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 Kiciński. Please go ahead, sir.
Thank you. Good evening. Hello. Welcome to the teleconference dedicated to CD Projekt Group results for the first quarter of 2021. My name is Adam Kiciński, and I will run this call together with Piotr Nielubowicz and Michał Nowakowski. The webcast of the presentation, along with the audio feed, is also streamed on our corporate website at cdprojekt.com and our IR YouTube channel. Let's get started. Please jump to slide three. Improving Cyberpunk 2077 remains our top priority. Since the beginning of this year, we've released five 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 three DLCs providing small bonus content for gamers as well as an updated next-gen edition of the game, which is scheduled for the second half of the year.
On slide number four, you can see how our efforts improved Cyberpunk's 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 of 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 franchise. On slide six, you can see our plans related to The Witcher universe for this year. Spokko, the youngest member of the CD Projekt 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 seven. Piotr, the floor is yours.
Thank you, Adam. Let's start with our P&L statement. This year's first quarter results are presented together with our 2020 Q1, which by then was the best first quarter we ever had. Last year, due to the pandemic, the release of The Witcher series and that of The Witcher 3 on Nintendo Switch, Q1 2020 revenue-wise was nearly two and a half times better than the first quarter of 2019. This year, these growth drivers appear to be gone. In the first quarter of 2021, Cyberpunk was our leading IP, which generated nearly 60% of sales of products at CD Projekt RED. It's worth mentioning that due to the non-existence of Cyberpunk on the Sony digital store, which is potentially the second-biggest marketplace for us, and settlements of sales provisions we set in Q4, our Cyberpunk revenues at CD Projekt RED have mainly been driven by PC digital channels.
The second source of revenue comes from goods and materials fueled by the GOG.com segment, where the segment itself enjoyed a 12% increase quarter-over-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, where we included PLN 17 million depreciation of Cyberpunk 2077. Our gross profit from sales reached PLN 135 million, PLN 10 million less than a year ago, despite the PLN 17 million Cyberpunk depreciation. Our operating costs increased, driven by four 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&L into the selling cost line.
Total servicing costs dedicated to Cyberpunk added to the much smaller Gwent live operation service costs and altogether amounted to PLN 30 million in the first quarter of this year. Second, during the first quarter, we ran research and prototyping works for our subsequent projects. Such expenses need to be booked directly into P&L into the general and administrative costs. These expenses amounted to over PLN 9 million and represent approximately half of the increase of the G&A position. Thirdly, the general and administrative costs include PLN 9.4 million of non-monetary costs related to our employee stock option plan. This is PLN 5.5 million more than the respective costs of the previous program booked in the first quarter of 2020. 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.
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 32.5 million 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 consolidated balance sheet. Our fixed assets grew by PLN 144 million, reaching over PLN 900 million. This growth comes mostly from the increase of financial assets as a result of foreign T-bonds acquisition, which was made to diversify and allocate some of our financial reserves. The PLN 64 million growth of other fixed assets, visible in the line below, comes mostly from the recalculation of our deferred income taxes by nearly PLN 60 million. The most notable changes occurred among the working assets.
Our receivables decreased by PLN 1,091 billion, leading to an increase of cash and bank deposits by PLN 823 million, and PLN 114 million increase on domestic T-bonds included in the other financial assets line. All in all, over the first three months of 2021, the total value of our cash, bank deposits, and T-bonds increased by PLN 1,014 billion, reaching a total of PLN 1,915 billion. Moving to the equity and liability side. The sales provisions we set as long-term at the end of 2020 were reclassified to short-term provisions, hence the change from PLN 145 million to zero 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 million.
Together with the decrease of long-term provisions, this made the total balance of provisions to decrease by PLN 105 million. Over the first quarter of 2021, we also reported an increase in our liabilities. This is mainly caused by the growth of our current income tax liabilities by PLN 66 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&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 value.
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 represents costs of servicing already released games. Till the release of Cyberpunk on the 10th of 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. The green part represents the so-called research costs, initial costs for prototyping of new projects. As you can see, we had 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 Slayer game, 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 expenses, this quarter, we reported record-high positive cash flows for the group. Remaining revenues from the premiere of Cyberpunk were paid into the company, which resulted in the decrease of receivables. All in all, our cash bank deposits and T-bonds value increased by PLN 1. 40 billion and reached an unprecedented total of PLN 1. 915 billion. This smoothly leads us to the next page.
Based on the strong financial position and taking into consideration the PLN 455 million excess of short-term liabilities over receivables as of the end of Q1, the board of CD Projekt proposed the general meeting to pay out a dividend in the total amount of nearly PLN 504 million, which translates into PLN 5 per share. The dividend day is set for tomorrow, and the dividend is to be paid out on the 8th of June. Thank you. That's all from my side. Now we can move to the Q&A section.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. We start with our first question from Nick Dempsey, Barclays. Your line is open. Please go ahead.
Yeah. Good evening, guys. Can you hear me okay?
Yes, we can. Hello.
Two questions, please. First of all, would love to get an understanding of the Cyberpunk unit sales in the quarter. Secondly, 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? How have those conversations progressed? Thank you.
Okay. I'll start with the first question. We usually communicate on unit sales where we hit certain milestones, round numbers that we can announce. This quarter, as usual, we presented revenues divided into each segment. Within CD Projekt, we also guided how much of the revenue was dedicated to Cyberpunk. Close to 60% of product sales revenues came from Cyberpunk. As I mentioned, most of the sales came from PC digital distribution channels.
Piotr, just listening up here. Sorry. I am just going to follow up there, folks. Maybe if I could just follow up on that answer. If we take sort of the average digital revenue per unit to be somewhere in the PLN 135, PLN 140 kind of sloppy range, when I look at what I use for Ubisoft, et cetera, that would get me to 800,000-ish kind 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 CD Projekt, and especially for a very special quarter like the first quarter after the release. Please note that the revenues we present are the revenues we achieve from our distributors. In case of Ubisoft, the situation is different. Ubisoft directly distributes many of their games and have direct access to retail channels, which we do not. Our sales are based on wholesale cooperation with partners that then supply the 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. I was thinking that that wholesale partner relationship would be less relevant to the average revenue per unit in this particular quarter.
To give you some more light on that, when a retail store sells a copy, it probably purchases this copy back last year. This number of copies was reported to us by distributors last year, and we reported the revenue for this last year. At the same time last year, we set certain provisions for potential returns and refunds we will be having with our distributors. All this time during Q1, the retail stores keep selling the game. There are two totally different layers. Our cooperation with distributors and the retail stores, which keep selling the game. Therefore, direct comparison of the two cannot be made, and especially in such a first quarter, first after the release, where distributors still have the stock purchase on release. Where retail stores still have the stock purchase on release.
Okay. That's helpful. Sorry, I interrupted you.
We take our next question from Matthew Walker, Credit [crosstalk].
Sorry, I believe there was a second question, which we didn't get to because there was ongoing questioning about the units. The second one was about the Sony and the PlayStation in particular set of metrics, how the conversation progresses. I kind of go deep into the set of metrics or how the conversation progresses. This has to remain at the discretion of PlayStation, of course, ourselves. Yes, there is some set of metrics, let's put it like that at a high level. Again, we cannot go into the details of where we are with that. 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 Suisse. 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 actual 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? Longer term, you're doing the simultaneous game development. Could you tell us when is work likely or has work started already on two new games? Could you tell us when work is likely to start on those games? Thanks.
I will take the first one. I assume you mean the digital percent of Cyberpunk sales or overall our sales within the first quarter?
I will.
It was very much digital. I do not have the figure in front of myself that I could reliably give you. 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 that. What influences our revenues are the digital sales as then the sales are instant, and the reporting is instant without the sub-distributor in the middle of the process.
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 nonexistent on the Sony storefront, we didn't report any revenues, any sales from this one. However, obviously, Witcher 3 was still selling. For the overall picture, definitely digital was doing most of the revenues for us.
Hi, Michał Nowakowski again, I can take the second one. When it comes to discounting, there's basically two kinds of discounts. One is what we call permanent markdown, which is like a permanent slash of price, and the other one is promotional. 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 because that remains at the retail discretion. There's of course special support funds, sort of like a marketing support fund for retail to do those, which is normal for any game to be honest, in a quarter post-launch, this is nothing unusual here. That's been happening for CP.
I've seen discounts between 20%, 30%, and 40%, depending on the occasion, on the 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% and 20% on the PC storefronts. When it comes to planned discounting policy for Q2, we of course have certain assumptions and plans of what's going to be happening there. We are definitely not in a position to reveal that. I've never actually seen anybody reveal ahead that kind of plans. That's it.
I'll take the third one. Adam Kiciński. As we announced during the strategy update, we are planning to start AAA development from 2022. Of course, this year is a year of transformation. There's much more work on Cyberpunk, of course, a big part of the team is still working on Cyberpunk, but definitely, there are teams preparing future unannounced projects. I would say that one third of the Cyberpunk team or AAA content team is working on announced things, 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 Ken Rumph, Jefferies. Please go ahead. Your line is open.
Good morning, everybody. Good evening, sorry. Three questions, if I may. Perhaps if you could just enlarge a little bit on that point about staff. Your original plan had been that the Cyberpunk team would kind of divide into three, a third moving on to a new project, a third working on DLCs, and maybe a third on the mobile game, I think. 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? Finally, in terms of next-gen versions of the game, and hopefully therefore a relaunch of the whole game, is there sort of any indication when in H2 you might plan to do that? I would imagine at least after July and August as those are holiday periods, but please guide me if that's wrong. Thank you.
Hi again. I'll start with the first one, Adam, I understand. Nearly half of Cyberpunk team still continue working on Cyberpunk itself and Cyberpunk's next-gen edition. We have teams working on unannounced things still, preparing works on to unannounced AAA lines, I would say. I'm not very precise because we don't want to pre-announce anything which is not announced yet. I'm not referring directly to the question, but there are smaller teams in transformation, preparing works on future content. 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.
Okay, understood.
Right. Regarding the second question, it's Michał Nowakowski 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 one.
Okay.
All right.
The third, Adam again, sorry, we can't comment on it. I mean definitely after our promise to start any communication closer to releases, we don't want to say anything more about next generation, more than second half of the year deliberately. Of course, we have the date internally, 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 second quarter. The first quarter 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 second quarter? On the cost side again, with the major fixing taking place in the first quarter, do you see any improvement in terms of profitability or lower costs which you incur in the second quarter? What should we expect from this perspective? 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 first quarter? Maybe some update on the M&A pipeline. Thank you.
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. Definitely each year, the most important part of the second quarter is the June and all the summer promos, and this is still in front of us. Looking broader at the situation, as I mentioned on the annual conference regarding the first quarter results, the general situation as long as we are not back on the PlayStation Store has not changed. One of the leading marketplaces for us is not available, and we generate most of the sales on the PC digital channels. Until the moment it changes, we will have more difficult situation than we would love to have. That's the general comment on what may happen or what is happening over the second quarter.
As far as the profitability is concerned, the size of the team involved in updating Cyberpunk is slowly decreasing, and also the research costs 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. 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. That's something we will gladly 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.
As I mentioned, we still have some of the liabilities. In our balance sheet there is a significant excess of liabilities over receivables, and this is also to be included in our cash flow plans. Actually, part of that was already paid as the team bonuses, which we covered in May, in the second quarter. The rest is supposed to be kept at the company to finance our growth, future projects, their marketing plans, and potentially some of the M&A transactions.
The fourth question, Adam, on this end. In terms of M&A, if there will be anything to announce, we'll announce it. That's the situation. Now we are finalizing the deal with our Vancouver studio and with Vancouver team. If any further plans like this or of this kind will appear, we'll inform the market.
Thank you very much.
Thank you.
Our next question is from Matti Littunen 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, there hasn't been any material development cost capitalized for any new project on anything resembling Cyberpunk's scale, before Q1 this year. The second question is on Spokko. 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? It's been Russia, Australia for monetization, and any color to give in terms of what the feedback so far has been.
I'll take the first one. Yes, the direct development expenditures during Q1 were smaller as part of the team worked on updating Cyberpunk, and another part of the team was also involved in 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. What we are doing, we are soft launching and tweaking not only the game itself but some retention and monetization mechanism along with testing the game. We are closer and closer to the final result. We are happy with what we can see. Of course, before the game is launched in a full scale, we don't want to announce any internal data regarding how the soft launches were progressing. The extensive phase of soft launches enables us to tweak many things, and we learned a lot. This project is definitely driven by design, of course, as a first priority, but by statistics and data as well.
Thank you. Very helpful.
Thank you.
Our next question is from Ken Rumph, Jefferies. Please go ahead. Your line is open.
Hello. I'm back again. Firstly, on the R&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? 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? Expansions to Cyberpunk, which you've said obviously that you plan expansions, in the future.
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? Does it somehow involve kind of also satisfying them about next-gen? 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 you.
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. Regarding the expansions, I may say that, currently the expenditures on them are capitalized.
Okay. Thank you.
Sorry. This is Michał Nowakowski, and the question about Sony and Xbox again. 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? All that has to remain, of course, at discretion between the parties. If 20 years from now I'm going to be writing memoirs, I'll promise to answer that. For now, it really has to remain between PlayStation and us, and we'll have announcements to share when they are ready. Of course, Xbox, the same situation.
Okay. 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 just had a couple 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. How do you impair anything on the Cyberpunk development? Or do you plan to revisit this once you launch back on the PS Store, or if that gets delayed? Finally, in terms of timing of the downloadable content to Cyberpunk, what's your sort of strategy in terms of how much content that is and in sort of pricing? Is it all going to be free or paid for? Thank you.
Hi, this is Michał. Could you actually repeat? I didn't fully understand, to be honest, the marketing and s orry. Could you repeat that?
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?
Oh, okay. I don't even think we're looking at it this way. Of course, it's going to be improvement of sales when we're back on the PlayStation because the sales are currently none, because we're just not in the store. When we get back there, I'm assuming there will be some sales, of course. 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 the 18th of December. We're right now, well, pretty much in June. It's May 31st right now. Honestly speaking, it would be unheard of to go back to the level of sales from the month of the launch six months post.
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 a game is available, but that's pretty much it. Nothing bombastic, so to say. Oh, I'm sorry.
The next question, timing of downloadable content to CP. I'm assuming this is about the expansions, so the sort of bigger ones. When we were talking expansions, what we meant was something similar to Blood and Wine or Hearts of Stone. The bigger expansions for The Witcher. These expansions for Cyberpunk would be definitely paid. They would not be for free. I hope that helps.
Yeah. Thank you.
Thank you.
Appears there are no further questions at this time.
Thank you. Now we have a section to answer the questions asked on chat. I will read them, and then we'll answer. The first two are from Konrad Krasuski, Bloomberg News. The first, how big is the percentage of employees or programmers still working on the improvement of Cyberpunk? The second, what are you seeing recently on employees churn? As I said, on Cyberpunk, there are still around 300 people. In terms of churn, the year after release is a natural year of higher churn. We don't see anything unexpected or surprising. That's the only thing I can say. All right. The next question from Piotr Łopaciuk, PKO BP. We observed significant increase in employee turnover after paying out of the annual bonuses. Oh, we've just answered this question. The next from Łukasz Kosiałek, PKO BP.
How many large patches do you plan to release in the next two, three months? That's tricky because actually our patches, some are larger, some are smaller. We used to call smaller ones hotfixes. It wasn't very fortunate because the nature of hotfixes is different, the natural nature. From now on, any update will be called patch. If there will be any hotfixes, so fixes needed after the patch is deployed, then we'll call them hotfixes. 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 patch, not the biggest one, rather smaller, will be launched in the next couple of weeks. It's almost ready. Of course, we are working on the future patches as well.
To add some color in it, the first series of patches 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. Because those things were, to our opinion, the most important. Then we'll be more and more into improving things, without promising anything, but the course of action will change a bit. We'll be more focused on pushing the perceived quality further. The next question from Albert Rokicki, Longterm. What is the percentage of sales of CP 2077 through GOG.com? Sorry, we can't share it. Actually, we never shared this kind of internal information, so we can't add any color on it. The next from Michał Wojciechowski, PKO BP Securities.
Hello, could you comment on number of workers of CD Projekt and your targets for employment for the end of 2021 and 2022? We have targets, but they are not revealed. Of course, we are in intensive hire processes. We don't share any numbers what are our targets. I can just highlight that one of the areas we want definitely to grow is Vancouver, as we have access to the wide pool of talent there. Of course, we'll keep hiring in Poland, bringing people to Poland from around the globe as well. That was all on our chat. Thank you very much, and see you on first half results in roughly three months. Bye-bye.
This concludes today's call. Thank you for your participation. You may now disconnect.