Hello. It's time to start. Thank you for joining. This is us, Aviators of gamedev, People Can Fly, PCF Group. I'm Mateusz Kirstein, Co-Head of Studio, and I'm here today with Michał Sokolski, our CFO.
Hi, for sure.
Sebastian Wojciechowski, PCF CEO and major shareholder. Seb is with us remotely from the U.S. Hello, Seb. Can you hear us?
Thanks, Mati. Yes, hello. Welcome everybody.
It's the first time we are doing this presentation in English for a global audience, so quite exciting. Once again, apologies for yesterday, but as I mentioned in my email, we had some technical issues with our digital signatures. In the first part of our presentation, we'll update you on studio's current operations. Then we will walk you through our 2021 financial results, and at the end, of course, we will hold a Q&A session. Before I will give the floor to Sebastian, let's start with a brief legal note. The video summary of People Can Fly's 2021. Enjoy. Sebastian, over to you.
Thanks, Mati. Hello everyone. Let me start with this quick look at PCF on the world map. As People Can Fly, we operate in seven main locations. Additionally, we have Game On in Montreal, Canada, and in Kórnik, Katowice, Poland. Our teams are rapidly growing. We were 281 by the end of 2020, excuse me, and almost 500 in December 2021. Today, the group is more than 550 people, and around one third of Aviators is working in North America. We are very proactive on the recruitment market. We take advantage of remote work options and growing PCF in the new locations, like Toronto in Canada or Kraków, Poland, you know, before the current conflict, also in Ukraine, Lviv.
From 2019, we consequently follow our strategy of increasing the scale of our business by producing several games simultaneously. Our IPO was a key milestone because it allowed us to gather the capital necessary to produce and publish the games created by the group. The strategy update from September 2021 sets the goal of releasing each year, starting from 2024, at least one game developed by the group, either in cooperation with publishers or in the self-publishing model. This cannot be achieved without transformation of PCF. We have decided to use proved effective and modern management practices. Our projects are driven based on agile principles, which we adopted to our industry and business context. Thanks to this, we manage the projects risk better and create games that keep the highest quality possible.
Apart from that, we are creating for our developers proper work environment, tools, and place which they will come back to eagerly on a daily basis. Those and other elements are the responsibilities of back office, which with geographical spread in mind, proceeds with its activities using the objectives and key results, so OKR method. This approach allows us to prioritize our internal development and focus on results achieved in short time intervals. In order to manage the development of several games simultaneously, we continue to develop the PCF Framework, our own expansion of the Unreal Engine technology, an engine which we have used for more than 15 years already. The structural and technological development is aimed to increase the effectiveness and stimulate creativity in work on our projects. Self-publishing plans are transformational for PCF.
We already have a team of top-notch experts that are shaping our publishing strategy. Last but not least, for quite some time we have been working on a new organizational structure to make sure that it can support exponential growth of the group and allow the scalability, so we can remain persistent in our organic growth, bold towards M&A targets, and efficient with integration processes. Speaking about M&As, we are active on the market, and as I said during Q3 results call, we are looking for bigger transactions than we did last year. We are looking for M&As opportunities mainly in Europe and North America. We are open to different options and scenarios when it comes to the structure of those deals, but our focus is on the M rather than A.
We are looking for not only healthy business, but businesses that will strengthen our EBITDA, but more importantly, for new partners that will work as part of the PCF management team to strengthen our growth and competencies. We are here to make games, right? As already mentioned, the strategy update from September 2021 set a goal of releasing each year starting from 2024 at least one game developed by the group, either in collaboration with publishers or in the self-publishing model. In consequence, People Can Fly works on a number of projects in parallel, including those based on our proprietary IPs. Today, we are providing further support for the Outriders IP with Square Enix. We will talk about Worldslayer in a moment, and two other projects with major publishers, Gemini, which is our new project with Square Enix, and Dagger with Take-Two Interactive.
Apart from that, we are working on our own IPs. We have Project Bifrost that we are developing through our American teams and intend to self-publish, as well as two projects in the concept phase, Red in Europe and Victoria also in North America. It's still up to us whether they will be self-publish or if we decide to work on them with publishers, but we want to move each of them to pre-production phase before even starting those discussions. Anyway, it's the first time we are revealing code names for our new games in the making, so that's pretty exciting. What will come first is Outriders Worldslayer expansion. It was revealed just, you know, a few hours ago.
I'm super happy to confirm that the expansion will launch on June thirtieth, and it will deliver an impressive amount of new content for Outriders, and hopefully a significant step forward towards achieving a break-even point for this project. Pre-orders are already up and running. No words can summarize what you can experience via visuals, so let's just see the Outriders Worldslayer reveal trailer.
There's a reckoning coming. Two paths diverge before you, Outrider. One leads to a new beginning, and the other to pain. If we don't find a way to stop what's coming, there will be nowhere for us to hide. You've been fighting for so long that you've lost sight of what is true. There is no saving humanity. Humanity is already dead.
All right. Today PCF is not just a development studio. We are a creative organization with diverse competencies reaching into different areas of the broadly defined games market. With Incuvo, we are growing our expertise in the VR sector with innovative mindsets. Green Hell VR launched for Oculus Quest two, a new project in the making commissioned by PCF, and ambitious plans. We want to be among leaders of this rapidly growing segment of the industry. Talking about the very positive reception of Green Hell VR, we want to present you some details. We think we are on the right track. The game got some great reviews and, as per its management board, already broke even on the Oculus platform. Here is the launch trailer for Green Hell VR. All right.
With Game On, which like Incuvo works with PCF but also as an independent service provider, we are growing our content production capabilities. Game On is a motion capture animation audio studio, and I'm happy to show you their latest reel so you can get a better understanding of their work and unique skill set.
Let's get started.
I hope you enjoyed this video as well as the brief update on where we are as a group. Now let's move onto the PCF Group financial results. One note that please keep in mind that some of the financial data contained in this presentation have been rounded. For this reason, in some tables throughout the presentation, the sum of amounts in a given column or row may slightly differ from the total value given for that column or row. Okay, I'm very happy with PCF 2021 financial results, and I can say that it was a good year for PCF. Revenues increased from almost PLN 104 million in 2020 to over PLN 180 million in 2021, which represents almost 74% increase.
This is a direct effect of PCF development team growth, as shown on the bottom of this slide. PCF total headcount grew from 281 at the end of 2020 to almost 500 at the end of 2021. In 2021, PCF continued development works for our two main publishers, Outriders plus DLC and Gemini projects with Square Enix and Dagger project with Take-Two Interactive. Additionally, after its acquisition in 2021, Game On also started contributing to the increase in revenues. From the profitability's perspective, adjusted EBITDA increased from more than PLN 30 million in 2020 to over PLN 70 million in 2021, which represents 160% increase. Let me walk you through key elements of PCF balance sheet.
Goodwill value of almost PLN 55 million is the result of PCF M&A activities in last year and was created after Game On, Phosphor and Incuvo acquisitions. Fixed assets increased from PLN 3.3 million to almost PLN 11 million is the result of two main factors, PCF investment in IT infrastructure and Game On acquisition, which has a fully equipped motion capture studio. Development work in progress, as we have started developing games in the self-publishing model. On the balance sheet, PCF have capitalized work in progress expenditures for such projects like Bifrost, Victoria, Red, Game Wave, Incuvo and also PCF Framework.
Right-of-use assets increased from PLN 11 million to over PLN 28 million refers to an extension of the lease period for PCF HQ in Warsaw and Game On acquisition, as Game On has a long-term office lease. Significant cash increase results from receiving IPO funds in the first quarter of 2021. Despite significant investment outflow in 2021, mainly in the field of M&As and work in progress expenditures, investments increase in PCF products, we have a very stable financial situation. Equity capital also a result of IPO and the results generated by PCF and overall assets and equity and liabilities increased from PLN 96 million to PLN 370 million shows total PCF Capital Group growth.
Now let's go through the top line. Firstly, revenues. In year 2021, PLN 180 million revenues, and PLN 178 million when we with Square Enix's warrants adjustment. That compares to PLN 103 million in revenues in last year, or PLN 107 million when we also take into consideration the Square Enix's warrants adjustment. Adjusted revenues increased over this period of time by 66%. Next slide, please. Yes. On this slide, we present split of PCF revenues for development work and royalties.
Obviously as royalties, as you probably all know, we are talking about Bulletstorm Full Clip, so the game that we published in or Gearbox published for us in 2017. Additionally, please take a look on the right chart where you can find revenues for each quarter with Square Enix warrants, subscription warrants adjustments. Q3 was the best quarter in the whole 2021, and also the best quarter in PCF history. Q4 was just slightly behind with a slightly lower sales, resulting mainly from revenue recognition model based on contracts valuation by percentage of completion, so the method from IFRS 15. This means that if the cost base is lower, then the revenue recognition is lower too.
On this slide, you can find the breakdown of the revenue split between game development and outsourcing stream, which goes for PCF Group on a very minimal margin. Obviously we are more interested in revenues and its growth on the left side rather than on the right side of this slide. This is why we are showing it because the margin is totally different. Taking this into consideration, PCF development related revenues grew even more from PLN 88 million in 2020 to PLN 167 million in 2021, which means the increase of 88% compared to 66% growth in total revenue as presented a couple of slides earlier. On this slide, you can find EBITDA values for the last five financial years.
In this period, PCF generated PLN 116 million, almost PLN 160 million in EBITDA. What is important, almost half of this was generated last year, so 2021. When comparing financial results from each quarter, comparing 2020 to 2021, you can find how impressive progress PCF has made over last year. Following last slide, on this one you can find adjusted EBITDA values for the last five financial years and in comparison of the quarterly results from year 2020 to year 2021. When comparing Q3 to Q4, adjusted EBITDA decrease, we would like to point to a couple of facts.
Firstly, there was a difference in revenues of about PLN 2 million, which we discussed on a couple of slides earlier, and this is mainly due to contract valuation method based on the IFRS 15. The rest of the difference is due to the increase of costs, firstly, the organic growth, with strengthening back office structures. We are, as presented a few slides before, working on the reorganization of the organization chart. We are hiring more people working in back office also to support our M&As plans for this year. Secondly and pretty importantly, recruitment costs and signing bonuses.
Due to the team growth, and although development costs of our internal projects is capitalized on the balance sheet, those costs, so recruitment costs, signing bonuses for all the team members that we are hiring to work on our own IPs that are capitalized on the balance sheet hit our P&L. Last but not least, the how we arrive at the adjusted EBITDA. In plus there are a couple of elements, IPO costs, advisory costs related to M&As and subscription warrants recognition under IFRS 2, and in minus, forgiveness of the PPP loan, paycheck protection program second draw in the U.S. and subscription warrants valuation reversal.
All of that to adjust EBITDA from PLN 73.2 million to PLN 70.5 million for the last financial year, 2021. I think with this one, I would like to thank you for the presentation and we can move to the Q&A. Thank you.
Thank you, Seb, and if there are any questions, the time is now. No questions? Okay, we'll wait one more minute. Okay, if there are no questions, thank you again for-
Hello, guys. Do you hear me?
Oh, okay. Yes, we can hear you.
Yeah, here, Michał Wojciechowski, Ipopema, so maybe I will-
Hello, Michał
Ask some questions. Maybe starting with this one. I recently heard some statements across gaming industry that.
The moderate AAA game budget is currently above $100 million. Could you comment, do you agree with such statement or not?
I assume you are referring to AAA, right?
Yeah, AAA, exactly.
AAA games. I don't think we can directly comment on that, but I would say that I agree that the budgets for the modern AAA games take into consideration next-gen consoles, take into consideration also next-gen Unreal Engine technologies, so the migration from UE4 to UE5. Those assumptions are pretty solid.
Okay, great. Maybe the next question, regarding-
Which doesn't mean that everybody and all publishers got those budgets when they are thinking about creating AAA games.
Yeah, I understand. Okay, maybe the next question regarding Green Hell VR release. The first part is, it was in line with your expectations or it was maybe better? Could you comment? The second thing, how Green Hell roadmap is affecting future pipeline of Incuvo?
I think that we are probably not ready to comment expectations of the Incuvo management board expectations when it comes to the Green Hell sales. I would defer that to the Incuvo management board, as I am not aware of the exact numbers right now. When it comes to the pipeline, I think that Incuvo obviously needs to grow the team, to be able to support both projects that they are currently working on. Further work on the Green Hell IP as well as the project that they are working for PCF.
Okay. Great. Maybe the third question regarding your upcoming results for the first quarter. Should we expect some improvement in sales in line with acceleration of the production in the first quarter versus the previous quarters? Could you comment on the wage pressure in the first quarter?
Sure. I think that the first part of the question requires a bit more reflection. I think one element that is new for everybody that is creating games currently is the fact that we are in the process of migration from UE4 to UE5, and this is a process that was not taken into account by I guess anyone on the production side. I'm not talking about PCF. I'm talking globally. This is a very complicated technological process that requires additional work that was never contemplated when you know people were thinking about the games you know a year ago two years ago.
I think that is, from that perspective, slowing down the curve that you would probably expect when it comes to the production team growth when the teams are in pre-production. Instead of having a, you know, rapid growth of the teams in the pre-production, you will, for a lot of projects around the world, observe a very stable line when it comes to resources that are working on or developers working on the projects because of the fact that there is a multi-month process of migration from one engine to another. For People Can Fly, this is not a huge change. It is very complicated.
It is also going to take time, but this is not something that is for us totally new, we have never done it. That's not the case. Also, UE5 is so the migration from UE4 to UE5 is way easier than migration from UE3 to UE4, where the underlying systems and the way you were producing games totally changed. Everything that everybody had when it comes to proprietary code that was working for UE3 stopped working for UE4. Here is a different situation. Our PCF Framework is just playing an important and amazing role for us because this code can be also migrated to UE5 and it will work just well.
What I'm trying to say for this a bit longer piece is the fact that there will be some additional time needed for projects to be able to migrate from one engine to the other, and this will affect the growth of the size of the teams working on the projects for that particular moment of time. When it comes to the second part of your question related to wages increases, obviously we are observing this pressure, and it is not only in Poland, this is global pressure that is influencing everybody's day-to-day operations. Now this is, you know, remote work model is allowing a lot of different developers to seek for talent where they were not seeking before.
The inflation rate, not only in Poland, but also, for example, in the United States, is creating some additional pressure. Yes, we are observing those wages pressure around the world.
Okay. That's all from me. Thank you very much.
Thank you.
Thank you, Michał.
Hello. It's Piotr Łopaciuk. Can you hear me?
Yes.
Yes, hello Piotr. We can hear you.
I have two question, if I may.
Sure.
The one is, like, more financially oriented. It's about your revenue recognition model. I'm wondering based on how you recognize your revenue, I mean, it's advancement of your works on long-term contracts versus costs incurred. We already mentioned the environment of quite big inflation in terms of cost of development. Should we assume that the further we are in these projects, unless nothing else change, just we can expect a bit lower margin because, you know, the costs are growing, so we have to take more costs to have the same advancement? I don't know if I am clear, but is it right way to think about it?
I think this assumption would be only right if we would not be able to negotiate also some changes on the revenue side. That's first thing. Second is also, please note that our still majority of costs are in Polish zloty and the exchange rates are working in favor of us right now.
Okay. Generally, this is not completely wrong, yes? Probably it's a bit easier to show high profitability in the beginning than later on, assuming that everything goes in even way, I would say, in the same pace.
I would ask Michał to comment on that.
Okay. In regards to this, our revenue recognition model, yes, you are right, Piotr, and it is based on percentage of completion. We are taking all the cost incurred till the balance sheet date, and we compare it to the whole budget. When you take into consideration the fact that cost side increased and the revenue side is on the same level, in the future there will be a decrease in margin. But please note what Seb said in regards to our sales. We can be able to negotiate the future milestones and future scope of work, so this is not closed topic.
Okay. I see this. Thank you. The second question is about the project for which you consider your own publishing. I guess there are three projects in the early phase of. Is it a conceptual phase? I mean, do you think that in the end you will be carrying on with all the three projects? Or rather you will pick one best, two best? Or how likely is it?
I think I tried to comment on that during the presentation, that we are indeed working on three projects right now. One of them is more advanced, two of them are a bit less advanced. When it comes to whether those projects are going to be finally also shipped as our self-publishing games, that's something totally TBD right now. We definitely want to move those projects to the certain stage that will allow us to also maximize our opportunities when it comes to negotiating this with publishers. If we decide that one of them, I don't know, two of them will be not self-published, but will go into the work-for-hire route.
Just to be precise in this question. You think that all projects will be executed? The only question is whether it will be on your own or with the publisher, yes?
Projects in the concept phase, and two of them are still in the concept phase, are the projects that are still shaping up, which means that there is still possibilities of decisions that we are not going to proceed with them. We are still finding the fun, so to speak. Only once this is done, we will be moving them from concept phase to the pre-production.
Thank you very much.
Sebastian, if you can open your Zoom chat, you will find some additional questions there. Maybe you can just go through them.
Okay.
Okay? Thank you.
Right.
Can you see them?
What is the current employment in the group?" Are we talking about numbers? I think that was in the first slide, so it was almost 500 people at the end of last year, and 550 nowadays. Could you elaborate more on Metaverse? What is your approach towards this possible mega trend in the entertainment industry? Very interesting. We are watching and reading about it, and let's see how that goes better. Could you comment on M&A process? So it's how it goes, when we can expect something. When it comes to M&As, obviously, as I said during the presentation, we are very active. We are working towards getting us further in those processes.
As I said, we are talking about M rather than A, and with M you have to have. You have to be more diligent when it comes to not only the potential of the company that you are going to take over, but also about partners that are going to be on board and are going to work with you. It's more like marriage rather than physical takeover. From that standpoint, it is just taking a bit more time. Since we started all those discussions last year, and we are looking December, then we are definitely closer to some conclusions. What are KPIs for paying extra money for. What are.
I think it is KPIs for paying extra money?
I think so.
I don't understand the question.
Andrzej, can you confirm or maybe?
Yeah, I just don't understand this question, so if that could be somehow written, I would appreciate. The last one. Do we expect royalties from Outriders in 2022? I mean, obviously we are not here to talk about expectations and crystal balls. We are here to talk about facts, which for me is that we definitely are going to get closer to that moment of breakeven of Outriders with Worldslayer launch and that's what we are right now focusing on. How many people do you expect to have on board at the end of this year? Again, speculation, but we are growing strongly, and you can see that at the end of the year, it was 500.
By the end of the first quarter, it is 50 more. We are talking about organic growth because nothing other happened during the first quarter of this year. It's a pretty rapid growth. What kind of salaries growth pace the company had in 2021, and what kind of momentum you expect in 2022? As I said, I mean, we are not discussing the growth of the salaries, and obviously it's also very difficult to find it out for our financial statement due to the rapid growth. There is a pressure which I discussed right a few moments ago.
I'm sure that this is not just a PCF problem at this moment, but we are trying to somehow get over this.
I just would like to add one sentence on this Metaverse topic because we just did a big interview with Andrzej Wychowaniec, who is the CEO at Incuvo for Game Rant. It should be out in a couple of days, and I believe that you can find a lot of interesting insights in that interview and get to know a little bit more about our approach towards the VR market and all the latest trends. Please follow that, and I'll be happy to share it with all of you as well. I don't know if, Andrzej, do you want to ask your question again, or should we just leave it as it is? I'm talking about these KPIs. Okay. Any other questions?
We are happy to take them.
Yes. Kasper is very silent today, isn't he? Oh, okay. I think I got it now. I think you are actually asking about our deal with Blight. Obviously we are not disclosing this at least right now. I cannot comment on this.
Okay. Maybe last round. 15 seconds. Okay. I guess that's it. Thanks everyone for joining. We hope that was insightful. Have a great Friday, have a great weekend, and we keep in touch. Thank you very much.
Thank you so much. Thank you guys for coming.
All the best. Bye-bye.
All the best. Bye-bye.