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Good afternoon, good evening, ladies and gentlemen. Thank you for standing by. Welcome, and thank you for joining CD Projekt Group H1 2022 Financial Results Investor Conference. [Operator Instructions] It is my pleasure, and I would now like to turn the conference over to Mr. Adam Kicinski, President of Board and Joint CEO. Please go ahead, sir.
Thank you very much. Good afternoon. Welcome to CD Projekt Group's 2022 Half Year Call. I'll start with a short recap of the highlights for the period. Then I'll move on to recent announcements. In the second part, Piotr Nielubowicz will cover the financials. Michal Nowakowski will join us for the Q&A session after the presentation. The webcast of the presentation as well as the audio feed are streamed live on our corporate website and our YouTube channel. Let's kick off with a summary of the key production milestones. In Q1, 2 separate CD Projekt RED teams were already working on 2 AAA projects. One team continued development of the expansion for Cyberpunk 2077. The other started preproduction of the next future game. On top of that, we continued working on improving Cyberpunk. In February, we released Patch 1.5, along with the next generation of the game. The positive response we received proved that we are heading in the right direction. Following the next-gen patch, we continued working on the 1.6 update, which came out yesterday. More on that later on. Back in March, we announced a strategic partnership with Epic Games. Our future productions will now rely on Unreal Engine 5 and its potential next versions. We had also used this opportunity to announce work on the new Witcher saga game that I've already referred to. As production of the game began at the end of Q1, the corresponding development costs started being capitalized. Now let's move on to the recent project announcements. We are super excited that CYBERPUNK: EDGERUNNERS anime series is coming to Netflix on Tuesday next week. We've produced it in collaboration with Trigger, the acclaimed Japanese anime studio. CD Projekt was responsible for creating the story, while Trigger adopted it to anime format. The first impressions of those who had the opportunity to watch the series during the recent PAX West are very encouraging. We believe the series will broaden the interest in the Cyberpunk world and bring new players to the game. Indeed, this format provides a perfect match for the Cyberpunk universe. Now let's move to Slide 4 and focus on Patch 1.6 called the EDGERUNNERS update. It brings anticipated features to the game, new weapons cyber war customization and the EDGERUNNERS content, to name just a few. With this new update, we also rolled out a set of modding tools to Cyberpunk called REDmod Thanks to this, it's finally possible to modify practically every system and any aspect of the game. So it opens countless possibilities. Another thing we added is the performance mode, allowing users of Xbox Series as to play the game at 60 FPS. This has been one of the most highly requested features by our community, and we are very happy to introduce it. Moving forward, we decided to focus our attention and resources on the new generations of Cyberpunk, so we can further develop and upgrade the game on PC, Stadia, PlayStation 5 and Xbox Series X and S. Of course, the game will continue to operate on previous gen consoles, and we'll keep providing technical support. Let's move to Slide 5 and recap basic facts of yesterday's announced expansion. We decided to develop 1 major expansion to Cyberpunk 2077 titled Phantom Liberty. To provide the best possible experience and great new features, the expansion will come to next gens and PC only. The release is planned for the next year. Now let's move to Slide 6, presenting the current allocation of our developers. As you can see, the largest team is working on Phantom Liberty, and the second project is on the new Witcher game. You can also see that the share of developers working on The Molasses Flood project has grown significantly since the end of 2021. At the same time, the GWENT team was adjusted to the scope of the game operations. And a small portion of the team continues to work on the next-gen version of The Witcher 3. Speaking of which, moving to Slide 7, I can confirm that this game is on track to launch in fourth quarter this year. Stay tuned.
Now let's move to Slide 8. I'm happy to invite you all to the presentation of the CD Projekt Strategy Update. The event will take place in October with details to be provided in upcoming weeks. We are eager to share our long-term vision and business outlook, can't wait. Now it's time for the financials. Piotr, the floor is yours.
Thank you, Adam. Now I will guide you through our results for the first half of 2022. So let's start with Slide 10, consolidated profit and loss account. In total, our sales revenue reached PLN 378 million, which is 20% lower than for the first half of 2021. As you may remember, in H1 2021, we were adjusting our sales and cost provisions created after the release of Cyberpunk. As a result, in the first half of 2021, nearly PLN 40 million in sales provisions were dissolved and slightly over PLN 40 million in cost provisions were created. This led to an increase in our costs as well as revenues reported last year. It's also worth mentioning that the reference period immediately followed the release of Cyberpunk when the high post-release curve in sales of the game could still be observed. And this year, during H1, our revenues from sales of products supported by the release of the next-gen addition of Cyberpunk reached nearly PLN 286 million. Revenues from sales of goods for resale and materials mainly represent GOG business. The total figure here decreased by 9%. The main measurable reasons for that are: first, revenue booked by GOG on the PC version of Cyberpunk was naturally lower than last year as the next-gen update mostly influenced our console sales. And last year, we still -- we were still in the post-release curve; second, this year, the digital store recorded lower revenues from new releases from external partners as some of the new releases planned for H1 were postponed; and third, suspension of sales to Russia and Belarus added a bit on top of the above. At the same time, and this applies both to the PROJEKT RED and GOG, where the bulk of sales is denominated in U.S. dollars, converting our revenues to benefited from the increased exchange rate of the U.S. dollar versus the zloty. Cost of products and services sold amounted to PLN 37 million. As mentioned a minute ago, the high figure reported for H1 2021 included adjustments of cost provisions in the amount of over PLN 40 million. Apart from that, both this and last year, most of the reported amount comes from amortization of past expenditures on the development of Cyberpunk. However, this year, unlike last year, we no longer have amortization of initial GWENT development activities, which had already been fully amortized by the end of 2021. Cost of goods for resale and materials sold came mostly from GOG and decreased in line with sales or even a bit more. All in all, our gross profit on sales exceeded PLN 276 million. Moving to the operating costs. In 2022, our selling expenses decreased to PLN 101 million, which is nearly PLN 30 million less than a year ago. The amount reported for H1 2021 was largely influenced by our involvement in servicing Cyberpunk, which, as we indicated previously, was expected to decrease this year. And this indeed happened from nearly PLN 48 million last year down to PLN 15 million this year. The selling expenses line also includes over PLN 27 million in expenses allocated with broadly associated with probably speaking, our Cyberpunk publishing activity, mainly as a consequence of the next-gen release campaign. Next slide, in H1 '22 until, we also saved on administrative expenses. The decrease was driven by 2 main factors: first, expenses related to the valuation of the stock-based incentive program, which declined due to the change in our estimates regarding the likelihood of meeting the results of the program, which happened at the end of 2021; and second, we can observe a decrease in early first phase research expenses related to our future products. That occurs as we progress to more advanced phases and further expenses are capitalized as expenditures on development projects. Moving further, although our total sales revenue decreased by 20% versus last year, our EBIT actually grew by 12%. This result was primarily driven by CD Projekt RED. However, GOG also posted close to PLN 2 million in EBIT profit, unlike last year, when the result of the segment was negative by nearly PLN 5 million. This significant improvement was made possible by reorganization and optimization of cost performed at GOG in recent months. This year, the balance of financial activities was more favorable to us, mainly due to the recent increase in interest rates, allowing us to add PLN 16 million to the total results. At the same time, same as in Q1, the reported income tax for the period and the effective tax rate were higher than what we had observed in previous years. The increase was mainly caused by withholding taxes paid abroad by our international licensees. Having received confirmations of withholding tax payments this year in accordance with existing treaties concerning double taxation, we deducted from our local corporate tax liabilities as much as was allowed. Obviously, the local R&D tax relief and IP Box regime, which allow for preferential local taxation, give us less capacity to deduct foreign withholding taxes. The excess withholding tax, which we could not deduct locally, was recorded in our P&L statement. The total amount of such excess in H1 this year reached nearly PLN 25 million. This amount is related mainly to license royalties collected after the release of Cyberpunk, for which the corresponding tax payment confirmations were delivered to us this year. All in all, our net profit for the first half of 2022 reached PLN 140 million. The absolute figure increased by 8% versus the comparative period. But what is worth mentioning, however, is that our net profitability grew from 22% to 30% year-on-year. And for CD Projekt RED, it even exceeded 38%, which means that for each PLN 100 in sales revenue, PLN 38.4 remained with us as the net profit after taxation. Let's now move on to the next slide, number 11, our consolidated balance sheet. In H1 of 2022, our balance of expenditures and development projects increased significantly by nearly PLN 84 million. This figure represents the balance of new expenditures and development projects for the period of PLN 121 million, less amortization of past projects in the amount of nearly PLN 37 million. I will come back to expenditures on new developments in a moment.
Another noticeable increase among noncurrent assets is presented in the shares in the nonconsolidated subsidiaries line. The increase by PLN 28 million was driven by our capital contribution to Spokko as well as the increased valuation of previously acquired U.S. shares in the Molasses Flood as a consequence of the U.S. dollar getting stronger versus the zloty this year. At the same time, looking at current assets, our receivables decreased by nearly PLN 122 million, mainly due to a natural cycle after Q4, a decrease in tax receivables and a decrease in prepayments for development projects. The total value of cash deposits and T-bonds included in the 3 items marked with an asterisk is summed up under the table and totaled PLN 1.178 billion as of the end of June 2022. This means that our financial reserves grew by PLN 24 million during the first 6 months of this year.
Let's move on to the second part of the balance sheet, Slide 12. As of the end of H1, our group's equity had a value of nearly PLN 1.903 billion and grew by nearly PLN 9 million. The main counterbalancing drivers should be mentioned here, two main counterbalancing drivers. First, an increase related to our profit for the period. And second, a decrease related to PLN 101 million dividend for 2021 approved by the general meeting just before the end of June. Another change affecting the liabilities section at the end of June 2022 involved the liabilities themselves, which increased by nearly PLN 92 million. And again, this was related mainly to recognition of our liability to pay out PLN 101 million dividend approved by the general meeting before the end of June and paid out in July. As regards provisions, we no longer have any post-release sales provisions. Our cost provisions Decreased by nearly PLN 49 million in the first half of 2022. Those related to team bonuses decreased by nearly PLN 23 million due to 2021 bonuses being paid out in Q2 of this year, while other costs provisions decreased naturally by PLN 26 million over the first half of 2022. Now please move on to the next slide, number 13. CD PROJEKT RED’s expenditures on Research, Development, and Service of released games are presented quarterly for 2021 and 2022 to illustrate the changes happening at the studio after the release of Cyberpunk. The yellow part represents our total costs of servicing our released games, mainly Cyberpunk and GWENT. Although we continue to support Cyberpunk and Patch 1.6 was released yesterday, the team is progressively moving on to new projects, and so this allocation continues to decrease. A similar situation can be observed with early-phase research work, represented by the green slice, which is actually barely visible in Q2. At the same time the share of the team developing new projects is on the increase. This is represented by the blue part, development phase of new projects. And this time since the development part is bigger than usual, we have 3 shades of blue to present it in more detail. The dark blue part at the top shows the amount related to outsourcing costs of the next-generation version of The Witcher 3 we booked last quarter. The medium shade of blue corresponds to outsourcing expenses related to Cyberpunk: EDGERUNNERS, mainly due to a shift in its status from prepayments for development projects to capitalized development projects, as the anime series has now been delivered by our partner animation studio Trigger. In both cases, we’re talking about kind of onetime events related to finalizing works on projects handled by our outsourcing partners.
And finally, the light blue part at the bottom represents our typical development activity, and its growing scope. And now, our simplified cash flow on slide 14. Cash-wise, the PLN 114 million in net book profit for the period was supported by over PLN 43 million in depreciation and amortization for the period, and nearly PLN 73 million decrease in receivables over the first half of 2022. The main outgoing cash drivers not included directly in the P&L statement were: nearly PLN 43 million decrease in liabilities and provisions, actual expenditures on development projects in cash terms, nearly PLN 90 million, purchases of intangible and tangible fixed assets at over PLN 25 million, increase in prepayments and deferred costs by nearly PLN 20 million, mainly driven by new distribution contracts concerning future game releases, signed by GOG; and actually among others this position includes a contract with a new important partner of GOG, SEGA, and it covers a wide catalog of SEGA games, some of which are already available on GOG, and the last, outgoing cash driver is a capital contribution to the Spokko company, which is excluded from consolidation; the contribution allowed Spokko to pay back its loans to CD PROJEKT, and the net effect of these two types of transactions amounted to PLN 17.5 million. Altogether our financial reserves increased by PLN 24 million, reaching PLN 1.178 billion in cash, bank deposits and T-bonds as of the end of June 2022. The increase was generated during the first quarter, mainly thanks to the collection of our receivables for the preceding 4th quarter, and for the February next-gen digital release of Cyberpunk. In Q2 we paid out our annual team bonuses for 2021, and incurred over two thirds of our increased expenditures on development projects for the first half of the year. This is all from me for now, thank you for your attention. We can now proceed with the Q&A session.
[Operator Instructions] We have the first question from Nick Dempsey from Barclays.
I've got two questions. So first of all, when I'm just focusing on the sales of product line, you saw in the first quarter, PLN 174 million; second quarter, PLN 112 million. When I'm thinking about that line in particular for the second half, am I right in thinking that you normally have seasonally lower Q3 and there's not really any other factors that would move that number up? And then in Q4, the only factor that could change it is The Witcher 3 next-gen update. Am I missing anything other than those factors when I'm thinking about how to model Q3 and Q4 sales of products? That's my first question. And then just on the second one. Slide 6, it looks as though as of the 31st of July, that was really only a very small team working on the next-gen version of The Witcher 3. Have you stepped the team up since then? Or is it just that it was more or less complete when you picked it up from Sabre? And are you still very confident of releasing that in Q4 of this year?
Okay. So start with the first one. Question about sales of products. Yes, typically, Q3 is the lower season of the year for us and typically Q4 is the high season of the year for us. As far as the Q3 is concerned, the main customer-oriented events on our side are the release of the new 1.6 patch and also the premier on the CYBERPUNK: EDGERUNNERS series on Netflix. Obviously, they do not directly drive sales and M&A on the premier of a new games, but as we move forward and we dedicate a lot of communication to both events, the [indiscernible] update for Cyberpunk. And the main event for us for Q4 will be The Witcher 3 next-gen release, which as Adam confirmed, is planned to happen by the end of the year in Q4.
So answering the second, the team is proper because when we take over the project, it was not ready, of course, but the remaining works were very highly specialized technical work. So there is a group of professionals proper for the tasks and finishing the works. And yes, as we said, we are on track to release the game in Q4.
The next question is from Omar Sheikh from Morgan Stanley.
I've got a couple of questions as well. Maybe first of all, on the next Witcher game. Could you just update us on where you are in the development of that game? How far through are you? And do you still anticipate it will take broadly 3 to 4 years to develop? And also, is that game all being developed on Unreal? Just that would be helpful as well. That's the first question.
And then secondly, I guess on the Cyberpunk expansion to next year, again, a similar question, I suppose, where are you in the development of that? How is that going? How is the game? How is the expansion currently looking in terms of development process? And are you broadly targeting just at some point before the end of the year? Or can you be a bit more specific?
Omar, so answering the first question, we are in preproduction phase, as I said. So this is the first phase of development. And as for now, we have a needed team, and we are in line with the plan. But commenting the total time of the project, I can't comment the total time of the project. But as for now, we are where we should be. And the game is being developed on Unreal Engine, as we said. On expansion, of course, the situation is very different. Expansion is the last project developed on our own technology. And -- well, we are where we should be at this stage. This is a very advanced stage. So with the bulk of our development and engaged in the project, and I can't comment anything about this. We are -- keep saying that this will be done next year. And well, it will be a time to -- for the further announcements.
Okay. And just one follow-up, if I could, on The Witcher. You referred to a new Witcher saga. So are you now talking about multiple new games? So just maybe if you could elaborate a little bit on what you mean by that.
Sure. We said that there will be new saga. But of course, now we are preproducing the first game of the saga. But we have in mind more than one. So like the first saga were 3 games. So now we are thinking about more than 1 game, but we are in preproduction of the first game from the second Witcher saga.
The next question is from Matti Littunen from Bernstein.
Just on the parallel developments beginning, just to check if I'm reading the charts correctly, that capitalized parallel development on those 2 products started in Q2. And is -- are we talking about a Witcher game and another AAA project? And if so -- you had a statement in the press release about revisiting a world, which is an integral part of CD Projekt history. Just checking, was that statement referring to the new Witcher saga game that you were mentioned or another game? Then now that we've got the Phantom Liberty trailer out and the next year's release date. Could you give us an update on -- if there is one on what the plan is for any subsequent sort of major expansion DLCs with Cyberpunk? Is it too early to say? Or could we maybe -- should we expect a similar couple of expansions as we got for Witcher 3?
I will take the first question about capitalization. No, actually, the capitalization started early. One project at the end of 2021, beginning 2022, and the second one in Q1 2022. And I'm talking about 2 projects since one is the next Witcher production, but we also work together with The Molasses Flood under projects, and it's also part of the capitalized expenses.
And to add one more thing, referring to parallel development to the CD PROJEKT RED, I meant development of expansion, which from the production perspective is fully AAA development. And together with this parallel, we started development of the next Witcher game.
And this is Michal. On your question on the further expansions for Cyberpunk, we decided to develop 1 major expansion for Cyberpunk, which is going to take advantage of all the capabilities of the new-gen consoles. And having said that, we're totally fully committed to developing the Cyberpunk IP further. So beyond the -- this particular Cyberpunk expansion, which is expansion, we've put a lot of effort and time into building this franchise, and we definitely want to continue to build up on what was built right now with new stories, new experiences, new content, basically, not just the video game format. But I'll leave it here. So in terms of expansion, it's just -- this is going to be just 1 major expansion. However, there's going to be new stuff in the future.
The next question is from Matthew Walker from Credit Suisse.
Just two questions, please. The first is, when we're thinking about the potential sales from the Cyberpunk expansion, should we be using the sales from the Witcher 3 expansions as a guide? Is that the best thing to do? Or is there another sort of methodology that you would recommend?
And then the second question is just, I think in the past, when you've talked about industry consolidation, you've always said that you want to remain independent to sort of run your own franchise and essentially make sure that you fully exploit Cyberpunk. Is that still the case? Is that still your thinking?
Okay. I'll take the first one. So the question is about the potential sales of the expansion. So we've never been big about leading on the actual sales. I guess what I can say is we believe we have a great expansion on our hands, and we have really ambitious goals. However, in this case, it's important to remember that there is -- that we're targeting the next-gen and the PC -- based on the next-gen, new-gen consoles owners and PC owners. So that's an important factor to keep in mind. And I think that's pretty much as far as we want to go. Important thing to maybe remember is that we're also looking at like a long-term sales, what's adding this expansion is also going to do for the sales of the base game, any potential complete additions and so on. Look back in the Witcher 3 history when we've done similar goals, and that's probably going to give you an idea. Again, I cannot really specifically comment on the actual numbers, even in terms of percentage and things like that.
Answering the second question, yes, definitely. Yes, we haven't changed our strategy. And we are focusing on building and doing franchises. We are focusing on bringing more and more content to our franchises, having, of course, AAA games in the center of our franchise supply groups.
Just a quick follow-up. Have you had any thoughts around how the cost of living crisis could impact the company going forward?
So of course, the cost of living and inflation impacts wages, definitely. And this is not the only factor, but we see that wages are rising. Last year, the average rise was 23%. This year, we are expecting same trajectory. It's also a similar trajectory. So costs are rising. And on top of that, we have new factors like working from home, which is, on one hand, opportunity because we can hire people from around the world. But on the other hand, wages are more and more global, and we have to adjust to it.
I meant really impacting the consumer demand. So basically, if inflation goes up, energy prices goes up, consumers got less money. How do you see that impacting the sales of the games?
So it's Michal. Of course, we're not fortune tellers, and the situation in the world is in currently -- on so many fronts is rather unprecedented. I think we can agree on that. Having said that, previously, games were rather crisis-proof. But again, nobody can 100% tell what is going to happen. Having said that, we have not -- with everything that's happened so far, we have not really seen any negative impact to ourselves to be perfectly honest.
And I can add one more thing. We are actually providing our customers, gamers with a fairly cheap entertainment considering that our games are for tens or sometimes hundreds of hours, and they pay, for Witcher 3, $40 or $20 on promotions. For Cyberpunk prices, it's very attractive as well. So they had a lot, forever decent price.
The next question is from Saim Saeed from Berenberg.
Just a very quick one on your player base and the split across different console type. Could you provide an indication of what percentage is on next-gen consoles and PC?
Could you repeat the question again? Sorry, I think we were...
So just in terms of your player base, do you have an idea of the split of the active player base that are on next-gen consoles and PC?
So yes, I mean, we do have, of course, obviously, a very good idea in terms of PC. In terms of consoles, that visibility is not as simple as with the PC. However, we do have insights into that too, yes.
And would you be willing to share that? Would you say the majority of console players have shifted on to next-gen? Or are they still on original -- partly playing it on an original or the previous generation of console?
No, we're not really providing guidance on that kind of stuff. Some of that information is also console-specific confidential, yes.
The next question is from George Brown from Deutsche Bank.
I have two, if I may. So firstly, in terms of the Cyberpunk expansion, what sort of price can we expect from this? Or will these details be shared at a later date? And then secondly, is there any potential for any future platform deals to bring Cyberpunk to Xbox Game pass or PlayStation now as sort of a subscription service as well?
Hello, again. So I can take these two. So the first one was about the price. So we're obviously not disclosing price at this moment in time. Of course, we're going to reveal that at an appropriate moment. Having said that, we did mention this is the major expansion. It's actually pretty sizable, and we're happy with its quality. So the price is going to be according to what we're going to present to the players basically. As for the second question, are there any potential deals on Xbox and PlayStation? We've done some deals in the past. But obviously, if there is any deal happening, it's -- we cannot really talk about it in the future. And if anything is going to happen, it's going to be announced at a proper time. We don't have anything on that matter to share it here now.
There are no further questions from the call. Perhaps we have questions from the webcast. And I hand over to [ Marick ].
Yes. The first question was from Piotr Poniatowski from mBanku. How many developers in total did you employ at the end of June 2022?
Yes. So the answer is, we have almost 800 developers in the group. Excluding GOG.com developers, we have approximately 730 working on different projects.
The second is from Piotr Zielonka, Santander Bank. When looking at OCF in H1, your OCF was decreased by PLN 50 million charge in provisions. Could you please comment more on this line of OCF? What exactly founded this line of cash flow statement? Is this linked to cash provisions linked to salaries, bonuses? Piotr, I think it's for you.
Piotr will come back to this question in a second. I will take the next one from Tomasz Rodak, Dom Maklersk.
Okay. I'm ready, sorry to jump in back. So there were 2 main factors for the decrease of provisions. One, each year, we set provisions for the annual profits for the team. And we accumulated quarter-by-quarter based on the results of the quarter. And then once the year is closed, we have the results for a year, we pay out bonuses. And so it happened in the second quarter of this year, we paid out bonuses for 2021.
And the second part was related to standard cost provisions we set at the end of 2021. And I would say that the provisions were consumed naturally, there was nothing surprising. We provision certain costs that materialized in 2022 and hence, the decrease of the provisions.
So coming back to the question of Tomasz, how does shift into a new engine work for you?
We've just started, but the agreement was followed -- was after a very detailed evaluation of the future plans of Epic Games and plans of development of Unreal Engine, and we believe it's a perfect match for us to use this technology. And on top of that, Unreal is known for great tools for developers. So we believe that some processes and pipelines should be more efficient once we are fully introduced to the technology. Now we are running workshops, and we are still learning. But on the other hand, there are much more developers who knows this technology on the -- to be hired. So the pool of developers we can target is definitely bigger than before.
Next question from [indiscernible]. Why do you want to update strategy? Will there be major changes in the directions of the development? What should we expect?
So no, you shouldn't expect any major changes. I mean, the strategy stays the same, but we want to share our vision of the future. We want to talk more about future plans and how we want to run the business because the previous update was mostly focused on the transformation. Now we believe we are ready to talk about our business outlook. So we are finishing our conference. Thank you very much for the participation and stay tuned. And as I said, in the next weeks, we'll invite you to our strategy update, which will take place in October this year. Thank you. Bye-bye.
Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.