Ubisoft Entertainment SA (UBI) Earnings Call Transcript & Summary

Welcome, everybody, and thank you for joining the call on such a short notice. Our second quarter fell short of expectations. Listening to players' feedback, we are determined to address this swiftly and firmly, with an even greater focus on a player-centric gameplay first approach and an unwavering commitment to the long-term value of our brands. Also, we want to address an important problem of perception that has been affecting the company's performance. On the back of our player-centric approach, the following important decisions relative to Assassin's Creed Shadows have been taken. First, leveraging the learnings from the Star Wars Outlaws launch. We have taken the decision to delay Assassin's Creed Shadows to February 14, 2025. In today's challenging market and with gamers expecting extraordinary experiences, delivering solid quality is no longer enough. We must strive for excellence in all aspects of our work. This will enable the biggest entry in the franchise to fully deliver on its ambition, notably by fulfilling the promise of our dual protagonist adventure, with Naoe and Yasuke bringing 2 very different gameplay styles. Second, we are departing from the traditional season pass model. All players will be able to enjoy the game at the same time on February 14, and those who preorder the game will be granted the first expansion for free. Finally, the game will mark the return of our new releases on Steam Day 1. Turning to Star Wars Outlaws. Despite a softer than expected launch, the game achieved solid ratings with a Metacritic score of 76 as well as a player user rating of 3.9 out of 5 across the first party and a 4.4 on Epic store. This reflects the immersive and authentic Star Wars universe as well as the effectiveness of the reputation system, great exploration possibilities and its Anti-cheat scoundrel fantasy. However, a portion of players have expressed dissatisfaction notably on stealth mechanics and overall polish that impacted the first hours of the game. In response to this feedback, we have begun implementing updates aimed at polishing and improving the gameplay quality and player experience with the first update deployed mid-September and 3 more to come over the next couple of months. This should enable us to improve its perceived quality and make it a must play game ahead of the holiday season to position it as a strong long-term performer. The game will launch on Steam on November 21. Although the tangible benefits of the company transformation are taking longer than anticipated to materialize, we keep on our strategy focusing on 2 key verticals: One World -- Open World adventures and GaaS-native experiences, with the objective to drive growth, recurrence and robust free cash flow generation in our business. In the light of recent challenges, we acknowledge the need for greater efficiency while delighting our players. As a result, being the first important short-term actions undertaken, the Executive Committee under the supervision of the Board of Directors is launching a review aimed at furthering our execution, notably on our player-centric approach and accelerating our strategic path towards the higher-performing model to the benefit of our shareholders and stakeholders. Finally, let me address some of the polarized comments around Ubisoft lately. I want to reaffirm that we are an entertainment first company creating games for the broadest possible audience, and our goal is not to push any specific agenda. We remain committed to creating games for fans and players that everyone can enjoy. I will now hand over the call to Frédérick.

Thank you, Yves, and hello, everybody. For fiscal year '25, we now expect to generate around EUR 1.95 billion of net bookings and around breakeven non-IFRS operating income and free cash flow. This revised outlook mainly reflects the softer-than-expected loan for Star Wars Outlaws and the updated Q4 release window for Assassin's Creed Shadows. This translates into Q2 net bookings that are now expected to stand at between EUR 350 million and EUR 370 million, mainly reflecting the softer-than-expected Star Wars Outlaws launch. Additionally, as the group transformation continues, we may progress on our cost reduction initiative with headcount steadily decreasing over the first half. To conclude, our balance sheet remains solid. Cash and cash equivalents are expected above EUR 850 million at the end of September 2024 after having repaid the EUR 250 million convertible bond maturing this month, notably reflecting the cash consumption in the first half related to the new release schedule. We will provide more detail when we report our H1 earnings on October 30. We are now ready to take your questions. Thank you.

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

I've got 3 questions, please. The first one on the Q2 guidance. So you cut it by like EUR 140 million. Is it only Star Wars Outlaws or there is something else underperforming in the portfolio? Because if it's only Star Wars Outlaws, it means you have missed by 2.5 million to 3 million units during the quarter. Do you think it's a fair assumption? Secondly, can you help us understand what is the bridge between the net booking reduction and the adjusted EBIT reduction for the full year? It seems you are reducing net booking by EUR 500 million and adjusted EBIT by EUR 400 million, which is pretty big. So if you can detail a bit more, that would be great. And finally, would you be ready to share the aspiration you have for full year '26 considering the delay of AC Shadows and what you have in the pipeline?

Nicolas, so in terms of the second quarter, it mostly reflects the softer-than-expected sales for Star Wars Outlaws. We also had behind expectations for XDefiant, but we'll give you a bit more detail at the end of October. In terms of the bridge between net booking and EBIT, this reflects mostly 2 elements. First, the fact that we decided to move Assassin's Creed Shadows to Q4 and the fact that we reflected lower expectation for Stars Wars Outlaws and to a much lesser extent with a limited impact also lower than expectation for XDefiant. In terms of fiscal year '26, we'll give you more perspective at a later stage.

Okay. Okay. Perfect. And on the full year '24 guidance, do you plan accelerated depreciation for Star Wars Outlaws or not?

So what we usually do and we follow this common practice is that we usually accelerate depreciation for games that are behind expectations. But we, of course, are following the normal closing process. So our auditors should validate the closing process as usual.

Our next question comes from the line of Ali Naqvi with HSBC.

What are you sort of hoping to achieve in a few months of the delay of AC shadows? And then secondly, in terms of the Executive Committee review, what is the things that they will focus on? Is that just on execution of your studios? Or could they also consider selling some IPs or off-loading assets? And then third question, longer term, could you give any sort of guidance or views on debt or cash headrooms or would you have to take on any additional debt as a result of today's warning?

Yes. Thank you, Ali. So yes, on Assassin's Creed Shadows, the game is feature complete. As you might know, we were about to run preview, so very close to shipping. What we see is that there is with additional months, the possibility to really further polish the game, so that the experience is really flawless, is perfect to deliver the fantastic promise of the most ambitious entry in the franchise. So that's really what is -- what we want to do is really to bring quality to the highest level possible. In terms of the Executive Committee review, as we said, we really want to make sure execution is flawless. We're focusing on gameplay first, player-centric approaches. So the objective is to really make sure that everything that will bring quality to a high level, will be a push in the agenda. We have, of course, important areas of work that we've been pushing over the last 1.5 years. So it takes time to deliver, but it's well underway, fostering creative talents as well as bringing gameplay first, as I mentioned, at the center of each and every decision, cutting-edge technology that we push with Snowdrop and Anvil, pushing the transformation of our franchise towards a more recurring model with GaaS-native experiences. This is also an important transformation for the future and simplification of the organization as we've been organizing our production along 5 zones to really streamline the work and focus our resources on our biggest opportunities. As part of the transformation plan, we had already mentioned that we were considering reducing cost and proceeding with the divestiture of noncore assets. This is, of course, still valid. On your last question around on debt. So as we said, we have a comfortable level of cash and cash equivalents at end of September of more than EUR 850 million. We plan to generate robust free cash flow in the second half of this fiscal year, knowing that we are planning to be neutral from a free cash flow standpoint this year. And if we look at our debt schedule, it's a very healthy and sound, average maturity of close to 4 years. So we have good visibility on that front.

And sorry, just one final follow-up, if I could. The trade receivable that was put in at the end of your FY '23 results, is there any change to that receivable coming through?

So yes, you're right. We reached, as we had mentioned, a record high level in terms of trade receivable at the end of fiscal year '24. So mechanically, that should contribute to reducing working capital needs this year. So of course, that's contributing positively to free cash flow.

Our next question comes from the line of Nick Dempsey with Barclays.

Yes. So first of all, just returning to debt that was mentioned in one of the previous questions there. So we had EUR 985 million, excluding leases in March '24 of net debt. If we're looking at breakeven free cash flow, I guess, total net cash flow that drives that net debt will be negative, so the net debt number goes up a bit. Can you talk about -- are there any covenants around any of your debt instruments? And is there anything about debt needing to be paid down in any particular rate, which will be problematic with your lenders? Because -- yes, every time now that we don't have positive free cash flow makes me worry a bit more about the scale of that debt. Second question, Ghost of Yotei, that is sequel to Ghost of Tsushima looks an awful lot like -- to me, perhaps I'm not into it deeply enough, but it looks an awful lot to me like Assassin's Creed Shadows. And we're talking about that game Ghost of Yotei coming out in 2025. So is there a risk of you start bumping into that one that people will not buy Shadows because they're waiting for Ghost of Yotei in a few months' time to get their fix of a Japanese game in that vein? And the last question, are you still expecting the same amount from partnership deals this year as you were when you said guidance? Has that had any impact on this?

So thank you, Nick. On the first question, so we don't guide on non-IFRS net debt. What I can tell you to help you is that -- so we are planning to be breakeven from a free cash flow standpoint. We also have regularly the positive proceeds of our employee share ownership plan that I think is around EUR 40 million. So that's what you can take into account in your projection. We plan to stay within the boundaries of our covenants. On the competition related to Assassin's Creed Shadow, the focus is really to make sure that we deliver a fantastic experience. With this dual protagonist approach with 2 different and complementary game plays with Yasuke and Naoe in a setting taking place in the field of Japan, that should be really enticing. So all the focus and everything that really informs our decision is to make sure that we polish the game and provide this fantastic promise. In terms of...

There was one question one, sorry.

Yes. On the partnership side, so we still expect the same level as we mentioned during the guidance setup, meaning significant contribution, but to a lower extent than last year.

And I would like to say that there is a lot of space for very high quality games, and those 2 games can sell very well.

Yes. Sorry, there was one question I forgot if I could just squeeze it in. In terms of your slate for FY '26, do you have plans to at least match what you've been doing in FY '25? And if we include the fact that Shadows will spread now into FY '26, can we have confidence that you can at least match your FY '25 levels with your new slate?

So as I said to Nicolas, we will provide you with more information at a later stage. What we are planning to do is to have a lineup that is a good reflection of our 2 vertical focus, Open World Adventures on one side and GaaS-native expenses on the other side. We also expect Rainbow Six Siege to continue growing, but you'll have more color at a later stage.

[Operator Instructions] Our next question comes from the line of Aleksander with Bernstein.

Can you maybe tell us what are the covenants on your debt and how much headroom you actually have with respect to those covenants?

Yes. So we have 2 ratios to buy by. First of all, net debt relative to equity should not exceed 0.8. And then the second ratio is net debt relative to EBITDA, 12 months EBITDA should not exceed 1.5. And as I mentioned, we are planning to stay within these boundaries.

And do you think you have enough safety even if the current trend continues into fiscal '26? Or do you currently plan for an improvement in fiscal '26?

Yes. So as I've just said, we're planning to stay within these boundaries.

Our next question comes from the line of David Lustberg with BMO.

I wanted to ask about the Assassin's Creed Shadow movement, 2 questions on it. One, does the shift from the Christmas and holiday season, do you expect that to impact unit sales? And any color you can provide on the incremental development costs to get the game ready?

Yes, we have less expectations during this financial year on Shadow. Now the excess of cost will be around EUR 20 million.

Well, of course, on the lifetime expectation, the potential is obviously intact, if not bigger, as we really want to deliver an outstanding quality.

Thank you. Ladies and gentlemen, I'm showing no further questions in the queue. I would now like to turn the call back over to Yves Guillemot for closing remarks.

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