Ubisoft Entertainment SA

PAR:UBI

Earnings Call Transcript 2019-Q1

[Yves Guillemot, Co]

Good morning, and good afternoon, everybody. Thank you for joining our conference call. Our solid Q1 performance is another demonstration of our transformation toward a more dependable and predictable model. Our back-catalog was at 75% of -- on the heel of an already strong performance last year. This bodes well for our full year gross targets. Over the past 3 months, we continued to deliver on our global strategic plan, most recently with another strong E3 showing. Our press conference saw an increased in peak concurrent live viewers by more than 70%, with the highest live ratio of all conferences. Our teams once again demonstrated their amazing creativity and commitment to our games communities. Our 2 biggest new games of the year, Assassin’s Creed Odyssey and The Division 2, were very well received, which further support our confidence in their potential in the market that would be even more competitive than expected.I will talk more about our E3 performance a little bit later, but before that, I will let Alain present our Q1 performance. Alain?

[Alain Martinez, Chief Financial Officer]

Thank you, Yves, and hello, everybody. While I will briefly cover our net revenue according to the new IFRS 15 standard, which modified the way we accounted for revenue of online-enabled games, most of my presentation will be based on net bookings to ensure comparability with prior communications.Let's start with net revenue, which stood at EUR 400 million. The unexpected overperformance versus net booking is mostly related to our learning curve process regarding the new accounting of revenue referrals. Revenue referrals from fiscal year '18 recognized during the quarter were indeed higher than anticipated and higher than the fiscal year '19 Q1 revenue deferred to future quarters.Let's now look at Q1 net bookings, up 89% to EUR 381 million, above our target of approximately EUR 350 million. This impressive progression, following last year Q1 already strong growth of 45%, reflecting part the release of The Crew 2 at the end of the quarter and most importantly, as Yves mentioned, the very strong performance of our back-catalog.The Crew 2 launched on June 29. Its activity is trending in line with The Crew 1, which had benefited from a Christmas launch. And its Digital performance is outperforming. The year-long road map of incoming content, including new disciplined features and vehicle, to constantly renew the experience has already been announced, confirming our commitment to long-term support. Back-catalog reached EUR 333 million, up 75%, and was supported by the performance of our deep portfolio of games. Far Cry's strong momentum continued, and for the third year in a row, Ubisoft had the industry best-selling game for the first 6 months of the year.Our live multiplayer games, Rainbow Six Siege, Ghost Recon Wildlands, The Division and For Honor, also delivered a solid performance as well as Assassin's Creed Origins. On the mobile side, up 79%, we continue to build our operation in a very disciplined manner. Our new release, Might & Magic Elemental Guardians, set a new launch record for Ubisoft-developed mobile games. Interestingly, China represents 50% of the worldwide iOS revenue, with 20 consecutive days in the top 100 crossing games ranking. On the partnership side, we are progressing well on building up our collaboration with Tencent, both for our PC and mobile titles. We will provide an update once our game are ready to be launched or relaunched in China. Last year release, Might & Magic Era of Chaos, crossed EUR 140 million in live to date gross revenues. Finally, our recent acquisition [ Catch-Up ] and 1492 Studios are performing very well, with strong year-on-year growth.In Q1, we reached record levels of active players; and excluding mobile, group MAUs were up 40% year-on-year. In the context of strong competition, total play time continued to grow nicely year-on-year. As a result of the ongoing strong performance of our live operation, Digital reached EUR 287 million, up 77%, and player recurring investment was up 51%. Despite strong growth, Digital player recurring investment represented respectively 75 -- Digital and player recurring investment represented, respectively, 75% and 33% of total net booking, down 5 and 8 point versus last year, as the quarter shows strong physical revenue growth driven by the Crew 2 release and Far Cry 5 ongoing performance. On a platform basis, it is worth mentioning the strong growth of PC that represented 24% of total revenue, up 3 points versus last year, thanks to Rainbow Six Siege and Far Cry 5 performance, notably in Asia. Accordingly, Uplay PC, our online services and distribution platform, reached new record activity and revenue levels during the quarter.To conclude the Q1 part, like last year, I would like to mention that Yves was ranked, respectively, second and fifth on the list of best CEO in France and Canada according to Glassdoor annual ranking. As you probably know, Glassdoor ranking is based on employees' ratings. Our potential to create great value lies in our capacity to nurture a strong working environment. Our success come from our talent and from our capacity to help them deliver their full creative and innovative potential.Having our employee show -- showing such strong support to our management, culture is thus extremely valuable.Moving to Q2. We expect net revenue of between EUR 345 million and EUR 355 million and net bookings of approximately EUR 345 million, up 31% versus last year. The growth will be driven by back-catalog as well as by initial early shipment for Assassin's Creed Odyssey that will be more than compensating for last year release of Mario + Rabbids: Kingdom Battle. We are confirming our full year target, with net revenue of EUR 2 billion, net bookings of around EUR 250 billion, non-IFRS operating income of approximately EUR 440 million and free cash flow of around EUR 300 million. We believe the current back-catalog trends and our game's E3 performance are strong support for those targets. To take into account the success of the recent employee shareholding plan, we are [ baking ] our assumption for number of diluted shares and stock-based compensation. We are now, respectively, expected at 120 million shares and EUR 55 million versus 118 million shares and EUR 40 million previously.I now hand over the call back to Yves.

[Yves Guillemot, Co]

Thank you, Alain. Receptions for our games presented during E3 has been very solid, notably for our biggest title. Assassin's Creed Odyssey was officially and successfully revealed at E3. Media and fans who had the opportunity to try its hands-on demo have come away impressed by its innovation and scope. They are very appreciative of how it continues the transformation of the Assassin's Creed experience in a full-fledged, open-world RPG. With the introduction of interactive dialogues and the return of seamless naval game play, the possibility to choose between a male or a female hero and the constant impact of players choice on the story have especially generated excitement and acclaim from players and commenters. As IGN wrote, "The shift into the role-playing genre fits the series well. And the engaging new combat abilities and gorgeous new settings has me eagerly awaiting another chance to jump in Kassandra or Alexios’ boots in what has the potential to be Ubisoft’s most excellent adventure through time yet. Odyssey will be released on October 6." The unveil of the first details of the Division 2 and it standalone demo impacted press and content creators alike with excitement for post-pandemic Washington D.C. The end game first figures of fear resonated, with price being one of the most consistent themes of coverage. Attendees were particularly excited about the features borne out of this philosophy, in particular 8-person raids and signature weapons. They also love that we projected a year of free content following launch. The Division 2 already set a new record, the fastest registering beta in Ubisoft's history, with more than 4x the previous record set by the original game in 2015.A game's writer recently wrote, "Massive entertainment, message is clear. The Division 2's only really gets going once you have finished the main campaign. And judging from what I've seen so far, I wouldn't have it any other way. The Divison 2 will be released on March 15."For Honor continues to grow and just crossed the 10 million players threshold, with the highest community sentiment ever. After announcing Marching Fire, its biggest update yet, For Honor was nominated by the Games Critics Award for the best ongoing game for 2018. The Marching Fire update will introduce a new [ section from ] function China, 4 new fighters, a new compelling castle siege mode and single-barrier content -- and single-player content, sorry. The announcement was in particular in China, where the [ revealing ] trailer was the most viewed video among all Ubisoft titles. Hence was said, "Laying siege to a castle and using the medieval tools of warfare to defend it was incredible fun, and I can't wait to do it again. The Marching Fire update will be released on October 16."With a great history and fun demo, we have put Skull & Bones on players' radar. Journalists and creators appreciated Ubisoft's [ single-player ] modern take on the pirate fantasy, with its systemic open world that encourages autonomous player experiences and spontaneous multiplayer interaction. They also praised the video graphics and stylish details of the demo as well as the enjoyment and accessibility of the combat system. Here is what gamers -- Game Informer wrote about it. "The cycle of maintaining your ship, while fighting off enemies and looting everything possible is exciting and adds fun layers to the enjoyable naval battle. [indiscernible] on the booth floor, fans lined up, with more than 4 hours' long queues, and all 4 booths were occupied throughout the show. Following E3, worldwide beta registration for upcoming Skull & Bones live phases grew by almost 40%. Skull & Bones will be released in 2019."Concluding, I would like to note that our performance during the quarter was broad-based, highlighting the enduring profile of our business. Our teams continue to deliver on our strategic plan, with super strong live services and exciting upcoming games. We operate in a striving industry, with new platforms and new business models that are expanding the market. In the coming years, streaming, AI and machine learning will allow us to reach an increasingly wide audience and to provide [ stellar ] of experiences to each player's profile. With many growth drivers at our disposal, the benefits of the Digital transformation, full IP ownership and our growing direct relationship with our communities, Ubisoft is ideally positioned to create great shareholders value over the coming years. We are now ready to take your questions.

[Operator]

[Operator Instructions] We'll take our first question from Tim O'Shea with Jefferies.

[Timothy Larkin O'Shea, Equity Analyst]

So I'm curious in terms of expectations how you're thinking about the Assassin's Creed Odyssey launch. For second half, the guidance does imply basically flat revenues year-over-year despite having AC and The Division. Last year, you just had AC and Far Cry. I'd argue Division's bigger than Far Cry, so it does suggest some conservative estimates for Odyssey this holiday. I just thought you could walk us through how you're thinking about the AC launch and maybe how we should think of it just in terms of numbers?

[Yves Guillemot, Co]

Of the games sold, will be sold in the third quarter of our year.

[Alain Martinez, Chief Financial Officer]

Yes, as I was trying to mention and apparently I just want to apologize for that because apparently there is some analyst that are not capable of connecting to our call, so sorry about this bug, and we'll try to help and answer your question directly afterward. What we said during my presentation was that a part of the shipment that Yves mentioned, because as he said, the release date is the 5th of October, and therefore there is some early shipment that will take place in the second quarter. And as I said, we do expect both the growth of our back-catalog but also a growth of our new releases on the back -- on the fact that while last year we had Mario + Rabbids: Battle, this year, we will have some of those early shipment on Assassin's Creed, which will make up the Q2 incremental revenue. So a part of the incremental revenue will have taken place in Q2. And yes, otherwise, I would say that we have tried to be reasonable -- reasonably conservative for the full year. As we mentioned, we were talking about 19 million unit all over for the year, which we believe is totally achievable.

[Yves Guillemot, Co]

For the new releases, yes.

[Alain Martinez, Chief Financial Officer]

Yes. So it doesn't mean we are taking an extra layer of conservatism. It's still the same 19 million unit that we've in our plan.

[Operator]

[Operator Instructions] We'll take our next question from Evan Wingren, KeyBanc Capital Markets.

[Evan Todd Wingren, Research Analyst]

I just wonder if you could dive into the PRI in the quarter. It certainly seemed like it was upside relative to expectations. So if you could just give us a sense for what the biggest contributors to that upside were and perhaps just what the biggest contributors were overall, that'll be helpful. And then I have a follow-up.

[Alain Martinez, Chief Financial Officer]

It is quite wide actually. As you know, Rainbow Six has had still very nice activity. It's still growing year-to-year, so it's a contributor because Rainbow Six is a large contributor in terms of player recurring investment. As we said also, For Honor, we've been really working very hard on that game, and it has been playing nicely. And of course, Far Cry had a good level of player-recurring investment basically on the additional content that we were selling on this season past. But quite interestingly enough, and I think we've said it quite often before, Assassin's Creed Odyssey -- sorry, Origins, has had very good level of player recurring investment. We knew we wanted to increase in these levels, but I would say that clearly this title has overperformed where -- from where we were anticipating it at the beginning. And Jean-Benoît says that I should also mention Ghost Recon Wildlands, so I'm naming all of them.

[Evan Todd Wingren, Research Analyst]

Just following up on your comment about Assassin's Creed initial shipments, is there any way to box that in a little bit for us and help us understand how many of the units or maybe what percentage of the overall units that you're expecting for that game you expect to ship in the second quarter, just so we understand the magnitude?

[Alain Martinez, Chief Financial Officer]

We -- at this stage, I think we want to let the balls in the air and play with them ourselves. Yes, as we said, there is some impact from this Assassin's Creed release. It will also depend what we're going to get from preorder. You know it's going to be a late shipment again. So the quality are not that simple to perimeter. We do have some [ deposits ], but at this stage, we prefer not to communicate on them.

[Evan Todd Wingren, Research Analyst]

Okay. Then maybe just one more then. Just in terms of The Crew 2, in terms of how many units you're expecting to ship for that title. Obviously, only a couple day -- selling days in the first quarter. Do you expect the majority of the units to have been sold in that first quarter? Or do you expect a meaningful amount of follow-on units still to come in the second quarter as well? Any help there on the magnitude will be helpful.

[Alain Martinez, Chief Financial Officer]

Yes, you're right. We had, I think, just a couple of days of sell -- selling and sell-through on The Crew 2. What we can say is after 2 weeks of history that the game is performing in line in terms of activity with the prior one. So it's really on par from where we stood with the prior one. And we know also that the prior one the kind of slow start and started to pick up as we build up more content and activity in the game. So if we do that, I would probably think that there will be still a significant part of the sales of that game in the next 3 quarters.

[Yves Guillemot, Co]

And also next 2 or 3 years.

[Alain Martinez, Chief Financial Officer]

Exactly.

[Yves Guillemot, Co]

So those games are following a long term.

[Alain Martinez, Chief Financial Officer]

Through that, I think The Crew 1 did close to as much revenue in year 2 than in year 1.

[Operator]

[Operator Instructions] We'll take our next question from Chris Merwin with Goldman Sachs.

[Christopher David Merwin, Research Analyst]

So just on the guidance of the 19 million front-line units that you're guiding to for fiscal '19. You currently have more in the plan for The Division 2 or Assassin's Creed. And are you assuming that Assassin's Creed units are up year-on-year, flat or down relative to Origins? And then just a second question on your plans in China maybe -- could you give us an update on getting a license to distribute Rainbow Six on PC in China? Any clarity if that could be later fiscal '19 or fiscal '20 and also potentially a game like For Honor as well?

[Yves Guillemot, Co]

Yes, for the different products, we have assumptions, and we had a very good E3 for both games. So we think that they are trending very well to achieve what we expect them to achieve. We can't say more. We -- they will be within those 19 million units that we announced. We will know more with -- when the games will come closer and closer to launch. But what we can say is they have been extremely well received, and the quality we will have will be exceptional. So that's the only thing we can say about that. On the PC side and the launch of those games in China, we can't say much at the moment. We are working with different organizations to make those games approved in China, and they will be launched as soon as all those approvals will be given actually.

[Alain Martinez, Chief Financial Officer]

What I will add to Yves' comment is, number 1, as you know, The Division will come on 15th of March, so that means that we will have a more limited sales window that we will have on Assassin's Creed. That doesn't mean that it sell more or less, it just mean you have to take that into account. And second, even though we're still working on the approval and publishing of those games locally in China, what we've said is that our PC pattern is really trending up quite nicely. We showed that we were getting 2 points higher this year, and part of it is due to the success we are getting in Asia and also, of course, in China. So right now, we are really working very hard to get our games approved, and we don't know exactly when this is going to take place. What we can say and what we are seeing is that our games are becoming more and more successful in Asia as it is today.

[Operator]

We'll take our next question from Doug Creutz with Cowen.

[Douglas Lippl Creutz, Managing Director and Senior Research Analyst]

Just first a really quick detail on that initial Assassin’s Creed revenue recognition in fiscal Q2, can you just confirm that, that would only be for physical units and not for any digital units you might sell around the launch? And then secondly, can you just talk about how the crowded window might be impacting the way that you're planning your marketing campaign for Assassin's Creed, let's say, compared to last year?

[Yves Guillemot, Co]

Yes. So on your first question, yes, it will be only physical preshipment to stores. On the marketing side, yes, we have -- we know when other games are going to come. The first decision was actually to come early. That's why you have the game on the 5th of October, and we are really creating our marketing campaign having in mind the competition coming. We'll have also lots of content, 1 month's or -- between 1 months and 2 months after launch, so that's we don't only have the game at the beginning of October, but we will have also lots of content till the end of the year, so that we have a regular update and activity on the marketing side during the end of the year.

[Operator]

[Operator Instructions] We'll take our next question from Robert Berg with Berenberg.

[Robert Berg, Analyst]

Couple of questions for me. First, I was one of the analyst who struggled at the beginning of the call. So if you did discuss it at the beginning, just let me know and I'll read the prepared remarks. Just on The Crew 2, you had an excellent streak going of getting Metacritics score over 80 that you were -- you're spending extra time developing your games, one of which was The Crew 2. And this one has come below 80. I'm just wondering your thoughts on what potentially went wrong? If anything went wrong, how you're looking to improve it? I know you said it's a long-term play with this game. Interested to hear your thoughts on why the extra time didn't help polish this game in particular. The second question, the saving of costs H1, H2, lots of moving parts with the Assassin's Creed units, a high proportion of the revenues coming from digital, so how should we think about the cost saving and EBIT operating profit for the first half?

[Yves Guillemot, Co]

Thank you for your question. In fact, what we have from players is a -- very good feedback. The only thing which is missing is that we don't have yet the multiplayer aspect. We have a few things that people thought that they would get from launch that they couldn't get. So that's why we -- they are anxious to get those things. But the game itself and the experience is fantastic. It's just we have to make sure we continue to bring more content. That will actually be shown at the game -- gamescom in August. That will help the game to continue to grow. It's actually the PVP that is not yet there. We have some multiplayer, but the PVP is not on the game yet. So that's making a little bit of frustration.

[Alain Martinez, Chief Financial Officer]

What I can say about the game is that we are tracking the sentiment from the gamer. It's actually trending nicely over 70-something, so it's a pretty good level of support for -- from the gamers. What we've been saying is that the activity is pretty close to The Crew 1 and that the digital activity is actually greater than The Crew 1, which you would expect. So altogether, we are also in the same process that we were last time. We are building additional content events, and we do feel that we have what it takes to make the game successful. And regarding your second question, sorry, Robert, whether there was additional revenue what we are going to have. You can expect that if we book revenue from Assassin's Creed like we did last year with the Raving Rabbids or the Mario + Rabbids, we will book some depreciation related to that game, of course. It's natural. As it looks like today, there will be an incremental revenue from last year which is quite significant. And our early expectations are that we should see nice improvement of our profitability versus last year as well as a nice improvement on our cash flow from the first half, but I cannot go in more detail right now.

[Operator]

[Operator Instructions] It appears we have no further questions at this time.

[Yves Guillemot, Co]

Okay. So if there is no further question, we'll end the call there. Sorry for the technical issues we had during that call, and thank you for listening today. Bye-bye. Have a great summer.