Cd Projekt Sa Unsp/Adr

Ladies and gentlemen, thank you for standing by, and I would like to welcome you to CD Projekt's Q1 earnings conference call on the 29th of May 2023. At this time, all participant lines are in listen-only mode. The format of today's recorded call will be a presentation by CD Projekt's management team, followed by a question and answer session. Without further ado, I would now like to pass the line to the company's CEO, Adam Kicinski. Please go ahead, sir.

Good afternoon. Welcome to call on CD Projekt Group's financial results. Today we'll briefly sum up the first quarter of 2023. My name is Adam Kiciński and I'll run this presentation together with Piotr Milubowicz. Michał Nowakowski will join us for the Q&A session. Before talking about Q1, I would like to share with you some good news. I'm very proud to say that The Witcher 3 Wild Hunt hit 50 million copies sold. This, according to public data, ranks The Witcher 3 among the 10 best-selling video games of all time. At the same time, the whole trilogy, Witchers 1, 2 and 3, has reached a total of over 75 million copies sold. This clearly shows the strength of the franchise, and we are excited looking forward to our next projects within the Witcher universe. Let's now move to slide four, our developers' involvement in ongoing projects. As of the end of April, the Phantom Liberty team working on the final phase of the project was over 320 people strong, making them our biggest team. The Polaris team is still growing and has reached 220 developers. Bearing in mind recent developments, I would like to take the opportunity and make some comments on two other teams. First, Sirius. Following the evaluation of the game, we decided earlier this May on a new framework for the project. As a result, the composition of the team has changed, mainly on the Molassas Flats side. Therefore, next time, the red part of the chart will naturally be smaller. Second Gwent. Having decided to entrust its future into the hands of community, the resources and roles required are naturally declining. Over the past year, we've been transferring some of the developers to other projects. But at the same time, we have to part ways with a number of team members. So the grant development team will continue to gradually decrease in size till the end of this year. And last but not least on my side, The marketing campaign for Phantom Liberty is kicking off soon. Less than two weeks from now, we'll be taking part in Summer Game Fest Play Days in Los Angeles. We'll have hands-on sessions for press and content creators. And at a later date, we are also planning plenty of hands-on opportunities for our community. So please stay tuned. Now, let's sum up the financials. Piotr, the floor is yours. Thank you, Adam.

Now, let's dive into our results for the first three months of this year. Let's start with our consolidated profit and loss account on slide 7. Unlike last year, when in Q1 we had the premiere of Cyberpunk Next Gen Edition, during the first quarter of this year we had no special sales events. Internally, both development-wise and publishing-wise, we focused on preparations for the most important event of the year, the launch of Phantom Liberty. As a result, our sales revenue compared to last year was naturally lower, but still reached a robust 175 million slots. In contrast to total group sales, our cost of sales slightly increased, which comes mostly from increased depreciation due to the completion and release of the Witcher 3 Next-Gen Edition in Q4 last year. Moving on to operating costs, our selling expenses decreased by 15 million zloty down to 39 million. This was mainly driven by a decrease in Cyberpunk servicing costs as well as in Cyberpunk IP-related publishing expenses. As regards administrative expenses, they didn't change much compared to last year. Moving further to other operating income and expenses, the positive balance of over 18 million Zloty comes mostly from a partial reversal of the series impairment allowance we made back in the 2022 books and partial write-off of our Q1 2023 development expenditures related to the project. All in all, series impairment adjustments improved our EBIT by nearly 19 million Zloty. We are happy that we've managed to work out a new framework for the project, and it's already set on its new ambitious course. Another supporting driver is visible in the income tax line. Our income tax for the period decreased by half compared to last year, mainly thanks to lower withholding taxes paid abroad. All in all, our net profit for the first quarter of 2023 reached 69.7 million zloty, which is slightly above the solid result of the previous Q1. Let's now move on to the next slide. Number eight, our consolidated balance sheet. Over the first quarter of 2023, our balance of expenditures on development projects increased by 71 million zloty. This figure represents the balance of new expenditures on development projects for the period, 74 million zloty, plus the already mentioned nearly 19 million zloty impairment adjustment related to project series and less the amount we've recognized as costs for the period of 22 million zloty. At the same time, among current assets, our trade receivables decreased by 91 million zlotys, which is standard for Q1 when we collect receivables for the preceding QCQ4 period. And last but not least, the total value of cash deposits and treasury bonds included in the three assets items marked with an asterisk is summed up under the table and totals 1,112,000,000 Zloty as of the end of March 2023. I will walk you through our main cash flow drivers in a moment. Let's move on to the second part of the balance sheet, slide 9. This time, the situation regarding equity and liabilities is quite simple. Our equity grew mainly due to profits for the current period, and our liabilities, mostly trade liabilities, decreased since the end of 2022, similarly to the decrease in receivables. Now, please move on to the next slide, number 10. So the Projekt RED's expenditures on research, development, and service of released games are presented quarterly since 2021 to illustrate the changes happening at the studio after the launch of Cyberpunk. I'll now focus on comparing this Q1 to the past Q4 to highlight the most recent changes. The yellow part represents our total cost of servicing our released games. The increase in Q1 comes from additional support we allocated for the next-gen edition of The Witcher 3 released recently in Q4. And also, as we are getting closer to completing Phantom Liberty, initial research works on new projects are on the rise, mainly Hadar and Orion. hence the slightly shorter blue bar and the more visible green bar. The main projects included in the blue part in Q1 were Cyberpunk Phantom Liberty, Polaris and Sirius. And now our simplified cash flow on slide 11. Cash wise, the 70 million Zloty in net book profit for the period was supported by 25 million Zloty in depreciation and amortization for the period. At the same time, When talking about cash expenses, the serious impairment allowance adjustment in the amount of 90 million Zlotyk needs to be deducted. The already mentioned change in our receivables and liabilities represented by the next two bars also significantly boosted our cash flows this Q1. We used the positive operating cash flows to finance over 70 million Zlotyk of expenditures on our development projects, which are the core of our business. Altogether, our financial reserves kept in cash, bank deposits and T-bonds increased by 21 million zloty over the first quarter. Our strong cash position leads us to the next page and the recent announcement regarding the recommended allocation of profit earned in 2022. The board after the project recommended to the general meeting to allocate 241 million zloty to the reserve capital and to share 100 million zloty with our shareholders by way of a dividend payout. We continue to believe that a dividend is the most straightforward, instant and democratic way of sharing profits on equal terms with all shareholders. That's all from me for now. Thank you for your attention. We can now move on to the Q&A section.