Ubisoft Entertainment SA

PAR:UBI

Earnings Call Transcript 2022-Q1

[Yves Guillemot, Co]

Welcome, everyone, and thank you for joining the call today. This was another very busy quarter for Ubisoft. We continued to focus heavily on the strongest brands and technologies while bringing further evolutions to our organization to seize the industry's biggest opportunities. Ubisoft Forward offered a glimpse at the extensive premium lineup and our teams are working on for the coming months and years. Along with our investment in free-to-play, this amazing content is intended to significantly grow our audience as well as recurring revenues and deliver strong return on investment.Ubisoft has proven time and time again its capacity to successfully enter new markets and segments in which it initially lacked expertise. 15 years ago, we learned new skills and ultimately became one of the leaders in open-world games, with Assassin's Creed and Far Cry among the industry's most successful franchises.10 years ago, we underwent another round of significant investments to become one of the best operators of live services with The Division, Rainbow Six, Ghost Recon, For Honor and The Crew. Additionally, over the prior console cycle, we created 5 successful new IPs in RPG, action-adventure, PvP combat, driving and strategy, while significantly increasing our exposure to the shooter segment. We also successfully revamped 3 franchises. All these results in audience and engagement KPIs growing respectively, 5x and 9x, over the past 8 years, with one of the deepest and most diversified portfolios in the industry. As a consequence, we delivered massive return on investments and shareholders' value over that time frame, significantly outperforming all major stock market indices.Our new investment phase initiated 2 years ago is the natural evolution of our commitment to build quality and depth in our portfolio to the benefit of our players. This will ultimately lead to bigger audiences and more recurring revenues. First, around 80% of our current investments are targeted at significantly expanding our premium offering by growing our biggest existing franchises, by building new IPs with a focus on player engagement and social interactions and by adding blockbuster licensed entertainment brands to our portfolio.Second, around 20% of our current investments are targeted at free-to-play to expand our brands' universes and bring them to a wider audience across all platforms, including mobile, across all geographies, including emerging markets, and with multiplayer titles designed to be evergreen. Each of these premium and free-to-play projects is built to maximize impacts on its respective brands universe.With Ubisoft Connect and our direct-to-player ecosystem, we aim to leverage the depth and diversity of this portfolio to maximize traffic and discoverability, social interactions and engagement, and ultimately, value for our players. Overall, our assets have never been so strong in an industry that continues to offer great prospects. The combination of our high-quality brands, technology and exceptional team ideally position Ubisoft to deliver, over the coming years, double-digit top line growth as well as continued profitability progression, leading to a material rise in operating income.I will now hand over the call to Frédérick. Frédérick?

[Frédérick Duguet, Chief Financial Officer]

Thank you, Yves, and hello, everybody. As I mentioned last quarter, my comments are now based after the mobile reclassification. Q1 of last year saw exceptional levels of engagement following initial lockdown measures. While they were softer this quarter with MAUs of 37 million across console and PC, down 8% versus last year, they were up 9% versus 2 years ago despite the fact Q1 fiscal '20 had benefited from the record launch of Anno and from the recent releases of The Division 2 and Far Cry New Dawn. We believe this highlights our continued progress.Keeping this in mind and in order to better illustrate our underlying performance, I will also compare our Q1 financial performance to fiscal '20. Our Q1 net bookings came out slightly ahead of our guidance at EUR 326 million, down 21% year-on-year and slightly higher versus Q1 of fiscal '20, a solid performance, considering we didn't have any meaningful new releases this year. Our back-catalog was indeed up 11% versus fiscal '20, demonstrating once again the value of our deep and diversified bench of franchises. The main contributors to performance this quarter were Assassin's Creed, Far Cry, For Honor, Ghost Recon, Immortals, Just Dance, Rainbow Six, The Crew, The Division and Watch Dogs. i3D.net, our fast-growing hosting activity continues to perform remarkably well, with revenues up sharply.Total digital net bookings reached EUR 279 million, down 4% compared to Q1 fiscal '20 and represented 86% of our total net bookings. PRI stood at EUR 174 million, up 13% when compared to Q1 fiscal '20, representing 53% of our total net bookings, and mobile amounted to EUR 41 million.Looking at Q2, we expect net bookings of around EUR 340 million, broadly stable versus last year. Q2 will include initial physical shipments of Far Cry 6. We also confirmed our fiscal '22 targets of single-digit net booking growth and non-IFRS operating income between EUR 420 million and EUR 500 million.Let's now look at the lineup for the upcoming year. Ubisoft Forward was a fantastic opportunity to showcase our premium content. We generated very strong engagement with record viewership. We could not be more pleased with the Far Cry 6 comeback that generated very strong community engagement and highly positive sentiment. Players praised the tropical setting, guerrilla fantasy, and stronger narrative push, particularly through Giancarlo Esposito's performance as antagonist, Antón. Also, fans were thrilled to learn they will be able to play their favorite villains for the first time. We have also revised the build of Far Cry 3: Blood Dragon title that players will be able to experience as part of a strong Season Pass offering. The Far Cry franchise has gone from strength to strength, and we expect Far Cry 6 to build on the strong momentum when it's released on the 7th of October.Last week, we announced that we were giving more time to both Rainbow Six Extraction and Riders Republic. We presented the games at Ubisoft Forward, and it provided us with useful feedback from players that informed this decision. While our games are in great shape, this additional time gives us more opportunities for players to test, play firsthand and give feedback to ensure we are bringing the best experiences to market and allowing them to reach their full potential. We believe the new release schedule will enable us to achieve that goal. This was the right decision for our players and for the long-term performance of our games, while keeping our fiscal '22 guidance unchanged.We are incredibly excited about Rainbow Six Extraction and believe it would bring something new and fresh to the marketplace with the familiar tension of strategic gameplay that the 75 million Rainbow Six players love. Relying on strong unique features, Rainbow Six Extraction is said to be a triple experience that would change the way players think about Club games.Our teams have also been hard at work on building bridges between Extraction and Siege as we will reactivate lapsed players from Siege and recruit new players to the franchise. We have only scratched the surface of what the title will bring to the table and look forward to showing more in the upcoming months. Extraction will be released in January 2022.Riders Republic, the new massive multiplayer outdoor sports game, will launch on October 28. Players will ride through breathtaking landscapes and engage in mass races of more than 50 players as well as a range of multiplayer modes. We expect this lively social playground to be a long-lasting title, and we are happy to welcome players in an upcoming beta.Also revealed was the new Just Dance, which after 2 years of strong growth will continue to leverage the ongoing strength of the brand and Switch' impressive momentum. A real entertainment phenomenon, Just Dance is the #1 music video game franchise of all time.Ubisoft Forward was also an opportunity to present Rocksmith+, an evolution of the successful electric guitar and bass learning software. We expect this new subscription service to be a solid addition to our long-term recurring revenue streams.And finally, we showcased our commitment to strong franchise content for our major franchises, including Assassin's Creed, Rainbow Six, Valhalla, For Honor and The Crew.Speaking of Assassin's Creed, the franchise has been evolving over the years towards a live service model that has been hugely successful among gamers, with Odyssey and Valhalla shattering records and significantly expanding the brand's recurring profile. We will continue to deliver powerful Assassins' Creed content over the coming months and years, starting with an ambitious post-launch plan for Valhalla, including The Siege of Paris expansion coming this summer, the release of the Discovery Tour: Viking Age and the very ambitious and surprising second year of content for the first time in the franchise's history.Regarding the project, codename Infinity, we have exciting plans for the future that has the potential to significantly expand both the brand's reach and recurring profile while holding true to Assassin's Creed legacy of rich narrative experiences. It is in the early stages of development, and we will share more details in due time.During Ubisoft Forward, we also unveiled 2 games set to release in fiscal '23 that were met with a very enthusiastic response. Mario + Rabbids Sparks of Hope will build on the success of the first opus, renewing our strong partnership with Nintendo and leveraging the massive Switch installed base. For its part, Avatar: Frontiers of Pandora was a remarkable showcase, combining Ubisoft's recognized capacity to create living and breathing worlds with the latest iteration of the Snowdrop Engine. As well on track for fiscal '23 release is Skull & Bones, whose production is just past alpha, a key phase of the game's development. We can't wait to show you more.Let's now turn to the free-to-play side of our lineup. Our ambition is clear. We want to grow our audiences and recurring revenues by widening our brand's top-of-the-funnel. We revealed Tom Clancy's XDefiant yesterday, a first-person shooter, blending a fast-paced 6-versus-6 arena combat with faction-based ability. It's an accessible game where the players want to have fun with their friends or play competitively. This new take on the free-to-play shooter segment associates realistic gameplay with close-quarter combat and personalized play time.Testing phases of all our free-to-play games are ongoing, and we will communicate additional information to our fans in due time with dedicated standalone events. As it is standard industry practice for free-to-play games, release data are ultimately a function of the outcome of the successive testing phases. As of today, we expect to release The Division Heartland and Roller Champions in fiscal '22 as well as the soft launch of our first mobile game, in partnership with Tencent. For its part, while XDefiant may launch in fiscal '22, it is not factored in our guidance.I would also like to highlight that 3 of our games have been officially approved in China: Rabbids Party, Mario + Rabbids: Kingdom Battle and The Division 2. The approval of The Division 2 on PC bodes well for our partnership with Tencent. We are now working with them to ensure that the gaming experience will be great for the Chinese community once the game is launched. We are also looking forward to Mario + Rabbids: Kingdom Battle as well as Rabbids Party, again specifically conceived for the Chinese market. Both will leverage the growing Switch installed base in China.Beyond our games, I also wanted to highlight other positive news. We received great ESG ratings from Sustainalytics that ranks Ubisoft among the top 6% of the more than 14,000 companies they cover. This is a testimony to the effective execution of Ubisoft's ambitious ESG strategy and a reward of our long-term commitment to having a global positive impact. This follows other solid ratings over the past year, notably from ISS, SAM Corporate Sustainability Assessment and the Financial Times diversity index. Similarly, in the 2021 Glaser ranking, based on employee ratings, Yves Guillemot was ranked among the top 15 CEOs in France.Before handing the call back to Yves for his conclusion, I would like to come back to our fiscal '21 performance. Indeed, we have had regular questions on the profitability of our core business since we announced earnings last May, and we wanted to provide more granularity. If we focus only on our premium business, our fiscal '21 non-IFRS operating income margin exceeded 25% versus the group's 21% we reported. And our cash flow from operations was a multiple of the reported EUR 65 million. The digital transformation, the expansion of our portfolio through our strong player engagement and our increasingly recurring business have delivered strong profitability progression, confirming our strong return on investment track record.While we do not plan to share this level of detail in the future, we believe this offers useful insight into the organic value creation of our business.I now hand over the call back to Yves.

[Yves Guillemot, Co]

Thank you, Frédérick. Q1 again demonstrated the benefits of having a much more recurring business, significantly less dependent on the performance of any given game. One of our key focus is to continue building that level of depth and recurrence over the coming years. We are also convinced of the strategic value of reinvesting a portion of our highly profitable and cash-generative premium core business into free-to-play. This major segment indeed offers exciting growth and value-creation opportunities for Ubisoft, with an attractive risk-reward profile.Before answering your question, I would like to highlight 3 key recent events. First, and in line with our ambitious ESG strategy that Frédérick just mentioned, we recently announced our commitment to actively contribute to global carbon neutrality. In 2020, Ubisoft made voluntary contributions that covered an amount of carbon dioxide equal to the emission resulting from our operations. Medium term, our objective is to decarbonize our direct operations, with the goal of reducing carbon emissions per employee by 8.8% by the end of 2023. Longer term, we are working on a carbon footprint reduction plan for 2030 in line with the goal of limiting global warming to plus 1.5-degree Celsius, which will be submitted to the Science Based Targets initiative for validation. As a major media and entertainment company, it is important that we continue increasing our positive impacts on the planet.Second, in line with the evolution highlighted in May, we continue to adapt our organization to ensure that Ubisoft is well positioned to meaningfully seize the opportunities I described in my introduction. As such, we recently announced the appointment of Guillemette Picard as VP of Production Technology. In this newly created role, Guillemette will lead a team of transversal experts to boost the strategy and supervision of all aspects of Ubisoft's production technologies. Additionally, from a publishing standpoint, we are moving from a region-based to a global organization. And we set up a dedicated team overseeing our direct-to-player initiatives with very ambitious development goals and an increased focus on our biggest brands.And lastly, I wanted to thank our shareholders for their steady support at our latest Annual General Meeting held earlier this month.We are now ready to take your questions.

[Operator]

[Operator Instructions] We'll now take the first question from Nicolas Langlet at Exane BNP.

[Nicolas Langlet, Research Analyst]

I have got 2 questions, please. The first one, on Assassin's Creed Infinity. So can you tell us a bit more about the business model you want to retain for this project? And also, should we expect Infinity to coexist with the traditional single-player experience of Assassin's Creed or to replace it over time?And second question, on the Chinese approval for The Division 2, what prospects do you see for the franchise in the country? Do you expect to release the game in full year '22, or it's too early? And finally, can you update us on the number of game, of your game which are waiting for approval for the Chinese market?

[Yves Guillemot, Co]

Thank you. So for The Division 2, we are working with Tencent to complete the development so that it fits exactly the Chinese market. And what is interesting is that we will be able to launch the game and also all the add-ons and expansion that we created on that game, so it's going to be able to live for a long time. Now Frédérick, maybe for the first question?

[Frédérick Duguet, Chief Financial Officer]

Yes. So hello, Nicolas. On the AC Infinity, yes, it's an exciting and ambitious project for the franchise. It's -- it will contribute to expand the audience and the recurring revenue level as well as player engagement for the medium to longer term. It's, as we said, at an early stage of development, so we cannot say much more. But we are happy to see talents among the best of the industry joining forces from the Montreal and Quebec studios. That's great news for the project and for the development of the franchise.What is important to have in mind is that we plan to come with very strong and powerful content every year in the short, medium and longer term. And we are committed to staying true to the DNA of AC, meaning that we will come with high-quality narrative experiences.For the short term, we, as you know, are focusing on delivering the most ambitious, biggest postlaunch program we've ever had on the franchise for 2 years. We are pushing the live service model to a level that allows Valhalla to be the best performer ever for the franchise to date. And we will be coming with exciting and new news and surprising, including for the second year of content.In terms of the third question, the update on the number of games waiting for Chinese approval, we still have Rainbow Six Siege in the backlog. So -- but we can't say more on that stage. We have other games in the pipeline as well, but we have not unveiled them yet.

[Operator]

We'll now take the next question from Charles Scotti at Kepler.

[Charles-Louis Scotti]

My first question, and I'm sorry, I missed your point on the Far Cry 6 shipments, does your Q2 guidance include any contribution from Far Cry 6?And my second question, if we take into consideration your Q2 and full year guidance, this suggests net bookings in excess of EUR 1.6 billion, with only 2 AAA games instead of 3 last year, and a more back-end-loaded release schedule. So to what extent do your full year targets rely on the performance of the 2 expected free-to-play titles?

[Frédérick Duguet, Chief Financial Officer]

Yes. Hello, Charles-Louis. So in terms of the second quarter, yes, it will include some pre-shipments for Far Cry 6. In terms of the prospective for the second half of the year, we are indeed relying on the growth versus last year as we are coming with a very strong lineup, Far Cry 6, both on the premium and free-to-play games. Even if we said that we took reasonable assumptions on our 2 free-to-play games, Far Cry 6 comes as a must-have game. It's going to be one of the biggest games of the industry this year. Remembering, it was the fourth biggest title in 2018 and we leveraged the strong momentum, the Far Cry 6 title will leverage the strong momentum from the franchise, that we've had iteration after iteration, and we are coming also with a very strong postlaunch program.Rainbow Six Extraction is expected to be a bigger seller than Watch Dogs: Legion last year. Riders Republic is expected to be at least as big as Immortals Fenyx Rising last year. And Just Dance 2022 is expected to be bigger than Just Dance 2021 as we enjoy a strong momentum, not only from the franchise itself, strong on TikTok, but also from the growing installed base of Switch.As for the back catalog, we expect a bigger postlaunch program in the second half than last year across Assassin's Creed, Rainbow Six Siege, For Honor, The Crew, Ghost Recon and The Division 2. And we will also have Prince of Persia coming as a back catalog as it is a remaster that will leverage the nostalgia that we've had from The Sands of Time.

[Operator]

We'll now take the next question from Omar Sheikh at Morgan Stanley.

[Frédérick Duguet, Chief Financial Officer]

Omar, we can't hear you. Operator?

[Operator]

[Operator Instructions] I'm very sorry, Omar. We also can't hear you. We will now take the next question from Brian Fitzgerald.

[Brian Nicholas Fitzgerald, Senior Analyst]

Got a couple. I want to know maybe if you could elaborate a little bit on how Extraction will redefine co-op play. Should we think about Rainbow Six Siege as an evergreen PvP game at this point alongside Extraction? And do you expect Six Siege to be a bigger game than Extraction for the foreseeable future? It's your second biggest title, so it's an important change or wrinkle to the product strategy. And then I have one follow-up.

[Frédérick Duguet, Chief Financial Officer]

Yes. So Extraction is an amazing co-op and Pv experience. It's -- it will borrow the tension, the intensity, the tactical strategic element of Siege. So it has no equivalent in the co-op segment -- market today, and that's why we are pleased to really leverage the extra time to optimize the potential by launch. By forward event, we only showed one game mode, only a fraction of the promise and of the content and game mode that will come at launch. So that will be a big game, important for the expansion of the Rainbow Six franchise. As we said, we are building good bridges between Siege and Extraction as we will reactivate, reengage lapsed players from Siege. But we will also recruit new players for the whole franchise, and that will benefit also to some extent to Siege.Rainbow Six Siege has been for 6 years in the market. It's one of the biggest shooter -- competitive shooter game today. We've just crossed the 75 million player mark. We've seen very strong growth in viewership on Twitch over the quarter versus last year. The Six Invitational event also saw record viewership. So we see that it confirms very strong traction for that game. And yes, Six Siege is expected to be a long game -- a long lifetime game. It's there for many years to come. We continue working on increasing, intensifying the frequency of content drop. We continue expanding the value of the Battle Pass for players. And again, we're building strong synergies as well as -- with Extraction.

[Brian Nicholas Fitzgerald, Senior Analyst]

Got it. And then the follow-up was just kind of some recent announcements in the space, in the industry around Steam Deck. We assume that's just another distribution channel. It's a platform that would be incremental for new publishers in the industry. How important is cross-platform play for you guys going forward? And then what's your -- if you have any point of view on Netflix' machinations to enter the gaming business.

[Yves Guillemot, Co]

So thank you. It's -- we're happy to see Steam Deck coming to the industry. It shows that there is continuous flow of very innovative new hardware coming to the market. And so we will look and see how big it becomes. But if it's big, we will have -- we'll be able to put our games on it. Now Netflix is also another big actor coming in the industry, and that's really good for the industry. We think that it's going to put, again, emphasis on the fact that content is the most important thing in the industry. And what we see is Netflix is very dynamic, and so they -- we expect them to have a good success.

[Operator]

We'll now take the next question from Mike Ng at Goldman Sachs.

[Michael Ng, Research Analyst]

My first question is just on Assassin's Creed. How does the second year of content for Valhalla and Assassin's Creed Infinity changed your release strategy for Assassins' Creed? Should we still be expecting a release every other year? And then I have a quick follow-up.

[Frédérick Duguet, Chief Financial Officer]

Mike, yes, as I said, Infinity is at an early stage of development. What we can say at this stage is that we plan to come with a powerful content program every year in the short, medium and longer term. At this stage, we cannot say much more except that we will have a very important content program for Valhalla for 2 years. And yes, there is still much to come on this content delivery.

[Michael Ng, Research Analyst]

Great. And I just wanted to follow up on the comment that fiscal '21 EBIT margins would have been, I think you said 25% for premium only. What were some of the investments in those nonpremium games? I guess Hyper Scape comes to mind. But were there other nonpremium investments that you were speaking to?

[Frédérick Duguet, Chief Financial Officer]

Yes. Mike, we -- I mentioned that on our premium business, actually it was exceeding 25%. Yes, so we've been investing in free-to-play games, Hyper Scape being one of them, but across all platforms, so that includes console, PC and also mobile games.

[Operator]

We'll now take the next question from Omar Sheikh at Morgan Stanley.

[Omar Farooq Sheikh, Equity Analyst]

Can you guys hear me now?

[Yves Guillemot, Co]

Yes.

[Omar Farooq Sheikh, Equity Analyst]

So I've got a couple of questions, if I could. First, maybe one for Frédérick. Could you just confirm that the guidance that you've got for the year includes the same assumptions for game releases as you gave -- you initially gave us guidance in May? So you haven't sort of included any other games in the slate, so it's truly like-for-like? That's the first question. And then secondly, on free-to-play, we talked a little bit on this call about some of the things you're looking for from the investments. So you talked about recurring revenues. You talked about high ROIs, widening top of the funnel. How should we measure success? So what data points are you going to be able to give us which will help us judge whether Heartland and XDefiant and other [ free-to-play classes ] you may launch are doing what you expect them to do?

[Frédérick Duguet, Chief Financial Officer]

Yes, Omar. So yes, we confirmed the guidance with the same element in terms of releases than what we had in May. So we didn't add any new release versus the assumption of May. On free-to-play, the way we've been measuring success, first will be, of course, audience impact across the portfolio. And that will also be -- we will be also following carefully about engagement as well as the percentage of recurring revenue. So we expect PRI to continue growing at an accelerated pace. We expect, of course, that free-to-play game as a stand-alone base as well as for the whole brand to which they will contribute will participate to continue increasing the financial performance of the company.

[Omar Farooq Sheikh, Equity Analyst]

So can I assume then, Frédérick, on that, that you -- we should assume that the total number of users for the game for, let's say for example, The Division, should expand post -- at some point post the launch of Heartland, for example?

[Frédérick Duguet, Chief Financial Officer]

That's the expectation. And because we expect to come with a business model that will be more accessible to more people, that will allow us also to notably accelerate our growth in the emerging markets in a more decisive way than we have ever done. And we will be bridging -- building bridges between premium and free-to-play games. So that should be allowing us to create really a virtuous circle, with players enjoying different experiences across different game modes and business model. And of course, beyond Heartland, we also mentioned mobile games. And so going into the mobile platform for our biggest franchises is a fantastic opportunity.

[Operator]

We'll now take the next question from Jamie Bass at Berenberg.

[Jamie Bass, Analyst]

2 questions from me, please. The first one, so on the Q2 guidance, normally, we're seeing a drop in back-catalog performance, but you've got an increase in the outlook. So is that mainly coming from the DLC in Siege of Paris? Second question, with the game delays and you're still reiterating your full year target, does that imply there was a bit of caution in the original numbers with the delays for Rainbow Six going to the fourth quarter?

[Frédérick Duguet, Chief Financial Officer]

So in terms of the Q2 guidance, so there is no change in outlook. But it clearly includes the release of The Siege of Paris, and we will recognize some of the season pass into the quarter. In terms of the impact of the delay of Rainbow Six Extraction and Riders Republic, we had taken some flexibility in our initial estimates. Each game's delay is not meaningful relative to the overall guidance. That's why we confirm the guidance as it was. We are not far from shipping these products. So it has no meaningful impact from the cost point of view overall, and we are leveraging a strong opportunity to maximize the audience by a long time.

[Operator]

We'll now take the next question from Charles-Louis Planade at TP.

[Charles-Louis Planade]

Just one more question for me. I was wondering, if the shortage of PlayStation 5 and other next-gen consoles were to continue, would you consider some new -- some additional delays with your big launches next year? Or is it already a bit included in your plans?

[Yves Guillemot, Co]

It is included in our plans. What we see is that step-by-step, they are finding ways to deliver the machines. It's difficult, but it is steady. So we think they will be able to bring the number expected this year, and it looks like they are coming with a big number for next year.

[Operator]

We'll now take the next question from Ken Rumph at Jefferies.

[Kenneth Charles Rumph, Equity Analyst]

2 questions. If I could start just looking again at that comment that you made, which was very helpful, about last year's margin would have been over 25% for premium games. You mentioned that in a sense, what wasn't included and what was therefore holding down the margin, one thing was Hyper Scape. But you also mentioned mobile. Are we to take it from that, that mobile was either loss-making or at least significantly below that margin? I wasn't thinking that it was a loss-making business.

[Frédérick Duguet, Chief Financial Officer]

So yes, Ken, so I was talking about free-to-play overall, not specifically mobile itself. What we're saying is that we are happy to enjoy such a high level of profitability from our core premium business as well as a strong generation from cash to help us and allow us actually to finance a very strong strategic opportunity for us to grow free-to-play because this is a fantastic opportunity to expand our premium franchises into free-to-play. It's -- naturally, we are in the learning phase. So it's -- we can lose money on some projects as long as we maximize and accelerate learning, which is what we're doing, and that's why we're coming with such a strong lineup as you can see.

[Kenneth Charles Rumph, Equity Analyst]

Okay. Well, maybe then my second question kind of follows on from that, which is we -- I think Hyper Scape was a very interesting game and I'm sure a useful learning experience. We're now moving into free-to-play games, in part, based on your core IPs. So Heartland and then XDefiant. Those 2 do overlap a bit in that they both contain elements from The Division, for instance. Do you feel there's kind of enough of an audience for 2 different kind of games, both free-to-play, partly in that universe? And should we kind of consider these still, in some sense, experimental? Obviously, every game can succeed or fail. But is this kind of multiple games will be experimented with and we'll see what happens? Or you would aim that both of these would be successful in one way?

[Yves Guillemot, Co]

What's important to know is that on XDefiant, you see, first, some Division elements. But as it is a Tom Clancy experience, you are going to see lots of diversity in the content. So it can look like those that sort of game or close, but they are not going to be close at all.

[Frédérick Duguet, Chief Financial Officer]

Actually, we're -- Ken, we're talking about the big and fast-growing market. And for -- of course, we haven't said much about Heartland. So you'll see later when we unveil more content that they are coming with very different experiences and game play propositions. What is very interesting with XDefiant is that we come with a unique proposition in the free-to-play space, combining realistic gunplay, action-based abilities, the possibility of these classes to offer great personalization, customization, flexibility on the fly. So the XDefiant proposition is unique. You'll see later to what extent Heartland has also some very specific features.

[Kenneth Charles Rumph, Equity Analyst]

Okay. Can I be permitted a final fanboy question? Does the mention of Beyond Good and Evil imply that it's appearing over the horizon for maybe FY '24?

[Frédérick Duguet, Chief Financial Officer]

That's a good try, Ken. And we progressed well with Beyond Good and Evil 2, but it's too early to tell you more at this stage.

[Operator]

We'll now take the next question from Matthew Walker at Crédit Suisse.

[Matthew John Walker, Research Analyst]

Just 2 questions. The first one -- the first -- can you hear me all right?

[Frédérick Duguet, Chief Financial Officer]

Yes. Yes, Matthew.

[Matthew John Walker, Research Analyst]

The first question sort of goes back to an earlier one, which was does Infinity mean that you'll no longer be -- we should not expect a premium Assassin's Creed game in FY '23, as I think probably most people are expecting, because it's basically Infinity is a sort of live services, permanent replacement for any premium Assassin's Creed game? And the second question is, obviously, you're pumping all this money into lots of new projects, lots of interesting ideas, free-to-play. But the market doesn't seem to be giving you value for all these different projects which are going on. At the same time, you're not doing M&A yourself. So I'm just kind of wondering where this ends from a strategic perspective because we're seeing a lot of consolidation in the industry but not much action around Ubisoft because the market is not giving you value for your efforts in the R&D.

[Yves Guillemot, Co]

Yes. In fact, we are investing in new IPs and free-to-play, and we think it's going to grow -- to be the basis of the growth of the next few years. We think it's the best place to put our money, especially because the M&A multiples are really high at the moment. So those investments are going for us to be the most effective ones. It's not yet taken by the market because they need to see what we are creating. But we are optimistic on the fact that we will be able to surprise with good quality games that will be able to be additional to one to the other to build a big -- a large growth in the next few years, growth and growth of profitability as well.

[Frédérick Duguet, Chief Financial Officer]

Yes. Matthew, we started the investment into free-to-play 2 years ago. That's a decision that we took 3 years ago. So it hasn't started to deliver yet, but we expect that to be a meaningful contributor on top of pursuing our investment into premium -- in our premium business. That's still a fantastic opportunity to grow. And that's why we believe that we'll be growing double-digits year-on-year in the coming years. That should lead to a material rise in operating income in the coming years. As for AC Infinity, forgive me if I repeat myself. But yes, we -- as I said, we -- AC Infinity is in early stage of development. And in the meantime, we are planning to come with a very powerful content program every year with high-quality narrative experiences. And that's all we can say for now, with a big focus in pushing Valhalla to even higher levels for the 2 years post launch.

[Operator]

We will now take the next question from Nick Dempsey at Barclays.

[Nicholas Michael Edward Dempsey, Research Analyst]

I've got 3 questions. So first of all, I wonder if you can just provide a bit more color on the reasons for the internal reorganization that you flagged and anything around the cost of that reorganization. Second one, at one point, you were planning to launch Watch Dogs: Legion and Rainbow Six Extraction pretty close to each other. At that stage, were you already expecting Extraction be the larger game? Or have you kind of changed? It was interesting that you made that comment about the 2 of them. And the third question, I guess for your investments in free-to-play, it's probably fair to say we won't be seeing the full benefit in revenues for 18 months to 3 years. I mean if we look back 3 years ago, the industry's approach to free-to-play from a consumer point of view is quite different to how it is now. How much confidence do you have that you won't be missing another change in the industry by the time those assets come to full fruition?

[Yves Guillemot, Co]

So first, on your first question, we felt that it was important to align all the countries now that the market is a lot more global. So that's why we have now one head for distribution and marketing, and it's helping to have also a smoother communication with production. So this is going to help be more agile, and we -- still in taking care of each individual market. So -- and on top, we were able to create this direct-to-player group. That is going also to grow our direct-to-player business. That will help us to be close to players and understand exactly what they want and push all of our games.

[Frédérick Duguet, Chief Financial Officer]

So to your second question, Nick, in terms of Rainbow Six Extraction, yes, we see it as a bigger game than Watch Dogs: Legion. It's coming with a different business model as it's a multiplayer co-op type of game, and it plays a key role next to Siege. So it's really a different model as -- than Watch Dogs: Legion. But yes, we see it as a bigger seller. In terms of free-to-play, we know that it's a business where we are -- need to acquire the key skills and to master success factors. We are learning fast, the same way as we had done for live services. And as you can see, we are coming with a compelling lineup. We know that the hit ratio on free-to-play is not 100%. So we want to take the time to optimize the KPIs, make sure that we are coming with accessible games with long retention. And we're confident that we have all it takes to create a very meaningful value in the medium term.

[Yves Guillemot, Co]

And the best technology as well.

[Frédérick Duguet, Chief Financial Officer]

Yes, very strong technology. We -- last year, we could see that Anvil was a very strong engine for a free-to-play game, for Hyper Scape. So that's a good capability that we have. And with XDefiant, we're coming with Snowdrop. That's also a very powerful engine for that type of FPS.

[Operator]

That concludes today's questions-and-answers session. Mr. Guillemot, I'd like to turn the conference back to you.

[Yves Guillemot, Co]

Thank you so much, and thank you for your questions. Have a good day or good evening.

[Frédérick Duguet, Chief Financial Officer]

And have a good summer.

[Yves Guillemot, Co]

And a good summer.

[Frédérick Duguet, Chief Financial Officer]

Yes.