Ubisoft Entertainment SA (UBI) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Ubisoft Q3 Full Year 2024 Sales Webcast and 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. Ubisoft recorded a solid third quarter, with net bookings slightly above our expectations. This quarter provided us with positive momentum and marks the beginning of our turnaround to constantly creating and delivering high-quality, long-lasting games. Our performance was driven by the releases of Assassin's Creed Mirage and Avatar: Frontiers of Pandora, by the continued strong trajectory of The Crew Motorfest as well as by the robust performance of our back catalog. The latter was propelled by the success of Rainbow Six Siege, which achieved sharp net bookings and playtime growth, and by the overall Assassin's Creed franchise that benefited from the launch of Assassin's Creed Mirage. The robustness and longevity of our back catalog is attributed to the attention we have had in constantly delivering high-quality titles that are loved by fans. I want to praise the outstanding work done by Ubisoft teams. They strove to offer quality games that align with our ambition to bring great entertainment to players. Players' very positive response to our latest major releases, such as Assassin's Creed Mirage and The Crew Motorfest, shows that we are indeed moving in the right direction. We also made great progress in terms of visual quality and universe richness, thanks to our proprietary Snowdrop engine, which was used in developing Avatar: Frontiers of Pandora, a game that sets a new industry benchmark in terms of world creation. The fourth quarter represents an opportunity to continue to build on this momentum, with the launch of Prince of Persia: The Lost Crown, a game that illustrates Ubisoft's capacity to revive iconic brands, and the release of Skull and Bones, which generating -- generated, sorry, increasingly positive engagement following its end of game -- it's end-game, sorry, and post-launch reveal. This new brand has the potential to establish itself as a new experience over the long run. The upcoming launch of XDefiant will take us a step further into the world of free-to-play, in line with our strategy of strengthening our position in Live services and increasing the recurrence of our business. We are also planning significant partnerships, including the nonexclusive licensing of the Activision Blizzard streaming rights that we acquired last October. Looking at our overall organization, we have been actively rolling out transformation initiatives across the group in order to respond to the market evolution and accelerate the execution of our strategy, while reducing our cost structure. In Q3, we made further progress in streamlining our operations and, at the same time, saw overall talent retention continue to improve. We are firmly committed to continuing along this path in the months ahead to deliver on our cost reduction targets and better position ourselves for collective success in the long term, while coming back to cash generation next year. Moving forward, we are gearing up for a very promising lineup for fiscal year '25, including 2 of the most awaited games in the industry. First, the upcoming release of Star Wars in '24 should be a major milestone in the video game industry, especially given the undeniable appeal of this legendary franchise. That will be coming for the first time to the open world territory. The lineup also includes Assassin's Creed Codename Red, set in the long-term -- in long-awaited feudal Japan. We look forward to revealing the full extent of the creative capabilities of Ubisoft's teams who are working hard to make these games a success that will live up to gamers' expectations. I will now hand over the call to Frédérick.

Thank you, Yves, and hello, everybody. Our Q3 net bookings came in at EUR 626 million, and as Yves mentioned, slightly ahead of our guidance of around EUR 610 million, driven by the strength of our back catalog and the return to a strong sequence of high-quality new releases. Excluding mobile, net bookings were up 43% year-on-year this quarter. As a reminder, Assassin's Creed Mirage pre-shipments were booked in Q2. MAUs across PC and console stood at 37 million, up 4% year-on-year. Overall, this quarter, our AAA new releases performed broadly in line with expectation and was notably marked by the releases of Assassin's Creed Mirage and Avatar: Frontiers of Pandora. Through a more condensed story than the usual brand proposition, Assassin's Creed Mirage was positively received by critics and players alike, delivering on the back-to-the-roots fantasy and bringing back mechanics that have defined the franchise for over 15 years. Avatar: Frontiers of Pandora showcased the power of Ubisoft's Snowdrop engine and new-gen technology. The release achieved a solid Metacritic user score and was met with strong community reception. Players praised the faithful fidelity to the Avatar IP and the freedom to explore the world, positioning the game to be a long-term seller, notably thanks to its post-launch road map and the growing new-gen consoles installed base. Also, we are very happy to see that The Crew Motorfest has continued to trade strongly with acquisition activity, monetization and net bookings metrics, clearly outperforming The Crew since its launch on a comparable basis, setting the brand on a solid long-term growth trajectory all the more as The Crew 2 have sustained strong activity levels. Back catalog in Q3 stood at [ EUR 360 million ] and was up 44% year-on-year, reflecting strong performances from our flagship brands and the appeal of our portfolio of games. Following its transition to our Live service brands last year, Just Dance 2024 Edition is accounted for [ in packet ] a lot. Rainbow Six Siege posted another remarkable performance this quarter in the context of a more competitive environment for first-person shooter Live services. Net bookings grew sharply year-on-year, driven by very robust growth in both active players and session days per player. Playtime was up close to 60% year-on-year over the quarter. As we look ahead, the activity and engagement metrics for the month of January continue to grow year-on-year. Notably, with session days growing around 20% since mid-January versus a year ago. The Six Invitational will start mid-February and will be set, for the first time in its history, in Brazil, a country that is close to the heart of the franchise. The game continues to expand its services to players with the launch of the Marketplace Beta last week that will contribute to stronger network effects on the long term. For its part, the Assassin's Creed franchise outperformed this quarter, driven by the robustness of the brand that benefited from the halo of the successful Mirage launch. Total digital net bookings reached EUR 468 million, down 18% year-on-year and represented 75% of our total net bookings. PRI stood at EUR 174 million, down 58% year-on-year. As a reminder, Q3 of last year saw the recognition of the last milestone related to the Assassin's Creed-Jade licensing partnership. With that in mind, digital net bookings and PRI, excluding mobile, were up, respectively, [ 70% ] and 32% year-on-year. Mobile stood at EUR 31 million this quarter. Looking at fiscal year 2024, we confirm our guidance of strong top line growth and non-IFRS operating income of approximately EUR 400 million. Q4 net bookings are expected sharply up, leading to record annual net bookings. This quarter includes the lineup with Prince of Persia: The Lost Crown and Skull and Bones on the premium side, a limited contribution from XDefiant on their free-to-play side, follow-on sales of prior quarter releases, a strong back catalog relying on a heavy Live services program and significant partnerships, including the nonexclusive licensing of streaming rights for the console and PC Activision Blizzard games. On the new release side, Prince of Persia: The Lost Crown has already been launched. The game was unanimously praised by players and critics, thanks to its best-in-class level design and the engaging and deep combat game play. The launch is a compelling illustration of our capacity to revive long-lasting iconic brands with a modern and popular game play, such as the metroidvania genre. Skull and Bones will launch on February 16. The Open Beta, that starts today and runs until February 11, will enable players to carry over their progression in the main game. It is a chance for all players to experience this unique multiplayer-first open world, inspired by the Indian Ocean during the Golden Age of Piracy, and to dive into its thrilling naval combat and RPG progression. Built as a Live game, this new brand will keep bringing new free content to players. The recently unveiled end-game and post-launch plans received increasingly positive reception from players, who praised the epic game play they will get to experience at launch and beyond. On the free-to-play side, in Q4, we expect to release XDefiant, our first-person arena shooter experience on the console and PC. While the game recently underwent some private test to verify all the work that has gone into the game in the last month, the team is gearing up to go live. We are very excited to finally bring this game to a wide audience. And on the mobile side, we initially had 2 AAA games scheduled for Q4. Regarding The Division Resurgence, we are very happy to have the game being approved for release in China. And in light of the very positive results of the game's latest Live test that ended late December, we are now planning for a much wider release later this year. At the moment, our focus is on making sure that the game is available to as many players as possible at launch, notably in Asia. Regarding Rainbow Six Mobile, the team has gathered valuable feedback since the start of the soft launch and is taking some extra time to launch later this year. This is imperative to ensure that players get the best experience possible at launch and enjoying game play propositions that do not exist today on this huge platform. To conclude, here are 2 fiscal year '24 housekeeping items, which we adjusted versus October for modeling purposes. The non-IFRS net financial charge, excluding foreign exchange impact, is expected at around EUR 40 million, reflecting the recently issued convertible bond and the repurchase below par of half of the nominal value of the 2024 convertible bond. And the number of diluted shares is expected at around 147 million, also reflecting the net impact of the new issuance and partial repurchase of respectively the 2021 and 2024 convertible bonds. We are now ready to take your questions.

[Operator Instructions] And your first question comes from line of Nicolas Langlet from BNP Paribas.

I've got 3. Maybe the first one, a high-level question for you, Yves. So the industry is going through a challenging time with slow market growth in major layers across the sector. You have been in the industry for a long time and you have seen various cycles in the past. Do you think there is a structural addition to the premium AAA game segment at the moment? And what makes you feel confident Ubisoft is well positioned to navigate the new market condition? So that's the first question. And maybe we can answer this one and follow up with the other after.

Thank you. Yes, the market is -- continues its evolution. And as we announced a few months ago, we have been working on reducing our costs to take care of that potential evolution of the market. What makes us confident is that what we see, when you are able to establish brands, that you are capable of growing them a lot and they can stand for the long run. So as we said earlier, Assassin's Creed, Rainbow Six are brands that continue to grow. And what we see when we are able to launch brands that can stay for the long run, like what we expect with Skull and Bones and other brands like The Crew Motorfest and others that are coming, is that we will be able to establish and launch some brands that will generate recurring revenue in the years to come.

Okay. Okay. Now the second question on the Q4 guidance. So based on my calculation, it implies, if you want to reach a record high net bookings for the full year, about EUR 780 million in Q4. So first, is that correct? And you mentioned a big contribution from the licensing agreement with Microsoft. How much of a contribution it could be in Q4?

So yes, your estimate is correct, Nicolas. We -- as we mentioned, we rely on 4 key building blocks on this for this quarter, the launch of the new releases this quarter, the meaningful contribution from the past quarter releases, starting with AC, The Crew and Avatar. We benefit from a strong momentum, as you've noticed on the back catalog. And then today, with Rainbow Six Siege, it has been strongly growing over the first 9 months of the year and did a good start in terms of activity this quarter. So that bodes well for the remainder of the quarter. And we are coming with a very heavy Live service program across all our Live service games this quarter as well. And for the licensing, we -- in terms of partnership, we mentioned that we are coming with significant partnerships. We can't share the numbers because, of course, these are sensitive and competitive information. But that will include indeed the nonexclusive licensing rights that we got from the Activision game.

Okay. Okay. And finally, on mobile. So you said the division's resumption [ should wait ] to have a global release even in Asia. And what about Rainbow Six Mobile? Anything to share on the recent play test? And is the delay more related to market condition? Or basically, you need more time to polish the content?

Yves?

Yes. So it's more time to continue to improve the game and adapt it to the market. And it's also underway also in China to -- for it to be -- to get approved also by the Chinese authorities.

Okay. And final question, AC-Jade, you're saying before, you were expecting a 2024 release. Is it still the case?

We have not made any comment yet on the release date, but the development is progressing well.

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

So the first one. Just in terms of partnership deals, in relation to the Activision Blizzard titles and the licensing rights that you have, can you share whether you've already made good progress to paying off the cash that you spent on that, that we talked about at your Q2 results as a result of these deals? And secondly, on the partnership deals, when we look into FY '25, can we expect this to be a regular feature now? Or should we, when we're modeling, be thinking that we need to fill a hole next year from -- through standard ways of generating revenue because of these partnership deals in FY '24?

Thank you, Nick. So on the first question, what we can confirm, as we said before, is that we are confident that this investment will be profitable. We can't share with you where we are as we speak. But we think that the right that we acquired, considering that they are granted for perpetuity for all already released games and games to be released in the 15 -- next 15 years, this has a good value. So we will -- we are really looking at different ways to monetize these rights. As we mentioned, we'll be happy to bring these games on our subscription platform so that players can enjoy the games through streaming. And also, we've been discussing with a number of platforms and partners that should be interested in getting the possibility to bring these games to a high number of players around the world, and that's what we'll continue looking at. And for fiscal year '25, what is important to have in mind is that we are coming with 2 huge games and notably, among others, as we will unveil the full extent of the lineup in May. But the fact that we are coming with Star War Outlaws and Assassin's Creed Codename Jade (sic) [ Red ], who are among the most-awaited games of the industry, the year will be relying on big building blocks as well as big games on mobile with The Division Resurgence and Rainbow Six Mobile, and also some partnerships which, as you know, has become more of a recurring and regular part of naturally expanding the audience penetration of our games at different stages of the life cycle.

And your next question comes from the line of Charles-Louis Scotti from Kepler Cheuvreux.

I have only one. When I look at your breakdown between the new release net bookings and back catalog, it seems that new release net bookings fell short of consensus expectation. It was offset, obviously, by a stronger back catalog contribution. But did they also come below your own forecast? And if yes, shall we read that as a sign that Avatar: Frontiers of Pandora is somewhat underperforming since its launch?

As I mentioned, overall, our new releases have come broadly in line with our net booking expectation over the quarter.

And your next question comes from the line of Brian Fitzgerald from Wells Fargo.

I just want to ask a little bit about the announcement we got yesterday from Disney and the partnership and investment in Epic Games. Obviously, you have several strong IPs on your own. There's non-exclusivities all the time in the industry, but we're curious about how you think that might impact access to licensed IP, not just for Ubisoft, but for the industry at large, particularly if we see this type of activity continue.

Yes. What we saw yesterday is something very good for the industry. What it showed is that more platforms will be created. And so we will be able to put our brands on more platforms on the long term. So it's something that is really good. And yes, those brands will be available for many platform. Our brands and Disney or other companies' brands will be available to go on all those distribution networks, in fact. And we are working very hard on our brands also to make sure they can become platforms that will have different types of modes and game play, and we'll continue to work with other companies' IP so that they can attract more and more players.

Got it. And then the second one I had was just around Skull and Bones. Could you maybe unpack for us the decision to price it at $60? You've certainly emphasized it's designed for a lot of Live services. What drove the decision to kind of make the game pay-to-play, when that could presumably limit the size of the player base and thereby PRI in the game? So any color on the decision around pricing?

You will see that Skull and Bones is a full-fledged game, and that you can see it on the market today. It's a very big game, and we feel that people will really see how vast and complete that game is. So it's a really full AAA/AAAA game, and that will lever on the long run.

And your next question comes from the line of Brian Pitz from BMO Capital Markets. And your next question comes from the line of Doug Creutz from TD Cowen.

You talked about the strength of your back catalog. And I think that you have been pretty willing to put a lot of your AAA titles on Xbox Game Pass after a certain period post-launch. Can you talk a little bit about kind of what goes into the decision about when to put those games in here? And how accretive or not accretive do you view the ability to put those games into Game Pass relative to sort of how your catalog performs on the PlayStation?

So we -- what we look at is how we can make sure those games are played a lot, so they continue to build the brand for the long run. And on games like Rainbow Six or For Honor or The Crew, we also look at how we can recruit more and more players over the long run so that we can generate also a lot of revenue from a player's time spent in the games. So we have a certain number of analysis on when to come, and we look all the time at what is the best way to generate the most revenue for the game.

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

I guess 2 groups. Just curious if you're sort of comfortable at this point that you think you'll be able to grow net bookings and EBIT in your fiscal year '25. Realizing you're not giving guidance here, but just curious if you're comfortable expressing growth for that period? And how you're thinking about your lineup in terms of the phasing of releases, given that Grant Theft Auto VI, I think, its implied release would be your fiscal 4Q '25. Obviously, that's a pretty competitive release. So curious your thoughts there. And then the second question would be still rumors here, but Microsoft is apparently in a position of going multi-platform, which obviously has some pretty incredible implications. So just curious, not to confirm that rumor, but if that's true, what you think it means to the industry to maybe the future of consoles? And any sort of competitive issues that you might think might come out now in the PlayStation and the Switch if they do put games on those platforms?

Mike, so yes, as you say, we don't guide yet on fiscal '25. What we can say again and repeating what I mentioned is that we'll be coming with huge games next year. So of course, we need to make sure we deliver well. But that will confirm the turnaround trajectory that we are going after, with the objective for the medium to longer term to strongly grow on net booking ahead of market growth and to grow EBIT. Considering that on the EBIT side, our objective is progressively to get back to the 20% operating margin that we enjoyed a few years ago. As for next year, we just confirm in terms of timing that Star Wars Outlaws will be in calendar year 2024. And so that's really a strong focus of the organization to make it come during that time frame, and we expect to really deliver a fantastic experience with -- for the first time, the franchise going open world.

And what we can say about GTA VI is what we've seen in the past is each time there's a big release like GTA, there are more and more people coming back to the industry, and that helps other games to sell as well. So it's -- we see it for sure, we look at it, and we are really organizing things around the launch of that game, which we don't know exactly when it's going to happen. We consider it will be closer to our financial year '26 than our financial year '25. But what we have seen is that, generally, it's actually positive for the market. And we did a good launch in -- when -- with the launch of the GTA V first launch and the GTA V [ IM ] game. Each time, we were able to generate really good revenue and profit on the games we launched and even record sales on the games we launched. Now on Microsoft agreements, we can't comment. They really are going to decide what is best for them. What you have to look at is -- that anyway, Activision Blizzard used to be multi-platform. So it would have an impact, but it's not a huge impact on the industry.

And the next question comes from the line of Brian Pitz from BMO Capital Markets.

Sorry, I dropped before, the technology dropping. Yves, first, a broad question on overall holiday console sales performance versus your expectations. Any insights there? And specifically, on types of content users are kind of leaning into and playing more recently? And then I apologize if you talked about this before. But on the free-to-play side, is there a different risk-reward profile for new IP like XDefiant versus established titles such as The Division? How should we and how are you thinking about modeling the contribution from free-to-play titles like XDefiant? Just give us a framework as to how to think about it.

Yes. First, console sales were a bit soft at the end of the year. Still very strong, but probably a bit less than expected. This was due to the overall market that was a little bit different than expected. On the free-to-play, what we see is that this market is enabling to launch games that can be recurrent and generate revenue for the long run. So we look at free-to-play and also premium games that can be Live games for us for the long run and generate revenue on a constant basis. So we don't make a difference between free access or premium. What we look at is on the -- on our Live games is how can they stay on the market for the next 10 years. So how do we create content that make people come back and play them on a regular basis because they love to do so.

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

Just a quick follow-up for me. I mean when you are talking about Q4 net bookings up sharply, leading to record annual net bookings, are we saying that they -- I think the largest number that you've had in the kind of fiscal year was [ 2241 ] in FY '21. So are we saying that the full year '24 net bookings are going to be above that number?

Yes, that's the expectation.

And your next question comes from the line of Eric Sheridan from Goldman Sachs.

Maybe 2, if I could. First, with new form factors emerging like Quest 3 and Vision Pro, maybe you can give us some more of your updated thoughts on the potential for development of IP and application of IP across different delivery mechanisms and the consumer experiences in the years ahead? And how you think about that factoring into your road map of content? And second, I know we're still in the process of finalizing this fiscal year and the operating income target you gave around efficiency. But we've seen a lot of media and technology companies now start to talk about multiyear efficiency and balancing growth and margins over the long term. Any updated thoughts about key learnings from this last year of driving efficiencies and how it might inform a more longer-term view of creating that balance?

Yes. On the -- we have been a bit disappointed by what we were able to achieve on VR with Assassin's Creed. It did okay, but it's -- and it continues to sell, but we thought it would sell more. So we are not increasing our investments on VR at the moment because we -- it needs to take off. We have been very impressed by what Apple came with, and we think it's a fantastic hardware. We -- but we continue to look at this VR business as something that we have to look at, but not invest too much in until it grows enough.

On your second question, Eric, yes, what we can say is to -- equal to what we said a year ago, which is the way we look at the market and the way we can deliver value over the next years is to really focus on expanding our biggest franchises to make them multi-platform, multi-business models and to really increase the share of Live services and the share of multi-players with higher retention. So that's the focus of the company, while adjusting our cost base and transforming the company. This year, as we said, we are still consuming cash. So the objective is to get back to cash generation next year as well as relying on the heavy lineup, starting with fiscal year '25. With the long term -- on the long term, with the lineup that we have and the focus that we decided to proceed with, we think that we can drive top line growth above market growth. Thank you.

And your next question comes on the line of Timothy O'Shea from BMO Capital Markets.

I'd just love an update on Ubisoft+ and particularly around how the Activision games like Call of Duty might be impacting the subscriber or engagement levels. And how would you think about licensing these Activision games into other services like Game Pass versus keeping them exclusive to Ubisoft+ over time?

So we have had a lot of inquiries, and we have many people that are interested by the rights of Activision Blizzard games. We will introduce them in the Ubisoft+ in -- quite soon. What we see is that they are going to generate lots of revenue. And what we saw in -- with the launch of many of our games on Ubisoft+, we saw a huge surge of newcomers that are helping a constant revenue growth on that platform. So we are very happy with the progress we are making there.

Thank you. That concludes the Q&A session. I will now hand the call back for closing remarks.

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

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.