Ubisoft Entertainment SA (OTCPK:UBSFY) Q1 2020 Earnings Conference Call July 17, 2019 12:15 PM ET

Company Participants

Yves Guillemot – CEO

Frédérick Duguet – CFO

Conference Call Participants

Robert Berg – Berenberg

Nicolas Langlet – Exane BNP Paribas

Michael Ng – Goldman Sachs

Charles Scotti – Kepler

Ray Stochel – Consumer Edge Research

Ken Rumph – Jefferies

Nick Dempsey – Barclays

Doug Creutz – Cowen & Co.

Julia Matoshchuk – Morgan Stanley

Jeff Cohen – Stephens Inc.

Tom Singlehurst – Citigroup

Operator

Good day and welcome to the Ubisoft Q1 FY ‘20 Conference Call. At this time, I would like to turn the conference over to Yves Guillemot, Ubisoft’s CEO. Please go ahead, sir.

Yves Guillemot

Good afternoon, and good morning, everybody. Thank you for joining our conference call. We started the year on the right foots. Our games performed solidly and player recurring investment grew strongly.

Notably, Assassin’s Creed Odyssey’s performance was outstanding with quite impressive engagement, PRI and sell-through, nine months after its release. The Québec City team has delivered handsomely and we can’t wait to share more about their next game, Gods & Monsters. The quarter also saw a better performance on anticipated for Rainbow Six Siege. Three and half years after its release, Siege continues to be one of the strongest games on the market. Not only it is one of the top 10 biggest sellers over the past five years, it also possesses a rapid degree. It is a game with an extremely strong core game value, amazing engagement and retention, great sport momentum and has a true global appeal reaching a wide audience in Europe, North America and Asia. Only a handful of games in the industry combine those qualities. In a very competitive market for future, Siege still continues to perform steadily and is already seeing the benefits from the revamped production organization that is initiated 18 months ago.

Our E3 performance was another key highlight of the quarter. Most importantly, the Watch Dogs brand is again top of mind for gamers, thanks to its breakthrough gameplay innovation. Ghost Recon Breakpoint gameplay demo also had a very solid showing. It achieved robust viewership with impactful content created video and the best sentiment score of any history game. Our full year targets are supported by those positive trends.

I’ll present our E3 performance in more details, but first Frédérick would review our Q1 highlight. Frédérick?

Frédérick Duguet

Thank you Yves and hello everybody. Our net bookings reached €314 million in Q1, down 18% year on year and above our target of approximately €270 million. As a reminder, the year-on-your decrease is due to the absence of a big release during the quarter and to last year’s back-catalogue benefiting from Far Cry 5’s strong contribution after releasing just five days before the end of March.

As Yves mentioned, we achieved this better than anticipated quarter, thanks to a broad-based performance from our games and PRI. While MAUs for our PC and console games were flat year-on-year, engagement per player increased and reached record levels.

On the new release side, as we said mid-May, Anno achieved a record launch including meaningful progression in player engagement. Our back-catalog down 18% to €273 million and is better than expected. While Rainbow Six Siege and Assassin’s Creed Odyssey were key highlights, we also saw nice contributions from For Honor, Ghost Recon Wildlands and The Crew 2.

Assassin’s Creed Odyssey’s solid momentum continued over the quarter. This was fueled by very strong growth in engagement. Over the quarter we released the first two episodes of the Fate of Atlantis Story Arc. We also launched story creative mode, a brand new feature allowing players to write their own stories. All these events and content updates rose excellent engagement, PRI and sell-through well ahead of Assassin’s Creed Origins last year. And we realized yesterday Judgment of Atlantis the final episode of the Fate of Atlantis Story Arc.

Rainbow Six Siege was the other highlight of the quarter, benefiting from an increased frequency of updates, including weekly content drops and cool new creations. The April Rainbow is Magic! Event, the new season went on live till June and successful a sport event in Milan generated very solid engagement and PRI. While April was challenging, June was remarkable and in terms of MAU finished as our biggest month ever.

Over the quarter overall, engagement and PRI grew year-on-year. We also signed a partnership with Neowiz to distribute Rainbow Six Siege in South Korea PC bangs. PC bang is our big segment in Korea and Neowiz is one of the leaders. Starting this summer, this will allow Siege to reach a wider audience in this key market for competitive shooters.

Continuing on this positive trend, in early July, we released a new event Showdown that had another positive impact on engagement and PRI. With the Division 2, we have delivered a great game with record Ubisoft Net Promoter Scores and engagement per player and a growing PRI versus the Division 1 and Far Cry 5.

The Division 2 is the best selling game worldwide for the first six months of the year. For the future, we plan to drive acquisition and engagements with significant post launch release plan, including free major content updates available for free to all players with additional narratives and missions, new PDA mode and new specializations. Episode 1 – DC Outskirts: Expeditions will start releasing on July 23rd. This major content update will include two new main missions, two classified assignments and newly Discovery difficulty setting for the raid and the most demanded adjustments based on our community feedback. We expect to see have a nice boost to global activity and acquisition.

Alongside this solid back-catalog performance, PRI was very strong at 19% to €150 million. This is even more impressive considering mobile revenue was down 24% due to no release this quarter versus the launch of Might & Magic: Elemental Guardians last year. This means non-mobile PRI had a very robust 32% growth year-on-year. While deferred revenues had some positive impact, most of the growth was generated during the quarter.

Total digital net bookings reached €292 million, up 2%. On a platform basis, PC represents 34% of our total revenues versus 24% last year, driven by the success of Anno 1800 which performed very strongly on Uplay. Uplay continued its strong momentum. And as announced during E3, we will launch in September Uplay Plus for PC, a new subscription platform. It will also be available on Stadia in 2020. Uplay Plus will allow us to stress on the direct relationship we have with players by leveraging the breadth of our portfolio, which is one of the most diversified in the industry.

To conclude on Q1, I would like to mention that according to Glassdoor’s annual rankings, which are based on employees’ ratings, Yves was third on the list of the best CEO in Canada for 2019. Having such strong employee support for our management is extremely valuable. Talents are at the core of Ubisoft capacity to create many games and so they’re always ready.

Looking at Q2, we expect net bookings at around €310 million, down 15% versus last year. This reflects fewer early physical shipments from Ghost Recon Breakpoint versus Assassin’s Creed Odyssey last year, in line with the continued digital transformation of the industry. To a lesser extent, it also reflects the late release of The Crew 2 in June 2018 which had a positive impact on Q2.

As for the full year, we confirm our targets with net booking expected around €2,185 million, up 8% and non-IFRS operating income at around €480 million up also 8%. Our current back-catalog and PRI trends as well as the performance of our games at E3 are robust support for achieving these targets.

I’ll now hand over the call back to Yves.

Yves Guillemot

Thank you Frédérick. Ubisoft had successful E3, especially on social media. Ghost Recon Breakpoint benefited from excellent variability among content creators and record-like ratios among players. The team’s focus on a strong and — on game succession delivered very well at four of the six most viewed content creator videos for Ghost Recon Breakpoint. It also reached the best sentiment score in the industry with only 2% dislike ratio. Ghost Recon Breakpoint is seen as a key step forward for the Ghost Recon franchise and the demo cemented this perception. The breadth of new survival features have been praised towards contribution to the tactical depth of the game. Media, players and influencers also reacted positively to the game’s stronger narrative and also Jon Bernthal presence, whose character is a charismatic antagonist to remember. Ghost Recon Breakpoint targets the military shooter segment, the biggest of all premium shooter segments, and we benefit from a great release window on October 4.

Now, Watch Dogs: Legion was a huge success also at E3. Media and content creators who had the opportunity to try the Anthem demo praised the never seen before groundbreaking play as any one innovation. It enables players to recruit and play as any character from the world. The reinvention of An Open World Near Future London On The Brink Of Collapse was also highly praised. With such a strong reveal, we have reignited the Watch Dogs franchise. Legion bannered more than 65 Awards and nominations including Best of Show by outlets like GameSpot, PC Gamer and GamesRadar, Best Action Game by IGN and Gaming Informer and Best Action Adventure Game by the official E3 game critics. Watch Dogs: Legion will be released on March 6, 2020.

We also unveiled the further tales of Gods & Monsters and Rainbow Six Quarantine. Gods & Monsters is a new IP developed by Ubisoft Québec. It stems from the research and stories from ancient Greek mythology they studied when creating Assassin’s Creed Odyssey. Gods & Monsters puts players on a quest to save the Greek gods in a reverently colorful open world filled with mythological monsters. The game will be released on February 26.

Rainbow Six Quarantine is leveraging the proven gameplay of the critically acclaimed Rainbow Six Siege Outbreak. Quarantine is a full-fledged PvE co-op experience complementary to Rainbow Six Siege PvP. And will be launched in the fiscal fourth quarter. Both games generated great interest at E3, and we can’t wait to show you more.

We also revealed Roller Champions a new free to play PvP action sport game developed by Ubisoft Montréal. It had the strongest performance of any E3 games in terms of streaming, viewing time, an amazing performance highlighting its fun and innovative competitive gameplay. Roller Champions will be released in early 2020.

At the conclusion, our games performed better than anticipated during the quarter with strong engagement and player recurring investment. We also saw a robust performance from our games at E3, which gives us confidence for the remainder of the year. With many growth drivers at our disposal, we are eagerly positioned to generate strong revenue growth and further increase our profitability over the coming years.

We are now ready to take all your questions.

Question-And-Answer Session

Operator

[Operator Instructions]. We will take our first question from Robert Berg of Berenberg. Please go ahead.

Robert Berg

Three questions from me if I can. The first as you said really good June start of July for Rainbow Six in terms of player count, PRI. You also mentioned more content too with the weekly drops clearly budgeted for the cost of the content in your guidance, the revenues ahead. So not worried about the full year guidance. But how should we be thinking about the relationship, the extra costs versus the extra revenue for these additional content drops? So what have you seen so far? What return do you think there that will be interesting? The second question on the competitive environment heading into your Q2, a bit of a follow on from my previous question I guess, there is no obvious impact that I have seen from your guidance from recent update from one of your peers, how you are seeing the competitive environment in July I guess? The third, the press reports of the deal with Facebook for VR. I know that VR has been pretty minimal so far, could this be interesting, how should be thinking about the VR opportunity for you guys? Thanks.

Frédérick Duguet

Thank you, Robert. On your first question, what we see that we started to see the benefit of the reorganization that the Rainbow Six Siege game did in terms of reorganizing our production pipelines to be more broad and efficient and that’s been very effective. But what we — we see that we’re coming from a situation where they were used to releasing big major updates in every three months and they continue to do so, but on top of that they are coming by fun events every six weeks being more creative and they’ve also come with smaller content drops every week. So all of this shows the agility of the team, but because they’ve been working on improving the engine adaptability as well as being pretty efficient. So that’s how we see the evolution of the Rainbow Six team and that’s also pretty inspiring for other teams.

Yves Guillemot

Now for the July month the competition environment is strong but we are upbeat with our games now succeeding. So we are not — we don’t see big pressure from the competition at the moment.

Frédérick Duguet

What we see is that June for Rainbow in particular was a record month in terms of MAUs and then just at the very beginning of July we came with slow down and it had a strong positive response from plays. So it has been building on the momentum of June but July has started to — off to a good start so far.

Yves Guillemot

And on the VR side, we think that seem less, friction less and good entry prices and good games could help this business to take off because it provides good emersion for players but we need to make sure those elements are there to make it actually grow.

Operator

We will now take our next question from Nicolas Langlet of Exane Paribas. Please go ahead.

Nicolas Langlet

Two questions from me. The first one is on The Division 2. How is the game changing versus The Division 1? And Yves, are you happy with the monetization level? And second question on the mid-term net booking growth, given your view on the industry growth potential, the increase in cash R&D spending you plan for the coming years and what’s driving your pipeline? Do you think you can maintain a double-digit net booking growth in the coming years, do you think it’s feasible? Thanks.

Frédérick Duguet

On Division 2, Division 2 did in line with our target in Q1. Today we rely on a stronger audience and with record level of engagement of player, so higher than Division 1 actually. And as we said PRI is up relative to Division 1. What is important for now is that we’re coming with massive post-launch program that is meant to further drive acquisition and to really getting game to activate players that we’re able to get more content, so that the whole idea behind this post-launch program that will be available for all players. So that’s we believe that Division 2 will be a strong performer in fiscal ‘20.

Yves Guillemot

And we have to first episode coming the 24th of July, so in a week.

Frédérick Duguet

In terms of mid-term net booking growth, yes, we expect a strong growth on the top-line and we view that it should be a double-digit growth over the next years that we come with improvements in our operating margin. And just to complete our answer on the Division 2, the post-launch program will be bigger one than what we used to have on Division 1 at the time.

Operator

We will now take our next question from Michael Ng of Goldman Sachs. Please go ahead.

Michael Ng

Could you talk a little bit about your expectations for PRI pacing throughout the rest of the year in fiscal ‘20? Should we expect this nearly 20% year-over-year growth that you realized this quarter to continue throughout the year and what are some of the key PRI drivers for the rest of fiscal ‘20 that we should be aware of? Thank you very much.

Frédérick Duguet

So for the year, we expect solid growth on PRI which means that we expect actually strong growth on the PC and console side, keeping in mind that we assume that mobile would be lower than last year as we have still lower impact from new releases on mobile than last year. And so yes we’re starting on a good basis in the Q1. I’m not going to tell you that we confirm the same percentage over the remainder of the year, but the fact that Rainbow and Division, and Assassin’s Creed Odyssey on top of for the rest of the catalog are doing very well on PRI, over this first quarter, it bodes well for the rest of the year.

Yves Guillemot

Yes. On top we had a good Ghost Recon Wildlands PRI, so the new Breakpoint will also be on the same thing.

Frédérick Duguet

For Honor also did well and The Crew 2.

Michael Ng

Great. Thank you. And one follow-up if I could. My understanding is Rainbow Six Siege is largely a PvP game but there have been some PvE event like Outbreak. How many Rainbow Six Siege players play those PvE events like Outbreak? I’m just trying to understand what that experience taught you about the potential demand for Rainbow Six Quarantine? Thank you very much.

Yves Guillemot

There is a huge demand from Rainbow Six players to have PvE and this event was really the biggest event on Rainbow Six when it was launched in March last year. So we think there are really a good percentage of the players that will come to this plus players that didn’t want to play PvP that will be coming back to the brand, we have the PvE, alright. But what we can say we can’t give you numbers. But we are very optimistic on the fact that it can be a good driver for either people that love the brand and who didn’t want to play PvP, and the people that play PvP actually.

Frédérick Duguet

We’re very happy to come with complementary type of gameplay on the franchise. And we believe that is more accessible gameplay that will also bring new players into the franchise.

Operator

We will now take our next question from Charles Scotti of Kepler. Please go ahead.

Charles Scotti

Three questions please. The first one on Rainbow Six Siege. It seems that the game has benefited from the class of Apex in Q1. And did you see any impact from the release of the Season 2 of Apex Legends on July 7? Second question is on Rainbow Six Siege, can you update us on the approval process of the game in China? And my last question is on the [Origins], I am not sure if I have well understood what you said during the call. MAU were flat in Q1, right?

Frédérick Duguet

Yes, MAU overall you mean? Were flat in Q1 but the engagement of player has been increasing and actually achieved record levels for the quarter — for the Group.

Yves Guillemot

Now for China, we can’t share more news on that. It follows the normal process I would say.

Frédérick Duguet

On the impact of competition, I will say that what we’ve seen in early July, as I said before, with the release of Showdown we had very positive reaction on our side in terms of activity and in terms of engagement, and PRI. So, so far so good for Rainbow related to the competitive landscape.

Having said so, we stick to what we said back in May for the full fiscal year, the guidance for Rainbow and in that we have factored in potentially strong competition landscape for the full year. So we’ll have to look at how things evolve. So far so good.

Operator

We will now take our next question from Ray Stochel of Consumer Edge Research. Please go ahead.

Ray Stochel

Can you all talk broadly about Net Promoter Score trends across your titles, anything that’s particularly standing out? And if possible, compare that either versus peers on either Net Promoter Score or similar sentiment metric? And whether or not you guys have seen improvement in any of your titles over the last several years? Thanks.

Frédérick Duguet

Yes, we — that’s one major tone that we’ve seen over the last year, which is a continuously improvement of consumer sentiment. Because we’ve been continuously investing in the post-launch program of all our live games, even when we had to face some difficulties some years ago on some of our games, we showed strong commitment and we’ve seen stronger progression of sentiment across all the portfolio, due to also the fact that we’re focused on delivering high quality on the launch of the game, as well as then in delivering constantly post-launch content of quality across the portfolio. We’ve also had to do strong work on everything that was related to infrastructure, server, player experience and that has been a learning curve over the years and that’s driving lot of good feedback that we follow on a weekly basis.

Yves Guillemot

And we haven’t seen everything yet because i3D is — we are staring to use more and more their infrastructure and this is going to help us a lot to improve the theme of all our players. So we will continue to improve the service all the time.

Frédérick Duguet

Yes, as well as protecting our servers from any security elements, so that’s very positive for us in the long-term.

Yves Guillemot

Yes, i3D is the last acquisition which did in fact back in December.

Operator

We will now take our next question from Ken Rumph of Jefferies. Please go ahead.

Ken Rumph

Three questions. Firstly briefly on PC, was all of the percentage increase Anno or was — is there an underlying increase in adoption of PC for you? The second question, you had a sale event in July that’s common with Steam and some other platforms. I wasn’t sure whether it was a new thing for you seasonally to do that and whether that should be something that we should be aware of from a revenue point of view? And finally, Uplay Plus launching mid-September I think initially free. I’m just wondering, will that therefore affect revenues, will it affect deferred income? And in fact if it’s free to begin with, even not affect revenue until later, just wondering how the kind of revenue recognition will work on Uplay Plus? Thanks.

Yves Guillemot

Yes. So the 34% was also pushed by Anno which is a PC specific game. But even with that launch, we had a very good performance on PC overall. Now on the Uplay Plus, it’s coming along well. We don’t expect the free events of September to have a mega impact on our back-catalog because it’s only one month for the people that would not pay afterward, or it will certainly make lots of people discover our games and then after they will decide if they jump in and pay the first month interact.

Frédérick Duguet

On the sale event in July, yes, we’ve had some information that it’s pretty common in Europe, which we do on a different platform. That’s the beauty of the digital flexibility that offers us regularly, but nothing in particular on this sale event.

Operator

We will now take our next question from Nick Dempsey of Barclays. Please go ahead.

Nick Dempsey

I’ve got three question, Yves. So just picking up on what you said earlier about good PRI for Wildlands and the impact on Breakpoint. Does your recent experience with Wildlands therefore make you more optimistic than you were at the start of the fiscal year when you set your guidance above the PRI contributions for Breakpoint this year? And secondly just about guidance for the year, I mean you started off the year I guess worrying whether Cyberpunk would land in the middle of your Q4, your big launch quarter, you’ve now had a Q1 which is comfortably better than you were expecting. So can we claim from that that you feel more comfortable by your guidance than you did when you set it?

Frédérick Duguet

So on the PRI side, good start from Wildlands in the first quarter is of course good news. It doesn’t really change what we anticipate for our Breakpoint. We believe Breakpoint will be stronger than Wildlands on the PRI side overall why because it’s coming with PvP from the very beginning, while it was not the case for Wildlands. So we can have a stronger fun base that we can build upon from Breakpoint and we will come with a two year post-launch program that would be even bigger than on Wildlands. So that we are busy talking of stronger PRI for Breakpoint. Then of course it’s good to see that Wildlands continues to do well.

On Q4, yes, it’s good news that Cyberpunk is not in the quarter but we will stay cautious on this. We stick to your assumption that we might have a strong potential competition in Q4. The key point for us was really to have fantastic release with Wildlands at Q3 and that’s what we achieved, so coming with such a strong industry innovation. So that’s about our guidance and we believe that our guidance across our game in Q4 is a good reflection of all the potential of the games and of the potentially strong competition there.

Operator

We will now take our next question from Doug Creutz of Cowen. Please go ahead.

Doug Creutz

You guys talked about how your engagement with Assassin’s Creed has been strong pretty deep into the game cycle. I think you just released your last planned DLC for the game this week. Being now strong, has been any appetite for further DLCs for Odyssey or do you need to now kind of move fix your development resources towards the next title? Thanks.

Yves Guillemot

Yes, so we actually think that development to other projects and the team particularly is working on Gods & Monsters. We are very happy with what they have been able to achieve what Odyssey. And what to consider is that they just released a story creator mode that is going to help players to create content and we are also going to come with the Discovery mode in September. So there is plenty to come again on Odyssey and they are working very hard on Gods & Monsters and I think this will be amazing.

Operator

We will now take our next question from Julia Matoshchuk of Morgan Stanley. Please go ahead.

Julia Matoshchuk

The first question is regarding your Q2 guidance, so you mentioned that it includes all the shipments of Ghost Recon Breakpoint but to lower extent than what you had on Assassin’s Creed. So is it right to assume that internally you assume that Ghost Recon is a smaller game than Assassin’s Creed? So that’s the first question. And the second, can we have a bit of guidance on what you expect regarding profitability in the first half of the year? Thank you.

Yves Guillemot

Yes. So on Ghost Recon, as it a multi-player game, the digital part will be actually stronger than on Assassin’s Creed types of games. So that’s why we have less units sold in those. So it doesn’t mean at all that it would be different from the other game.

Frédérick Duguet

For H1, yes, we usually don’t guide on the first half. To help you model any way what you can anticipate for this first half. As you know, we much more really don’t know on the second half. For the first half, we’re coming with lower impact from new releases. And so that’s why we guided for net booking to be down by €120 million or so. We can anticipate that we might have some increase in direct costs. Of course that will lead you to model for a lower EBIT than last year.

Operator

We will now take our next question from Jeff Cohen of Stephens Incorporated. Please go ahead.

Jeff Cohen

So I know there’s been some backlash from the gamer community around the Epic Game Store and some of the exclusive deals that they signed. I was curious if you could provide some color around sales of Division 2 on that platform, maybe against your expectations?

Yves Guillemot

We can’t give much information on that because we have been with them for a short time now. What we can say is we’re working very well hand-in-hands to make sure we can grow the sales directly now between our Uplay Store which is doing extremely well and Epic Store that is growing step-by-step. So overall when you take Uplay and Epic Store, we are very happy with what we are achieving.

Frédérick Duguet

And we did well on Anno 1800 — we did well on Anno 1800 on Epic, but the key point here is really that we continue to have a very strong momentum on Uplay.

Jeff Cohen

And then as a follow up, could you maybe talk about the additional R&D spend required to bring game to Stadia versus traditional consoles? And then maybe if you could just discuss your expectations for platform commissions on Stadia versus the PS4 and Xbox?

Yves Guillemot

Yes, the cost — the extra cost to put to make sure the games work well on Stadia is not that high. It’s part now of our pipelines and we have a good relationship with Stadia to make sure it is profitable for us. Now, we are not speaking about 2.0 types of games that will need more work and this we will see more in the future action.

Frédérick Duguet

On the platform commission, we will let Google talk about. What we can just say is that the financial equation is good for us.

Operator

[Operator Instructions]. We will take our next question from Tom Singlehurst of Citi. Please go ahead.

Tom Singlehurst

Two questions, both slightly general in nature. The first was with respect to UPlay Plus. Just wonder if there’s anything you can share in terms of market stake or anything like that? And just around whether you anticipate sort of target audience for UPlay Plus to be existing gamers and also the new gamers. I am just trying to work out how adequate that would be for the kind of mix just in case? So that would be first question.

Second one was just a broader one on industry consolidation. In the last couple of weeks both about Sony and then the Facebook considering sort of acquisition of video game publishing. So, just wondering whether you have a general view on sort of vertical integration, whether that’s a risk or an opportunity to yourselves as we see the market consolidates? Thank you very much.

Yves Guillemot

In fact, on Uplay, we — what we like UPlay Plus is that we have a fair amount of new players that are coming to this new offer. And it’s really part of our strategy to offer players many ways to get to play our games. So, we will have a majority, yes, of the usual suspects to come, but we are very happy with the new ones that are coming and that will be also part of the new gamers in our universe and will be able to actually try all the different types of games we create, so they can after that spend more times on our games.

So, on Sony and Facebook acquisitions, I think what it shows is that content is key and that as Ubisoft being able to create high-quality content, we are a good player of the industry and so we can do more things with them. And Sony, Facebook but also all the players of this industry and that is actually a good thing. Now, on the acquisition, I think we can’t say much about that.

Operator

There are no further questions over the phone at this time.

Yves Guillemot

Okay. So, thank you very much everyone and have a good evening or good morning. Thanks again.

Frédérick Duguet

Thank you, guys.

Operator

Ladies and gentleman, this concludes today’s call. Thank you for your participation. You may now disconnect.

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