Ubisoft Entertainment SA

PAR:UBI

Earnings Call Transcript 2023-Q3

[Operator]

Good day, and thank you for standing by. Welcome to the Ubisoft Third Quarter Sales Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Yves Guillemot. Please go ahead.

[Yves Guillemot, executive]

Welcome, everyone, and thank you for joining the call today. We are committed to boosting our efficiency and execution through a more agile organization with a strong focus on initiatives to enhance predictability across our production and through our cost reduction efforts of more than EUR 200 million over the next 2 years.

We are notably rolling out the best-in-class Assassin's Creed production model throughout the organization. The Assassin's Creed brand has leveraged exceptional predictability and execution, hitting high-quality targets to become one of the industry's most powerful brands. This reflects maturity in terms of production tools, best practices, and processes we have built over the past 15 years on this beloved brand.

We are applying its proven production framework to all our biggest brands production pipelines to deliver memorable and differentiated experiences to players in a more predictable manner. We are also focused on building on our strengths as we prioritized our efforts on big brands and long-lasting live games. Next fiscal year, we'll see the release of a meaningful lineup of major IPs, including new titles within the Assassin's Creed and Avatar universities as well as the yet to be announced [ Dodge ] game. It will also be supported by the launch of several long-lasting live games with Skull and Bones and The Crew Motorfest as well as new offerings for mobile with Rainbow Six Mobile and The Division: Resurgence.

Before handing the call to Frederick, I would like to say we have been thrilled to see that the talented composer Stephanie Economou, won the first ever Grammy Award for best soundtrack for video games and other interactive media for her work on Assassin's Creed Valhalla. It's a testament to the importance and relevance of video games at the medium of culture and entertainment. I will now hand over the call to Frederick. Frederick?

[Frédérick Duguet, executive]

Thank you, Yves, and hello, everybody. Our Q3 net bookings came in at EUR 727 million, in line with the revised guidance. Our back-catalog stood at EUR 249 million, down 27% and MAUs were EUR 35 million, down 6% year-on-year. As a reminder, last year, back-catalog benefited from the Game Pass partnership on Rainbow Six as well as stronger content delivery on Assassin's Creed Valhalla.

While the macro environment impacted the video game market and our Q3 results, our established franchises and live games have performed solidly. In particular, in a very competitive backdrop, Rainbow Six Siege posted very strong performance in December and January. Our teams continue to do an amazing job as they build on the positive momentum since Q1 fiscal '23, which has led the game's PRI to grow double digits on a 9-month basis.

The content they are bringing to players is impressive, delivering on many of our players' top request and this is clearly reflected in stronger engagement levels. As a result, Siege delivered a new DARPU record in December and engagement is back to double-digit growth versus last year since the beginning of this calendar year. At the end of the ongoing Esports Six Invitational events, the team will unveil the new season of Rainbow Six Siege as well as an exciting year of content. Additionally, next fiscal year, we'll see the release of Rainbow Six Mobile, which is set to leverage the brand's current momentum and to bring it to a significantly larger audience.

Total digital net bookings reached EUR 568 million, up 7% year-on-year and represented 78% of our total net bookings. PRI to that EUR 419 million, significantly up year-on-year, thanks to the mobile licensing partnership and represented 58% of our total net bookings. Mobile amounted to EUR 311 million. The upfront revenue linked to the mobile licensing partnership we announced last July has now been fully booked. Over 9 months, the mobile net booking revenue progression is expand by the impact from this partnership. It offers great financial benefits to Ubisoft and has the potential to bring the related brands to a significantly larger audience. This reflects more than ever our capacity to leverage the powerful appeal of our brands and our portfolio. As a reminder, we do sign sizable partnerships every year.

Looking at the full fiscal year 2023, we confirm our financial targets of net bookings expected to be down more than 10% and non-IFRS operating income of approximately minus EUR 500 million. Next fiscal year, we'll see the release of a meaningful lineup to support the development of big brands as well as long-lasting live games. This would include Assassin's Creed Mirage, Avatar, Frontiers of Pandora, Rainbow Six Mobile, Skull and Bones; and The Crew Motorfest as well as The Division Resurgence and the yet-to-be-announced large premium title.

We are now ready to take your questions.

[Operator]

[Operator Instructions] Now we're going to take our question and the question comes from the line of Omar Sheikh from Morgan Stanley.

[Omar Sheikh, analyst]

I've got 3 questions if I may. Can I maybe start with Rainbow Six Mobile. Maybe Yves or Frederick, could you just talk us through how -- what the launch plan is there? So are you planning to launch this globally? Is this going to be in China and outside China? And could you maybe talk about the revenue model? So how do you book the licensing revenue, whether it's outside China or inside China, that would be helpful to start.

Secondly, on Avatar and Skull and Bones, could you maybe just update us on where you are on those games? How confident are you that you're going to be able to release them? And how finished are those 2 games right now?

And then thirdly, maybe one for Yves. You've made some decisions to cancel some titles. You've cancel 7 so far in the last 12 months. Could you maybe just talk about whether you think you currently have the right number of premium games and mobile games, sort of, that you're currently operating and have in the pipeline? Do you think there's scope for further rationalization? Or do you think you're in the right place right now?

[Yves Guillemot, executive]

Thank you for your question. So Rainbow Six Mobile will happen this financial year. It's going to be -- next financial year, sorry. It's going to be a free-to-play game. We can't say about China because it's -- we have to go through a process for approving those games and we don't have information yet to give. So any revenue that we would get from the sales of items in games would be in our revenue this year. So it's a big launch worldwide, except China till we don't -- we have the actual number from the Chinese government.

On the canceled games. So yes, we canceled a few games because we thought we needed to make space for other games that are on -- in development in the company. And that's really helping all the other games that are progressing well. Now we feel we have the right number of games, knowing that we will launch a lot of them -- a lot of games in financial year '24. That will also give space for the other games that are underway in the company.

So in the -- if we look at 24 months, the number of games in the company will -- in work will go down quite a lot and that will give more space to -- all the games we have underway. Having said that, we know that many of those games are also going to have post-launch content. And this will take a certain number of teams to -- and talents to actually create that content.

Now on the Avatar and Skull and Bones. There's a lot of work, which is done by the team who are really dedicated to those games. And we have regular play tests on those games that are giving us information of where we are and what we have to tweak. So they are well underway. We can say more at the moment about the games, but they are -- we expect they will be good contributors to the next fiscal year.

[Omar Sheikh, analyst]

Great. But can I maybe just follow up with one for Frederick, actually. Frederick, you talked on the last call about delivering EUR 200 million of savings over the next 2 years. Could you maybe just talk about how much of that you're expecting to happen in fiscal '24?

[Frédérick Duguet, executive]

So yes, you're right, Omar, we mentioned that -- I mentioned and we mentioned that we will make a significant effort in terms of cost reduction of our fixed cost base over the next 2 years, meaning that by fiscal '26, our fixed cost base will be lower than EUR 1.6 billion. And we are working on that actively. But of course, we'll give you more detail when we reach specific milestones.

[Operator]

And the next question comes from the line of Nicola Langlet from BNP Paribas Exane.

[Nicolas Langlet, analyst]

I've got 3 questions, please. First, on the licensing agreement contribution in Q3. Based on my estimate, it was close to EUR 250 million to EUR 260 million. Do you confirm that figure? And I think at Q4, what sort of contribution are you expecting?

Secondly, if we look at next year pipeline, you don't mention The Division Heartland, the free-to-play initiative. Does it mean it's not [ ready ] for full year '25.

And finally, on the EUR 200 million non-variable cost reduction, are you able to split that between the OpEx reduction and the cash R&D [indiscernible] trend you expect? Not necessarily a very precise figure, but any indication would be helpful.

[Frédérick Duguet, executive]

Yes, Nicolas. So on your first question on the licensing contribution in Q3, the number you're quoting, I would say it's, yes, right about the right ballpark figure. And we have now booked the full upfront fee. So you should not expect more in Q4.

As for The Division Heartland, yes, we're working actively on this game that we've -- there are strong survival shooter game across the PC and console in free-to-play. We have not mentioned a release date, yes, until we complete the different phases of tests ahead of us.

On the cost reduction program, in terms of split between cash R&D and operating expenses, will give you more detail in the future.

[Operator]

And the next question comes from the line of Nick Dempsey from Barclays.

[Nick Dempsey, analyst]

Just first of all, are you closing Skull and Bones and The Crew Motorfest as AAA games? Because we've still got another large game not mentioned, have made that 5 AAA games in 2026 to '24 lineup, but perhaps you're not categorizing it that way.

Second question, can you give us any more color on what costs there might be in terms of upfront or during the process to take out that EUR 200 million of savings, so the restructuring charges?

And there was a question on The Division Heartland. You also don't mention XDefiant in your 2023 to '24 lineup but you do referred to in the release. Does that mean that we shouldn't expect XDefiant during the 2023, 2024 fiscal year.

[Frédérick Duguet, executive]

Nick. So to your first question, yes, we consider Skull and Bones and The Crew Motorfest to be our AAA games and there will be live service types of games. So we expect that they will contribute to increasing our recurring revenues over time.

On the cost question, we won't have more detail to share at this stage. We had mentioned that it would be a combination of hiring freeze as well as targeting restructuring and including some non-core asset divestiture.

As for XDefiant, I will give you the same answer as for The Division Heartland that I just gave, which is that we are starting with a technical test as we speak. And we will complete the different phases of tests before communicating on the release date.

[Operator]

And the next question comes from the line of Michael Hickey from The Benchmark Company.

[Michael Hickey, analyst]

You mentioned that Assassin's Creed was generating player engagement records in the quarter. Can you just sort of double-click on what exactly records you're hitting there in terms of engagement and how that sort of sets the stage, I guess, for your upcoming release of Mirage and Jade.

[Frédérick Duguet, executive]

Yes. On AC, what we said is that the number of active players in the quarters has increased over the first 9 months has increased by 30% versus last year. That shows that the brand is in very good shape, and we have seen that trend confirmed in the last quarter. So that's really set the brand very well for the next new releases.

[Yves Guillemot, executive]

And we know that each time now we launch a new game in the franchise. All the back catalog is actually growing a lot and as well as when we launch new content on the brand. So it's a very active brand at the moment.

[Michael Hickey, analyst]

And do you have an update on your Mobile Jade, at the Assassin's Creed?

[Frédérick Duguet, executive]

Nothing new to say at this stage. We still have some -- also more tests to complete until we can share more.

[Michael Hickey, analyst]

The last question for me. You guys have, pre-COVID here, historically been really strong presenters at E3 in Los Angeles. Do you guys plan to attend the event in person this year and show your games?

[Yves Guillemot, executive]

Yes. If will happens, we will be there and we will have a lot of things to show.

[Operator]

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

[Matthew Walker, analyst]

I was just wondering, firstly, on Skull and Bones. What are your assumptions within the mix on the EUR 400? Have you effectively de-risked that now by assuming very low units or not?

The second question would be in the EUR 400 million of EBIT, have you assumed that there will be any other one-off sales like the mobile deal that you did, the mobile deal you did, which you just referred to?

And then finally, what are the risks around -- I mean we've heard reports of strikes or potential strikes in France and potentially elsewhere. Could you sort of update us on what's happening on the ground there and what the risk is of delays to your schedule?

[Frédérick Duguet, executive]

So on Skull and Bones, as we said, we're giving it a few more months to -- so that players can really have the improved version in hand, and we believe that the work is progressing well. So that's why we confirm that launch will be in early fiscal '24. And we are confident that this game can establish itself for the long-term and contributing to more recurring revenues as it's based on the live service type of game play.

In the -- in your second question, what we've been saying for a number of years is that we do sign partnerships with -- every year with the biggest platforms and entertainment players of the industry. So this is part of the business model. And we can say we -- for your last question, we know that the current global macroeconomic and social environment as well as our recent decisions create some interrogations within our employees. And we are in constant and direct dialogue with our teams and take the necessary time to actually explain the reasons behind these decisions. So we are working very hard with them to tell them about what we do, what we -- how we plan to get organized in the next few years.

[Operator]

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

[Ali Naqvi, analyst]

Just to step back in terms of your strategy, how much of this shift on your core titles affect how you're thinking about marketing for future releases for Avatar or Skull and Bones, which are not core IPs yet?

[Frédérick Duguet, executive]

So in terms of strategy, actually, what we're doing is really focusing on big brands and live services. And these are really the 2 directions that we are focusing on. And that's why we really want to make sure that our biggest brands such as Assassin's Creed, Rainbow Six, The Division [ the 2 ]-- will -- and Far Cry will grow in the next 3 to 5 years with strong road maps across all platforms, geographies and business model. So that's really what we're doing on one side.

And on the other side, we'll continue working on more and more live service types of games. That's why we're coming on mobile on these big brands, but we also believe that on specific market segments such as on The Crew, for example, we can really establish these plans for a long period of time.

[Yves Guillemot, executive]

And Skull and Bones as well. It's -- for us, it's very important when we are able to install a game for the long-term because it actually generates a very regular revenue and very profitable revenue for the years to come.

[Ali Naqvi, analyst]

Understood. And just maybe a follow-up on this sort of topic. How much of this focus on the core IPs do you think is a function of the economic cycle and views on discretionary spending versus something that may reverse and you may look at more on new IPs when it turns and things get a little bit better?

[Yves Guillemot, executive]

The market is going toward bigger IPs at the moment. But as you -- we could see with Harry Potter last week, some IPs also can also come from outside the industry. So it's a market that goes for projects that are very appealing. So it's a very dynamic market, which is reacting fast to new experiences that they will like. So it's big IPs, and it is also some games that can generate recurrent revenue also for the company.

[Operator]

And the next question comes from Sebastian Patulea from Jefferies.

[Sebastian Patulea, analyst]

The question is regarding Skull and Bones please. Reportedly, you've been working on this game for about 10 years now since close to 2013. Therefore, I'm assuming that the investments here are quite sizable. Can you please give us an estimate on either the number of units or maybe revenue that Skull and Bones will have to book in order for this title to breakeven and potentially a [ weighted ] impairment. I'm asking this because we've seen the reviews and they don't look particularly strong.

[Yves Guillemot, executive]

Thank you for your question. In fact, we've been amortizing this game over the years. So we only have a certain amount that we still have to amortize when we'll launch the game. Those kind of games are new games, new IPs on a different model, and that's why they take time. It doesn't mean that it should have been that long and we don't like the fact that it was too long, but it is a game that is going to -- as we see generate revenue for the years to come. So we don't know yet exactly what it's going to do.

[Sebastian Patulea, analyst]

If I may follow up, please. So from...

[Frédérick Duguet, executive]

Sebastian, just -- sorry, just to complete the answer, as we said in January, we've been very happy with the play test that we've seen in early January. So we have a very strongly improved version to show to players that they haven't seen yet. So this is really what we are going to leverage in the next months to drive more momentum on the game.

[Sebastian Patulea, analyst]

I appreciate the color for that. may I please follow up. So I understood that the risk for an impairment is low here, given that you guys have amortized this title through the years. May I please also ask what's the cash return that has to come in order to amortize the cash investment in order to break even on the cash investment, please?

[Frédérick Duguet, executive]

So what we are planning for next year is really to grow strongly. We -- as we said recently, we are focusing on R&D allocation towards more of our biggest IPs and live service types of games. And that's why we anticipate that behind this strong growth in the coming years behind a very rich lineup, we progressively get back to above 20% operating margin in the medium-term.

[Operator]

Thank you. Dear speakers, there are no further questions at this time. I would now like to hand the conference over to Yves Guillemot for closing remarks.

[Yves Guillemot, executive]

So thank you very much for your questions, and have a good afternoon or good morning. Thank you.

[Operator]

That does conclude our conference for today. Thank you for participating. You may now all disconnect. Have a nice day.