Dear ladies and gentlemen, welcome to the conference call of CD Projekt SA. At our customer's request, this conference will be recorded. As a reminder, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. If any participants have difficulties hearing the conference, please press star key followed by zero on your telephone for operator assistance. May I now hand you over to Adam Kiciński, 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 CD Projekt Capital Group for Q3 2019. My name is Adam Kiciński, and I'm the Joint CEO of the company. Today's conference will be co-hosted by Piotr Nielubowicz, CFO of CD Projekt, and by Michał Nowakowski, Member of the Board. To begin with, I'll summarize key business events from July till now, while Piotr will discuss financials. Later on, we'll have time for a Q&A with all three of us. The presentation is available on our website, cdprojekt.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 ran one-hour-long gameplay demos at closed sessions for media and business partners, along with 25-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 15th, The Witcher 3 and its expansions debuted on Nintendo Switch. 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 two-day 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, CD PROJEKT RED and GOG, which was released for iPhones and iPads on October 29th. The mobile edition of GWENT is receiving excellent scores from users. As of today, game's average rating stands at 4.8 out of 5, 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%. Even though we have expanded GWENT's user base, the game remains a relatively small part of our business. The next step will be to proceed 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 2.0, 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 PLN 93 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 CD PROJEKT RED , mostly comprising royalties associated with the sales of "The Witcher 3," which increased this year versus the third quarter of 2018, and in a smaller amount, royalties associated with "Thronebreaker" and in-game sales of "GWENT." Another important contribution to our revenues was from revenues from sales of goods and materials, PLN 43 million, comprising mostly of, at GOG, revenues from digital distribution, over PLN 30 million, which grew by 12% quarter-to-quarter, and at CD PROJEKT RED , over PLN 14 million 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 3 for Nintendo Switch and components of the collector's edition of Cyberpunk, and second, revenues from sales of merchandise at CD PROJEKT 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 PLN 16 million represents mostly ongoing depreciation of development expenses for GWENT and Thronebreaker, which commenced in the fourth quarter of 2018, along with the release of both games. 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 million in association with GOG digital sales.
At CD PROJEKT RED 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 PLN 55 million, which is visibly higher than a year ago. Regarding current period costs, the largest contribution was from selling costs over PLN 27 million, which includes marketing and promotional expenses incurred in each of the segments. However, most of these costs were borne by the CD PROJEKT RED segment in the scope of promoting "Cyberpunk," "GWENT," and "The Witcher 3" prior to the October launch on Switch. A notable part of this quarter's selling cost in those 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 CD PROJEKT RED and GOG.com, in line with the consortium agreement. In the GOG.com segment, selling costs correspond also to sales, marketing, and transaction processing 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 million in Q3 2019. This line includes compensation of the G&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 2019 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 costs of the program are 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 12 months. The group's consolidated net profit in the third quarter of 2019 was nearly PLN 15 million which is comparable to the net profit of Q3 2018.
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 iOS 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, our balance sheet. At the end of the third quarter of 2019, the bulk of the group's consolidated fixed assets was represented by the expenditures on development projects, which increased by PLN 41 million and reached PLN 333 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 11 million PLN at CD PROJEKT RED segment, which came from initiating of production of both box edition of The Witcher 3 for Nintendo Switch, released later on in October, initiating of production of physical components of collector's edition of Cyberpunk, and recognition of inventories held by the CD PROJEKT RED store, which began distributing products to European customers in May and to North American customers in September this year. One line below, the reported reduction by nearly 51 million PLN in the group's trade receivables at the end of 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 pre-order campaign, which translated into an exceptionally high value of trade receivables as of the 30th of June.
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 million. 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 million compared to the 30th of June this year. Moving to the equity and liability side, at the end of the third quarter of 2019, the group's equity was nearly PLN 995 million, having increased mostly due to current period profits. Biggest change on the liabilities were recorded in the deferred revenues line, which increased by PLN 46 million and reached PLN 130 million.
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 pre-order sales, as well as, in a smaller scale, GWENT expansion, Iron Judgment, and The Witcher 3 for Nintendo Switch. In this line, we also include 9.5 million PLN 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 530 million PLN of cash and bank deposits. During the reported quarter, the group generated nearly 15 million PLN of net profits. At the same time, our total amount of receivables decreased by 51 million PLN, 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 expenses side, we financed the increase of inventory of The Witcher 3 for Switch, Cyberpunk physical components, and merchandise of our CD PROJEKT RED store. Last but not least, during the third quarter, we spent over PLN 43 million on the development of games and technologies. All in all, at the end of September, we had nearly PLN 594 million of cash and bank deposits, which was by PLN 63 million 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 CD PROJEKT RED 's development of Cyberpunk 2077, which has now entered its final, most intensive stage. More specifically, the main reason behind the increase involves expenses related to localization of Cyberpunk, and especially the recording of multiple language soundtracks we're preparing, as well as expenses on adapting The Witcher 3 for Nintendo Switch. That's all for me. We can start the Q&A session. Thank you very much.
Dear ladies and gentlemen, we will now begin our question and answer session. If you have a question for our speakers, please dial zero one on your telephone keypad now to enter the queue. Once your name has been announced, you can ask a question. If you find your question is answered before it's your turn to speak, you can dial zero two to cancel your question. If you're using speaker equipment today, please lift the handset before making your selection. One moment please for the first question. The first question received is from Ken Rumph 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? 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. 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 updating our plans from time to time. Last time we did it, once we finished our previous stock option plan. 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, we can describe maybe a bit longer period ahead of us for the next, I don't know, four to six years. It might happen somewhere mid next year, but it's not decided due to the fact that we want finish the current stock option plan. The second question can't be answered. In our promotional activities, we would like to surprise.
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, this is Michał Nowakowski, your last part of question was, I think, about the next-gen consoles and the streaming services. 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-and-date release , so it's not going to be 16th of April. We did not say anything more specific, of course you can assume it's going to happen later than the 16th of April next year. What we also did mention is that.
You will be able to access game on Stadia. Stadia will be like another sales channel. 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 next-gen , our game is coming to the current gen consoles and this is what we have announced. 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-gen . 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 timeframe of those consoles. I think that's pretty much it.
Maybe I'll add one more thing. Our games were always kind of ahead of technologies. They were always played best on strong PCs. In many areas, we are kind of ready or almost ready for stronger specs, so higher specs. From technical perspective, it seems to be doable.
Okay. Thank you very much, gentlemen.
Thank you.
Before we take the next question, as a reminder, if you would like to ask a question, please press zero one on your telephone keypad now. The next question we received is from Massimo Cali from . Mr. Cali from , your line is now open. Please go ahead. We go on to the next question. It's from Matilde Durazzano from Barclays. Your line is now open, madam. Please go ahead.
Hi. Good morning. I wanted to ask a question regarding pre-orders. You mentioned at the half year that you were expecting pre-orders 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. Secondly, I wanted to know what kind of benefits you feel, The Witcher 3 on Switch and GWENT will have on your full year numbers by the end of 2019. Thank you.
Yes. We still keep generating pre-order sales for Cyberpunk, and the cumulative number is definitely in line with our expectations. They increase, obviously, the initiation of pre-orders generated certain spike in pre-orders that stabilized a bit later on, which is a natural process. Probably the most important period for all of the pre-orders campaign will happen a couple of days before the release. Where basing on the example of Witcher 3, the spike was definitely the highest and generated that majority of total pre-sales we recorded for the game. As far as the sales of Switch and GWENT, both of Witcher 3 for Switch and GWENT iOS, both of the releases were releases to products that already existed on the market, however, allowed us to add products to new customers base.
It obviously should expand our revenue generation, but it's not another new release like in case of Witcher 3 or Cyberpunk. 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.
The next question 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? It's interesting, a lot of companies are getting Tencent to develop their mobile games. If you could explain your strategy around mobile, that would be helpful. 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? Thank you.
I just wanted to start, could you repeat the part about the strategy for mobile games? We didn't really understand what you said, if you could repeat that part.
With Tencent.
Yeah, you mentioned something Tencent and the strategy, and we didn't really get the gist of the question.
Yeah, a lot of other publishers are asking Tencent to help them develop their mobile games. 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. 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 a kind of cool idea, and we decided to let them try, and they've built, under our wings, their studio. We have 75% in Spokko. They have 25. They are in development. We are not revealing anything about this. We are just saying that something like this exists. It's not R&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.
We decided to do it by our own because those who are behind this project are fairly experienced. That was the reason.
I can also make a comment on the Tencent thing. Actually, Tencent does not really that much help other developers' games. They sometimes help to sort of adapt those games to the Chinese market, and they're the specialist in operating games and improving the operations of the games. There's actually not a single Tencent-originated game that I am aware of that has been globally successful. There is none. There are Tencent's own or co-owned studios from the West that have been successful, that have actually been successful prior to the acquisition of five, whatever % by Tencent, but there's not a single game in the history of Tencent that has been successful globally that originated from Tencent. 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, and one has to give it to them. 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.
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. You can expect that we won't change our general policy toward deals with gamers. Expect wise monetization and always value for money.
Okay. Thank you, guys. Thank you.
Ladies and gentlemen, as a reminder, if you would like to ask a question, please press zero one on your telephone keypad now. The next question we received is from Tomasz Rodak. The line is now open, sir. Please go ahead.
Hi. Tomasz Rodak, BOŚ 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 completely new to the GWENT, and how many just moved from PC to iOS? Maybe you're not even able to judge, but could you comment on it? The second question is, could you comment on the sale of The Witcher 3 on Nintendo Switch? The game is currently based in the top 20 most popular games on Nintendo store. Could you comment, is the sale is above or below your expectations? 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 reveal any detailed data, the vast majority of the iOS users are new to the project, and they experience GWENT for the first time. Obviously, there was some migration from the classical platforms, 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, the physical sales results are being reported with a delay. Secondly, the most important time of this calendar year, so the pre-holiday season is still in front of us. I believe it will influence the final results we'll report for the fourth quarter. So far, the sales are in line with our expectations. We had them quite precisely defined with our distributing partners, there are no significant surprises to that.
Everything goes as it was planned. The third question was about the merchandise store. We included the store into consolidation for the first time within this financial statement since it grew to a significant scale. However, on the revenue side, it was a relatively small part of our sales. On the profitability side, I would say it was kind of neutral. Yet we had some investment 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 part.
Thank you.
The next question we received is from Ken Rumph from Jefferies. Your line is open, sir. Please go ahead.
Hello. I'm not sure. Was that me? Hello. It's Ken Rumph here 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. Actually you went ahead and did make a payment. 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? My second question regards capitalized development and maybe generally of the current game development staff 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. First question, the dividends. It is 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 and development. First of all of the development costs related development and expansion of the project costs are 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 GWENT and Thronebreaker. They do not increase the total value of the expenses on development we present on the balance sheet.
What's visible in the balance sheet comes mostly from Cyberpunk single player, Cyberpunk multiplayer is so far a smaller project with smaller staffing. We also have some other things in early development. As I said, vast majority of the expenses is related to the Cyberpunk universe.
Okay, gents. Thank you very much.
Ladies and gentlemen, again, as a reminder, if you would like to ask a question, please press zero on the telephone keypad now. The next question we received is from Mr. [Jasiński from Kreko]. Your line is open, sir. Please go ahead. Mr. [Jasiński from Kreko], 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 a highly anticipated release? 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 games to work in VR technology? Thank you.
Of course, we've seen the Half-Life VR announcement. I think it was a surprise for everybody, but I think not in a way you are suggesting.
VR remains an extremely niche-y niche of the market. It's 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 cooperation 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 niche. That niche is very, and I could add a few verys here, small. From the market perspective, are we afraid? No, because it's a very different niche. This is an endeavor to sort of try to push the hardware while we are really targeting the mass market, where it is, which is major consoles and the PCs without the need to have the VR gear.
I am actually unaware in our conversations with other major publishers of really pushing hard for VR, but perhaps this information has missed me. I generally don't know. I know there's a few titles here and there that usually are some sort of showcase or experience, but I have not heard of anybody building an actual valid business on the VR so far. That may very well change in the coming years, and perhaps Half-Life will be this first stone that is going to turn into something larger as we go. That's definitely not going to be the case come 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 VR may be 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.
About 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. Having VR in mind in part at least. That's the first comment. The second is that we are rather for working on new great things than on working on older stuff. It's not always true, as we've just released "The Witcher 3" on Switch, but we are rather for delivering new games than working on old titles.
I see. Thank you very much.
Thank you.
As a reminder, if you would like to ask a question, please press 01 on your telephone keypad now. 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. 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.