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

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'd like to turn the conference over to Adam Kicinski. 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. Today, as usual, I'll be running this call together with Piotr Nielubowicz and Michal Nowakowski. The webcast of the presentation along with the audio feed are also streamed on our corporate website, cdprojekt.com, and on our IR YouTube channel. Let's start off with the Cyberpunk 2077 franchise and a summary of what we've accomplished so far with regard to supporting the game. In the first half of the year, we have focused on supporting Cyberpunk by rolling out successive improvements. So far, 4 patches and 3 hotfixes have been delivered. What's more, we recently released Patch 1.3, also included additional free content referred to as DCL. With each update, we address multiple performance and stability issues, improving the overall game play experience for players. Restoring Cyberpunk 2077 to the digital PlayStation Store front 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 development of the next-gen version of the game, which brings me to Slide #4. 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, products and 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 of -- point in time. Now let's move on to The Witcher franchise. Please move on to the next slide. The 2 most significant events related to The Witcher universe took place after the close of the reporting period. In July, together with the Netflix, we co-organized the first ever addition of The WitcherCon, a 2-day virtual event for funs of The Witcher universe. This event attracted great community attention and was streamed by a number of key influencers. At The WitcherCon, apart from the interviews and panels attended by the project leaders as well as The Witcher Series staff and members, we announced the base edition of The Witcher 3: Wild Hunt along with its next-gen version regardless of the platform, contain some extra content inspired by Netflix series. As with Cyberpunk 2077, our target date for the release of the next generation of The Witcher 3: Wild Hunt is late 2021. Let's move on to Slide 8. The Witcher: Monster Slayer, a mobile location-based AR game developed and published by our daughter company, Spokko, was launched on the 21st of July. We are very satisfied with how the game has been reviewed and rated by gamers. Its rating currently stands at 4.5 on App Store and 4.1 on the 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. The plan -- we plan to roll out new content, including new adventure seasons, Monsters and [indiscernible] Now let's move to Slide 9. In July, following the signing of takeover agreement, Digital Scapes formally became a member of CD PROJEKT family. The studio was subsequently rebranded as CD Projekt RED, Vancouver. The Canadian studio has set itself an ambitious goal to triple in size by the end of the calendar year with a target in size of approximately 40 people. It will focus on supporting the project's efforts related to technology and game play programming for the studio's core IPs. Let's move to the final slide of this part of the presentation, on Page 11. In accordance with our promise to gamers, we intend to keep improving Cyberpunk, for, as I said, as long as it does. 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 expansion 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.

[Audio Gap] the profit and loss account for the first half of this year. [Audio Gap] this year, our revenues from sales of products reached PLN 360 million and were 54% higher than a year ago. While 2020 has 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 more than made up for this decrease. CP was the most important source of revenue first half this year, and most of its sales came from digital channels. As you may remember, at the end of 2020, we booked some provisions mainly for settlements with our physical distributors. [Audio Gap] this year, we were adjusting and utilizing them. We've analyzed the situation, possible settlement of contracts with our distributors and have decided to decrease part of our unused sales provisions by nearly PLN 40 million, which boosted our product sales revenues. And at the same time, we will increase our cost provisions related to cooperation with CP distributors by PLN 40 million, which boosted our cost of products sold. These 2 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 1 more important new element in the cost of products and services sold live. 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 PLN 34 million, hence nearly PLN 88 million 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 was visibly stronger against the dollar, while to the prior graph, the line decreased. Net sales of relatively low margin physical goods and materials on the way to the Cyberpunk release. This year, it's back to normal in this respect. Hence, lower sales and cost of goods and materials sold at the product. All in all, our total sales revenues for this year reached PLN 470 million and were 29% above the sales of the first half of 2020. Our gross profit from sales reached PLN 308 million, which is 1% more than a year ago. Moving to the operating costs. Our selling costs increased this year to PLN 131 million, being [Audio Gap] driven by the Cyberpunk servicing cost. 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 services reached nearly PLN 48 million. G&A costs also increased versus last year. Among others, we included in this position some of the early project research based costs in the amount of PLN 11 million and also a PLN 10 million increase in cost of our incentive program compared to a year ago. Our financial activity presents a negative outcome due to the negative FX differences and we see 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 PLN 105 million, 28% less than a year ago. As GOG posted negative results, PLN 109 million in net profit was generated back to the prior graph. [Audio Gap] perspective, let's go to the next slide, #13. Each of the 4 bars represents revenues for the first 6 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, present CP servicing costs. This is our commitment to gamers, but also, I believe, an expensive [indiscernible] nature. The yellow slice represents the appreciation of something natural [indiscernible] yet on existing last year and of a nonmonetary nature this year. And the red part, these are the early price reserve expenses mostly of Q1. And finally, the dark gray part on top represents adjustments with increase in sales revenue due to the revaluation of our sales provisions that, as I explained, was neutralized by a cost provision of a similar volume. Let's move to the next slide, #15, our consolidated balance sheet. As of this year, our net expenditures on the development projects balance decreased by PLN 27 million, 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. At -- all the financial assets and cash are marked with a star and summed up under the total assets table to the amount of PLN 1.1 billion. [Audio Gap] assets, the significant decrease of receivables by over PLN 1 billion down to nearly PLN 250 million 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 a moment. Our equity decreased over the first 6 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 and development projects as I wanted to share with you 1 more slide. Please go to the next page, #16. Tax expenditures on research, development and service of released games, 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 [indiscernible] 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 PLN 1.29 billion was mainly dedicated to paying the dividend in the amount of PLN 503 million and decreasing our long-term, short term liabilities and provisions by PLN 366 million. Altogether, with the PLN 105 million net profit for the period, it increased our financial reserves by PLN 255 million up to PLN 1.129 billion 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.

[Operator Instructions] We'll take our first question from Omar Sheikh with Morgan Stanley.

I've got 3 questions, if I could. So first of all, I wanted to just check in on the timing of the release of the next-gen versions of Cyberpunk and The Witcher. I mean, you said late 2021, but I guess, arguably, any day from tomorrow is late 2021. So if you could maybe just be a bit more specific on when, during the next 4 months, you broadly anticipate the release of these 2 titles? And maybe if you could comment on the risk of -- or not the risk, but I guess your attitude towards pushing the release of these titles into 2022? That's the first question. Secondly, I don't know whether I missed it, Piotr, but if you could just clarify what percentage of the total revenues or maybe the percentage of the sales of products come -- came from Cyberpunk in Q2? That would be helpful. And then thirdly, I just want to refer to Slide 10. I can see from what you said there, but if you look at other projects, does that include the next AAA release. I'm thinking about the next Witcher, for example. Is that included in other projects? And secondly, on this slide, should we assume that given the second biggest sort of chunk of the current split of your development staff is in the expansion for Cyberpunk. Should we assume that, that's the next thing that we'll see in terms of a big release?

Okay. This is Michal Nowakowski and I'll start with the first one. So thanks for the questions. I'll tackle the first one, which I believe was about the next-gen releases of Cyberpunk and The Witcher. I think you kind of combined the question. So I'll start with Cyberpunk. I mean, our target is to release the next-gen version of CP 2077 late this year, which is something that Adam mentioned in his opening statement. At the same time, keeping in mind the lessons we have learned during the past year and taking into account the fact that this project still remains in development, we can't say with full certainty that the production schedule will not change, of course. And with The Witcher 3, the situation is slightly different in a way that this is being tackled by the external team mainly, which is Saber Interactive, the company we have worked before on Switch and also the updates in the past. And as with Cyberpunk 2077, our goal is to release that game still in late 2021. However, similarly, development process is ongoing and we cannot be absolutely dead certain that the release schedule will not change. But for the time being, we definitely are aiming with both titles for the late 2021, and I don't want to be more specific at this moment in time.

The revenue split, I was not referring to any precise revenue split for Cyberpunk or other products. But what I can confirm is that Cyberpunk was a leading source of revenue for us during the first half of 2021.

Hi Omar, Adam here. I'll take the third 1 regarding Slide 10. So the yellow part is strictly related to Cyberpunk 2077, the game which is already released. Maybe the part which is not covered there yet, because we are in the transformation is technology, because technology ultimately will be separate. I mean part of technology would be a separate division. But for now, it's assigned to PROJEKT, but besides this, the yellow bar just represents working on the game itself, Cyberpunk 2077 and the other projects are AAAs, which are not announced yet. So we do not provide any comments on -- obviously, on our unannounced project. So I can't confirm anything more than this is both games, which we haven't announced yet. And the next big AAA content will be obviously EP1, which you can see on the slide as well.

We'll take our next question from Nick Dempsey with Barclays.

I have 3. So first off, just looking at these provisions. So to understand it, you are unwinding a negative provision in the revenue lines around PLN 40 million. And then you have a new provision of around PLN 40 million in the cost line. So effectively, without those things, you're boosting the revenue line by about PLN 40 million, but the operating profit is more or less unchanged by that activity. But first of all, I wanted to understand if that's correct. And secondly, can we expect any other provisions in the rest of the year in relation to these areas? Second question, did you sell more or fewer units of Cyberpunk 2077 in Q2 versus Q1? Are you able to give us an indication there, even if you don't give us a number? And the third question. There's a comment in your release about Q3 being a lower quarter in general than Q2 and Q4. Are you pointing us towards Q3 being a lower revenue quarter than in Q2?

I will take the first 2 questions regarding provisions. So yes, your understanding is correct. Both our -- due to the, let's say, in very simplified terms, reclassification of provisions, so decrease of sales provisions and an increase of cost provisions. Our gross margin or gross profits were not affected, because those values are very close to PLN 40 million. Actually, the cost provision was slightly bigger than the sales provision. As far as the other provisions are concerned, we still have PLN 160 million of provisions to be used for the second half of the year or for the future, maybe not all of them are exactly for the second half of the year. We have been, up to our best knowledge, estimated as for the publication date. And yes, that's what is our judgment on the future potential settlements with distributors and the contracts we have is reflected into this amount. This amount also includes provisions for bonuses for the team for the first half of this year. I hope it answers the question.

We'll take our next question from Matthew Walker with Credit Suisse.

Actually, I don't think we answered all the questions. Sorry, there were 2 more actually. Sorry, and this is Michal Nowakowski. Regarding the Q2 versus Q1 CP units, we're not really commenting on the number of unit sales for the time being. As for the third question on the revenue, I think that's probably going to be taken by Piotr. So, I'm going to switch off right now.

Guiding on future sales results or future profits, that -- usually, the third quarter of the year is the weakest quarter. It covers the summertime. It misses the big promo events like the summer promo or the promos that happened around Black Friday in the fourth quarter. So I would say that the traditional seasonality for the third quarter is to be expected lower, but it's just general and I'm not intending to guide you on any specific results we may achieve in this particular third quarter.

Now we have finished. Yes.

We'll take our next question from Matthew Walker.

Thanks, everyone. Can you hear me, okay?

Yes, sir.

Okay. Yes, could you just explain the -- first of all, on the provision side. Can you just go back to first principles and explain why you took these provisions in the first place and now why you're releasing them into the revenue line and explain about the provisions that you dissolved in the period as well? That's the first question. The second question is on, you said, I think maybe I got it wrong, but did you say that you had PLN 160 million of potential provisions that you could release into the sales line in the second half of the year? Can you just explain that for us as well? And then -- could you also maybe give us an indication of how many units you've got through putting it back onto the PlayStation in the latter part of June? And then just confirm, when you're talking about the expansion for Cyberpunk, are you talking about the first paid DLC, which is coming in 2022? Is that what you're referring to when you talk about expansion?

The question was why we took the provisions in the first place. So we set some provisions in the first place back in 2020 upon releasing Cyberpunk. And the provisions included both expected costs of releasing the game that were not invoiced to us back in 2020, and we expect the invoices to come mainly to the company and also potential returns or price protections that we were expecting to happen later on. However, we're supposed to correct the sales, which we already invoiced back in Q4 2020. So the provisions or costs or sales revenues originating mostly from the premier back in 2020. Each quarter, we have to evaluate them and we have to adjust them. Right now, based on the market situation, based on the reports from our distributors, we decided to reevaluate them. And in very simple terms, we reclassified some of the sales provisions into cost provisions. Hence, the close to neutral effect of those transactions to our gross profit, but we believe having the knowledge we have today, that they better present what should happen to our profit and loss calculation. So the company should have higher sales, but at the same time, our settlements with distributors will include more costs that we will refund based on the contracts we have with them, at the same time, having higher sales and higher income from them. So that's kind of technical booking, I would say, that better reflects how we should present it book-wise and how we decided to adjust it based on the current knowledge we have right now. And as far as how much of the provisions were used and how much of the provisions were adjusted, I would love to point you to, in the Note 12 as far as I remember, other provisions of our financial statements. And there are 2 tables precisely showing what sales provisions, what cost provisions and what bonus provisions we had for the beginning of the period, how they were used, which were consumed and which were added and which were canceled over the first 6 months. I believe this will be much more convenient than describing all of the numbers right now. If you would happen to have any additional questions, I will be happy to answer them directly. Thank you. I believe that's all from my side on the first 2 provision questions.

Okay. And Michal Nowakowski, again. I'll jump in on the fourth question. Regarding the third, how many units were sold on CP when we came back to the Sony Store. We're not really commenting the units as we mentioned before also. So I can't go deeper in that question either. Regarding the fourth question about the expansion that Adam mentioned in his opening statement, is it the first [indiscernible] I'd actually like to first focus on the net income mentions here because we actually make a distinction. When we say about -- when we speak about DLCs, we mean small things like a skin, product character, like a new jacket or a new color of the hair or something similarly, well not sizable. When we speak about expansions, then yes, we're talking about a bigger thing, like in the past in Blood and Wine or Hearts of Stone, for example. So when Adam was mentioning in the opening statement, the people working on the expansion, he did mean the bigger one, which historically has been paid. I hope that explains.

We'll take our next question from Ken Rumph with Jefferies.

I suppose I'll try a further go at the provisions just to see if I'm understanding it in real world terms? So are we to take it that you think that you will have sold more units, but suppliers will make use of the price protection type policies that you have. Anyway, I think you get my idea, what's happened in the real world do you think that's causing this reallocation of provisions, if there's a way of explaining that. My questions, however, are going to be mainly about Slide 10 about staff. Firstly, any comment on staff turnover? Secondly, these are percentage numbers, approximately where are the absolute numbers between the end of the year and now? And probably finally, I was a little bit surprised how large the Gwent number was. Is this just kind of the normal number of people for Gwent, given that it has expanded to mobile now? Or is there perhaps more going on in terms of development of that game than I realized? It's bigger share of the total than I would have expected?

[Audio Gap] again. No, they are not directly related to unit sales. Obviously, the sales are the data on which we base estimating the reserves and potential future outcome of settlements of our contracts with distributors, but it's not that -- sort of that number of units generated this result. We cooperate with a number of distributors and with some of them we were adjusting the reserves this way. We've ordered the other way. And we came to a conclusion closing their books for the first half of this year. That all in all, the sales provisions should be smaller, but at the same time, provisions for cost of cooperation with the distributors, and certain of our accounts with them should also be higher. It's happens that both months are close to you will recall. The cost is slightly higher than the sales. But it's not directly related or linked one to another and neither it's linked to any specific situation with more units sold than we expected or less units sold. That's effect of total calculation of a number of contracts with distributors and a number of markets we evaluated for this purchase. Ken...

We'll move on to the staff.

Yes, yes. I'll try to cover it. So -- of course, we are observing increased churn this year. This is normal. This is what we expected after the conclusion of the large project. It always -- it is always like this. We have also intensified our recruitment activities. And what I can say that the total number of employees to the project was -- I mean, at the end -- by the end of June, it's very similar comparable to what we had at the end of 2020. So no big changes there. And in terms of churn, it's comparable what we had with -- after we [indiscernible] through. So, so far, nothing unexpected. About Gwent, well, this is related to the project and Gwent team is sometimes a bit bigger, sometimes a bit smaller. So nothing under this. I mean it's a normal situation. So apparently, at the end of H1, the number was like this, but it might change in the future as well.

Okay. Could I ask a couple of supplementaries. One is to say without going too much into current trading, but is the -- where do we stand at the end of August in terms of employees? Does -- do your comments regarding churn and against that recruitment still apply? Has there been any dramatic change kind of in July and August? And the other question I was going to ask was you referred to the fact that at the moment kind of technology/engine staff are kind of included within the other groups largely within the Cyberpunk as yellow bar. What's your idea? Do you think for how large that group would be either in absolute or percentage terms, kind of on the new model when you're working under the new sort of central resource for technology and engine model?

So after the end of July, there was no dramatic change. I mean nothing new in terms of what we had at the end of H1. In terms of technology unit, it is still in discussion. So hard to say where we'll be a year from now, definitely big part of that growth support more than what were projected at the time, but it is still in discussion. We are in the middle -- first part or the middle of transformation. So hard to say anything precise regarding numbers. But definitely, there will be the people working on technology, not necessarily at least booking thing wise assigned to projects.

We'll take our next question from Matti Littunen with Bernstein.

First question on revenue recognition. So just to check that would all the days in June for PlayStation digital units and Steam Summer Sale units be already recognized in Q2 revenue. So in other words, were all the June days from those channels included in the Q2 sales number? And the second question is related to REDengine 4. So you mentioned the technology investment. If we were to talk about hypothetically about your next big project, would it be correct to sort of assume that the technological investment in the engine required to get the next big game out would be less than that between Witcher 3 and Cyberpunk 2077, where you updated to a whole new version of the REDengine while you're also working on the game?

[Audio Gap] with revenues from digital storefront, specifically Steam and PlayStation. So all of the sales by the end of June that we reported to us, and basically, all of them were reported to us are included in the revenues for the first half of the year. You mentioned the Steam Summer Sale. As far as I remember, this action started in June but ended in July. So not the whole Steam summer promo was included in the first half results on the sales achieved by the end of June. The July sales, the finish of the summer promo will be part of the Q3 report from us.

Adam, on this end. I'll take the second about REDengine. To be honest, it's too early to say, because we are still very deep in working on the current technology for Cyberpunk 2077 and we are evaluating and discussing future avenues in this regard. So it is definitely not the right moment to say precisely or firmly where it will go and what would be the impact to our books regarding technology.

We'll take our next question from Vladimir Bespalov with VTB Capital.

I have actually two. During the first quarter conference call, you mentioned that each quarter, a few people would work on fixing Cyberpunk. Will it be the case in the third quarter? And should we expect some improvement in profitability as a result? As I would assume more people would work even within the Cyberpunk project on expansions and these costs could be capitalized, I assume. And the second question is on Spokko. You haven't consolidated it yet. But given the release of the Monster Slayer game, are you going to consolidate it from the third quarter? And if you are going to consolidate, what could we expect in terms of revenues, costs, just the overall effect on CD PROJEKT's financials?

[Audio Gap] question. With regard to Cyberpunk, we realized the game still needs improvement, and we will continue to work on it as long as necessary. However, as the developers naturally move to other projects, the number of team members engaged in the support of the game decreases with each month. That's the status quo for now. You asked whether it will increase profitability. Well, I would say it will decrease our costs for the period directly booked into the P&L. That's probably more proper to put it this way. [Audio Gap] in Spokko company. So we have certain rules for consolidating in companies. So we'll evaluate the group results versus the Spokko results, both sales numbers, and the balance, the total value of their assets. As far as I remember, that's the second criteria. And based on that, having the Q3 results, we'll make final decision. It has not decided yet whether Spokko should be consolidated in starting from -- potentially should be consolidated in starting from Q3 or starting from the full year results for 2021. And the question what's -- how Spokko results will influence our group results. That's obviously a question about future results that are still in front of us. We are not guiding on that. We've not calculated this yet ourselves. So please be patient, please be with us, and we'll cover it as soon as we have some news to share.

We'll take our next question from Maria Mickiewicz with Wood & Company.

I've got 2 questions. First -- sorry for another follow-up on provision. But I'm just trying to understand, looking at the Note 12 that you mentioned, of your financial statement. I can see for provisions for returns that actually those created in first half are almost PLN 43 million, but dissolves or release provisions seemed to be PLN 82 million. So like first look could imply that the impact on your P&L would be still positive, but you are saying it's neutral and referring to release provisions of PLN 40 million rather than PLN 82 million. So if you could just explain the difference that I'm probably not seeing in those numbers. So that will be the first question. And the other question would just refer to the revenues of CD PROJEKT RED. So basically, if you could just explain what was the reason, the main reason, for quarter-on-quarter growth in revenues? So if we exclude that, the positive impact of provisions, so if we just adjust this PLN 40 million provision for the second quarter, it would be still like quite visibly higher revenues than in first quarter. So I'm aware that you are not commenting specifically on the numbers for Cyberpunk or Witcher, but maybe you could just, at least, say whether this growth came mostly from Cyberpunk or sales increased quarter-on-quarter or Witcher or anything else? That's all for my side.

The PLN 40 million I referred to was the balance of all the adjustments we've made for the number of distributors we work with. So if you look at the referred note in our financial statement, actually, nearly PLN 70 million provisions were consumed. So they were effectively used during this period. They were PLN 82 million provisions dissolved and PLN 42 million created. So the balance of the PLN 82 million minus PLN 42 million is the PLN 40 million that influenced directly our revenues for the period, and that I mentioned in my presentation. As I said, there is more than 1 customer. There is more than 1 contract that we monitor, and that's -- that we reflect in our provisions assessment and the 40 -- around PLN 40 million net effect is the outcome of all of the calculations. The second question was what influenced the Q2 results being better than Q1. As I said, the biggest revenue driver was Cyberpunk and most of the sales generated during this period on Cyberpunk came from digital distribution. During Q1, we were not present on Sony PlayStation store. Cyberpunk came back to sales. It was an event for us, but it also allowed us to generate some extra revenues that were not present in the Q1. And so other -- Cyberpunk in other stores like Steam added to the sales and, all in all, made Q2 better in this respect than the Q1. Comment from the top of my head for now.

We'll take our next question from Tomasz Rodak with BOS Brokerage House.

Yes. Can you hear me well?

Yes, sir.

Yes. First question, once again, is related to the provisions, the reduction of provision and it's fairly simple, I think. Does it -- the fact that you reduced the provision, does it, to any extent, mean that the sale of Cyberpunk in physical channels is better than you expected when you were creating this provision? Or is it at all not connected with this? And with regards to second half of this year, you will probably be -- maybe reducing the provisions in the future in the second half. What -- is there any chance that the reduction of provision in the second half be profit contributing? If yes, what would have to happen to make the reduction of provision profit contributing? And, yes -- and if you -- could you give us some information on the digital versus physical revenue structure in the first quarter and second quarter? Yes, and that's it.

[Audio Gap] distributors have a number of possible ways of settling. In some cases, we get sales revenues, but in some other, we are also liable to refund them some of the expenses they covered on their side. The fact that we dissolved part of the sales provisions but increased the cost provisions does not naturally mean that we expect better sales on the sales side or worse sales on the cost side of the provisions. That's the effect of our estimation of what the future may bring in respect of our settlements with distributors. It happened to be close to neutral for the gross profit. But it's based on the amounts we contractually expect to be certain with the distributors and not directly on the units sold by them. So your question whether we could be evaluating the provisions in the third or fourth quarter, and will it affect -- and will it affect our profitability? Yes, we are evaluating the provisions every quarter. And depending on what the future market situation will be, we may either be required to increase them or if we were to secure, maybe we will be lucky to lower the amount of provisions. But what we booked for the end of June reflects our estimations on future cooperation with distributors and our and their future liabilities arising from the contracts we have. So that's our best knowledge on this. Regarding the physical digital speed of our revenues in both Q2 and Q1, I would say digital -- from the top of my head without checking any tables, digital was definitely the most important part of -- the most important source of revenues for us. As in case of physical, for vast majority of our cooperation with distributors, due to the nature of physical distribution that first, high quantities of games are shipped to the market and then you manage the stock in the retail channels. Most of the cooperation and most of the revenues with physical distribution partners are starting right now on the level of provisions. So the new royalties and new revenues, back to the prior growth are generated in mostly the other distribution channels for now.

[Operator Instructions] We have no further questions at this time on the phones. I would like to turn the conference back to your speakers for any additional remarks or chat questions.

Hello, Adam here. I'll take the question from the chat. Does the Management Board has any idea how to manage the supply of the employee shares? Yes, we do have an idea. Piotr, maybe you can cover this, I think because you are running this project, if you may.

The brokerage house, which mediated the take-up of shares at the beginning of the program when we were making it back in 2020, will reach out to program participants, who are contemplating -- potentially contemplating sale of shares soon after the lockup period is over, and present them with a comprehensive offer, which should enable such transactions to be carried out in an organized manner. The offer would also enable to the product to inform the market ahead of time, how such sale orders should be carried out. As with transactions carried out last year, all sales order placed by our shareholders would be aggregated and processed by an experienced team of Trigon brokers. We expect these transactions to be spread over some time and to have a limited share in our daily turnover. That's the idea, which we discussed with Trigon when preparing for the end of the lockup to be able to offer them to come to our employees with a proposal of some organized solution how to potentially help them if they decide to sell their shares. But at the same time, I can say that we've discussed it among -- with my colleagues from the Board and none of the Board members intends to sell their shares following the end of the lockup period that will expire this September. So that's the info on the this I can share right now.

And the next question I have is -- we have here -- sorry, this is Michal Nowakowski, is from Konrad Laskowski from Bloomberg News. And there's 2 questions actually. So the first 1 is regarding expansion to -- regarding the expansion to Cyberpunk. When should we expect it? And the question is here, 2022. And is it finally agreed it will be paid and what scale of price should we expect similar to what's your expansions? So I'll cover that first and then I'll read the other 1 before switching off. So regarding the expansion, as we mentioned earlier, we're actually not -- it's in development, but we're not providing any specifics about the dates. And I know 2022 is a broader question. It's not super specific like XYZ, even month, but we still would like to keep up the rule that we're not commenting the dates until we're ready to deliver that. So I'll refrain from going deeper here. And regarding the price, whether it will be paid? What price should we expect? I mean, historically, expansions have been paid as you have rightly noted with The Witcher. However, it is definitely way too early to talk about price as we've not even given the date. So again, I cannot give any details. And then the second question that was asked here was regarding your cover of report. You came back to [indiscernible] Does it suggest that you refocus on The Witcher 3 next-gen or The Witcher 4 maybe? So well, the choice of covers is very often purely aesthetic -- relying on aesthetics. I don't think any of us actually thought about it like you suggested here. But obviously, there's Witcher 3 nex-gen coming. So I guess you could tie to that. I hope that covers the question. I'm switching off now.

All right. The time, this is 7:00 p.m. in Poland, at least. And this is the end of the conference. Thank you very much. If you have any further questions, please contact our IR and we'll gladly to answer all the questions. Of course, that's the questions we can answer. Thank you very much. Bye-bye.

Ladies and gentlemen, this concludes today's conference. We appreciate your participation. You may now disconnect.