Good day, and welcome to the CD Projekt Group Financial Results for Q1 2021 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Adam Kucinski. Please go ahead, sir.
Thank you. Good evening. Hello. Welcome to the teleconference dedicated to Cedeperay Group results for the Q1 of 2021. My name is Adam Kichinski, and I will run this call together with Piotr Nier Lubovitch and Mikhail Novakovsky.
The webcast of the presentation along with the audio feed is also streamed on our corporate website at tedepreg.com and our IR YouTube channel. Let's get started. Please jump to Slide 3. Improving Cyberpunk 2,077 remains our top priority. Since the beginning of this year, we've released 5 updates.
And of course, there is more to come. The next update is to be released in a few weeks. As we announced before, This year, you can also expect free DLCs providing small bonus content for gamers as well as And updated next gen edition of the game, which is scheduled for the second half of the year. On Slide number 4, you can see how our efforts improved Cyberpunk stability. The crash rate is getting lower and lower with each update.
Please bear in mind that it's Somewhat natural for each new update to cause some extra short term boost in statistics, which is strictly related to the process So downloading and installing the update itself. That's why the chart shows local peaks around the time of releases. But overall, We can definitely observe a downward trend here. Given the recent improvement and motivation we have, we strongly believe That the game will prove success in the long run. Moving on the next two slides, the Witcher front page.
On Slide 6, you can see our plans related to The Witcher universe for this year. Spokko, the youngest member of the Cebetoyak family, is about to launch The Witcher Monster Slayer, a free to play mobile location based RPG that uses AR technology. This release is expected this summer. As for the second half of the year, We plan to release the next gen edition of the Witcher 3: Wild Hunt. That's all from my side.
Let's now move on to Slide 7. Piotr, the floor is yours.
Thank you, Ella. Let's start with our P and L statement. This year's Q1 results are presented together with our 2020 Q1, which By then, it was the best Q1 we ever had. Last year, due to the pandemic, the release of The Witcher series and that of The Witcher 3 on the Nintendo Switch Q1 2020 revenue wise was nearly 2.5x better than the Q1 of 2019. This year, these growth drivers appear to be gone.
In the Q1 of 2021, Cyberpunk was our leading IP. We generated nearly It's worth mentioning that due to the non existence of Cyberpunk on the Sony Digital Store, which and is potentially the 2nd biggest marketplace for us. And settlements of sales provisions we set in Q4, our Cyberpunk revenues at Sutterby Threat have mainly been driven by PC Digital Channels. The second source of revenue comes from goods and materials fueled by the geog.com segment, where the segment itself enjoyed a 12% increase quarter to quarter. As always, our sales were accompanied by Cost of sales.
The main increase here is visible in the cost of products and services sold line, which we included where we included SEK 17,000,000 depreciation of Cyberpunk 2,077. Our gross profit from sales reached SEK 100 and 35,000,000, 10,000,000 less than a year ago despite the SEK 17,000,000 Cyberpunk depreciation. Our operating costs increased driven by 4 main factors. First, a big part of the dev team was working on updating Cyberpunk And since this was a service to an already released game, costs were booked directly into P and L into the selling cost line. Total servicing costs dedicated to Cyberpunk added to the much smaller Gwent live operation service costs and all together amounted to PLN30 1,000,000 in the Q1 of this year.
2nd, during Q1, we run research and prototyping and we will now take a look at the financial results. These expenses amounted to over PLN9 1,000,000 and represent approximately half of the increase of the G and A Thirdly, the general and administrative costs include PLN 9,400,000 of non monetary costs related to our employee stock option This is $5,500,000 more than the respective costs of the previous program booked in Q1 of 2020. And last but not least, the increase in all our operating costs also reflects the growth of the back office marketing, communication and sales teams over the last Year on year, the headcount for this part of the team grew approximately by 1.6. All in all, deducting financial expenses and income taxes, our net profit for the period amounted to PLN 32,500,000, which is proportionally less than usual, mainly due to the time limited research and servicing works booked directly into our costs of this quarter. Let's now move to the next page, Our fixed assets grew by SEK 144,000,000 reaching over SEK 900,000,000.
This growth comes mostly from the increase of financial assets as a result of foreign T. Bonds acquisition, which was made to diversify I and double take some of our financial reserves. The PLN64 million growth of other fixed assets, visible in the line below, It comes mostly from the recalculation of our deferred income taxes by nearly PLN 60,000,000. But the most notable changes occurred among the working assets. The our receivables increased by SEK 1,000,000,000 decreased by PLN1.91 billion, leading to an increase of cash and bank deposits by PLN823 million And SEK 114,000,000 increase of domestic teen months included in the other financial assets line.
All in all, over the 1st 3 months of 2021, the total value of our cash bank deposits and T bonds increased by PLN 1,440,000,000, reaching a Total of PLN 1,950,000,000. Moving to the equity and liability side. The sales provisions we set As long term, at the end of 2020, we're classified to short term provisions, hence the change from PLN 145 million to 0 for this position as of the end of March 2021. At the same time, the total value of provisions among the short term liabilities increased by PLN 40,000,000. Together with the decrease of long term provisions, this made the total balance of provisions to decrease by PLN 105,000,000.
Over the Q1 of 2021, we also reported an increase in our liabilities. This is mainly caused by the growth of our current income tax Liabilities by PLN66 million. This growth was offset in big part by the deferred income tax asset decrease I mentioned a minute ago. Let's move to the next page. Each time I comment on results, I typically present a chart with our expenditures and development projects.
This time, I decided to slightly modify it to visualize the allocation of our developers' efforts in recent quarters and explain how respective Costs were booked and influenced our P and L and balance sheet. The blue part represents our expenditures and development projects. It's a book perspective. This is the quarterly increase in the capitalized volume. Why was it so high in 2020 Q4?
Mainly due to the final phase of development of Cyberpunk related costs, including provisions for developers' bonuses. This year, the capitalized amount was smaller as many of the developers were moved to other tasks. The yellow part to represent costs of servicing already released games. Till the release of Cyberpunk on the 10th December, these costs were mainly related to GWENT. After the release of Cyberpunk, a big part of the team was moved to updating the game, which translated into the increase for Q4 and especially Q1 2021.
As you can see, we have initiated this cost last year, but the increase clearly occurred this year. Both the yellow and the green parts, which are servicing and research expenses, were booked directly into our profit and loss calculation. Please note that the Spokko Company, which works full force on the coming The Witcher Monster's Lagerie is not included in the presented consolidated results yet. Let's move to the next page, simplified cash flow presentation. Putting aside the bookkeeping qualification of incomes, costs and This quarter, we reported record high positive cash flows for the group.
Remaining revenues from the premier of Cyberpunk were paid into the company, which resulted The decrease of receivables. All in all, our cash bank deposits and T bonds value increased by PLN1.40 billion and reached an unprecedented total of PLN 1,950,000,000. And this smoothly readjust to the next page. Based on the strong financial position And taking into consideration the PLN 455 1,000,000 excess of short term liabilities over receivables as At the end of Q1, the Board of Sotheby Prague proposed the general meeting to pay out a dividend in the total amount of nearly PLY 504,000,000, which translates into PLY 504,000,000 The dividend day is set for tomorrow and the dividend is to be paid out on the 8th June. Thank you.
That's all from my side. Now we can move to the Q and A section.
Thank you. And we start with our first question from Nick Dempsey, Barclays. Your line is open. Please go ahead.
Yes. Good evening, guys. Can you hear me okay?
Yes, we can. Hello.
So two questions, please. First of all, I would love to get an understanding of the Cyberpunk unit sales in the quarter. And secondly, I wonder if you could update us on your conversations with Sony about what it would take to get you back on the PlayStation Store. Clearly, you've shown us some metrics have been improving there, but does Sony have a particular set of metrics in their mind, which would then allow you to go back on the store or how have those conversations progressed? Thank you.
Okay. So I'll start with the first question. We usually communicate on unit sales where we reach certain milestones, rounds, numbers that we can announce. And this quarter, as usual, we presented revenues divided into each segment. And within Telekarekoye, we also guided How much of the revenue was dedicated to Cyberbank?
So close to 60% of product sales revenues came from Cyberbank. And as I mentioned, most of the sales came from PC Digital Distribution Channels.
I was just going to follow-up there. Maybe if I could just follow-up on that answer. And If we take sort of the average sort of digital revenue per unit to be somewhere in the 135, 140 kind of slotty sort of range. When I look at what I use for Ubisoft, etcetera, That would get me to 800,000 ish kind of sort of range of Cyberpunk units sold. Am I at all in the right ballpark?
I'm afraid this kind of calculation is not to be applied on Sotepriek and especially for a very special quarter like the Q1 after the release. Please note that the revenues we Present are the revenues we achieved from our distributors. And in the case of Ubisoft, the situation is different. Ubisoft directly distributes many And have direct access to retail channels, which we do not. So our sales are based on wholesale cooperation with partners that then supply Retail stores and therefore the characteristics and the pricing is different.
I'm sorry to come back again, but you did say it was Mostly PC and digital. So I was thinking that, that wholesale partner relationship would be less relevant
To give you some more light on that, When a retail store sells a copy, it probably purchased this copy back last year. So this number of copies was reported to us by distributors last year, and we reported the revenue for this last At the same time last year, we've set certain provisions for potential returns and refunds we will be having with our But all this time during Q1, the retail stores keep selling the game. So there are 2 totally different players. Our cooperation with distributors and the retail stores, which keep selling the game. Therefore, direct comparison of the 2 cannot be made and Especially in such a Q1, first after the release, where distributors still have the stock purchased on release, Where retail stores still have the stock purchase on roofs.
Okay. That's helpful. Sorry, I interrupted
And we take our next question from Matthew Walker, Credit
Sorry, I believe there was a second question, which we didn't get to because there was like ongoing questioning about the units. The second one was about the Sony and the PlayStation in particular set of metrics, how the conversation progresses. So I cannot go deep into the set of So how the conversation progresses, this has to remain at the discretion of PlayStation, of course, ourselves. But yes, there is some sort of metrics. Let's put it like that at a high level.
But again, we're not going We cannot go into the details of where we are with that. But there is a process. We're in the middle of that process, And this conversation is happening. That's as much as we can say. The decision will be announced when it's ready to be announced.
Okay. Thanks, guys.
Thank you.
Our next question is from Matthew Walker, Credit Sir, please go ahead. Your line is open.
Thanks a lot. Good evening. Just a few questions, please. The first is, could you give us the Dual digital percentage of sales in the quarter. Secondly, can you tell us what discounting happened in the quarter And what you're doing for discounting, if anything, in Q2?
And then longer term, could you say, has you're doing the simultaneous game development. Could you tell us when is work likely or has work started already on 2 new games? Or could you tell us when work is likely to start on those gains? Thanks.
So I will take the first one. I assume you mean the digital percent of Cyberpunk sales or Overall, our sales
were in the Q1?
Yes, overall.
So it was Very much digital. I do not have the figure in front of myself that I could reliably give you. But as I mentioned, the retail stores In general, still have the stock they purchased on release and they keep selling it. This means that our distributors Do not ship additional quantities to them. So our revenues do not include any additional sales on them.
What influences our revenues are the digital sales as then the sales are instant and the 14 is instant without the sub distributor in the middle of the process. And most of the sales occurred for PC On all of the available PC platforms, there is obviously the Xbox Digital sales. And since Cyberpunk is non existent on the Sony store We didn't report any revenues, any sales from this one. However, obviously, Witcher 3 was still selling, but For the overall picture, definitely digital was doing most of the revenues for us.
Hi, Michal Novakoskie again. I can take the second one. So when it comes to discounting, there's basically 2 kinds of discounts. 1 is what we call permanent markdown, which Just like a permanent flash of price and the other one is promotional. So within Q1, I am not aware of a permanent markdown.
There's been a bunch of Promotional markdowns happening both in physical and in digital. You have to remember that We are not in direct control of the discounts that are happening in the retail. Of course, there's That remains at the retail discretion. There is, of course, special support funds, sort of like a marketing support For retail, you know, to do those, which is normal for I think, to be honest, in a quarter post launch. This is nothing unusual here.
So that's been happening for For CP, I've seen discounts between 20%, 30% 40% depending on the occasion, on Country on the territory, there's as many stories as there are retailers around the world. In terms of digital, I've seen discounts of 10% 20% on the PC storefronts. When it comes to planned discounting policy for Q2, we, of course, have certain assumptions and plans So what's going to be happening there? But we are definitely not in a position to reveal that. I've never actually seen anybody We deal ahead that kind of plans.
So that's it.
And I'll take the third one, Ivan Petchinsky. So as we announced during the strategy update, we are planning to start AAA Parallel AAA Development from 2022. But of course and this year is a year of transformation. There is Much more work on Cyberpunk. Of course, I'm a big part of the team still working on Cyberpunk.
But definitely, there are teams preparing future unannounced projects. I would say that onethree of the Cyberpunk team or AAA content team is working on on announced teams, but it's not like we are in parallel AAA development. It's rather Preparation for future works, not development per se.
Okay. Thanks a lot.
Thank you.
Our next question is from Kean Rumph, Jefferies. Please go ahead. Your line is
Good morning, everybody. Good evening, sorry. So three questions, if I may. Perhaps if you could just enlarge a little bit on that point about staff. Your original plan had been The Cyberpunk team was kind of divided into 3, 3rd moving on to a new project, A third working on DLCs and maybe a third on the mobile game, I think.
But anyway, tell me perhaps sort of how things divide up at the moment. Secondly, regarding Xbox, it's on sale, but when you click through, there is a warning saying there may be issues, Pending patches and so on. Is there a similar kind of discussion going on with Xbox? And finally, In terms of next gen versions of the game and hopefully, therefore, a relaunch Okay. Is there a sort of any indication when in H2 you might plan to do that?
I would imagine at least after July August as those are holiday periods,
Hi, Ken. I'll start with the first one. Adam, on this end. So nearly half Of Cyberpunk News still continue working on Cyberpunk Itself And, Cyberpunk's Next Gen Edition. Then we have teams working on unannounced Still preparing works on to unannounced AAA lines, I would say.
I'm not very precise because we don't want to preannounce anything which is not announced yet. So I'm not referring directly to the question, But there are teams, smaller teams in transformation preparing works on future content. But I can just repeat what I've already said that Next year is the year when we want to split teams and to work full scale. Of course, depending On the project in the different phases on future AAA content.
Understood.
Regarding the second question, it's Michal Novakoskie again. The question was about the Xbox and the warning language on the product page. On the storefront, yes, there is a similar conversation happening with the Xbox team as well As the PlayStation 1.
Okay.
All right.
And the 3rd, Adam, again, sorry, we can't comment on it. I mean, definitely, after our promise to Any communication closer to leases, we don't want to say anything more about Magdalena. This is more than second half of the year deliberately. Of course, we have the date Internally, but it's too early to say anything about this.
Okay. I thought I'd ask. Thank you very much.
Our next question is from Vladimir Bespalov, VTB Capital. Your line is open. Please go ahead.
Hello. Thank you for taking my question. My first question will be on the trends in the Q2. The Q1 was very special. The major patch was released only by the end of the quarter.
Do you see any improvement in the sales trend At least on PCs for Cyberpunk in the Q2. And on the cost side again, with major fixing taking place in the Q1, Do you see any improvement in terms of profitability or lower costs, And which you incur in the Q2, what should we expect from this perspective? And I also have a question on Your capital allocation apart from dividends, how are you going to spend the cash pile that you have after you received a lot of cash in the Q1? And maybe some update on the M and A pipeline? Thank you.
So I'll take the first and the second question.
We are
not guiding future results. So I cannot give you too much into precise information. But definitely, each year, The most important part of the Q2 is the June and all the summer promos, and this is still in front of us. But looking broader, the situation, as I mentioned on the annual conference regarding the Q1 results, The general situation as long as we are not back on the Sony store has not changed. We One of the leading marketplaces for us is not available, and we generate most of the sales on the PC digital Until the moment it changes, we will have more difficult Then we would love to have.
So that's the general comment on what may happen or what is happening over the Q2. As far as the profitability is concerned, the Size of the team involved in updating Cyberpunk is slowly decreasing. And also the research costs So I mentioned in my part of the presentation should also be smaller in the second quarter. This is a natural process and that's what we expect. But the Total profitability of the company will depend on the proportion of sales less the Fixed depreciation of Cyberpunk and all of our operating expenses, and that's something we will broadly discuss on our H1 results.
As far as the capital allocation, the significant part Of the capital we earned over last year will be paid via dividends. Dan, as I mentioned, we still have some of the liabilities in our balance sheet. There is a significant excess of Liability of liabilities over receivables and this is also to be included in our Cash flow funds, actually part of that was already paid as the team bonuses, which we covered in May in the second quarter. And the rest is supposed to be capped at the company to finance our growth, future projects, their marketing plans And potentially some of the M and A transactions,
Which is actually the 4th question, Adam, on the sand. In terms of M and A, if There will be anything to announce, we'll announce it. I mean, that's the situation. Now we are finalizing The deal with our Vancouver studio and with And if any further plans like this or of this kind Thank you.
Our next question is from Matti Leutonen from Bernstein. Your line is open. Please go ahead.
Hello, good afternoon. The first question, thank you for giving us the breakdown on the product research, development and service costs. Just based on this and your earlier comments, just to clarify, so there hasn't been any material Development costs capitalized for any new project on anything resembling Cyberpunk's Scale before Q1 this year? And the second question is on Spokko. So do you have any Color to give on the sort of what the soft launch process has looked like?
What types of countries have you done? Has it been Russia, Australia for monetization? And any color to give in terms of what the feedback so far has been?
So I'll take the first one. Yes, the direct development Stenditures during Q1 were smaller as part of the team worked on updating Cyberpunk and another part of the team was also involved The research, so early works for subsequent projects that we have in the pipeline. Once we finish the research phase, Which should come shortly. This will be qualified as development expenditures and will be capitalized.
I'll take the second one, Adam. So What we are doing, we are soft launching it and tweaking not only the game itself, but some retention and monetization mechanism along with testing the game. And we are closer and closer to the final result. And we are happy with what we can see. But of course, before the game is launched in a full scale, We don't want to announce any internal data regarding How soft launches were progressing?
But the extensive phase of soft launches enables us to tweak many, many things, and we learned a lot. And this project is definitely driven by design, of course, on as a first priority, but by statistics and data as well.
Thank you. Very helpful.
Thank you.
Our next question is from Ken Romp, Jefferies. Please go ahead. Your line is open.
Hello. I'm back again. Firstly, on the R and D that's being expensed on early stage work, Is that a new thing? Or I simply don't remember this from kind of back in the day when, I guess, you were working on Cyberpunk before Witcher 3 came out. So is this kind of a new approach or just something perhaps that wasn't significant or I don't remember from the past?
Secondly, can I ask just about how expansion work is Expensed or capitalized? So expansions to Cyberpunk, which you've said, obviously, that you plan expansions in the future. And finally, on the discussions with Sony and with Xbox, Firstly, does it potentially involve the next gen version? Or is it simply a discussion about the Old last gen, we should call it current gen, but the PS4 version. But does it somehow involve kind of also Satisfying them about NextGen.
And that probably you can answer, one I'm not so optimistic about. Is it simply a technical discussion? Or does it involve financial and pricing issues for the game? Thank
I will take the first two questions. As far as I remember, We had the same approach. However, back in the days, it was not significant. And regarding the expansions, I may say that currently they are the expenditures on them are capitalized.
Okay. Thank you.
Sorry. And this is Mikhail Wachowski. And the question about Sony and Xbox again.
And the
question was whether it involves the next gens or only current gens or is it just technical or does it involve financial and pricing Discussion. It's still it's very good and very difficult questions, but all that has to remain, of course, at Question between the parties. If 20 years from now I'm going to be writing memoirs, I'll promise to answer that. But for now, it really has to remain between PlayStation and us. And we'll have announcements to share when they are ready.
And of course, Xbox, the same situation.
Okay. Well, I understand that. Thank you.
Thank you.
Our last question is from Ali Naqvi from HSBC. Please go ahead. Your line is open.
Hi, good evening. I I just had a couple of questions, please. Your expectations for Cyberpunk once it gets back to the PlayStation Store, do they diminish from your previous expectations? Or do you think that you'll have to Invest in marketing to get back to where you had initially on launch. Second question and a bit of a reminder, have you impaired anything on the side Of the government or do you plan to revisit this once when you launch back on the PS Store or if that gets delayed?
And finally, In terms of timing of the downloadable content for Cyberpunk, what's your sort of strategy in terms of how much content that is and sort of pricing? Is it all going free or paid for. Thank you.
Hi. This is Miano with Cusick. Could you actually repeat I didn't fully understand, to be honest, the Sony part, the marketing and sorry, could you repeat that?
So when the when Cyberpunk launches back on the PlayStation Store, what are your expectations for sales? Do they return back to what you had Previously or would you have to invest in marketing to get back to that level?
Okay. I mean, so I don't even think we're looking This way, I mean, of course, I mean, it's going to be improvement on sales when we're back in the PlayStation because the sales are currently None, because we're just not in the store. So when we get back to I mean, I'm assuming there will be some sales, of course. So that will be a positive information on its own. However, in terms of bringing it back to the previous level, that is a pretty Tough question because the game left the store on 18th December, and we're right now Well, pretty much in June.
It's May 31 right now. So honestly speaking, I mean, it would be unheard of to go back to the level of sales From the month of the launch, 6 months post. I mean, I think that's as much as I should go in the details here. But It would be unrealistic to assume that we're going to go back to the December level of sales with any kind of Marketing, really. When it comes to marketing support of coming back to the PlayStation, I would not really expect when that happens, if that happens And it's announced we would probably run some sort of information campaign that again is available, but that's Pretty much nothing bombastic, so to say.
I'm sorry. And there's the next question there was a next question, tagging of the laudable content to CP. I'm assuming this is about the Expansions, so the bigger ones, expansions, when we were talking expansions, what we meant was something similar to Blood and Wine or Hearts of Stone, so the bigger expansions for The Witcher. So these expansions for Cyberpunk Would be definitely paid, it would not be for free. I hope that helps.
Yes. Thank you. Thank you.
It appears there are no further questions at this time.
Thank you. So now we have a section to answer the questions and asked on chat. So I will read them and then we'll answer. The first two are from Konrad Krasutsky, Bloomberg News. The first, how big is the percentage of employees or programmers still working on the improvement on Cyberpunk?
And the second, And what are you seeing recently on employees' churn? So as I said, on Cyberpunk, there are still around 300 people. And in terms of churn, the year after release is a natural year of higher churn. So we don't see anything unexpected or surprising. That's the only thing I can say.
All right. The next question from Piotr Wopachuk, PikaO BP. We observed significantly increase in employee turnover after paying out of the annual bonuses. I will just answer This question, the next from Mukesh Kosherski, PKO. How many large patches do you plan to release in the next 2, 3 months?
That's tricky because actually our purchase, some are larger, some are smaller. We got we used to Call, smaller one, hotfixes. It wasn't very fortunate because the nature of hotfixes is different, the natural nature. So from now on, any update will be called patch as And if there will be any hotfixes, so fixes needed after the patch is deployed, then we will call them hotfixes. And In terms of number, I don't want to pre announce things which are not announced yet.
We were prepared just to say that the next Not the biggest one, I mean, rather smaller will be launched in the next couple of weeks. It's It's almost ready. But of course, we are working on the future purchase as well. And to add some color on it, the first series of purchase were mostly focused on low level technical areas. Not only, of course, we are fixing glitches and bugs as well, but We're focused on stability, performance and so on.
And because those things were, To our opinion, the most important. And then we'll be more and more into improving things without promising anything, but the course of action will change a bit. So we'll be more focused on pushing the The next Question from Albert Trokitsky, long term. What is the percentage of sales of CP277 through GOG dotcom? Sorry, We can't share it.
Actually, we never shared this kind of internal information, so we can't add any color on The next from Michal Wojtykovski, Popema Securities. Hello. Could you comment on number of workers of CVV and your targets for employment for the end of 2021 2022. We have targets, but they are not reviewed. So we are of course, we are in intensive higher processes, But we don't share any numbers what are our targets.
I can just highlight that one of the areas We want definitely to grow with Vancouver as we have access to the wide Full of talent there. But of course, we'll keep hiring in Poland, bringing people to Poland from around the globe as well. And that was all on our chat. Thank you very much and see you on half
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