Ubisoft Entertainment SA (UBI) Earnings Call Transcript & Summary

Welcome, everyone, and thank you for joining the call today. This year has been a challenging one for Ubisoft, with mixed dynamics across our portfolio amid intense industry competition. Despite these headwinds, Ubisoft managed to deliver positive free cash flow generation over the fiscal year, reflecting the discipline applied across the group. Aware of the challenges ahead, we took decisions to continue strengthening the company's future. The launch of Assassin's Creed Shadows was defining moment. It reaffirmed the power of the Assassin's Creed brand with a highly favorable community response from long-time fans and new players alike. We also completed our initial cost savings program ahead of schedule. We are committed to going further, with additional savings of at least EUR 100 million over the next 2 years, to drive structural efficiencies and reinforce the foundations of our organization. This continued focus on discipline would support our growth ambitions and the profound transformation of Ubisoft. We are currently working on reshaping the group's operating model and plan to announce a new organization by the end of the year. A major step in this transformation was the announcement in March of the creation of a new subsidiary backed by Tencent as a core strategic partner, focused on accelerating the growth of 3 of our most iconic IPs. This new subsidiary will play a pivotal role in building evergreen, billion-euro brand ecosystems. We are progressing steadily towards the closing of the transaction by year-end, a key milestone that will fully deleverage the company and position us for sustainable long-term growth. Additionally, after a review of our pipeline, we have decided to provide additional development time to some of our biggest productions in order to create the best conditions for success. As a consequence, financial year '27 and financial year '28 would see significant content coming from our largest brands. Ubisoft is entering a new chapter. And I am confident in our ability to build a stronger, more resilient company for the benefit of all our stakeholders. I will now let Frédérick detail our fiscal year performance. Frédérick?

Yes. Thank you, Yves. And hello, everybody. Full year net bookings reached EUR 1.85 billion, down 20% year-on-year, slightly below our revised objective, thus reflecting lower-than-expected partnerships notably due to a timing impact. Excluding partnerships, net bookings were down mid-single digits year-on-year. Activity metrics across console and PC were broadly stable year-on-year, notably playtime and session days, which proved solid. Unique active players and MAUs stood at 134 million and 36 million, respectively. For the fourth consecutive year, the Assassin's Creed and Rainbow Six franchises have each sustained around 30 million unique active players, while the Far Cry franchise maintained around 20 million players over the same period. Our other brands continued to drive strong community appeal, with more than 100 million unique active players this fiscal year. The year ended with the best month of March over the past 4 years in terms of session days. Turning to our Q4 net bookings. They stood at EUR 902 million, up 3% year-on-year, reflecting a record fourth quarter for Ubisoft. Our portfolio of brands continued to perform strongly, demonstrating their power and attractiveness, with each of the top 10 brands posting year-over-year net bookings growth. The quarter was marked by the Assassin's Creed Shadows release that launched on March 20, delivering the second highest day 1 sales revenue in franchise history, second only to Assassin's Creed Valhalla; and setting a new record for Ubisoft day 1 performance on the PlayStation digital store. Player sentiment has been overwhelmingly positive, with an average score of 91 out of 100 across first-party stores, reflecting the game's excellent quality. To date, consumer spending has been clearly outperforming Assassin's Creed Odyssey with a superior play count accumulated. Also, players have logged 160 million hours in Assassin's Creed Shadows, underscoring its engaging gameplay and the enduring appeal of the franchise. The game's performance reaffirms the strength and resilience of the Assassin's Creed brand. Assassin's Creed Shadows is also the first installment built on Ubisoft's significantly upgraded Anvil proprietary engine, setting a new benchmark for both the industry and Ubisoft's future releases. The engine delivers a richly detailed world enhanced by improved visual fidelity, dynamic physics and increased environmental interactivity, significantly deepening immersion. Since launch, the game has already received updates based on community feedback and will continue to see free updates and new content to continually enrich the experience. Assassin's Creed Shadows will continue to contribute strongly for fiscal year '25, '26 and will notably see later this year the release of the Claws of Awaji expansion that will introduce a new region and continue the story of Naoe and Yasuke following the events of the games epilogue. Q4 back-catalog net bookings were up 20%. In a competitive first-person shooter landscape, Rainbow Six Siege delivered a solid performance this quarter, with net bookings up year-on-year. The launch of year 10 season 1, Operation Prep Phase, celebrated a decade of the franchise and helped set the stage for the upcoming Siege X release. The update drove strong player engagement, achieving a record Battle Pass conversion rate over the first month after launch. And the membership base reached a record high at the end of March. Overall, annual net bookings grew year-on-year and were stable, excluding partnerships. The quarter also featured the reveal of Siege X, which set viewership record for Rainbow Six Siege events. Launching on June 10, Siege X represents a major evolution for the franchise and sets the foundation for the years to come. It introduces modernized 5-versus-5 maps with enhanced visual, a complete audio overhaul, deeper tactical gameplay features and an enriched onboarding journey for new players. It will also include a brand-new 6-versus-6 mode named Dual Front that will add fresh dynamics by blending attacker and defender roles. Siege X will also bring an evolution to the business model, with free access to Dual Front, unranked modes and basic game features, with the objective to significantly enlarge the player community. Upgrading to premium versions will unlock competitive modes, ranked and Siege Cup. Finally, the Anvil engine upgrade will also enable much stronger quality and velocity of content releases for the years ahead, 2 key success factors in this segment. Elsewhere in the back-catalog, The Crew Motorfest posted a strong performance this quarter and pursued its increasingly growing momentum, with activity and engagement metrics up high double digits. Avatar: Frontiers of Pandora continued to attract new players and saw activity up double digits sequentially this quarter. Q4 was marked by significant partnerships, albeit to a lower extent than last year, highlighting the value of Ubisoft back-catalog of games, cloud streaming rights and including a new mobile opportunity on one of its leading franchises. Total digital net bookings stood at [ EUR 801 million ], stable year-on-year. PRI stood at EUR 350 million, up significantly year-on-year, reflecting the mobile opportunity I just mentioned. Excluding partnerships, PRI was down low single digit, reflecting slower lower -- slightly lower monetization for some of our titles, on the back of a very strong comparable base. Mobile stood at EUR 202 million, up significantly year-on-year. Let me now go into the details of our full year earnings. First, you will find our non-IFRS P&L on Slide 6 of our presentation. Gross margin was down year-on-year and reflect the fact that this fiscal year saw less high-margin partnership than the previous year. R&D was stable year-on-year and will -- and I will come back to that point in the following slide. SG&A was down 9% and reflects a decrease of our structure costs on the back of the continued progress of our cost reduction program as well as lower variable marketing expenses due to a lower new release slate this year. Please refer to our press release or presentation appendix to -- for the full IFRS to non-IFRS reconciliation. Turning now to Slide 7. P&L R&D was stable year-on-year and reflects lower depreciation of in-house software-related production coming from a smaller amount of AAA releases this year, combined with the fact that Assassin's Creed Shadows was released towards the very end of the fiscal year. This was offset by higher noncapitalized R&D, notably linked to investments into our live titles, in particular XDefiant that was discontinued last December. [ For its part ], total cash R&D was down 2% or EUR 20 million. This year's reduction in capitalized investments that will flow through the P&L over the coming years amounted to EUR 91 million. Looking at our cash flow statement on Slide 8. Free cash flow stood at EUR 128 million, above our target, compared with a negative of EUR 509 million the previous year. The variation mostly reflects the following impacts: on one -- on the one hand, a significant improvement in cash flows from operating activities that notably reflected a favorable variation in change in working capital requirements, as the vast majority of the high level of trade receivable at end of March 2024 has reversed; and on the other hand, lower net investment in capital assets due to the fact that the previous year's figure included the acquisition of the Activision Blizzard cloud streaming rights. Non-IFRS net debt has improved by EUR 100 million versus prior year, currently standing at EUR 885 million at end of March. Cash and cash equivalents amounted to a comfortable level of around EUR 1 billion. I would now like to provide an update on the cost reduction trajectory. As Yves mentioned, we have completed our initial cost reduction program, that was to reduce our fixed cost base by EUR 200 million, ahead of the time line and slightly above the target. Thanks to continued discipline in recruitment control as well as targeted restructuring, the total number of employees worldwide stood at 17,782 at the end of March 2025, representing a decrease of around 1,230 employees versus a year before and a decrease of around 3,000 employees since September 2022, while bringing attrition back to Ubisoft's lowest record levels, notably for senior positions. Overall, our fixed cost base has been reduced by EUR 205 million over the past 2 years or 12% at current foreign exchange rates, including favorable currency impact. Out of the EUR 205 million, EUR 203 million came from a reduction in capitalized R&D that will flow through the P&L in the coming years and will contribute to improved operating margin over time in a significant manner. Versus a year ago, we improved our fixed cost base by EUR 55 million, including a slight EUR 2 million foreign exchange benefit. Out of this EUR 55 million cost reduction this year, around EUR 90 million came from a reduction in capitalized investments, as mentioned before. And around EUR 45 million came from the structure costs impacting the P&L. This was partially offset by an increase of the noncapitalized R&D that I mentioned earlier linked to investments into our live titles. Looking ahead, we plan to further reduce our fixed cost base by at least an additional EUR 100 million, versus fiscal '25, over the next 2 years. This will be supported by similar drivers, meaning an increased selectivity in investment allocation, ongoing targeted restructuring and strict control on recruitment. Before I turn to the outlook, I would like to come back to the transaction announced in March involving Tencent's investment in the newly created subsidiary that will house the development of the Assassin's Creed, Far Cry and Rainbow Six franchises. First of all, it crystalizes the true economic value of 3 of our leading franchises and will play a pivotal role in accelerating their growth. They are well positioned in high-growth markets like open world and Live Ops and served by a very powerful 5-year lineup to come. Backed by growing investment and Tencent expertise as a core strategic partner, the new subsidiary will focus on building brand ecosystems capable of becoming evergreen billion-euro franchises on a yearly basis. This includes improving the quality of narrative-driven solo experiences, expanding live service offerings with richer multiplayer features and more frequent content updates, significantly enhancing content creation by leveraging Ubisoft technological stack, scaling into underpenetrated markets such as mobile and China. The minority nature of the transaction enables Ubisoft to maintain full control of these IPs, retain financial consolidation as well as safeguard strategic alignment with the group and maintain the upside on these franchises while immediately strengthening its balance sheet. It will be steered by a dedicated leadership, with a team that will include external hires, and that will be advised by industry veterans. Now let's dive into the details of the transaction. Tencent will invest EUR 1.16 billion in a primary issuance by the new subsidiary, acquiring an approximate 25% economic interest. At closing, at least EUR 500 million will be upstreamed to Ubisoft, ensuring sufficient working capital needs of the new subsidiary at start. As part of this transaction, the new subsidiary will be granted a worldwide exclusive, irrevocable, perpetual license in respect of the IPs; and similar proprietary rights owned or licensable by Ubisoft in relation to Tom Clancy's Rainbow Six, Assassin's Creed and Far Cry. In exchange, Ubisoft will receive a royalty based on the percentage of the new subsidiary's annual revenue, which is expected to exceed EUR 80 million per year in the coming years. The implied value for Ubisoft of this license is at least EUR 1 billion, in addition to the circa EUR 4 billion pre-money enterprise value of the new subsidiary. In other words, this crystallizes the value of these 3 brands and their operations at a minimum of EUR 5 billion, a significant benefit to Ubisoft stakeholders. Going forward, the new subsidiary will be financially autonomous, and liquidity will continue to be upstreamed through license royalties and cash pooling. Overall, the transaction will enable to fully deleverage Ubisoft and provide flexibility to both sustain growth of select franchises and transform the group's organization while reaching a consolidated net debt position of around 0. Additionally, Ubisoft will provide the new subsidiary with specific shared services, including technological and online services as well as co-development resources, remunerated on an arm's length basis. Finally: The carve-out is progressing well, and the completion of the transaction continues to be expected by the end of 2025. The first condition precedent has been satisfied with the issuance of the fairness opinion from independent expert Finexsi that concluded that the transaction is fair from a financial standpoint for Ubisoft shareholders. Now turning to the outlook for fiscal year 2026. We expect net bookings to be stable year-on-year, non-IFRS operating income to be around breakeven and negative free cash flow reflecting the group transformation. Following the closing of the Tencent transaction, we expect to maintain a consolidated net debt position of around 0. Fiscal year 2026 net bookings will benefit from strong back-catalog that will notably rely on Assassin's Creed Shadows; and the release of Siege X, which is expected to strongly grow franchise net bookings; regular partnerships; as well as the following new release lineup: Anno 117: Pax Romana, Prince of Persia: The Sands of Time remake, Rainbow Six Mobile and The Division Resurgence. Other titles will be announced at a later stage. And as always, here are a few fiscal '26 housekeeping items for modeling purposes. The stock-based compensation is expected at around EUR 40 million, a significant decrease versus last year. The non-IFRS net financial charge is expected at around EUR 45 million, reflecting a year-on-year increase primarily attributable to lower interest income. The non-IFRS tax rate is not relevant in the context of break-even non-IFRS operating income. And the number of diluted shares is expected at around 131 million, reflecting the fact that, with an expected negative net income, the dilutive nature of our instrument doesn't kick in. Beyond fiscal year '26, we expect to return to positive non-IFRS operating income and free cash flow generation in fiscal year '27 and to see significant content coming from our largest brands in fiscal year '27 and fiscal year '28. To conclude. We expect Q1 net bookings to grow year-on-year, at approximately EUR 310 million. While there will be no new release this quarter, Siege X will launch on June 10. And the quarter will benefit from follow-on sales of Assassin's Creed Shadows as well as the solid back-catalog, keeping in mind that the comparison base included the XDefiant launch last year. We are now ready to take your questions.

[Operator Instructions] We will now go to our first question. And your first question today comes from the line of Nick Dempsey from Barclays.

I've got 3 questions. Can you hear me okay?

Yes.

Excellent. So the first one, if I look at that first quarter guidance that Frédérick pointed to of EUR 310 million. That contains decent follow-on units from Shadows. So to reach flattish revenue year-on-year on a full year basis, you need to do much better in the coming quarters on average, so is that coming from notable partnership deals that will help you or from significant new content coming in those quarters? And if the last one then, can you give us an indication of the rough number of new games? Sorry. That's one question. The second question: You mentioned a new mobile opportunity which has helped your partnership deals in Q4. Is that a deal that we've seen before where you're licensing your IP to a third party so they can make a mobile game? And you'd expect that to sell well in Asia. Is it that kind of deal? And the third one, in terms of the EUR 80 million royalty that you are pointing to. That's -- is that a fixed percentage of what you currently estimate to be the average revenues for each of the next few years from those big 3 franchises? In other words, could it actually be quite volatile from year to year against that average of EUR 80 million?

Yes, thank you, Nick. So on your first question. So we'll have the meaningful sales from Assassin's Creed Shadows with a strong post-launch content and with a DLC coming. And of course, we expect a strong Christmas and coming from a highly praised title. We expect a strong growth from Rainbow Six Siege X. That will really grow the game meaningfully. And we will have the growth also driven by Rainbow Six Mobile for the total brand. And as we mentioned, we will have a number of other releases with Anno 117 and Prince of Persia: The Sands of Time that is a remake of an iconic game. And we -- I will say -- I can't be precise. I will say that we have a couple of other titles to be announced at a later stage. On the new mobile opportunity, I cannot elaborate at this stage, yes. And what I can say is that this mobile opportunity is on one of our leading franchise that -- franchises that have a strong potential in Asia. In terms of the royalty fee that will be upstreamed to the parent company, yes, it's a fixed percentage of the net booking. And we expect strong growth of the net bookings on these 3 brands, as we have a big lineup to come for the next 5 years.

Your next question comes from the line of Aleksander Peterc from Bernstein.

I'd like to know how we should think about the revenue and profitability of what remains 100% Ubisoft post the transaction; and the amount that will flow to minority shareholders, shareholder Tencent, in the venture that owns your best franchises. So that we can have an idea of what kind of net profit group share we will have after the transaction. That will be my first question. I have a follow-up.

Yes. So what we had said back, yes, in March is that, on the 3 brands in this entity, we've had on average EUR 1 billion net booking. So that gives you, by difference, the revenue that we've done over the last few years on the other brands. So what we really want is, of course, to make the 3 big brands to become billionaire brands on a euro -- on a yearly basis, first, with Rainbow Six; and then Assassin's Creed; and after that, Far Cry that we'll need to -- first, to get to the EUR 0.5 billion level. And we also have a strong focus, as we have said, over the last years to grow the Tom Clancy shooter open-world brands that are The Division and Ghost Recon; to grow our live brands, starting with The Crew that is enjoying strong momentum, as well Anno that is coming this year and a few other key live brands. And we'll be also creating [ a few ] experiences and/or new brands. And so that's what we can say. As for this new subsidiary, we will be fully consolidating and fully controlling that entity. And as we mentioned, Tencent will have around 25% of economic interest.

Okay. And just in terms of a follow-up: Your profitability has been quite erratic over the past 5 years. We now have an outlook of another break-even year, the non-IFRS EBIT level. Can you give us an idea of where you would like to land in terms of non-IFRS EBIT margins longer term once you stabilize your operations fully?

Yes. We -- when we look at our 5-year road map, we expect to get back to positive profit; and cash generation in as soon as fiscal '27, even more so in fiscal year '28. And we want to progressively get back closer to the normalized 20% operating margin that we used to enjoy. So we have stronger investment to nurture that growth on our biggest brands and live brands and we also pursue our program of cost reduction. And as we mentioned, over the last -- the EUR 200 million cost reduction that we've had over the last 2 years has been 100% net in the reduction of capitalized investments, so with no impact on the P&L yet. So that will flow progressively to contribute to higher operating margin in the next years.

Your next question comes from the line of Nicolas Langlet from BNP Paribas.

I've got 3 questions. First of all, on the licensing deals, can you tell us, what was the split between new game and back-catalog in Q4? Because it seems there was impact on both. And do you expect any other meaningful nonrecurring deals in full year '26? You mentioned a timing impact from Q4 to maybe Q1, but is there anything else you expect in the full year '26 guidance? Secondly, on the net booking guidance for '26, just to make sure: that on the back-catalog, you do expect the overall back-catalog to grow in full year '26 or not taking into account the licensing deals. And finally, in terms of the adjusted EBIT guidance for '26, what are the key building blocks compared to full year '25? I understand there is additional cost reduction. We should assume stronger contribution from AC Shadows and Rainbow Six Siege, and that will be offset [ maybe ] by lower partnership deals. Anything else you would highlight?

Yes. Thank you, Nicolas. So in terms of partnership, we don't disclose the difference -- the split. What we can say is that the amount in Q4 was clearly below what we did last year. And it's been split between, indeed you're right, new games, back-catalog as well as streaming rights, so there have been 3 sources of revenues there. And in fiscal '26, we expect other partnerships. As we've said, over the last 6 years, we've had recurring levels of partnerships B2B that allow us to increase audience and penetration of our brands across different platforms. And the platform are happy to see higher traffic coming from our games, so we will continue doing so, as a complement to B2C, as long as the financial terms are attractive. So we expect some in fiscal '26 but to a lower level than in fiscal year '25. And in terms of the guide for fiscal '26, I think that you had a good summary, yes. So meaningful sales from Assassin's Creed Shadows and Rainbow Six Siege. We expect back-catalog to grow year-on-year. We also get the benefit of a strong momentum from The Crew overall. And we will have the contribution from the new releases I mentioned plus a couple of other unannounced titles -- and I can't remember your last question.

I think you -- yes, you responded to the 3. Maybe a last follow-up: On the new subsidiary, can you give us an idea of the profitability in full year '25? Do you think like 25%, 30% would be in the ballpark?

So what we can say is that, over the last 3 years, our 3 brands had good profitability and good cash generation. That's what we can say.

Your next question comes from the line of Ali Naqvi from HSBC.

I'm just wondering if you could give us an idea of what the net operating income and free cash flow would be qualitatively, excluding the restructuring costs. And then in terms of the significant content that's coming out in '27 and '28, is there anything you can say, by way of quantum, which year is going to be greater than the other? And the games that you're investing in, in terms of time, are you delaying those by a matter of months, or is it a matter of years? And then finally, what are the sort of hurdle rates that Assassin's Creed Shadows has crossed in terms of units sold?

Yes. So on the first element, we don't disclose that element. What we can say, looking at the past 2 years, is that, fiscal '24, fiscal '25 accumulated, we've had around EUR 25 million of restructuring costs. So that, to give you an order of magnitude. In terms of content to come in fiscal '27 and fiscal '28, yes, as we mentioned and Yves mentioned that, we will have strong content coming on our largest franchises. So that really reflects what we -- the shift in focus that we announced 2 -- a bit more than 2 years ago, so yes, you should expect strong content on our main franchises. As you know, we had mentioned that Assassin's Creed, Far Cry, Rainbow Six, The Division and Ghost Recon were part of our 5 biggest ones. And in terms of the product road map overview that we conducted as part of the execution review that happened over October, December, as you know, it led us to give a few more months to Assassin's Creed Shadows, and it's been a good decision, to deliver a really strong quality. And so we've been moving some products to fiscal '27 and fiscal year '28. That's what we can say and -- on this topic. On Assassin's Creed Shadows, we don't disclose units sold. What we can say is that, in accumulated player counts terms, it's been higher, so far, than Assassin's Creed Odyssey.

Sorry. One very quick follow-up. Could you just give us an idea of the phasing of the negative cash burn that you're expecting over the course of FY '26, please?

We don't disclose this element and -- for now.

[Operator Instructions] And your next question comes from the line of Ben Shelley from UBS.

I've got 3 questions as well, if I may. One, can I push you a bit harder on the numbers for negative free cash flow in FY '26? Should we be thinking above or below the minus EUR 100 million mark? Two, can you walk us through the group's transition to positive free cash flow generation in FY '27 and beyond? And should we expect this to be more of a top line or cost base story? And then three, can you remind us of your debt obligations over the next 3 financial years, including any convertible bonds with put options?

So for fiscal year '26, yes, free cash flow consumption will be -- should be above EUR 100 million and including restructuring cost impact. In terms of the fiscal year '27, yes, we expect cash flow to come back to positive, with a robust generation in fiscal year '28. And that will be a combination of top line growth and cost base reduction on the back of our -- of the extension of our program. In terms of our debt maturities: So we have in 2025 around EUR 275 million across term loans and Schuldschein. And if the put option of the convertible bond was to be exercised, that will be around, a bit more than EUR 500 million in 2026. And in fiscal year '27, we have around EUR 700 million.

Thank you. There are currently no further questions. I will hand the call back to you.

Thank you very much and -- for all your questions. And have a good evening or good morning. Thank you.

Thank you.