Half Year 2017 Ubisoft Entertainment SA Earnings Call On

THOMSON REUTERS STREETEVENTS EDITED TRANSCRIPT UBI.PA - Half Year 2017 Ubisoft Entertainment SA Earnings Call

EVENT DATE/TIME: NOVEMBER 03, 2016 / 5:15PM GMT

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©2016 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. NOVEMBER 03, 2016 / 5:15PM, UBI.PA - Half Year 2017 Ubisoft Entertainment SA Earnings Call

CORPORATE PARTICIPANTS Yves Guillemot Ubisoft Entertainment SA - CEO Alain Martinez Ubisoft Entertainment SA - CFO

CONFERENCE CALL PARTICIPANTS Tim O'Shea Jefferies - Analyst Jean-Christophe Liaubet Exane BNP Paribas - Analyst Peter Testa One Investments - Analyst San Phan Mizuho Securities - Analyst Robert Berg Berenberg - Analyst Emmanuel Matot Oddo Securities - Analyst Thomas Alzuyeta Gilbert Dupont SA - Analyst

PRESENTATION Operator Ladies and gentlemen, welcome to the Ubisoft H1 Earnings and Sale Conference Call. For your information, this conference is being recorded. At this time, I'd like to turn the conference over to Mr. Yves Guillemot, CEO; and Alain Martinez, CFO. Gentlemen, please go ahead.

Yves Guillemot - Ubisoft Entertainment SA - CEO Good afternoon and good morning, everybody. Thank you for joining our conference call. Ubisoft is building interestingly recurring and dependable activity. We are laser focused on delivering more visibility and more regularity. Here is how we are doing that.

First, our competitive advantage on internally created owned brand has been providing us with strong visibility on the future of our franchises. Second, our multi-studios organization gives us unrivaled capacity to release open-world games on a regular basis. Third, we are creating live experiences that are successfully engaging players over the long term. Rainbow Six, The Crew, and The Division have now accumulated more than 10 million unique registered users each, while total Ubisoft MAU were up by 44% year on year.

And we are investing in eSports to continue that momentum. We are very pleased by Season 3 of the Rainbow Six eSports Pro League, in partnership with ESL. Unique viewers are ended up over 130% versus the prior session.

Fourth and finally, through very disciplined and well-targeted acquisitions like Ketchapp, we are having more expertise to deliver recurring revenues to the group. All of this will allow us to continue to generate strong shareholder value during the coming years.

Our H1 results reflect those benefits. We exceeded our sales target thanks to the strength of our franchises, combined with a strong boost from our digital performance. Our momentum is exemplified by Rainbow Six Siege, which has a 40% increase in daily active players, following the release of Skull Rain, its latest update.

The big engagement increase mechanically resulted in significantly higher revenues than anticipated. Since its launch 11 months ago, the Rainbow Six team has done a great job at constantly releasing improvements and updates from weapon balancing and anti-cheat solutions, to online stability. All this plus the free content that we have regularly released, have translated into a great gaming experience.

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As a consequence, the games rating among player are very high, and it has continued selling well in the context of a very competitive environment. Our goal is to follow the same trend with all our live games. The recently 1.4 update on The Division, which brought a major overhaul of the game, have been praised by its fans, and will continue to be [humbled] by the passion and support for the game.

The 1.4 update helped increase engagement by over 50% since its release one week ago. We believe we can continue this good momentum with the upcoming release of Survival, the next expansion. We are committed to make The Division a great experience for the players over the long term, just like we are doing with Rainbow Six Siege.

Thanks to this very strong first half, which is having a positive impact on our profitability profile, we have revised therefore our income target for the year.

Before diving into H1 results, I would like to make a quick comment on the very important Annual General Meeting, which took place at the end of the quarter. As you are well aware, Vivendi claims that their stake in Ubisoft deserves a Board representation. We have always strongly opposed that claim on the basis that the many conflicts of interest and their (inaudible) control approach would be negative for our Company, our employees, and our shareholders. To make it short, our shareholders vastly demonstrated that they supported our strategy and position on this matter.

It certainly prevented Vivendi from presenting any resolution. At the same time, Vivendi maintains their aggressive approach by abstaining on all resolution. This way they made sure that some extraordinary resolutions that require third (inaudible), notably the one supporting share grants for all employees did not pass.

Excluding Vivendi, the approval rates from our shareholders for those resolutions was close to or well above 80%, meaning they would have passed easily. It was a calculated act of disruption and another confirmation that Vivendi's intentions do not align with our employees' and our shareholders' benefits.

We believe our best defense has been, is, and will be the great shareholder's value we create over the years, and the demonstration that we do continue to deliver on our strategy. We do not take the support of our shareholders for granted, and we know this trust has to be earned month after month, year after year.

As such, we are fully focused on delivering continued outperformance over the coming year. I'll now hand the call to Alain, who will present our H1 performance in more detail.

Alain Martinez - Ubisoft Entertainment SA - CFO Thank you, Yves. And hello, everybody. Our H1 performance was materially better than what we had originally anticipated. Sales for the first half were EUR281 million, up 36% year on year. The second quarter reached EUR142 million, much better than our EUR100 million target.

We outperformed expectations thanks to the quality of our back catalog, as well as the strength of our recurring player investments.

Overall, digital represented 72% of our total revenue, versus 48% last year, with a 79% boost in our digital distribution. But the biggest growth driver was recurring player investment, up 132% to EUR95 million. This was led by the performance from The Division and Rainbow Six Siege. This is the best demonstration we are executing on our strategy. Great multiplayer games are driving engagement significantly higher. As a consequence, we are seeing (inaudible) acceleration in extra content revenue, as well as sustained sales of the main game.

Back-catalog revenue reached EUR256 million, and represented 91% of our sales. As a reference, this is higher than the EUR233 million we achieved in the entire year of fiscal year 2015, just two years ago. This is a clear indication that our business is benefiting from a wider base of recurring revenue.

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As Yves mentioned, alongside The Division, our best performer during the first half was Rainbow Six Siege, which did significantly better than expected. This bodes well for the future of the franchise and for our full-year visibility. I would like also to mention The Crew, whose H1 revenues were flat versus last year H1, a great achievement for a title released more than a year and a half ago.

On a geographical standpoint, there has been some headwinds in Europe, including exchange rate evolution in the UK, while the US benefited from the strength of the Tom Clancy brand. Asia continues to be a strong growth driver, notably Japan and China; while South America experienced a slowdown.

On the earnings side, the EUR74 million increase in top line translated into a great EUR46 million improvement at the non-IFRS operating income level, thanks to the 6 point gross margin improvement and solid cost control. This good cost control reflects increasingly efficient marketing and R&D operations. We are also leveraging the heavy investment we have made in digital in the prior years, as we are reaching more critical mass.

We ended the semester with a net cash situation of EUR38 million, compared with a net debt of EUR156 million last year.

Let's now review the detail. As I said, non-IFRS operating result stood at minus EUR61.6 million versus minus EUR107.8 million last year. This EUR46 million improvement reflects a EUR72.1 million increase of the gross margin, linked both to the higher sales and to a 6 point margin improvement. This is clearly the result of our strong digital activity. It means that also back catalog today generates great level of gross margin, which was less the case in the past.

But we had also EUR24 million higher R&D expenses, linked to additional depreciation for the games released in the fourth quarter of fiscal year 2016, and to the growth of our live operations.

On a percentage term, this represents a 4 point improvement, which reflects the higher profitability of recurring players' investments. This positive impact can also be seen in variable marketing expenses that were flat at EUR72 million year on year. These demonstrate particularly well that recurring player investment provide benefits in every part of our activity.

Finally, structured cost with a slight EUR3 million increase at EUR93 million illustrated our good cost control as we start leveraging some of our digital investment made in prior years.

Other topics worth mentioning, the EUR1.6 million financial charge includes a EUR2 million foreign currency gain. And as usual, the first half year tax rate of 45% is not representative of our full-year 28% estimate. Indeed, losses are over-represented in our French holding, generating higher percentage tax credit, while distribution and studio subsidiary are structurally generating profit, but generally at a lower tax rate.

Moving to page 20 of our presentation which details our R&D expenses, the major things to mention are number one, the EUR15 million increase of depreciation, which mechanically reflects last year backend loaded releases, such as The Division and Far Cry Primal; and a EUR13 million increase in the non-capitalized expenses, which reflects the consistent expansion of our online operation as we switch a greater part of our activity toward recurring players investment, and we focus in delivering additional content and raising community engagement through regular events, updates, and game balancing. These charges also include the restructuring cost involved with the closure of our Casa Blanca Studio.

Regarding the capitalized R&D, it only grew by EUR7 million to EUR231 million, again reflecting the switch toward more live operations that are directly expensed.

Moving to slide 21, the IFRS/non-IFRS reconciliation shows three types of adjustments. The traditional stock-based compensation charge standing at EUR24.9 million, up from EUR6 million in fiscal year 2016. Out of this, EUR13 million were linked to our recent successful employee shareholder plan. It takes into account the full 15% discount granted, which allowed our employees to subscribe some 2.4 million shares at EUR30.86.

On a cash basis, the shares delivered have been bought an average price of less than EUR29. So the net flow was actually positive for the Company. It also includes a charge of EUR3.5 million related to brand depreciation. And finally we recognized a EUR2.3 million IFRS charge in our financial result related to an earn-out payment linked to better-than-anticipated financial performance from one of our recent acquisitions.

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Indeed, in our IFRS while the potential earn-out is allocated to the goodwill and can be readjusted in the first year of acquisition, beyond this period any additional earn-out is treated directly as expense, but are tracked income tax credit.

Finally, free cash flows stood at minus EUR18 million versus minus EUR359 million in fiscal year 2016. This reflects a EUR29 million increase of our cash flow from operations impacted by our better overall profitability, but also a EUR315 million working capital decrease or improvement due to the backend release of Far Cry Primal and The Division in fiscal year 2016.

The EUR27 million net investment in capital assets, up EUR3 million versus fiscal year 2016, includes the purchase of a small new building for our Ivory Tower Studio. A larger similar investment is underway in the second part of the year for our Massive Studio.

We recognized a EUR54 million net cash inflow related to the significant employee shareholder plan completed in H1. This will be more than compensated in H2 by the EUR122 million buyback of BPI 3.6 million shares that took place in October.

Finally, as part of the IFRS treatment of our EUR400 million OCEANE or convertible bond raised in September, some EUR40 million of them were treated as equity. They will be consumed over the next 5 years as our IFRS accounts will reflect the option charge.

This then ends the first half fiscal year 2017 financial presentation. I will now introduce our revised fiscal year 2017 objectives.

Our strong H1 performance, mainly the excellent momentum of back catalog and digital, as well as good cost control, should continue in H2. This is expected to translate in an improved profitability profile for the full year. As a consequence, we increase our non-IFRS operating income target to between EUR230 million and EUR250 million, versus approximately EUR230 million previously.

Additionally we revise downward our sales target to take into account more conservative sales assumptions for H2 new releases. We now expect revenue between EUR1.610 billion and EUR1.670 billion, versus approximately EUR1.7 billion previously. As a consequence, our profitability targets for the year have been increased and are now expected between 14.3% and 15% versus 13.5% previously.

As a driver of our better profitability profile, we are now targeting digital revenue of around 40% of total revenue, versus over 35% previously. We are also raising our back-catalog revenue at around 35% versus around 30% previously.

Our target update also reflects the recent positive impact from the Ketchapp acquisition, compensated by the negative impact from the British sterling weakness. Additionally, with the release of South Park in the fourth quarter, we expect to generate positive free cash for the year, and solid free cash flow before working capital.

Finally, the success of our recent employee shareholding plan with record participation rate of over [50%], which is a record, is increasing our stock-based compensation for the year to EUR40 million versus EUR25 million previously. We now expect 118 million diluted shares for the year, versus 115 million previously.

That increase reflects the employee plan and the recent 3 million shares from the convertible bond that will be converted at EUR54.7, partly compensated by the acquisition of BPI shares.

Regarding the tax rate, we continue to expect 28% going forward. I know hand over the call back to Yves.

Yves Guillemot - Ubisoft Entertainment SA - CEO Thank you, Alain. Let's look at our second half financial year 2017. We expect a stable Q3 at around EUR560 million. This reflects lower revenues from new releases, as last year had seen the release of Assassin's Creed Syndicate and Rainbow Six, compensated by higher revenues from back catalog and digital.

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Our successful back catalog lineup will be joined in Q3 by existing and ground-breaking new games. First, Watch Dogs is coming back in a big way, as IGN commented, Watch Dogs 2 adds fun to every facet of the game, and its multiplayer is a blast. The previews from both journalists, and freelance, and influencers have been overwhelmingly positive. They praise the great freedom of the experience, its charismatic characters, the vibrant San Francisco setting, and the extension of the seamless online experience that was introduced in the original title.

The addition of Co-Op Play and the new bounty mode are an impressive technical and gameplay breakthrough from our team in Montreal. We have significantly enhanced the player's ability to jump in and out of other player's world in a seamless manner, bringing new layers of intense action and fun. Watch Dogs 2 will be released on November 15th. We expect it to be the top title in the action-adventure genre this holiday season.

Next up is Steep. Steep will reinvent actions for gaming by giving players a highly-connected and beautiful open-world mountain to experience. Following on the game's closed alpha in October, more players will be able to experience Steep firsthand with an early access beta starting on November 10th, followed by the open beta on November 18th.

Steep has been designed from the ground up to be a long-lasting experience. And we have an incredibly rich and first post-launch plan for the game. We are collaborating very closely with Action Sports brands like Red Bull and Go Pro to deliver (inaudible) and realism to the experience. Players have told us they love the experience, and Steep won the official Game Critic's award of best sport game at E3, and best sport game award at Gamescom. We will release Steep on December 2nd on PS4, Xbox One and PC.

Just Dance Now 2017 was released on October 25th. For the second year, players will be able to access a catalog of 200 songs through Just Dance Unlimited. This subscription offers increased engagement and gave a nice boost to ARPU last year. To make sure more players can enjoy the experience, we are lowering barriers to entry to the service. Last year, 36% of Just Dance players tried the unlimited free offer. This year, it will be automatically unlocked, meaning 100% of the players will be able to test it.

Building on the strength of the (inaudible) where we also delivered great new content to the cumulated 30 million plus total registered users of The Crew, Rainbow Six Siege, and The Division. The Crew Calling All Units will be released on November 29th. Rainbow Six Siege [for] Operation Red Crow and The Division Survival Expansion release date will be unveiled very soon.

Finally, on December 21st, we will release the highly anticipated Assassin's Creed Movie. FOX shared the second trailer of the movie a few weeks ago. In terms of special volume, it's ranked higher than the second trailer for the film, and the trailer was at a higher level than Warcraft or Guardians of the Galaxy. With a great positive conversation of 86%. We encourage you to check it out.

Overall, Q3 is a very exciting quarter for Ubisoft, with great entertainment experiences for a wide category of players and fans.

We expect a strong fourth quarter with the release of three major titles-- For Honor, Ghost Recon Wildlands, and South Park; versus two titles last year. South Park is building on the franchise's huge fan base, and on the success of the prior title, with an even more robust RPG experience. The game's authentic humor, storyline, and voice acting are consistently prized as they remain faithful to the South Park spirit, and make players feel like they have been transported into an episode of the TV show.

For Honor continues to excite players across the globe. After the global success of its closed alpha, the biggest in Ubisoft's history, For Honor just concluded two more successful live testings in Russia and Japan. Player feedback is massively positive, and we have seen a huge boost in registration for the upcoming beta. The game won Game Critic's award for best PS4 and PC game at Gamescom.

With its unique combination of [good] setting, (inaudible) to scale and maximum freedom of gameplay, Ghost Recon Wildlands makes a return to form. And its potential beyond its traditional audience will be very important. We recently conducted a technical test of tens of thousands of players. It went well. And the game is on track for release next March. Wildlands will tap into a (inaudible) community of more than 20 million registered users who have engaged with Rainbow Six Siege Order Division in the last 11 months.

Finally, Q3 and Q4 we expect another boost from our back-catalog revenues and players recurring investments. The March quarter will also see the release of the Nintendo Switch. As we have already said, with think the platform is great.

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For the first time ever, players will be able to continue their own console experience on the go, while traveling or commuting. That is a true innovation.

Second, most importantly, despite the huge competition from mobile gaming, Nintendo managed to sell more than 55 million 3DS since its launch. The Switch will benefit from this strong demand for Nintendo games on a dedicated and handheld platform. Its potential, if potential is reached, then Ubisoft as the leading third-party publisher on Nintendo owned consoles for the past 10 years, will benefit disproportionately from that.

I would like to conclude by saying that the momentum of our franchises, coupled with our acceleration in digital and our strong financial situation, is positioning us to see significant shareholder value creation during the coming years. As such, we are on the right track toward our financial year 2019 target.

We are now ready take on your questions.

QUESTIONS AND ANSWERS Operator (Operator Instructions) Tim O'Shea, Jefferies

Tim O'Shea - Jefferies - Analyst Yes. Hi. Thank you for taking my questions. So the question is on Watch Dogs. I'm just curious how preorders in anticipation might be tracking ahead of the big launch. And then you guys have enjoyed a lot of success driving digital revenue, particularly around your big multiplayer games. So the question is with Watch Dogs in the different genre, what should we expect in terms of digital revenue and maybe that recurring player investment? How should we think about that? Thank you.

Yves Guillemot - Ubisoft Entertainment SA - CEO So on the digital revenue, because it's a game that is launched during Christmas, it will be more around 20% than what we see generally in the first quarter or outside Christmas. Now we will have also Season Pass. That will be important for that game. So we expect good revenue coming from that Season Pass.

Now on preorders, Alain will give you more details.

Alain Martinez - Ubisoft Entertainment SA - CFO Yes. What we can say is that today the expectation we have done overall regarding our releases for the second half, taking into account our revised view on each of the games, and taking into account, of course, the preorder, the buzz and a number of elements-- the quality of the game, we do consider that preorders are important. But they are not completely the rule for the success of the game.

We have seen games like Far Cry, for instance, in past that had a slow start and did extremely well because of their quality. Today we will see where we stand. We do believe that overall we have been conservative on the six games that we will release. And we think that we have a game of great quality with a lot of innovation.

That's all I could say at this point.

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Yves Guillemot - Ubisoft Entertainment SA - CEO Yes. What I can say also is the play tests we are conducting are really positive. So we expect we'll have a very good game.

Tim O'Shea - Jefferies - Analyst Great. Thank you so much.

Operator Jean-Christophe Liaubet, Exane BNP Paribas

Jean-Christophe Liaubet - Exane BNP Paribas - Analyst Yes. I just had a question on Watch Dogs 2 for you. Is you stated several times in the past (inaudible) that you expect Watch Dogs 2 to be the one-- potentially your best seller ever for Ubisoft. Is it still the case right now?

My second question will be on the H1 catalog sales. Would you give us an idea about the percentage of digital sales which are represented within-- in H1 catalog sales?

And my last question will be regarding the incentives plan which has been blocked due to the Vivendi vote in the AGM. How do you intend to [put up] with this potential order compared to the policy of (inaudible) for your employees, for instance?

Yves Guillemot - Ubisoft Entertainment SA - CEO So, on Watch Dogs, what we can say as we said earlier is that the play tests are good. We have a good momentum on the game. Yes, the preorders are not as high as we thought they could be. But we feel that the experience is a fantastic experience. So we feel it can do extremely well.

Alain Martinez - Ubisoft Entertainment SA - CFO And on the third question, and I skip the second one; what I can tell say is you look at what happened, for instance, on the plan that we built for our employees this year, which was very successful, it was done on existing shares. So actually we didn't use any particular resolution. So we do believe that we have solution to get around to do different things for our employees. We thought it was valuable to mention that, today to mention that Vivendi had, by abstaining, had blocked this resolution, while more than 80% of our shareholders had voted in favor of that. I think it's an important message.

That said, we do believe that we have a solution that could make our employees still be motivated to deliver for Ubisoft. And I'm sorry about the second question that I missed. If you could repeat please?

Jean-Christophe Liaubet - Exane BNP Paribas - Analyst Yes. My second question was regarding digital sales in H1-- no catalog sales, catalog sales in H1. Can you give us an idea of what percentage of catalog sales are coming from digital.

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Alain Martinez - Ubisoft Entertainment SA - CFO I would say most of the catalog sales are digital. As it is more and more the case, as you know. Because also in the EUR250 million of digital revenue-- no, no back-catalog revenue, as we said, we have EUR95 million coming from recurring players investments, which is 100% digital. And the rest will be, a great part coming from full-game digitally downloaded. I hope that helps you.

Jean-Christophe Liaubet - Exane BNP Paribas - Analyst Okay. Thank you.

Operator Peter Testa, One Investments

Peter Testa - One Investments - Analyst Hi. A couple questions, please. Maybe just finishing on the preorder question. Given the advent of increased digital and digital download, can you just give some comments as to how you think preordering offers a true view, and maybe an understanding how if you look at preordering versus markets with very high digital download propensity, whether you see any correlation there in some of your analysis? So just so we can understand how to perceive preorder comments or data.

Then the second question is just looking at your comments on outlook for revenue when you take the proportions that are digital and back catalog, obviously you have been more cautious on your new games. If you look, is there any timing issues in there, or is it just a general view of conservativeness on the games?

And lastly can you give some view as to how you've taken account of the film, Assassin's Creed film, in your guidance, updated guidance, please?

Yves Guillemot - Ubisoft Entertainment SA - CEO Sure. So on the preorders for sure, due to the digital possible download, are less reliable than they were before. Because people can now download the digital game. So they know they will be able to get the version they want.

Now Alain, maybe for the--

Alain Martinez - Ubisoft Entertainment SA - CFO So, on the revenue of the movie? It's-- we are, of course, integrating some revenue. And we will have a P&L related to at the same time the revenue and the investment made in the movie. At this stage, we haven't communicated on what we do expect. We are quite happy about what's happening. As you've said, the trailer has been moving forward very nicely. Both our partner and our team are feeling good about it. But we cannot say much more.

As far as the reduction of our expectations from the new releases or the additional security we took, basically as you are aware, except for South Park, which has been moved from Q3 to Q4, all the other games have been maintained in the same quarter. So I wouldn't say that there has been a huge impact related to a switch or move of release date from any of our games.

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Peter Testa - One Investments - Analyst Okay. Just to follow up on the first two, the movie, are you basically saying that with the revenue and the cost, so you guys see a modest contribution at this stage because you just don't know exactly how to perceive it? And on the digital, if it's possible just to give some view as to how you perceive-- when you look at preorders in markets that have had high digital download experience, do you see a significant pattern there or a correlation between markets with high digital download and softer preorders, so to give you some clues or us some clues on how we should perceive the data?

Alain Martinez - Ubisoft Entertainment SA - CFO I would say that on the movie, like on the new releases, we have tried to adopt something that we feel is reasonable, in line with what we are getting from our associate feedback, which I would think would have good knowledge. But we don't have this level of expertise. So I think we have been properly conservative.

As far as the impact of digital in country toward preorder, there is that. Of course, what we are saying is that, for instance, on Far Cry 3, preorders were not very great. And one of the reasons was not particularly because digital download was high or like this. I think that the people wanted to see whether the game was going to be up to standard. And it was very important that it actually proved it was the case. So it was more a case of gamers wanting to be assured that the game had the right qualities.

I think we have that with Watch Dogs, like we had with Far Cry. But this is something that we need to prove to our gamers.

Peter Testa - One Investments - Analyst Okay. No. Thank you for the answers.

Operator And the next question-- I'm sorry. Go ahead.

Alain Martinez - Ubisoft Entertainment SA - CFO Yes. And just one thing I wanted to mention is that besides Far Cry, what was very, very interesting if you think about Rainbow Six when it was launched last year, the initial launch was okay. But we didn't have the perfect reaction from gamers. And through the weeks and months that we kept improving the game, the community adopted the game and gave it better and better ratings. And that relates to the success of today.

So what we are trying to say is that preorders are indeed very important. Quality is very important. But also the attention that you put on the game over the long term is also very, very key. And this is why we're doing exactly that on The Division.

We believe that for the good of the brand, the fact that we are proving to our customer that we continue improving and listening to them to come with a perfect experience is what will be the most valuable for the success of that game and its future expansion, and also for the future of the next game.

Sorry.

Operator Thank you. San Phan, Mizuho

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San Phan - Mizuho Securities - Analyst Hi. Thanks for taking the [question]. I really like that slide that you put in the deck with the live services. Thanks for providing the color there. I was interested to know how are The Division and Rainbow Six pacing compared to what you saw with The Crew, and then if there's anything new since last time that you can share with how you're thinking about re-releasing Assassin's Creed?

Alain Martinez - Ubisoft Entertainment SA - CFO So clearly what we are seeing and we mentioned that, is that multiplayer games are delivering much better revenue in terms of back catalog. But they are also delivering much better gamer investment, recurring gamer investment over lifetime. And that's exactly what we are receiving from The Division and from Rainbow Six. So it's really very, very important. And this is why in the end you saw that our back catalog was so much better than what we even anticipated ourselves, even if it's modest, versus our total objectives.

And also it's not just the back catalog. It's the digital recurring revenue that have been very impressive for the semester.

Yves Guillemot - Ubisoft Entertainment SA - CEO Yes. And we saw that Rainbow Six has been accelerating in the last two months. So we expect with the new updates and DLCs that will come, we'll be able to continue to grow that franchise in the long term.

Same for The Crew. That continues to do well, and also Rocksmith. So most of the games that we have following that path are actually doing well and at a constant flow of revenue, but also profit.

San Phan - Mizuho Securities - Analyst Okay. So that 44% that you mentioned in year two, is that a good benchmark or baseline for us to kind of look at with your other titles, or was that something more unique to that specific title?

Alain Martinez - Ubisoft Entertainment SA - CFO I would say if we took last year when we compared that it was basically on a game like The Crew. I would say that probably Rainbow Six did as well, and probably even better on that one. So we are quite satisfied by that, yes. And if you look at it, the fact that we raised the percentage of our back catalog for this year really is thanks to those sorts of games.

San Phan - Mizuho Securities - Analyst Ok, great. And then just about Assassin's Creed, if there's anything new you can share since you last talked about how you're thinking about re-releasing it.

Yves Guillemot - Ubisoft Entertainment SA - CEO Yes. There's-- no. We can't say much about that yet. We are working out on this game, and it will launched when ready.

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Alain Martinez - Ubisoft Entertainment SA - CFO But it's a great game (inaudible). It's looking good.

San Phan - Mizuho Securities - Analyst Thanks.

Alain Martinez - Ubisoft Entertainment SA - CFO I must say, yes.

Operator Robert Berg, Berenberg

Robert Berg - Berenberg - Analyst Hi. Thanks. Three questions from me. The first, I mean you say that back catalog has been much better and you were saying as well how whilst originally sales may be lower than expected for some titles, over time they've become in line or better than expected perhaps. So would you say your more prudent assumptions for the second half could be offset by better back catalog sales maybe in fiscal year 2018 or beyond for these titles? Is that a fair way to look at it, or is this kind of-- these are going to be lower revenues full stop?

The second question-- sorry-- my line dropped dead for a moment. But on The Division 1.4 patch, I don't know if anyone asked about that. My channel check suggests renewed interest in the game. Is there something that you're seeing-- gamers or engaged or is-- how should we think about that update and the monetization of The Division?

And the third question, could you give us an update on the acquisition of Ketchapp? Is it still on track to close in the third quarter, and what impact if any, should we expect on this year's financials? Thanks.

Yves Guillemot - Ubisoft Entertainment SA - CEO To answer your question about what we expect after the launch of those games, what we see is the more attention we put, as Alain said earlier, on improving and continuing to improve the content and create new content for new releases is increasing their lifespan. So we expect those games will do more over time thanks to that.

Alain Martinez - Ubisoft Entertainment SA - CFO What I can say also is that as you have noticed, our Q4 will be record for next year. So it normally, it should have a positive impact on fiscal year 2018, even though we cannot extrapolate on everything. And you're right. The fact that we kept investing on The Division is for the long term of that brand. And we believe that it was the priority to fix everything that the gamers were asking before we moved to something else.

And hopefully, like it worked out with Rainbow Six, where we both saw an over-performance in the recurring investment from players, but also in the sales of games, for games. We could see something happening. But at this stage, it's a bit early to mention.

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Yves Guillemot - Ubisoft Entertainment SA - CEO So what is good to say is that we had increase of 40%-- 50% in the number of players playing daily on The Division. So it's a good sign for the game.

Alain Martinez - Ubisoft Entertainment SA - CFO And regarding Ketchapp, the closing took place on the 2nd of October. So it's done. What we said is that on the full year, Ketchapp is a company capable of delivering around EUR10 million of EBIT, and something like a 40% profitability. So over the 6 months, if we are right, that would have an impact of about EUR5 million.

But as we mentioned, that has also been compensated by the Sterling weakness. So it's positive, of course. But we have also some negative influence to take care of.

Robert Berg - Berenberg - Analyst Perfect. Thanks.

Operator (Operator Instructions) Emmanuel Matot, Oddo

Emmanuel Matot - Oddo Securities - Analyst Yes. Good evening, gentlemen. A few questions from me, please. First, how will be the level of competition in H2 compared to the same period last year? Could it be more intense than your first expectations, which may explain why also you are a little bit more cautious for your top line this year?

Second, if you do achieve your target for this year with a much better mix than expected, do you think you will have to update positively your midterm plan?

Also a question regarding stock-based compensation this year, what we can plug into our model, because the amount in H1 was very high.

And my last question is about the treasury shares, how many do have at this time? Thank you.

Yves Guillemot - Ubisoft Entertainment SA - CEO So on the competitive level, we can say that it's close to what we expected. So there's no big surprises there.

On the other question, Alain?

Alain Martinez - Ubisoft Entertainment SA - CFO Yes. And what we would say also is that the two games that we are releasing in Q3 are not directly in competition with the big blockbusters such as Titan 4, Battlefield, and Call of Duty. So clearly the direct competition of Watch Dogs is Mafia.. So we do believe that we have a good standing against that game. And Steep is in another category.

So for Q3, I wouldn't say that the competition is impacting us very strongly.

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Regarding revision of fiscal year 2019, I think we are a little bit going quick there. So I think we will abstain from me making any comment at this stage. And did I cover everything?

Ah, yes. The stock-based compensation; you should deliver two questions, because I keep missing the third. On the stock-based compensation, indeed the plan we made for our employees was quite significant. But we believe it was good. What I tried to explain was that although we booked a EUR13 million expense in our P&L, actually we sold our share at a higher price than what we had actually bought them. So in cash basis, we got more cash than what we gave to our employees.

For the year it's EUR40 million, including that EUR30 million. I cannot say for future years. What we said is we expect around EUR25 million traditionally. We will see, as we move.

As far as the treasury shares that we own, as you know we bought the BPI shares. So I think it was about 3.6 million shares. And we had a few ones on top. So I would say we are probably close to 4 million shares that we hold.

Emmanuel Matot - Oddo Securities - Analyst Okay, no more?

Alain Martinez - Ubisoft Entertainment SA - CFO That's my guestimate.

Emmanuel Matot - Oddo Securities - Analyst Okay. That's fair. Thank you very much.

Operator Thank you--

Alain Martinez - Ubisoft Entertainment SA - CFO And they were not counted in at the end of September, because we had not bought the BPI shares at the end of September. We bought them in October. Sorry.

Operator Thomas Alzuyeta, Gilbert

Thomas Alzuyeta - Gilbert Dupont SA - Analyst Good evening. Just coming back on your top-line guidance. If we do the math, it seems that you expect Q4 sales to be between EUR770 million and EUR830 million, which seems quite impressive. And I think [it sort of] relies significantly on Ghost Recon.

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I just wonder why are so confident on that game, where you are currently (inaudible) your expectation on Watch Dogs. And it seems that the game has, I would say, less traction than The Division last year, for example. So I just wanted to know, what is your feeling on that game, on the (inaudible) also. Thank you.

Yves Guillemot - Ubisoft Entertainment SA - CEO The feedback we get on Ghost Recon are excellent. This game is the first open-world game, open-world shooter game. So what we see is that it can be a revolutionary game. And to compare with The Division last year, it's in the same trend. Actually, we expect next quarter to do some open betas and closed betas that will help a lot on the players actually to know what the game is and what it can become. And we are very confident that it will excite gamers a lot.

Alain Martinez - Ubisoft Entertainment SA - CFO And what we can say also is that last year we came up with The Division. And you're right. It was our best-ever launch for a new IP. But if you think about it, there was only a second game last year, which was Far Cry Primal, which did very well and it was very profitable for Ubisoft. But it wasn't one of those huge-- one as big as Far Cry. If you compare this year, we come with three AAA games.

You mentioned rightly Ghost Recon. But also we will gave South Park and we will have For Honor, for which we are getting very good feedback from gamers. So all together, yes indeed, we think that our release revenue from-- our revenue from the new release will be higher than last two year.

Two other things that will be favorable, as we said the back catalog will be better in Q4 than it was in Q4 last year. And third, we believe that the reorder we are anticipating from the Q3 releases will be better than the reorder we actually got in Q4 of last year, particularly on Assassin's Creed. So that's why we are good about it. Sorry.

Thomas Alzuyeta - Gilbert Dupont SA - Analyst So it means that you expect the long-term sales of Watch Dogs to be more positive than Assassin's Creed?

Alain Martinez - Ubisoft Entertainment SA - CFO Exactly.

Thomas Alzuyeta - Gilbert Dupont SA - Analyst Thank you.

Operator And at this time, there are no further questions, sir.

Yves Guillemot - Ubisoft Entertainment SA - CEO Thank you very much so, for all your questions today, and have a good evening or a good day. Thank you. Bye-bye.

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Operator Well, thank you. And that does conclude today's conference call. We do thank you for your participation today.

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