Cd Projekt Sa Unsp/Adr

Good afternoon. My name is Adam Kiciński and I'll be your host during today's conference dedicated to the CD Projekt Group's financial results for the third quarter of 2023. I'll be running the presentation together with Piotr Nielubowicz. Michał Nowakowski will be joining us for the Q&A session after the presentation. The past quarter was marked by the launch of the expansion for Cyberpunk 2077, Phantom Liberty. So, before discussing earnings, let me take a moment to make a quick reminder and update of the basic facts related to this release. We have crossed another milestone. Sales of the expansion have already exceeded 4.3 million copies. So the estimated attachment ratio is 20%, which I believe is a great result. Briefly about the player's score. Already on launch, Phantom Liberty's reception was very enthusiastic. The score on Steam for the last 30 days hit 92%. It's worth mentioning that the base game has reached the same score of 92% of recent positive reviews. Indeed, thanks to the votes of gamers around the world, Phantom Liberty was awarded at the Golden Joystick Gala. It won in two categories, Best Game Expansion and Best Game Trailer. What's more, Cyberpunk got five nominations for the Game Awards. Phantom Liberty was nominated for Best Narrative, Best Performance for the role of Idris Elba as Solomon Reed, and yesterday, also for the Player's Voice, which is a 100% community-voted award. Cyberpunk 2077, in turn, has been recognized and nominated in Best Community Support and Best Ongoing Game categories. This year is packed with the releases of great games, and we are proud to be among the nominees and look forward to the announcement of winners on December 7. In just one week we'll be releasing Cyberpunk 2077 Ultimate Edition for Xbox Series X and S, PlayStation 5 and PC containing both the base game and the expansion. It will be launched digitally on December 5th. The physical version will also be available in selected markets through local distributors. Now let me go to the current developers engagement. Firstly, we've decided to present, for the time being, all Cyberpunk developers as one group. They have been engaged in work on the base game, the Phantom Liberty expansion and the Ultimate Edition. Also, some of those in transfers are included in this group. That's why it consisted of 220 people at the end of October. This figure will continue to decrease in further months. This is partially connected to the organizational changes, including the transfers to other projects such as Polaris. Speaking of Polaris, the team is steadily growing, having reached almost 330 developers at the end of last month. It's expected to grow to over 400 by mid next year. All right, let's move on to the financials. Piotr, the floor is yours.

Thank you Adam. Let's go directly into our consolidated profit and loss account on slide 10. No doubt, the launch of Phantom Liberty was the highlight of the third quarter of this year. But as you may remember, the comparative period in 2022 was also very rewarding, marked by the release of Cyberpunk Edrona's anime and Cyberpunk Edrona's update. This year, in Q3, our consolidated sales revenue reached 443 million zloty, which is 80% above the revenues of the strong comparative period. Our cost of sales increased as well, primarily driven by initial amortization of Phantom Liberty, but also by accelerated amortization of the base edition of Cyberpunk. I will come back to this in a moment. Still on this line item, having evaluated the market situation and our publishing plans among the costs of products and services sold, we also included 13 million zloty in provisions associated with distribution costs of the initial print of the Cyberpunk 2077 box edition. Moving on to operating costs. Our selling expenses increased by 21 million zloty to 66 million. This was mainly driven by nearly 40 million zloty dedicated to the Phantom Liberty marketing and promotion campaign in Q3 2023 only. As regards administrative expenses, their increase cannot be attributed to a single driver. During the reported period, among others, we noted a natural increase in provisions for results-related bonuses, Growth of base remunerations of our G&A teams, increased expenses for research on new products and technologies, as well as increased costs related to the introduction of our new incentive programs, which replaced the previous program. All in all, during the third quarter of 2023, our total operating costs increased by 64%. Another supportive driver for the P&L is visible in the financial The reported surplus at 47 million zloty came from the usual drivers, such as Apex gains and interest from deposits or T-bonds, but also from bookings related to the merger of CD Projekt with Spoko. Our merger with Spoko was registered by the court in this Q3 and resulted in the following bookings on CD Projekt's site. We included Spoko's current year costs and revenues in CD Projekt's 2023 profit and loss statement, This decreased our results for this year by approximately 3 million zlot. Spoko retained earnings decreased our equity in the retained earnings position as if Spoko had been part of CD Projekt in the past. Following the merger, we also included Spoko's assets and liabilities among CD Projekt assets and liabilities as of the end of September 2023. Of course, in this process of merging Spoko's financial data into the project books, all transactions between the two entities were eliminated. And therefore, as we recorded Spoko's assets and liabilities, as well as current and historic negative results in our books, we also reversed the historic write-down of Spoko's shares in the amount of 27 million zloty, which is part of the discussed financial income line item. Moving further, our income tax for the period consisted of three components. Current local income tax, changes in deferred tax and withholding tax paid abroad. As regards the withholding tax, in this reporting period we've decided to change our approach to when it is recognized in our P&L statement. From now on, each quarter we will be estimating and including in this line item the amount of withholding tax related to current sales that does not qualify for recovery from our local tax settlements. Historically, this process was completed upon receipt of withholding tax payment confirmations from our licensing partners, which occurred in the following financial year. The amount for the first three quarters of this year that we've recognized in Q3 according to the new formula reached 8.3 million zlotys. All in all, our net profit for the third quarter of 2023 amounted to 203 million zlotych, over two times more than what we've achieved in the very solid comparative period. Net profitability of DEFZ segment exceeded 50%, while for GOG this factor reached nearly 10%, a very solid result for a distribution business. As mentioned a minute ago, on the next slide number 11, I'd like to present in more detail the depreciation scheme of expenditures on the Cyberpunk base game and Phantom Liberty expansion. But first, let me guide you through what exactly the amount that's going to be depreciated consists of. 178 million zloty represents the sum of expenditures on development of Cyberpunk 2077 base game and its next-gen update, that have not yet been amortized. What I would like to emphasize here is that this amount does not include expenses related to the update 2.0, as those were booked historically in selling costs of each period, just like other costs of previous updates. Other expenditures to be amortized are related to the development of Phantom Liberty in the amount of 273 million zlotys. All in all, this totals 451 million zlotys. We expect that in the future most of the sales should come from the announced Cyberpunk 2077 Ultimate Edition and therefore we believe that the future monetization of the base game and its expansion are inextricably linked. Thus, for the total amount of 451 million zloty we've planned joint depreciation in the following order. 20% of the sum, both in Q3 and Q4 this year, then 5% each quarter of 2024, 3.5% in each quarter of 2025, 2.5% in each quarter of 2026, and 2% in each quarter of 2027 and 2028. Let's now move on to the next slide, number 12. I'm proud to share with you that the last quarter was our best third quarter ever. Both in terms of sales revenue and net profit. This is true for the whole group, for CD Projekt Red alone and for GOG.com. The chart speaks for itself. Let's now move on to the next slide, number 13, our consolidated balance sheet. Over the Q3 2023, our balance of expenditures and development projects decreased by 26 million zloty. We kept investing into new projects, mainly Phantom Liberty, Polaris and Sirius, all together 71 million zloty. At the same time, an even bigger amount was amortized due to completion and premiere of Phantom Liberty and acceleration of amortization of historic expenditures on Cyberpunk 2077 base game, as we had just discussed a minute ago. Another noticeable decrease in the non-current assets is visible in the Deferred Tax Assets position, which is to be attributed to the release of Phantom Liberty. At the same time, among current assets, our trade receivables nicely grew by 204 million zloty. This is typical after such an increase of sales related to the expansion premiere, which took place at the very end of the reporting period. And last but not least, the total value of cash, deposits and treasury bonds included in the three asset items marked with an asterisk is summed up under the table totals 1 billion 15 million zlotych as of the end of September 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 14. Our equity increased driven mainly by the profits of the current reporting period, up to 2.2 billion zloty. Our total liabilities increased by 51 million as well. This resulted from the growth of liabilities themselves, but also growth of provisions, as discussed on the P&L slide. Now, please move on to the next slide, number 15, to the project RAD's expenditures on research, development and service of released games, presented here quarterly since 2021. As you can see, our development work continues to be in full swing. As Phantom Liberty was launched at the very end of September, some team members already transferred to research works and new projects. At the same time, costs of servicing released games are in decline, which will probably change in Q4 due to the post-release support granted to the Cyberpunk 2.0 Edition, Phantom Liberty and preparation of the Cyberpunk Ultimate Edition. And finally now, our simplified cash flow on slide 16. Cash-wise, the 203 million Zloty in net book profit for the period was supported by 97 million Zloty in depreciation and amortization for the period. At the same time, cash-wise, we invested nearly 65 million Zloty in the development of new projects, which decreased our cash reserves. Short-term liabilities and provisions increased by a similar amount of 60 million zloty. And finally, the already mentioned increase in our short-term receivables amounted to 198 million zloty, an amount similar in size to the actual net profit for the third quarter. Altogether, our financial reserves, capping cash, bank deposits and T-bonds increased by 84 million zloty over the reported period. It's a very solid result taking into consideration the DX Pension was launched only five days before the end of the quarter, and at the end of which an amount similar to our net profits for the same time was frozen in the increased receivables, which are to be collected during the upcoming fourth quarter. That's all as far as Q3 2023 results are concerned. I'm looking forward to our annual earnings call when we will be able to discuss the full results of Phantom Liberty and the Ultimate Edition launch. Now we can move on to the Q&A session. Thank you.

As a reminder, if you do have a question, please signal by pressing star 1 on your telephone keypad to register your question. And please, you may type your question in through the questions button in the toolbar at the bottom of your screen. We have a question on the phone from Alexey Filippov of JP Morgan.