capacity to increasingly value and monetize our IP through partnerships. Rainbow Six Siege posted a remarkable performance this quarter in the context of diverging trends in the competitive first-person shooter market. Net bookings were up high double digit, notably reflecting the successful Year 8 Season 3 release. This growth is notably driven by session days, which benefited from a very strong increase in intensity. Overall, this has led to net bookings being up around 50% year-on-year in the first half for the game. The sustained and strong comeback reflects the team's attention to improving the quality and frequency of new content, as well as its care in providing a healthy playing environment. We have also observed over-performance across our big brands such as Assassin's Creed that benefited from the positive AC Mirage launch dynamics as well as Far Cry. Total digital net bookings reached EUR 475 million, up 25% year-on-year. PRI stood at EUR 387 million, up 44% year-on-year. Within PRI, mobile amounted to EUR 45 million compared to EUR 153 million in Q2 of last year. That included the first revenue recognition linked to the mobile licensing partnership. Excluding these one-off elements, casual mobile was up more than 35% year-on-year, notably reflecting the strong performance of Kolibri Games. 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 firmly up year-on-year, notably reflecting the higher levels of PRI. R&D was down versus H1 of last year. I will come back to that point in the following slide. SG&A was down 5%. This reflects a 14% decrease in the structure cost, representing a EUR 30 million decrease that was partially offset by higher variable marketing expenses due to the larger new release schedule versus a year ago. 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 down 11% year-on-year or EUR 51 million, mostly reflecting the fact that H1 of last year was impacted by the consolidation of 4 projects as well as accelerated depreciation linked to additional development time we had provided to several of our games. For its part, total cash R&D was down 7% or EUR 46 million. Looking at our cash flow statement on Slide 8. Free cash flow stood at minus EUR 284 million versus minus EUR 110 million in H1 fiscal year '23. This variation mostly reflects the following impacts. On the one hand, EUR 297 million unfavorable move in change in working capital requirements. This notably traces to the new release slate in late Q2 of this year impacting trade receivable as well as to an unfavorable variation in other liabilities. As a reminder, the change in working capital requirement in H1 of last year benefited from the unwinding of the EUR 130 million increase in trade receivables at the end of March 2022 versus March of the previous year, as well as a significant deferred revenue impact linked to the AC Jade partnership. And I feel that EUR 104 million improvement in cash flow from operations, driven by the increase in net income. Overall, the cash outflow this semester results from a usual pre-release cash consumption pattern ahead of delivering a meaningful lineup with strong cash inflows expected over the second half of the year. Non-IFRS net debt stood at EUR 881 million versus last year, and cash and cash equivalent amounts to around EUR 1.3 billion. We continue to expect to generate positive cash flow from operations this fiscal year. I would now like to provide an update on the cost reduction plan. This quarter, Ubisoft proposed to consolidate the Hungry Shark franchise at the Ubisoft Barcelona Mobile studio, and has engaged consultation regarding the proposed closure of the Ubisoft London Mobile office. With the continued tight control of recruitment as well as targeted restructuring, the total number of employees worldwide stood at 19,410 at the end of September 2023 compared to 20,729 at the end of September 2022. During the same period, employee retention has improved. Overall, the cost reduction plan is well on track with the total H1 fiscal year '24 fixed cost base of around EUR 0.8 billion, down 7% year-on-year, representing a decrease of around EUR 65 million. On the free-to-play side, we continued to make progress this quarter as we iterate and learn. Rainbow Six Mobile soft launch in Mexico and Canada at the end of August, helped us gather valuable feedback as the team prepares to expand to additional geographies in the coming months. Also, we were happy to have the Division Resurgence showcased at Apple Keynote in September and to be able to share the game's high-quality graphics with a wide audience for this event. Regarding XDefiant, the latest tests confirmed very high appraisal of the gameplay proposition. We are, however, taking the time to make sure the experience would be stable and enjoyable for all players at launch. This is in line with our iterative approach. And as a reminder, we expect small profit impact from our free-to-play releases in fiscal year '24. Looking at Q3, we expect net bookings of approximately EUR 610 million, which will represent a year-on-year decrease of around 15%. However, Q3 of last year saw the recognition of the [nice milestone] related to The Assassin's Creed Jade licensing partnership. Excluding this impact, Q3 will be up around 30%. The quarter will benefit from the release of Assassin's Creed Mirage, that is in 2024, and Avatar: Frontiers of Pandora, as well as the VR game, Assassin’s Creed Nexus and additional content across several of our live games. Year-over-year performance in Q2 that I described earlier, combined with the current positive momentum of Ubisoft IPs gives us confidence in the rest of the year. We can, therefore, confirm the guidance of strong top line growth and non-IFRS operating income of around approximately EUR 400 million without releasing the other large game we had initially planned to release in Q4 fiscal year '24. This is the large game we launched in fiscal year '25 so as to maximize its value creation. The lineup for the remainder of the fiscal year includes on the premium side, Assassin's Creed Nexus, VR, Avatar: Frontiers of Pandora, Just Dance 2024 addition that was released 2 years ago, Prince of Persia, The Lost Crown and Skull and Bones which is set to release in the fourth fiscal quarter. On the free-to-play side, Rainbow Six Mobile, The Division Resurgence and XDefiant will also launch later this fiscal year. Before I open it up to questions, I would like to take this opportunity to once again thank Jean-Benoît Roquette, for the exceptional impact he has had at Ubisoft over the years. As some of you know, he has decided to move on after a remarkable 17-year tenure as Head of Investor Relations at Ubisoft. We wish him all the best in his next adventure. I also have the great pleasure of announcing that Jean-Michel BONAMY will be joining as VP Investor Relations. Jean-Michel who is with us today, brings with him a wealth of very solid and extensive investor relations experience, notably in CAC40 Media companies such as Publicis. We are now ready to take your questions.

[Operator Instructions] And your first question comes from Nicolas Langlet from BNPP Exane.

Yes. I've got 3 questions, please. To start with Rainbow Six Siege. So if net booking is up 50% in H1, it means it was well above 50% in Q2. So can you give us a bit more detail on that? And anything specific that caused the spike in engagement? Is it better monetization or player acquisition? And what trend as you included in your guidance of that game in H2? So first point. Second point on the deal with Activision Blizzard. So you are supposed to make an upfront payment for the dip in H2. How large could it be? Is it below or above EUR 50 million? I think that would be in April. And also what sort of payback period are you looking for this initial period? Last question on the Q3 guidance. So back-catalog usually generates EUR 250 million per quarter, which means you only assume EUR 360 million for the 3 new games. Are you specifically cautious that [indiscernible] of Just Dance 2024 to have such a low guidance for Q3?

Thank you, Nicolas. So you're right, on Rainbow Six Siege. We reported a very strong 50% growth in H1. Can you give -- so the point is that we had indeed high double-digit growth in Q2. And the reason for that is -- follows a strong momentum, sustained momentum over the 9 months. And what caused this strong performance is a combination of higher quality of content, more frequency as well as strong and positive playing environment that is proposed to all players. And one big driver of this over-performance is the fact that intensity for the number of sessions per player has significantly increased. And that's why we are so happy with such a performance, nearly 8 years after the launch of the game. And it helped by more players as well coming to play the game, indeed. And on your question on monetization, the monetization is very healthy and sound. On the Microsoft, so we -- as you know, we don't provide detail on the transaction. But yes, it's ahead of EUR 50 million. We are very confident that it will be a very profitable transaction. On Q3, we are coming with good visibility on our new releases. We, as you noted, have the pre-shipment of AC Mirage that impacted Q2. So that will come -- it won't come in Q3. And we are factoring good visibility on the Just Dance 2024, Avatar: Frontiers of Pandora. We have also a good momentum from our current or recently release, and as we said, we have a good momentum on back-catalog.

Okay. And maybe to come back on the first answer on Six Siege, what are you expecting for H2? Is there any reason why the momentum should slow down materially compared to what we have seen in Q1 and Q2?

So as we said, we have in Q2, the contribution of partnerships. For Q3, as we mentioned, we are factoring a 30% growth versus last year excluding the recognition of the licensing agreement. So it's a strong momentum that we have versus last year.

Okay. And on the licensing with Microsoft, roughly, what sort of payback are you expecting? Is it 3, 5 or more than 5 years?

It's difficult to give you an answer yet. What we see is that as it is a long-term deal, we expect it to be really profitable for the company. Yes, we will have different ways to monetize. So first, we will bring the games to a subscription offer, and we will also have the possibility, of course, to license this write-out to any platform that we want to get access to this games in stream. And it will help our subscription to be on more platforms as well.

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

I've got 3 questions. So first one, the partnership or partnerships that you're referring to, which is around EUR 100 million of benefit in the quarter if I'm working with half of the incremental back-catalog. Is that a single partnership or more than one, does it relate to mobile game like we've seen before? And should we expect anything more from this partnership effect in the coming quarters? That was one question. Second question, Yes, when you look at consensus net bookings for full year '24, EUR 2.12 billion, 22% growth. Is it fair to say that now with delay of one of your games, your definition of strong top line growth is quite a lot lower than consensus definition? And the third question. When we're thinking about Q4, we know we have Skull and Bones, we have some follow-on sales from Avatar, ongoing sales from your other games. But surely, it would make sense for us to think about net bookings in Q4 being a reasonable amount lower than those in Q3. Is that correct?

So Nick. So on the first question, we are talking about different partnerships across different platforms. So yes, it's -- we're talking several of them. On your second question, we confirm that we expect a strong growth. So we won't comment on the sensory, we confirm that we expect a strong growth over the fiscal year. On Q4, what we can say is that we expect a strong quarter because we have the combination of the launches of Skull and Bones, we have the launch of Prince of Persia The Lost Crown. We will have the impact of the Q2 and Q3 launches. So Avatar, Just Dance, The Crew Motorfest, Assassin's Creed Mirage and Assassin's Creed Nexus, and we expect, of course, the maintenance of a strong momentum on the back-catalog.

And also the free-to-play revenue.

And you're right, we will have the impact of the free-to-play games by the end of the year.

Okay. Just to come back on the first question. Are we done with partnership benefits? Was that solely Q2 effect? Or could we get some more partnership benefits in the second half?

We've been signing a regular flow of partnership every semester over the last years. So we, of course, include our partnership in the quarterly guidance when it's already agreed and signed. So you can expect that this is a trend that is here to stay for the future years as well.

[Operator Instructions] And your next question comes from Mike Hickey from the Benchmark Company.

Just 2 from us. The first one on Rainbow Six Mobile, looks like you've completed the soft launch, you said in Mexico and Canada. I'm just curious if you could share with us the feedback you got from that process and how it sort of shapes the development of the game in your launch plans moving forward? And then the second question, there's pretty good evidence now that we've seen some pullback in consumer spend. And I think there's clear evidence we've seen it over the last year plus in the video game industry. So just curious, your updated thoughts as you see your product and the channel, how it's performing? And if you're seeing any incremental pressure or not, I guess, from any sort of consumer pullback? And I'm kind of curious of your perspective on that across sort of the 3 main areas; mobile, live service and premium?

Thank you, Mike. So on Rainbow Six Mobile, the soft launch, yes, we started the soft launch in 2 big countries, Canada and Mexico, and the soft launch continues as we speak today, and we've been getting good feedback that we incorporate to further optimize our KPIs as we prepare to expand the soft launch into more countries until we launched the game worldwide by the end of the fiscal year. On the consumer market, what we see on console/PC for premium games is that the market is currently dynamic and growing. We have...

September was particularly good for the market. And we see good positive trend. Now on mobile, there's more pressure.

Yes. On the console/PC Premium Games, we see that there is a good benefit from the installed console base. The pricing is also sound and the quality of the product coming to market is also very good.