Ubisoft Entertainment SA (UBI) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Ubisoft Full Year 2023-24 Earnings 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.

So welcome, everyone, and thank you for joining the call today. Our financial year '24 confirms -- results confirm that Ubisoft is back on track on its profitable growth trajectory with record annual and Q4 net bookings, operating income and cash flow from operations aligned with our targets. This year marked a pivotal first step in our turnaround showcasing solid performance and the first benefits of our transformational -- toward a more balanced and recurring business model, one supported by multiple revenue streams. The year also demonstrated the strength and value of our key assets, including our talented global teams, a diversified portfolio of high-quality franchises which drove our back-catalog revenues to all-time highs. Passionate communities of fans across our franchises, cutting-edge proprietary technologies and a unique position in the gaming industry that enabled us to sign profitable B2B partnerships. At the same time, we continued to adapt to a fast-changing industry and made further progress on transforming the organization at all levels. I will now let Frédérick detail our financial performance. Frédérick?

Yes. Thank you, Yves, and hello, everybody. The year was marked by improved activity metrics across Console & PC with 138 million unique active users, up 4% versus last year and MAUs at 37 million also up year-on-year. Playtime progressed well, up 12% year-on-year with higher PRI per hour. Full year net bookings came out at record levels, reaching EUR 2.3 billion, up 33% year-on-year. Our Q4 net bookings stood at EUR 873 million, up 179% year-on-year. Record back catalog was a key driver for Ubisoft performance this year, with net bookings up 49% to EUR 1.5 billion. It notably reflects a stellar Rainbow Six Siege performance as well as our capacity to increasingly value and monetize our IPs through B2B partnerships. Rainbow Six Siege in its 9th year stressed its leadership in the highly competitive first-person [ true to ] live services landscape with impressive and sustained numbers throughout the year. The phenomenal reception of the Six Invitational that broke all previous viewership records, a record battle pass conversion and multiple gameplay and player safety improvements contributed to the game's remarkable performance this year, with net bookings up more than 50%. Session days grew significantly year-on-year, up 38%, and session days per player grew 24%, leading the game to start fiscal year '25 in very good shape. Indeed, in April, we have already seen an acceleration of its year-on-year session days growth versus Q4. Additionally, the introduction of the marketplace beta generated a positive reaction from the community and bodes well for the future of the games, thanks to the potential of much stronger network effects. The Assassin’s Creed back catalog continued to outperform in Q4, benefiting from the recent Assassin’s Creed's Mirage launch and the inclusion of Assassin’s Creed Valhalla in the Game Pass. Overall franchise quarterly active users grew double digits year-on-year. The overall brand grew net bookings by more than 30% over the year. I would also like to highlight that The Assassin's Creed and Rainbow Six franchises both benefited from solid fan basis, each surpassing 30 million unique active players over the year. [Audio Gap]

[Operator Instructions] Your conference will resume shortly. [Audio Gap]

[Technical Difficulties] Activities as well as its well balanced economy. [indiscernible] is quadrupling year-on-year. For its part, Assassin’s Creed Mirage contributed to the strength of the franchise, winning the Audience Award of the 2024 Pegasus ceremony, and players continue to engage in the game that notably saw the addition of the [ Permadeath ] mode in February. And finally, Avatar: Frontiers of Pandora was praised for the visual quality of this world, setting an industry benchmark and showcasing the power of Ubisoft SnowDrop, our proprietary game engine. Furthermore, in an industry marked by strong demand for high-quality content, the uniqueness and attractiveness of Ubisoft's portfolio of wholly owned IPs was once again highlighted this year, thanks to our continued ability to sign profitable B2B partnerships that are incremental to the lifetime value of our back-catalog titles while providing quality content for our partners. Together, we continue to unlock and create value and deliver great experiences for a growing number of players. The year was also marked by B2B partnerships on streaming, including licensing the Activision Blizzard streaming rights on a nonexclusive basis. Total digital net bookings reached EUR 1.988 billion, up 34% year-on-year. NPRI stood at EUR 879 million, down 12% year-on-year. The latter is due to last year's significant contribution from the licensing agreement granted to Tencent to publish Assassin’s Creed Jade. For its part, Mobile revenues stood at EUR 138 million. Let me now go into the detail of our earnings. First, you will find our non-IFRS P&L on Slide 6 of our presentation. Gross margin was firmly up year-on-year by 370 basis points to 91.2%, notably reflecting the growing back catalog, the partnership we signed this year and, to a lesser extent, the impact from the cost reduction program. R&D was down year-on-year. I will come back to that on the following slide. SG&A was up 10%. This reflects a 4% decrease in our fixed cost structure, representing EUR 17 million that was more than offset by higher variable marketing expenses to support our much larger new release schedule versus a year ago. Non-IFRS EBIT came out at EUR 401 million, in line with our objective. 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 26% year-on-year of EUR 369 million, reflecting the accelerated depreciation we booked in the previous year. For its part, total cash R&D was down 5% or EUR 73 million. The reduction in the capitalized investment that will flow through the P&L over the coming years is minus EUR 112 million. While we got costs firmly down, we sustained investment to pursue solid net booking growth over the coming years and notably in fiscal year '25, which resulted in a still meaningful cash R&D versus P&L GAAP of EUR 229 million. Looking at our cash flow statement on Slide 8. Free cash flow stood at minus EUR 509 million, down year-on-year. This mostly reflects the following impacts. On the one hand, as expected, positive cash flow for operations that stood at EUR 91 million. And on the other hand, working capital requirement increase of around EUR 500 million notably related to [ inventory ] related trade receivables on the back of a record Q4, as well as a year-on-year increase in investment in capital assets related to the acquisition of the Activision Blizzard streaming rights last October. Non-IFRS net debt stood at EUR 985 million and cash and cash equivalents amounted to a comfortable EUR 1.2 billion. We expect to grow non-IFRS cash flow from operation next year, leading to positive free cash flow generation. Of note, equity increased [ strongly over the ] exercise by around EUR 400 million, up to a solid position of nearly EUR 1.9 billion. I would now like to provide an update on the cost reduction plan on which great progress has been made this year. In Q4, there have been -- notably been further reorganization within the global publishing teams both at the APAC region that is now organized into 3 engagement hubs and at the central level. Thanks to the targeted restructurings combined with the continued tight control of recruitment this year and more selective investment, the total number of employees stood at 19,011 at the end of March 2024. This represents a decrease of more than 1,700 or minus 8% over 18 months, while retention has continued to improve over the period. Overall, this has led to a reduction in our fixed cost base by around EUR 150 million this year or 8% at current foreign exchange, including close to EUR 50 million favorable foreign exchange impact. As said, out of the EUR 150 million, EUR 112 million was a reduction in capitalized investments, which will flow through the P&L in the coming years. The remaining part that positively impacted the P&L was EUR 38 million. While there remains work to be done, we are on track to reach the annual EUR 200 million cost reduction objective by fiscal year '26. Additionally, in line with the increased selectivity of our investment, we have decided to stop development on The Division Heartland and are redeploying resources to bigger opportunities such as XDefiant and Rainbow Six Siege. Turning to the outlook. We expect for fiscal year '25 solid net booking growth, a slight increase in noncash in non-IFRS operating income and growing non-IFRS cash flow from operations, leading to positive free cash flow. So let me summarize the different moving parts that explain the expected slight increase in operating income. First, the solid net booking growth will be driven by a mix skewed towards stronger releases compared to last year. Our much bigger releases on the premium side than last year will come with significantly higher R&D royalties and marketing expenses in year 1, as we are coming with strong ambitions [indiscernible]. Our free-to-play releases will come with an expected negative contribution reflecting early cautiousness in the guidance in year 1 for this new business model. Net, this higher contribution coming from [ The Division Resurgence ] together with the growing Rainbow Six Siege and the impact of our cost reduction program are expected to be partially offset by a lower contribution from higher-margin partnerships. The above translates into gross margin slightly declining year-on-year. P&L R&D expected to be above the historical range of 35% to 40% of net booking and SG&A expected to be at the high end of the historical range of 25% to 30%. And as always, here are a few fiscal year '25 housekeeping items for modeling purposes. Stock-based compensation is expected at around EUR 60 million. The non-IFRS net financial charge is expected at around EUR 45 million, reflecting the full year effect of the additional financing of last year. The non-IFRS tax rate is expected at between 30% and 35%, and the number of diluted shares is expected at around 157 million, mostly reflecting the full year impact of the recently issued convertible bond. Now turning to the lineup for this fiscal year. It includes on the premium side, Assassin’s Creed Shadows and Star Wars Outlaws, 2 of the industry's most anticipated games for the year. And on the free-to-play side, Rainbow Six Mobile. The Division Resurgence and XDefiant. Ubisoft Forward would take place on June 10, and we'll provide updates on the upcoming release. Star Wars Outlaws recently had its comeback with a story trailer generating excitement and anticipation for its upcoming release on August 30. Developed by Massive, the first ever open-world Star Wars game, we invite players to live out the scoundrel fantasy as Kay Vess and her loyal companion Nix. They'll navigate the underworld, including formidable crime syndicates to pull off one of the greatest heists the galaxy has ever seen, exploring both iconic and new distinct locations. Assassin’s Creed Shadows, the next flagship title in the franchise and the future of the open-world RPG in Assassin’s Creed was just revealed a few minutes ago through the official cinematic well premier trailer. Set to release on November 15 and developed by Ubisoft Quebec, the studio behind Assassin’s Creed Odyssey, the game will let players embark on a journey through feudal Japan, a setting that has been long awaited and highly anticipated by the community featuring an all-new generation of the Anvil engine technology. XDefiant, a PC and console free-to-play GaaS-native game will launch its preseason on May 21. Developed by Ubisoft San Francisco, the fast paced 6v6 first-person shooter arena experience will leverage fractions from different Ubisoft [ worlds ], enabling players to enjoy varied play styles. The game will start with 14 maps, 5 game modes, 5 playable factions and will be enhanced by regular new content updates every quarterly season. And to conclude, we expect Q1 net bookings to come in at around EUR 275 million, representing a slight year-on-year increase of 3%. There will be no new release in the quarter with the exception of XDefiant for which we have strong ambitions in the long term, but are initially cautious as it is a new business model for us. Of note, this quarter we'll see the part of Assassin’s Creed Mirage to mobile on iPhone 15 Pro, thanks to our Anvil technology and our engineers that together with the Apple teams have adapted a AAA game controls to the touch screen, delivering a comfortable and engaging gaming experience. This breakthrough opens new opportunities for AAA Games to be natively developed on our proprietary technology and further expand the reach of our big IPs within and beyond our core mature markets. I will hand it back to Yves, who will say a few words on our current strategy focus.

Thank you, Frédérick. As you have seen in financial year '24, we realized initial returns from our ongoing transformation. Advancing our strategy to expand the global reach of Ubisoft's biggest brand and enhance our recurring model through long-lasting live games. As a result of details, market analysis as well as a pragmatic and more selective organic investment strategy, we are playing to our strengths and sharpening our strategic focus on two verticals: Open World Adventures and GaaS-native experiences. This focus not only offers profitable growth and recurrence prospects, but also allows us to leverage and better cross-fertilize our established brands as well as our proprietary technologies to reach and sustain a competitive advantage. Our first objective is to return to leadership in the Open World Adventure, which are immersive worlds with a rich lore that deeply engages players. The Open World Adventure market represents EUR 25 billion today and is expected to grow over the coming years. This market is dynamic, frequently benefiting from technological disruptions and is characterized by high barriers to entry. We can rely on big franchises such as Assassin’s Creed's, Far Cry, The Division, Ghost Recon and Star Wars to address this market. This will start, as Frédérick mentioned, in financial year '25 with the launch of Star Wars Outlaws and Assassin’s Creed Shadows and will continue in future years as we deliver immersive experiences that can attract more players into our universities and reach new audiences, notably thanks to multiplayer and mobile. Our second objective is to expand our footprint in GaaS-native experiences, one of the major segments in the video game industry. It currently represents EUR 120 billion, is a growing market and has the largest total addressable market in terms of number of players. In this segment, we have notably successfully installed Rainbow Six Siege, which has become one of the -- our largest and most profitable games. The objective is to expand our footprint in this dynamic market, notably thanks to growing our existing experiences as well as the upcoming releases of XDefiant, Rainbow Six Mobile and The Division Resurgence. We are fully convinced that our proprietary cutting-edge technologies will provide critical competitive advantages in these 2 core verticals, driving not only efficiency but also differentiation. Ubisoft has always been a technologically forward-looking company and have significantly revamped its opening model in recent years through a dual approach. First, we have streamlined, consolidated and neutralized our tech assets to achieve economies of scale. Notably, we have rationalized the branches of Ubisoft Anvil and SnowDrop, our proprietary game engines, converging on just 2 reference branches shared among our games in production, enabling our teams to focus on breakthrough innovation and facilitating sharing across studios. The impact will be notably visible this year with the release of Star Wars Outlaws and Assassin’s Creed Shadows. Second, we continue to invest in the potential of new technologies that can open new frontiers for creativity and player experience, especially generative AI. Notably, at GDC 2024, we unveiled NEO NPC, our first player-facing generative AI prototype. It is designed to transform the way players interact with non-playable characters, and create more immersive gameplay experience by natively integrating generative AI features. And beyond several ongoing internal projects, we are also partnering with leading AI companies on joint initiatives. We are also pursuing a pragmatic and selective organic investment approach. The aim with this increased focus is to drive growth and recurrence with the objective to gradually expand operating income and generate robust free cash flow. Thanks for listening, and we are now ready to take your questions.

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

I've got a question, please. First, on the licensing deals in partnership. So can you help us quantify what was the impact in Q4 and how it's split between the back-catalog partnerships and the streaming licensing deals? And looking at full year '25, have you included any contribution from call it, nonrecurring licensing deals or partnerships compared to the usual level? Second question on The Division Heartland cancellation. Have you already write down all the capitalized development cost? Or it will be part of [indiscernible]. And finally, on the reorganization. So you announced it '23. Since then, the market condition has been tougher than expected, and many companies have announced new [ developed ] restructuring. So given the current market conditions, would you consider going beyond the EUR 200 million nonvariable cost reduction?

So on your first question, as we said early February, we expected a significant contribution in Q4 from B2B partnerships. And that came in line with what we expected. We've been happy to materialize profitable partnership. I won't provide you with the split between the different ones. What we can say relative to the nonexclusive licensing of the streaming rights that the revenue came in at a higher level than the initial purchase price, which we said had been comprised between EUR 50 million and EUR 100 million. So we'll be happy to already secure a strong return on investment. In fiscal year '25, as I said, yes, we included further partnership. As we've said in the past already. We've seen a recurring revenue stream from this B2B partnership because we see diverse number of players that want to get access to high-quality content and to get access to our high-quality back catalog. So we will continue, but to a lower extent than in fiscal year '24. For Heartland, yes, it was a difficult but necessary and important decision to decide to stop the game as we see bigger opportunities coming with XDefiant and Rainbow Six. Yes, we already depreciated the full game costs. And in terms of the cost reduction, as we mentioned, we've been progressing along the lines that we had defined in a significant manner. Combining selective investments, strict control on recruitment, reduction in real estate footprint, [ requestioning ] external spending, both in the production and IT side. And proceeding with targeted restructuring, and we will continue along these lines. We are confident to deliver on the EUR 200 million, at least objective. But there is still [ many ] work to do to get there. So we will stick to that objective for that.

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

I have three questions. So first of all, just on your guidance for Q1 net bookings. It's more or less in line with the first quarter of 2024. Considering The Rainbow Six Siege, it sounds like it is continuing to do well. You should have some follow-on unit sales or some of your launches second half of '24. I don't think there were notable partnership deals in the first quarter of '24, and you've got XDefiant coming up. Why wouldn't the first quarter of '25 be higher than first quarter of '24? The first question. Second question, apart from games that are always in the portfolio, like Just Dance, are you building into your guidance any releases that you have not yet revealed to us? And the third question, looking at your geographical split in Q4, quite a big spike up in North America. Can we assume that the partnership deals were very weighted to partners in that region?

So on the first question, yes, we are usually cautious with our early guidance getting into the year. So that's what is being reflected here. We are happy indeed to see early strong progression from Rainbow Six Siege, so that bodes well for the rest of the year. In terms of the new releases for the full fiscal year, we are happy with what we shared with you today. So we have nothing more to share. Just one word around Just Dance that you mentioned, which, as you know, has moved to a Live service model, so it's now being reported as back-catalog. On your third question, yes, so in North America, it was a higher number significantly versus last year, that affects the profile of our new releases. The fact that Rainbow Six Siege has had a remarkable growth and first person shooter games are particularly stronger in the U.S. and yes, to some extent a repartition of the partnership revenues.

And your next question comes from the line of Ed Young from Morgan Stanley.

I've got two, please. First of all, it's a very strong net bookings number for the year just reported. You talked about strong growth, perhaps it's -- it's certainly a beat from where the consensus was. Is that what you anticipated, is that what you really thought strong would be? Or is it a little bit -- is it fair to say that it's above your expectations going in? And if so, how do we bridge the IFRS operating profit being in line with where you originally came to? And the second, there was some discussion there about generative AI and NPCs and sort of the raise for start point of that. Do you have any formed view on what kind of efficiencies AI can generate in terms of efficiency production or better production in terms of how you think about the opportunities set in, let's say, the next 1 to 2 years? Or is this very much kind of theoretical upside as you think of it?

Thank you for your question. So yes, for Q4, net booking came in line with our expectations. As I said, the B2B partnership came in as we anticipated. We had a softer launch than expected on Skull and Bones that was offset by an overperformance from Rainbow Six Siege.

On the Gen AI, we already -- we have two groups working on Gen AI, one for the different jobs that we have, marketing sales, IT, [indiscernible] and all the other jobs where we look at how we can be more efficient and how we can automatize a certain number of things. And that's coming along quite well with good systems to improve our efficiency there. And on the other side, it's -- we can improve the quality of our games in making those games more alive. So we did present NEO NPC at the last conference, and it was well appreciated and it showed what we'll be able to -- we will be able to do in our games that will make them more alive and richer. So I expect a lot from Gen AI in our games, to make our games more interesting and for people to really have a personalized experience.

And your next question comes from the line of George Brown from Deutsche Bank.

I have two, if I may. Just firstly, how should we think about your free-to-play contribution for next year? I noticed you have several games now confirmed to release. How do you account for these games in your guidance for next year? And also for your Q1 net bookings guide? How are you accounting for XDefiant? And then secondly, can you help us understand what you mean with your guidance for next year? You expect strong net bookings growth in fiscal year '25. Does that mean above or below 10% growth? And then on profitability, you expect a slight increase over the year. Again, is that above or below 10%?

Thank you, George. So on the free-to-play side, as we said, we are very excited to come with 3 games that will be contributing to growing our game and Gaas-native experiences. Starting with XDefiant next week. As I mentioned, we -- because it's a new business model for us, naturally, that led us to [ take a quick stance ] in terms of top line expectation for the -- for fiscal year '25. So that's why we factored in a negative contribution this year. As for the net booking growth and profitability progression, I won't provide you with more granularity. What we can say is that we expect a solid net booking growth mostly driven by our newly released and mostly coming from premium launches such as Star Wars and Assassin’s Creed. And in terms of profitability, as we said, it would be growing slightly, and that reflects a stronger mix skewed towards new releases and that would be partially offset by a lower contribution from high-margin partnerships.

And your next question comes from the line of Ali Naqvi from HSBC.

Could you just sort of break down the working capital outflow this year in a bit more detail, please? And just linked to that, I mean, the partnership revenues, what are the sort of cash conversion on those? And how material should we think about that in terms of working capital contributions for next year as well? Secondly, just on The Division Heartland's cancellation. Could you just talk about how this sort of new strategy from open-world games and Games-as-a-Service reconciles with your previous strategy, you're focusing on the 5 key IPs. Is that -- should we no longer think about that? Is this the new sort of guidance and how to think about it and -- on a conceptual basis? And then finally, in terms of the Star Wars revenue split, will you book 100% of it in your bookings and then pay royalties? Or how will that be accounted for, please?

Yes. Ali, so the breakdown in terms of working capital increase in fiscal '24 is pretty simple. It was nearly all driven by the fact that we delivered a record Q4, so leading to a high level of trade receivable. In terms of cash conversion from partnership, these are, of course, sensitive information that we keep confidential, so we don't share the payment schedule. What we can say is that the majority of this cash will be done -- cashed in within the first 18 months and a significant part of it within the first year. In terms of working capital for next year, we're not guiding specifically on this. We said that we expect cash flow from operations to grow versus fiscal '24 and that will lead to a positive free cash flow.

On the new strategy, it's -- in fact, the strategy is very close to the one we had. It's just more focused on action Open World Adventures and GaaS-native games. And Heartland was not really aligned with that strategy.

And it stays very consistent with our focus on the big IPs, on our 5 big IPs. As we mentioned, Ghost Recon, The Division, Assassin’s Creed, Far Cry are very important IPs for us to secure strategic territories in the Open World Adventure market and to grow from there and notably to bring multiplayer and mobile there. And Game-as-a-Service, of course, starts with the expected growth from Rainbow Six, but not only all our other existing GaaS-native brands, but also making sure that we create new experiences, such as XDefiant contributing to that. As for the division, we have an ambitious road map that relies on investing in The Division 2. The Division Resurgence will come on mobile this year, and we have The Division 3 that is in development. In terms of Star Wars, so we have the revenues that will be reported like any other games and the royalties that we'll be paying will be a function of the economic success of the game. So we accounted for a significant amount this year, on the back of a strong expectation for Outlaws.