Cd Projekt Sa Unsp/Adr

Ladies and gentlemen, thank you for standing by. Welcome and thank you for joining the CD Projekt Group Q3 2022 Financial Results Investors Conference. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question and answer session. If you would like to ask a question, you may press star followed by one on your touch-tone telephone. Please press the star key followed by zero for operator assistance. I would now like to turn the conference over to Adam Kaczynski, President of the Board and Joint CEO. Please go ahead.

Good afternoon. My name is Adam Kaczynski and I'll be your host during today's conference dedicated to the CD Projekt Group's financial results for the third quarter of 2022. I'll run this presentation together with Piotr Nielubowicz. Michał Nowakowski will join us for the Q&A session. All right, let's get started down from the short summary of the past months. In the Cyberpunk franchise, two important events took place in September. On the 6th, we released patch 1.6, named The Adronis Update, bringing another batch of substantial updates to Cyberpunk 2077. This was followed a week later by our first anime series, Cyberpunkedramas aired on Netflix, a co-creation between ourselves and the Japanese studio Trigger. The update featured multiple improvements to the game, many of which had been directly requested by the community. It also contained tie-ins to Cyberpunkedramas, encouraging anime fans as well as gamers to immerse themselves in the dystopian world of Cyberpunk. Our goal was to establish transmedia synergy between these two formats, and it worked well. Now, let's move on to slide three. High scores on review sites, favorable impressions from key media outlets, and a great deal of positive feedback from the community. All of this greatly exceeded our expectations. In its first week, Cyberpunk Adramas hit the top 10 most watched non-English shows on Netflix and remained on that list for nearly a month. The popularity of the anime generated fresh interest in the game. For four weeks in a row, over a million gamers, both new and returning, explored Night City each day. What's more, The share of recent positive reviews of the game on Steam exceeded 90%. It's an incredible result that once again proves we have a great game on our hands. Now let's move to the next slide. In the past two years, we worked hard to introduce the necessary changes to the company's operations and to prepare internally for the big public review of our future plans. In our strategy update presented on the 4th of October, we confirmed the key directions in which we want to expand our business focused on the long-term product outlook. Speaking of which, let's move to the next slide. In the second half of October, we disclosed that Canis Majoris, one of the projects originally announced during the strategy update, would be a remake of the first Witcher game. This project will be developed by an external studio, Fools Theory, a company run in big part by experienced ex-Celebrate Red developers. Of course, we'll also be involved. Still on the subject of The Witcher, December 14th, we'll see the launch of the next-gen update for The Witcher 3 Wild Hunt. This will feature multiple visual, performance, and technical enhancements over the original. including performance and ray tracing modes on consoles, a new camera option available when playing the game, cross progression and photo mode, which was highly requested by the community. The update will also offer a variety of community created modes and additional content inspired by the Witcher Network series. As for our current operations and development, let's move on to slide seven. As you can see, Our focus remains unchanged. We are concentrating on the final stage of the development of Phantom Liberty, an expansion for Cyberpunk 2077 scheduled for the next year. Right now, almost 350 developers are working on that project. At the same time, we have strengthened the Polaris and Sirius teams. The former have grown to more than 150, while the latter accounted for around 60 developers at the end of October. Now let's get back to the strategy outlook. Our ambitious plans for the next years to come are strongly linked to the recent announcement that we are opening a new studio based on two hubs, one in Boston and one in Vancouver. The goal behind this is to expand our development capabilities by tapping into the Northern American talent pool. This brings me to the last slide of my part of the presentation. Attracting highly skilled employees and effectively motivating those who we already have on board is crucial for us to succeed in the long run. That's why during the upcoming Extraordinary General Meeting, we want to put to the vote a new incentive program for the years 2023-2027, replacing the existing one. We expect this change to boost our position as an employer of choice in the highly competitive global gaming industry. It will also contribute to the long-term value of our company, which is aligned with the interests of our shareholders. If you have any questions in this matter, do not hesitate to contact us. Now it's time for financials. Piotr, the floor is yours.

Thank you, Adam. Now let's dive into our 2022 Q3 results. Let's start with slide 10, Consolidated Profit and Loss Account. Although due to seasonality, Q3 is usually the weakest quarter of the year, this year so far it was the strongest one for us. In total, our sales revenue reached 245 million zloty, which is 70% higher than for the third quarter of 2021. The Cyberpunk game was the main contributor to the achieved revenues. As you know, since its release, we've dedicated a lot of effort into patching and updating it. In February this year, we released a next-gen update. And as Adam mentioned just now, in September we released another significant one, called the genres update. It brought further enhancements and improvements to the game, but also additional content related to the anime that was to be released one week later. And so it happened. On the 13th of September, Cyberpunk Adr's anime premiered on Netflix. Both events were supported by marketing and PR communication. All this resulted in a significant number of gamers playing the game, both returning and newcomers. As far as the anime is concerned, in Q3 we also recognized full revenues and costs related to it. This resulted in increased sales of products, as well as increased costs of products and services sold, line item, which, together with amortization of our already released games, reached nearly 49 million Zloty in Q3 this year. Although on the anime itself we enjoyed lower profitability than we usually see on CDPR games, the gross profit on sales amounted to 166 million zloty, 82% above Q3 last year. Our selling costs, 54 million zloty, slightly decreased versus last year along with a change of the structure. We experienced a decrease of costs dedicated to servicing Cyberpunk 2077 and an increase of marketing and PR costs related to the franchise. Next line, we also save on administrative expenses. Although most cost categories were on the rise this year, the decrease versus the comparative period was driven by two 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 goals of this previous program, a change which we communicated in our 2021 annual report. Second, Our early phase research expenses related to future products also decreased as we progressed our projects to more advanced phases and further expenses are capitalized as expenditures on development. Moving further, decreasing operating costs and the growth of our sales revenue allowed us to increase the EBIT position. In Q3 this year, it was over six times higher than in Q3 2021. This result was primarily driven by CD Projekt Red. However, GOG also posted over 2 million zloty in EBIT profit, unlike last year, when the result of the segment was negative. This year, the balance of financial incomes less financial costs was also more favorable to us than last year, mainly due to the recent increase in interest rates. All in all, our net profit for the third quarter of 2022 reached 99 million zloty, which is again six times more than a year ago. What is also worth mentioning is that our net profitability for this quarter reached 40%, and for CD Projekt Red alone, it even exceeded 47%. Let's now move to the next slide, number 11, as I would also like to share with you that the last quarter was our best third quarter ever, both in terms of sales revenue and net profit, and both for the whole group and for CD Projekt Red alone. The chart speaks for itself. Let's now move on to the next slide, number 12, our consolidated balance sheet. In Q3 of 2022, our balance of expenditures and development projects increased by 15 million zloty only. This figure represents the balance of new expenditures and development projects for the period, nearly 65 million zloty, less the amount we've recognized as costs for the period in the amount of 49 million zloty. which also includes the already mentioned one-time amortization of our expenditures related to Cyberpunk Edgerunner's anime. As usual, I will come back to expenditures on our new developments in a moment. Another noticeable increase among non-current assets is presented in the other financial assets line, which mostly includes part of the treasury bonds we acquired in order to diversify our cash position. At the same time, looking at current assets, our trade receivables increased by 84 million zloty, which is 2.3 times the balance as of the end of June. The growth was mainly caused by the high revenues we accounted for in Q3 this year. The total value of cash deposits and treasury bonds included in the three items marked with an asterisk is summed up under the table and totals 1,095,000,000 zloty as of the end of September 2022. This means that our financial reserves decreased by 82 million zloty during the last quarter. Taking into account the increase of trade receivables by 84 million zloty and the fact of paying a dividend in the amount of 101 million zloty, this is a very solid result. I will give you more details on that in the cash flow presentation. Let's move on to the next part of the balance sheet, slide 13. As of the end of September, our group's equity had a value of nearly 2 billion zloty and grew by 95 million, driven by our profit for the period. Another noticeable change among the liabilities section involved the liabilities themselves, which decreased by 82 million zloty. This was mainly caused by the July distribution of the already mentioned dividend, which was approved by the General Meeting before the end of June and was recognized among our liabilities as of the end of the second quarter. As regards provisions, this line item grew by 19 million Zloty, mainly in relation to provisions for team bonuses set based on this quarter result. Now, please move on to the next slide, number 14. So the 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 in recent quarters. The yellow part represents our total costs of servicing our released games, mainly Cyberpunk and Gwent. Although we continue to support Cyberpunk and the Edgerunners update was released just now, the team is progressively moving on to new projects, 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 and Q3 2022. At the same time, the share of the team developing new projects is on the increase. This is represented by the blue part. Unlike last quarter, this time we had no extraordinary one-time bookings related to cooperation with our external partners. Main projects included in the blue part this past quarter were Cyberpunk Phantom Liberty, Polaris, Serious Witcher 3 Next-Gen Edition, and final expenditures related to Cyberpunk Adrenals. And now, our simplified cash flow on slide 15. Cash-wise, the 99 million zloty net book profit for the period was supported by nearly 52 million zloty in depreciation and amortization for the period and 18 million zloty increase in liabilities and provisions, not including the dividend liabilities. The main outgoing cash drivers were the already mentioned payout of the 2021 dividend in July in the amount of 101 million zloty Actual expenditures on development projects, in cash terms, 56 million zloty. Increase in prepayments and deferred costs by 13 million zloty, mainly driven by new distribution contracts concerning future game releases signed by GOG. And last but not least, 84 million zloty increase in trade receivables that should be collected in Q4. Altogether, our financial reserves kept in cash, bank deposits and t-bonds decreased over the last quarter by 82 million zloty. As I already mentioned, taking into account the increase of trade receivables by 84 million Zloty and the dividend payout of 101 million Zloty, this is a very solid result. That's all from me for now. Thank you for your attention. We can now proceed to the Q&A session.