Good day and thank you for standing by. Welcome to the Ubisoft first quarter conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. You will then hear an automatic message advising your hand is raised. 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, Ubisoft CEO. Please go ahead.
Welcome everyone, and thank you for joining the call today. As we have said many times, the current environment for gaming, entertainment, and tech industry is very favorable for owners of strong assets. The new partnership we announced today from one of our brands is another demonstration of the great value of our deep portfolio of own IPs. It will significantly impact our financial performance this year. This partnership will also greatly enhance our medium-term mobile footprint, reflecting the powerful appeal of our brands for the fast-growing AAA mobile segment. It also provides our teams with more time to fully realize their creative vision, deliver high quality experiences for our fans, while increasing our visibility for this year and next fiscal year.
In parallel, and despite facing the ongoing production challenges that continue to impact the entire industry, our teams are fully dedicated to delivering Ubisoft's strongest pipeline of games and content in its history across genres, business models, and platforms. We are working hard to design the most efficient working conditions to ensure both flexibility for our team as well as strong productivity in order to deliver great and memorable experiences to players and their communities. In the current uncertain economic environment, video games offer a strong value proposition with deep social interaction and one of the best value per hour metric for any form of entertainment. However, given the global context, it is more important than ever that we focus our energy and resources on delivering games with the highest possible quality while in parallel optimizing our cost structure.
Based on the strength of our pipeline and building on our talented teams, dependable assets, and a solid balance sheet, we are entering a multi-year phase of significant top-line growth and starting in financial year 2024, significant progression of our operating income. I will now hand over the call to Frédérick. Frédérick?
Thank you, Yves, and hello everybody. Our Q1 net bookings of EUR 293 million came out slightly ahead of our guidance of around EUR 280 million. The foreign exchange tailwind on our outperformance was limited to EUR 3 million. Net bookings were down 10% YoY, as Q1 last year saw the release of Assassin's Creed Valhalla, first DLC, and the related impact from deferred revenues on the season pass. Our back catalogs stood at EUR 256 million, down 16%, and MAUs were 35 million, down 6% YoY. Rainbow Six Siege performed ahead of our expectations as the game starts to reap the benefits from the steady work our teams have been doing on the quality and quantity of the content released.
This translated into stabilization of PRI, thanks to very strong DARPU and Battle Pass conversion. The Assassin's Creed brand also performed ahead of expectations on the back of a strong quarter from Odyssey, Origins, and Valhalla. We saw a significant uptick in overall engagement with double-digit active player growth versus last year, as players were excited by the beginning of the fifteenth year anniversary campaign of the brand. Roller Champions has been well received for its fun and dynamic gameplay. On both retention and revenues KPIs, the game is tracking ahead of Hyper Scape, and we have an extended post-launch program to come. Total digital net booking reached EUR 262 million, down 6% YoY, and represented 89% of our total net bookings. PRIs stood at EUR 153 million, down 12% YoY, and represented 52% of our total net bookings.
Mobile amounted to EUR 36 million. The past few months have been active in terms of gameplay and game reveals. The Skull and Bones comeback provided the community with an extended gameplay walkthrough. The core strengths of the game revolves around its unique combination of a gritty pirate fantasy, dynamic and action-packed naval combat, as well as multiplayer features based on both co-op and PVP that will allow for memorable moments with friends. Skull and Bones will release on November 8. Mario + Rabbids Sparks of Hope also made its comeback with an October 20 release date. The community applauded the tactical aspect of the game, and GameSpot described the upcoming game as primed to surprise players all over again, with a great degree of flexibility and more Mario-like mechanics. The community is eagerly waiting its launch, which is one of the most anticipated Nintendo Switch releases this year.
On the free-to-play side, we revealed the upcoming mobile title in the Division universe, The Division Resurgence, that received positive player reception. With this title that is currently undergoing testing, we are bringing the Division franchise to a significantly larger audience. The quarter was also very active on our other free-to-play projects as the different testing phases for XDefiant, Rainbow Six Mobile, and The Division Heartland took place throughout the world. We are pleased with the supportive player feedback gathered throughout these respective tests. Looking ahead, we set the date for our next Ubisoft Forward event on September 10th. September will be an important month as we will also unveil the future of the Assassin's Creed brand. Today, we announced that Avatar: Frontiers of Pandora will now launch in fiscal year 2024.
This amazing global entertainment brand represents a major multi-year opportunity for Ubisoft, and we are committed to deliver an outstanding immersive game that delivers on the promise of transporting players to Pandora. It will be one of the most beautiful video game worlds ever created, enabled by our powerful Snowdrop engine and led by our massive studio team. We expect the game to entertain for the years to come. We also decided to release in fiscal year 2024 a smaller unannounced premium game that was originally slated for fiscal 2023. Both of these decisions are a reflection of the ongoing constraints put on production across the industry, and we are working hard to adapt and redesign our workplace conditions and policies to ensure both flexibility for our teams and robust productivity, all while keeping top of mind the objective of delivering the best experiences to players.
We also announced today a licensing deal on mobile for one of our AAA brands. With this major partnership, we demonstrate again the great value behind our own IPs. On top of significantly enhancing our mobile footprint for the years to come, it will materially impact our P&L and cash generation this financial year. We will provide more details about this partnership in due course. At the full year level, we continue to expect significant top-line YoY growth now above 10%. The biggest driver of this growth will be the partnership. Growth will also benefit from the fact we expect our three premium games, Just Dance, Mario + Rabbids Sparks of Hope, and Skull and Bones, to generate slightly more revenues than last year's fall. We will also have the impact from the releases of free-to-play titles and favorably impact from exchange rate.
Additionally, we confirm today our non-IFRS operating targets of EUR 400 million and positive cash flow from operations. This confirmation reflects the benefit of, first and foremost, the positive contribution from the partnership. Second, adapting our organization to current global economic uncertainties through cost optimization. Third, a positive exchange rate impact. Coming back to the sizable cost optimization I just mentioned, we are looking to reduce our structural cost growth for fiscal 2023, and we expect them to come back to fiscal 2022 levels by the course of fiscal 2024. We also expect to maintain fiscal 2024 cash R&D to fiscal 2023 levels versus our prior expectation for slight growth. All this while continuing to expect a significant multi-year top-line growth trajectory. This will be achieved through the stabilization of headcounts by the end of fiscal 2023 at the level of end fiscal 2022.
Strict overall cost discipline and even more focus on our biggest development opportunities, as evidenced by our decision to stop development of the Splinter Cell VR game, Ghost Recon Frontline, and two other unannounced titles. All these elements offset the EBIT impact from the canceled games and from reduced top-line assumptions across the board to take into account the more uncertain economic environment. Let me now share some additional financial elements for fiscal 2023 as a consequence of these changes. We now expect our gross margin to be roughly flat due to the high margin impact of the partnership. We continue to expect P&L R&D to end up at the high end of our 35%-40% range and SG&A at the high end of our 25%-30% range.
We also continue to expect the gap between the cash R&D and P&L R&D to be lower than last year. Finally, we continue to expect positive cash flow from operations. Looking at Q2, we expect net bookings of around EUR 270 million, including a first limited benefit from the mobile partnership. As a reminder, Q2 of last year included initial physical shipments of Far Cry 6, as well as the release of Assassin's Creed Valhalla second DLC. Before I conclude, I would like to highlight two recent events. On the environmental side, Ubisoft has recently received the official target validation from the Science-Based Targets initiative, confirming that Ubisoft's 2030 carbon reduction objective is in line with the goal to limit global warming to 1.5 degrees Celsius.
On the governance side, Ubisoft shareholders approved all the resolution on the agenda for its annual general meeting early July with approval rates above 95%. We would like to thank them for their steady support. Following this AGM, the board now has an absolute majority of independent directors, 45% women, and three employee representatives. We are now ready to take your questions.
Thank you. As a reminder, to ask a question, you will need to press star one on your telephone and wait for your name to be announced. Please stand by while we compile a Q&A roster. Thank you. The first question comes from the line of Ken Rumph from Jefferies. Please go ahead. Your line is open.
Hello, everybody. I guess the questions I was gonna ask about the mobile deal, it sounds like we're not gonna hear about today. Is there anything more you can explain about the nature of this? Does it relate to the Tencent deal or it's something completely different? Clearly it's important to your maintained profit forecast and to revenue. Is a game gonna come out this year or it's a sort of prepayment for a future project? Whatever you can say about that, but I understand perhaps we need to wait. The other questions perhaps you could comment on. Avatar is being delayed because you feel you need more time to work on it, even though it's obviously already been delayed once. Do we now expect perhaps that it comes out with the next Avatar movie in December 2023?
The second question, the other premium game, which studio was this being developed in? Is it a new IP or related, you know, an existing IP? Thank you very much.
Hello, Ken. Yes, regarding the mobile partnership, first of all, this is a major partnership. As you've mentioned, that it will allow us to increase our mobile footprint for the years to come. The partnership is built upon a sizable upfront component that will positively impact the P&L and cash generation of this fiscal year with a revenue share scheme for the future. This is a licensing agreement on one IP that includes one game. We will say more in the future. What we can say is this is not a game that is planned for this year. This is still an unannounced game that will come in the future.
Okay.
On the Avatar delay, what we feel is the Avatar brand can become a video game brand. Because the potential is just enormous because there are also lots of movies coming, and lots of activity on that brand in the next few years. We are treating that brand like a video game brand. We are putting all the energy of the team to make sure it is a fantastic game.
Mm-hmm.
As for the other game that is a smaller game that was not announced and we can't say more at this stage, but it's planned to come next fiscal year.
Okay. I'll go back in the queue. Thank you very much.
Thank you.
Thank you, Ken.
Operator?
The next question comes from the line of Omar Sheikh from Morgan Stanley. Please go ahead. Your line is open.
Good evening, everyone. I just have three questions, if I could. The first one to Frédérick, on costs. Frédérick, you mentioned a sizable cost optimization plan. Could you maybe quantify what you essentially are targeting for cost savings in fiscal 2023? That'd be helpful for the first question. Secondly, on the licensing deal, should we think about it this way, that maybe the value or the kind of P&L impact you're gonna see in 2023, for the licensing deal is basically at least in line with the profit you're expecting from Avatar and the AAA game that you delayed into next year? That's the second question.
Thirdly, the licensing agreement, I'm assuming is not with Tencent, but I wonder if you could maybe just talk about where you are on the Tencent relationship, because I noticed you didn't. I mean, the involvement with Rainbow Six game seems to be a bit less than you originally said. Can you just maybe confirm, are you still working with them? Are you working with them on a number of games? Are you anticipating the release in some games via that partnership at some point in the next, say, one or two years? Thank you very much.
Yes, thank you, Omar. On the cost, what we can say is that we have decided to implement sizable cost optimization that will have a meaningful impact in fiscal 2023, meaning that's relative to our early assumptions. We have decided to reduce the growth of our cost base in fiscal 2023. We will be stabilizing headcount by the end of this fiscal year with the objective that our structural costs in the course of fiscal 2024 will be back to the fiscal 2022 levels. With the other objective that our R&D investments will be flat in fiscal 2024 versus fiscal 2023, which compares with our prior guidance of small growths. As for the licensing deal, this is as we said, a sizable positive element impacting the P&L.
We can say this is the biggest offsetting item that compensates for the games delays, as well as the fact that we have decided to reduce our estimates on the top line across the board. To reflect the fact that we are going into a more uncertain economic environment and also to offset for some accelerated depreciation that we decided to take related to delayed and canceled games. On the other side, we are benefiting from a sizable impact from customer utilization as well as a positive impact from exchange rates.
On Tencent?
Yes. On Tencent, we continue to do lots of business with Tencent, on mobile games, either in China or in the rest of the world. There are plenty of activity. We plan to launch The Division on PC in China. We are working very hard to make it a game that will be very strong on the Chinese market. Related to Rainbow Six Mobile, as we mentioned, the reception by the player community has been really strong. The tests that we've been conducted since the reveal has been really supportive. They have great teams working on our common project.
Okay. Thank you very much indeed.
You're welcome.
Thank you. We will now take the next question. Please stand by. The next question comes in from Nicolas Langlet from BNPP Exane. Please go ahead. Your line is open.
Yes. Hello. Good afternoon, everyone. I've got three questions, please. The first one on the net booking guidance. Just to be sure, are you confirming the +20% net booking growth for full year 2023 or not? Because I can understand the licensing agreement can have quite a good impact on the adjusted EBIT, but the gap on the net booking seems quite wide. Are you confirming that? And if that's the case, what are the offsets compared to the two games delayed? That's the first question. Second question on the cash R&D. I think until now you were expecting a growth of cash R&D this year. Given what you have just said, what sort of growth are you expecting? I guess it's lower than the previous guidance.
Last and third question on the share of free-to-play you expect this year. Are you able to tell us roughly the net booking and adjusted EBIT contribution you expect? Last year you expected free-to-play to be loss-making or at best breakeven. Is it still the case this year? Thank you.
Hello, Nicolas. First on net bookings, what we're saying is that we revised our top line growth guidance to what was above 20% now to be above 10%. That reflects the impact of game delays, mostly Avatar. That reflects, as I said, the reduced assumptions we've taken on the top line across the board, and that is partially offset and mostly offset by the impact of the major partnership from the upfront components, as well as the impact of the exchange rates that are favorable. In terms of cash R&D, what we're saying is that we plan to have stabilization of R&D in fiscal 2024 versus fiscal 2023.
While we previously assumed that it will be growing of fiscal 2023, we are indeed reducing the growth, but it will still be a meaningful growth this year. In terms of free-to-play, what we're saying is that the launch of our free-to-play will be material to the top line growth this year. We assume in our guidance that on the EBIT side, the contribution will be very limited for the first year, first fiscal year of operations.
Okay, you still expect at least a small contribution from those games? Just when you said significant growth of cash R&D, are we talking about below or above 10% fiscally?
It will still be a significant growth, but we won't share any more detail at this stage.
Okay.
Thank you. We will now take the next question. The next question comes from the line of Brian Fitzgerald from Wells Fargo. Please go ahead. Your line is open.
Thanks. Maybe clarification around the licensing deal, AAA brand, one IP, one game, not for this year. Is there a length to how long that licensing partnership is gonna last? Is it multi-year, three-year, five-year? The second question, maybe broader. For a long time, we've accepted the narrative that gaming spend is relatively resilient during a recession because of that value proposition, you know, low cost per hour of entertainment. At the same time, the model has been shifting to services or PRI. How resilient do you think in-game spend microtransactions will be as we enter a recession? Is that more at risk, do you feel in a recessionary environment?
Thank you, Brian. On the partnership, yes, we're talking about the triple-A brand, including one game. Yes, this is a multi-year partnership. What we should add is that this is a non-exclusive deal, meaning that we will be able also to develop our own mobile game on that IP.
On the second question, I think that the cost per hour remains very low for the video game industry. Yes, we have also the streaming business that is also very competitive. We feel video games will be a key component of the time spent by people during that period of more uncertainty.
It's a combination of very competitive value per hour, as you said, but also combined with this unique element of stronger interaction between players, more social experiences at scale. That's where also the industry has made some progress over the last decade since the financial crisis. Well, more than ever, that's the focus that we have at Ubisoft, is to deliver very high quality together with strong cost discipline.
Got it. Thanks, gentlemen.
Thank you.
Thank you, Brian.
Thank you. We will now take the next question. The next question comes from George Brown from Deutsche Bank. Please go ahead. Your line is open.
Hi, guys, thanks for taking my question. Just concerning the Avatar delay, what exactly were the constraints on production? Was it constraints on talent? You know, have there been higher attrition rates or is there something else? A little bit of color would be great. Then two questions on Skull and Bones. Can you give us any indication as to the level of pre-orders? Is it tracking where you would expect it to, and how does it compare to other games? I guess the same goes for Mario + Rabbids. Then secondly, just looking at competition, later on in the year, there seems to be a lot of premium games coming out that were delayed by COVID.
Skull and Bones, for example, is coming out at a similar time to God of War Ragnarök. I'm just wondering how you're thinking about the possibility of increased competition going into the second half of the year.
Yes, thank you for your questions. In fact, the Avatar delay is due to the fact that the working conditions are more difficult in the industry at the moment, where people can't come to the office as often. That has an impact. It was the biggest impact.
On Skull and Bones and Sparks of Hope, we don't share indication on pre-orders. What we can say is that we'll be coming with the possibility for players to put their hand on the game on Skull and Bones. That will be an important pulse point because we have a unique take with this game on the naval combat and pirate fantasy. Players will be able to see the value, depth, and richness of this multiplayer and social experience that is pretty unique. Back to your last question, Skull and Bones will be targeted at a different audience versus God of War because social and online will be core to the experience on top of being available on more platforms.
As for Mario + Rabbids Sparks of Hope, we've seen that it's a highly anticipated Switch game this year on a platform that now accumulates more than 100 million units. That will be a big game this year. For the competition, there are not that many games at the end of the year. Yes, God of War is a great game that we consider. But around that, there are not that many games during the end of the year. On Nintendo, there's only Pokémon. Mario + Rabbids is really going to be one of the big games of the end of the year.
Now also to come back to Avatar, as we want to make it a video game industry brand, it is important for us that we come with something that is perfect.
Perfect. Thank you.
Thank you.
Thank you.
As a reminder, if you wish to ask a question, please press star one on your telephone. I would like to hand back over to Yves Guillemot for final remarks.
Thank you very much for your questions and have a good day or evening. Thank you. Bye-bye.
Thank you.
This concludes today's conference call. Thank you for participating. You may now disconnect. Speakers, please stand by.