Good day, and welcome to the CD PROJEKT Q3 2023 earnings webcast. My name is Kevin, and I will be your coordinator for today's event. Please note, this conference is being recorded, and for the duration of the call, your lines will be on listen only. However, you will have the opportunity to ask questions at the end of the call. For those on the phone lines, this can be done by pressing star one on your telephone keypad to register your question. For those on the webcast, you may type your questions in through the questions button in the toolbar at the bottom of your screen. I would now like to hand the call over to Adam Kiciński, CEO.
Thank you very much. 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 2023. I'll be running the presentation together with Piotr Nielubowicz. Michał Nowakowski will be joining us for the Q&A session after the presentation. The past quarter was marked by the launch of the expansion for Cyberpunk 2077: Phantom Liberty. So before discussing earnings, let me take a moment to make a quick reminder and update of the basic facts related to this release. We have crossed another milestone. Sales of the expansion have already exceeded 4.3 million copies, so the estimated attachment ratio is 20%, which I believe is a great result. Briefly about the player's score. Already on launch, Phantom Liberty's reception was very enthusiastic.
The score on Steam for the last 30 days hit 92%. It's worth mentioning that the base game has reached the same score of 92% of recent positive reviews. Indeed, thanks to the votes of gamers around the world, Phantom Liberty was awarded at the Golden Joystick Gala. It won in two categories: Best Game Expansion and Best Game Trailer. What's more, Cyberpunk got 5 nominations for the Game Awards. Phantom Liberty was nominated for Best, for Best Narrative, Best Performance for the role of Idris Elba as Solomon Reed, and yesterday, also for the Players' Voice, which is a 100% community-voted award. Cyberpunk 2077, in turn, has been recognized and nominated in Best Community Support and Best Ongoing Game categories.
This year is packed with the releases of great games, and we are proud to be among the nominees and look forward to the announcement of winners on December 7th. In just one week, we'll be releasing Cyberpunk 2077: Ultimate Edition for Xbox Series X and S, PlayStation 5, and PC, containing both the base game and the expansion. It will be launched digitally on December 5th. The physical version will also be available in selected markets through local distributors. Now, let me go to the current developers' engagement. Firstly, we've decided to present, for the time being, all Cyberpunk developers as one group. They have been engaged in work on the base game, the Phantom Liberty expansion, and the Ultimate Edition. Also, some of those in transfers are included in this group.
That's why it consisted of 220 people at the end of October. This figure will continue to decrease in further months. This is partially connected to the organizational changes, including the transfers to other projects, such as Polaris. Speaking of Polaris, the team is steadily growing, having reached almost 330 developers at the end of last month. It's expected to grow to over 400 by mid-next year. All right, let's move on to the financials. Piotr, the floor is yours.
Thank you, Adam. Let's go directly into our consolidated profit and loss account on slide 10. No doubt, the launch of Phantom Liberty was the highlight of the third quarter of this year. But as you may remember, the comparative period in 2022 was also very rewarding, marked by the release of Cyberpunk: Edgerunners anime and Cyberpunk Edgerunners update. This year, in Q3, our consolidated sales revenue reached PLN 443 million, which is 80% above the revenues of the strong comparative period. Our cost of sales increased as well, primarily driven by initial amortization of Phantom Liberty, but also by accelerated amortization of the base edition of Cyberpunk. I will come back to this in a moment.
Still on this line item, having evaluated the market situation and our publishing plans, among the costs of products and services sold, we also included PLN 13 million in provisions associated with distribution costs of the initial print of the Cyberpunk 2077 box edition. Moving on to operating costs, our selling expenses increased by PLN 21 - 66 million. This was mainly driven by nearly PLN 40 million dedicated to the Phantom Liberty marketing and promotion campaign in Q3 2023 only. As regards administrative expenses, their increase cannot be attributed to a single driver. During the reported period, among others, we noted a natural increase in provisions for results-related bonuses, growth of base remunerations of our G&A teams, increased expenses for research on new products and technologies, as well as increased costs related to the introduction of our new incentive programs, which replaced the previous program.
All in all, during the third quarter of 2023, our total operating costs increased by 64%. Another supportive driver for the P&L is visible in the financial operations category. The reported surplus at PLN 47 million came from the usual drivers, such as FX gains and interests from deposits over T-bonds, but also from bookings related to the merger of CD PROJEKT with Spokko. Our merger with Spokko was registered by the court in this Q3 and resulted in the following bookings on CD PROJEKT side. We included Spokko's current year costs and revenues in CD PROJEKT's 2023 profit and loss statement. This decreased our results for this year by approximately PLN 3 million. Spokko retained earnings decreased our equity in the retained earnings position as if Spokko had been part of CD PROJEKT in the past.
Following the merger, we also included Spokko's assets and liabilities among CD PROJEKT assets and liabilities as of the end of September 2023. Of course, in this process of merging Spokko's financial data into CD PROJEKT books, all transactions between the two entities were eliminated. And therefore, as we recorded Spokko's assets and liabilities, as well as current and historic negative results in our books, we also reversed the historic write-down of Spokko shares in the amount of PLN 27 million, which is part of the discussed financial income line item. Moving further, our income tax for the period consisted of three components: current local income tax, changes in deferred tax, and withholding tax paid abroad. As regards the withholding tax, in this reporting period, we've decided to change our approach to when it is recognized in our P&L statement.
From now on, each quarter, we will be estimating and including in this line item the amount of withholding tax related to current sales that does not qualify for recovery from our local tax settlements. Historically, this process was completed upon receipt of withholding tax payment confirmations from our licensing partners, which occurred in the following financial year. The amount for the first three quarters of this year that we've recognized in Q3, according to the new formula, reached 8.3 million PLN. All in all, our net profit for the third quarter of 2023 amounted to 203 million PLN, over two times more than what we've achieved in the very solid comparative period. Net profitability of the CD PROJEKT RED segment exceeded 50%, while for GOG, this factor reached nearly 10%, a very solid result for a distribution business.
As mentioned a minute ago, on the next slide number 11, I'd like to present in more detail the depreciation scheme of expenditures on the Cyberpunk 2077 base game and Phantom Liberty expansion. But first, let me guide you through what exactly the amount that's going to be depreciated consists of. PLN 178 million represents the sum of expenditures on development of Cyberpunk 2077 base game and its next-gen update that have not yet been amortized. What I would like to emphasize here is that this amount does not include expenses related to the Update 2.0, as those were booked historically in selling costs of each period, just like other costs of previous updates. Other expenditures to be amortized are related to the development of Phantom Liberty in the amount of PLN 273 million.
All in all, this totals PLN 451 million. We expect that in the future, most of the sales should come from the announced Cyberpunk 2077 Ultimate Edition, and therefore, we believe that the future monetization of the base game and its expansion are inextricably linked. Thus, for the total amount of PLN 451 million, we've planned joint depreciation in the following order: 20% of the sum, both in Q3 and Q4 this year, then 5% each quarter of 2024, 3.5% in each quarter of 2025, 2.5% in each quarter of 2026, and 2% in each quarter of 2027 and 2028. Let's now move on to the next slide, number 12.
I'm proud to share with you that the last quarter was our best third quarter ever, both in terms of sales revenue and net profit. This is true for the whole group, for CD PROJEKT RED alone, and for GOG.com. The chart speaks for itself. Let's now move on to the next slide, number 13, our consolidated balance sheet. Over the Q3 2023, our balance of expenditures on development projects decreased by PLN 26 million. We kept investing into new projects, mainly Phantom Liberty, Polaris, and Sirius, altogether PLN 71 million. At the same time, an even bigger amount was amortized due to completion and premiere of Phantom Liberty and acceleration of amortization of historic expenditures on Cyberpunk 2077 base game, as we have just discussed a minute ago.
Another noticeable decrease in the non-current assets is visible in the deferred tax assets position, which is to be attributed to the release of Phantom Liberty. At the same time, among current assets, our trade receivables nicely grew by PLN 204 million. This is typical after such an increase of sales related to the expansion premiere, which took place at the very end of the reporting period. Last but not least, the total value of cash deposits and treasury bonds included in the three asset items marked with an asterisk, is summed up under the table, totals PLN 1,015 million as of the end of September 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 14.
Our equity increased, driven mainly by the profits of the current reporting period, up to PLN 2.2 billion. Our total liabilities increased by PLN 51 million as well. This resulted from the growth of liabilities themselves, but also growth of provisions, as discussed on the P&L slide. Now, please move on to the next slide, number 15. So CD PROJEKT RED's expenditures on research, development, and service of released games, presented here quarterly since 2021. As you can see, our development work continues to be in full swing. As Phantom Liberty was launched at the very end of September, some team members already transferred to research works on new projects.
At the same time, costs of servicing released games are in decline, which will probably change in Q4 due to the post-release support granted to the Cyberpunk 2.0 edition, Phantom Liberty, and preparation of the Cyberpunk Ultimate Edition. And finally, now, our simplified cash flow on slide 16. Cash-wise, the 203 million PLN in net book profit for the period was supported by 97 million PLN in depreciation and amortization for the period. At the same time, cash-wise, we invested nearly 65 million PLN in the development of new projects, which decreased our cash reserves. Short-term liabilities and provisions increased by a similar amount of 60 million PLN. And finally, the already mentioned increase in our short-term receivables amounted to 198 million PLN, an amount similar in size to the actual net profit for the third quarter.
Altogether, our financial reserves, kept in cash, bank deposits, and T-bills, increased by PLN 84 million over the reported period. It's a very solid result, taking into consideration that the expansion was launched only 5 days before the end of the quarter, and at the end of which, an amount similar to our net profits for the same time was frozen in the increased receivables, which are to be collected during the upcoming fourth quarter. That's all as far as Q3 2023 results are concerned. I'm looking forward to our annual earnings call, when we will be able to discuss the full results of Phantom Liberty and the Ultimate Edition launch. Now, we can move on to the Q&A session. Thank you.
As a reminder, if you do have a question, please signal by pressing star one on your telephone keypad to register your question. Please, you may type your question in through the questions button in the toolbar at the bottom of your screen. We have a question on the phone from Alexei Philippov of JP Morgan.
So thank you very much for the presentation, and congratulations with the good results. My first question would be on your pricing strategy in the fourth quarter. Can you talk about what's your plans on how do you want to promote the product? So basically, the Cyberpunk or Ultimate Edition. Is it reasonable to assume that your average revenue per unit or average price for Cyberpunk products would be significantly lower in the fourth quarter relative to the third quarter? And a second question is basically on other projects and the pipeline. I understand that you are extensively working on Polaris, but maybe can you talk about what is the status of other projects that you are working right now?
Because, there is like casual Witcher that you are working on, there is the remake of the original Witcher that you are also working on. What is the status of those projects as well? Thank you very much.
Hello, so Piotr Nielubowicz here. So as you know, we are not guiding future revenues, neither we guide future, price changes. But as you may expect, this, fourth quarter will be kind of special, as on one side, we'll have fourth quarter typical promotion actions, like, the recent Black Friday, Black, Black Weekend, Black Week, Cyber Monday, and all this. Some services also will have, holiday promos, closer to the end of the year. But at the same time, we're launching the Ultimate Edition, which, retail price, as you may imagine, will be, will be higher than, what we historically had, for the base edition of Cyberpunk. And also at the very end of the third quarter, the expansion was added. That will also change the mix.
So the situation will be kind of new, and there was no guidance from us so far on what the average price for the Cyberpunk family should be expected, and how the market will set it, taking into consideration all of the actions, promos, and new additions that are supposed to come.
Hello, this is Michał Nowakowski. Second question about the other projects and the current status they're at. We don't comment specific stages of the projects, we never have. But obviously, the most advanced project is Project Polaris, so the next big Witcher game. Other projects are, every project is basically going according to the plan we have for that specific project. So it's true for The Witcher 1 Remake, Canis Majoris, codenamed Project Orion, which is a codename for the next Cyberpunk, and Project Sirius, which is a codename for the Witcher project developed by The Molasses Flood.
But we are not providing specific guidances on the status of the projects, you know, any alphas, betas. We're not really talking about it. The Polaris one is the most advanced one by far.
Very clear. Thank you very much.
Once again, if you have a question, please signal by pressing star one. As there are no further telephone questions... Oh, pardon, we have a question from Itai Kalili of Barclays.
Hi. Hello. Thanks a lot for the presentation. I have four questions. So first, so we understand that people working on Cyberpunk and Phantom Liberty were mostly cost CapEx, in most of the third quarter. So should we expect that they become OpEx from fourth quarter, and OpEx goes higher than the third quarter as a result or not? So this is the first question. And my second question, could you comment on the new team building in the U.S. next year, and overall, how is it going? Like, is it going according to plan or not? And third question, so given that Cyberpunk got boosted, in terms of sales, following Phantom Liberty, are you expecting it to sell at a higher level, than first half 2023 next year or not?
Finally, given recent management changes, should we expect any changes at all in terms of strategy or not? Thanks a lot.
So I'll start with the first question: whether the people that used to work on Phantom Liberty and their remuneration costs will become CapEx or OpEx. Most of them are being moved to the projects that are ongoing, that is Polaris, and some to Canis Majoris or support to Sirius. So in this case, such costs will be capitalized. However, some part of the team will continue working on preparing the Ultimate Edition, patching and updating the Phantom Liberty and the Ultimate Edition itself, and their remuneration or costs related to their operations will go directly into our P&L. And this servicing cost in Q4 should increase versus the costs we recorded in Q3.
Moreover, as it was presented on the slides, with our servicing, development, and research works expenditures, the research works on new products are also on the rise. This, that was the smallest slice, however, most dynamically growing. And you may expect this, this part also to continue growing, and the research costs are booked directly into P&L.
I'll take the second one, Adam Kiciński. Before I answer, just to make some order in our American team. So we have team in Vancouver, 40ish, 40-something, mostly technical, and it's growing. It's there, it's working. We've been with them for the last five years, and this team will be supportive team for Cyberpunk, working directly with Boston. Boston is the place where we have the Molasses Flood working on their own game, Sirius, and probably you are asking about the new Boston part of the RED, which will work with Vancouver. And this part is right at the very beginning of establishing. So the team of 10 leaders from Cyberpunk franchise is moving to Boston.
Some of them already moved, some are moving in December, and this core team will be the foundation for the growth and for building Cyberpunk franchise team in Boston. There are already some hires in place. Game director for Cyberpunk franchise is already there for some time. So we are starting. We are starting, and we are eager to see how fast we will be able to build this team. And we believe that for the first year, we don't need to have like hundreds of people. I mean, definitely for the first phases, even though we are already in conceptual phases of Orion, but for the next year will require, let's say, 40-ish, 50-ish team in Boston. We'll see, we'll see.
It depends on the experience of those who we will hired. But that's generally the pace of growth for the next year.
I'll take the third one, the question about the boost of sales following Phantom Liberty launch. Yes, it is true, we have experienced a boost of sales of the basic game following the Phantom Liberty launch. In fact, whenever we have something significant happening for Cyberpunk, in the past, that was the case as well. Phantom Liberty was, of course, quite a big factor. Now, in terms of what it means to the future sales, we're looking at it from a long-term perspective, so not really at just the next year. But we're very happy that we managed to boost the sales to a higher level of Cyberpunk, because it means longer tail of the sales of the game in the years to come.
What I would point attention to, though, is that typically, you know, the sales of the game outside of promotional activities are slightly going down. So this is probably as far as I would go here, but we're not gonna be obviously guiding any specific revenue goals attached to that.
And I'll take the fourth one, Adam Kiciński again. The short answer is no, not at all. And to add some color to this, we as a board, we are really, really well integrated, and all of us were behind the current strategy. So those transitions that are planned are really well planned, and we all support the future strategy. I will still stay within the board for the next year, and then I hope to join the supervisory board, still being actively supporting as non-executive board member, the future strategy of Cyberpunk.
Thanks a lot for the answers.
Thank you.
We have a follow-up from Alexei Philippov of JP Morgan.
Yes, thank you very much for the opportunity. I want to ask about the seasonality of the last two months in terms of sales of Phantom Liberty. So you reported this 1.3 million incremental sales for the expansion. Is it fair to assume that the majority of those sales were driven by early October, when you had the dates closer to the release of the game, or you had spike during those promotional events like Black Friday, Cyber Monday, et cetera? So in which period, if you can share, you can see the spike in sales? Thank you very much.
Yeah, thank you for this question. As you may imagine, as you properly pointed out, initiation of sales right after the launch of a game allows us to achieve higher numbers, higher sales, for some time after the launch. But also, you were right, expecting that, promotion periods like Black Friday boost sales, both in terms of units, but also, in terms of revenues. Phantom Liberty is not on promotion itself. However, it's offered in a combo package together with the base edition of the game, and therefore, the more of the package customers buy, also, the higher the number of expansions sold is. Therefore, both effects, which you pointed out, actually happens during the reported period.
All right, thank you very much. And just to double-check, what is exactly the difference between Ultimate Edition and the bundles that you're currently selling? What is the difference? What is basically Ultimate Edition? Can you explain again? Thank you.
All details about Ultimate Edition will be revealed soon, but from the very technical perspective, it's a new build. I mean, we prepared a new build that can smoothly run both, but the content is fairly the same. But all details about the final shape of the Ultimate Edition will be revealed soon.
Yeah, and on Ultimate Edition, maybe, yeah, you will reveal the details, but do you expect there is some room for kind of incremental spending on this Ultimate Edition among existing players, or this is targeted for new players?
It's definitely targeted for new players. I mean, those who already bought the base game, the reasonable path is to buy expansion only, and expansion will stay available, of course. I mean, we are not removing expansion from shelves, but for new players, Ultimate Edition is the ultimate version of the game, contains everything and more, and, you know, that's the SKU for the next years to come.
Perfect. Thank you very much.
Once again, it is star one if you'd like to ask a question. As there are no further telephone questions, I'd like to hand the call over for any webcast questions.
So the first question comes from Piotr Poniatowski from mBank. While calculating 20% attachment rate, have you counted only PCs, PS5 and Xbox X player base? Yes, that's correct. While calculating the attachment rate, we've taken into consideration the next-gen consoles and PC computers only. Second question from Sebastian Gawlowski, ISB News: Could you comment on priorities for 2024?
Thanks, Piotr. I can, I can take it, Adam Kiciński. Definitely, Polaris is one of our top priorities, but we have to bear in mind that we are in parallel development for some time, and this is strategic goal to be able to develop AAA games parallelly. So as Polaris is higher priority, building team in North America for Cyberpunk has same priority. We are also working on other projects besides video games within the, let's call it, the, this our franchise flywheel. But we have nothing to announce at the moment, but we've been working on this for quite a while, and we hope that the time will come to share some insights about this.
Of course, The Molasses Flood will continue to develop Project Sirius with iterations. There is Canis Majoris, which is a very special project. We know the game very well because this is Witcher 1, but at the same time, we want to remade it with all new technologies and designs that we are preparing for Polaris. Thank you.
Next question is from Konrad Krasuski, Bloomberg. Could you discuss how recent changes in FX exchange rates, strengthening of złoty versus U.S. dollar, may impact your earnings? Sure. Most of our revenues are done abroad, and most of them are settled in U.S. dollars. So the weaker the foreign currencies versus złoty are, or the stronger the złoty is, the directly lower revenues we report. On the good side, more and more costs that we carry are also carried in U.S. dollars, including the expected opening of the office in Boston, but also the operation of The Molasses Flood. As you may imagine, the revenues are much higher than the costs we have.
However, in costs terms, at least to some degree, we can offset the negative effect on revenues as the costs become kind of cheaper when recalculated into... The cost in U.S. dollars become cheaper when recalculated into Polish złoty.
The next question from Piotr Poniatowski, mBank. What was the number of developers at the end of October 2022? So we have almost 700 developers in our dev studios, which are CD PROJEKT RED, our main, the biggest, and, and The Molasses Flood. And this number does not include any GOG.com developers, so this is purely, RED plus, plus The Molasses Flood, our studios.
Hey, and I have a question here from Konrad Krasuski from Bloomberg. Could you hint how Phantom Liberty and Cyberpunk 2077 have been selling in recent weeks? Can revenues boost recorded in the third quarter, maybe to some extent repeated also in the fourth quarter? So, well, last week was obviously strong, when there was a Black Friday promotional activity, and we're happy with it. And the weeks before it, without the promotional, we're obviously quite happy with as well. In terms of Q4, we're not really giving guidance. I mean, Q4 is obviously typically, you know, quite strong for the industry, but that's as far as we would go. We're not really giving anything more here. And I think I can go to the next question as well.
That's from Sebastian from Jefferies, and the question is: Given that Phantom Liberty is an expansion and its attachment rate is already quite high at 20%, should we expect a steep decline in demand for this revenue line from the first quarter, 2024 onwards, please? Also, may you please discuss some of the ways that you plan to nurture this IP going forward. So, okay, let me put it like this, there's so we're launching, there's one thing, one thing is the sales of the Phantom Liberty as a standalone, and one thing is a bundled version or Ultimate Edition, which we're about to release soon. So, so in the second case, specifically, you know, people who would be buying a complete thing would be automatically buying Phantom Liberty expansion as well.
So, well, we definitely expect there's gonna be some slowdown. It's gonna be just normal, it's gonna be natural. We don't expect any, you know, off-the-cliff drop or something of the kind. And in terms of promotional activities, you know, there's Ultimate Edition launching soon, but when it comes to Cyberpunk IP, we're gonna be nurturing and developing it through activities going outside of the game as well. And we're talking about the, you know, the franchise flywheel things happening for it.
We're not really, you know, discussing specifics here, but one of the obvious things that we have announced, well, not happening next year, but going to be developed or moved in the direction next year is the project we have announced with Anonymous Content. But that's not probably gonna be the only thing. But again, more to come as we're gonna progress throughout 2024. Definitely not gonna be quiet.
Next question comes from Kacper Kopron, Trigon. Cyberpunk 2077 Ultimate Edition, what is the price of the bundle? Can you comment on how the Witcher's result after the GOTY version was released? Michał, do you want to take it?
Yeah, I can take it as well. So when it comes to price of the bundle, please, please wait just a little bit more. We're gonna be announcing, you know, the details, including the suggested retail price. Obviously, the actual retail price is not for us to decide. And when it comes to The Witcher 3 sales after the Game of the Year Edition, well, first of all, that edition really takes place of whatever was in the market before. So what happened for The Witcher 3 is pretty much it became the dominant sort of unit sold for whoever was reaching for The Witcher 3, and we expect the same thing to happen for the Ultimate Edition.
So if there's a new customer who is interested in buying Cyberpunk 2077, we expect that new customer, that person, to reach for the Ultimate Edition, rather than, for example, for just the basic edition of the game and then adding Phantom Liberty, though obviously, those cases will be happening as well. But we expect vast majority of sales to be coming from that combined SKU.
Next question comes from Łukasz Majkowski. Could you say something about next season of Edgerunners anime? Can we expect it on in 2024? Michał, I think it's for you again.
Yeah, I can take it. It's a question with the thesis, which we cannot confirm. We have not announced second season of Edgerunners anime, therefore, we cannot comment on it being released in 2024 or any other year. We have obviously ambition to do more in the animation field, but that's something we've been repeating quite a few times. All righty, thank you.
Next question from Kacper Kopron, Trigon again. Can you comment on how you will approach potential cash distributions after Phantom Liberty launch year? Investments in new games or some form of distribution to shareholders. So what I can confirm at this stage for certain, is that we definitely want to continue, with developing games and with investing into them. We want to do it at the scale that was not precedented in the history of our company, working on few projects at the same time. Something that we've never made, this scale, historically. And as far as shareholders' distributions are concerned, first, let's close the financial year. Let's see the full result for 2023, and then we, as a board, will come back with some recommendation that is to be approved, by shareholders, but it's still months away from us.
The next one is probably for me, from Kacper Kopron, Trigon. Can you comment on sentiment among employees in the company after the announced key personnel changes in management? To be honest, I wouldn't expect any big changes. As we said, as I said a couple of times, we as a board, we are a very integrated group of people running this company together, and those changes were in preparations for years. So this is very smooth, natural transition, and I believe that everyone understand it. Those who work with us on daily basis were well-prepared, and I expect no changes in sentiment. And in the long run, I hope that sentiment will keep growing as... Our strategy is very ambitious, and we expect achieving it should gives us a lot of satisfaction.