CI Games SA

WSE:CIG

Earnings Call Transcript 2023-Q1

[Marek Tyminski, executive]

Welcome to first quarter results. My name is Marek Tyminski, I'm the founder and the CEO. Together with me is David Broderick, who is the CFO for the group.

Just quickly to summarize, CI Games is an experienced global AAA and AA game developer and publisher with popular IP franchises. Obviously, our 2 main franchises that we are known for are Sniper Ghost Warrior and Lords of the Fallen. We started to work on the third IP that was 1.5 years in and it's a working title Project Survive. We self-publish original IPs on all the major platforms, including Steam, PlayStation, Xbox and Nintendo. We are listed on Warsaw Stock Exchange and we are absolutely having a strong back catalog that is supporting ourselves when we have no new releases. Experienced global team with distributor development and marketing.

So currently, we have almost 140 game developers fully operating remotely. Its international development team led by seasoned management teams and globally experienced Board, strong relationship with third-party outsourcing companies across the globe and strategy confirmed by the success of the latest internal developed game that was over 90% developed remotely. And that's our strength, again, we are hiring the best talent where the talent is available.

We are not focused on any given location for as long. This is a similar time zone. And quality and efficiency, we absolutely committed to deliver the best games we can. And obviously, on one part is the latest Unreal Engine 5 that we have been building all the major releases. But looking into a track record in the last 5 years, there is a strong performance, both from the standpoint of critics and players around the globe in terms of our key releases and smaller releases from United Label as well, very well-received games and highly rated.

In brief, that's our management team. So obviously, it's starting from the left, it's me, David; Darren, who is the Head of United Label; Kirsty that is the HR Director; Saul, that is leading Studio Hexworks that is responsible for Lords of the Fallen; Akor, that is leading Underdog currently with Project Scorpio and Federal Sniper Ghost Warrior; Ryan, who is our Brand Director; Mich who joined middle last year, she is currently our Global Marketing Director; and John is leading the sales globally for both digital and physical.

Just a quick summary again, 20 years in developing video games, AAA, AA and publishing 3 main IPs, 60 million copies sold, 5 main locations across Europe but those locations mostly serve operationally to hire and maintain our staff across Europe and in the U.S., currently a bit more than 170 people internally full-time working for CI Games as a group. But at this moment, we are engaging over 300 people full-time and that is coming from -- for our partners through our outsourcing partners for third-party developers working on our projects. And the average is 18 years of experience of our management team and directors.

Again, this is a brief summary on Souls-Like Dark Fantasy action RPG in terms of the genre. It became very popular with Elden Ring released last year. Elden Ring was one of the best-selling games in the U.S.

And that brought a genre that wasn't yet fully mainstream genre to become basically a mainstream -- another mainstream genre post Elden Ring. We see a strong appetite and interest from gaming communities globally, looking for the next big game and we hopefully -- we have Lords of the Fallen that hopefully will reach that broad audience and be the next big game in that action RPG Souls-Like genre. The game is fully developed by Hexworks. That's our internal studio. Obviously -- currently the studio is around 90 people.

We have been working and we will continue working with a matter around 90 people, full time externally. So currently, the team that is behind Lords of the Fallen is around 180 people full-time, strong production values, AAA production values. We have a strong combat system. Visually, the game looks absolutely great. and we absolutely committed to delivering the game at the right performance from the start from the day one.

The game is running on Unreal Engine 5, that on its own will allow us to bring some of the features that will differentiate us from previously released games in that space. But the game on its own has also unique aspects and strong unique features that will make that being relevant to that audience who want to have a fresh experience from -- in that genre.

Strong global marketing campaign. We've said that many times. We started the campaign in August 2022 with a strong release of the trailer. We continued through December, the game awards. And recently, we launched a bigger game play trailer 2 weeks ago, and we're very, very pleased with the outcomes from both the players, media influencers and reactions to that trailer. Just briefly modernizing IP what we have done with Lords of the Fallen, back in 2024 when the game was launched.

Obviously, it was more of a high fantasy and [indiscernible] power fantasy versus now. It's more dark fantasy marching epic journey. It's a faster combat, it's more integrated million spells and spells became more important this time than previously. The systems are bigger and broader in terms of the whole RPG experience. And the world itself is way more interconnected, more vertical, and it's 5x bigger than on the previous game.

And what's more important here is the online aspect. So we will -- we have a strong [indiscernible] experience and PVP that was missing in the previous game. And we believe that, that multiplayer experience will expand the audience and will keep the audience engaged in the game for longer.

And this goes back to the popularity of that genre and the genre becoming a mainstream genre, not just in the U.S., but globally, we see a strong sales of Elden Ring across the Globe. U.S. is obviously probably the largest market, definitely the largest market, but we see a strong performance in Western Europe, Central Eastern Europe, we see strong performance in Asia, so that genre is popular pretty much everywhere. And I think a couple of important points here. What makes the next game, Lords of the Fallen successful is definitely compelling thematic and expensive game world to explore, an exploration itself is very important for gamers. And enhancement innovations that we are bringing and the key innovation, key enhancement here apart from slightly different take on combat is definitely Ambrell, the dual-world system that we are bringing with Lords of the Fallen, a strong level of challenge.

The game has to be challenging. The game has to challenge the players. That's what players expect. They expect to get that challenge and the game will deliver that. But at the same time, we absolutely stay fair and that's, again, what the players want. They want to have the challenge and they want to have the fairness in terms of that experience. And [indiscernible] that's a very strong reason why people are going potentially to get engaged in the next RPG game.

We think that our world, our narrative, our meta story and [indiscernible] itself will be really interesting and very exciting for the gamers around the world. And all of that obviously has to be brought with the effective marketing campaign, and we're very serious on that. Our marketing campaign will be at the scale of AAA marketing campaign.

Also in terms of the budget, we think we can absolutely reach the audiences in all the key countries and beyond that. Currently, where the project is, we are pleased with the pace of production, and we are pleased where -- with what -- where we are with this game now. We are at the testing, the QA of that project and polishing the game and making sure that we are ready to release that game with the already announced release date of the 13th of October.

At the same time, we are looking how we can maximize the publishing, the sales marketing around that game. And I think that's very important. We are coming up in the fourth quarter that statistically, historically is the strongest quarter of the sales, but at the same time, we are also aware of a competitive landscape not just in RPG, I think it's, in general, big games are coming, obviously, as usual in the fourth quarter. And we absolutely are aware of that and we'll be looking into how we can maximize the opportunity releasing the game in that period.

And answering potential questions. If we -- if there is a strong argument to move the release a bit and 1 week this way or 2 weeks the other way, we absolutely will consider that, but no decision has been yet made around that. And I think multi-sales channels, including, obviously, the physical part, we are planning to ship over 0.5 million units on the physical format, the digital absolutely, the most important that is around 70% to 75% of the sells we expect. The game will perform over the digital stores. preorders, we're pleased with the start, but this is still early, that's a start. Deluxe is doing -- is performing much better than the standard. So we see over 70% of preorders coming from the Deluxe addition, and we are very pleased with the performance of the Collector's solution.

We have a clear pricing strategy. And currently, the game is price of PLN 69.99 as a standard edition and PLN 79.99 as a Deluxe addition, which is very much in line across the AAA category. And we're definitely staying there.

David, the financial report is to you. Just before you go into the numbers, I would like to summarize that and state again, like with everything what we have been -- what we have been working on, it's been a major transformation for the company in the last years.

And I think the outcomes of those -- of that transformation period will be seen very shortly.

[David Broderick, executive]

Thank you, Marek. Obviously, I'll jump straight into the numbers in the interest of time so we can get to the Q&A. These are obviously the kind of traditional headline numbers that we put up around revenue, EBITDA margin and our cash debt position. I'll talk to those in more detail as we go through the P&L and balance sheet in detail. So starting with the income statement. Obviously revenue is down year-on-year.

But again, as Marek pointed out, that's in a year where absent releases, absent releases, we've seen the decline, but again, still a reasonably strong performance, just under 10 million slots in light of that with a large contribution coming from Sniper Ghost Warrior contract 2. Also, United Label giving a strong contribution of 15% and combined, given just under 70% of sales coming from those 2 sources for the company. SG&A, again, up significantly last year of PLN 3.1 million versus PLN 1.3 million.

Again, I think what people have to appreciate is we are building the infrastructure. We are building the model, the business to support the demand and the interest that we see coming down the track. So in light and in advance of the demand for Lords, we're building out our sales and marketing team. We're professionalizing that. We're also incurring additional marketing expenses ahead of release. So there's over PLN 1.2 million of costs in there, relating to us scaling up and also taking costs in advance of the release of Lords.

Again, as you can see, we've increased our numbers in terms of our development team, our overall cost structures. We're building out for the other games outside of Lords and our general kind of G&A costs have increased as a result of that as we increase our recruitment costs. We build out our HR teams and our legal costs to support all the kind of infrastructure and the larger organization that we're slowly but truly coming.

The net impact on that is just shy of breakeven for the year. Again, I think a strong performance when you consider the cost and overheads that we've been taking in and also the absence of a release in the kind of current year. But again, it's all built towards our expansion, our growth and building a bigger CI games that can stand up for the release or Lords and gains beyond that.

In terms of balance sheet, again, as you can appreciate, we have 3 projects under build at the moment. Kind of Sniper, Scorpio, Lords of the Fallen and Survive. So consequently, our total assets increased 12% in that period. That's all driven by the investments into those games. You can see how the intangible assets have increased in the quarter by 21.3%. And then you also can see that our group debt at the end of the period is 34.2% with a portion of that relating to IFRS 16 and the accounting that takes place under there.

I think what's important to highlight as well is certainly from the cash and debt perspective, there's a number of events that took place post the quarter end. So we signed our plan agreement towards the end of April this year with more agreements lined up and ready to sign in at signature stage in terms of our distribution.

We announced the additional loan agreement with PKO BP, on the 29th of April, again, we saw another additional PLN 20 million available to the company in the form of debt. And like I said, we continue to work with our suppliers. We continue to work with our distributors. We continue to work with our existing lenders, all to fund the business over the next well. And we will also probably look at additional debt coming into the business of a non-dilutive form.

So again, that leaves us at the 31st of March with a cash balance of just under PLN 8 million comparable to the same period last year. It's just a rough breakdown, again, just illustrating the revenue mix, the strength of the back catalog and the stream of revenues coming into the business over the next while. And again, this is probably a trend that we expect to continue, optimum clearly in the release of Lords later on in this year.

I don't think there's much need to go through the appendices. Again, this is just reiterating our overall strategy, the various pillars that we announced earlier in the year -- last year. And just some background detail that people can kind of read it their own measure. So Marek, I don't know if you want to sum up or we jump into the Q&A?

[Marek Tyminski, executive]

I think we can jump into the Q&A directly. Yes. So I think -- David, I think this question is to you, how much more debt you can get from banks according to your current loan lines agreements?

[David Broderick, executive]

Again, at the end of the quarter, we obviously have the additional PLN 20 million available to us that's there. And again, that's what under the existing signed contracted facilities. That is what is available to us, above and beyond what we reported at the quarter.

[Marek Tyminski, executive]

We have plenty of questions in regards of launch. So when will the advertising campaign start? And when will the numbers -- the first numbers being known in terms of the sales and how often will you report those numbers? So I mean, let me answer that here. In terms of the advertising campaign, the major, major advertising campaign will be in a few weeks before the launch and at the launch in principal answering that question, that's when we plan to spend a big part of the budget at the launch basically.

In terms of the numbers, we will be sharing the sales results with investors. I think more often than not, but we want to make sure that when we share the numbers, we have a complete picture of our -- those numbers in terms of the sales after the release of the game. So as soon as we have it, we will be sharing those information. So as you have seen, we're trying to share more information than less as a company with the investors in general.

Do you feel confident about the preparations to the release of Lords of the Fallen? As I said previously, yes, we are absolutely confident in regards to the preparation to the release. And then the question around that was also -- what's left to finish the game. So that's the question in the same topic. So we are currently -- the game is -- we have the full game, right? And the game is working well in terms of the performance. But it's still about polish, it's still about back fixing, and that's typical in any software product doesn't -- it's not just games, you're just fixed bugs. You have usually at that stage. The company has a lot of bugs to fix.

I mean every project has a lot of bugs to fix and those bugs are being fixed on a daily basis. We work with the external QA company. We work with [indiscernible] they are reporting to us pretty much on a daily basis, and that's ongoing process. So that's what -- if you -- in a simple answer, what's left. It's just fixing all the bugs, all the issues that the game has. That's a typical process before launching any software product. A question to you, David, potential strategic investor next year? Are there any talks going on?

[David Broderick, executive]

I think we've obviously been quite open about the process historically that we've run and where we've talked to strategics probably over the last 18 months, 2 years. I think -- look, I think with the release of Lords, with the other exciting titles that we have. I think people will get a real appreciation of what has been taking place and the transformation that has taken place within CI Games. The change in technology with the game engine, the change in the teams and the caliber and experience of the teams that are behind the games now.

And the professionalization of the various kind of support structures through marketing, et cetera, with people who are bringing a lot of experience with them. So look, at the moment, there's no live discussion, but I think it would be what I would call a high-class problem if we do our job well, but that's what we're focused on. We're focused on delivering the best game we can. We're focused on producing and making the company the best company it can be. And Lords will be our first real reveal of what transformation has taken place to the general public and to people out there. And I think that will really not re-rate but re-show the progress that has been made and the type of organization that we are. And -- but our focus at the moment is running this company, doing the best we can and delivering on that. And that's where our attention is at the moment. Marek, I don't know if you have...

[Marek Tyminski, executive]

That is answering that question really well. Nothing else to add at this moment -- on that one.

Another question is on what are the expecting -- there's several questions around the same, so expectations in regards to the sales of Lords of the Fallen. So obviously, it's a good question. It's a very good question. It's a million dollar question. We think it's absolutely not correct for us yet to share our internal expectations, and we still don't have enough data points to be able to share that. And we prefer to wait. We think that there's a very, very strong potential that the game has and Elden Ring proved that market segment became mainstream and is large. And obviously, Elden Ring has great numbers, and we're not saying that we are looking to repeat those numbers. That's absolutely not what we are saying. But their segment is large enough that this should allow us to be really successful with Lords of the Fallen. So we're very confident, but we don't want to share this yet, our sales expectations, we prefer to wait.

Then the question is around what is the certification when the game may go gold and when we should expect console certification to happen? So we will be -- we are expecting them to be certified with the major platform holders in August. So in order for the game to be -- to pass the certifications, the game has to be -- the process of certification has to start within the next month, 1.5 months, and that's our plans.

And we're absolutely working according to that plan, and we're confident about our plan. The question -- a couple of questions around what events will be part of. So absolutely, there are several very important events coming in the next 5 months, but we don't want to answer that question yet when -- I mean, we absolutely inviting people to follow our social media channels. We will be speaking about when people may expect to see us investors games on any given show. And -- so nothing yet for us to confirm on that, but we are absolutely looking forward to at least some of the key shows in the next 4 or 5 months to be part of.

There's a question David, do you hear me? I'm not sure -- can you hear me well. Okay. In the SP, you mentioned 5 big events promoting Lords of the Fallen. Can you elaborate if there will be longer 10 to 15 minutes game play is one of them?

[David Broderick, executive]

Yes, absolutely, we are planning a longer game play, call it an interrupted gameplay. There was several different segments to be public in the next few months and definitely way ahead of the release of the game. So yes, that's one of the bits we are planning. There's a few questions, Marek, just how we see the game evolving post release and hope we get a positive reception to that and our view on DLCs?

[Marek Tyminski, executive]

Right. So we have nothing yet to say about the DLCs, but we absolutely can confirm we have plans for that franchise in broad terms post launching the game in October. But nothing yet for us to really publicly say at this moment. But we will be absolutely supporting. And obviously, what's important here, I think, from the investment standpoint, there's very important sales to be generated in the first weeks from the launch. But at the same time, we will be doing our best to maximize the revenues and profits from that game in the years to come, right? So this is a franchise, that's the product that will generate important revenues and important contribution to our results in the next years, not just in the next year, but in the next years obviously. There's a question, what are the current sales expectations for the game Lords of the Fallen based on the preorder sales data? To us, it's too early to really build a meaningful model and expectations just on the preorders. It's definitely too early for us. We see that we're pleased with the numbers, and we're even more pleased with the wishlist that is increasing -- has been increasing in the last weeks and has been increasing since the start. So there's a lot to like about that, but it's absolutely too early to really build a meaningful model based on this first week, 1.5 weeks of preorders, neither the wishlist.

There are a number of questions in regards to what will be the sales in the next year. And I think that -- those questions are just too early for us to answer. I mean, we are absolutely fully focused on Lords of the Fallen.

But meanwhile, the other projects are being further developed and we have separate teams working on Project Survive, on Project Scorpio, those teams have been also growing. And there is a question on Project Survive, the size of the team currently is around 40 people, but that team is also -- has been also growing and further growth. So that will be a bigger, bigger team. And the same with Project Scorpio that will also become a bigger and bigger team.

Those gains are very important to our future revenues and profits, but it's too early for us to give any comment. The only thing, apart from that, I can say again, like we've been happy from the progress of those projects. And they've been developed. They've been developed by separate teams. So we have a separate team working on Lords of the Fallen, Hexworks, outsourcing partners. We have a separate team working on Project Scorpio, and we have a separate team working on Project Survive.

There are definitely synergies between those projects. And one of them is Unreal Engine 5. So all of those games are based on the same technology. So that allows for certain synergies and some of the systems that can be used across those projects. But yes, but there are separate teams working on that.

David, do you see any other important question we should touch upon?

[David Broderick, executive]

I'm just looking through -- you've touched on most of the interest seems to be about the release of the game, the life after the game and what we're doing after that. And you've obviously just touched on the other ongoing projects with Survive and Scorpio as well, which are obviously for life after Lords and another big kind of component in terms of what we've been investing into the business, in order to deliver growth and sustainable model going forward. So just...

[Marek Tyminski, executive]

So the questions around marketing, I think, right? So how we're going to finance the marketing? So just briefly here, and I think, David, you can follow up, there's more I want to say. I think we will be financing the marketing mostly through our partners. So that's -- it's a broad term mostly for our partners and that's a very typical, right? So a typical way of financing the marketing. David, you can add anything if you feel there is something more to add here.

[David Broderick, executive]

No. I think like I said earlier, when we were going through the presentation, I think it's important to remember, obviously, we've reported our numbers at the end of Q1. There's been quite an amount activity. We talked previously as to the means of how the business is financed, and the ongoing business and the back catalog is one element that still continues to hold up. We talked about that we would be signing agreements with our distributors. We've executed on the first of those we play on. We have others lined up that will see close on 90% of the coverage of our entire sales network covered very, very soon and a lot of the other smaller contracts are at an advanced stage.

We've also talked about what we've done with PKO BP, again, there was more activity in that post the Q1 results at the end of April. And as Marek has pointed out there, working with our suppliers and working with our partners is another key aspect in terms of cash flow and funding in terms of how we bring the game ultimately to market.

Again, I think additional debt is probably a logical path for us given what we're seeing in terms of the potential for the game to really maximize, I suppose, the opportunity that we see ahead. But I think we've been pretty transparent, very open about the means that we've seen, and we've equally demonstrated clear conversion and execution on those different means of financing.

So that's what we will continue to do and close out as we work towards the release of Lords.

[Marek Tyminski, executive]

Thank you, David. Plenty of questions around game. I think that a lot of that, we cannot really answer yet, that's not yet public, how long the game will take to beat, I mean longer than shorter for sure. But that's all we can say now.

I mean we know exactly what we expect, but we cannot share that was -- it's not yet public knowledge, we cannot share that yet, unfortunate with investors, but it's definitely a bigger game, and meaningful and a longer experience. Question, David, on whether we're planning capital increase? It's been a common question, I think -- are we planning any capital increase?

[David Broderick, executive]

No. Like I said, I think what I touched on there is that we would look at -- we took more debt, we would look at a non-dilutive form of bringing money into the business and hence, no capital increase in that regard.

[Marek Tyminski, executive]

Dual listing is completely stopped or just postponed in time? That's another question that I found here.

[David Broderick, executive]

Yes. I mean, again, I suppose nothing's changed from our position. We paused it previously, the sentiment to a lot of the game stocks in the U.K. had changed and also general kind of global market conditions. I think the Polish market, the knowledge of the investor base, both from public and institutional investors is very strong. We currently have a very strong peer group of well-respected gaming stocks in Warsaw. So at the moment, we had a lot of our focus on Lords, the sensible thing continues probably to pause that. And we thankfully have seen strong support from the investor base in Poland in recent weeks and months looking at the story and long may that continue.

[Marek Tyminski, executive]

Thank you, David. I mean that's -- yes, I mean, we don't -- we don't want to say -- we don't want to speak yet about what may happen after Lords launch, right?

I mean, first we want to get to the launch, maximize the launch, make sure that we do our best across the whole team to make the most out of that opportunity. And then obviously, we will be making further decisions together on what's next for the company and what's next for us in general.

As you said, are you prepared for a large number of online players on release date, one game had problems with operation of servers, so first week if the number of players exceed your expectations in a positive manner, will you be testing stability? I think just to answer that question, in general, yes, we are. We have a very senior team and very competent team on that project, and we have a senior competent team on the QA side as well.

So we are -- we know what we are doing, and we are -- yes, we are testing, as I said previously, we are testing this game with external partners mostly. We have a QA team internal, smaller. It's mostly tested with external partners. So I want to make sure that the game has all the functionality and is ready to launch when it's launched. So we are aware of any potential issues, and we are ahead of them in terms of our work around the release.

Just trying to look if there's anything more. I mean there are questions in regards to more details on publishing of the game and more details of the game. We are not able to share answers on them yet. So we have to apologize to investors. But again, I would like to ask everyone to stay and basically follow our social media channels, and there's a lot to come from us.

We have at least 5 major marketing bits coming before the launch of the game. And I think within every month, there will be way more presented and investors can understand better details on the game itself, on marketing and publishing and everything around that. So just to follow our social media channels, I think that's definitely what we would like to ask investors to do. Yes. I think that's -- I'm not sure, David, you see anything else there to answer.

[David Broderick, executive]

As you said, most of the questions have been kind of promotion up to the release of the game, support of the game, post-release. So that seems to be the general theme. So I think we've touched on most of those if not all of those kind of questions that have come through.

[Marek Tyminski, executive]

Yes. Thank you very much, everyone, for taking part in our first quarter investor call. And again, we look forward to seeing you soon. Stay in touch with our social media channels. Thank you very much. Thank you.