CD Projekt S.A. (CDR) Earnings Call Transcript & Summary

Dear ladies and gentlemen, welcome to the conference call of CD Projekt S.A. At our customers' request, this conference will be recorded. [Operator Instructions] I now hand you over to Adam Kicinski, who will lead you through this conference. Please go ahead, sir.

Good morning. Welcome to the annual results conference of CD Projekt Group. Today, we'll talk about key business events and financial data for 2019. My name is Adam Kicinski, and I will run the presentation together with Piotr Nielubowicz, as always. There is also Michal Nowakowski with us, and he will join us in the discussion section, which is planned in the second part of the conference. This is, of course, Q&A session. The presentation in PDF format is available on our web page, cdprojekt.com in the first white tile on the right, titled CD PROJEKT Group Presentation FY 2019. In the past, Piotr and I were on the stage together during annual conferences. This time, exceptionally, the conference is organized as a conf call due to the pandemic circumstances. And I would like to start the presentation with a short update of our response to COVID-19. Let's jump to Slide #3. We started an intensive preparation to be able to work from our homes in the first half of March. We multiplied the connection bandwidth in the office, laid down new cables, brought new hardware and software, enabling us to effectively connect all team members to our internal servers, so they can all work remotely. By the 16th of May -- March, sorry, we had already moved over 1,000 people from CD PROJEKT RED and GOG offices to the safety of their homes. The whole operation went smoothly. Of course, all those measures were prevented, as by the mid-March, the pandemic component was only just starting. The first 3 weeks of remote work have shown that we are able to carry on all internal works without bigger turbulences. Therefore, our plans haven't changed and so we're vigorously continuing preparations of Cyberpunk's launch in September. Moving on to the summary of the last year, I would like to start with a couple of slides about key business events of 2019. Let's jump to Slide #6. Our games debuted on new platforms. We released Witcher 3 on Nintendo Switch in October, and it was our first game ever released on Nintendo platform. Therefore, our flagship game and key generator of the current result is now available on 4 platforms, all -- and, sorry. And regardless of the fact that the game is already 5 years old, its sales are still outstanding. Please move on to the next slide, so #7. Last year, we sold almost twice as many copies of Witcher 3 as in 2018. This is more so it proved that focus on quality is critical to our business and it's worth investing time and money in games that can sell for many years. On the next slide, so #8, you can see the increase of the digital distribution in sales of Witcher 3 over the last 5 years. Today, digital distribution is the -- is a dominant revenue generator for us. Additionally, our royalties on Witcher 3 products on Steam, which is currently our biggest seller, has increased 80% -- sorry, of course, to 80% earlier this year. Moving on to the next slide, which is #9. GWENT, our online free-to-play game, debuted on Apple mobile devices in the end of October. It was a key milestone in GWENT's development as the game was designed from the beginning with mobile devices in mind. On the next slide, #10. We can see that iOS accounted for more than half of the total revenue since its release till the end of the last year. It clearly shows that GWENT landed well on mobile devices. And 2 weeks ago, we added Android version, but this is a story for the sum up of the results of Q1 this year, which is planned for May. Let's move on to the Slide #11. And I'm passing the presentation over to Piotr. Piotr, the floor is yours.

Thank you, Adam. Last year was a very good year for us, indeed, also in respect of the financial results achieved. Please go to the Slide #12, our profit and loss account. Group revenues exceeded PLN 521 million. Most of this amount, PLN 304 million came from sales of our own products, The Witcher 3, including the release on Switch; GWENT, which premiered on iOS devices; Thronebreaker; Witcher 2; and Witcher 1. Next line, PLN 38 million of revenues from sales of services was delivered by CD PROJEKT RED and consist of revenues obtained in collaboration with external publishing partners in the framework of the Cyberpunk promotional campaign and to a lesser degree, the promotion of The Witcher 3 release on Nintendo Switch. The next big source of group revenues came from gog.com segment and PLN 154 million of its digital sales presented in the revenues from sales of goods and materials. As usual, GOG platform and GOG GALAXY sales peaked the results of the previous year. This line also includes PLN 35 million revenues of CD PROJEKT RED, which mainly consist of sales of physical elements of Cyberpunk Collector's Edition and physical elements of The Witcher 3 on Switch to all distributors. And also our first PLN 6 million of revenues generated by the CD PROJEKT RED STORE, which started operation in the middle of 2019. All in all, our 2019 sales grew 44% compared to the level achieved in 2018, where sales growth, cost of products, goods and materials sold usually increase as well. The increase of cost of products and services sold comes from full year depreciation of expenditures and development projects related to GWENT and Thronebreaker, both products were released at the end of 2018, and therefore, the proportional depreciation in 2018 was lower. Moreover, in the last quarter of 2019, we released and started depreciating the expenses related to Witcher 3 Switch edition. Cost of goods and materials sold also went up. However, the increase was slightly lower than the growth of revenues for this category. Grade sales allowed us to achieve PLN 360 million of gross profit from sales, 40% more than a year before. At the same time, all operating costs grew by 25% and reached nearly PLN 180 million. The growth comes mainly from 3 cost groups: First, promotional and advertising expenditures, especially related to Cyberpunk, GWENT and The Witcher 3. Secondly, remuneration of team members, both fixed and dependent upon group's results. And early recognition of costs related to our motivation program due to a revision of the expected moment of attainment of the goals of the program. Since the operation costs increased less than our gross profit on sales, we enjoyed 60% growth of EBIT and same 60% growth of the net profit of the group. Our net profit for 2019 reached PLN 175 million. A big part of our result was delivered during the fourth quarter of last year. Please go to the next slide, Slide #13. This chart presents CD PROJEKT Group's quarterly revenues for 2018 and 2019. The Q4 release of Witcher 3 on Switch and GWENT on iOS significantly added to the sales of the best season of the year. On top of that, the popularity of The Witcher series from Netflix certainly added to the recognition of The Witcher universe at the very end of the fourth quarter. As you all know, the revenues we book into our P&L are offset by costs and expenses and the remaining revenue that is not expensed becomes our profit. Please flip to the Slide #14 that presents how the quarterly revenues were allocated between cost and expenses and net profit. During last quarter of 2019, our net profit was bigger than all the costs and expenses together, which means that the net profitability we reported for this quarter reached 51% of the revenue. I'm really proud to say that in respect of sales, the fourth quarter of 2019 was the best fourth quarter we ever had in the history of CD PROJEKT Group. Better still, it was the best fourth quarter ever, not only in terms of sales but also in terms of our net results. Let's go to the Slide #15, our balance sheet. Assets. Our fixed assets grew, especially in line with the development of Cyberpunk, Witcher 3 on Switch and other projects we work on, which is visible in the expenditures and development projects. I will come back to this in a moment in more detail. All other fixed assets grew by nearly PLN 140 million, and the growth comes mostly from first investment into our campus. At the end of October, we acquired the building complex in which we have successfully been growing for the last 2 decades. We want to create a unique complex tailor-made game development needs that will secure our future growth and working space for upcoming projects. Secondly, recognition of rights under our different lease agreements in line with the application of IFRS 16 with a total value of PLN 20 million, which is offset by the corresponding other financial liabilities on the liability side. And last, all tangible and intangible assets repurchased or replaced last year. Inventories at the end of 2018 -- '19, sorry, reached nearly PLN 30 million and grew due to preparations for Cyberpunk premier. It also includes the newly created inventory of the CD PROJEKT RED STORE, which started its operation in 2019 and is servicing both European and North American markets. Receivables went up at the end of last year to the considerable amount of PLN 210 million, which is PLN 152 million more than at the end of 2018. The reason for this high value comes from great sales at the end of the year and VAT-related receivables, mostly linked with our purchase of the immovable property. The good news is the 2019 receivables have been flowing to us in 2020 with no turbulences. Another significant line, cash and bank deposits. I will come back to this in a moment. Our equity grew, and there were 2 major opposite forces shaping, dividend paid out to shareholders and the net profit of 2019. Long-term liabilities. This is mostly the other side of the IFRS 16 and the leasing agreements I mentioned a minute ago. Our liabilities at the end of 2019 grew slightly reaching PLN 73 million, which comes mostly from trade liabilities of both GOG and RED segment. And finally, my most favorite line among liabilities deferred revenues, PLN 145 million out of the PLN 161 million comes from advances on royalties for Cyberpunk PC digital preorders and initial advances and minimal guarantees from our physical distributors. This line grew quarter-by-quarter in 2019. It's worth mentioning that it also grew during the fourth quarter as the incoming amounts related to Cyberpunk were higher than the total value of advances related to Witcher 3 on Switch, which was released in Q4 and all the preorders were booked into sales. Provisions. It includes different provisions, but the most significant position is related to reserves for annual bonuses dependent on our profit of the year. This year, the result outperformed last year. And therefore, the provisions for 2019 profit-related bonuses are higher than a year ago. Good. Let's go to the next slide, #16. Promised changes in our expenditures and development projects. We started 2019 having nearly PLN 243 million invested into our development. Out of this, PLN 178 million was related to work in progress and PLN 65 million to finish projects, GWENT and Thronebreaker. During 2019, this position in our balance sheet increased by PLN 173 million, mostly due to development of Cyberpunk, Witcher 3 on Switch and other projects we have worked on. In October 2019, we accomplished the switcher projects and PLN 30 million was moved from work in progress to finished goods. Finally, during 2019, we depreciated nearly PLN 30 million of expenditures on finished development projects, GWENT, Thronebreaker, and Witcher 3 for Switch starting from October. The total amount of expenditures on development projects at the end of 2019 reached nearly PLN 386 million. Let's go to the next slide, #17. Our cash and bank deposits balance decreased over 2019 due to 3 major reasons: First, we paid PLN 101 million dividends. Secondly, we invested over PLN 121 million into fixed assets; the biggest investment was made into our campus. And we spent PLN 165 million on development projects. And from all our remaining activity, we generated PLN 210 million of positive cash flows. That is by PLN 35 million more than our net profit for the period. And what is more good news at the end of 2019, we still had PLN 220 million of open receivables, which, as I said a minute ago, reinforce our account in 2020. Please turn to Slide #18. The results and achievements of last year allowed us to attain the goals of our incentive program, which I would like to present starting from Slide 19. The first goal responsible for 20% of entitlement was for our stock price to grow as much as the index plus 100 percent points. Since the end of 2015 till the end of 2019, the WIG index grew 25%. And so the product shares grew substantially more, nicely exceeding the target. On the next slide, #20, please find our profit target for the years 2016-2019, responsible for 80% of entitlement. The profit target was PLN 618 million. Altogether during the last 4 years, we earned PLN 735 million, which is PLN 117 million above the target. Therefore, both goals of the incentive program on the group level were attained. Formal confirmation will come after our annual stockholder meeting. As the old motivation program will soon be over, and as we have big challenges and opportunities in front of us, we, the Board of the company, would like to propose to the stockholders' meeting of CD PROJEKT to set another long-term incentive program for key CD PROJEKT Group team members. Basing on our successful past results, we believe the next program should be shaped on the same logic as our 2 previous programs. The current program included 3 base goals that grew over time. Please refer to the Page #21. Obviously, the goals of the new incentive program should be updated. To put them into perspective, we presented them on Slide #22, together with the goals of the current program. During the time frame of our first incentive program until the release of Witcher 3, CD PROJEKT Group earned between PLN 5 million and PLN 28 million a year. After the release of Witcher 3 during the time frame of the most recent incentive program, our net profits varied between PLN 100 million and PLN 250 million a year. We would like the new program to move us again to a new level where our average net profit could be measured in billions of zloty. Same as last time, we would also like to set premium goals. Please have a look on the Slide 23. PLN 10 billion is the ultimate goal for the 6-year period between 2020 and 2025. And at the same time, we do not want to be driven solely by the need of achieve -- by the need to achieve particular financial results. As always, the main target for us is to stay focused on quality, to be fair to gamers and develop the greatest games we can imagine. If we do that, I'm convinced that profits will come as a natural consequence of our work and dedication. Thank you. That's all from my side. We can now start the Q&A session.

[Operator Instructions] The first question is from Robert Berg, Berenberg.

3 questions from me. The first, it sounds like, fortunately, everything is going well with regards to working from home and development and everything in your control seems good. What about any elements of the release of Cyberpunk 2077 that's out of your control? We hear about certain rating agencies that have kind of slowed down or shut down. Is there any elements that you're concerned about? Are there certain aspects of development that are out of your control? And then I have a couple of questions on your incentive program. Looking at those slides, you can see a slightly bigger increase in your targets in 2025 versus 2024. Is that implying anything about the release cadence of certain games? And then on tax, a slight update would be nice. What tax rate are you using in your base case assumptions?

All right. So I can start with the first question. This is Michal Nowakowski, and the rest is probably going to be addressed by Piotr, I would imagine. The first one, you were asking about the rating agencies. That's what I got.

Yes. We read about Japan closing for a month, and I'm not sure if any others are similar.

Right. So that may be the case, but we have obtained vast majority of ratings already for the game. The game has been submitted for the ratings, I think -- I don't want to lie to you with exact date. I don't remember exactly, but it was earlier in March. And by now, we have obtained vast majority of ratings. So there's no risk of us not obtaining rating for the game in any of the major markets or in any of the not major markets for that matter. We don't really see any major physical related -- or any risks related to the launch that may impede us or stop us in any way from launching in September. There are some difficulties with the localization process, which specifically with recording some of the access. Most of the studios are right now closed down, at least for the time being. However, we have managed to record vast majority of the voice overs, but there is always some last pickup sessions. And we're not very worried about that because that's something we can record even late and add in a form of digital patch. So by the moment the customers would actually buy the game in September, they would just download a file, which would add the missing pieces of recordings, but that process has been humped a little bit here and out. But it's not something we identified as a major, major risk, but this is literally the only thing that is on our radar. Everything else, we either already are past that hurdle. So we're not really impacted by it or things are progressing smoothly or business as usual, I would say. I'll pass the remaining 2 questions to Piotr.

Yes. The target of the motivation program are not directly linked to our financial plans, obviously. However, they are somehow related to the product roadmaps that we are planning to bring to the market -- develop and bring to the market. But it's rather a general idea with, we believe, ambitious goals for the future that we would like to meet by releasing the games. And therefore, I cannot directly answer the question about the effective tax. We will always be doing our best to pay the required taxes basing on the current -- on the future regulation. The standard income tax rate in 2019, and this year, we were able to lower it down to 7% of the effective tax rate, thanks to certain tax preferences that we could apply for, which is IP box regime and the relief for research and development work. But the future targets are not directly linked or on a couple of tax percent points lower or bigger -- better or lower results due to that.

The next question is from Matthew Walker, Crédit Suisse.

The first question is on the marketing strategy for Cyberpunk. So with -- obviously, with the conferences shut down, can you explain a little bit more about how you're going to reach people and market the game? Secondly, with physical stores, obviously, also being shut down. We don't know how long that's going to last, hopefully, not that long. But can you give us any insights as to any hitches potentially with physical stores? And I think you said previously that you expected the release to be maybe 50% physical, at least for the first few weeks. Can you -- will you revise that view based on what's happening with the physical stores? And then lastly, can you say anything at all about the mobile game that Spokko is working on and any time lines?

All right. So again, it's Michal Nowakowski. I'm going to take the first -- well, 2, 3, actually, second and third is kind of connected the split in physical stores. And Spokko, I think I'll pass to probably Adam, I would imagine, or Piotr. So first of all, on the marketing strategy and the missing, if free games comes and all the shows. I mean we've been planning for that since as early as, I think, second half of Feb. So this has not been too much of a surprise to us, to be perfectly honest. We've been working on a digital strategy to unveil new facts about a game, to present new beats to the players without these events. One has to remember that while, of course, if free and all that is super important, I mean the conferences were presented to the vast majority of consumers via digital formats. So people were watching that on streams, Twitch, Mixer whatnot, re-watching on YouTube and so on. So vast majority of that content was consumed in a digital form, anyway, when it comes to mass consumer. So that won't change. We are working, however, on smart ways to present it to us large volume of people as we can. I'm not really able to go into details here on this call because that's part of the mix we're working on. But we have plans for mix. From June through September without any physical events happening and we're able to execute the whole marketing mix without that. When it comes to the final marketing mix, there are various scenarios we're considering. There is also a scenario we consider as purely digital marketing. But of course, we're not, at this very moment in time, excluding other forms of marketing such as physical in-store presence or out-of-home, but of course, that will depend on how the situation in particular market is going to evolve. The situation is so specific that a lot of these assets available for placing marketing in special places, it's pretty much frozen right now, and we'll be able to react very, very fast. We are ready in terms of actual our assets to be everywhere we want to be. So we're prepared to be both physical and digital should we deem to be. So we're keeping the flexibility for as long as we can. We're constantly updating each other on the major markets, but also on the smaller markets, and we'll react accordingly depending on what is the situation once we get closer to September. Now when it comes to the retail stores, I mean, vast majority of the market, the retail -- the physical retail is closed. The effect of that is actually -- does vary depending on the market. In these markets where despite the closure of the physical stores, the sales have spiked. And that happened actually in some of the most hard-hit stores to the point that in those markets, the consoles are completely sold out. The physical sales, the box sales have actually risen to some point. But it is not true for all the markets. And of course, that we recognize, this is a dynamic situation. So just because that it happened in March doesn't mean that has to be the same situation in April. All said and done, you have to remember, we're launching in September. So that is still 5 months away from now. So we assume that things will change significantly. And we hope for the better. And then we imagine that stores may be open. There's another question of what retail channels will gain advantage in a given market or lose advantage in a given market. But what we're seeing is that in the current situation where this is happening, some retail are losing importance and some gaining importance. The overall number seems to remain more or less the same. And of course, the retailers, which you would expect would naturally benefit from delivering packages straight to people's homes are taking advantage of that situation. Not in a -- by the way, that just sounds wrong. I mean they just benefit from that naturally because this was the natural source of business anyway. So coming back to your last question from the pool I'm taking, which is our -- which is the split. We're not really -- we built a couple of scenarios, of course, depending on various scenarios of what might be in September, but we're not really officially changing that split. That change may split slightly in favor of digital, for sure, which, by the way, would mean bigger revenues from sold unit for us, of course. But this does not necessarily have to be the case. A lot will depend on how retail is going to cope with the situation in the coming months, what is going to be the outcome of that come September. And yes, that's pretty much it. For now, we were not really making major shifts in our planning. It's too early, and we're still going to be analyzing that situation. But the situation does not look great or bad, for sure.

And on the Spokko, Piotr?

Yes. Adam Kicinski, on this end. We can't say too much, to be honest. The game is -- I mean, the prototype is playable. We are testing it. Our lesson from GWENT -- one of our lessons from went were that releasing online game can wait till the moment that we are sure that we have absolutely amazing farm play core game. So we are now focused on internal testing. And we are now focused on making the game better and better. And it's too early to say when we'll be ready to release it. And the fact that we want to release very polished product, it's even more important, bearing in mind that the game is purely mobile. So for now, we can't share any further details about Spokko project.

The next question is from Nick Dempsey, Barclays.

I've got 2 questions. One, just a follow-up to Matthew's question about the digital physical split. I mean I guess we all have a go in our model trying to see the difference between a digital unit and a physical unit. Is there anything you can say now to help us understand if that mix went to 60-40 rather than 50-50, the kind of benefit per unit you get in your revenues for digital versus physical? And the second question, just in terms of competition around your launch dates, and we've seen a few games being delayed already. I guess we can all imagine that a few more may be delayed because it must be difficult to market games at this moment. Is there a risk that we're going to have quite a pile up of new launches towards the back end of the year, and that might make it more tricky for you to do the numbers of units from a competitive point of view that you might have hoped?

So I can start with the -- this is Michal Nowakowski, again, with the second one. So with the pile of the titles towards September. This -- there is some shifts of releases, of course, happening right now. Frankly speaking, I'm aware of one major one, which is the last of us, which is the only one, a really big one I'm aware of. And they haven't actually proposed a new one just yet. But to come back to the origins of your question, we're not really worried. I mean you're never launching in a time which is exclusive to you, there's no such thing. September has anyway been a very competitive period of time, and we've always been looking at that being aware of that. If it becomes a tad bit more competitive, that's fine. We believe we're going to be launching with the title. That's going to be a master title. And people are going to choose it because they really have been waiting hard for that, and this is going to be the moment they can enjoy that. So we don't know how many titles will pop out in the window, nobody knows that for sure, probably even the owners of the brands are not 100% sure of that just yet because they haven't made up the point just yet, but we're definitely not planning to move our date, I don't know, because somebody else is going to land in the window. So that's as good answer as I can give you right now. We're definitely not planning to move because of somebody else coming into that September window.

Okay. And coming back to the first question, what could be the impact of changing proportions between physical and digital sales. Historically, for the initial period of Witcher 3 market sales, on each digital copy, we were earning twice as much as we did on physical copies sold. But this data is proper for the specific case of The Witcher 3. Our physical royalties are paced basing on the revenue made by the physical distributor plus all the costs related to the premier and distribution of the game. Some of the costs are fixed costs, like the marketing campaign. So the final royalty per copy depends on what is the proportion between the variable revenues and the fixed copy -- and the fixed cost of releasing the game. And the more you sell, the proportionally that -- much more than proportionally, the bigger the royalty will be. Therefore, I cannot give you a clear answer, especially in this new situation, as it's really a new opening to estimate what exactly sales will be in digital and physical and the situation we know from the past may not be naturally applicable to the future of sales.

The next question is from Anna Kazaryan, VTB Capital.

Congratulations with good results. I would like to ask some questions. Firstly, how would you assess preorders for Cyberpunk 2077? Can you share any update? Secondly, could you share any update on your plans related to new games? Particularly, do you have more clarity about Cyberpunk multiplayer and how it will be monetized? And the last question is about your expenditures on development of new games and technologies so they reached PLN 175 million in 2019. Which trend would you expect in 2020 and further?

All right. On the preorders -- this is Michal Nowakowski, we're not really disclosing the numbers or any details of the preorders. I mean I can only state what was stated before, which is we're happy with the way they're progressing. That has not changed, but we cannot go into any details really. This has always been the plan, not sure, specifics around that.

And Adam Kicinski, on this end. And regarding our next project, we are going to talk a bit more about the future after releasing Cyberpunk. So for now, we are not going to review any details about the future projects -- any more details because we said that there will be a series of events after releasing Cyberpunk, but nothing new to be said today as we want to focus our gamers and all our clients solely on Cyberpunk release, not to distract their focus. Piotr, maybe the third question for you.

Yes. We're not giving any guidance on future results, but the general situation with our development for the future is that definitely we will not be decreasing the team, the whole team and probably even increase. We'll keep on working as we still keep hiring and growing. So salaries, which are a big part of the R&D expenses on our side, will not decrease. But at the end of 2019 and same will apply to the first month or at least first 2 quarters of 2020, we will also have some extra expenses for localization, for testing and some other expenses related to the final stage of production of Cyberpunk. Obviously, once we release the game, this product will be gone for some time until we finish another project. And this should decrease the quarterly or annually spend on our development projects.

So far, we have no telephone questions at the moment.

Okay. So we should proceed to the questions we got in written form. How many developers are now working on Cyberpunk 2077 and how many on market player version of the game? There are 600 people working altogether on Cyberpunk-related projects or a bit less than 600. And the team is focused, of course, on single player release. Some people from multiplayer are engaged in single player and the other way around because those projects are directly connected. So the team in Warsaw, which is 40, is dedicated to multiplayer. So that's what I can say. The vast majority is working on single player release.

Sorry. This is Michal Nowakowski. So the next question is, do you feel comfortable with September release of Cyberpunk? What else is there to do to finish the game? How many people are there in QA testing the game? So do we feel comfortable with the September release of Cyberpunk? Yes, we do. What else is that to finish -- to do to finish the game? So lots of small things adding up to a larger thing, but to simplify, we need to send a game certification to the third parties, and then it's pretty much work till the launch of the game on the day 0 patch, fixing, fixing and polishing, and that's pretty much it. But the game is in a complete form. It's done and it's all bug fixing, polishing. And like I said, it's a lot of smaller and bigger activities, adding together to that stage when we sent to certification. It goes into manufacturing. Some components of the game are actually already being manufactured or have been manufactured in physical form. In terms of QA testing game, it's about 130, 150 people working on it right now.

Another question, do you plan buyback of your stocks to offset supply of stocks after current incentive program is over? And it's our -- such a decision on our side would need to be reported. So far, there was no report on that. So, so far, there is no decision at all in this respect. Another one. Do you think that your effective tax rate from 2019 will be sustainable in the next quarters? Can you comment on how the trade is calculated? So our effective tax rate for 2019, as I already mentioned, includes both the IP box regime and R&D release. In order to be able to qualify for the tax preferences, we need to have products that meet the criteria of the tax preferences. And in case of The Witcher, we could apply it newly entirely. But in case of some other projects, it's not that easy. So the effective tax rate in the future may vary depending on the situation, depending on the release and depending on the composition of our revenues and profit. On what we make the profit, all the physical sales, like gadgets and other physical products do not qualify to it, and our own game in vast majority, too. So the final proportion will depend on the product mix and the revenue mix we generate in the future.

Okay. So the next question is it is difficult to provide physical copies of games these days, considering that you consider postponing the premier, the launch of Cyberpunk. So I'm not -- first of all, I'm not sure what is meant by provide physical copies of games these days. So I'll try to answer from a couple of angles. First, the manufacturing. It's not impeded in any way. So the manufacturing of physical copies even right now all over the world in all the facilities is pretty much happening normally without any difficulties. When -- if you mean by providing to the physical stores that is not impeded at all either, like all the physical stores that continue to sell and that are able to sell, the transport is happening normally. So there's no issues whatsoever as well. The last thing, if you mean to providing to the end customer, something I addressed in a previous question, somebody asked about that. As I mentioned, even right now, in quite a few really hardest-hit countries, I don't want to say specifically, but there has been an increase of physical copy sales, not only of digital, but physical. So it seems a lot of retailers have adjusted very, very well, actually, to this situation, although this is not something that we've been expecting, to be perfectly honest with you. Again, time will tell how the situation will evolve, should they continue to be closed. But for now, there's no -- in vast majority of the market, there doesn't seem to be as much of an impact as we actually thought there may be on the physical side of things. Again, just to remind, we're launching in September. We're not launching in May. We're not launching right now. We're not launching in June. And we do assume that things will change, hopefully, for the better by September time. So again, it's very -- like I said, I mean, currently, there's no damage in the supply chain starting from manufacturing to shipping to the end consumers of the physical boxes. But I would be far from judging right now what is going to be the impact of the current situation on the September situation because the September situation could be very, very different. We're hoping it's actually going to be better.

Okay. The next question is current testing of Cyberpunk is internal or external? And the answer is that both. I mean we have both internal and external testers. Internal testers work from their homes through VPN. So the situation is very similar to what we had with Witcher 3, although the number of testers is almost doubled compared to Witcher 3. Okay. The next question where does the difference between best case and optimistic scenario, which is PLN 8.3 billion and PLN 10 billion net come from? Does it depend on the release date of the next peak title? No. The -- basically, the difference between the base case and the premium scenario is that the premium is based on the same target. However, the assumption is made that the targets are made within 1 year or less. So the fourth year target for the base case should be made in 3 years to reach the premium goal. 5-year goal should be made in 4 years and 6-year goal should be made in 5 years. And by moving the target a year before, obviously, we happen to have a gap for the sixth year. And the premium PLN 10 billion ultimate goal of the program is our dream, our target for ourselves, of what we would like to achieve in such a premium scenario as the ultimate goal to be reached. And it does not depend on releasing or not releasing maybe in the base case scenario and other game moving the same 6-year time frame. Okay. Another question. We can only find the preorders from Steam and GOG. Can you please provide us with any comment if console sales on the platforms are not included in the deferred revenue position might be similar to PCs? In general, preorders on consoles are lower comparing to PC. PC is more preordering platform. And in our balance sheet, you cannot find the console preorders because the console platform holders are not prepaying advances on royalties based on preorder campaign or preorder effectiveness. Therefore, it's not visible. In the deferred revenue line, we present on the PC preorders advances and also advances from our physical distributors with whom we have contracts and building on the contracts, some amounts are due to us prior to the release of the game.

It's Michal Nowakowski again. And the question is since you already have development kits from Sony and Microsoft, I'm assuming it's about next gen. Can we assume that once future consoles hit the market, Cyberpunk will be immediately available or will you take some time to finish the float after the consoles are released? So we have announced in response to Microsoft announcement of their smart delivery that we will when the version of the next gen is going to be ready for release, that it will be available for the players who purchase the Xbox One version. There's no official announcements coming from PlayStation. So we really cannot confirm or deny anything. It's PlayStation that first needs to address these issues, and then we're happy to make a comment, but we cannot jump the gun ahead of them. I hope you understand that. In terms of Microsoft console, like I said, I mean we have officially confirmed both the updates and the cross-gen availability, meaning that you'll be able to play the game from the get-go on the next gen. However, when it comes to a proper fully blown next-gen version, that's going to come later. We haven't announced when, and I don't have a new comment here on that. But such patch will be available for anybody who purchases the Xbox One version here and now from the get-go. Once that update is live, they will be able to download that free of charge. That's the announcement we have officially made. And again, I cannot really comment on the policies of the first parties before they officially announce them. So cannot address the PlayStation part of the question.

Adam Kicinski again, and the question is how big impact for Netflix you see for sales of future in Q1? As Q1 results are not published yet, we can't comment too much on this. But obviously, we see the impact. Netflix series is extremely popular. So it works in favor of popularity of the whole franchise. So it influences the games as well. As you've just seen, on our presentation, sales of Witcher 3 last year almost doubled the sales of the same title in 2018. So -- and it happens mostly to our sales activities because Netflix series debuted 10 days before the end of the last year, so it helped just in a very narrow window. And this year, this effect of Netflix will be probably more visible because it's about whole period of this year.

Another question, were the cost of settlement with Andrzej Sapkowski fully booked in P&L in the fourth quarter of '19? The consequence of the contract we signed with Mr. Sapkowski were fully included in our financial statements. And all of them are our costs immediately of the fourth quarter. Some will become our costs later on during the cooperation with Mr. Sapkowski, but all the provisions or all the rights or all of the costs required are already into -- put into our annual report of 2019. Another question, can you please provide us with the information of what amount did you transfer from deferred revenues to P&L as a result of Witcher 3 Switch version release? No, we were not revealing this information, but obviously, the total preorder amount for Switch was lower than the fourth quarter value of preorders for Cyberpunk. Another question is will the shares that will be allocated under the current incentive program will be new issues or purchase from the market? We didn't make any final decision on that, but looking at the number of shares and the current market price, I would say that buyback option to fully executed incentive program is less probable than creation of new shares for the employees. Exactly like it happened already twice in the history of the CD PROJEKT Group for the first and for the second in -- for the previous first edition of the incentive project. Another question about dividend. We didn't make any final judgment or decision on the dividend for 2019. But in general, we believe the time we have right now is the time we should rather focus on developing Cyberpunk, on preparing the release of the game, and on making sure we have all what can help the process, all what can help to minimize any potential risks and paying dividends during this time is probably not in line with such a philosophy.

Thank you very much. If you have more questions, please ask them direct to our IR and thank you for participating in our conference. Hopefully, see you next time, live on stage.

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