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Edited Transcript of UBI.PA earnings conference call or presentation 15-May-19 4:15pm GMT

Full Year 2019 Ubisoft Entertainment SA Earnings Call

Montreuil-sous-Bois Cedex Jun 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Ubisoft Entertainment SA earnings conference call or presentation Wednesday, May 15, 2019 at 4:15:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Frédérick Duguet

Ubisoft Entertainment SA - CFO

* Yves Guillemot

Ubisoft Entertainment SA - Co-Founder, Chairman, CEO & President

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Conference Call Participants

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* Charles-Louis Scotti

Kepler Cheuvreux, Research Division - Research Analyst

* Douglas Lippl Creutz

Cowen and Company, LLC, Research Division - MD and Senior Research Analyst

* Evan Todd Wingren

KeyBanc Capital Markets Inc., Research Division - Former Research Analyst

* Julia Matoshchuk

Morgan Stanley, Research Division - Equity Analyst

* Michael Ng

Goldman Sachs Group Inc., Research Division - Research Analyst

* Nicholas Michael Edward Dempsey

Barclays Bank PLC, Research Division - Research Analyst

* Nicolas Langlet

Exane BNP Paribas, Research Division - Research Analyst

* Robert Berg

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Thomas A Singlehurst

Citigroup Inc, Research Division - Director and Head of European Media Research

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Presentation

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Operator [1]

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Good day, and welcome to the Ubisoft FY '19 Earnings Conference Call. At this time, I would like to turn the call over to Yves Guillemot. Please go ahead, sir.

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Yves Guillemot, Ubisoft Entertainment SA - Co-Founder, Chairman, CEO & President [2]

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Good afternoon, and good morning, everybody. Thank you for joining our conference call. When we presented our 3 years planning in February 2016, we based our assumptions on a relatively traditional model, with major impact from new releases, with low recurring revenues and with gradual digital shift. Since then, we have steadily executed on our plan. We have released high-quality experiences and we did so at a high cadence. We delivered a much faster digital transformation than anticipated with significantly stronger recurring revenues. As a consequence, in 3 years, our top line rose 46%, while our non-IFRS operating income grew even faster by 164%, leading to a 10 point improvement of our profitability. In an industry that continues to evolve rapidly, we have delivered a robust performance, thanks to our capacity to combine long-term thinking and agility. Our focus on building a sustainable organization has been paying off greatly with an attention on the following 5 pillars.

First pillar, we strive to foster a strong internal culture that promotes smart risk taking and innovation. The company that attracts the most creative and talented people and empowers them to achieve their full potential. We have continued to develop that culture, while at the same time, growing our team by more than 10,000 talents over the past 10 years.

Second, we own a wide network of studios. With the focus of efficiency and productivity, we have invested heavily into our collaborative and cost competitive organization with a particular attention to sharing technology, expertise and resources. This is providing us with the ability to face the enormous challenges of today's games development and post-launch production. As such, we can deliver high-quality games and content at a high cadence. We also have the flexibility to embrace industry disruptions, as demonstrated through our recent partnership with Google's Stadia.

Further, we have recognized ability to create internally successful new brands that provides us with long-term benefits of full IT ownership. We, today, have one of the most, if not the most, diversified portfolio in the industry. We have transformed this portfolio over the years with bigger focus on players' engagement.

Fourth, we have a deep relation with our communities with recognized expertise in managing live services. This relation is at the core of our games' long-term value.

And fifth, we have relentlessly invested over the past 10 years in Uplay, our online service and platform, which is to date, a major asset to fully leverage our content-creation capacity and that direct relation with players. As a result, we have continued to create mostly organically, very significant shareholders value, highlighting our capacity to be nimble in a fast-moving industry.

I will now let Frédérick detail our full year performance, before coming back to present the major transformation the industry will face in the future and the opportunities for Ubisoft. Frédérick?

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Frédérick Duguet, Ubisoft Entertainment SA - CFO [3]

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Thank you, Yves, and hello, everybody. Full year net bookings reached a record EUR 2.029 billion, up 17% year-on-year, in line with our target of approximately EUR 2.050 billion. Net sales stood at EUR 1.846 billion. For the first time, we reached 100 million active console and PC players, connected to our platform during the fiscal year, nicely up from 87 million last year. We continue to achieve market growth on PC and mobile, leveraging not only the growing strategic and global value of our brands and of our Uplay platform.

Our record fourth quarter at 25% year-on-year, was a stronger-than-expected performance in our overall digital, back-catalog and PRI, compensating mostly for the launch of the Division 2. Importantly, this quarter reached a record level of engagement and the month of March was a record month for Ubisoft in terms of overall audience activity and playtime across consoles and PC.

With the Division 2, like with Assassin's Creed Origins, Odyssey and Far Cry 5, we have delivered an amazing experience to our community. The Division 2 has been praised for its realistic world, filled with constant activity, solid gameplay loot mechanics, creative missions and beautiful graphics. It is widely considered as the new benchmark for the looter-shooter genre. However, unlike the other titles I mentioned and despite its strong release, the Division 2 ended up short of our ambitions, expectations on consoles. We believe this is due for a large part to a more competitive environment than expected.

Interestingly, the game's performance on PC was in line with the first division's massive launch, including a huge 10x increase on our sales on Uplay. It highlights both the strengths of the brand and the efficiency of our own distribution platform.

In the long term, we are confident that the Division 2 will continue to grow and gain traction driven by ongoing drops on updates. The reaction from players has been outstanding, with excellent net promoter scores and with record levels of digital distribution, per player engagement and season pass attach rate for Ubisoft AAA game. As promised, the Division 2 will continue to develop and has already seen an excellent reaction to our first content drop. Tomorrow's release of the highly awaited First Raid should mark another key step in the Division 2 development. With extensive post-launch content plan, we should continue to see long-term performance.

Rainbow Six Siege performed in line with our expectations during the quarter and delivered the third consecutive year of growth. The game has passed EUR 1 billion cumulated net bookings 3 years after its release, an amazing performance from a game that had a relatively quiet launch.

Over the past 12 months, the number of registered players have sharply grown by more than 40% to cross the 45 million mark. Finally, the Rainbow is Magic! event received praise from both the players and press and generated solid engagement and PRI. The new production organization implemented by the team is allowing them to be agile and to produce more meaningful and higher-quality content as well as delivering more regular updates. And this is just the beginning for more exciting events and updates during the year.

Regarding eSports, the Six Invitational event organized in February turned out a meaningful engagement progression with 31% increase in watch time over the week compared to the 2018 addition. At the groups level, the time spent watching eSports on our YouTube or Twitch Channel has grown 133% over the past 12 months.

Assassin’s Creed Odyssey sell through units were up nicely in Q4 versus Origins last year, driven by the game's great quality, stronger post-launch content and price promotion. Live-to-date engagement continues to be materially higher as do all digital KPIs including PRI, season pass attach rates and digital distribution ratio.

Assassin’s Creed Odyssey is delivering more consistent long-term engagement with the number of current players up 70% year-on-year and as a consequence stronger PRI.

For the first 13 months of release, Far Cry 5 has now become the best-selling Ubisoft game in unit sell-through on current generation of consoles. Title after title, we have been able to achieve consistent and strong growth for the Far Cry franchise. And Far Cry New Dawn expanded the story arch and allowed the team to introduce gameplay evolutions including RPG elements, which resulted in stronger MTX per user than Far Cry 5.

After recently surpassing the 20 million players For Honor's third year of activity is well on its way and the engagement remained strong. The team is not only releasing content on a regular basis, but it's also offering surprising events to entertain the fans. Major events based on the GameLore 1-day celebrations and more to come.

Over the full year with MAUs up 16% for our consoles and PC games, back-catalog was firmly up 39% to EUR 1.147 billion. This remarkable growth was broad-based fueled by higher yield releases and the continued performance of our live services, that year-after-year add new layers of recurring revenues to our overall business. Back-catalog represented 57% of our total net bookings versus our target of more than 50% and versus 48% last year. This is another demonstration of the growing recurring profile of our business, which is now much more dependable than in the past.

The total digital net bookings reached EUR 1.396 billion, meaningfully up by 39% and representing 69% of our total net bookings versus our target of around 65% and versus 58% last year. This represents a remarkable progression compared with 19% level achieved 5 years ago.

Digital distribution continues to gain share of total distribution and represented 37% of our total net bookings versus 30% last year.

PRI grew 20% in Q4, faster than initially anticipated, since our performance was essentially fueled by our back-catalog games. Over the year, PRI net bookings were sharply up 33%, and represented 32% of total net bookings versus 28% last year and versus our target of approximately 30%. PRI continues to be a major catch-up opportunity for the company, as we continue to grow engagement in our games.

On the platform basis, we continue to gain share on PCs, thanks to the increasing rate of multiplayer and RPG games in our portfolio. Our PC segment was up by a robust 79% and represented 27% of total net bookings versus 18% last year, which is all the more beneficial as PC players are very engaged. We believe our PC segment will continue to represent a bigger and bigger share of our overall business, especially with our growing focus on Asia, as barriers between frontiers are disappearing.

Uplay had a great year, as more and more gamers are downloading their games directly from it. It grew 150% year-on-year, and we saw a sharp acceleration at the end of the year with the release of the Division 2.

Mobile reached EUR 153 million, strongly up 73% year-on-year, driven by the acquisition of 1492 Studio by our partnerships and by the successful release of Might & Magic: Elemental Guardians. Mobile offers a significant long-term opportunity to Ubisoft, as a growing number of consoles and PC brands are achieving strong performance on this platform. A quick comment on Asia, which continues to progress robustly, up 62%. This region will be a significant driver of our long-term performance as we continue to see a stronger and stronger appetite from Asian players and partners for our premium entry to play games.

On the earnings side, we grew our non-IFRS operating income by 49% to EUR 446 million in line with our targets. This represents a significant 4.7 points operating margin improvement, which led to a record margin level of 22%. Free cash flow reached EUR 310 million in line with our targets. Let me go into more details.

As you can see in Slide 15 of our presentation, our gross margin was up EUR 265 million and almost 1 percentage point. A meaningful part of the positive mechanical impact from the 11 point growth in digital share was compensated by the previously announced under performance of Starlink, since we reacted fast to clear remaining inventory.

R&D was up EUR 39 million and down 3.7 points. I will come back to this line in the following slide.

SG&A was up EUR 79 million and flat as a percentage of net bookings. Variable marketing expenses reached EUR 296 million and represented 14.6% of the total net bookings, versus 13.5%. This increase is notably the consequence of higher marketing support last Q3 as the quarter was very competitive. Fixed structure cost reached EUR 257 million, and 12.7% of total net bookings versus 13.9% the prior year, reflecting the positive impact of scale. As mentioned during our last call, our net financial income includes a noncash and nontaxable gain of EUR 13 million related to the total return swap contract linked to Vivendi's exit.

Moving on to Slide 16. Total R&D reached EUR 700 million, up 6%. This is lower than we had anticipated due in part to lower performance-based expenses and to a lesser extent good control costs at the post-launch content level. We delivered stronger PRR revenues with less R&D intensity than anticipated. The 13% increase of capitalized R&D support our very attractive long-term growth opportunities, and Yves will come back to them. As a consequence, the gap between R&D expenses and investment stood at EUR 101 million, up EUR 42 million from prior year.

Moving to Slide 17. The IFRS/non-IFRS reconciliation shows 4 types of adjustments. EUR 183 million IFRS 15 deferred revenue with additional stock-based compensation charge standing at EUR 55 million, as expected. And long-term charge of EUR 49 million related to brand and goodwill depreciation. A financial charge of EUR 8 million related to the implicit convertible bond option costs. Our average non-IFRS tax rate closed at 25% higher than the 23% previously communicated, due to our current estimate of the U.S. tax reform impact.

Finally, Slide 18. Free cash flow stood at EUR 310 million in line with our guidance of around EUR 300 million. This compares with a free cash flow of EUR 111 million in fiscal '18. This progression reflects mostly the impact of 2 elements: First, our cash flow from operations increased by EUR 85 million, principally, due to the EUR 113 million improvement of our non-IFRS net income compensated by the EUR 42 million increase of R&D, P&L and R&D cash gap. Second, the EUR 84 million positive swing in our working capital, notably thanks to the benefit of this year's factoring in cash and increase of our R&D subsidy.

Below the free cash flow line, the acquisition of i3D.net and earn-out payment for over performing past acquisitions amounted to EUR 87 million. As disclosed in the first half, proceeds from issue of capital of EUR 230 million, reflects the successful employee stock plan as well as the booking correction on the EUR 100 million deposit, we made on the EUR 200 million swap agreement related to the Vivendi's exit.

Lastly, we purchased EUR 202 million of our own shares reflecting the buyback of 3 million shares on November 9. As a result of these different flows, we ended the year with EUR 294 million net debt versus EUR 548 million at the end of last year. With equity of EUR 0.9 billion, we enjoy a strong balance sheet.

I now hand over the call back to Yves, and I will come back to review our fiscal '20 targets.

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Yves Guillemot, Ubisoft Entertainment SA - Co-Founder, Chairman, CEO & President [4]

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Thank you, Frédérick. While the video game industry has grown meaningfully over the past 4 decades and is now the largest segment in entertainment, it is still very early in its development. We are only at the outset of major transformation that will see our total addressable market grow to 5 billion gamers in the next 10 years, as silos between geographies and between platforms are progressively falling. Better accessibility, more mainstream appeal and the acceleration of technologic capacity will be important drivers of our business and of our industry.

Let me provide you with some details. Streaming and cloud gaming will play an important part in this transformation. Streaming will bring high-quality big-screen experiences at lower entry cost to a broader population. It also will deliver seamless multiscreen gaming leveraging the wide global reach of mobile. If there was a need for proof that multiscreen drives strong players adoption, just look at the Switch momentum over the past 2 years.

Alongside streaming, cloud gaming will enable our developers to access unlimited machine power in the cloud to create more credible, dynamic and immersive experiences. This should be another meaningful driver of players adoption. As demonstrated by our partnership with Google Stadia, we are at the forefront of this trend.

Additionally, the ongoing removal of geographical barriers is set to benefit us in a substantial way. In particular, Asia is a massive market, where our games and live services have been reaching a wider and wider audience, most notably in places like China, Japan and Korea. We will continue to take advantage of this geographical expansion with our stronger PC offering and with the upcoming adaptation of our franchises on mobile. Our shift toward RPG and multiplayer games continues to have a greater impact on our global reach.

More territories and more platforms mean more opportunities for Ubisoft. A clear indicator of the future scale of this transformation is an increasing number of platforms or competing with one another to obtain quality content and get access to communities of engaged players. Because video games are immensely complex to produce and because they drive their value from the direct relationship with communities, those new platforms will rely heavily on developers like Ubisoft over the long term. Our recent partnership with Tencent, Google and Epic are evidence of those ongoing positive trends.

As a consequence, we plan to accelerate our investments in our teams and studio capacities over the coming years. This will provide us with the means to benefit from the following opportunities: First, drive audience and engagement higher through bigger games and post-launch content. Second, enter new gaming genres, segments and business models, create new IPs like Skull & Bones, or new experiences like Beyond Good & Evil 2 and videogame adaptation of James Cameron's next Avatar's movie. Third, bring our established PC and console franchises to mobile and as such, reach a much wider audience. Fourth, ramp-up our capacities -- our capabilities for the upcoming generation of consoles that will provide a new boost to the market. Fifth, capture the streaming and cloud gaming opportunities. Six, pursue the development of our flourishing Uplay platform and ecosystem -- and e-commerce ecosystem. And seventh, continue to pursue the development of artificial intelligence solutions to both improve production and better tailor experiences to each player's profile.

Ubisoft's long-term growth opportunities are meaningful and plentiful, and we expect profitability to continue to progress over the coming years.

Frédérick is now going to present our financial year '20 assumptions and targets. Frédérick?

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Frédérick Duguet, Ubisoft Entertainment SA - CFO [5]

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Thank you, Yves. Fiscal '20 net bookings and non-IFRS operating income are expected around EUR 2.185 billion and EUR 480 million, respectively. This represents a 8% year-on-year growth. On the new release side, we expect to launch 4 AAA titles with a strong growth year-on-year. Ghost Recon Breakpoint has already been announced. The other 3 are targeting different gaming segments and will be releasing in our fiscal fourth quarter. They will be revealed soon.

Seven years ago, we started Ghost Recon Wildlands with a small team of experts. Today, more than 1,000 developers are working on the franchise. In the past 2 years alone, we have released 19 title updates and reached 15 million unique players. In parallel, the team has prepared a future of the franchise with Ghost Recon Breakpoint, which was revealed last week. It is the only PvE and PvP open-world military shooter, entirely playable solo or in up to 4 player group. In the boots of the Ghosts, players will find themselves pitted against the wolves, led by Cole D. Walker portrayed by Jon Bernthal, well known for his amazing performances in the Punisher and the Walking Dead. Ghost Recon Breakpoint will be released on October the 4th.

Skull & Bones will no longer ship in fiscal '20. It is an ambitious project combining naval battle, PvP, Co-op and RPG. The teams at Ubisoft Singapore are committed to pushing the envelope during development to deliver the best experience possible. And this additional time will allow them to do so. PRI net bookings is expected to increase solidly in absolute value and to grow as a percentage of net bookings versus fiscal '19. It will progress strongly on console than PC, driven by even more robust post-launch plan. This growth will be partly compensated by lower revenues for our mobile segments, as there will be fewer releases than in fiscal '19, knowing that we have not factored in new partnerships in our target.

Also, please note that as anticipated the first mobile games developed by -- with Tencent to be released in fiscal '21. We are expecting digital to end up higher than 70% of total net bookings and back-catalog around 50%. Despite continued top line growth, we plan for a flat operating margin around 22%, as we are coming with more new releases than last year. We are looking for continued gross margin improvement offset by higher operating cost.

Regarding the items below the non-IFRS operating income line, we expect stock-based compensation of around EUR 50 million, a net financial charge of around EUR 70 million, including EUR 8 million related to the noncash convertible bond option cost. Tax rate is expected between 25% and 27%, and number of diluted shares is expected around 120 million. We expect the difference between R&D, P&L and R&D cash to be higher than EUR 100 million, as we accelerate our investment in our future growth potential.

With this increased gap and a negative impact from working capital, due notably to our backend-loaded year, we plan for a significantly lower free cash flow generation than in fiscal '19. Excluding the working capital impact, we continue to expect solid free cash flow generation this year and over the coming years.

Looking at Q1, we expect net bookings at approximately EUR 270 million, down 29% year-on-year. The decrease reflects lower net bookings from our Q4 fiscal '19 titles versus last year, as Far Cry 5 was released just 5 days before the end of March. Additionally, Anno 1800 is a smaller title than The Crew 2 last year.

Talking of Anno, the quarter started on a positive note as our latest entry in the brand became the fastest selling title of the franchise to date with a meaningful progression and engagement.

I now hand over the call back to Yves for his conclusion.

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Yves Guillemot, Ubisoft Entertainment SA - Co-Founder, Chairman, CEO & President [6]

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Fiscal year '19 was a remarkable and meaningful year for Ubisoft. We have executed on our 3 years plan and we delivered a 49% operating income year-on-year growth. The past 12 months, I've also confirmed the benefits of Ubisoft unique mobile and long-term strategy. Fiscal year '20 will be another year of growth for Ubisoft, as we will be delivering a bigger slate of AAA titles and post-launch content as well as a solid back-catalog. The year will also be served by our momentum in Asia and on PC, and by the strong expansion of our direct-to-player platform. We are excited by the numerous upcoming growth opportunities that will allow us to create significant shareholders' value over the coming years. We are now ready to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question. Comes from Nicolas Langlet from Exane.

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Nicolas Langlet, Exane BNP Paribas, Research Division - Research Analyst [2]

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I've got 3 questions, please. The first one on the PRI. Yes, notably in Q4, if you exclude Far Cry New Dawn digital distribution from the PRI, what would have been the underlying performance? On my estimate, if we exclude mobile and Far Cry New Dawn, PRI was down like minus 20% in Q4, so can you confirm that? And tell us what were the drivers of this decline.

Second question on Rainbow Six. So it seems that the net booking was down in Q4 on the tough comparable basis, can you confirm that? And if possible, tell us about how much decline? And then looking at the coming quarters for Rainbow Six, do you think the franchise still has what it takes to grow? The franchise is now entering a phase of maturation, where the next booking will progressively fade.

Third question, on the AAA games of year '20, how many of the 4 game will be based on proven franchise? So we know for Ghost Recon, but what about other 3? And do you expect all the 4 games to be full priced? Or are you including a free-to-play title?

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Yves Guillemot, Ubisoft Entertainment SA - Co-Founder, Chairman, CEO & President [3]

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Thank you, Nicolas, for your question. On the first question, what we saw in Q4 -- what we've seen in Q4 is that we overperformed on PRI across a number of titles. So we've been very happy with it. Now as we -- as I said in the last call, we expected the comparison with Q4 to be tougher than the previous quarters, due to the fact that last year we had an exceptional peak in PRI with the Outbreak release on Rainbow Six Siege. So in Q4, yes, the comparison for Rainbow was much higher last year and that's why it has had an impact on the PRI decrease.

Now on the -- when we look at the Rainbow moving forward, what we see that -- we see strong growth opportunities and knowing that we are building our very strong momentum of new players. As we said, we increased the number of new players by 40% this year. And we are relying on the loyal base of fans and many returning players, due to a very unique gameplay in the shooter segment. So we see strong growth opportunities on PC in general and in Asia in particular. And as we said earlier in the call, we've been happy that the team recently reorganized itself to come with more regular updates, higher-quality content at a faster cadence and that's the new standard that we want to go for with Rainbow, and it's a very exciting consideration for the brand. Also, we see a continuous expansion on the eSport side across the world with stronger focus, especially in Asia in fiscal '20. So all this bodes well for Rainbow in the future.

Now for the 4 games, they are all full price games. And you will know soon about them because we don't give more information at the moment.

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Operator [4]

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We'll now take our next question. This comes from Robert Berg of Berenberg.

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Robert Berg, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [5]

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A few questions actually. The first really a high-level question for Frédérick. Your first, sort of, full year guidance. Historically, a lot of them had a view of being very prudent, so much so that even with the rise of Fortnite, you could still meet the guidance or broadly meet the guidance this year. I'd be really interested to how you think about guidance, especially, with regards to your degree of prudency that you're comfortable with? The second question is, you said, back-end loaded 3 games in Q4, I'm interested to know why you're planning for 3 games in Q4. What's the thought process behind that?

Third question on China, any update there on how things are progressing with Tencent? And also whether you assume anything in your guidance for that opportunity? And the fourth question, just a clarification on the free cash flow. Excluding the working capital, did you point towards that it is kind of stable or growing free cash flow?

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Frédérick Duguet, Ubisoft Entertainment SA - CFO [6]

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So on the -- yes, on your first question, of course, we like to be prudent and what we've seen this year is a remarkable progression, so I'm happy to rely on the strong momentum. But yes, we are at the beginning of the year and we want to take a prudent stance, that is pretty logical. Having said that, we are planning for a healthy growth year-on-year of 8%, both on the top line and the bottom line. And what we've seen lately is that competition has been stronger than anticipated both on premium and free-to-play, and that's a pretty stimulating environment. But we see that we are working today in healthy and growing market and that's really encouraging for us. The key takeaway from this last quarter that we see for next year is that we recently over performed on catalog digital PRI and as I said earlier, we closed the year with a record level of engagement and activity for Ubisoft, so that's really encouraging for the future.

Now on your second point, why do we have 3 titles in Q4, as we said earlier, we are coming with 3 titles that are positioned in very distinct gaming segments. So we like the Q4 in the fiscal, we used to release 2 big titles 2 years ago. We're coming with 3 distinctive offerings this year, and that also bodes well for fiscal '21, since they will have a strong impact in fiscal '21?

Now as for China, we've been very happy with strong growth in Asia, this year, with 62%, and we continue to enjoy strong growth on PC through our own distribution platform are through Steam, so we are very happy with the fact that the momentum in China is very strong. And now we are continuing to ramp up our operation with Tencent to get prepared for the release of some games. For fiscal '20, we haven't taken -- we have taken the assumption that there will be no problems for Rainbow Six Siege for cautiousness reason, so we'll see and that might be an option for upside in the fiscal year, but there is no impact for fiscal '20 in our guidance today.

So in terms of free cash flow between -- without working capital, we expect solid cash flow from operation in the year. We will be slightly down versus this year in terms of capital comparisons due to the fact that we are anticipating to increase our R&D investment to prepare for long-term opportunities and particularly the one that Yves mentioned earlier.

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Yves Guillemot, Ubisoft Entertainment SA - Co-Founder, Chairman, CEO & President [7]

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It's very important for us also to continue to develop our games -- our console and PC games on mobile. And this is going to actually need lots of good creators.

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Robert Berg, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [8]

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And one quick follow-up on the Q4 releases. Just wondering why, and if it's timing of development, that's one thing. Why you didn't want to put out a game earlier in the year, why 3 in -- specifically in Q4?

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Yves Guillemot, Ubisoft Entertainment SA - Co-Founder, Chairman, CEO & President [9]

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No, we wanted to give those games the development they needed, the time they needed because as we know, it's a long-term -- they are long-term sellers, so it's important that they come with the best opportunity.

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Operator [10]

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We will now take our next question, comes from Charles Scotti of Kepler.

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Charles-Louis Scotti, Kepler Cheuvreux, Research Division - Research Analyst [11]

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A couple of questions from my side. The first one, any chance that you can tell us, if the 3 AAA games especially, in Q4 are based on existing or brand new franchises? And also for modeling purposes, will the release of those games late in Q4, which could also explains why your guidance monetize in terms of non-IFRS which is a little bit cautious. My second question on Rainbow Six Siege, can you tell us if your next year guidance include the release of Rainbow Six Siege in China? And also on Rainbow Six Siege, I have the feeling that OGMs have been slightly declining in April, any reason, I'm missing? And how do you see the performance of those games this year? And then, my last question on Skull & Bones, what explains delay of the game or postponement of the games to at least next year?

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Frédérick Duguet, Ubisoft Entertainment SA - CFO [12]

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Thank you, Charles-Louis. So yes, the games will be late in the fiscal year. We don't say when in Q4 they will come. But yes, it explains to some extent why the operating margin not increased because the year-end fiscal '20 related to fiscal '19 will be more biased towards new releases, which usually carry a lower operating margin, pretty logically, and especially, as they come in Q4. So the strong positivity impact of these 3 titles will, of course, will be seen, to a much larger extent, in fiscal '21. We don't say anything more today on these 3 titles, and you will know more soon.

On Rainbow Six Siege, as I said earlier, we didn't factor in the release of Rainbow in China in fiscal '20, so that's an option for upside. We are awaiting for the government approval. As I said earlier, we've been very happy so far with strong growth in China on Rainbow through Uplay and MC. In April, in terms of MAUs, actually, we are about flat versus last year.

On Skull & Bones, as you know, it's a new IP, it's a very ambitious project. It takes time usually for new IPs to come and hit market with a right level of quality. It's a very important project for Ubisoft as it has massive scope and it should carry a strong performance in terms of engagement, so it's the right decision to give enough time for the team to take the most of its long-term potential that it has for the Ubisoft catalog.

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Yves Guillemot, Ubisoft Entertainment SA - Co-Founder, Chairman, CEO & President [13]

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And what I can say is that we are very happy with the direction the game is taking. And we expect this game to be a really great seller.

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Charles-Louis Scotti, Kepler Cheuvreux, Research Division - Research Analyst [14]

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Just one follow-up question, is on Anno 1800. Obviously, not a AAA game, but it is sold at full price. So can you give us an idea of the selling potential of these games? If it is in the EUR 40 million or EUR 50 million net booking range?

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Yves Guillemot, Ubisoft Entertainment SA - Co-Founder, Chairman, CEO & President [15]

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So first it's only on PC, and we expect for the games coming from Blue Byte next year to be on the multi machines, so that would be new for those brands. So it's a game that is doing a lot more than the previous games launched on the IP. We expect to have this game to have regular sales during the next 2 or 3 years, but I can't give you an exact number. It's just getting better sales -- a lot better sales than what we have seen on the franchise in the past.

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Frédérick Duguet, Ubisoft Entertainment SA - CFO [16]

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What we can add is that we've been very happy with the performance of Uplay and with our Epic partner. And what is interesting with this game, it has a very strong playtime as it's a strategy and city building type of game.

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Yves Guillemot, Ubisoft Entertainment SA - Co-Founder, Chairman, CEO & President [17]

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And it actually did well -- really well in China, which is the second market for the game -- third market -- second market for the game.

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Operator [18]

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And we'll now take our next question. It comes from Evan Wingren of KeyBanc Capital Markets.

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Evan Todd Wingren, KeyBanc Capital Markets Inc., Research Division - Former Research Analyst [19]

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I wanted to ask a little bit about PRI in fiscal year '20, what the growth drivers are for the year as you think about them today? And what the headwinds might be for the year, so that would be one? And then two, on the unit sales for the year, just want to confirm that you have unit sales from the 4 games relative to the 3 games that you launched in FY '19 up. And then, perhaps some context on the marketing strategy for those 4 games. Just given the concentrated time frame that they are in. I recognize that it sounds like they might be going into different genres, but just how to think about that? And potential risk associated with launching those 3 games in a relatively short window from a marketing side?

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Frédérick Duguet, Ubisoft Entertainment SA - CFO [20]

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Yes, sure. So on the PRI for fiscal '20, the main drivers should remain around Rainbow, of course. We -- as we said earlier, we relied on stronger player engagement for Assassin's Creed Odyssey relative to Assassin's Creed Origins and on the Division 2 relative to Far Cry 5. Let's say, if we take this as a comparison and that's -- these are interesting dynamics that will get the benefit for in fiscal '20. As we said earlier, after 60 days, Division 2 has reached a record level for Ubisoft game in terms of player engagement -- engagement per player. So that bodes very well for the future development of the activity and engagement of Division 2 and then for its PRI. We also expect Ghost Recon Breakpoint to be a key contributor in PRI as well.

On your second question in terms of unit sales, we don't give detail on this, but we expect a strong growth on unit sales on the AAA as well as on the net booking, as we come with 4 AAA games as opposed to 3, and we're very happy with strength of this lineup.

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Yves Guillemot, Ubisoft Entertainment SA - Co-Founder, Chairman, CEO & President [21]

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And we've said also that our 3 games coming in Q4 will be very different types of games, so they will be able to address a very diverse market.

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Frédérick Duguet, Ubisoft Entertainment SA - CFO [22]

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Remember, 2 years ago, we had launch of Ghost Reckon and For Honor in the same quarter and it had worked very well. So yes, of course, we like the Q4 quarter. It's very favorable for us.

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Operator [23]

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And we will take our next question, it comes from Nick Dempsey of Barclays.

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Nicholas Michael Edward Dempsey, Barclays Bank PLC, Research Division - Research Analyst [24]

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I've got 2 questions. So first of all, just looking at FY '19, you're originally looking at a 19 million unit target. You talked clearly about the Division 2. Can you give us -- I know, you are not going to give us an exact number, but can you give us a rough indication of, kind of, how far below that 19 million target you came in for FY '19? And second question, is there a risk with Cyberpunk, which could land at some point, could land in the quarter to end March 2020, and therefore, clash with 3 AAA launches from yourselves?

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Frédérick Duguet, Ubisoft Entertainment SA - CFO [25]

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So in fiscal '19, we ended up slightly below 18 million units.

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Yves Guillemot, Ubisoft Entertainment SA - Co-Founder, Chairman, CEO & President [26]

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So for the -- yes, there's possibility for competitive games to come. But what we feel is, with the games we are coming with, we have a good chance to generate lots of good sales. Having said that, they represent less in the total fiscal year. Because the back-catalog and the releases that will happen in -- at the beginning of October will do also a lot of the revenue and profit.

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Frédérick Duguet, Ubisoft Entertainment SA - CFO [27]

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What is the level for Q3? It is that we expect a lower slate of competitive premium games into this season relative to what we had last year, which was pretty exceptional. So it should be favorable for Ghost Recon.

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Operator [28]

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And we'll now take our next question, comes from Tom Singlehurst of Citi.

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Thomas A Singlehurst, Citigroup Inc, Research Division - Director and Head of European Media Research [29]

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I just had a couple, if that's okay. The first one was on price discounting just as a strategy. You mentioned this is a factor, I think, earlier on in the presentation on Assassin's Creed volume. Can you just talk little more generally about how you use price to sort of get unit sales over the line? And will this become more common? That was the first question?

And then second, a very simple one. Obviously, plenty of engagement and some very dramatic positive figures on sort of eSports. I was just wondering whether that's something that you think can monetize in the short term. Or are you more focused on the higher engagement it's driving and, therefore, prospects for PRI?

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Frédérick Duguet, Ubisoft Entertainment SA - CFO [30]

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So on the price discounting, it's -- we've seen it impacting in Q3 and also in Q4. It's true that Q3 was an exceptionally high in terms of positive intensity, which we had anticipated. In Q4, actually, competition was stronger-than-anticipated both on premium and free-to-play.

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Yves Guillemot, Ubisoft Entertainment SA - Co-Founder, Chairman, CEO & President [31]

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And on eSports, we continue to focus on engagement. Our goal is really to reach a larger audience. So at the moment, we push our teams to have -- to reach more teams that are actually creating bigger audience overall on the game.

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Operator [32]

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And we'll now take our next question from Julia Matoshchuk of Morgan Stanley.

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Julia Matoshchuk, Morgan Stanley, Research Division - Equity Analyst [33]

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Two questions, please. The fist one, how many unit sales your 2020 guidance assumes on 4 AAA releases? So that's the first question? And the second, again, regarding your guidance, could you just help us understand what is the reasonable level of in-game monetization that we should assume on new releases. Like, for example, if you earn EUR 100 million on your new releases, what is the share of PRI?

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Frédérick Duguet, Ubisoft Entertainment SA - CFO [34]

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So on the first question, as I said, we don't give any indication of the total unit sales, but we expect a strong growth relative to fiscal '19. In terms of monetization, yes, we should expect good monetization from our new releases. Of course, they usually carry a lower level of PRI than catalog. If we think about what we said for fiscal -- what we did for fiscal '19, which is that PRI as a percentage of the total premium net booking is around 26% for cost control and PC. So if you are 26%, we had said that Rainbow came with a PRI 60% of total net booking. So when you come with a new release your -- this is actually below the 26%.

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Operator [35]

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And we'll now take our next question. This comes from Mike Ng of Goldman Sachs.

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Michael Ng, Goldman Sachs Group Inc., Research Division - Research Analyst [36]

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I was wondering if you could talk about your thoughts about the pace and frequency of content updates. You mentioned, you're increasing the pace of content updates for games like Rainbow Six. I think Ghost Recon Breakpoint will have a more traditional season-based content update. I'm just wondering with games like Fortnite or Read Dead Online providing updates every week, is updating content every few months frequent enough? And then, my second question is, whether or not, whether you can give us some insights into the development and launch plans for your Tom Clancy titles? Was Ghost Recon Breakpoint always planned for fiscal 2020? Why Ghost Recon and not Splinter Cell, given that Wildlands came out a few years ago, any insight into that process will be very helpful?

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Yves Guillemot, Ubisoft Entertainment SA - Co-Founder, Chairman, CEO & President [37]

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Okay. So it's a very good question on how often we come with content. It is, you're right, something that we have been working on in the last 24 months. Our teams are organized now to -- or getting organized to come more regularly with content. And most of our games are going to come with drops of contents and events on a more regular basis. Rainbow Six is increasing its content drop speed a lot already and you will see that coming this year. And even, Ghost Recon Breakpoint will see lots of content drops on a regular basis because they will also have the PvP, the Co-op and the campaign. So you can expect on all the products and not only Rainbow Six and on Ghost Recon, content drops coming regularly, including on For Honor, but also a lot on the Division 2. So it's the new trend now in the industry and these -- those drops are generating lots of -- are making lots of people come back to the games and also spend money in them.

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Frédérick Duguet, Ubisoft Entertainment SA - CFO [38]

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And what is important is that we're doing this in -- focusing in the improvement of our engines and tools to be more flexible, adaptable, so that we come with this extra content at faster pace in a very profitable manner.

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Yves Guillemot, Ubisoft Entertainment SA - Co-Founder, Chairman, CEO & President [39]

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And now for Breakpoint. Yes, it has always been expected in financial year '20. And it's a major new release that we think can benefit from the Ghost Recon Wildlands launch. We think it's a fantastic game and it will be -- I expect one of the best games we ever created. So we expect a lot from that game.

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Frédérick Duguet, Ubisoft Entertainment SA - CFO [40]

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We have a unique positioning in the shooter genre.

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Operator [41]

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And we'll now take our next question from Doug Creutz of Cowen.

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Douglas Lippl Creutz, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [42]

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I have 6 questions, but I'll ask just one, so others will get a chance. You talked about the competitive environment being difficult in this last year, impacting your results, and you also talked about the fact that you're going to be ramping your investment in R&D against your IP. Two of your major competitors have also recently said the same thing. Is it wrong to be concerned at the amount of incremental investment that's going into this space is outstripping the actual growth contained therein?

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Frédérick Duguet, Ubisoft Entertainment SA - CFO [43]

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So what we see is that we have very attractive growth opportunities, so that's really what is driving our growth on investment. And actually, when we think about it, when we decided to accelerate investment 5 or 6 years ago, it translated into a stronger financial performance. And what we see today is that, as we focus more our resources on post-launch content, it drives higher profitability and PRI. But it's true that we also need to think about the medium to longer term, and here the opportunities are tremendous, and it's important to get ready to seize this possibility to expand our franchises to many more devices in more regions.

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Yves Guillemot, Ubisoft Entertainment SA - Co-Founder, Chairman, CEO & President [44]

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And now to answer on the competition, to recruit the best talent, in fact what is important to consider when you look Ubisoft is that, Ubisoft is all over the world. And our capacity to attract talent everywhere is helping us a lot, and we are also -- we also have a good capacity to recruit also on the Eastern Bloc, where there are lots of engineers. So our -- we, for sure, are very concerned by the risk of more competition, but at the moment, we don't see a huge competition on the field.

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Operator [45]

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(Operator Instructions)

Okay. Because we have no further questions at this time, so I'd like to hand the call back to our speakers today to conclude the call.

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Yves Guillemot, Ubisoft Entertainment SA - Co-Founder, Chairman, CEO & President [46]

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

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Frédérick Duguet, Ubisoft Entertainment SA - CFO [47]

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Thank you, guys.

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Operator [48]

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This concludes today's call. Thank you all for your participation. You may now disconnect.