Dear ladies and gentlemen, welcome to the conference call of CB Project SA. At our customers' request, this conference will be recorded. As a reminder, all participants will be in a listen only mode. I now hand you over to Adam Kishinski, CEO, who will lead you through this conference. Please go ahead, sir.
Good morning. I would like to welcome everyone to the earnings teleconference of Celebrities Capital Group for Q3 twenty nineteen. My name is Adam Kicinski, and I'm the joint CEO of the company. Today's conference will be co hosted by Piotrzyn Lubovich, CFO of Ceder Project and by Michal Novakovsky, member of the Board. To begin with, I'll summarize key business events from July till now, while Piotr will discuss financials.
And later on, we'll have time for a Q and A with all three of us. The presentation is available on our website, fedeproject.com. Let's start with Cyberpunk. During the summer and fall, we have continued with the promotional campaign. The focus is still on introducing the Cyberpunk universe to as many gamers as possible around the globe.
This year's presentations of gameplay footage began in earnest in June at E3, which was very successful for us. In August, we carried on with the same scenario at Gamescom, Europe's largest game fair, where we run one hour long gameplay demos at closed sessions for media and business partners, along with twenty five minute demos at our public stand. In the second half of year, Cyberpunk was present at 18 game shows and fairs and was viewed by 60,000 spectators. All those events are on the second slide of the presentation. On October 15, The Witcher three and its expansions debuted on Nintendo Switch, so for the first time, it can be played on the go.
The game is available in both physical and digital editions priced at $60 According to the preliminary estimates, physical copies account for the vast majority of to date sales. However, detailed sales figures will be known after the close of the fourth quarter since physical distributors submit their reports in quarterly cycles. Before we depart from the Witcher universe, I would like to briefly summarize Gwent, a joint project of our two segments, Celebrate Red and GOG, which was released for iPhones and iPads on October 29. The mobile edition of Gwent is receiving excellent scores from users. As of today, games average rating stands at 4.8 out of five, which makes Gwent one of the most highly scored mobile card games.
In the first three weeks following the iOS release, 68% of our revenues were generated by mobile devices with PCs accounting for 28% and consoles 4%. However, even though we have expanded Gwen's user base, the gains remains a relatively small part of our business. The next step will be to proceed with the with an Android release scheduled for the first quarter of the next year. Moving on to GOG. The most important project is ongoing development of GOG Galaxy two point zero currently in closed beta.
This platform is our answer to the growing fragmentation of the PC digital distribution market with more and more platform exclusive releases being published. The idea is to enable users to have all their games in a single library and have all their friends on one friends list where users can track one another's progress and achievements across gaming platforms. So far, feedback from closed beta users is very positive. Now over to Piotr.
Thanks, Adam. Let's move to the next page, our consolidated profit and loss calculation. Our sales revenues in the third quarter of this year reached nearly BRL93 million, which is 38% more than during the reference periods in 2018. The greatest contribution to the group's revenues was from revenues from sales of our own products at Celebria Credit, mostly comprising royalties associated with the sales of The Witcher three, which increased this year versus the third quarter of twenty eighteen. And in a smaller amount royalties associated with Thronebreaker and in game sales of GWEN.
Another important contribution to our revenues was from revenues from sales of goods and materials, PLN 43,000,000, comprising mostly of at TOG, revenues from digital distribution over PLN 30,000,000, which grew by 12% quarter to quarter and at Sedi Proi Kratz over PLN 40,000,000 altogether, which came from two groups: first, revenues from sales to distributors of components of physical editions of our own video games, including, in particular, first, shipments of The Witcher three for Nintendo Switch and components of the collector's edition of Cyberpunk and second, revenues from sales of merchandise at Telefriek Red online store, our new activity, which is a separate company, is included in our consolidated results for the first time. On the cost side, our cost of products and services sold of over PLN6 million represents mostly ongoing depreciation of development expenses for GWENT and TRONDEBRKER, which commenced in the fourth quarter of twenty eighteen along with the release of both games. Therefore, this position did not exist in the reference period. The value of goods and materials sold corresponds mainly to costs incurred by GOG.com over PLN 21,000,000 in association with GOG Digital sales. At Cerda Proi Credit, at the same time, cost of goods and materials sold related to sales of physical components of our games and, to a lesser degree, cost of selling merchandise products via our new online store.
Our gross profit on sales reached nearly from PLN55 million, which is visibly higher than a year ago. Regarding current period costs, the largest contribution was from selling costs over PLN27 million, which includes marketing and promotional expenses incurred in each of the segments. However, most of these costs were borne by the Telefonica Red segment in the scope of promoting Cyberpunk, Quint and The Witcher three prior to the October launch on Switch. A notable part of this quarter selling costs in both segments was related to maintenance and development of Gwent, including work on its recent expansion, Iron Judgment and iOS edition. Both were published in October, which was after the reporting period.
These costs are split between Cetepriakret and GOG.com, in line with the consortium agreement. In the GOG.com segment, selling costs correspond also to sales, marketing and transaction costs related to operation of the GOG.com platform. The reported increase in selling costs compared to the reference period is mainly due to the intensive promotional activities in the run up to the release of Cyberpunk. The general and administrative expenses reached nearly PLN 12,000,000 in Q3 twenty nineteen. This line includes compensation of the G and A part of the team, all costs related to the existing incentive program along with costs of boarding services, which qualify as general and administrative expenses.
The reported increase compared to the reference period in 2018 is mainly due to a reassessment of the likely implementation timeframe of our incentive program, which we did at the end of the first half of this year. As a result of said reassessment, the cost of the program was spread over a shorter period and consequently generate proportionally greater costs comparing to last year. Furthermore, general and administrative expenses have increased as a result of our group expansion and the recruitment of additional personnel over the past twelve months. The group's consolidated net profit in the third quarter of twenty nineteen was nearly PLN 15,000,000, which is comparable to the net profit of Q3 twenty eighteen. However, this year, between July and September, we had a surplus of costs related to Gwent, including depreciation of its earlier development costs, work on Iron Judgment, the recent expansion and IRS version of Gwent, which both were released in October as well as large scale expenses related to promotion of Cyberpunk.
Please go to the next page of our balance sheet. At the end of the third quarter of twenty nineteen, the bulk of the group's consolidated fixed assets was represented by the expenditures on development projects, which increased by PL41 million and reached PL333 million. In this position, we aggregate mostly our expenses on development of new video games and technologies. I will come back to this in a moment. The next visible increase was for inventories that reached nearly PLN 11,000,000 to the product red segment, which came from initiating of production of those box edition of The Witcher three for Nintendo Switch released later in October, initiating of production of physical components of collectors edition of Cyberpunk and recognition of inventories held by the Telepriek Red Store, which began distributing products to European customers in May and to North American customers in September.
One line below, the reported reduction by nearly PLN 51,000,000 in the group's trade receivables at the September 2019 is mostly due to collection of receivables reported at the end of the second quarter. During the second quarter, we generated strong sales revenues and launched the Cyberpunk preorder campaign, which translated into an exceptionally high value of trade receivables as of the June 30. The biggest change in all of our assets is visible in the aggregate value of cash and bank deposits, which reached a total of PLN $594,000,000. Despite ongoing large scale expenses related to development of new video games and technologies as well as promotion of Cyberpunk, our cash position increased by PLN 63,000,000 compared to the June 30. Moving to the equity and liability side.
At the end of the third quarter of twenty nineteen, the group's equity was nearly PLN $995,000,000, having increased mostly due to current period profits. Biggest change on the liabilities was recorded in the deferred revenues line, which increased by PLN 46,000,000 and reached PLN 130,000,000. The reported deferred revenues comprise mainly the future period sales of Cyberpunk, which are both minimal guarantees from distributing partners and advances on royalties for preorder sales as well as, in a smaller scale, grant expansion, Iron Judgment and The Witcher three for Nintendo Switch. In this line, we also include PLN 9,500,000.0 of deferred revenues associated with our subsidies. Let's go to the next page, graphical presentation of our main cash flow drivers.
We ended the second quarter having PLN530 million of cash and bank deposits. During the reported quarter, the group generated nearly PLN15 million of net profits. At the same time, our total amount of receivables decreased by PLN51 million, adding to our positive cash flow. During the last reported three months, we also significantly increased the value of deferred revenues, mainly future period sales of Cyberpunk that I mentioned a minute ago, which was the third big stream of positive cash flows to us. On the expense side, we financed the increase of inventory of the Witcher three four switch, Cyberpunk physical components and merchandise of our Teleparec Red store.
Last but not least, during the third quarter, we spent over PLN 43,000,000 on the development of games and technologies. All in all, at the September, we had nearly PLN $594,000,000 of cash and bank deposits, which was by PLN 63,000,000 more than at the beginning of the quarter. Coming back to the core of our activity, development of games and technologies, the next page presents our quarterly outgoing cash flow for development projects for this and last year. The visible increase in our expenditures in recent quarter comes mainly from Telekarek Web's development of Cyberpunk 2,077, which has now entered its final and most intensive stage. More specifically, the main reason behind the increase involved expenses related to localization of Cyberpunk and especially the recording of multiple language soundtracks we are preparing as well as expenses on adopting The Witcher three for Nintendo Switch.
That's all for me. We can start the Q and A session. Thank you very much.
Our
The first question receives is from Ken Ram from Jefferies.
Hello, gentlemen and ladies. I hope you hear me okay. I have some questions looking towards the future. I know that you don't wish to talk about future games while the focus is on Cyberpunk. But if I could ask a couple of more general longer term questions.
Firstly, you set out a strategic plan a few years ago. Do you have any plan to sort of refresh that at any point? Is there any schedule at which you would aim to do that? And secondly, you've already said that we should expect paid and free DLC following the Cyberpunk release. Does that mean that you would not wish to begin the marketing or attract attention to any future game until those DLCs have been released?
I'm just wondering, for instance, if we might hear about a new game at E3 next year, for instance, after Cyberpunk had been launched with what we all expect will be great success in April. So a couple of questions about the future. And then a final one, which is any comment on how you will approach new generation consoles and streaming, for instance, with Cyberpunk, given that these come out later next year? Thank you.
Hello. We do hear you. We are going I mean, we are updating our plans from time to time. Last time, we did it once we finished our previous stock option plan. So I assume it's not decided yet because we are not yet there, but we are fairly close to finish the current stock option plan.
And that might be the good moment to refresh the strategy. Although, I would like to emphasize, strategy remains the same. We are here to develop AAA games, but then we can describe maybe a bit longer period ahead of us for the next, I don't know, four to six years. So it might happen some or mid next year, but it's not decided. It's due to the fact that we will or we won't meet the finish the current stock option plan.
The second question can't be answered. I mean, we are in our promotional activities, we would like to surprise. So I can't say whether we are going to talk about the next AAA single player game during the campaign and the period of releasing expansions or not. So sorry, we can't comment on this.
Okay, understood.
Hi. And this is Miano Vakoskin. Your last part of question was I think about the next gen consoles and the streaming services. So streaming services, maybe let me start with that one. We actually went public with that.
I can't remember, I think it was Gamescom this year, so August, that we're going to be present on Stadia with Cyberpunk. We did announce it's not going to be a day to date release, so it's not going to be April 16. We did not say anything more specific, but of course, you can assume it's going to happen later than the April 16 next year. And what we also did mention is that you will be able to access game on Stadia. Stadia will be like another sales channel.
So you will be pretty much buying full price access and streaming will be a method of delivery to your device, not part of any subscription program. When it comes to NetGent, I mean, our game is coming to the AirEngine consoles and this is what we have announced. And of course, we do have insights into what's around the corner, what's happening with PlayStation and Xbox, and we're watching it closely. And one may probably safely assume that at some point we're going to do something with the next year. However, we cannot really be very specific what that might be, when exactly that might be.
I would only safely assume that it's definitely not going to be around the launch time frame of those consoles. And that's I think that's pretty much it.
And maybe I'll add one more thing. Our games were always kind of ahead of technologies. They were always played best on strong PCs. So in many areas, we are kind of ready or almost ready for stronger specs, so higher specs. So from technical perspective, it seems to be doable.
Okay. Thank you very much, gentlemen.
Thank you.
Before we take the next question. And the next question we received is from Massey Mokal from Credit Mr. Carl from Corefield, your line is now open. Please go ahead. So then we go on to the next question.
It's from Martile Dozano from Barclays. Your line is now open, Madam. Please go ahead.
Hi, good morning. I wanted to ask a question regarding preorders. So you mentioned at the half year that you were expecting preorders to be a bit lower in this quarter after the marketing campaign. I wanted to know whether they were tracking in line with your expectations. And then secondly, I wanted to know what kind of benefits do you feel the switch or Freon switch and WANs will have on your full year numbers by the end of twenty nineteen?
Yes. We still keep generating preorder sales for Cyberpunk, and the cumulative number is definitely in line with our expectations. They increase, obviously, the initiation of preorders generated certain spike in preorders that stabilized a bit later on, which is a natural process. And probably the most important period for all of the preorders campaign will happen a couple of days before the release where basing on the example of Witcher three, The spike was definitely the highest generated, but majority of total sales we recorded presales we recorded for the game. As far as the sales of Switch and GWENT, those of Switch 3.4 Switch and GWENT iOS, both of the releases were releases to products that already existed on the market.
However, allowed us to address the products to new customers' base. So we obviously should expand our revenue generation, but it's not another new release like in case of which is three or Cyberpunk. So we will basically increase the sales, but it's not changing the status quo like each new release, totally new release could do.
Okay. Thank you.
And the next question we received is from Mr. Walker from Credit Suisse. Your line is now open, sir. Please go ahead.
Thanks a lot. Good morning, everyone. Two questions, please. The first is, could you tell us much about the Spokko mobile game? And it's interesting a lot of companies are getting Tencent to develop their mobile game.
So if you could explain your strategy around mobile, that would be helpful. And secondly, on the multiplayer version of Cyberpunk, you haven't given a release date for that. But could you give us any feel for the likely intensity of monetization around that sort of free to play game?
I just wanted to start. Could you repeat the parts about the strategy for mobile games? We didn't really understand what you said. So if you could repeat that part like With Tencent. Yes, you mentioned something Tencent and the strategy and we didn't really get the gist of the question.
Yes, a lot of other publishers are asking Tencent to help them develop their mobile games. But obviously with Spokko, you're kind of doing it yourself. So I just wanted to get a bit of a feel about why you decided you've got the necessary expertise in mobile gaming.
All right. So people behind Spokko are in this business for years. Before they joined us, they had released close to 30 small games. Most or all of them were casuals, but they've learned a lot during this. And we had known them for years, and they approached us with kind of cool idea and we decided to let them try and they've built under our wings their studio.
We have 75% in Spokol, they have 25%. And they are in development. We are not reviewing anything about this. We are just saying that something like this exists. But it's not R and D phase anymore, but still somewhere in the middle of development.
We are kind of experimenting with ideas. The game is based on one of our IPs, but we can't share any details about this. And we decided to do it by our own because those who are behind these projects are fairly experienced. So that was the reason.
I can also make a comment on the Tencent thing. Actually, Tencent does not really that much help develop other developers' games. They sometimes help to sort of adapt those games to the Chinese market, and they're the specialists in operating games and improving the operations of the games. But there's actually not a single game Tencent originated game that I am aware of that has been globally successful. There is none.
I mean, there are Tencent owned or co owned studios from the West that have been successful, that have actually been successful prior to the acquisition of five whatever percent by Tencent. But there's not a single game in the history of Tencent that has been successful globally that originated from Tencent. So they don't really specialize in that. I just wanted to sort of clear because there's clearly a bit of a confusion. They're high level specialists in terms of improving operations and events and so on.
Terms of improving operations and events and so on, and one has to give it to them. But I have not heard of Tencent actually helping develop from scratch a concept of the game. That is something that generally comes from the studios around the world, but not from some sort of Tencent Magic. Yes.
And as far as the monetization on the multiplayer for Cyberpunk is concerned, we believe right now it's definitely too early to share any details on that or give guidance. The project is in relatively early stage. We keep experimenting. That's our first multiplayer game, and we check different options and possibilities. And it's definitely not the time to point you to a certain specific direction on that.
Yes. But you can expect that we won't change our general policy toward deals with KEMAS. So expect wise monetization and always value for money.
And the next question we received is from Thomas Roberts. Your line is now open, sir. Please go ahead.
Hi, Thomas Sotak, Bosch Brokerage House. If I understood you well, 68% of revenues from GWENT project falls for iOS right now. Could you comment on how many of these players are new, completely new to the GWENT? And how many just moved from PC to iOS? Are you maybe you're not even able to judge, but could you comment on it?
And then the second question is, could you comment on the sale of The Witcher three on Nintendo Switch? The game is currently based on the top in the top 20 most popular games on Nintendo Store. Could you comment, is it if the sale is above or below your expectations? And the third one, could you comment on the scale of the revenues generated by the online merchandise store?
Yes. First of all, new users coming from iOS, we didn't release any detailed data, but the vast majority of EIS users are new to the project and they experienced Brent for the first time. Obviously, there was some migration from the classical platforms, but this seems to be minority as we see it right now. The switch results, we have just, as Adam said, just couple of first weeks and physical sales results are being reported with a delay. And secondly, the most important time of this calendar year, so that pre holiday season is still in front of us, and I believe it will influence the final results we'll report for the fourth quarter.
But so far, the sales are in line with our expectations. We have them quite precisely defined with our distributing partners, and there are no significant surprises to that. I mean, everything goes with it as well. The third question was about the merchandise store. We included the store into consolidation for the first time for within this financial statement since it grew to a significant scale.
However, on the revenue side, it was relatively small part of our sales. And on the profitability side, I would say it was kind of new drop yet. We had some investments into establishment of the store. And right now, we continue and increase the sales. And hopefully, in the future, it will account for some more visible parts.
Thank you.
And the next question we received is from Jean Romp from Jefferies Sir, please go ahead.
Hello. I'm not sure, was that me? Hello. It's Ken Rompierre from Jefferies. Was that me?
Yes.
All right. Okay. Sorry about that. Okay. Sorry.
A couple of follow-up questions. Firstly, at the results call for the full year results of last year, you'd originally said regarding dividends that you preferred to kind of pay out after you'd had a success. Then actually, you went ahead and did make a payment. And obviously from a cash point of view, even before Cyberpunk, the group continues to be in a strong position. Is there any guidance or expectation regarding dividend payments that we could think about for the current year that perhaps shareholders like a payment and you'll continue that process?
And my second question regards capitalized development and maybe generally of the current game development path that you have, how would you approximately divide them between Cyberpunk, GWENT and any other projects you mentioned that work had begun on another project. Is it still the vast bulk and most of the capitalized expenses relate to Cyberpunk? Thank you.
Okay. So first question, the dividends. It's definitely too early to make any serious discussion on dividends for this year, especially taking into consideration the planned launch of Cyberpunk at the beginning of the next one. We are rather focused on making this through and releasing the game instead of sharing the profits for this year. Once we make such a decision, it will require to be reported.
So please follow our official reports on that. Secondly, the division of our expenses on development. First of all, all of the development costs related development and expansion of the project costs related to GWENT are now costs of the current period. So they are not capitalized anymore since the fourth quarter of last year when we released both Quint and TronBreaker. So they do not increase the total value of the expenses on development we present on the balance sheet.
And what's visible in the balance sheet comes mostly from Cyberpunk. Cyberpunk single player, Cyberpunk multiplayer is so far a smaller project with smaller staffing. And we also have some other things in early development, but as I said, vast majority of the expenses is related to the Cyberpunk universe.
Okay, gents. Thank you very much.
Okay.
And the next question we received is from Mr. Yavim Zki from Craigos. Your line is open. Sir, please go ahead. Mr.
Yasminki from Plaka. Your line is now open, sir. Please go ahead.
Thank you. Good morning. A question on the announcement by Valve yesterday to release a new entry into the Half Life franchise. Now obviously, the game is set to be released in VR only, but are you afraid that this may pull some of the gamers away from Cyberpunk due to the title being highly anticipated release? And the second part of the question is whether you are considering to re release some of your titles in VR, seeing as major publishers are considering this to be a viable option for the future?
And how hard would it be in technical terms to convert your existing gains to work and be out economically?
So of course, we've seen the Half Life PR announcement. I think it was a surprise for everybody, but I think not in a way you are suggesting. VR remains an extremely nichey niche of the market, like it's very, very small. The only reason I can think of why Valve has decided to actually put this title on the market is because they actually have a corporation on the hardware side of the things, and I assume that they actually are planning. This is probably a big effort for them to sort of try to expand that.
That niche is very, very, very and I could add a few verys here small. So from the market perspective, are we afraid? No, because it's a very different niche. It's this is an endeavor to sort of try to push the hardware while we are really targeting the mass markets where it is, which is major consoles and the PCs without the need to have the VR gear. Now I am actually unaware in our conversations with other major publishers of really pushing hard for VR, but perhaps these informations have missed me.
I generally don't know. I mean, I know there's a few titles here and there. They're usually some sort of showcase or experience, but I have not heard of anybody building an actual solid business on the VR so far. That may very well change in the coming years. So perhaps half life will be this first stone that is going to turn into something larger as we go, but that's definitely not going to be the case on first half of the next year.
I dare say it's probably not going to be next year even I don't dare to venture even further because things may change and at some point, we are maybe a mass market entertainment that will validate the business model behind it, but it is not the case, at least not for us right now.
And about our games, our past games to be converted. Hard to say, but bear in mind that to prepare a game for VR, you should design it for VR. I mean, having VR in mind in part, at least. That's the first comment. And the second is that we are rather for working on new things, new great things than on working on older stuff.
It's not always true as we've just released Witcher three on Switch, but we are rather for delivering new games than working on old titles.
I see. Thank you very much.
Thank you.
As there are no further questions, I hand back to the speakers.
Thank you very much for participating in the call. The next meeting is March next year. It will be yearly conference. As always, it will be streamed both in Polish and English. So feel invited and see you next year.
Thank you.
Thank you very much. Thank you.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.