Ubisoft Entertainment SA

PAR:UBI

Earnings Call Transcript 2021-Q3

[Operator]

Good day and welcome to the Ubisoft Q3 Full year 2021 sales. At this time I would like to turn the conference over to Mr. Yves Guillemot, Ubisoft's CEO. Please go ahead, sir.

[Yves Guillemot, Co]

Welcome everyone, and thank you for joining the call today. Our strategy continues to bear fruit. Despite a competitive environment we achieved the strongest quarter in Ubisoft's history by far. Thanks to the quality of our releases, and the depths of our catalog, we are immensely proud of our teams, who in exceptionally challenging times, launched 4 great titles across multiple platforms, and simultaneously continued to enrich our live services. It is an unparalleled achievement and they showed remarkable adaptability and resilience. I thank them sincerely for their dedication and determination. Our ability to execute at such a high level of quality demonstrates the power of our production model and the sustainability of our organization. In the context of an interesting engagement and very supportive industry trends, the first 9 months of the year confirm that we are continuing to move towards an increasingly pronounced recurrence of our revenues on the back of growing audiences. Therefore, we expect our highly profitable back catalog to account for an even larger share of our business going forward. Ubisoft's model is mostly based on internally created wholly owned IP and assets. It is a tried and tested model that has enabled us to build one of the broadest, most diversified portfolio of successful franchises in the industry and delivered remarkable shareholder value. The benefit and opportunities offered by this strategy are still growing in a context of strongly rising video game brand value and of AAA-quality asset scarcity due to the increasingly higher barriers to entry. This virtuous momentum confirms our confidence in our ability to carry on generating strong value for our teams, our players and our shareholders over the long term. I now hand over the call to Frédérick for the Q3 review. Frédérick?

[Frédérick Duguet, Chief Financial Officer]

Thank you, Yves, and hello, everybody. I will start my review with 3 impressive high-level highlights on our calendar 2020 performance. First, Ubisoft was the #1 publisher in terms of total number of units sold across all platforms last year, driven by strong digital growth. Also, in terms of units sold, we were the second best publisher on the new generation of consoles, and the #1 third-party publisher on Switch as we continue to benefit from the console's mass adoption. This speaks highly to the depths and strengths of our catalog and our capacity to reach a wider and diverse audience. Turning now to Q3. As I mentioned in the prior quarters, for the sake of comparability, I will base all my comments today before the new mobile reclassification rule to ensure like-for-like comparison with fiscal '20. The reclassification amounted to EUR 10 million in Q3 and EUR 32 million for the first 9 months. At the industry level, we continued to see very supportive trends overall, with stronger levels of engagement than before the pandemic started. More people are playing, they are playing more, and they are spending more. These are powerful tailwinds for the industry. For Ubisoft, traffic and engagement levels were once again very strong in Q3, with a record quarter in terms of unique active players and with December being our biggest month ever. MAUs reached 40 million this quarter and are up nearly 50% over 2 years. Furthermore, we reached the 120 million unique player mark across console and PC in the first 9 months of the year, already outpacing the prior full fiscal year figure. Q3 net bookings reached EUR 990 million, up 117% and above our target of between EUR 850 million and EUR 950 million, excluding the mobile reclassification. This is by far Ubisoft's biggest quarter ever. As Yves mentioned, this better-than-anticipated quarter was delivered thanks to our team's excellent execution, with a high-quality release slate that included 3 AAA titles, plus Just Dance 2021, and to the continued appeal of our deep and diversified portfolio of franchises. This performance was all the more remarkable as it was achieved in a competitive environment and in a context marked by production challenges linked to work from home, the transition to next gen, as well as the rollout of Ubisoft Connect. Our teams had plenty on their hands, and they delivered. They deserve a big congratulation. Thanks to these strong release slates, Ubisoft placed 3 games in the top 7 bestselling titles on the new-generation consoles. With our early positioning, we are set to benefit from the new gen momentum, especially given the limited upcoming competition. Let's move on to our new releases. After a strong first week, Assassin's Creed Valhalla confirmed its position as the biggest Assassin's Creed game launch in history. Valhalla was one of the biggest sellers of calendar 2020, and the second best-selling title on new gen. It was acclaimed by critics and was notably awarded Best RPG of the Year by PC Gamer. Player reception and engagement were very strong, with daily average users at twofold when compared with Assassin's Creed Odyssey on a comparable time frame. It is also interesting to note that Valhalla is the greatest Ubisoft game launch in terms of digital and PRI. We look to maintain this momentum with a significantly longer and stronger post-launch content road map that will continue this spring with the combined rollout of free and paid content. For Xbox, Watch Dogs: Legion was praised for its beautiful recreation of London, the Play As Anyone innovation, and was the fourth best-selling title on the new generation of consoles. The award winning game was also the third largest contributor to PRI this quarter. We have a robust post-launch road map that will bring fresh content to the single player mode and introduce a dedicated online multiplayer mode as part of a free game update. The introduction of Play As Anyone into the online sandbox as well as upcoming Pv and PvP live content will drive and sustain engagement. With Immortal Fenyx Rising, Ubisoft is making a promising foray into the fantasy genre, further broadening its potential audience. The game generated significantly high positive sentiment from the community and journalists alike with its lighthearted tone and fresh game play. On top of ranking as the seventh biggest seller on the new generation of consoles, the game also has a clear bias toward the Switch audience and is benefiting from excellent world of mouth. We therefore expect Immortal Fenyx Rising to have very long legs. Just Dance continued its excellent run, benefiting from the widespread adoption of the Nintendo Switch, as well as from another successful massive campaign on TikTok. Just Dance 2021 performed very strongly, with net bookings up sharply year-on-year and was the best-selling Just Dance title of the past 6 years. On top of the very strong performances of Assassin's Creed Valhalla and Just Dance 2021, the quarter displayed another remarkable progression of our back catalog, up strongly 18% despite the very limited release slate in the prior year. Quarter after quarter, year after year, our back catalog has become a central force of our business, bringing both strong visibility and very high profitability and driving growth in our franchises this year. Rainbow Six Siege has demonstrated resilience in the context of a stronger competitive landscape, notably on PC. It has recently reached a tremendous milestone of surpassing 70 million players, having added 15 million over the past 12 months, a significant moment as the game enters its 6th year of life service and continues to maintain stable MAUs and robust acquisition. For Q4, the game faced the continued, albeit, temporary headwind of reduced physical esports events. Looking ahead, Rainbow Six Siege's early positioning on PS5 and Xbox series, as well as the progressive return to a normal path for esports events, combined with the full expansion of the Battle Pass model, and of course, the halo effect from the upcoming release of Rainbow Six Quarantine, will contribute to further grow the franchise over the coming years. On the back catalog side of the Assassin's Creed franchise, Odyssey and Origins continued to benefit from the transition to the RPG model and to the additional boost brought by Valhalla. As an illustration, there were more daily average users on Odyssey in December 2020 than in December 2019, which testifies to the impressive current dynamic of the brand. The combined strong release of Brawlhalla and the back catalog momentum enabled the franchise to break, by far, a new record for Ubisoft brand over 9 months. Many of our other games performed very well over the quarter, including strong year-on-year net bookings growth for the Far Cry, The Crew and Anno brands as well as for our free-to-play title, Brawlhalla. For its first half, Just Dance back catalog was up threefold over the quarter. And Mario + Rabbids: Kingdom Battle fully benefited from great word of mouth and the Switch momentum, with close to 50% year-on-year net bookings growth. Q3 total digital net bookings stood at EUR 588 million, up 68%, and represented 58% of our total net bookings. PRI reached EUR 208 million, strongly up 27% year-on-year, representing 21% of net bookings. Over the first 9 months of the fiscal year, total net bookings reached EUR 1.724 billion, up 55 -- 54% year-on-year despite strong foreign exchange headwinds. Back catalog reached EUR 990 million, up 29%, and represented 57% of net bookings. Interestingly, while Rainbow Six Siege continues to grow over the period, the ever-expanding breadth of our portfolio of franchises and live services offering means that our back catalog is less and less dependent on any particular single franchise. Looking at Q4, we expect strong growth, with net bookings of between EUR 464 million and EUR 524 million, including an estimated EUR 9 million from the mobile reclassification. The quarter is off to a solid start, with January's activity sharply up year-on-year, with notably very strong trends on Switch. As a reminder, Q4 last year benefited from the first impact on engagement from lockdown and from the highly successful release of The Division 2's expansion, Warlords of New York. Let's now turn to our full year guidance. We are tightening the range of our targets, with net bookings now expected in the range of EUR 2.220 billion and EUR 2.280 billion, and non-IFRS operating income now expected in the range of EUR 450 million and EUR 500 million. This is in line with the midpoint of our prior operating income target, while at the same time, offering us the opportunity, as announced over the past few weeks, to give more time to some of our games and additional content, including Riders Republic and the remake of Prince of Persia: The Sands of Time. We also took into account the postponement of Rainbow Six Siege invitational due to new COVID restrictions.After this record year, fiscal '22 will be a springboard year. We indeed remain deeply focused on crafting the building blocks essential to significant value creation, as we set the foundation for double-digit growth trajectory and for the progression of our profitability over the long term. As a consequence, we expect to deliver top line growth and another solid financial performance in fiscal '22, leveraging the power of our established franchises and back catalog, while our guidance will also reflect meaningful organic investments in our new IP and free-to-play releases, being in the early stages of our free-to-play ramp up, we will be making reasonable assumptions for these games. The year will see the reveal and launch for some of the exciting initiatives we have been working on. As we have previously mentioned, this investment will allow us to grow our existing brands and our portfolio of franchises, while reaching a wider audience on more platforms and business models over the long term. Fiscal '22 will hence be marked by the strength of our recurring revenues as well as innovation and rich experiences for our community of gamers to capture the many optionalities of the market. Our strong release slate will include free-to-play games and numerous paid titles, out of which, a total of 3 AAAs. The new releases are Far Cry 6, Rainbow Six Quarantine, Skull & Bones, Riders Republic, the remake of Prince of Persia: The Sands of Time, and Roller Champions. As we look to expand the reach of our franchises on more platforms and business models, our first mobile title, in partnership with Tencent, is expected to soft launch in the fourth fiscal quarter of fiscal '22. A few other surprises are in the works and will be unveiled in due time. In fiscal '22, we will continue our evolution from a AAA release-centric model towards a model where AAAs stand alongside new premium and free-to-play innovative experiences across platforms. These diverse experiences will feed on each other through complementary game plays and business models. As we traditionally do, we will provide more color on the outlook mid-May. Before I hand over the call back to Yves, I would like to highlight the recent ratings that recognize our environmental, social and governance efforts. Earlier this calendar year, ISS ESG, the ESG investment research analytics provider, issued a prime status for Ubisoft. Prime status recognizes top companies within their industry on various ESG indicators. This is putting us in the top 2 deciles within the software and IT services industry, with notably very strong ratings in terms of transparency. This follows all the solid ratings over the past year from SAM's Corporate Sustainability Assessment, MSCI ESG, [ viagem ] Moody's and the Financial Times Diversity Index. I now hand over the call back to Yves.

[Yves Guillemot, Co]

Thank you, Frédérick. We are well set to deliver a record year, demonstrating our team's amazing resilience and the sustainability of our organization. Our actions have always been taken with a long-term mindset. We are grateful our commitment to being at the forefront of all ESG matters is being recognized. Our quarter was also marked by the nomination of Raashi Sikka as VP, Global Diversity and Inclusion; as well as Belén Essioux Trujillo as an independent director to our Board. I'm looking forward to working with them to continue building a stronger Ubisoft. I would also like to highlight the collaboration we revealed mid-January with Lucasfilm Games on a new video game set in the beloved Star Wars galaxy. We are very happy to be partnering again with Lucasfilm Games. The project will be aided by our Massive studio, who will make the most of their cutting-edge technologies, including the Snowdrop engine, to deliver a groundbreaking Star Wars adventure. We are very proud of this collaboration, which is a testament to Ubisoft's leadership and expertise, notably in creating amazing worlds. It is another demonstration of our capacity to build partnerships with the biggest names in the entertainment and technology space. To conclude, our prospects are bright as we continue laying the foundation to expand our portfolio and to reach a wider audience on more platforms and business models, while at the same time leveraging the strength and visibility offered by our recurring catalog business. We are now ready to take on your questions.

[Operator]

[Operator Instructions] We can now take our first question. It comes from Nicolas Langlet of Exane BNP.

[Nicolas Langlet, Research Analyst]

I've got 3 questions, please, the first one on the back catalog, which continues to perform quite well in Q3. What sort of trend are you expecting for Q4? So you mentioned probably some headwind for Rainbow Six Siege, but are there any reasons why the growth momentum will slow down materially compared to Q3? Second question on the AAA game for full year '22. I think the plan was to release at least 2 games, Far Cry 6 and R6 Quarantine during H1 full year '22. Is it still the case? And finally, regarding the partnership with Lucasfilm and Massive, what are the implications for The Division franchise? Should we expect the franchise to be put on pause for some time? Or you think you have enough resources to manage both The Division, Star Wars and the Avatar project?

[Frédérick Duguet, Chief Financial Officer]

Yes. Thank you, Nicolas. Yes, so the back catalog, yes, we were very happy to see such overperformance across the board on Q3, on all franchises, including our major franchises. For Q4, what we see and to take -- we need to take into account when we look at the outlook is that last year, we had a strong base for comparison for a different reason. First is that we had the month of March, that was hit by the first early restrictive lockdown measures on a global scale. So that had a positive impact, if I may say so, in March. And second, we had also the very successful launch of our expansion on The Division 2: Warlords of New York. That worked very well. The last point that we also need to take into account is that, as you know, last year was a very successful Six Invitational event for Rainbow Six Siege. And we had to recently decide to postpone it, so we won't have it in this quarter. As for the AAA for fiscal '22 plan, yes, the plan is still to release the 2 games you're referring to in H1. For the partnership with Lucasfilm, the implication on The Division, you have to know that the Massive studio is a large studio. And they are also collaborating with lots of studios in -- over the world, lots of inside studios. So you are going to see more on The Division in this year and the year after.

[Operator]

Our next question comes from Omar Sheikh of Morgan Stanley.

[Omar Farooq Sheikh, Equity Analyst]

I have 3 questions as well, please. The first one's on the guidance for Q4, just so we're clear on the message here. You pointed out a couple of, I guess, the headwinds for the net bookings in the quarter, including the pushing out of the content, Prince of Persia and Riders Republic, into next fiscal. But I mean could you maybe comment on some of the tailwinds you also have, notably, the impact of the lockdowns on engagement, which you highlighted as started strongly in January? And also, are you seeing any benefit from the ongoing issues with Cyberpunk? That's the first question.Secondly, on Lucasfilm, could you give us a sense of the timing of the releases -- or the release rather of the game that you're working on? Is it just broadly going to be fiscal '22, '23 or beyond? And are you seeing any benefit already from the -- on hiring? I noticed that you immediately went out with some hiring ads at the time. So I wonder whether you could give a sense whether there's any sort of benefit on that side? And then thirdly, on the Tencent mobile game, it's good that you've confirmed a launch in Q4 '22. But I just wondered, maybe just taking a step back on that, on your mobile strategy more broadly, I don't know whether you might be able to maybe comment in the context of what EA did last night, whether Ubisoft's mobile strategy is where you would like it to be. You've made some acquisitions in the past, Kolibri, Green Panda. I wonder whether you have any thoughts on whether you have the right -- enough skills in mobile games development to take you where you want to get in mobile? That's my third question.

[Frédérick Duguet, Chief Financial Officer]

Yes. Thank you, Omar. So on Q4, we expect a strong growth that in terms of ranges, expecting between plus 17% to plus 33% versus last year. Indeed, we recently decided to postpone Riders Republic and Prince of Persia to benefit from such a strong financial year. And while we maintained the midpoint of our EBIT target, we thought it was the right focus to provide them with even more polish time and pursue higher quality at launch. So that's a good move for us on top of, as we said, we had to recently decide to postpone the Six Invitational. In terms of tailwinds, it's true that we see today a very strong engagement across the board, across all our back catalog. We mentioned during the prepared remarks that we start with January with very strong engagement growth versus last year, notably on the Switch, as we have a good lineup that benefits from the mass adoption on the consoles. In terms of lockdown, today it's still a bit difficult to isolate the elements of more restrictive or less restrictive sanitary measures, but overall, we see a strong engagement across our portfolio. And we're happy for having come with such high quality of -- across all our AAA games and just end 2021 on top of coming with high quality on live services and live content. And we see that it would benefit for -- to us in the coming months, in the context where we don't expect such a big competition in terms of new games being launched.

[Yves Guillemot, Co]

On Lucasfilm, we can say we are at the early stage of development on the Star Wars game. To answer your question about the benefit from that in terms of hiring, yes, we see lots of people wanting to participate in this adventure, and it's really a very good thing. On the mobile strategy, yes, we have seen what happened yesterday [Foreign Language]. We have a strategy to work on high-end games where we want our brands to be on AAA, but also to be on mobile. So we have been doing some work with Tencent on that front and also inside the company. So we -- our strategy is very much around AAA quality games on mobile.

[Frédérick Duguet, Chief Financial Officer]

And to expand our existing franchises.

[Operator]

Our next question comes from Ken Rumph of Jefferies.

[Kenneth Charles Rumph, Equity Analyst]

I have 3 questions also. Firstly, specifically on Valhalla compared to the previous kind of record holder in the series, Assassin's Creed 3. Back then in 2013 at this point, the game has been out, I think, for a week or 2 longer, it came out in October, but you'd sold 12 million units. Could you comment whether Valhalla is doing better? Or maybe were the sales kind of front-loaded, and therefore, it performed better at the beginning, but there was a kind of acceleration? It seems to have also sold more digital, more PC, so maybe the pattern is different. So basically is it kind of continuing to set records?Secondly, was just, kind of in a sense to confirm that you're saying 3 AAAs for next year, not 3 or 4 as previously? And your comment about the sort of transition to kind of modify the sort of hybrid model where there are AAA games, there are free-to-play games. Should we assume in a sense that the focus on AAA titles is a bit less, and we should think about other things? And maybe it's 2 or 3 and the games last longer? That would appear to be another implication of Assassin's Creed that Valhalla's going to continue just as Odyssey is continuing to generate revenue for a longer time. And regarding the AAA games next year, should we be expecting $70 price tags? Or -- I'm not sure if preorders are already kind of fixed for Far Cry and so on?

[Frédérick Duguet, Chief Financial Officer]

Thank you, Ken. We saw on the Assassin's Creed franchise, in terms of unit count at the end of December, Assassin's Creed 3 is still the biggest launch. But in value, clearly, Assassin's Creed Valhalla is the biggest launch ever for the franchise and benefits from a much stronger level of engagement of playtime, and will also benefit from a stronger and longer post-launch program than Assassin's Creed Odyssey. And we refer to the level of engagement of Assassin's Creed Valhalla related to Odyssey, which was already a super top-class game in terms of engagement. And we see that Valhalla is really starting very well, so it's really heading to very long legs, and we should rely on strong engagement growth over time.In terms of the 3 games that we mentioned for fiscal '22. Yes, we said for a number of years that our normal template is to come either with 3 or 4 AAA games, so we stick to this pattern for fiscal '22. But we see that we are progressively continuously moving from a model that used to be only focused on AAA releases, to a model where we have a combination of strong releases on AAAs and strong back catalog dynamics, but also complementing our program of new releases with free-to-play and other dynamic experiences. And the idea being to continuously driving higher audience, but also progressively, progressing on getting a higher share of recurring revenues, as you rightly pointed out, with longer lifetime for our games.In terms of the price ...

[Kenneth Charles Rumph, Equity Analyst]

$70 dollar point? Sorry, yes.

[Yves Guillemot, Co]

Yes. In terms of pricing, we've been analyzing the competitive dynamics of the last quarter. And we're still looking at the opportunity, but we have not made any decision yet.

[Kenneth Charles Rumph, Equity Analyst]

Okay. Could I ask a follow-up, by the way, just confirming on Star Wars. My understanding was that EA's exclusivity run out in '23. I'm not sure if that was fiscal or calendar '23. But it seemed to me to imply that, along with your comments about it being at an early stage, that the game couldn't be before fiscal '23, more likely fiscal '24. Is that wrong?

[Frédérick Duguet, Chief Financial Officer]

We didn't mention any specific dates. The game is at an early stage of development. So we will have to wait a bit before telling you more about timing.

[Operator]

Our next question comes from Matthew Walker of Crédit Suisse.

[Matthew John Walker, Research Analyst]

I've got 3 questions as well. First thing is on Rainbow Six, it seems to have slowed down. Rainbow Six seems to have slowed down a bit, maybe some competition from a couple of other strong titles. What's the plan to sort of revitalize the revenue growth from Rainbow Six? The second question is we saw Diablo and League of Legends get approval in China. Can you say anything more about your China approval process? How many games are you trying to get approval for? Is it only Rainbow Six? Or is it other games that you're also trying to get approval for? And then last question is, I think on the last couple of calls, you said that fiscal '22 net bookings would be above '21. And I'm guessing you'd still say that, given that you pushed some of the games from '21 into '22. You haven't previously commented on whether you see operating profit in '22 above '21. So would we be right to assume operating profit in '22 will be above '21?

[Frédérick Duguet, Chief Financial Officer]

So on Rainbow Six Siege, it's been slightly growing. This year it shows again, strong resilience in the context of stronger competition than a year ago, notably on PC. What is remarkable on this game is that it continues to drive robust acquisition of players. We added 15 million new players over the last year, so that provides a good base to monetization over time on the game. We see that the fact that we put the game early on new-gen consoles should drive acquisition further or reactivate lapsed players. And as we are today complement -- completing -- finalizing, I would say, the transition in terms of monetization model from a full season pass model, until a year ago, to a full Battle Pass model, that should drive higher value and higher engagement for our players. We see that the game should benefit from a good momentum, on top of, of course, having the possibility to get back strongly on physical esports events, hopefully, in the course of the year.

[Yves Guillemot, Co]

On the approval process in China, we -- what we are encouraged by the fact that there were lots of western games approved, one of which was one coming from Ubisoft because Rayman Legends on Switch was approved. We are working very hard with Tencent also to make sure the games can be approved in the short run. So it's -- the process is improving, and we hope it will have a good impact.

[Frédérick Duguet, Chief Financial Officer]

So for fiscal '22, what we expect to grow on the top line, we expect another solid financial year. What we see is that we will rely on a big slate of new releases that will include AAA games, the 3 that we mentioned. Other premium game launches, as well as for the first time, a big step into to free-to-play launches on top of relying on strong back catalog trends for next year. And what we mentioned is that coming with new IPs and free-to-play games will, of course, come with strong initial R&D and marketing investment that will lay strong foundations for us to pursue strong top line growth in the outer years and to continuously improving operating margin year after year. In terms of operating income for fiscal '22, we'll give you more color in May. But again, we expect a strong financial year again on the back of top line growth.

[Operator]

Our next question comes from Doug Creutz of Cowen.

[Douglas Lippl Creutz, MD & Senior Research Analyst]

Yes. This one is for Yves. You've been around the industry for a long time. And it seems to me the level of capital market activity we've seen around gaming in the last 6 months, but even particularly in the last couple of months has been pretty hectic. Just curious as to your reaction to this. What do you think is going on? And has it changed your thinking about M&A as a strategic priority for the company?

[Yves Guillemot, Co]

Our strategy has been more to develop internally our own IPs and invest inside the company and in our studios. So we use M&A more in acquiring some technologies or teams that will help us to enter a new field. So at the moment, we are very much investing inside the company than outside, actually.

[Frédérick Duguet, Chief Financial Officer]

What we have seen over the last 15, 10 last years is that our internal model has delivered tremendous value. And we -- that's what we want to continue doing. We think that we have tremendous value creation of opportunities ahead of us in developing our business in an organic fashion. So we don't need to rush or -- and to do M&A at any expansive costs. But again, as you've mentioned, we are very vigilant and we seize opportunities on specific skills that can complement our organic development at reasonable cost.

[Yves Guillemot, Co]

And we have the cash we need if it's necessary.

[Operator]

Our next question comes from Nick Dempsey of Barclays.

[Nicholas Michael Edward Dempsey, Research Analyst]

I've got 3 questions left. First one [ as of today] notice the free-to-play games are pretty uncertain in terms of their launch. Is your comment that you will grow in FY '22 versus FY '21 reliant on delivering some successful launches in the free-to-play games you're referring to? Second question, just on the Rainbow Six Quarantine, do you not worry there are some PR problems about launching a game about an alien parasite when we're in the middle of a global pandemic? Is that not something that has made you wonder whether you should delay that game? And third question, you referred a couple of times to the investment you're expecting in FY '22. Are you also -- are you suggesting that the cash R&D would grow more than the kind of low teens level that you've talked about before in that year? Or are we talking more about a P&L impact around marketing and in the year?

[Frédérick Duguet, Chief Financial Officer]

So on our comments for next year on growth is related to the fact that we will rely on a big slate of new releases. That will be a combination of 3 strong AAAs, a premium game that will be launched for a number of them that we have not announced yet, and also a first big step on free-to-play. And so free-to-play will be one element, but the growth for us is the combination of a strong slate of new releases overall, as well as relying on the robust trends on the back catalog.

[Yves Guillemot, Co]

On Rainbow Six Quarantine, we are creating a product that is actually, as it's named today, it is something we are evaluating, and we will see what comes in the future on that product.

[Frédérick Duguet, Chief Financial Officer]

On the investment expected, so we stay consistent with our view that we can pursue top line growth year-on-year on average in the coming years being double digits, and that will come with an even stronger progression on gross margin. So that's the long-term view that we see. And we expect R&D to continue being, growing at a good pace because we see that we have immense value creation opportunities ahead of us.What we really mean for fiscal '22 is that we -- because we come with new IPs, and you know we have had a great track record in terms of establishing new IPs, that comes initially with strong investment in R&D and also in marketing. And we expect it to be the same as we come meaningfully on free-to-play. On free-to-play, we made a specific comment that because this is a first big step in this new model. We will, of course, take reasonable assumptions in the way we forecast the year as it will be year 1 in our ramp up.

[Operator]

Our next question comes from Michael Ng of Goldman Sachs.

[Michael Ng, Research Analyst]

I was just wondering if you could share a little bit more detail about the Watch Dogs: Legion performance. Was this a game that's more similar in form to Watch Dogs 1 or Watch Dogs 2? And then I was just wondering if you could talk a little bit about the Immortals Fenyx Rising performance as well? Was that in line with expectations and do you see further opportunity there? Or is there a longer tail on Switch at all?

[Yves Guillemot, Co]

About IFR performance, we are actually very happy we were able to launch a new brand in that segment of the market. That is a game that is very much family oriented, and that is also very strong on the Switch. So it's helping us to actually be the #1 third-party publisher on Nintendo. And that game is also played at home and also in outside homes, so it's something interesting and important. We see that this game is going to have long legs. So we need time to make sure it becomes a huge success.

[Frédérick Duguet, Chief Financial Officer]

For Watch Dogs: Legion, we've seen that it was well received by players and critics alike. It was ranked well on the new-gen console, being #4. It was our third biggest PRI contributor, which has been a good start with a sharp, very sharp increase in terms of engagement related to Watch Dogs 2. While we didn't even launch the multiplayer yet, so that's still ahead of us, we are coming with a strong post-launch program for the single player, but also, importantly, with a dedicated online multiplayer with gameplay that would be competitive and cooperative. So that should allow us to drive and sustain engagement over time, focusing also on replayability.

[Operator]

Our next question comes from Tom Singlehurst of Citi.

[Thomas A Singlehurst, Research Analyst]

Tom here, obviously. So I suppose the first one, I mean it feels like you're just pushing back releases to sort of hold back potential revenue for next year, because you've got the back catalog effect from extended lockdowns, et cetera, et cetera. So the question is, with those delayed launches, should we think about growth being double digits in 2022, in line with the sort of medium-term aspiration? That's the first question. And the second question, going back to Nick's comment on free-to-play. I mean, once again at a high level, it feels like you've had one big success in Brawlhalla and one -- not a big failure, but less successful attempt in Hyper Scape. I'm just trying to work out was it -- is there any sort of lessons you've learned from that and you can share with us in terms of trying to predict whether free-to-play games will be successful when they land, given it's now a meaningful part of the guidance.

[Yves Guillemot, Co]

Yes. So in terms of pushing releases to next year, it's true that we benefit from such a stronger fiscal '21, such a stronger Q3, and as you mentioned rightly, such strong back catalog trends. So that gives us even more comfort to meaningfully postpone some of our productions and focus on even more polish and higher quality. So yes, it provides us with higher visibility for next year. We plan to grow next year. We come back to you in May to qualify the progression that we see. But again, what is important to have in mind is that we rely on a big slate of new releases and strong back catalog trends that we observe today. Of course, on the back catalog side, we will need to take into account the fact that in H1 and notably in Q1 we had a positive impact, if I may say so, in a significant manner from the early lockdown restrictive measures. But we also see today that we benefit from stronger dynamics, and we will get the tailwind of the stronger slate of new releases of fiscal '21 comparing favorably versus fiscal '20. But again, in terms of qualifying the growth for next year, we'll come back to you in May. In terms of free-to-play, so Brawlhalla was a fantastic acquisition that has driven a fantastic return for us, and, indeed, quite learning curve in the multiplayer side. We've been implementing the Battle Pass over the summer, and that has a strong impact on engagement. And we see that bringing the games on so many platforms is a good model for us. And that we, of course, want to expand into other franchises in the future. In terms of Hyper Scape, we've been learning in terms of implementing a great engine. We learned a lot in terms of making the infrastructure very robust to host many, many players. So as we said, it was the first step in our learning curve, the same way as we had launched The Crew when we come into -- when we came into live services and then learned from there and expand more meaningfully into live content. So we are following this same learning path and will come stronger in fiscal '22 on free-to-play.

[Operator]

Our next question comes from Richard Eary of UBS.

[Richard Eary]

I just got a couple of questions. Just on the guidance numbers that you've given out obviously, you've pulled down the top end of the range by 70 million. Just to be clear, you said that obviously, we've got delays of Riders Republic, delays of Prince of Persia, but also the Six Siege Invitational is now not going to happen in this quarter as well. If we look at those delays, do they even more than offset the benefit from back catalog? So what I'm trying to get at is that if you hadn't delayed those games, would you have actually upgraded guidance rather than change the guidance? So just a bit of clarity in terms of those 3 games on the numbers. The second side of it is just as we look in terms of changes in the landscape around digital distribution, I don't know if you can update us in terms of thoughts around digital distribution and what's happening within the space and how that will potentially impact margin. And then just largely -- lastly on the free-to-play release, I'm not sure if I picked it up correctly. Are you -- is that going to be in calendar fourth quarter or fiscal fourth quarter? I'm just trying to understand that for '22 on a release basis. And when can we expect to get, obviously, some clarity on that release with Tencent?

[Frédérick Duguet, Chief Financial Officer]

Yes. So in terms of the updated guidance, what we -- while it reflects the very strong performances of Assassin's Creed Valhalla and Just Dance 2021, and indeed the overperformance of the catalog, but yes, it was partially offset by the fact that we had to postpone with the Six Invitational, and we recently decided to postpone the remake of Prince of Persia and Riders Republic, as well as taking into account also that we had decided to move the post-launch program of Watch Dogs: Legion from Q3 to the second half of Q4. In terms of digital distribution, we see that we have a good momentum on the digital progression in terms of share of our overall net booking. At the end of December, it's 59%. It was 54% 2 years ago. So we continue increasing the digital share. Of course, when we look at the evolution over the last 2 years, this year was a bit specific because we had more new releases and 3 of them being launched in a strong period of retail and Thanksgiving and Christmas. We also have a higher share of the Switch that usually carries a higher part of physical sales, but even that platform increases in digital. And we also, of course, this year had the specific impact of players purchasing physical software games on top of their purchase of the new consoles. Overall...

[Yves Guillemot, Co]

The trend, yes, is actually going in the direction of more digital, so better gross margin.

[Frédérick Duguet, Chief Financial Officer]

Yes, absolutely. In terms of free-to-play, we said that our free-to-play games will be launched in fiscal '22. And we made a specific comment that the first game developed with Tencent will be soft launched in the fourth quarter of fiscal '22.

[Yves Guillemot, Co]

But it's -- we have, on one side, the free-to-play, and on the other side, the mobile game, which is fiscal -- which is Q4 fiscal '22.

[Richard Eary]

Okay. Just going back to the guidance question, you mentioned that in Q4, you were supposed to lead a Watch Dogs: Legion extension. Was that correct? I missed that. And is that now being postponed until fiscal '22?

[Yves Guillemot, Co]

No, no, no. What I said is that we had decided a while ago to postpone the post-launch program from Q3 fiscal to the second part of the fourth quarter of this year.

[Operator]

Ladies and gentlemen, that concludes our question-and-answer session for today. I'd like to hand you back to your speakers for any additional or closing remarks.

[Yves Guillemot, Co]

So thank you very much for your questions, and have a nice evening or day.

[Frédérick Duguet, Chief Financial Officer]

Thank you, gentlemen.

[Operator]

Ladies and gentlemen, that concludes today's conference call. We thank you for your participation. You may now disconnect.