Ladies and gentlemen, thank you for standing by. Welcome and thank you for joining the CD PROJEKT Group Q3 2022 financial results investors conference. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. If you would like to ask a question, you may press star followed by one on your Touch-Tone telephone. Please press the Star key followed by zero for operator assistance. I would now like to turn the conference over to Adam Kiciński, President of the Board and Joint CEO. Please go ahead.
Good afternoon. My name is Adam Kiciński, and I'll be your host during today's conference dedicated to the CD PROJEKT Group's financial results for the third quarter of 2022. I'll run this presentation together with Piotr Nielubowicz. Michał Nowakowski will join us for the Q&A session. All right. Let's get started down from the short summary of the past months. In the Cyberpunk franchise, two important events took place in September. On the sixth, we released Patch 1.6 and the Edgerunners Update, bringing another batch of substantial updates to Cyberpunk 2077. This was followed a week later by our first anime series, Cyberpunk: Edgerunners, aired on Netflix, a co-creation between ourselves and the Japanese Studio Trigger. The update featured multiple improvements to the game, many of which had been directly requested by the community.
It also contained tie-ins to Cyberpunk: Edgerunners, encouraging anime fans as well as gamers to immerse themselves in the dystopian world of Cyberpunk. Our goal was to establish transmedia synergy between these two formats. It worked well. Now, let's move on to slide three. High scores on review sites, favorable impressions from key media outlets, a great deal of positive feedback from the community. All of this greatly exceeded our expectations. In its first week, Cyberpunk: Edgerunners hit the top 10 most-watched non-English shows on Netflix and remained on that list for nearly a month. The popularity of the anime generated fresh interest in the game. For four weeks in a row, over 1 million gamers, both new and returning, explored Night City each day. What's more, the share of recent positive reviews of the game on Steam exceeded 90%.
It's an incredible result that once again proves we have a great game on our hands. Let's move to the next slide. In the past two years, we worked hard to introduce the necessary changes to the company's operations and to prepare internally for the big public review of our future plans. In our strategy update presented on the 4th of October, we confirmed the key directions in which we want to expand our business focused on the long-term pro-product outlook. Speaking of which, let's move to the next slide. In the second half of October, we disclosed that Canis Majoris, one of the projects originally announced during the strategy update, would be a remake of the first Witcher game. This project will be developed by an external studio, Fool's Theory, a company run in big part by experienced ex-CD PROJEKT RED developers. Of course, we'll also be involved.
Still on the subject of The Witcher, December 14th will see the launch of the next-gen update for The Witcher 3: Wild Hunt. This will feature multiple visual performance and technical enhancements over the original, including performance and ray tracing modes on consoles, a new camera option available when playing the game, cross-progression, and photo mode, which was highly requested by the community. The update will also offer a variety of community-created modes and additional content inspired by The Witcher network series. As for our current operations and development, let's move on to slide seven. As you can see, our focus remains unchanged. We are concentrating on the final stage of the development of Phantom Liberty, an expansion for Cyberpunk 2077, scheduled for the next year. Right now, almost 350 developers are working on that project.
At the same time, we have strengthened the Polaris and Sirius teams. The former has grown to more than 150, while the latter accounted for around 60 developers at the end of October. Let's get back to the strategy outlook. Our ambitious plans for the next years to come are strongly linked to the recent announcement that we are opening a new studio based on two halves, one in Boston and one in Vancouver. The goal behind this is to expand our development capabilities by tapping into the North American talent pool. This brings me to the last slide of my part of the presentation.
Attracting highly skilled employees and effectively motivating those who we already have on board is crucial for us to succeed in the long run. That's why during the upcoming extraordinary general meeting, we want to put to the vote a new incentive program for the years 2023, 2027, replacing the existing one. We expect this change to boost our position as an employer of choice in the highly competitive global gaming industry. It will also contribute to the long-term value of our company, which is aligned with the interest of our shareholders. If you have any questions in this matter, do not hesitate to contact us. Now it's time for financial. Piotr, the floor is yours.
Thank you, Adam . Let's dive into our 2022 Q3 results. Let's start with slide 10, consolidated profit and loss account. Due to seasonality, Q3 is usually the weakest quarter of the year, this year so far it was the strongest one for us. Our sales revenue reached PLN 245 million, which is 70% higher than for Q3 2021. The Cyberpunk was the main contributor to the achieved revenues. As you know, since its release, we've dedicated a lot of effort into patching and updating it. In February this year, we released the next-gen update, and as Adam mentioned just now, in September, we released another significant one called Edgerunners Update. It brought further enhancements and improvements to the game, but also additional content related to the anime that was to be released one week later.
It happened. On the 13th of September, Cyberpunk: Edgerunners anime premiered on Netflix. Both events were supported by marketing and PR communication. All this resulted in a significant number of gamers playing the game, both returning and newcomers. As far as the anime is concerned, in Q3, we also recognized full revenues and costs related to it. This resulted in increased sales of products as well as increased costs of products and services sold line item, which together with amortization of our already released games, reached nearly PLN 49 million in Q3 this year. Although on the anime itself, we enjoyed lower profitability than we usually see on CD PROJEKT RED games, the gross profit on sales amounted to PLN 166 million, 82% above Q3 last year.
Our selling cost, PLN 54 million, slightly decreased versus last year, along with a change of the structure. We experienced a decrease of costs dedicated to servicing Cyberpunk 2077 and an increase of marketing and PR costs related to the franchise. Next line. We also saved on administrative expenses. Most cost categories were on the rise this year, the decrease versus the comparative period was driven by two main factors. First, expenses related to the valuation of the stock-based incentive program, which declined due to the change in our estimates regarding the likelihood of meeting the results goals of this previous program, a change which we communicated in our 2021 annual report. Second, our early phase research expenses related to future products also decreased as we progressed our projects to more advanced phases and further expenses are capitalized as expenditures on development.
Moving further, decreasing operating costs and the growth of our sales revenue allowed us to increase the EBIT position. In Q3 this year, it was over 6 times higher than in Q3 2021. This result was primarily driven by CD PROJEKT RED. However, GOG also posted over PLN 2 million in EBIT profit, unlike last year, when the result of the segment was negative. This year, the balance of financial incomes less financial costs was also more favorable to us than last year, mainly due to the recent increase of interest rates. All in all, our net profit for the third quarter of 2022 reached PLN 99 million, which is again 6 times more than a year ago.
What is also worth mentioning is that our net profitability for this quarter reached 40%, and for CD PROJEKT RED alone, it even exceeded 47%. Let's now move to the next slide, number 11, as I would also like to share with you that the last quarter was our best third quarter ever, both in terms of sales revenue and net profit, and both for the whole group and for CD PROJEKT RED alone. The chart speaks for itself. Let's now move on to the next slide, number 12, our consolidated balance sheet. In Q3 of 2022, our balance of expenditures and development projects increased by PLN 15 million only.
This figure represents the balance of new expenditures and development projects for the period, nearly PLN 65 million, less the amount we've recognized as costs for the period in the amount of PLN 49 million, which also includes the already mentioned one-time amortization of our expenditures related to Cyberpunk: Edgerunners. As usual, I will come back to expenditures on our new developments in a moment. Another noticeable increase among non-current assets is presented in the other financial assets line, which mostly includes part of the treasury bonds we acquired in order to diversify our cash position. At the same time, looking at current assets, our trade receivables increased by PLN 84 million, which is 2.3 times the balance as of the end of June. The growth was mainly caused by the high revenues we accounted for in Q3 this year.
The total value of cash deposits and treasury bonds included in the three items marked with an asterisk is summed up under the table and totals PLN 1,095 million as of the end of September 2022. This means that our financial reserves decreased by PLN 82 million during the last quarter. Taking into account the increase of trade receivables by PLN 84 million and the fact of paying a dividend in the amount of PLN 101 million, this is a very solid result. I will give you more details on that in the cash flow presentation. Let's move on to the next part of the balance sheet, slide 13. As of the end of September, our group's equity had a value of nearly PLN 2 billion and grew by PLN 95 million, driven by our profit for the period.
Another noticeable change amongst the liabilities section involved the liabilities themselves, which decreased by PLN 82 million. This was mainly caused by the July distribution of the already mentioned dividend, which was approved by the general meeting before the end of June and was recognized among our liabilities as of the end of the second quarter. As regards provisions, this line item grew by PLN 19 million, mainly in relation to provisions for team bonuses set based on this quarter results. Please move on to the next slide, number 14. The prior credits expenditures on research, development and service of released games are presented quarterly for 2021 and 2022 to illustrate the changes happening at the studio in recent quarters. The yellow part represents our total cost of servicing our released games, mainly Cyberpunk and Gwent.
Although we continue to support Cyberpunk and the Edgerunners Update was released just now, the team is progressively moving on to new projects, so this allocation continues to decrease. A similar situation can be observed with early phase research work represented by the green slice, which is actually barely visible in Q2 and Q3 2022. At the same time, the share of the team developing new projects is on the increase. This is represented by the blue part. Unlike last quarter, this time we had no extraordinary one-time bookings related to cooperation with our external partners. Main projects included in the blue parts this past quarter were Cyberpunk, Phantom Liberty, Polaris, Sirius, Witcher 3 Next Gen Edition, and final expenditures related to Cyberpunk: Edgerunners. Now our simplified cash flow on slide 15.
Cash wise, the PLN 99 million in net book profit for the period was supported by nearly PLN 52 million in depreciation and amortization for the period, and PLN 18 million increase in liabilities and provisions, not including the dividend liabilities. The main outgoing cash drivers were the already mentioned payout of the 2021 dividend in July in the amount of PLN 101 million. Actual expenditures on development projects in cash terms PLN 56 million, increase in prepayments and deferred costs by PLN 13 million, mainly driven by new distribution contracts concerning future game releases signed by GOG. Last but not least, PLN 84 million increase in trade receivables that should be collected in Q4. Altogether, our financial reserves kept in cash by deposits and T-bonds decreased over the last quarter by PLN 82 million.
As I already mentioned, taking into account the increase of trade receivables by PLN 84 million and the dividend payout of PLN 101 million , this is a very solid result. That's all from me for now. Thank you for your attention. We can now proceed to the Q&A section.
Ladies and gentlemen, at this time we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their Touch-Tone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you're using speaker equipment today, please lift the handset before making your selections. Anyone who has a question may press star followed by one at this time. One moment for the first question, please. The first question is from the line of Omar Sheikh with Morgan Stanley. Your question please.
Hi there everyone. I've got three questions, if I may. First of all, on Cyberpunk sales in the quarter. I know you don't normally give an absolute number for units, but if you could maybe just tell us whether you thought this quarter's sales or the quarter you just reported was the biggest so far for Cyberpunk, excluding the launch quarter, obviously. That would help us understand where this, where the number's coming from. Secondly, on Phantom Liberty, you haven't yet given us a date for which part of 2023 you're planning to launch in or which quarter you're sort of currently targeting. I wonder if you could just give us an update on that. Finally, The Witcher Next Gen.
Could you just give a sense of, give us a sense of what the marketing campaign will look like, if you benchmarked it against previous expansion marketing campaigns, how should we sort of think about it? Is it gonna be along the lines of Blood and Wine, or is it gonna be more in line with some of the major game releases? Thank you very much.
I'll start with the first one. Definitely this year this was the best quarter of sales for Cyberpunk. I cannot tell you by heart how this Q3 result differentiates from the last year's Q4, which was also very good. Looking at the data I have in front of me for this year only, this quarter was the best one for Cyberpunk again.
Okay. For the second question, it's Michał Nowakowski. We are unfortunately not disclosing the specific quarter for the launch of the Phantom Liberty yet, so I'll have to ask you for a little bit more patience here. We'll talk about it when we're ready. I'll actually take the third question as well. I think the question was whether the marketing campaign level is gonna be comparable to what it was with Blood and Wine. I'd say it's very difficult. It's not really to compare one to the other. It's not apples to apples. The market circumstances have changed. The install bases are different. I don't think we're really able to super specifically hone in on what that number might be. Of course, it would not be the size of the marketing campaign of the full game launch, and it will be adequate to the expectations we have with the expansion.
It's a big expansion. Yes, there will be marketing support. I would not draw a simple equal sign between the Blood and Wine campaign and what we're gonna prepare for the Phantom Liberty.
Okay, sounds good. Thanks a lot.
The next question is from the line of George Hill with Deutsche Bank. Your question please.
Good afternoon, guys. Thanks to take my questions. I have two, if I may. Firstly, just thinking about the trend in Cyberpunk sales. You've obviously seen a big spike in sales with the recent update and the Netflix series this quarter. Has that since normalized back to the trends level before the release of Edgerunners or has it remained higher? Secondly, is there any guidance in terms of the developer head count you will need to reach in order to execute upon the strategy you announced recently with a significant step up in release activity? Does head count need to double or even triple from the current level for this to happen? Is this the wrong way to think about things? Thanks, guys.
Hi, it's Michał Nowakowski. I'll take the first one and then pass on to Adam, I think. When it comes to the trend of the sales of Cyberpunk pre-Edgerunners and well, right now, I can confirm that the sales level we are seeing right now is higher than prior to the Edgerunners launch and straight after the Edgerunners has launched. We see that the stable bar has raised to a level higher than what it was pre-Edgerunners launch. Thank you.
I'll take the second one. Adam Kiciński speaking. The final... I mean, there is no final goal in terms of, for the size of the team. Our goal is to keep growing. We'll see actually, whether it will double size of the current team in the, I don't know, five or 10 years or... I mean, I don't want to close ourselves in those numbers. It highly depends on the average skill of new team members, especially in the new North American studio, which we are going to open, to start opening next year. Even though the Vancouver is already existing and growing. I don't want to refer to any numbers, but we want to keep growing.
I mean, this year, net, we've grown so far around 100, and we'll keep growing. It will be according to our needs. We believe that. We have very good start with the team which we already have to continue developing Polaris and then to jump to Orion next year. Thank you.
Thank you so much.
The next question is from the line of Nick Dempsey with Barclays. Your question please.
Yeah. Good evening, guys. First question, given that so many people have bought The Witcher 3 already, a huge success over many years, and those people get the next-gen update for free, do you expect to get a notable step up in revenue during Q4 around that launch? Or just to kind of a boost for the community of The Witcher 3 rather than a step up in revenue? The second question, when do you expect to start ramping up the cash spend on the Boston studio? Will that initially be expensed in the P&L or will it be capitalized because it will, from the beginning, be associated with a new yet to be released game?
Third question, just when we're thinking about Q4 versus Q3, historically, you've seen a seasonal boost in Q4 versus Q3. You saw the spike in September and now you've helpfully talked about that coming off but at a higher level. When we're thinking about balancing out those two quarters, should we still have a seasonal step up when we consider all of that?
Okay. I'll start with the first one maybe, Michał, here again. First and foremost, we do not really provide guidance when it comes to revenue for any of our launches really, and that is true also about The Witcher 3 next-gen update. I may just make a comment that it's obviously, it's free of charge for people who previously owned the copy of the game. Obviously if you never owned the copy of the game, and I believe there are people like that still around, they would obviously be needing to purchase the game one way or another. I would just like to add that little point, but we do not provide a guidance per se to any of the launches. Thank you.
I'll take the second and the third question. When do we expect to start ramping up the Boston studio? Basically, after launching Cyberpunk Phantom Liberty, we will accelerate the works on Orion Project done by the New Boston studio. The second part of the question was whether we will be expensing the cost of this development directly into P&L or we'll be capitalizing them. Initial phases, research phases will be expensed directly into our P&L. Once we move to the actual development phase, it will be capitalized. We will use the same formula as we used to use also on recent developments. The third question was about the seasonal boost in Q4 and Q4's proportion versus Q3. First of all, as you know, we are not guiding.
The Q4 is still up and running. Definitely Q3 was our best. This Q3 was our best Q3 in history. The base for comparison with Q4 is definitely high. However, for this Q4, we have The Witcher 3 Next Gen Edition still in front of us, which will definitely support the sales and revenues we may expect from this quarter. There is no precise answer I could give you, especially that so we intend not to guide on future results.
Thank you.
As a reminder, if you would like to ask a question, please press star and one on your telephone. The next question is from the line of Matthew Walker with Credit Suisse. Your question please.
Hi, guys. Thanks for taking the question. I've just got two if that's okay. I think you've indicated that with Sirius and Canis Majoris, I think you've indicated that one of those will come after The Witcher 4 launch. The other one, which I think is Sirius, is that coming before The Witcher 4 or afterwards? How do you think about the size of that game? The second question is, if Cyberpunk costs something like PLN 570 million to develop, what do you think the average cash flow development cost of the titles that you've, you know, outlined will be to help us model? Thank you.
Hi. Adam speaking. I'll take the first one. Starting from Sirius, we are not guiding anyhow anything about designs of this game. We are not talking about the size or what type of game it is. We just said that the design is to be accessible for broader audience, and that's it. There is a very clear business purpose to that because we have to prepare ourselves in the right moment to communicate the product to gamers. As the product is very different from anything we've released so far, we have to be sure that gamers first will understand properly what the game is about.
That's why we are not saying anything, we are not describing what type of game and what kind of size of the game it is. Coming back to the remake and when it will come, yes, it will come after Polaris, which is a consequence of how we think about this project. We think that remake will be based in big part on technologies from Polaris. It will be developed partially parallel to Polaris. Once Polaris is launched, everything for Polaris will be then in final shape, and it will be partially imported, used in remake. We are not saying whether Sirius will be before Polaris or after.
We just said that all those three Witcher games will be the first games we are going to launch in our pipeline, but this is the only thing I can say as for now. The second question was about budgets or cash outflows for the titles we plan to develop. We've not revealed any budgets for any of our future games. That was always so prior to releasing them. Once we release a game, then we usually share the budgets. We're definitely not in this position yet. Having said that, we will develop all those games and all those products announcing the strategy updates gradually. At the same time, we still continue selling our historic titles.
We will be releasing some new products like The Witcher next-gen edition or the Cyberpunk Phantom Liberty, which will also allow us to increase the cash inflow into the company. We will use this daily incoming or monthly rather incoming cash to also finance the developments and the investments into new products.
Okay. Thank you.
We have currently no other questions. I hand it back to Adam.
Thank you. We have two questions in the chat window. The first is: When do you plan to publish the results targets for the incentive program? Piotr, you can take it, right?
Yeah. This question requires a bit broader answer. The nature of the new program is different from our historic programs. It's divided into two parts. In part A, where shares will be sold at nominal value and which will therefore account for the bulk of the program's costs, there are no results goals at all. The scheme is based on the concept of deferred remuneration, payable in shares after three years of employment. The aim of the program here is to promote retention. In part B, three, four, or five-year goals will be set in due course for each stage separately throughout the program's five years duration. What is also important, the exercise price for each stage within this program, part B, will be based on the stock price and the corresponding grant date.
This means that in order for participants to benefit from the program, it will be necessary for the CDR stock to gain value, and also for the company to achieve its long-term goals. Part B, aimed at members of the management board and other top managers, is much more demanding in terms of requirements than plan A. As I said, the goals will be set year by year over the duration of the program. Given our policy to avoid guidance on future earnings, not to publicly reveal the internal planned release dates, we purposely decided not to reveal our financial goals throughout the duration of the program.
The second question: Do you think about opening more studios outside of Poland in the next year? Let's open CD PROJEKT RED North America first. This is the plan for the next year, and it's very ambitious. We have no plans for opening further studios. Of course, I mean, we can think about things like this in the future, but no plans for now for opening any other studios as CD PROJEKT RED North America. The third one is: Do you expect to enter pre-production phase of Cyberpunk sequel in the next year? Michał, I can take it as well. Yes, after releasing Phantom Liberty, we will start working on the next Cyberpunk game.
Of course, initially it will be a conceptual phase, which from the very formal perspective is not a pre-production because there are two perspectives. I mean, our common language in development and then the formal language linked to how we allocate costs. Initial phases or from the very formal perspective, research phases and all costs are going directly into P&L. Once concepts are ready, we start development. This is very, very formal approach. I mean, how we make it in our books. Development starts from pre-production. From very formal perspective, pre-production probably won't start next year as this is the first part of development. But of course, we'll start working on the game in a conceptual phase next year.
Of course, in smaller team than is now working on Phantom Liberty, as some developers will join Polaris and will help in development of Polaris. The next question is: Are you planning a second season of Cyberpunk: Edgerunners for Netflix? Michał, I think you can take it.
Yes, I can take it. While we're not confirming any specific plans, second season of Edgerunners or anything else super specifically, we did say a number of times that we have an appetite for, you know, to do more in the transmedia, so in the linear visual animation or live action, those plans have not changed. When we are ready, you may expect to see more announcements in that regard coming from us.
All right. As we have no more questions, I would like to thank you again for joining us today. If you have any follow-up questions, do not hesitate to contact our IR team directly by mail. Have a nice evening and goodbye.
Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.