Ubisoft Entertainment SA

PAR:UBI

Earnings Call Transcript 2022-Q3

[Yves Guillemot, Co]

Welcome, everyone, and thank you for joining the call today. The beginning of the year offered a striking confirmation of both the great appeal of the video game industry and of the scarcity of high-quality assets. The multiplication of platforms offers great opportunities for IP creators like Ubisoft. With our long-term approach and appetite for taking creative risks, we have developed internally some of the industry's strongest proprietary brands as well as the industry's deepest and most diversified portfolio.Along the way, we have also built the most significant production and creative capabilities, cutting-edge technologies and a strong community of engaged players. This makes us exceedingly confident about Ubisoft's future and our capacity to take full advantage of our industry's powerful momentum. Looking forward, with the unmatched production scale and creative fire power, we are increasing access to all distribution venues, platforms, geographies and business models, leveraging the strength of our brands. We are currently working on the significant expansion of our portfolio with ambitious road maps for our biggest franchises, notably Assassin's Creed and Rainbow Six. We are also developing powerful new brands and the opportunity to significantly expand our audiences through free to play, which is very important for us. Alongside our investments in promising new technologies, this will drive double-digit top line over growth -- sorry, over the coming years. We could not be prouder of our team's amazing work, and what the richest pipeline of games in Ubisoft story.I will now hand over the call to Frederick.

[Frédérick Duguet, Chief Financial Officer]

Thank you, Yves, and hello, everybody. Q3 net bookings came out within our guidance range at EUR 746 million, down 25% year-on-year with 38 million MAUs. The quarter was marked by another very solid performance from our back catalog, up 10% year-on-year and up 37% compared to Q3 fiscal '20 or up 33% excluding the mobile reclassification. While our new releases did not reach the high end of our expectations, our Q3 performance is once again a demonstration of the robustness of our model. It is based both on our new releases continuously feeding the deep and diversified stream of revenues from our back catalog and on our capacity to leverage the strength of our brands.As we continue improving our game's play time per player, we are seeing each title's revenue stack on each other year after year. Players continue to have a great time in Far Cry 6, which ranked in the top 5 released games in calendar 2021 across Xbox and PlayStation and its post-launch content. Playtime per player is now up 45% when compared with Far Cry 5, while PRI per player is up 30%. Riders Republic garnered strong reception from the press and the community with playtime per player and PRI up 60% and 4x respectively versus Steep.Similarly to what we achieved with For Honor and The Crew and in line with our live service strategy, we expect Riders Republic to be a very long and profitable seller and add a new layer to our recurring revenues for many years. 2022 continues to leverage the Switch momentum and delivered the third consecutive year of strong performance. The solid back catalog dynamics were driven by our deep portfolio of games and live services, highlighting its recurrence and resilience. The main contributors were Assassin's Creed Valhalla and Odyssey, Brawlhalla, The Crew 2 and Far Cry 5, Ghost Recon Breakpoint, For Honor, Immortals Fenyx Rising, Mario + Rabbids: Kingdom Battle, Rainbow Six Siege and Watch Dogs: Legion.Assassin's Creed Valhalla posted a remarkable performance in Q3 with overall engagement now up more than 30% when compared to Assassin's Creed Odyssey. This stellar performance, coupled with a stronger performance program delivered impressive life-to-date net bookings, and PRI growth of, respectively, over 70% and over 80%.Turning to Rainbow Six Siege. The game recently passed the 80 million player mark, adding 10 million players over a year, and continues to be one of the biggest multiplayer shooters on the market despite intense competition.Total digital net bookings reached EUR 530 million, down 10% year-on-year. And PRI stood at EUR 187 million, down 14% year-on-year. The back-catalog portion of PRI was up this quarter. For its part, mobile bookings amounted to EUR 49 million, slightly up year-on-year.Turning to Q4. We expect to deliver very strong year-on-year growth with very dynamic back catalog trends, high-quality releases, partnerships against last year's Q4 easier comparison days and significant post launch delivery throughout our brands.Rainbow Six Extraction was released on January 20, and reached more than 5 million unique players to date, bringing in Siege's engaged fans and new players to the franchise as well as a significant number of reactivated lapsed franchise players. An innovative buddy pass system that allows players to let their friends play free for up to 2 weeks, will continue to fuel the games growth, along with the title inclusion in Game Pass. There is more to come for Extraction players post launch, which will be revealed during the Six Invitational broadcast tomorrow.The long-running RTS franchise, The Settlers, is coming back to PC on March 17, challenging players to explore new lands, build cities and train an army, all while managing a growing medieval economy. Q4 will also be marked by strong content delivery across our brands. On March 10, Ubisoft Sofia, the team behind Assassin's Creed Rogue, will be bringing the highly anticipated Dawn of Ragnarok expansion, Ubisoft's biggest ever expansion that will leverage the games very strong momentum. We are also bringing The Ezio Collection to Switch, further extending the audience of the franchise.The Far Cry 6 post-launch content this year will be bigger than what we delivered last year with Assassin's Creed Valhalla, Watch Dogs: Legion and Immortals Fenyx Rising combined. And finally, the Rainbow Six Siege Six Invitational is back to its usual February pattern. Players will have a lot to look forward with the most ambitious year of new features and content to date starting this quarter with the first season of year 7.Today, we confirmed our fiscal '22 targets of flat to slightly down net bookings, and non-IFRS operating income target of between EUR 420 million and EUR 500 million. To be noted that we are currently operating in the lower end of our targets.Turning to fiscal '23. We are planning to come with a strong new release lineup next fiscal year. It will notably include the release of Avatar: Frontiers of Pandora, Mario + Rabbids Sparks of Hope and Skull & Bones, which are all progressing well as well as more exciting games. Ubisoft continues to progress towards its ambition to extend its brand's reach to a significantly larger orders through free-to-play across all geographies and platforms. The test phases for these games are ongoing and will inform their release schedules. We are now ready to take your questions.

[Operator]

[Operator Instructions] And the first question comes from the line of Ken Rumph from Jefferies.

[Kenneth Charles Rumph, Equity Analyst]

Could I start just with a question on the guidance and your comments at the end there about operating. I think you said at the lower end of the range of guidance. Given that you've got good visibility now with Extraction behind you and one major event still to come, probably in Ragnarok, should we take it that you're effectively narrowing the range to the lower half? Or do you still believe that anywhere between EUR 420 million and EUR 500 million is possible? Maybe if I can ask a second question -- no, go ahead, please. Go ahead.

[Frédérick Duguet, Chief Financial Officer]

Yes Ken, on this point, we indeed have a very strong growth expected in Q4. It's right to say that we are currently anticipating to be in the lower end of the guidance. We still can achieve the high side of it because we have a lot of content to be released and upside is possible, but it's fair to say that for now, the forecast is in the lower side of the guidance.

[Kenneth Charles Rumph, Equity Analyst]

Okay. And if I could ask a question, I guess, for Yves. Perhaps also personally, you described the strength of the assets and team and pipeline at Ubisoft in the context of, obviously, as you say, industry events, the M&A that we've seen. Two questions on that. Firstly, you talk about access to distribution channels. Are you confident that you will, if the kind of consolidation we've seen continues, still have access going into the future? And what conclusion should we draw from the fact that the value of those assets, as you described, are more highly -- they're being more highly valued than ever before? Is that there for a moment to sell?

[Yves Guillemot, Co]

Yes, sure. Yes, we will continue to have access to all those platforms because all the platforms need great content. And if we are continuing to do great content like we do today, we will be able to access all those platforms. And if we look at Nintendo, which is a platform on which Nintendo is publishing a lot, we are the #1 third-party publisher on it. So it's -- because Nintendo is interested by everything we do, and we are even developing games with their brand. So the collaboration exists, and it's very fruitful.Now on your second question, we have always taken our decision in the interest of our stakeholders and -- which are our employees, players and shareholders. So Ubisoft can remains independent. We have the talents, the industrial and the financial scale and the launch portfolio of our full IPs that you saw in the document in the press release we did. Our IPs are sought after by the biggest global players in entertainment and tech. Having said that, if there were an offer to buy us, the Board of Directors would, of course, review it in the interest of all stakeholders.

[Operator]

Next question comes from the line of Charles-Louis Scotti from Kepler Cheuvreux.

[Charles-Louis Scotti]

A couple of questions from my side. Can you give us more details on the amount of the down payment that you received from Microsoft to include the Rainbow Six Extraction within their Game Pass. Is it substantial? And should we expect that the net bookings coming from these games to be lower in the future?Also, your full year EBIT guidance is -- the range is quite wide. What explains this big difference between the low end and the upper end, whereas you have only one big launch, Dawn of Ragnarok expansion, before the end of the fiscal year?And my last question. Some of your competitors are being taken over by bigger conglomerates and the industry is shifting really to a subscription-based business model. Do you think that being -- not being part of a big conglomerate or a console manufacturers platform could be a disadvantage for you in the future?

[Frédérick Duguet, Chief Financial Officer]

Thank you, Charlie. So on the partnership with Microsoft, of course, we can't disclose any detail for competitive and confidential reasons. What we can say is that it's another very good example of a high-value partnership. In that case, we wanted to value the whole Rainbow Six brand. As you know, Siege was already part of the program on console. We renewed it on console and extended it to PC, and we wanted to have Extraction and Siege together. So that's, again, a great example of valuing the Rainbow Six franchise. It's a meaningful partnership that is -- it's been impacting Q3 and Q4.And it's also interesting to see that as part of this announcement, we mentioned that Ubisoft+, our subscription program, will be made available on the Xbox platform. So that will be good news to extend our subscription offering beyond our PC platform and beyond Stadia and Luna. So that would give us a way also to make our games played by more people because they will have access to all those games. And it was also, of course, in doing so, one way to derisk financially the Extraction project.In terms of the EBIT guidance, yes, we maintain it as it is. We have an important content to come in the next 6 weeks. As we said, we have the most ambitious expansion ever in Ubisoft history with Ragnarok. As you know, Assassin's Creed Valhalla is doing a stellar performance. So we are building on the great momentum. And so far, the expectation from players since reveal of that expansion are very strong. So we see a very good momentum in terms of potential performance.We're also coming with The Settlers, that is a new release in March. We are coming today with a significant launch on Switch with Ezio Collection. As you know, Ezio is an iconic character from the AC brand. It's a great opportunity to extend the audience of AC on the mainstream Switch platform, and we have very meaningful post-launch content coming across all our brands, and starting with the beginning of the year 7 on Rainbow Six Siege that we did the biggest year since launch in terms of content and features.And we are coming with also a big content on Far Cry 6 and For Honor. We are announcing tomorrow post-launch content also on Extraction that we leverage the good player base that we've had so far. So yes, still a lot to come, and that's why we believe it was relevant to maintain the EBIT guidance unchanged.

[Yves Guillemot, Co]

And it's good to know that for the first time in the Assassin's Creed brand, again, past the $1 billion consumer revenue, it did that during the December month. So it's also something new for a brand like Assassin to reach that level of revenue.

[Frédérick Duguet, Chief Financial Officer]

On your last question, as you've mentioned, there is a very strong appeal of our IPs vis-a-vis all the tech and platform players across the whole industry. So we see that our focus in creating high quality content, high quality IPs, very strongly engaged communities, and behind the biggest workforce of the industry that combines creative power, strong engineering and quality and investment in technology is the right setup to be able to serve all the needs from our big platform asking for our content.

[Operator]

Next question comes from the line of Omar Sheikh from Morgan Stanley.

[Omar Farooq Sheikh, Equity Analyst]

I've got 3 questions as well, please. Maybe, first of all, on the guidance, Frederick, maybe if you could just elaborate a little bit on what exactly you need to do in order to get to the top end of the guidance, to get to EUR 500 million of EBIT? You've mentioned the releases that you've got in the pipeline. But is there anything on the cost side that we should take into account there? That's the first question.Secondly, on Microsoft, you mentioned that there's going to be an impact from the agreement with Microsoft in both Q3 and Q4. Could you maybe just elaborate a little bit on that? I mean, it would be great if you could just walk us through exactly how you're planning to account for the payments that you're going to receive from them. And maybe even just give us some color on whether you expect more impact in Q3 versus Q4, for example, on the network side? So that's the second question.And then finally, useful to have the update on the future releases on AAA for fiscal '23. I noticed you didn't mention anything about the free-to-play or mobile efforts that you have, in particular, the Tencent game that you've been developing for the last 3 years. Could you just maybe give us an update on the plans for free-to-play mobile next year as well, please?

[Frédérick Duguet, Chief Financial Officer]

Omar, thank you for your questions. So on the guidance, as I said, we have very strong growth expected over the quarter that is mostly driven by the back catalog, not only the dynamics of the back catalog that we've had so far against the lower comparison base of last year, if you remember, but also with the content that we are putting to market in the next weeks. And we also have good new release slates of high-quality together, as we said, enhanced by the partnership with Microsoft. And we are also coming with a very meaningful post-launch content across all our new releases that will be bigger than what we had last year.So of course, to get to the high side of the guidance range, we need to get to the top of our ambitions, primarily on the expansion of Ragnarok as well as on all the contents that we're putting in terms of post launch, including the Ezio Collection on Switch. So -- but, of course, as we mentioned before, the high side of the range is becoming -- has become more challenging.In terms of Microsoft, yes, we'll repeat what I've mentioned before. The partnership combined Rainbow Six Siege renewal and extension as well as putting Extraction as part of the launch across console and PC. So the impact has been meaningful across Q4 and Q3 across both games.As for fiscal '23, so on the free-to-play side, we are progressing well for all our games. As you know, we're bringing very high-quality content, primarily in the shooter segment. This is a great opportunity for the long term that Ubisoft can do it in an organic manner, while others will spend billions of dollars in M&A to go there. As we mentioned before, we need to go through each testing phases before we announce the release date for any given game, but we expect some of this free-to-play to come in fiscal '23.

[Operator]

Next question comes from the line of Matthew Walker from Credit Suisse.

[Matthew John Walker, Research Analyst]

The first question is in a consolidating industry. I guess, I'm just wondering why you guys haven't had an offer given the embedded value in your IP. Is that because in order to be acquired, you have to signal that you want to be acquired but you haven't done that? And if somebody did go for that route, how would you extract value for all the stuff in terms of free cash flow that you've spent on building up free-to-play and mobile, which I guess, as you point out the other companies haven't done, how would you help extract value for that?The second question is on PRI, which was -- looked pretty weak. You said you'd added 10 million players to Rainbow Six, but the revenues for PRI are significantly lower than last year. Can you just explain that? And do you think that PRI will grow again year-on-year in fiscal '23?And then the final question was on Assassin's Creed. There was some stories out saying that you were turning an expansion pack into a new game, but maybe a smaller one than usual. So you haven't flagged Assassin's Creed in fiscal '23. Should we expect a proper, larger and on the scale of Valhalla in '24? Or not?

[Frédérick Duguet, Chief Financial Officer]

Thank you, Matthew. So on your first question, we will not speculate why people not have made any offer. What is the interest...

[Yves Guillemot, Co]

And if any of afterwards were made.

[Frédérick Duguet, Chief Financial Officer]

Absolutely. So I can't comment on that any further. What we can say is that, as we mentioned, we have high-value assets. We have the scale to remain independent and create a very meaningful value in the future because we have scale in terms of production workforce as well as engineering, technology, IPs and strong engaged communities. That's why we are able to serve so many platforms today with such high-quality content and with good favorable terms for publishers like Ubisoft. And of course, we won't speculate anymore on any potential interest in buying Ubisoft. In terms of what we're doing in free-to-play, it's very clear that we've seen big multiples from companies that were willing to diversify and go to free-to-play. What we're doing is consistent with our historical DNA. It takes time, but it's a major opportunity to bring AAA type of content from our core IPs on a big segment that is the shooter segment and to do it in an organic manner that can allow us to unlock massive audiences and continue our journey towards more player engagement, more recurring revenues over time.

[Yves Guillemot, Co]

And also more on mobile, which is -- which has a bigger potential for the brands we own.

[Frédérick Duguet, Chief Financial Officer]

So on the PRI, yes, so the PRI is down versus last year for the very reason that, as you remember, last year, we had a very meaningful strong impact from live services on Assassin's Creed Valhalla at the time of the launch over the quarter. What is interesting to see over the last quarter is despite Rainbow Six Siege, as expected, has been stronger, especially from a competitive point of view, the overall back-catalog PRI has had a solid growth. So that confirms the strong resilience and recurrence of our recurring revenues on the back catalog. Moving forward, it's too early to talk about fiscal '23. What we can say is that we expect a very strong growth on the PRI side in Q4.And as to your question relative to risk, I think what we can say here is that we won't comment further on the rumor. What we can say is that back to our comment in October, we have a very strong road map on the AC franchise for the years to come with very meaningful content coming every year. We reaffirm our focus on delivering high-quality narrative. Today, as is mentioned, we are very happy to celebrate the stellar performance from Valhalla so far. The momentum being great, and that's why we are so happy about putting Ragnarok to market very soon. And we are really focused on delivering the second great year of post-launch content on such a great game.

[Matthew John Walker, Research Analyst]

I just had one very tiny technical follow-up, if I could, which with Microsoft, do you put that revenue into PRI? Or do you put it into product sales?

[Frédérick Duguet, Chief Financial Officer]

It's primarily product-based.

[Operator]

Next question comes from the line of Doug Creutz from Cowen and Company.

[Douglas Lippl Creutz, MD & Senior Research Analyst]

You just alluded to the fact that you expect strong PRI growth in fiscal Q4 and in my model, it seems to suggest that you're expecting to see a record quarter for PRI in the history of the company. Obviously, you've got Ragnarok coming, which should be pretty big. And you mentioned you have a lot of content for your other franchises coming, which suggests to me that it's not initially been launched yet. How should I think about your ambitions for all that in the context of a release slate in February and March in the industry that looks a lot more like what you'd expect to see in October, November than February, March?I could list all the games that are coming out over the next 6 weeks, but I'm sure you're aware of what they are, too. Could you just talk about how you think about all these content drops and how you make sure players are aware of them in the context of such a heavy release slate for this part of the year?

[Frédérick Duguet, Chief Financial Officer]

It's true to say that Q4 this fiscal for us is an ambitious quarter. We have historically done great in this quarter. Yes, there is a number of good quality games for the market. What we could see with Ragnarok is that on the back of such great momentum from Valhalla, we've seen a very strong player engagement since reveal in December, and that was confirmed and measured and tracked against last week when we released our trailer. And we see strong engagement on the preorder side as well.

[Yves Guillemot, Co]

And what we have seen generally when there are lots of content on the market, actually, all the games sell very well. So it's also something to consider because people play all sorts of games. And when they are good creation coming on the market, they also tend to try them and play them a lot.

[Frédérick Duguet, Chief Financial Officer]

Yes, the sales curve are more vertical during this quarter than during the pre-Thanksgiving season.

[Operator]

Next question is from the line of Nick Dempsey from Barclays.

[Nicholas Michael Edward Dempsey, Research Analyst]

I've got 3 questions left. So just first of all, on the revenue or net bookings guidance range for FY '22. I mean, to my mind, there isn't a lot of difference between flat and slightly declining. So we're talking about being in the bottom end of that range. Could slightly declining be minus 3% or 4%, something in that sort of range, or would that be definitely more than a slight decline?Second question, when I think about non-IFRS operating income margins in FY '22, they've got support from strong back catalog, no free-to-play games and I guess a decent margin of some of that Game Pass upfront payments. When I then sort of flick to FY '23 in my model, you've got a bunch of free-to-play games, which are unlikely to be profitable straightaway. Skull & Bones needing heavy marketing and no Games Pass upfront amounts. So why shouldn't I assume a clear step down in my margins between FY '22 and FY '23?And the third question, just on those free-to-play games in FY '23. I mean we've got 3 free-to-play shooters. Would you launch those close to each other? Are they different enough from each other to do that? Or should you have a big gap between when you launch them, so some of them coming late in FY '23 or even beyond FY '23?

[Frédérick Duguet, Chief Financial Officer]

Nick. So on the first point, yes, we confirmed the slightly declining to flat guidance for the full year. So yes, you -- I think you're about -- towards a good order of magnitude in terms of potential decline.In terms of fiscal '23, it's too early to talk about the margin profile. What we can say is that we can rely on the strong back catalog dynamics. And as for your comment on free-to-play, it's true to say that we are at an early stage in investment phase period, but it's really important to value this investment on free-to-play for the long term in mind. Again, it's a great opportunity for us to be able organically to move to free-to-play while others will spend a lot of money in M&A to go there.In terms of your comment on the, I think, the Game Pass deal, it's interesting to see that -- what we see over the last years is that there is an increasing interest from platforms into our content, and that's something that we've been leveraging for the benefit of our IPs, and that's an element that we'll continue amplifying into the next years.

[Yves Guillemot, Co]

And for your last question about when those games will come, it will depend very much on KPIs, but we will make sure they don't compete one with the other.

[Operator]

Next question comes of Michael Ng from Goldman Sachs.

[Michael Ng, Research Analyst]

I was just wondering if you could give us an update on the development progress for some of the games that are coming out in fiscal '23, Skull & Bones, Avatar and Mario?And then secondly, I was just wondering if you could talk a little bit more about the strategy with working with Game Pass? Was this more opportunistic in nature? Or do you expect to utilize a Game Pass partnership for AAA games going forward? Do you feel that engagement is incremental to overall engagements?

[Yves Guillemot, Co]

For Game Pass, it's more opportunistic. We go to Game Pass when we think it can be beneficial for our brands and that where the margin we will get is higher than what we can get otherwise. And then, Fred, maybe you can...

[Frédérick Duguet, Chief Financial Officer]

Yes. So on the development of our games for next year, they are progressing well. As you know, Avatar is a highly awaited as well as the movie. Our teams, from the beginning, wanted to create a gorgeous world with Pandora. So we believe we can deliver one of the most beautiful world ever created, and that's what the teams are focusing on.Mario + Rabbids is a great opportunity. Again, a good example of another high-profile partnership with a big platform, with Nintendo. And we'll get the benefit of a bigger game, a deeper game play and a much bigger installed base than what we had with the previous title. So that's a great opportunity for us.As for Skull & Bones. It's a very promising new IP, focusing on multiplayer first. So very consistent with our strategy to bring multiplayer in competition and co-op first in the big open world with a great and attractive fantasy. So that's, of course, a longer development time that we've had on that game, but we are very happy with the artistic direction and the progress of the game so far.

[Operator]

Next question comes from the line of Brian Fitzgerald from Wells Fargo.

[Brian Nicholas Fitzgerald, Senior Analyst]

We wanted to ask about platforms like Stadia. Google is reportedly diminishing the gaming focus there, maybe never really hitting enough of critical mass in terms of subs. Is maybe there's just limited opportunity for yet another device or experience in the market? Maybe more gamers are excited about enhanced versions on the Gen 9 platforms versus the costs? Anything you can unpack there for us? Are there performance quotients around that experience?And then second question may be related. When you look at the recent market activity and this notion of exclusive titles or features or release windows, is cross-platform gaming really diminishing the need for exclusives?

[Yves Guillemot, Co]

What we can say about Google or streaming platforms in general is that they really do a good job to bring AAA games to as many screens as possible. And that's a trend that will continue and amplify in the years to come. We don't know yet exactly when it will be taking 50% of the industry. But what we see is for a certain number of players, the experience is really smooth and they are having a great experience when they play those games. So it's just how many people will be able to play at a good price that will make this grow a lot. And the other thing is when they will be games that will be really creative having in mind that they will be on those -- that will be native for the cloud, and those games will automatically help this streaming business to grow exponentially.

[Brian Nicholas Fitzgerald, Senior Analyst]

And then on the cross platform, is that kind of diminishing the need for exclusives?

[Yves Guillemot, Co]

It's -- cross-platform is working. It's just not yet massive. So we will see how massive it becomes. It's going to be more and more important also. But that's why I think the platform holders are still looking quite a lot at exclusives to differentiate themselves.

[Operator]

Thank you. I would now like to hand back over to the speakers for final remarks.

[Yves Guillemot, Co]

Yes. Thank you very much for all your questions today, and have a good day or good evening. Thank you.