Cd Projekt Sa Unsp/Adr

Good day, ladies and gentlemen, and welcome to the CD Projekt Group financial results for H1 2021 conference call. Today's call is being recorded. At this time, I turn the conference over to Adam Kaczynski. Please go ahead.

Thank you very much. Good evening. Welcome to the teleconference dedicated to CD Projekt Group's earnings of the first half of 2021. As usual, I'll be running this call together with Piotr Nielubowicz and Michał Nowakowski. The webcast of the presentation along with the audio feed are also streamed on our corporate website cdproject.com and on our higher YouTube channel. Let's start off with the Cyberpunk 2077 franchise and a brief summary of what we've accomplished so far with regard to supporting the game. In the first half of the year, we are focused on supporting Cyberpunk by rolling out successive improvements. So far, four patches and three hotfixes have been delivered. What's more, we recently released patch 1.3, also included additional free content referred to as DLC. With each update, we address multiple performance and stability issues, improving the overall gameplay experience for players. Restoring Cyberpunk 2077 to the digital PlayStation storefront in the second half of June was an important milestone for us, reinforcing our confidence in our plans to improve the game. In terms of support, work on Cyberpunk will continue for as long as it's necessary. Our ultimate goal is to deliver on the promise we gave to gamers and regain their trust. We are fully committed to ensuring that Cyberpunk lives up to its full potential and becomes a long-term success. At the same time, we are focused on the development of the next-gen version of the game, which brings me to slide number four. Our target date for the release of the next-gen update is late 2021. Please note, however, that as the game is still in development, production plans might be subject to change. The next-gen version is an important step on our adventure in the Cyberpunk universe. As I said before, we strongly believe in the long-term potential of this IP. That's why we are currently working on the first expansion for the game, although I cannot say anything more about it at this point in time. Now let's move on to the Witcher franchise. Please move on to the next slides. The two most significant events related to the Witcher universe took place after the close of the reporting period. In July, together with Netflix, we co-organized the first ever edition of the WitcherCon. a two-day virtual event for fans of the Witcher universe. This event attracted great community attention and was streamed by a number of key influencers. At the WitcherCon, apart from interviews and panels attended by the project creators as well as the Witcher series staff and cast members, we announced that the base edition of The Witcher 3 Wild Hunt, along with its next-gen version, regardless of the platform, contains some extra content inspired by Netflix series. As for Cyberpunk 2077, our target date for the release of the next-gen version of The Witcher 3, Wild Hunt, is late 2021. Let's move on to slide eight. The Witcher Moffat Slayer, a mobile location-based AR game developed and published by our daughter company Spoco was launched on the 21st of July. We are very satisfied with how the game has been reviewed and rated by gamers. Its ratings currently stand at 4.5 on App Store and 4.1 on Google Play. Regular users as well as experts point to, among others, strong focus on storytelling and the game's immersive nature, driven by AR. We are in process of collecting and analyzing data, in-game stats, and feedback from gamers, and we have ambitious plans for the coming quarters. We plan to roll out new content, including new adventure seasons, monsters, and features. Now, let's move to slide nine. In July, following the signing of the takeover agreement, Digital Escapes formally became a member of CD Projekt Funding. The studio was subsequently rebranded as CD Projekt Land Van Hoever. The Canadian studio has set itself an ambitious goal to triple in size by the end of the calendar year with a target team size of approximately 40 people. It will focus on supporting CD Projekt's efforts related to technology and gameplay programming for the studio's core IPs. Let's move to the final slide of this part of the presentation, number 11. In accordance with our promise to GMS, we intend to keep improving Cyberpunk 4, as I said, as long as it takes. Meanwhile, we do not lose sight on the bigger picture. We want to develop other products based on our franchises, and to keep growing our core business. Right now, 160 people are working on the size expansions for Cyberpunk, while nearly 70 more are involved in other unannounced projects. That's all from me for now. Let's move on to slide 12, Piotr. The floor is yours.

Our profit and loss account for the first half of this year. Our revenues from sales of products reached 367 million zloty and were 54% higher than a year ago. While 2020 had been our best H1 in years, the first half of this year was even better. Though we saw lower sales of the Witcher franchise this year, which is natural and expected. Cyberpunk 2077 has been more than made up for this decrease. CP was the most important source of revenue this year, and most of that sales came from digital channels. As you may remember, at the end of 2020, we booked some provisions, mainly for supplements with our physical distributors. This year, we were adjusting and utilizing them. We've analyzed the situation and possible settlement contracts with our distributors and have decided to decrease part of our unused sales provisions by nearly 40 million zloty, which boosted our product sales revenues. And at the same time, we did increase our cost provisions related to cooperation with CP distributors by 40 million zloty, which boosted our cost of product sales. These two changes were effectively neutral with regard to the gross margin. However, they reflect our updated estimation of future settlements of contracts with our distributors. There is also one more important new element in the cost of products and services sold line. During the first half of last year, it included mostly the depreciation of the Witcher 3, Switch Edition, Gwent, and Thronebreaker. This year, it also includes depreciation of Cyberpunk in the amount of 34 million zloty, hence nearly 88 million zloty total value of cost of products and services sold. Revenues from sales of goods and materials, we reported a decrease by 20%. GOG sales of goods and materials stayed at the same level as last year, although the zloty got visibly stronger against the dollar, while at Telepark RAT, the line decreased. had sales of relatively low margin physical goods and materials on the way to the cyberpunk premium. This year, it's back to normal in this respect. Hence, lower sales and costs of goods and materials sold to the project. All in all, our total sales revenues for this year reached 407 million zloty and were 29% above the sales of the first half of 2020. Our gross profit from sales reached 308 million zloty which is one fifth more than a year ago. Moving to the operating costs, our selling costs increased this year to 131 million zlotys, being driven by the Cyberpunk servicing costs. A large number of our developers and testers were working on updates and patches to the game. This year alone, the total cost allocated to Cyberpunk servicing reached nearly 48 million zlotys. G&A costs also increased versus last year. Among others, we included in this position some of the early project research phase costs in the amount of 11 million zloty and also a 10 million zloty increase in costs of our incentive program compared to a year ago. Our financial activity presents a negative outcome due to the negative effects differences and missing interest on deposits due to the low interest rates. And our effective income tax rate was around 9%. This is slightly above the level of last year, when it was just below 9%. All in all, our net profit for the first half of this year reached 105 million zlotys, 28% less than a year ago. As GOG posted negative results, 109 million zlotys net profit was generated by to the prior grant. Perspective, let's go to the next slide, number 13. of each of the four bars represents revenues for the first six months of each of the presented years. From these revenues, we covered our costs and expenses, marked gray, and earned our net profits, marked blue. However, this year, our cost structure was different than a year before. Please go to the next slide. Presents CP service costs. This is our commitment to gamers, but also I believe an expanse of temporary nature. The yellow slice represents the creation of something natural, yet non-existing last year, and of a non-monetary nature this year. And the red part, these are the early phase research expenses, mostly of Q1. And finally, the dark gray part on top represents adjustments for the increase of sales revenues due to the devaluation of our sales provisions that, as I explained, was neutralized by a cost provision of a similar value. Let's move to the next slide, number 15, our consolidated balance sheet. This year, our net expenditures on the development projects balance decreased by 27 million zloty, mainly due to the depreciation of Cyberpunk I just mentioned. At the same time, our long and short-term other financial assets increased in line with our purchases of T-Bonds as a way of diversifying our financial reserves. All the financial assets and cash are marked with a star and summed up under the total assets table to the amount of 1.1 billion zloty. Assets, the significant decrease of receivables by over 1 billion zloty down to nearly 250 million zloty comes from collection of our receivables due to us after the release of Cyberpunk. I will elaborate more on how this cash flow was allocated in the moment. Our equity decreased over the first six months of 2021, mainly due to the 2020 dividend payout, which in some part was compensated by profits for the year. I did not elaborate much on the expenditures on development projects, as I wanted to share with you one more slide. Please go to the next page, number 16. That's expenditures on research, development, and service of released games, quite a continuation of what I was presenting during our Q1 conference. In Q2, the yellow part, our total cost of servicing our released games decreased visibly versus Q1. Since the release of Cyberpunk, this part is mostly dedicated to CPU. Also, the green part, which is the early research phase costs, were much lower in Q2 versus Q1. And at the same time, the blue part, actual development of new projects visibly increased. This is in line with what Adam was presenting just now regarding involvement of our team. And simplified cash flow on slide 17. The money flowing in from reduction of receivables by 1 billion 29 million Zloty was mainly dedicated to paying the dividend in the amount of 503 million Zloty. and decreasing our long and short-term liabilities and provisions by 366 million zloty. Altogether, with the 105 million zloty net profit for the period, it increased our financial reserves by 255 million zloty, up to 1,129,000,000 zloty of cash, bank deposits and T-bonds as of the end of June 2021. This is the source of financing for our future projects and developments. That's all from me for now. Thank you for your attention. Let's now move to the Q&A section.