Good afternoon. My name is Adam Kiciński, and I'll be your host during today's conference. We are meeting to discuss the First Half of 2023 at CD PROJEKT Group. I'll run the presentation together with Piotr Nielubowicz. Michał Nowakowski will join us for the Q&A session. Before discussing earnings, let's quickly sum up key events that took place in recent months. At the beginning of June, media outlets from all over the world had their first hands-on experience with Phantom Liberty. We gave our visitors the opportunity to play the expansion on all platforms. That is PC, Xbox, and PlayStation 5. More than 120 media representatives have since published their first impressions. We are very happy with those early reactions. Not long after that, at several Xbox FanFest events, we invited gamers to try out the expansion as well.
Their opinions were closely aligned with the positive feedback from media. Both groups appreciated the huge amount of work that we had gone into the expansion and are looking forward to its release. The release date was announced at the Xbox Games Showcase event. Phantom Liberty will launch on 26th of September 2023. At the same event, Keanu Reeves announced a new trailer for the expansion. This trailer has been viewed by nearly 13 million people on our social media channels. This confirms Phantom Liberty's position as one of the most anticipated releases of this year. These announcements went together with the launch of pre-order campaign. After two months, we are very happy with how it's going, but of course, most pre-orders come in during the final pre-release days.
By the way, this is also a great opportunity to highlight that the base game reached an important milestone in July. Cyberpunk has passed the Very Positive score threshold on Steam. From over 550,000 reviews posted since the release, 80% of players have rated the game positively. What's more, the recent average review score stands at almost 90%. This is a significant achievement that validates the hard work we have put into Cyberpunk over the last three years. Let's go back to the summary of the Phantom Liberty marketing campaign. We have also announced the Phantom Liberty Tour, a series of eight community events taking place around the world in August and September. Participants can play the expansion, attend contests, and meet the development team.
On top of that, last week, at the opening of gamescom, we showcased new ways to play, a video announcing new content coming in the expansion, as well as in Update 2.0, the biggest patch for the base game yet. We have prepared a number of new and overhauled features to help experience the game in the best possible way. Phantom Liberty has again generated great interest in our IP. We believe it's another positive signal showing anticipation for our upcoming release. Before moving on to our developers' involvement in ongoing projects, let me quickly wrap up the recent organizational changes at the studio. As we announced in July, by the end of January 2024, we'll be parting ways with about 9% of our team. This decision is closely related to the ongoing internal RED 2.0 transformation.
We need to adopt the scale and structure of the team to our current operational needs and development plans. Coming back to the current allocation of developers. At the end of July, the Phantom Liberty team, working on the pre-release phase, consisted of 300 people. That's fewer than at the end of 2022, but still it remains our biggest team. On the other hand, the Polaris team has grown to almost 260 developers by the end of July. Last but not least, I would like to make some comments regarding two other teams. As you can see, the red part of the chart is smaller. This is a result of changes in Sirius project that we announced in May. Concerning the green part, the GWENT team will gradually decrease in size until the end of this year.
This is related to the GWENTfinity project, which entrust the future of GWENT to the gaming community. Now, let's move on to financials. Piotr, the floor is yours.
Thank you, Adam. Let's start with our consolidated profit and loss account on slide 10. Unlike last year, when we launched Cyberpunk next-gen edition in Q1, the first half of 2023 saw no comparable sales events. This year, our focus has been on preparing for the Phantom Liberty expansion launch, as mentioned by Adam a moment ago. While we've been working on this new release, our existing RED, RED products generated PLN 244 million in revenue. Together with PLN 85 million from GOG, this resulted in PLN 325 million in consolidated sales revenues. That's 86% of last year's figure. In contrast to the group sales, our cost of sales increased slightly, primarily from increased depreciation due to the completion and release of The Witcher 3 next-gen edition in Q4 last year. Moving on to operating costs.
Our selling expenses decreased by PLN 5 million to PLN 85 million. This was mainly driven by decreasing Cyberpunk servicing costs. At the same time, the preparation and execution of the Phantom Liberty release campaign resulted in the Cyberpunk IP-related publishing expenses, reaching nearly PLN 30 million, which accounted for a substantial part of our selling expenses. As regards administrative expenses, their increase is related mainly to the introduction of our new incentive programs in Q2, which replaced program introduced in 2020. Some of the new entitlements directly replaced the old ones, which produced increased costs on the new grant date. All in all, during the first half of 2023, non-cash expenses related to our incentive programs exceeded PLN 10 million.
Moving further to our operating income and expenses, the positive balance of PLN 25 million comes mostly from the balance of impairment adjustments related to the Project Sirius project in the amount of nearly PLN 90 million, as discussed during the meeting dedicated to Q1 results. The second positive driver for the operating income, which did not exist before, was a nearly PLN 8 million effect on applying the innovative Employee Tax Relief. This regulation allows us to use the R&D tax relief budget, originally intended to lower our corporate income tax, to offset a portion of the personal income tax, which we are obliged to remit to tax authorities. Introduction of this mechanism makes it easier for us to benefit from the R&D relief and our status as an R&D center. Another supporting driver is visible in the financial operations category.
The reported surplus of nearly PLN 22 million came mostly from interest on bank deposits and T-bills. Our income tax for the period consisted of three parts: current income tax paid locally, withholding tax paid abroad, and changes in deferred tax. As regards the calculation of deferred taxation, it was increased by nearly PLN 8 million as a result of utilizing the R&D tax relief budget on innovative employee relief, as mentioned a moment ago. All in all, our net profit for the first half of 2023 reached PLN 91 million. Let's now move on to the next slide, 11. Our consolidated balance sheet. Over the first half of 2023, our balance of expenditures on development projects driven by Cyberpunk, Phantom Liberty, Polaris, and Sirius projects increased by PLN 123 million.
This figure represents the balance of new expenditures on development projects for the period, PLN 148 million, plus previously mentioned nearly PLN 90 million impairment adjustments related to Project Sirius and less the amount we've recognized as cost for the period, PLN 43 million. At the same time, among current assets, our trade receivables decreased by nearly PLN 82 million, which is typical after the preceding to Q4 period. And last but not least, the total value of cash deposits and treasury bonds, including the three asset items marked with an asterisk, is summed up under the table and totals PLN 931 million as of the end of June 2023. I will walk you through our main cash flow drivers in a moment. Let's move on to the second part of the balance sheet. Slide 12.
Our equity stayed flat, as the 2022 dividend paid in June this year was offset mainly by the profits of the current reporting period. Our liabilities, mostly trade liabilities, decreased since the end of 2022. The mechanism here is similar to what we experienced with trade receivables. During the first half of 2023, we also observed a significant decrease in provisions. This was mainly driven by the payout of 2022 bonuses in 2023 and change in our remuneration strategy. The change implemented in 2023 shifted most of the profit-dependent team bonuses to base salaries and new incentive programs instituted this year. As a result, we set aside significantly lower provisions for 2023 results related bonuses. Now, please move on to the next slide, number 13. CD PROJEKT RED's expenditures on research, development and service of released games, presented here quarterly since 2021.
As you can see, development work has been in full swing during the past three quarters. Although our main focus right now is on the upcoming release of Phantom Liberty, other projects we have in development are also progressing with each passing quarter. Now our simplified cash flow on slide 14. Cash wise, the PLN 91 million in net book profit for the period was supported by nearly PLN 15 million in depreciation and amortization for the period. At the same time, when talking about cash expenses, the non-persistent impairment allowance adjustment in the amount of PLN 90 million needs to be deducted. The already mentioned decrease in our receivables was similar in size to the combined decrease in liabilities and provisions, all of which are represented by the next two bars.
During H1, we also financed nearly PLN 163 million in expenditures on development projects, the core of our business. To top it off, we shared PLN 100 million with our shareholders in the form of a dividend. Altogether, our financial reserves kept in cash and deposits and T-bills decreased by PLN 160 million over the first half of 2023. That's all as far as H1 2023 results are concerned. I'm looking forward to our Q3 earnings call, when I will walk you through the results of the Phantom Liberty launch quarter. Over to you, Adam. Thanks, Piotr. We are now 27 days away from the launch of Phantom Liberty. As I've already mentioned, we are entering the most intense phase of the marketing and PR campaign.
On top of that, in the next weeks, we'll be sending review copies to journalists around the world, enabling them to publish their impressions and to review before the release. We are very excited, and we eagerly await the moment gamers can finally experience the game. That's all from us. Now we will proceed with the Q&A session. Thank you.
Thank you. As a reminder, if you would like to ask a question, please press star one on your telephone keypad. If you'd like to withdraw your question for any reason, please press star two. You will be advised when to ask your question. We have a question coming through. Our first question comes from Nick Dempsey of Barclays. Please go ahead.
Yeah, good evening, guys. I've got two questions. The first one, when I'm looking at slide 13, I'm looking at the development expenditure, new products line for Q2, that looks almost identical to Q1. When I'm looking at slide 14, and I look at expenditure on development projects, I've got PLN 163 versus, I think it was PLN 71 at Q1, so there's more of over PLN 90 million in Q2. Can you just explain to me what the gap is between those two things? Because that's going to be helpful for me trying to model that for the full year. And the second question, when we're thinking about attempting to model Phantom Liberty unit sales by thinking about an attach rate versus Cyberpunk unit sales, one consideration is that Phantom Liberty is not available on the PS4 and Xbox One.
Can you give us any indication out of the unit sales that you achieved as somewhere just over 20 million, roughly what kind of proportion might have been purchased on PS4 and Xbox One? Thank you.
Hello, Piotr Nielubowicz here. I'll take the first question. So the difference between the two slides is based on the fact that the slide number 14 presents our cash flows, so the money actually outgoing from the company on development of our games, while the previous slide number 13 presents the book expenses we booked during the period. The major difference between the two in respect of the first half of this year is that within this period, we paid out bonuses for 2022, which was one-time cash operation visible in the cash flow slide. And at the same time, cost-wise, it was applied on the previous quarters of 2022, therefore was not visible in the first half of 2023.
And at the same time, as you may have heard, starting this year, we've implemented a few, according the philosophy of remunerating people, we've shifted some or most, actually, most of the bonuses to base salaries and incentive programs are implemented this year. Therefore, this year, book-wise, we have much less reserves for bonuses, profits-related bonuses than we used to have in previous years.
Okay. So just to understand, if I'm trying to continue that going forward, is the kind of just under PLN 75 million or something closer to PLN 90 million, a sensible number? Does the PLN 90 million include some kind of one-offs related to bonuses that I shouldn't be rolling forwards?
Yes and no. Bonuses are kind of one-off paid, were kind of one-off, one-off paid, the following year for the results of the previous year. However, as I said, we've shifted the bonuses to base salaries and month-to-month costs, will be proportionally higher, and they will not be booked one time or quarterly, they will be booked month by month.
Okay, that's helpful. Thank you.
In some average way of transforming, obviously, because each year is different.
Thank you. Our next question comes from Matthew Walker of Credit Suisse. Please go ahead.
I see there was a second question, which we haven't answered yet. Hello?
Hi, Matthew. Matthew Walker from Credit Suisse. Are you there?
Yeah, I am.
Okay, please go ahead.
Shall I go ahead? Okay. Thanks a lot. Good afternoon. Yeah, firstly, when you talked about pre-orders, you said most pre-orders, I think, will come in the final period before the launch. I was just trying to think about what are you expecting for the split in units between Q3 and Q4, given that you're launching, you know, quite late in the third quarter. And then if you re-remember back when you launched the original Cyberpunk, you know, some issues around console, obviously, as Nick said, you're, you know, you're not sort of doing this on old consoles, but are you happy that you've got the balance right between the coding working really well on both PC and next gen consoles?
And then final question is, what impact do you think the Phantom Liberty launch is going to have on the impact of the base game? Because obviously, I guess you're going to have some bundles, you know, with the base game. Thanks.
Okay. I'm probably going to take most of these questions, kind of, but first, I actually wanted to go back because, I think Nick asked one more question, which we haven't addressed, and we went immediately to the, to these questions. So please allow me, because there was a, sorry, not a comment. There was a question about the, pre-orders we would have expected had we launched for the Xbox One, and PS4, so the previous generation of the consoles. So, we never obviously modeled anything for the past consoles, because, as you may recall, from the moment we have announced the expansion, we were targeting the next gen. So, we don't really have, any answer to that.
Also, I'd like to add, we're not really guiding on attach rates or sales ahead of launch. We never did that. We're not going to do it here either. But one thing which it brings an interesting case, I mean, there is no such thing as a single standard for platforms or generations or PC versus consoles or attach rates. So there is nothing that we can say with 100% certainty that we've lost XYZ because we were not, you know, percentage-wise. It just doesn't work like this. So now jumping to the questions which were asked just a second ago. Sorry, we need to. I need to remind myself, looking at them. The pre-orders, what are we expecting for the news between Q3 and Q4, given that we're launching quite late in the quarter?
So, the expansion launch is sort of similar to the launch of a game, to be honest, and typically the moment of the launch and the weeks, the last weeks leading to that launch, the last weeks, two weeks, one week of pre-orders are, like, the most significant when it comes to the numbers. So, obviously, Q4 has Christmas and, you know, and lots of reasons for people to, you know, purchase gifts and whatnot. So, I would say that Q3 is going to be significant in terms of number of units, just because it is a launch period. And I would not, however, want to go deep and suggest, you know, what is going to be exact split of units, but that, my bet would be Q3 is going to be significant for sure.
Now, the next question, back when you launched CP, there were some issues around consoles. We're not launching on the old consoles. Are we happy that we got the balance right for the code working on next-gen PC? I'm not sure I follow exactly the question here, but if you're asking about the performance on the next-gens, we have been actually showing the game publicly, you know, on the next-gen console, consoles, you know, to the public during the Phantom Liberty Tour. And we just came back from gamescom in Germany, where the game was shown both, you know, on PC, but also on the Xbox consoles. And we had Very Positive feedback from both gamers and media. And, you know, I mean, let's wait for the launch and talk then.
But, you know, all we've seen so far, we're, we're satisfied, we're happy. Now, the impact of the PNL launch have on the base game. Obviously, we'll have bundles. We're not, you know, commenting or making statements about bundles or anything. The full focus is on, on the Phantom Liberty launch, which is just around the corner. And, what impact it will have? I mean, typically, the launch of an expansion, of a big expansion drives the launch, sorry, drives the numbers of the base game as well. So, yes, there will be an impact for sure. We've seen that in The Witcher 3.
We're already seeing that to some extent in the pre-orders, which if you're tracking some of the, you know, sales spots on Steam, which are publicly available, a click away, you can see that yourself, as well, without obviously specific numbers, but those we're not providing here. So been talking long, but I'm gonna - I think I'm done. Thank you so much.
Yeah. Thanks a lot. Cheers.
Thank you. Our next question comes from Alexei Philippov of JPMorgan. Please go ahead.
Yes. Hello, good evening. My first question is that there is a step up in resources allocated to the Witcher IP in this quarter. Is it mostly Project Polaris, as it seems, and you're scaling down the Project Sirius? So what's happening there, please? And shall we assume that Project Sirius is not on the table? That's my first question. Another question is on the transition to new engine. What is the update there? What is the strategy with developers that are now working on old engine? That is the biggest team of Phantom Liberty. And one more final question is, could you comment on the fact that the principal place of the business is relocated to Boston, according to your management comments report? Thank you very much.
Hi, Adam Kiciński. I'll take probably all three. So, there are more and more resources on Polaris. As you can see on the slide, it's 250-ish now, and it will keep continuing. I mean, we'll move more and more people towards towards Polaris. Sirius is smaller, actually. Sirius, Sirius is smaller than in the previous, I mean, Q Q1 presentation, as as we.
Yeah, change some fundamentals in terms of approaching this project, as announced before. And so this is about The Witcher resources allocated to The Witcher, Witcher IP. Transition to new engine. We are transitioning. I mean, we are happy that we made this decision. Of course, still in development, we are finishing the last big project on REDengine, Phantom Liberty. Most of developers is already familiar with Unreal, and, as I said, we are happy that we are transitioning. Of course, still, there are things to be done, but in this regard, as for now, we think it was great decision that we are shifting to Epic's technology. And, the third one. Oh, Piotr, you want to take the third one, right? Okay. So, the floor is yours.
Right. So yes, the principal place of business was relocated to Boston, but only for our Los Angeles company, that so far was responsible for our North American marketing activities. We decided to use the same shell, the same company, the same legal entity, also to kick off, to initiate, the development studio that is to be located in Boston. So the principal place as to the product was and stayed in Warsaw. There was no change. However, one of our daughter companies was relocated from Los Angeles to Boston.
Thank you very much.
Thank you. Our next question comes from Ali Naqvi of HSBC. Please go ahead.
Hi, good evening. Thank you for taking the question. If I could just refer to on slide 8, the light blue portion, which is your development teams working on the Cyberpunk expansion. When the game gets released, are they gonna move on to Polaris, or what is the sort of strategy there in terms of staff members, or is this another opportunity to look at your development team and see if it's appropriate for the projects you have going on and that are live? And then could you just remind us what your policy is on updating us in terms of copies sold? Is it every iteration of 5 or 10 million? And when we might expect a sort of an update on how Cyberpunk has sort of fared.
Final question: Given the release of Phantom Liberty and the new 2.0 expansion, and this will hopefully address a lot of the issues that were solved, or issues that came out of the original release, how much does this go in terms of returning the lifetime value of the Cyberpunk franchise?
Thank you for the questions. I'll take the first one, Adam Kiciński. So, after releasing Phantom Liberty, we'll transfer a big part of the team to Polaris, obviously. Some remaining members will then focus on supporting other ongoing projects like Orion or Hadar. But bear in mind that we'll also be supporting Phantom Liberty after we launch for some time. That's obvious. It's across the company, but including Phantom Liberty, as I said in my presentation, we are at the same time parting ways with some team members. It's a gradual process which will end in Q1 next year. Michał, you can take the second, right?
Yes, I can take the second. I'll try to take the third one as well, I think. So on the policies and updating us on copies. So we don't have any official policy, but we're trying to make them a notable milestones, basically. So the last one we have announced was 20 million copies. I think it was September or fall In autumn last year, 20 million copies of CP. And again, we're not. I don't want to create here on the call a policy which is gonna, you know, which is then something we're gonna have to religiously follow or something. But when there's gonna be a notable milestone crossed, we're definitely gonna update you. Now, as for the third question, how does the 2.0 go in terms of retaining the lifetime value of Cyberpunk franchise?
So the whole idea of 2.0 comes from us listening and analyzing what the players wanted, and we're big believers in that if you listen and have proper conversations with your fan base, that can only, you know, end up in good things happening to the franchise, also in a commercial way. So I guess it's my way of saying that we do believe it does definitely add up to returning lifetime value to the Cyberpunk franchise, but it is. I don't think I'd to quantify it in any way. I think it's very intangible, but we are deeply convinced that it's something that, you know, is going to add up to the life cycle of the franchise in long time, and it's gonna benefit both the players and us.
Thank you. Great. Thank you.
Thank you very much. As we don't have any further questions on the line, now we will move to questions from chat. Please go ahead. I would like to turn the call over to the host to take questions from chat, please.
Yeah. I'll read them, and then I'll read the first, and then we'll answer. Piotr Poniatowski, mBank, is asking: What part of deferred income is connected in Cyberpunk 2077 Phantom Liberty pre-orders? Piotr, that's for you.
Yes, hello. So the current part as to the products segment, deferred income, was reported in the amount of approximately PLN 18.5 million as of the end of June, and it consists of around PLN 2 million of subsidies and PLN 16.5 million of sales relating to future periods. Around three-fourths of the ledger amount is attributable to pre-orders of Phantom Liberty just for the last 19 days of June, so from initiation of the pre-order campaign until the end of the reporting period. What needs to be taken also into consideration is that this amount reflects only the advances in royalties we got for PC pre-orders, since none of the console platforms is advancing royalties for console pre-order sales. The amount we can receive and book, therefore, is attributable only to our PC Phantom Liberty pre-orders.
The second question from Kacper Koproń, Trigon. Can you comment on quality assurance process in Phantom Liberty? Have you completed it already? Can you comment whether the QA is carried out internally or externally? It's not completed as we are still in the final phases. It's already. It's almost completed, of course. We are releasing Phantom, Phantom Liberty digital- only, so we are not producing any physical discs for it. So the final touches are still there, and it's carried out both internally and externally. The next one, Piotr Poniatowski, mBank. How far are you with Hadar right now? Have you already created a framework for the universe? Michał, we can talk this much, but you can take it, right?
Actually, you sort of answered, I mean, because, as much as we would love to, it's not the right time for us, you know, go deeper into Hadar. So, the work is progressing, the small team that is, you know, that is creating this framework, as you called it, as you put it, of the universe, is, you know, is working on it, but we don't have any comment in terms of how far, how deep, and, you know, how much more time they need. That's not something we're commenting here and now.
The next question from Konrad Krasuski, Bloomberg: What number of Phantom Liberty sales may convince you to work on another paid expansion? And what low number may mean you may drop such idea as not worthy to pursue? Oh, Michał can take it. Yeah.
I mean, it's. Yeah, I can take it. So it's the decision has been actually made already, as we have announced a long time ago. We're not gonna make second or third expansion. This is the only expansion of the game, and it has nothing to do with the numbers, how satisfied or not we are with sales or anything of the kind. It's technological decision, to be honest. This is the last time we're working on the REDengine for the time being, at least in the foreseeable future. As you know, we are working on the Unreal Engine from Epic, and this was one of the key reasons why we decided to. This is the only one.
Thank you, Michał. And there is another question from Konrad Krasuski: Have you recently made any changes to work from home rules following layoffs? Do you see that market is still driven by employees, not employers? So it's totally not connected with layoffs. Layoffs are the result of planning the future productions, and they are not connected with anything else, so not with work from home rules whatsoever. And about the market, well, in our case, market is not as other markets, I would say generally, because we are fighting for top talent, and we are always. It's always very competitive, but at the same time, we believe that great projects and great working conditions we can provide are attractive enough to attract top talent. But I wouldn't say whether the market is driven by employees or employers in our case.
Thank you.
All right, as we have no more questions, I'd 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. Goodbye.
Thank you. That concludes today's conference. You may now disconnect.