Ubisoft Entertainment SA (UBI) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Ubisoft First Half Fiscal Year '25 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Yves Guillemot. Please go ahead.

Welcome, everyone, and thank you for joining the call today. Despite the [indiscernible], we are continuing to deeply transform the Ubisoft in order to restore the level of creativity and innovation that build Ubisoft's success while delivering stronger execution and selectability. Even with our first half performance fell short of our initial expectation, there are still been some positive aspects. First, the solid underlying performance of our back catalog that was at double digits, excluding partnerships. Second, we achieved new milestones in terms of consumer funding metrics. Over the past decade, the Assassin’s Creed franchise has reached around EUR 4 billion, Rainbow Six Siege has generated over EUR 3.5 billion and Far Cry has topped around EUR 2 billion including g The Division, Ghost Recon and Just Dance, Ubisoft has 6 brands that have surpassed EUR 1 billion in consumer spending over the last 10 years. This highlights the quality, uniqueness and value embedded in our brand portfolio and the strength of our live services and highlight our potential to deliver more recurring revenue, sustainable growth and long-term value for our stakeholders. We have a big pipeline of products to come over the next years on these big brands. To succeed, we must redouble our focus on execution and reinforce the player-centric mindset in everything we do. For example, we are improving the quality of Star Wars Outlaws, including actively addressing player feedback through title updates and get ready for the Steam launch, the first story pack and the upcoming holiday season. We are also taking the additional time to ensure that the upcoming very ambitious focus in our flagship franchise, Assassin's Creed Shadows, is a highly polished, exceptional experience on day 1 and that it resonates strongly with players. Over the past semester, we also further advanced our cost reduction program, thanks to the strict control on recruitment, targeted restructuring and lower external spend. This is the fruit of a group-wide effort with -- and I would like to thank the team as we are transforming the company into a more efficient and agile organization. Over the past semester, -- over the first semester, we have already achieved more than EUR 200 million savings versus 2 years ago on an annualized basis. There still remains work to be done to support robust and cash flow generation in the future. The executive committee review aimed at improving our execution focused on a player-centric and gameplay first approach is progressing. This notably includes actions aimed at tackling the dynamic behind the polarized comments around Ubisoft so as to protect the group's reputation and maximize our game sales potential. We remain committed to making decisions in the best interest of all our stakeholders. In this context, we have already indicated the company is also reviewing all its strategic options. I will now let Frederic details our H1 performance.

Thank you, Yves, and hello, everybody. H1 net bookings reached EUR 642 million, down 22% year-on-year, reflecting a high comparable base in H1 of last year that notably included Assassin’s Creed mirage for shipments and significant partnerships valuing our back catalog. This semester, back catalog, excluding partnerships, was up 12% year-over-year, reflecting, as we just mentioned, the value embedded in our portfolio of brands. In terms of activity metrics across console and PC, MAU stood at 37 million, up 3% year-on-year and included close to 3 million new accounts per month. Playtime and session days were up 9% and 6% year-on-year, respectively. Over the last 12 months, we have attracted 138 million unique active users, up 4% year-on-year. Both the Assassin's Creed franchise and Rainbow Six Siege benefited from strong audiences with more than 30 million unique active users each and growing year-on-year. Turning to our Q2. Net bookings stood at EUR 352 million, in line with our revised guidance, which mainly reflects a softer-than-expected launch of Star Wars Outlaws. Back-catalog, excluding partnership, was up 12% year-on-year this quarter. In a challenging first-person shooter environment, Rainbow Six Siege delivered a solid performance despite a strong comparable base with playtime and session days both up double digit year-on-year over the semester. The year 9 Season 3 Battle Pass achieved the second best ever conversion rate and the newly introduced operator, Skopós, was highly appreciated by the community notably thanks to its innovative gameplay, which contributed to session days per player growing slightly in Q2. Adoption for the recently introduced membership service grew solidly this quarter, and the marketplace continued to establish itself within the games ecosystem, engaging a significant number of players. The team continues to broaden engagement [indiscernible] on PC, a new competitive format. Other live items across the portfolio of games demonstrated strong engagement and activity. The group franchise attracted over 8 million active players this quarter and saw strong growth in engagement, thanks to the final season of content for year 1 for The Crew Motorfest as well as promotion initiatives for the Crew 2. Ryders Republic benefited from its inclusion in the Xbox Game Pass, generating a strong uplift to session days and profitability and has now surpassed 10 million players. For its part, the Ghost Recon franchise also delivered a strong performance, growing both in terms of activity and net bookings over the first half. On the new release side, the quarter saw the release of Star Wars Outlaws, which underperformed sales expectations. The game achieved solid reviews and user scores across first-party and epic stores, reflecting one of the most immersive expressions of the Star Wars Universe ever created. Teams are fully mobilized on implementing changes to enhance game mechanics and overall polish. Since launch, the team has delivered 3 title updates focused on quality of live features and back fixing, notable improvement in cells mechanics and PC AI and safe features. This has produced initial tangible results with a meaningful community sentiment improvement. The most significant update yet will be released on November 21 with the 4 title update that will include further improvements to combat and stealth, and we launch alongside the release on Steam as well as the first story pack, wild card with fan favorite Lando Calrissian from the original trilogy. This should engage a large audience during the holiday season and position the game as a strong long-term performer. Total digital net bookings reached EUR 269 million, up 12% year-on-year, excluding partnerships. PRI stood at EUR 154 million, flat year-on-year, excluding partnerships. Within PRI, mobile amounted to EUR 28 million, down year-on-year on the back of a strong comparable base that notably reflected the strong performance of Idle Bank Tycoon. 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 down year-on-year, notably reflecting the fact that the first semester of last year had seen significant high-margin partnerships. R&D expenses was up versus H1 of last year. I will come back to that point in the following slide. SG&A was up 4%. This reflects a 9% decrease in the structure costs, representing EUR 17 million that was more than offset by higher variable marketing expenses, notably linked to the Star Wars outflow and X5 releases. Please refer to our press release or presentation and IFRS to non-IFRS reconciliation. Turning now to Slide 7. P&L R&D was up 26% year-on-year of EUR 103 million. This is mostly due to a EUR 43 million increase of noncapitalized R&D that notably reflects post-launch investment in ExF5 as well as other live games and a EUR 51 million increase in the depreciation of in-house software-related production that is notably linked to accelerated depreciation for some titles. For its part, total cash R&D was down 2% or EUR 14 million. The reduction in the capitalized investment that will flow through the P&L over the coming years is EUR 61 million, down 13.5%. Looking at our cash flow statement on Slide 8. Free cash flow stood at minus EUR 126 million versus minus EUR 284 million in H1 fiscal year '24. This variation mostly reflects the following impacts. On the one hand, more negative cash flow from operations and on the other hand, favorable move in change in working capital requirements as the high levels of trade receivable at end of March 2024 have started to reverse. Non-IFRS net debt stood at EUR 1.1 billion, up versus last year, and cash and cash equivalents amounted to a comfortable level of EUR 933 million. We expect to generate robust free cash flow in the second half on the back of the AC shadow release and favorable working capital requirements as well as further cost reduction. Of note, equity increased by more than EUR 100 million versus a year ago at EUR 1.7 billion. I would now like to provide an update on the cost reduction plan on which we have continued to make substantial progress over this past semester. As a reminder, our objective is to protect our production and creation capacity while being more selective in our investment and simplifying the organization. We have continued our efforts to streamline operations and adapt to evolving market trends with targeted restructurings across select North American studios to better align their organizational needs with business and development goals. With the continued tight control of recruitment as well as targeted restructuring, the total number of employees worldwide stood at 18,666 at the end of September 2024 compared to 1,911 at the end of March 2024. All in all, this represents a decrease of more than 2,000 over the last 24 months. Overall, this has led to a year-on-year reduction in our fixed cost base of EUR 46 million or 6% at current foreign exchange, including a slight EUR 3 million favorable foreign exchange impact this semester. Out of the EUR 46 million cost reduction semester versus last year, EUR 61 million came from a reduction in capitalized investment, which will flow through the P&L in the coming years. This was partially offset by an increase in our fixed cost base impacting the P&L of EUR 16 million, reflecting, on the one hand, the EUR 43 million increase in noncapitalized R&D that I mentioned earlier to support and drive live services and on the other hand, the lower structure cost. We have achieved a EUR 106 million reduction versus H1 fiscal year '23, meaning that on an annualized basis, we have already achieved around EUR 210 million, including a close to EUR 50 million favorable foreign exchange impact. EUR 109 million came from a reduction in capitalized investment, and that was partly offset by a EUR 3 million increase in our fixed cost base impacting the P&L. What this means is that the reduction in fixed cost to date has already had a substantial cash benefit, but has had a limited impact on the P&L so far with the benefits to come over the medium term. Additionally, retention has continued to improve significantly over the first half and has come back to close to the historical best levels observed during the 2010 2020 decade that was the foundation for Ubisoft's success. On top of that, hundreds of former Ubisoft employees have rejoined the company, including a significant number at senior levels bringing high-level expertise and know-how that strengthen our AAA core teams, which is critical for performance over the coming years. Turning to the outlook. We reaffirm our full year objectives with net bookings expected at around EUR 1.95 billion and both non-IFRS EBIT and free cash flow expected at around breakeven. The above translate into gross margin slightly declining year-on-year, P&L R&D expected to be significantly above the historical range of 35% to 40% of net bookings and SG&A expected to be slightly above the historical range of 25% to 30%. And as always, here are a few fiscal year '25 housekeeping items for modeling purposes. The stock-based compensation is now expected at around EUR 55 million, slightly down versus prior guidance. The non-IFRS net financial charge is expected at around EUR 45 million, unchanged versus the May guidance, reflecting the full year effect of last year's additional financing. The non-IFRS tax rate is not relevant in the context of breakeven non-IFRS operating income and the number of diluted shares is expected at around EUR 128 million, reflecting the fact that with an expected negative net income, the diluted nature of our instruments no longer kicks in. Looking at Q3, we expect net bookings of approximately EUR 380 million, which will represent a year-year increase of around 39%. Beyond solid expected sales from Star Wars O closed, this reflects a high comparison base last year for both the back catalog and the new releases that included Assassin's Creed Mirage and Avatar: Frontiers of Pandora. And finally, we expect a record fourth quarter, slightly up versus last year with net bookings of around EUR 900 million. This reflects a strong Assassin's Creed Shadows release, Solid Towers outgrow sales, a very robust back catalog that is expected to be strongly up double digits, excluding partnership with significant live services content, notably thanks to Rainbow Six Siege for which we have big plans to come. Q4 is also expected to include meaningful partnerships, but to a lesser extent than last year and good growth from our subscription revenues on the back of the Assassin's Creed Shadows release and the Activision Blizzard Games Coming to our streaming platform. We are now ready to take your questions.

[Operator Instructions]. And now we're going to take our first question, and it comes from the line of Nicolas Langlet from BNP Paribas Exane.

So I've got 3 questions. First one on the Q4 guidance that you just mentioned. So you do not expect material licensing partnership deals contribution. Can you confirm that? And you said it's going to be lower than last year. I think last year, it was like EUR 400 million. Are we talking about half of that or potentially lower? So any color on that would be great. And if you can share any details regarding the type of partner you are dealing with? And yes, that would be helpful. Secondly, on the IP rights for Activision Blizzard Games. So Xbox announced a plan to expand the streaming services Cloud to a lot of new games, including Activision Blizzard Games. So since you own the IP of the Activision Blizzard Game and streaming platform, should we assume you will book revenue as soon as players start to access the Activision games through Cloud or not? And lastly, the Executive Committee review, when do you expect to get the result of that review? Is it 3, 6, 12 months? Any color would be helpful.

Thank you, Nicolas. Yes, so we do expect meaningful partnership in Q4, and that's actually in line with our initial guidance. As we had said that we expect a meaningful level of partnerships this year, but indeed, to a lower extent than last year, and I won't go beyond that comment for now. In terms of streaming games from Activision, so as we had said last year, we started to monetize these rights in a meaningful manner, and we can continue leverage that in the future. We have no more comments to be done on that stage on that at this stage. As I mentioned, we still, of course, expect the first games to come on our subscription program in Q4 and that will drive more traction for our overall offer. On the Executive Committee review, so yes, it's been progressing significantly together with the Board of Directors. As we mentioned, we reaffirm that the strategy, double focus on Open World Adventures and gas native types of games is the right focus and the Executive Committee as well as with the teams is hard at work to make sure that execution is strong so that we can accelerate and can build results with a stronger focus on player and community as well as gameplay first. So we expect that this will translate into strong delivery with Assassin's Creed Shadows, strong progress in Star Wars Outlaws sales as we get into the holiday season and of course, a meaningful impact in the pipeline of products into the coming years. We also reiterated the fact that while we are very happy with the progress on the cost reduction side, there is still more work to be done so that we can support sustainable recurring cash flow generation in the coming years. And last but not least, we reiterated that we are reviewing strategic options in the interest of all stakeholders.

And the next question comes from the line of Thomas Singlehurst from Citi.

Yes. It's Tom here from Citi. First one, you don't mention XDefiant an awful lot in the release. I apologize if I missed some of the early comments on the call. But the -- I mean how should we think about that? It's obviously tailed off. Is this just another example or another case of there's just not working the games as a service sort of free-to-play wherein I know Rainbow Six is obviously incredibly successful. But should we chalk define up as another miss, first question. Secondly, I mean, you're very clear on the review of strategic options. I'm just wondering whether there's -- within that, there is a sort of broader reappraisal of the sort of vertically integrated approach? I mean, we look at, for example, the reductions in staff count, I can see they're real, but your full-time employee base is still whatever it is, 5,000 people, 6,000 people bigger than an EA or take to? I know there are some structural reasons for that. But I'm just interested within that review whether there is a broader reappraisal of the strategy. Or is it just a reappraisal of the execution? And then final question on leverage. I think you were very clear about the covenants and it does look like you're within covenants as far as I can tell. But I suppose there's not a huge amount of headroom. I'm just wondering what the sort of fallback is if for example, Assassin's Creed is delayed or if there are other sort of mishaps across the third and fourth quarters that mean that you don't necessarily reach your billings targets because it feels like it's getting tight, and I guess that's what the equity and credit markets are telling us.

Yes. Thank you, Tom. So as we said a month ago, XDefiant was behind our expectations. And the team is today working and focusing on improving the heat registration element and improving the net code, and that's really the priority as we speak. Our game and service strategy remains core Pillar of what we want to do next. Starting with indeed Rainbow Six Siege that is expected to further grow. The game is in great shape, and we believe that we can expand further with the strong plans that we have, and we will be bringing Rainbow Six Mobile next to that game to broaden the franchise. But yes, free-to-play game as a service remains core element of our future strategy to the benefit of our big brands in the coming years. On the strategic options, as we said, we are reviewing the way we can improve execution and deliver recurring, sustainable robust cash flows in the future. So there are a number of topics that are being reviewed, but I won't go further in terms of comment at this stage.

But what we can say is we are making sure our games are at best when they launch. So that we will not policy of the games that come on the different franchises we have, can make a big impact on the market when they are launched.

On the third question around covenants, so yes, we mentioned that we plan to stay within the covenant boundaries because we expect substantial EBIT results in the second half as well as robust cash flow generation, not only because we expect a strong launch from AC shadow, but also with the benefit of material partnerships that will be coming, strong back catalog growth across live services in Q4, but with big plans with Rainbow Six and Siege. We also are, as we mentioned, planning to further progress on the cost reduction side. So the cash benefit will grow further. And last but not least, we had mentioned that at the end of last year, we reported a record trade receivable, so which are flowing back through capital requirements reduction this fiscal year. And separately, as we mentioned, we are -- we continue exploring the sale of some assets.

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

I've got 3 questions. So first of all, you mentioned in the release that you might look to sell noncore businesses. Would it be practically possible to sell, for example, one of your smaller AAA franchises? Or would the multi-studio development approach that Ubisoft has always taken make that difficult to kind of sell the whole thing? Second question, just going back to the partnership deals that Nicolas asked about. How much visibility do you have on when those will land? I mean, in this industry, we've seen before that if a potential partner knows that you need their revenue to get over the line on guidance. then they might be able to exploit that situation. So do you have perfect visibility on the timing of when you can assign those deals? And the third question for FY '26. I don't know whether you can give us any indication at all on approximately how many AAA games you might be able to release during that year to help us model?

So on the -- thank you, Nick, on the sale of assets, we can't make any specific comments at this stage. What we mentioned already is that we have strong focus and we can consider selling assets that are not on the critical path of this strategy. In terms of partnership, we have usually a regular review and good visibility on pipeline, and we can activate different opportunities. And in terms of fiscal year '26, you know more by May, what we can say is that our lineup in the coming years will reflect also the focus -- the double focus on open world adventures and game as a service. We had said in the past that when we unveiled the Assassin's Creed road map that we've come with high-quality paid content every year. We also should expect, of course, strong back catalog sales from AC shadow that was pushed later in the year. And we expect Rainbow Six Seige to grow with the plans that we have for that game. And we still have in the pipeline The Division Resurgence as well as Rainbow Six Mobile whenever we believe that they will be ready to launch. I can't make any more comment at this stage on the other titles that are yet to come.