Ubisoft Entertainment (UBSFY) Q2 2021 Earnings Call Transcript

Ubisoft Entertainment (UBSFY 4.92%)
Q2 2021 Earnings Call
Oct. 29, 2020, 9:15 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Yves Guillemot -- Co-Founder and Chief Executive Officer

Welcome, everyone, and thank you for joining the call today. The video game industry is benefiting from a very strong momentum, by far the fastest growing segment of entertainment and is driving incredible consumer engagement and social interaction. In this context, our strategy and competitive advantages continue to be fully validated by our strategy and competitive advantage.

The recent industry announcements of consolidation and new platform launches have been a big event. The value of video game IPs has never been so strong, and these announcements highlights the importance of owning a deep and diversified portfolio of a high-quality franchises. Thanks to these major assets, which we have built organically over more than two decades, Ubisoft has entered into fruitful partnership with the biggest technological and video game platform, who are all thrilled to onboard our content.

At the same time, we continue investing to increasingly leverage our direct-to-player relationship. Over the past 10 years, we have built our proprietary online distribution and services ecosystem, our unique identifier across games and platforms, and our unparalleled production capacity. These are formidable assets for strengthening this direct relationships through multiple entry points and business models. And with the introduction of Ubisoft Connect, we aim to offer players frictionless access and enriching experiences across our full catalogue of games. This will expand discoverability, traffic and global engagement to ultimately provide meaningful value for our players, our teams and our shareholders over the coming years.

A word now on Ubisoft Connect. We announced last week that our existing ecosystem of players, of player services and loyalty programs, Uplay and Ubisoft Club is expanding as Ubisoft Connect. This new ecosystem will be easing the transition between generation and platforms and will be the starting point for new services aimed at further contributing to more player centric ways of entering our games. It notably lays the foundation that will enable our games and services to make cross-platform features a standard moving forward. As part of this commitment, full cross-progression across all platforms and services will be available for Assassin's Creed Valhalla, Immortals Fenyx Rising and Riders Republic. That means you will be able to start Assassin's Creed Valhalla on your PS4, continue it on Xbox series X and S, and complete the game on PC, PS5, all streaming platforms.

I now hand over the call to Frederick for the review of our Q2 outperformance and of the details of our new full-year targets as we aim to maximize the quality and value of our games in the challenging production environment that we had highlighted in May and July. I will come back afterward to detail the actions we are implementing to continue transforming our company culture. Frederick?

Frederick Duguet -- Chief Financial Officer

Thank you, Yves, and hello everybody. As I have mentioned in the past quarters, for the sake of comparability, I will base all my comments today before the new mobile reclassification rule to ensure a like-for-like comparison with fiscal '20. The reclassification amounted to EUR11 million in Q2 and EUR21 million in H1.

Traffic and engagement reached record levels in H1. We had a 100 million unique players across console and PC, on par with levels delivered during the full 2019 calendar year. It was also great to see that Q2 MAU levels ended up at 40 million, stable quarter-on-quarter.

Net bookings in H1 reached EUR733 million, up 15% at constant exchange rates, spurred by strong backlog at 35% to EUR693 million, and which represented 95% of our total net bookings. Our Q2 net bookings reached EUR334 million, down 1% at constant exchange rates, and significantly above our target of EUR279 million. As a reminder, Q2 of last year benefited materially from early physical shipments linked to the release of Ghost Recon Breakpoint. Excluding this technical impact, Q2 is strongly up year-on-year. We delivered this better-than-anticipated quarter, thanks to the continued appeal of our deep and diversified portfolio franchises; of our strong live services notably with numerous updates in September, as well as some limited positive impact from confinement in North America.

We continue to see overall very supportive industry trends, a stronger levels of digital purchases and engagement than before the pandemic started. In this context, our back catalog net booking growth remained very strong at plus 28%. Rainbow Six Siege continued its solid performance despite stronger competition. Acquisition was solid and engagement was slightly up year-on-year after seeing strong growth in Q1. Overall, the game delivered robust net bookings growth in H1 supported by solid player acquisition progression, and repeated monetization peaks. The team is hard at work upgrading the game to PlayStation 5 and Xbox Series consoles. Leveraging the power of the new generation of consoles to offer a significant boost to performance with up to 4K resolutions and 120 frames per second. This upgrade to next gen will be free for PS4 and Xbox One game owners. As we celebrate the games' five year anniversary, we are pleased to announce that Rainbow Six Siege has crossed the 65 million unique player mark, and generated close to EUR2.5 billion in cumulated consumer spending over its lifetime.

Many of our games continued to perform very well over the quarter, including double-digit year-on-year net bookings growth for The Division 2, For Honor and The Crew 2, which continue to benefit from the strengths of the live services. Watch Dogs, Assassin's Creed Odyssey witnessed very sharp increases in sell through, daily player engagement, and PRI over the past three months, compared with Assassin's Creed Origins, respectively growing over 200%, 250% and 400% on a like-for-like basis. Ahead of the upcoming Valhalla release, the whole Assassin's Creed franchise enjoys the momentum that we had never seen before. Finally, the Just Dance franchise continued to strive with net bookings more than doubling year-on-year.

Let's now turn to Hyper Scape. The technical side of the game is very solid, and our Anvil engine is demonstrating its versatility by being a great tool to create action adventure RPG games like Assassin's Creed, competitive shooters with destructible environments like Rainbow Six Siege, and now Battle Royale supporting 100 simultaneous players. However, the intense gameplay is proving today too challenging to reach a wide enough audience yet. To address this, we have outlined a roadmap to broaden the game's reach.

Q2 also saw the release of two mobile games, including Brawlhalla Mobile, which has generated incremental activity in geographies where the PC and console versions of the game were less present. It is also worth highlighting that Brawlhalla on PC and console continued to perform extremely well, with net bookings doubling year-on-year.

Q2 total digital net bookings stood at EUR289 million, up 19% and represented 87% of our total net bookings. PRI continued to be strong this quarter, reaching EUR162 million and up 2% year-on-year, representing 49% of net bookings. Excluding the EUR35 million from mobile, PRI on console and PC was at 9% despite the lighter release slate over the past 18 months, and a tough comparison base that included a strong post launch program on Assassin's Creed Odyssey. The strongest contributors to be PRI this quarter were in this order, Rainbow Six Siege, For Honor and Assassin's Creed Odyssey, followed by Ghost Recon Breakpoint, and The Division 2.

Let me now go into the details of our first half earnings marked by record profitability. First, Slide 6 of our presentation. Our pro forma gross margin was up 3.7 percentage points to 89%, reflecting the 5 point progression of digital as a percentage of total net booking, as well as lower gross margin last year due to one-off hosting cost.

R&D was down 26% -- EUR26 million, and down 9 points. I will review the details in the following slide. Variable marketing expenses were down 4 points due to fewer releases in H1 of this year. At EUR164 million, fixed structure costs were mostly stable compared to H2 of last fiscal.

Turning now to Slide 7. P&L R&D was down 9% driven by a 37% decrease in total depreciation due to a lighter release slate this semester. Total cash R&D was up 21% to support our future strong top line growth, and the most ambitious line-up of the industry. Non-capitalized R&D is at 23% and reflects our growing investment in our live services and higher bonuses.

Moving to Slide 8. The IFRS/non-IFRS reconciliation shows mainly two types of adjustments. First, the traditional stock-based compensation charge standing at EUR32 million, flat versus last year. And second, we have booked a non-current goodwill amortization charge of EUR36 million.

Looking at our cash flow statements on Slide 9. Free cash flows stood at minus EUR116 million, versus minus EUR71 million in H1 of last year. This EUR45 million gap mostly reflects the EUR42 million decrease of our cash flows from operations, mostly due to the EUR77 million increase of net income, which was more than offset by the EUR150 million growing gap between cash and P&L R&D. To be noted, that the first half was negatively impacted by EUR25 million versus last year due to the timing of cash tax payments.

Below the free cash flow line, we had EUR16 million in acquisition related to deferred payments of past acquisitions. Finally, our employee-related share plan had a total impact of EUR114 million on our cash situation. Overall, our non-IFRS net debt improved year-on-year at EUR124 million, compared to EUR218 million last year, and slightly up versus end March.

Looking at Q3, we expect net bookings of between EUR860 million and EUR960 million, including an estimated EUR10 million from the mobile reclassification. This will represent a significant increase versus last year, and reflect the release of three AAA games over the quarter versus only one last year. We have not factored in any new impact from the renewed COVID-related restriction.

Watch Dogs Legion was released today and earlier reviews are solid. The strong ratings, notably from IGMIGN, Game Informer, GameSpot and PC Gamer. The game benefited from the additional development time relatively a deeper integration of the Play As Anyone innovation adding more granularity to characters and more player abilities. The teams also made the experience more accessible with the Intel system that suggests new additions to your team based on missing capabilities. All this aims to increase accessibility and engagement. The game is Ubisoft's first title to benefit from the ray tracing technology.

Watch Dogs Legion also includes very cool exclusive collaborations. First, Stormzy, the award-winning British musician will be included in the game with a standard admission. Second, El Rubius, one of the most important Spanish speaking YouTuber with more than 38 million subscribers on his channel, will be included as a playable character in the game. Finally, the game will come with robust post-launch content to drive long-term engagements. The online multiplayer mode will be available on December 3, as part of the free game update, and we'll bring the Play As Anyone innovation to the next level by introducing an online sandbox including new missions, design, card gameplay, a new PvP mode and dedicated progression and rewards. Plenty of additional features free and paid, both solo and multiplayer, will be added in the future.

Assassin's Creed Valhalla, which is said to be one of this holiday's biggest mainstream titles will launch on November 10. Previews and community interest indicators allow us to be very enthusiastic. This gigantic office will leverage the popularity of both Assassin's Creed Odyssey and Origins, which are still benefiting from a very high level of engagement, respectively two years and three years after the release, significantly expanding the brand's player base. For the first time ever in the franchise history, the game will be payable on consoles in 4K resolutions and 50 frame per second on PS5 and Xbox Series X.

The game will be complemented by an ambitious post-launch content campaign, including a season pass with two major expansions. Additionally, all Assassin's Creed Valhalla players will have access to an extensive lineup of free seasonal content, including in-game events as well as new set of buildings, narrative content, services, and game modes. Discovery Tour, which was a successful way for players to learn Greek and Egyptian History will come to Assassin's Creed Valhalla in 2021. Finally, we just announced a partnership with Netflix to produce multiple different series on the Assassin's Creed brand, demonstrating once again the growing strength of video game brands.

On December 3, we will launch our ambitious new IP, Immortals Fenyx Rising on PC consoles, including switch and streaming platforms. In Immortals Fenyx Rising, players will explorer a rich open world, teaching Greek mythology and engaging puzzles narrated through the lighthearted banter of Zeus and Prometheus. The additional development time give us the opportunity to improve navigation and exploration by adding more interactive elements to the environment, enhancing combat features and increasing customization options, including gear and abilities. Additionally, we were able to improve the realism of our creatures and characters. Previews and player receptions have been very positive, and we think it will be the big surprise hit to close out the year.

Just Dance is returning this year on six platforms. The massive success of the Switch with an increased mass market reach should be a strong driver for the game's performance. Building on last year's hugely successful TikTok campaign with the hashtag JustDanceMoves generating 12 billion views, we will deliver an even more ambitious campaign with the goal of accelerating the brand's current momentum. Overall, beyond the very strong trends we have seen in terms of hardware over the past year, we are thrilled by the current strong player anticipation of the new generation of consoles. With its early positioning and very strong lineup, Ubisoft is ideally positioned to benefit from this exciting opportunity.

Let's now move to our updated full year targets. As a reminder, in order to take into account the significant external tranches and uncertainties brought by the COVID-19 crisis, we introduced back in May a range to our financial targets. This range took into account the possibility that one of our AAA titles may be postponed to next fiscal year as well as the economic risk this unprecedented crisis was putting on overall consumption and on our business partners. Our initial range imply that the delay of one title would result in a non-IFRS operating income below EUR500 million. Since then market trends are continuing to be very supportive, and our back-catalog significantly outperformed versus our initial expectation.

Our teams have executed amazingly with strong and regular updates for our live services, as well as working on delivering the strongest line up of the industry for the end of the year. In this context, we have decided today to move the two high contribution margin Q4 titles to next fiscal year. This will allow our teams to fully leverage the game's potential and will be very beneficial to the final phase experience. Our decision to give more time to Far Cry 6 can be fully attributable to the production challenges related to the COVID-19 crisis.

For Rainbow Six Quarantine, as you know, we took advantage of last year's delay to extend the experience with the largest group, while optimizing polish. As I described earlier, this was also an opportunity on which Watch Dogs Legion and Immortals Fenyx Rising capitalized. The development of Rainbow of Quarantine is today progressing well. The team recently solidly delivered a major production gate with an intense core experience builds upon unique co-op tactical gameplay. This mandate of extending the experience combined with the depth of a fully online game, and in the context of the COVID-19 production challenges, is today requiring additional time, which will be used to enhance onboarding progression and further polish. Rainbow Six is a powerful brand and we want to ensure we're coming with the best possible experience to match player's high expectations and expand the franchise beyond Siege.

We're, therefore, updating today our full year targets that remain well within our prior range at the non-IFRS operating income level, despite pushing out two AAA releases. Our new assumptions take into account a slightly higher combined unit count for these three AAA titles, and also include a high single-digit back catalog growth year-on-year versus our prior anticipation of down low-single-digit. We continue to expect digital and PRI to be above fiscal '19 in percentage of net booking.

Finally our new -- our newly updated targets no longer reflect the safety margin on the risk on consumption related to the COVID-19 crisis. as we are getting positive confirmation on video game demand by the end of the year. We are, however, keeping a safety margin related to the potential impact on our business partners. As a consequence of these moving parts, net bookings are adjusted to between EUR2,250 million and EUR2,400 million. And non-IFRS operating income is now expected between EUR450 million and EUR550 million. The gap between the high end and low end of the range is explained by the safety net on our business partners at the bottom of the range, as well as a higher unit count at the top of the range as we are entering the most important part of the year.

In addition with the recent unfavorable foreign exchange evolutions, notably with our euro dollar assumptions moving from EUR1.13 to EUR1.16 for the full year, including EUR1.19 for the second half, we're seeing a negative impact of around EUR50 million on net bookings and EUR30 million on non-IFRS operating income. As a result, our newly communicated guidance is of net bookings in the range of EUR2,200 million to EUR2,350 million, and non-IFRS operating income in the range of EUR420 million to EUR520 million. Being able to maximize the long-term value of our IPs, while at the same time maintaining solid financial targets, highlights the increasing recurring nature of our revenues, the current strengths of our portfolio of franchises, confidence in our holiday's release slate and current supportive industry dynamics.

As a consequence to these changes to fiscal 2021, there are a few moving parts to next fiscal year. Fiscal 2022 will, of course, benefit from the arrival of our Far Cry 6 and Rainbow Six Quarantine, on top of the previously announced release of the Skull & Bones. We expect to reduce both Far Cry 6 and Rainbow Six Quarantine in the first half of fiscal 2022. While the COVID-19 crisis remains a challenge for next year's production and it is important to remain prudent, we feel good about the progress of these three AAA titles. Conversely, with the postponement of the Avatar movie to December 2022, we have accordingly moved our Avatar game to fiscal 2023. On the mobile side, we look to release our first game from our Tencent partnership, and we expect to continue building our overall free to play offering in fiscal 2022.

Finally, we expect back catalog growth in fiscal 2022, but to a lesser extent than initially expected as fiscal 2021 will see the release of three AAA titles versus five previously anticipated. Please also keep in mind the following consideration. The current adverse exchange rate effects will have a bigger impact in fiscal 2022 than in fiscal '21 if they were to remain at current levels. And while we are more optimistic in the short term, it is important to remain prudent on the economic environment given the second COVID-19 wave we're observing in a number of geographies. In this overall context, we expect top line growth versus fiscal '21, and we look to provide more information on the full extent of next year's lineup in due course.

I now hand over the call back to Yves.

Yves Guillemot -- Co-Founder and Chief Executive Officer

Thank you Frederick. I would like to had a few words about how we are transforming our Company's culture. Over the past few months, we have progressed on the action plan outlined in July. More than 14,000 of our talents have participated in different forms of feedback. It provided us with a deep understanding of the situation on which we can build a better company and put our teams at the center of our transformation plan. We have notably put in place compulsory anti-sexist and anti-harassment training. 75% of our teams have already received this training and we're well on track to reach close to 100% by the end of the year, and the Content Review Committee to ensure that our group's content and product marketing is aligned with Ubisoft's value of respect and fairness.

We're also very happy to announce today that we have finalized the recruitment of the VP, Global Diversity and Inclusion. We look forward to introducing her soon.

While much remains to be done, the testimonies we have gathered also showed a deep attachment to Ubisoft and a desire to defend the values of respect and benevolence on which the group was built. We are committed to the transformation and we must become exemplary on all these subjects.

Before answering your questions, I would like to thank whole Ubisoft teams for their focus and dedication during this challenging production time. Releasing three major AAA titles by year end on so many platforms is an amazing achievement that should not be underestimated and may allow us to deliver a record performance.

Our execution is strong. Our strategy of maximizing the full long-term value of our IPs continue to be fully validated by a recent industry-related news. Our business is very robust, public confidence in our holiday release slate is strong, and the industry momentum is highly supportive.

We are now ready to take your questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] We'll take our first question from Nicolas Langlet from Exane BNP Paribas. Please go ahead.

Nicolas Langlet -- Exane BNP Paribas -- Analyst

Hello good afternoon. Hello, good afternoon, everyone, and I've got three questions please. The first one on the guidance cut. Are you able to quantify the net booking cut related only to Far Cry 6 and R6 Quarantine? Secondly on the full-year 2022 guidance, so if we take into account the inclusion of Far Cry 6 and R6 Quarantine and the delay of Avatar, how the full-year 2022 guidance compare with your previous assumption knowing that before you were expecting a year-on-year growth compared to full-year 2021? And finally a question on Assassin's Creed Valhalla. At this stage, do you think that game could monetize as much as AC Odyssey, during the first year and overtime? And if yes, what are the main additions you implemented in the game to support this higher monetization? Thanks.

Frederick Duguet -- Chief Financial Officer

Thank you, Nicolas. And so on the Far Cry 6 and Rainbow Six Quarantine, what we have said is that, among the AAA title that we had in terms of expectation for fiscal '21, Far Cry 6 had a higher expectation than Rainbow Six Quarantine. That's what I can share with you today. And that is being reflected in the -- in our renewed guidance, and why we postponed them to next year. In terms of fiscal '22, so what we have in our assumption today that we still rely on three to four AAA games. We rely on the growing back catalog relative to fiscal '21, but not to a lesser -- not to the same extent knowing that we now have three AAA games in fiscal '21 as opposed to five impacting back catalog of next year. And we also took, as I've said before, some elements of prudence related to the impact on general consumption. And in the medium-term, we are very positive on the short-term consumption of video gaming. But considering the overall macroeconomic context, we need to be cautious on that stay -- on that point. And also we've taken some prudence in terms of impacting our productions related to -- the vast majority of our developers still working from home. So we expect growth in fiscal '22 relative to fiscal '21, not to the same extent as we have previously anticipated.

On Assassin's Creed Valhalla, at this stage, we anticipate a very strong game leveraging the recipe of Assassin's Creed Odyssey and leveraging the very strong momentum that we have on the brand, as we significantly expanded the player base over the last six months across Odyssey and Origins. What we anticipate is that we will have a very strong ambitious post-launch program, and that will combine very well with our RPG mechanics on the game. On top of that, we expect, even if it's -- we will not have five games as expected on back catalog. We expect the three games we are launching this quarter to be very strong next year as well.

Nicolas Langlet -- Exane BNP Paribas -- Analyst

Okay. Okay, and just to come back on the comment on the full-year 2022 guidance, just to make sure so, in absolute term all those delay and other element are net positive, negative or neutral effect in absolute term?

Frederick Duguet -- Chief Financial Officer

For fiscal '22 what we said is that we plan to grow related to fiscal '21. And that's what we can say at this stage. We'll give you more color in due course with the full extent of our lineup.

Nicolas Langlet -- Exane BNP Paribas -- Analyst

Okay. Okay. Thank you.

Frederick Duguet -- Chief Financial Officer

You're welcome.

Operator

Thank you. And now we're taking our next question from Robert Berg from Berenberg. Please go ahead.

Robert Berg -- Berenberg -- Analyst

Hi. Thanks. Three questions, please. First on the delays. You're saying the games further weigh in Q4 including Rainbow Six Quarantine, which has already been delayed a couple of times. It needs more time. But the two games in the coming weeks, still to come, didn't need any more time. You've confirmed those dates today. Could you give us some comfort that these games will be ready with all the work from home issues we saw this with one of your peers delay the title very soon before the release? That's the first question. The second on Hyper Scape. Feels like a bit of a missed opportunity at least so far anyway. If I remember rightly one of your learnings from Ghost Recon Breakpoint was the game wasn't what the community wanted and there was a failing on the market research process. Maybe I'm wrong, but it feels like you're saying perhaps a similar issue here with a game that maybe wasn't what the majority of gamers wanted or could play. Do you feel like there's more you could do with regards to that process? And then on the guidance maybe a clarification, in May you effectively lowered or derisked unit expectations. This quarter, you're raising them back up again. Are we back to where we were before? Or are your unit expectations now above what you thought pre-COVID? Thanks.

Frederick Duguet -- Chief Financial Officer

So on your first question. So yeah we had to take into account the impact of the COVID-19 on Rainbow Six Quarantine and Far Cry 6 knowing that both games are progressing very well, and that's why we're confident that they will come and be ready in the first half of fiscal '22. And we've been very happy and proud to be coming with three major games this quarter on top of Just Dance '21, while our developers were working from home.

Yves Guillemot -- Co-Founder and Chief Executive Officer

Assassin's Creed and -- so Watch Dog was launched today, and it's a good game. And we are coming -- we are already preparing for the launch of Assassin's Creed, which is coming in a bit more than a week, and so it's really on the way. And we see also for Immortal Rising-Fenyx Rising that it's also good and we are -- we will be on time also with these games. So all those three games will be at the launch period expected.

Frederick Duguet -- Chief Financial Officer

So on the units, yes you're right, we had -- there is a unit expectations. Back in May, what we said is that, yes we slightly increased this -- the overall unit count for the three games to be released in Q3 and that reflects the positive use that we have on this game given the momentum. Also taking into account the strong demand that is expected on the new generation of consoles. If we compare the high end of the range, we are already in the low side of the range. We also took in consideration some safety net related to our business partners in the context of potentially more restrictive confinement impacts.

Yves Guillemot -- Co-Founder and Chief Executive Officer

And you had a question also on Hyper Scape. So Hyper Scape is part of our free to play investment. It's what is very good as Frederick mentioned earlier is that we have been able to develop on our engine the possibility to play with 100 players. Technologically, that's been fantastic results. We are -- it's a long investment in the free to play and we think it's a first step, and -- you will see other things that will make us become a very strong player in that environment. As on other investments we made in the past like on PRI and so on, it takes a little bit of time but we know we are on the right path.

Robert Berg -- Berenberg -- Analyst

Okay. Thanks. I'll leave it there. Thanks.

Yves Guillemot -- Co-Founder and Chief Executive Officer

Thank you.

Operator

Thank you. And now we are taking our next question from Omar Sheikh from Morgan Stanley. Please go ahead.

Omar Sheikh -- Morgan Stanley -- Analyst

Good evening, everyone. I've got three questions as well, if I may. The first is on the delay again. Yves said that 100% of the reason for the delay was COVID. I wonder whether you could just be a bit more specific about what exact -- what part of the development process is being impacted, and perhaps what's -- what are you doing in terms of mitigation? And then also on the delay, could you just confirm that if you didn't -- if you hadn't had COVID, could you have released those two games? That's the first question. Secondly, it was just on the '21 guides, so this fiscal year. You mentioned in -- on back catalog that you included a high single-digit growth in back catalog this year. But you did over 30% growth in the first half. So I'm just wondering should we consider that to be conservative? That's the second question. And then the third is on the '22 slates. So I mean if you push two games in this year into next then potentially you're pushing three games, up to three games that you would have otherwise released next year into the following year. So I'm just wondering if could give us a bit more color on whether there's any impact on the development process for those three games up to three games for fiscal '22. Is that being impacted by COVID as well? And also is there any impact from the fact that you haven't had a Chief Creative Officer for the last few months. And is there any kind of impact on development process from that, I guess, disruption? Thank you very much.

Yves Guillemot -- Co-Founder and Chief Executive Officer

Thank you. So far, yes, those two games could have been launched without COVID for sure. What we did on with the work from home is we had to organize the Company differently. And we saw a certain number of difficulties during certain times, certain periods in the creation of games. And so we've been working on those elements to improve the efficiency of the teams during those specific period in games -- in the creation of the games. And now we are seeing an optimization that is coming along, and we are learning and we feel more comfortable with the work from home.

Frederick Duguet -- Chief Financial Officer

Yeah. We had said back since -- back in May and July that it has had a significant impact on productivity across all our productions. And what we've been doing since then is that whenever we could have people getting back to the office, of course, we prioritized the teams for the tasks that were the most difficult to be done somehow. So on your question on the back catalog for fiscal '21, yes, you're right. We had a strong growth on the back catalog in the first half of plus 35%. What we see today is that we have a higher level of activity on our paid games on the back catalog, and what we initially anticipated and that's still valid. And before -- and more than what we had before the pandemic started, so we also put some more back catalog in the second half of the fiscal year. We haven't taken into account any potential impact of renewed COVID confinement -- COVID-related confinement measures.

Now if we look at the evolution in terms of back catalog in the second half. Relative to last year, we need to consider that last year we had a huge Q4 with the launch of Warlords of New York, expansions for The Division 2 and then a huge month of March with the impact of the very strict confinement impacting the month. And if these assumptions ended to be too prudent, of course that could be a potential benefit to our numbers.

Yves Guillemot -- Co-Founder and Chief Executive Officer

On the Chief Creative Officer, the fact that we have six VPs around me is helping to take care of all the games we have under way. And so we -- we have -- we're in a good position to really push the games to the level of quality we anticipated, in fact.

Omar Sheikh -- Morgan Stanley -- Analyst

Okay. That's clear. And just to follow up on the '22 slate, if I may. Do you anticipate releasing the mobile game by the Tencent agreement in that year?

Frederick Duguet -- Chief Financial Officer

Yeah we are -- we anticipate to have our first game through the Tencent partnership to hit in fiscal '22.

Omar Sheikh -- Morgan Stanley -- Analyst

Thank you very much.

Frederick Duguet -- Chief Financial Officer

You're welcome.

Operator

Thank you. And now we are taking our next question from Nick Dempsey from Barclays. Please go ahead.

Nick Dempsey -- Barclays -- Analyst

Yeah. good evening, guys. So, first of all, you're referring to your business partners and some risk there and building that into your guidance range. I guess you're talking about physical retail due to lockdown. But what exactly are you assuming now in terms of the impact? And if lockdowns drive less physical purchases, can you get a benefit there in terms of margin, as they shift to digital? And the second question, you're pointing to work-from-home holding back production processes. Are you assuming that you have your teams back in the office at a particular point in 2021? Or could you also see delays to Skull & Bones, for example, if work-from-home continues for quite longer? The final question is another go at the FY '22 sort of commentary on the numbers. I think you said it will not be the same as previously anticipated, just to kind of understand that. Are you saying that the year-on-year growth in FY '22 versus FY '21 won't be the same as previously anticipated or was that an absolute comment that clearly FY '22 absolute won't reach the implied level you said before? Thank you.

Frederick Duguet -- Chief Financial Officer

So in terms of our physical retailers, we've seen that they've been very resilient since the beginning of the crisis. We've seen also that they've had positive trends on the hardware, on the accessories. And we can anticipate that they will have a positive boost from the next generation of console launch. We've also seen that e-commerce has taken over on the delivery of physical goods. Now, of course, we need still to be cautious, as of course our big launches are also relying strongly on physical sales. And that's why we take this safety net. We keep the safety net in the low side of the guidance.

Yves Guillemot -- Co-Founder and Chief Executive Officer

What we can say about the next gen consoles is that they are -- they will certainly be in short supply compared with demand. And we are very happy that all our games for the end of this year are actually taking full advantage of those new consoles. And we expect next year to be a big year, a great year for next gen consoles as well as the demand will be also extremely strong.

Frederick Duguet -- Chief Financial Officer

So on your second question, so we -- today as I said, we have good visibility on the advancement of our three games, including Skull & Bones, Far Cry 6 and Rainbow Six Quarantine. The two of them are already planned for the first half. And we're taking into account in our three to four AAA games review for next year that there is some uncertainty related to the timing by which we're -- we'll have our teams going back to the office.

So in terms of the fiscal '22 growth related to the fiscal '21, as I said, we still rely on the same slate of AAA title in term of numbers, the 324 like we originally anticipated. But because we have three games this fiscal year as opposed to five, we are taking into account our back catalog still growing, still strongly growing versus this year. But we take a lower back catalog assumptions in value -- in absolute terms. We also took into account the possibility that the foreign exchange rates might stay at the level where they are today. And if that happens then that has also a negative impact related to our first original assumption.

Nick Dempsey -- Barclays -- Analyst

Thank you.

Frederick Duguet -- Chief Financial Officer

You're welcome.

Operator

Thank you. And now we are taking our next question from Mike Hickey from The Benchmark. Please go ahead.

Mike Hickey -- The Benchmark Company -- Analyst

Hey, Yves, Frederick. I hope you guys are good. Thanks. Thanks for taking my question. And congrats on the quarter. Obviously, the virus influence here has created some challenges on the development side. But also I think we're sort of at the moment here where we're getting close to some potential vaccines that could sort of help us along the way. So I'm guessing, I'm just sort of wondering if these vaccines one or many are approved and they're considered safe, would you require your developers or employees to take the vaccine to return back to the office? And I have a follow-up. Thanks.

Frederick Duguet -- Chief Financial Officer

Yes. In fact, we are learning a lot from this crisis and we see that a mix between going to the office and being at home is working perfectly well. So things would change to the benefit of the different parties. We think the -- our employees will have a better life, and we'll be able to also organize things in such a way that it will be also very strong for the Company.

Mike Hickey -- The Benchmark Company -- Analyst

All right. Thank you. The second question from me is, we've seen Microsoft make a huge acquisition recently with Bethesda, $7.5 billion deal. And, of course, that studio now will add a catalog and new games, I think, day and date, to the Xbox Game Pass. And I think that subscription now, as we sort of go into new hardware, is north of EUR15 million. And I think they've also incorporated EA Play and those games. So when you think about some of the alternative business models that have taken shape this generation do you think the sort of subscription that Microsoft has and their dedication to putting new content and to be the killer app, so to speak for this next generation of hardware. And I guess, when you think about this sort of subscription from Microsoft getting size and doing day and date releases, how does that sort of change your competitive profile when you look forward?

Yves Guillemot -- Co-Founder and Chief Executive Officer

In fact we are in a very interesting industry because there are now more and more forms to sell our games. And what we see is the quality of the experience remains a very important attraction point. So when you create exceptional games, people will come and buy them where they are, and in the form they want. And we would see more and more possibilities in the future to consume those games. So yes, Microsoft is doing a good job and there are also lots of other ways to do a good business. And Sony is progressing extremely well as well with their way of doing things, which is different from Microsoft. And we have also a Nintendo that has a completely different approach as well that is working fine. And on top of that, we see those two streaming platforms that are coming. And we think that with over time, they are going to grow the market tremendously as well. So that is for the high end machines. On the mobile, we are also seeing a good growth and we will see games that will work on mobile and high-end platforms in the future. So there's a lot of possibilities to create a high-quality games and to monetize them differently.

Frederick Duguet -- Chief Financial Officer

As we've said before the -- this recent announcement confirm that -- there's high value in having a deep and diversified portfolio of brands and games of high quality, and we see that more platforms coming in the space are happy to differentiate themselves with high quality content, and that's why we've been building a very strong partnership with all these big players. And we see that today by building a strong direct-to-player ecosystem at Ubisoft, we are getting the most of this evolution. Also through our direct distribution platform we are getting the benefit of this evolution. So in the future, we see a different business model co-existing. Our paid games, different subscription models, and being a cross platforms, and of course, more free-to-play across all platforms. So we are preparing ourselves to be winning with all these different business models.

Mike Hickey -- The Benchmark Company -- Analyst

Thanks, guys. Good luck.

Frederick Duguet -- Chief Financial Officer

Thank you.

Yves Guillemot -- Co-Founder and Chief Executive Officer

Thank you.

Operator

Thank you. And we are taking our next question from Charles-Louis Scotti from Kepler. Please go ahead.

Charles-Louis Scotti -- Kepler Cheuvreux SA -- Analyst

Yes. Good evening. I've got a couple of questions. The first one on the Roller Champions, I didn't see any mention of Roller Champions neither in the press release nor in the slide show. Can you give us an update on this game? Then on your cash R&D spending that increased 21% in H1, this is above the 15% CAGR you provided at least three years, two years ago. Is this the new normalized level? Or do you stick to the 15% CAGR target? And then considering there is no release in Q4, shall we expect a significant working capital inflow this year. and then some free cash flow generation? Thank you.

Frederick Duguet -- Chief Financial Officer

So on the Roller Champions as you know, we showcased it during our last Ubisoft forward event and the game is progressing well. We're adding more and more depths to the gameplay and getting the most of the feedback that we had got during the closed alpha. And we are planning to have the game at the beginning of next year. In terms of cash R&D increase, no, there is no change in our road map -- investment road map. The first half was stronger in terms of evolution because we had to prepare for the launch of our big games coming comparing with last year, and also with the impact of higher bonuses. But when you look at the medium to longer term and taking fiscal '19 as a reference, yes, we pursue a strong investment program because we see that the opportunities are immense. The industry trends are very supportive and we see a growing addressable market for Ubisoft. So we continue investing in this long-term growth opportunities and into our direct-to-player ecosystem.

We believe that we can grow double-digit on the top line year-on-year on average in the coming years, again taking fiscal '19 as a reference. By getting -- by expanding our portfolio of paid games through audience engagement PRI and margin -- and then margin expansion. And as we said before, we want to expand on the free-to-play model together with subscription, expand into more platforms including mobile and extend the region in Asia and China. So that's why we believe that it's important to have a dynamic investment plan. Of course, in the context of a potentially long and severe economic recession, if some of these opportunities were not to materialize, we will adjust our investments accordingly.

So in terms of cash generation, we expect to have in the Q4 Riders Republic and Prince of Persia. And we expect to have a stronger -- significantly stronger Q4 than last year, because we have the momentum of the next generation of consoles, and a much bigger slate of releases than last year. In terms of cash flow from operations, we expect it to be a positive to solid for the full year.

Charles-Louis Scotti -- Kepler Cheuvreux SA -- Analyst

Okay. Thank you. And one follow-up question. Do you have, at this stage, a leading indicator that could help us assess how successful it will be Watch Dogs: Legion in terms of preorders or whatever?

Frederick Duguet -- Chief Financial Officer

So on Watch Dogs: Legion, as we said earlier in the call we have strong ratings that are really supportive of our guidance, and we see that the momentum is good but it's too early to give more indication.

Charles-Louis Scotti -- Kepler Cheuvreux SA -- Analyst

Okay. Thank you.

Operator

Thank you. And now we'll take our next question from Mike Ng from Goldman Sachs. Please go ahead.

Michael Ng -- Goldman Sachs -- Analyst

Hi, thank you very much for the question. I was just wondering if you might be able to talk a little bit about the relative union expectations for the games next year, just in terms of rank order between Skull & Bones, Far Cry 6 and then Rainbow Six Quarantine. And then secondly, I -- sorry, I missed it when you talked about your PRI expectations for the rest of the year. I was just wondering if you might be able to reiterate that? Thank you.

Frederick Duguet -- Chief Financial Officer

So we give you more color on the expectation for our games for next year in due course. What we've said before is that Far Cry 6 would be a bigger game than the Rainbow Six Quarantine, both of them being a ambitious games. And we take the benefit of the extra time to bring them at even a higher level. And Skull & Bones is progressing very well. In terms of PRI expectation for the rest of the year, we confirm our guidance that it will be superior to the fiscal '19 in percentage of net bookings. So it's superior to 32%. We've had the good momentum in the first half and we expect that the three games -- three AAA games that are coming will also drive stronger PRI.

Michael Ng -- Goldman Sachs -- Analyst

Great. Thank you, Frederick.

Frederick Duguet -- Chief Financial Officer

Thank you, Mike.

Operator

Thank you. And now, we'll take our next question from Ken Rumph from Jefferies. Please go ahead.

Ken Rumph -- Jefferies -- Analyst

Good evening, gentlemen. Three questions also, if I may. Firstly, we've talked about the effect of COVID on new game content. Can you comment a little bit on how it's affecting live game content? For instance, Rainbow Six Siege, which has been so successful, you were able to continue to generate the sort of frequent content that you've been doing recently. And likewise, for instance, you mentioned last year when you were talking about back catalog that Warlords of New York did so well for The Division in the first quarter of the calendar year. What can we expect for other games in the back catalog in terms of additional content? Is that being affected? Firstly, what are the plans for the fourth quarter, for instance? And also, is that being affected in a similar way potentially by COVID? Second question was just an update on China. You mentioned the Tencent mobile game, but Rainbow Six Siege, for instance, being permitted. And finally, a longer-term question about cadence and kind of gaps between games in your big franchises like Assassin's Creed, maybe like The Division, like Far Cry. Given the kind of long post-launch period and the monetization you're making, clearly we're expecting at least a year before another Assassin's Creed, because it's not going to be next year, but what should we think about in terms of the kind of cadence of these big franchises in future? Thank you.

Frederick Duguet -- Chief Financial Officer

So on them on the first question in terms of the live game content, yes, we've been very happy with the reason of content delivery. If you remember, we had to postpone some content delivery in the first quarter of the fiscal as we were impacted by the confinement. But since then we have had a very good agility and cadence delivery. On Rainbow Six Siege, we've seen that -- the metrics are very healthy. And the team has been also focusing on top of the rest on delivering the next gen version, which as we said before should bring a good boost to the overall experience. And that will help us drive even more players into the game and potentially reengage lapsed players. So that's a positive for the Rainbow Six momentum. But overall, we expect that the cadence that we've got on live games is here to stay for the rest of the year.

Ken Rumph -- Jefferies -- Analyst

Thank you.

Frederick Duguet -- Chief Financial Officer

On China, we -- so we're -- in terms of Rainbow Six Siege, we believe we've done the job that is needed, but we're still waiting for the final approval to come. So in terms of -- in terms of cadence between the different franchises?

Yves Guillemot -- Co-Founder and Chief Executive Officer

Yeah, on that front, on the Rainbow Six, we have done lots of changes and now the game is ready to be approved. So we are just waiting for the number.

Frederick Duguet -- Chief Financial Officer

And in terms of cadence between -- for franchises, between releases, it's true that we've seen that our live games are getting stronger and stronger in terms of the retention, engagement and micro transactions and PRI overall. So that gives us indeed a high level of profitability and more recurring revenues. On Assassin's Creed, we are leveraging Odyssey's recipe, and we think that we've gone with a very ambitious and potentially longer post-launch program. So that should -- allows for the game to have a longer life time, like we've seen with Odyssey. That's all we can say at this stage in terms of cadence.

Ken Rumph -- Jefferies -- Analyst

Okay. Thank you.

Yves Guillemot -- Co-Founder and Chief Executive Officer

In the game, what we can say is that the teams have been able to adapt with COVID and they organized the production, their productions to make sure they could supply regularly the content they wanted. So as it is a constant flow of contents that is coming they were able to adapt to make sure they could bring the content needed at a good pace, actually.

Ken Rumph -- Jefferies -- Analyst

Thank you. May I ask a supplementary question actually on Beyond Good and Evil 2. Perhaps because of a personal interest and then looking forward to the game and Michel Ancel choosing to retire? Could you comment perhaps on the kind of development progress there?

Yves Guillemot -- Co-Founder and Chief Executive Officer

Yeah, the game is progressing well. The world is really a fantastic world as you could see I don't know if it is -- as you could see Netflix also decided to take that universe to create a movie with it. So there's a lot of progress in that team and the game is -- it's coming along very well.

Ken Rumph -- Jefferies -- Analyst

Great. Thank you very much.

Yves Guillemot -- Co-Founder and Chief Executive Officer

Thank you.

Operator

Thank you. We're taking our next question from Tom Singlehurst from Citi. Please go ahead.

Thomas Singlehurst -- Citi -- Analyst

Thank you. Tom here from Citi. You've been very generous with your time. I've just got one question really. I've just got one question really. If we go back 12 months, I suppose at this stage last year, you delayed a whole load of titles, but the mechanics of that was you were just shifting sort of revenue and profit from one year into the next. With this delay, it feels like we're not quite getting everything back next year because ultimately there's the sort of knock on effects in launches. I suppose the question is, can you guys just not do four or five AAA launches, is that just beyond sort of the capability of the organization in terms of bandwidth? That's the question I will be really interested in. Thank you very much.

Yves Guillemot -- Co-Founder and Chief Executive Officer

Sure. We can do. It's just when you have COVID, it's more complex. And what we are making sure is that we take enough time on each franchise so that we can polish the games and bring the highest quality possible, Rainbow Six franchise is a very strong franchise for the Company. So we want Quarantine to be at the highest level to take the franchise to another level. So that's why we didn't launch the five AAAs this year, but it's certainly a possibility for the Company.

Thomas Singlehurst -- Citi -- Analyst

Perfect. And just one clarification. It's just one game that's being delayed from FY '22 to FY '23 in the form of Avatar. Is that the only shift in this longer-term schedule?

Frederick Duguet -- Chief Financial Officer

No. What I -- we said is that we postponed Avatar to fiscal '23 along with the date of the movie being moved there. Overall, today we assume to have three to four AAA games in fiscal '23 including the three that we already unveiled.

Thomas Singlehurst -- Citi -- Analyst

Perfect. Thank you very much. Thanks a lot.

Frederick Duguet -- Chief Financial Officer

You're welcome.

Yves Guillemot -- Co-Founder and Chief Executive Officer

Thank you.

Operator

Thank you. It appears there are no further questions at this time. Mr. Guillemot, I'd like to turn the call back to you for any additional or closing remarks.

Yves Guillemot -- Co-Founder and Chief Executive Officer

[Operator Closing Remarks]

Duration: 65 minutes

Call participants:

Yves Guillemot -- Co-Founder and Chief Executive Officer

Frederick Duguet -- Chief Financial Officer

Nicolas Langlet -- Exane BNP Paribas -- Analyst

Robert Berg -- Berenberg -- Analyst

Omar Sheikh -- Morgan Stanley -- Analyst

Nick Dempsey -- Barclays -- Analyst

Mike Hickey -- The Benchmark Company -- Analyst

Charles-Louis Scotti -- Kepler Cheuvreux SA -- Analyst

Michael Ng -- Goldman Sachs -- Analyst

Ken Rumph -- Jefferies -- Analyst

Thomas Singlehurst -- Citi -- Analyst

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