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

Yes. So the expansion pack is going to be an expansion. It's big, it's sizable and we're very happy with what we're offering to the gamers. But it's not a full AAA new title.

And the second part of the question related to our future cash flows, which, as you know, we are not guiding. So therefore, I'm afraid I cannot directly answer the question.

And the next question is from the line of Nick Dempsey with Barclays.

I've got a couple more follow-ups, please. So the first one, as The Molasses Flood is clearly a pretty small team. Is it fair to say the Project Sirius will be a much smaller game than your major AAA assets that you've been describing? And the second one is just a business model of projects Canis Majoris, how is that going to work with an external partner? It is a question if you're funding it and then taking revenues by giving them some royalties or fixed payments only. Can you describe how the business model will work with an external partner?

Okay. So when it comes to Molasses Flood, actually the team is right now more than 60 people because that project is not only in Boston, it's also -- there's also team members working on that project in Europe and in Vancouver as a matter of fact. And we also intend to keep growing that team. So it's a sizable team and it's going to be bigger by the time the project launches. So no, the project is definitely not a smaller game, and we intend to fully go behind that game when it launches. So I guess that answer when it comes to the second one, Adam wants to chime in here.

I'll just add 1 thing because we clearly say that The Molasses Flood Project Sirius is different from our past productions. So don't expect another open world story-driven RPG like Witcher 3. It's a different project targeted for a broader audience. So that's why we decided to acquire The Molasses Flood with their expertise and run this project by them.

Regarding the business model of our cooperation with external partner working with us in Canis Majoris, what I can say is that the project will be based on our IP, and we will be the party financing. However, I wouldn't like to dive any deeper into details of our cooperation with our external partners.

[Operator Instructions] The next question is from the line of Tomasz Rodak with DMB.

First question regards the Polaris project. As you said, the games will be released in a 6-year publishing cycle, which make it like basically 3 years per second and the third game. And I just want to ask if they're going to be a full AAA experience like for several dozens of gaming hours because it seems that the 3-year production cycle is rather short for a AAA project. And the other question regards the Sirius game from Molasses Flood, you said that it targets a broader group of players than your previous games. However, it seems that action games, shooter games are the most of genres and you did those. I wonder what can be more popular, unless we talk about, I don't know, my mobile game? And maybe these 2 questions for now.

I'm Adam Kicinski. I will take the first one. And I know it's a bold statement that we are going lead 3 full-fledged AAA open world story-driven RPGs in 6 years. But we really mean it because we believe we have a plan for this. We are currently working on a fully technological foundation for all our future releases and especially being -- I mean, releasing Polaris will have all tools to continue streamlined development on successive parts of the trilogy. Still, of course, we want to approach each game with a great ambition. So we are not cutting corners. I mean, there is no plan -- any plan for this. And we believe that changing our pipelines from the past ones when we were really, really very much into deep technological processes for each game to start games with almost ready technology. Of course, we'll have to add some because some technologies are always needed to create something new, but this is very different from what we've had in the past.

I'll take the second one. Michal Nowakowski. So I can definitely say Sirius, Project Sirius is not a mobile game. And when we were talking about it, I think we actually were talking about like broader demographics, which means we want to reach to people that we were not necessarily efficiently reaching through The Witcher games that we've been making so far. So imagine people who are maybe watch the TV show but have not necessarily -- are not necessarily into playing very dark themes, hardcore RPG games. So this is more the kind of thinking behind it. And that's unfortunately as deep as I can go, but I hope this gives you a little bit more -- a better picture of what we're trying to do. And obviously, we're going to be talking much more about that project as the right time comes.

Yes. Great. I would like to have 2 follow-up questions, if I may. Are some of the games mentioned in the strategy and mobile games? And last question, just to make things more clear, Orion will be developed by this North America studios? CD PROJEKT in North America that consists of Boston and Vancouver? And I understand that both of them are making like Sirius right now. Does it mean that -- I mean, Molasses Flood is making Sirius right now. Does it mean that after Molasses Flood end Sirius, it will start working on Orion?

Okay. So I can start with the first one. So none of the games mentioned in strategy are mobile games, let's set this clear. Having said that, when it comes to mobile, we did mention that we are opening up also on that front to external corporations. And when we're ready, we'll tell you more, but that's the part we've been covering when it comes to the strategy and mobile games.

And I will take the second one. Adam here. So no, no, the Orion will be developed by the north -- to the PROJEKT RED North America, which will consist of already existing Vancouver and totally new team, which we are building in Boston next to The Molasses Flood. Actually, next doors, but it's totally separate from The Molasses Flood will stay focused on Sirius, and we are building another team in Boston to lead together with Vancouver to consist -- to build the PROJEKT RED North America and to lead production on Orion.

[Operator Instructions] And I hand back to written questions.

All right. So I'll read the first question from Omar from Morgan Stanley. Your plan for future releases are much more ambitious than your last strategy update. What has changed? Why are you more confident you can deliver a fuller slate of content? So first and foremost, in our previous strategy update, we were not very much about pipelines, about future product plans. We were mostly or solely focused on transformation and how we are willing to approach development, what we call RED 2.0. And from that moment, which at the last strategy update was 1.5 years ago, we started transformation. So we are more confident, of course, because we are -- after the phases of transformation, we see first positive results. We see how we can work in Asia, how we can deliver. And we have new technology. Unreal Engine 5, of course, with its challenges, but it's ultimately at the end of the day, we believe that it will help streamline our development. And on top of that, we are opening PROJEKT RED North America, which should significantly grow our capabilities in terms of recruitment. Okay. And I will read the second one. How are you thinking about the use of the third-party outsourcers to help deliver your development ambitions? Michal, maybe that's for you.

So when it comes to third party, it's not even outsources, it's partner, because outsources suggests that these are companies that help us do like a portion of the game. In some cases, they're actually working on a game per se. So we're looking for people who share our ambitions who share our drive for quality and who we believe are not going to deliver experience that would be inferior to what the fans of that given IP that given franchise deserve. So we definitely don't want to cut corners with any of the games that would be done in cooperation with third-party development team.

And the third question from Omar is definitely for Piotr. How much cash do you think you need to maintain on the balance sheet during this accelerated phase of game releases?

Yes. As of the last reporting quarter, we had slightly above PLN 1 billion on our bank accounts. And what I can share with you is that we definitely aim at having decent safety buffers. We want to be self-financed, and the safety buffer in our cash was with us 4 years till now, and we do not want to change the situation. Having said that, we will balance between the revenues generated on a daily basis, continuing to sell our products, releasing new products like the ones to come in a shortest time are the Witcher 3 next-gen addition, Phantom Liberty expansion and other projects later on announced to being the strategy. And at the same time, continuously and gradually financing development of future games. However, we are not sharing precisely the outgoing or income future cash flows. And therefore, the future cash balances as per different future balance dates.

Okay. I can read the next question from Konrad Krasuski. What is the difference between Sirius and Polaris? And there is also a second part of that question, and what is the future for target in incentive plan? I'm going to take the first part of the question. We sort of spoke about that in one of the previous questions. So Polaris is the next Witcher game, you may think similar to what we've been doing in the past with Witcher 3, 2, 1 and so on. So like a continuation of the Core series and Project Sirius is the one 1 reaching out to broader demographics for the meantime as I discussed before. So to people who are interested in the franchise, interested in the IP, but are not necessarily into playing hardcore role-playing game like The Witcher series we presented so far.

The second question from Konrad Krasuski Bloomberg is -- and what is the future for targets in the incentive plan? So as I already mentioned, we continue working on next iteration of our incentive plan. However, we plan to change it. It will not be a direct continuation or direct multiplication of the historic programs. We plan to change a bit of the logic of it, make it more comparable with incentive plans offered by our top competitors in the global scale. As soon as we have all the details, we'll share them with you. The next question from Morgan Stanley. Just a point of clarification, what are the 2 games being developed in parallel now? Would you consider the Cyberpunk DLC as one of the 2 games? Phantom Liberty and Sirius are the 2 ongoing development. So first and foremost, Phantom Liberty, we don't call it DLC. It's a huge expansion. So from the development perspective from how you organize the production, it's very similar. It's actually the same as the produced full fledged game. So the first AAA project, the first AAA content we are working on, yes, this is Phantom Liberty. And the second one is preproduction of Polaris, and Sirius is on top of this because we were talking about CD PROJEKT RED working on 2 AAA content development and Sirius is on top of that, it's run in the [indiscernible] as well. The next question is from Maria Mickiewicz with Wood & Company. Taking into account your development plans, where would you see the size of your development team in, let's say, 3-year horizon and to double check order around 800 developers now? So we are constantly looking for talent and developers, that's for sure, we have to grow. The group currently employs over 1,200 people, including nearly 800 developers, but this includes GOG. In our studios, we have over 700 developers. So those are developers working on the game itself. And it's -- I'm not ready to talk about the targeted numbers of people. But for sure, our North American teams will grow and we will grow our European forces as well because those ambitious plans are based on the assumptions that will keep growing our creative forces. The next question from [indiscernible]. Do you consider potential equity issue to finance the ambitious plans. For now, we do not have such plans and we do not consider issuing new equity. As you know, we've -- today, we've announced a buyback program. So the direction is rather the opposite. What would be your role in Canis Majoris projects? Purely the publisher? That was the second question from Maria Mickiewicz, Wood & Company. Michal, that's for you, I guess.

So we obviously would be publisher for the Canis Majoris project. Having said that, there's also a certain development and technology overlap. So there will be parts of the project where we would be participating with -- in development of the project over the team that is developing this project. However, a vast majority of that project will be done by that team specifically. So like I said, participating, but not really make it -- it's external, but published by us.

And there is another question actually, the follow-up question from Maria Mickiewicz. In terms of the size of the projects, would it be fair to assume that Polaris, Orion Hadar will be a large AAA game, while the remaining 2, Sirius and Canis Majoris, relatively smaller production? Michal, maybe you.

Sure. I can take that. So you're correct that Polaris, Orion and Hadar will be large AAA games. Having said that, we would definitely not call Sirius and Canis Majoris smaller games. Canis Majoris is a AAA stand-alone project. Sirius, Project Sirius also an ambitious project. It's different than what you got used to when the main, Witcher series However, as I mentioned earlier, we're fully going behind it, and it's a big project for us as well.

Next question is from Rafal Wiatr from Citi.

I would apologize for repeating other questions. I have to say that I'm still confused a little bit about the sort of timing and the scale of the games. So if you can confirm that 4 projects would be AAA projects, that's what I sort of understand, and please correct me if I'm wrong. If you can comment on Polaris project, which will take 6 years on publishing, but when that will sort of start -- or should we count from now that 6-year period? And then, if you can say, Hadar, will it be earlier quality release earlier than 6, 7 years from now?

So I'll take probably all of it. Adam Kicinski. Starting from Polaris. Polaris is the next full-fledged, open world, story-driven, RPG in the Witcher universe, and it will start the Saga. The Saga, which means, in this case, 3 games. And this 6-year window is starting from the release of Polaris. So we are going to release Polaris, and then within 6 years, the second and the third game in the Saga, and all of them full-fledged AAA are RPGs. Hadar, we just started last year conceptual work, not on the game itself, but on the set. For the first time, we are working on our own IP. We are incubating it internally. So we need some time to be ready to start working on the game.

Can you still hear me?

Yes.

So just -- and I do apologize if it might the question may sound bizarre. But I do understand that it's a 6-year period, that the 6-year period can start 10 years from now or 3 years from now. That's sort of more if you can just give us a little bit of insight. And if that is the case, then Hadar is going to be a long way project from here, from today.

So we are not talking about release dates. We've just said that we've started development as a preproduction, as the first phase of development of Polaris in Q1 this year. And once we'll be ready to talk about that, of course, we'll talk. But in the past, our development of big games together with technology were between 4, 5 years. And once Polaris is released, then we are going to release the second and the third game in the Saga counting the time from the moment of release of Polaris, and then within 6 years, we believe that we'll deliver another 2 big games. And Hadar really way too early to talk about that.

I do assume that the projects that are presented here are more in a chronological order, is that correct?

No. They are not. No, no, they are not in chronological order. We said that the first 3 games in our pipeline which means that will be released, not in chronological order, but will be released to the market first, so Polaris, Sirius and Canis Majoris. So this is the only sneak peak to our thinking about orders. So those 3 should be first on the market without think which first, which second, which is third, and on the rest we are not guiding. I think we are running out of time, and I would like to thank you again for joining us today. If you have any follow-up questions, do not hesitate to contact our IR team directly by e-mail. Have a nice evening. Goodbye.

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day.