Q1 19/20

Jul 17, 2019

Earnings release

Good afternoon, and good morning, everybody. Thank you for joining our conference call. We started the year on the right foot. Our games performed solidly and players' recurring investment grew strongly. Notably, Assassin's Creed Odyssey's performance was outstanding with quite impressive engagement, PRI and sell through 9 months after its release. The Quebec City team has delivered handsomely and we can't wait to share more about their next game Gods and Monsters. The quarter also saw a better performance than anticipated for Rainbow Six Siege. 3.5 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 of the past 5 years, it also possesses a rare pedigree. It is a game with an extremely strong core gameplay loop, amazing engagement and retention, great e 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 shooters, Siege's team continues to perform steadily and is already seeing the benefits from the revamped production organization they 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's gameplay demo also had a very solid showing. It achieved robust viewership with impactful content creators' video and the best sentiment score of any history game. Our full year targets are supported by those positive trends. I will present our E3 performance in more details, but first Frederic will review our Q1 highlights. Frederic? Thank you, Yves, and hello, everybody. Our net bookings reached €314,000,000 in Q1, down 18% year on year and above our target of approximately €270,000,000 As a reminder, the year on year decrease is due to the absence of a big release during the quarter and to last year's back catalog benefiting from Far Cry 5 strong contribution after releasing just 5 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 engagements. Our back catalog, down 18 percent to €273,000,000 ended up better than expected. While Rainbow Six Siege and Assassin's Creed Odyssey were key highlights, we also saw a nice contribution from Far Hunter, Ghost Recon Wildlands and Accruutoo. Assassin's Creed RDC's solid momentum continued over the quarter. This was spurred 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 Creator Mode, a brand new feature allowing players to write their own stories. All these events and content update origins last year. And we released yesterday Judgement 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 Phantom site in June and a successful eSport 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 Neowis to distribute Rainbow Six Siege in South Korea PC Banks. PC Banks are a 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 these positive trends, 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 1st 6 months of the year. For the future, we plan to drive acquisition and engagements with significant post launch release plan, including 3 major content updates available for free to all players, with additional narratives and missions, new PVA mode and new specializations. Episode 1, DC Outskirts Expeditions, will start releasing on July 23. This major content update will include 2 new main missions, 2 classified assignments, a new discovery difficulty setting for the raid and the most demanded adjustments based on our community feedback. We expect it will have a nice boost to global activity and acquisition. Alongside this solid back catalog performance, PROI was very strong, up 19% to €150,000,000 This is even more impressive considering mobile revenue was down 24% due to no release this quarter versus the launch of Mind and Magic: Elemental Guardian 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 €292,000,000 up 2%. On a platform basis, PC represented 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 strengthen 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 ranked 3rd 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 amazing games and strong shareholders value. Looking at Q2, we expect net bookings at around €310,000,000 down 15% versus last year. This reflects fewer early physical shipments for 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 confirmed our targets with net booking expected around €2,185,000,000 up 8% and non IFRS operating income at around €480,000,000 up also 8%. Our current back catalog and PROI trends as well as the performance of our games at E3 are robust support for achieving those targets. I now hand over the call back to Yves. Thank you, Frederic. Ubisoft had a successful history, especially on social media. Guthrie and Breakpoint benefited from excellent visibility among content creators and record like ratios among players. The team's focus on a strong hands on gameplay session delivered very well as 4 of the 6 most viewed content creator videos were 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 clear step forward for the Ghost Recon franchise and the demo cemented this perception. The breadth of new survival features has been praised for its contribution to the tactical depth of the game. Media players and influencers also reacted positively to the game's stronger narrative and also Jones Bird style presence, whose character is a charismatic antagonist to remember. Costa Rica and Brightpoint targets the military shooter segment, the biggest of all premium shooter segments, and will benefit from a great release window in on October 4. Now Watchdog Legion was a huge success also at E3. Media and content creators who had the opportunity to try the hands on demo praised the never seen before groundbreaking play as anyone 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 Watchdog franchise. Legion garnered more than 65 awards and nominations, including Best of Show by outlets like Gamespot, PC Gamers and GamesRadar. Best action game by IGN and Game Informer and best action adventure game by the official history game critics. Watch Dogs Legion will be released on March 6, 2020. We also unveiled the first details of Gods and Monsters and Rainbow Six: Quarantine. Gods and Monsters is a new IP developed by Ubisoft Quebec. It stems from the research and stories from ancient Greek mythology they studied when creating Assassin's Creed Odyssey. Golden Monster puts players on a quest to save the Greek gods in a vibrantly colorful open world filled with mythological monsters. The game will be released on February 26. Rainbow 6: 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 6 Siege PVP and will be launched in the fiscal 4th 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 PDP action sport game developed by Ubisoft Montreal. 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. World of Champions will be released in early 2020. As a conclusion, our games performed better than anticipated during the quarter with strong engagements 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 ideally positioned to generate strong revenue growth and further increase our profitability over the coming years. We are now ready to take all your questions. Will take our first question from Robert Berg of Berenberg. Please go ahead. Yes. Hi, guys. Three questions for 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, you budgeted for the cost of the content in your guidance, the revenues ahead. So I'm 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? What have you seen so far? What returns are you seeing there? That would 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's no obvious impact that I've seen from your games from recent update from one of your peers, how you're seeing the competitive environment in July, I guess. The third, the press reports of a deal with Facebook for VR. I know that VR has been pretty minimal so far. Could this be interesting? How should we be thinking about the VR opportunity for you guys? Thank you, Robert. Yes, on your first question, what we've seen is that we started to see the benefit of the reorganization that the Rainbow Six Siege team did in terms of reorganizing their production pipelines to be more agile and efficient. And that's been very effective. What we see is that we are coming from a situation where they were used to releasing big major updates every 3 months, and they continue to do so. But on top of that, they're coming by fun events every 6 weeks, being more creative. And we 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 on the engine adaptability as well, it's being pretty efficient. So that's how we see the evolution of the Rainbow 16, and that's also pretty inspiring for other teams. Now for the July months, the competitive environment is strong, but we are happy with how our games are succeeding. So we are not we don't see a big pressure from the competition at the moment. What we've seen 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 showdown and it had a strong positive response from players. So it helped building on the momentum of June. But July has started to after a good start so far. And on the VR side, we think that seamless, frictionless and good entry prices and good games could help this business to take off because it provides a good immersion for players, but we need to make sure those elements are there to make it actually grow. We will now take our next question from Nicholas Langas of Exane Barabas. Please go ahead. Hello. Good afternoon, everyone. Two questions for me. The first one on the Division 2. How is the game trending versus the Division 1? And notably, are you happy with the monetization level? And second question, on the midterm net booking growth, given your view on the industry growth potential, the increase in cash R and D earning you plan for the coming years and what you have in 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. From Division 2, Division 2 did in line with our target in Q1. Today, we rely on strong core audience and with record level of engagement per player, so higher than Division 1 actually. And as we said, PRI is up relative to Division What is important for now is that we're coming with a massive post launch program that is meant to further drive acquisition and to Norwegian game to activate players that were eager to get more content. So that's the whole idea behind this Poisson program that will be available for all players. So that's why we believe that Division 2 will be a strong performer in fiscal 2020. And we have the first episode coming the 24th July, so in a week. In terms of midterm net booking growth, yes, we expect a strong growth on the top line. And we it means that it should be a double digit growth over the next years that will come with improvement in operating margin. And just to complete our answer on Division 2, it's the Postman program will be a bigger one than what we used have on Division 1 at the time. We will now take our next question from Michael Ng of Goldman Sachs. Could you talk a little bit about your expectations for PRI pacing throughout the rest of the year in fiscal 2020? Should we expect this nearly 20% year over year growth that you realize this quarter to continue throughout the year? And what are some of the key PRI drivers for the rest of fiscal 2020 that we should be aware of? Thank you very much. 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 a fewer lower impact from new releases on mobile than last year. So yes, we are starting on a good basis in Q1. I'm not going to tell you that we confirmed the same percentage over the remainder of the year. But the fact that Rainbow and division and Assasin Secours d'Or DC on top of the rest of the catalog doing very well on PRI over this Q1, it bodes well for the rest of the year. Yes. On top, we had a good gastric and wildlands PRI. So the new breakpoint will also be on the same vein. Yes. For Honor also did well and The Crew too. Great. And one follow-up, if I could. My understanding is Rainbow 6 Siege is largely a PVP game, but there have been some PvE events like Outbreak. How many Rainbow 6 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. There's a huge demand from Rainbow 6 players to have PVE. And the this event was really the biggest event on Rainbow 6 when it was launched in March last year. So we think it's they 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 via the PVE. So that's 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 couldn't who didn't want to play PVP and the people that play PVP actually. Great. Thank you very much. And we're very happy to come with a complementary type of gameplay on the franchise. And we believe that with a more accessible gameplay that will also bring new players into the franchise. Thank you, Frederic. Thank you, Mike. We will now take our next question from Charles Gotti of Kepler. Please go ahead. Yes. Good evening. Three questions, please. The first one on Rambo Citi, it seems that the gains have benefited from the collapse of Apex in Q1. And did you see any impact from the release of the season 2 of Apex Legends on July 2nd? Second question is still on Rainbow 16. Can you update us on the approval process of the game in China? And my last question is on the audience. I'm not sure that I well understood what you said during the call. MAU were flat in Q1, right? Yes. MAU overall, you mean we're flat in Q1, but the engagement per player has been increasing and actually achieved record levels for the quarter for the group. Now for China, we can't share more news on that. It follows the normal process, I would say. On the impact of competition, I will say that what we've seen in early July, as I said before, the release of Showdown drove very positive reaction on our side in terms of activity and in terms of engagement and PRI. So, so far, so good for Rainbow relative to the competitive landscape. Having said so, we stick to the what we said back in May for the full fiscal year guidance for Rainbow, meaning that we have factored in a potentially strong competition landscape for the full year. So we'll have to look at how things evolve. So far so good. Okay. Thank you. We will now take our next question from Ray Stochel of Consumer Edge Research. Please go ahead. Great. Thanks for taking my question. 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 a similar sentiment metric and whether or not you guys have seen improvement in any of your titles over the last several years? Thanks. Yes. That's one major point that we've seen over the last years, which is a continuously improvement of the 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 a stronger progression of sentiment across all the portfolio due to also the fact that we focus in delivering high quality on the launch of the games as well as then in delivering constantly post launch content of quality across the portfolio. We've also had to do a strong work on everything that was related to infrastructure, server, player experience, And that's been a learning curve over the years. And that's driving a lot of good feedback that we follow on a weekly basis. And we haven't seen everything yet because i3d is we are starting to use more and more of their infrastructure. And this is going to help us a lot to improve the ping of all our players. So we will have we'll continue to improve the service over time. Yes, as well as protecting our servers from any security elements. So that's very positive for us in the long term. Yes. I3d is the last acquisition we just did in fact back in December. We will now take our next question from Ken Rumph of Jefferies. Three questions. Firstly, briefly on PC. Was all of the percentage increase ano? Or was is there an underlying increase in adoption of PC for you? The 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 is 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, will it even not affect revenues until later? Just wondering how the kind of revenue recognition will work on Uplay plus 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 3 months of September to have a mega impact on our back catalog because it's only 1 month for the people that will not pay afterwards. So it will certainly make lots of people discover our games. And then after, they will decide if they jump in and pay the 1st month, in fact. On the sale event in July, yes, we've had some promotion, but that's pretty common and usual, which we do on a different platform. That's the beauty of the digital flexibility that it offers us regularly, but nothing particular on this very event. Okay. Thanks very much. Thank you. We will now take our next question from Nick Dempsey of Barclays. Please go ahead. I've got two questions, Seth, please. So just picking up on what you said earlier about good PRI for Wildlands and the impact on Breakpoint. Does your recent experience at Wildlands, therefore, make you more optimistic than you were at the start of the fiscal year when you set your guidance about the PRI contribution 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 glean from that that you feel more comfortable by your guidance than you did when you set it? So on the PRI side, what we the good start from Rylands in the Q1 is, of course, good news. It's what it does anticipate for Boeing. We believe breakpoint will be because it's coming with PVP from the very beginning, but it was not the case for WiLAN. So we could have we can have a stronger fund base that we can build upon from breakpoint. And we will come with a 2 year post launch program that would be even bigger than on Wildlands. So that's that should be supportive of stronger PRI for Breakpoint. But 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 still keep to our assumption that we might have a strong potential competition in Q4. The key point for us was really to have a fantastic review with Watch Dogs at E3, and that's what we achieved, so coming with such a strong industry innovation. So that supports 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. We will now take our next question from Doug Creutz of Cowen. Please go ahead. Hey, thank you. 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. Given how strong it's been, any appetite for the DLCs for Odyssey? Or do you need to now kind of move shift your development resources towards the next title? Thanks. Yes. So we are shifting the development to other projects, and that team particularly is working on Golden Monsters. We are very happy with what they have been able to achieve with Odyssey. And what is 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's plenty to come again on Odyssey, and they are working very hard on God damn Monster. And I think this will be amazing. Okay. Thank you. It's been a great We will now take our next question from Julia Matashuk of Morgan Stanley. Please go ahead. Julia, we can hear you. Sorry, guys. Hi. Can you hear me now? Yes. Yes. Perfect. Great. Thank you very much. Sorry, the first question is regarding your Q2 guidance. So you mentioned that it includes early shipments of Go3 Con breakpoint, but to the 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. Yes. So on Ghost Recon, as it is a multiplayer 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 stores. So it doesn't mean at all that it will be different from the other game. 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 have a year that is much more buckled on the second half. For the first half, we're coming with lower impact from new releases. So that's why we guided for net booking to be down by €120,000,000 or so. We can anticipate that we might have some increase in indirect costs. So of course, that will lead you to model for a lower EBIT than last year. Great. Thanks. You're welcome. We will now take our next question from Jeff Cohen of Stephens Incorporated. Please go ahead. Hey, guys. Thanks for taking my questions. So I know there's been some backlash from the gamer community around the Epic Games Store and some of the exclusive deals that they've signed. I was curious if you could provide some color around sales of Division 2 on that platform maybe against your expectations? 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 are working very well and enhanced 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. We did well on the annual 1800. We did well on the annual 1800 on Epic. But the key point here is really that we continue to have a very strong momentum on new play. Thanks. And then as a follow-up, could you maybe talk about the additional R and D spend required to bring a 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? Yes. The cost the extra cost for 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. As for the platform Congrats on the strong start to the year. On the platform commission, we will let Google talk about it. What we can just say is that the financial equation is good for us. We will take our next question from Tom Singlehurst of Citi. Please go ahead. Hi, good evening. It's Tom here from Citigroup. Forgive the slightly crunchy voice, I've got a cold. Two questions, both slightly general in nature. The first was with respect to uPlay Plus. Just whether there's anything you can share in terms of market search data or anything like that. Just around whether you anticipate the sort of target audience for Uplay plus to be existing gamers or to be new gamers? I'm just trying to work out how additive that would be or whether it's going to be cannibalistic or reduced in basis. So that was the first question. Second one was just a broader one on industry consolidation. I've seen reports in the last couple of weeks both about Sony and indeed Facebook considering sort of acquisitions of video game publishers. I'm just wondering whether you have a general view on I suppose vertical integration whether that's a risk or an opportunity for yourselves as we see the market consolidate? Thank you very much. Thank you for your questions. 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 it's 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. That's very clear. Thank you very much. Thank you. There are no further questions over the phone at this time. Okay. So thank you very much, everyone, and have a good evening or a good morning. Thanks again.