Cd Projekt Sa Unsp/Adr

Good evening. Hello. Welcome to the teleconference dedicated to CD Projekt Group results for the first quarter of 2021. My name is Adam Kiciński and I will run this call together with Piotr Nielubowicz and Michał Nowakowski. The webcast of the presentation along with the audio feed is also streamed on our corporate website at cdprojekt.com and our IR YouTube channel. Let's get started. Please jump to slide 3. Improving Cyberpunk 2077 remains our top priority. Since the beginning of this year we've released 5 updates and of course there is more to come. The next update is to be released in a few weeks. As we announced before, this year you can also expect free DLCs providing small bonus content for gamers as well as an updated next-gen edition of the game, which is scheduled for the second half of the year. On slide number 4, you can see how our efforts improved Cyberpunk's stability. The crash rate is getting lower and lower with each update. Please bear in mind that it's somewhat natural for each new update to cause some extra short-term boost in statistics, which is strictly related to the process of downloading and installing the update itself. That's why the chart shows local peaks around the time of releases. But overall, we can definitely observe a downward trend here. Given the recent improvement and motivation we have, we strongly believe that the game will prove success in the long run. Moving on the next two slides, the Witcher franchise. On slide 6, you can see our plans related to The Witcher universe for this year. Skoko, the youngest member of the CD Projekt family, is about to launch The Witcher Monster Slayer, a free-to-play mobile location-based RPG that uses AR technology. This release is expected this summer. As for the second half of the year, we plan to release the next-gen edition of The Witcher 3 Wild Hunt. That's all from my side. Let's now move on to slide 7. Piotr, the floor is yours.

Thank you, Adam. Let's start with our P&L statement. This year's first quarter results are presented together with our 2020 Q1, which by then was the best first quarter we ever had. Last year, due to the pandemic, the release of the Witcher series and that of the Witcher 3 and Nintendo Switch, Q1 2020, revenue-wise, was nearly two and a half times better than the first quarter of 2019. This year, these gross drivers appear to be gone. In the first quarter of 2021, Cyberpunk was our leading IP, which generated nearly 60% of sales of products after the Projekt Red. It's worth mentioning that due to the non-existence of cyberpunk on the Sony digital store, which is potentially the second biggest marketplace for us, and settlements of sales provisions we set in Q4, our cyberpunk revenues at SEDECRECT have mainly been driven by PC digital channels. The second source of revenue comes from goods and materials fueled by the GOG.com segment, where the segment itself enjoyed a 12% increase quarter to quarter. As always, our sales were accompanied by cost of sales. The main increase here is visible in the cost of products and services sold line, where we included 17 million depreciation of Cyberpunk 2077. Our gross profit from sales reached 135 million zlotych, 10 million zlotych less than a year ago, despite the 17 million zlotych Cyberpunk depreciation. Our operating costs increased, driven by four main factors. First, a big part of the dev team was working on updating Cyberpunk, and since this was a service to an already released game, costs were booked directly into P&L, into the selling cost line. Total servicing costs dedicated to Cyberpunk added to the much smaller Gwent Live Operation service costs, and altogether amounted to 30 million zloty in the first quarter of this year. Second, during first quarter we run research and prototyping works for our subsequent projects. Such expenses need to be booked directly into P&L into the general and administrative costs. These expenses amounted to over 9 million zloty and represent approximately half of the increase of the G&A position. Thirdly, the general and administrative costs include 9.4 million zloty of non-monetary costs related to our employee stock option plan. This is five and a half million more than the respective costs of the previous program booked in the first quarter of 2020. And last but not least, the increase in all our operating costs also reflects the growth of the back office marketing, communication and sales teams over the last year. Year on year, the headcount for this part of the team grew approximately by one sixth. All in all, deducting financial expenses and income taxes, our net profit for the period amounted to 32.5 million zlotych, which is proportionally less than usual, mainly due to the time-limited research and servicing works booked directly into our costs of this quarter. Let's now move to the next page, our consolidated balance sheet. Our fixed assets grew by 144 million zlotych, reaching over 900 million. This growth comes mostly from the increase of financial assets as a result of foreign T-Bonds acquisition which was made to diversify and allocate some of our financial reserves. The 64 million zloty growth of other fixed assets, visible in the line below, comes mostly from the recalculation of our deferred income taxes by nearly 60 million zloty. But the most notable changes occurred among the working assets. Our receivables decreased by 1,091,000,000 Zlotyk, leading to an increase of cash and bank deposits by 823,000,000 Zlotyk and 114,000,000 Zlotyk increase on domestic payments included in the other financial assets line. All in all, over the first three months of 2021, the total value of our cash, bank deposits and T-bonds increased by 1 billion and 14 million zlotyk, reaching a total of 1 billion and 915 million zlotyk. Moving to the equity and liability side, the sales provisions we set as long-term at the end of 2020 were classified to short-term provisions. Hence, the change from 145 million zloty to zero for this position as of the end of March 2021. At the same time, the total value of provisions among the short-term liabilities increased by 40 million zloty. Together with the decrease of long-term provisions, this made the total balance of provisions to decrease by 105 million zloty. Over the first quarter of 2021, we also reported an increase in our liabilities. This is mainly caused by the growth of our current income tax liabilities by 66 million zloty. This growth was offset in big part by the deferred income tax asset decrease I mentioned a minute ago. Let's move to the next page. Each time I comment on results, I typically present a chart with our expenditures on development projects. This time I decided to slightly modify it to visualize the allocation of our developers' efforts in recent quarters and explain how respective costs were booked and influenced our P&L and balance sheet. The blue part represents our expenditures on development projects. It's a book perspective. This is the quarterly increase in the capitalized volume. Why was it so high in 2020 Q4? may lead to the final phase of development of Cyberpunk-related costs, including provisions for developers' bonuses. This year, the capitalized amount was smaller as many of the developers were moved to other tasks. The yellow part represents costs of servicing already released games. Till the release of Cyberpunk on the 10th of December, these costs were mainly related to Gwent. After the release of Cyberpunk, a big part of the team was moved to updating the game, which translated into the increase for Q4 and especially Q1 2021. And the green part represents the so-called research costs, initial costs for prototyping of new projects. As you can see, we had initiated this cost last year, but the increase clearly occurred this year. Both the yellow and the green parts, which are servicing and research expenses, were booked directly into our profit and loss calculation. Please note that the Spoko company, which works full force on the coming The Witcher Monster Slayer game, is not included in the presented consolidated results yet. Let's move to the next stage – simplified cash flow presentation. Putting aside the bookkeeping qualification of incomes, costs and expenses, this quarter we reported record high positive cash flows for the group. Remaining revenues from the premiere of Cyberpunk were paid into the company, which resulted in the decrease of receivables. All in all, our cash, bank deposits and t-bonds value increased by 1 billion 40 million zlotyk and reached an unprecedented total of 1 billion 915 million zlotyk. And this smoothly leads us to the next page. Based on the strong financial position and taking into consideration the 455 million zloty excess of short-term liabilities over receivables as of the end of Q1, the board of CD Projekt proposed the general meeting to pay out a dividend in the total amount of nearly 504 million zloty, which translates into 5 zloty per share. The dividend day is set for tomorrow and the dividend is to be paid out on the 8th of June. Thank you. That's all from my side. Now we can move to the Q&A section.

Thank you. So if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. And we start with our first question from Nick Dempsey, Barclays. Your line is open. Please go ahead.