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

Good afternoon, and welcome to this -- Hello, and welcome to the CD Projekt Half year 2024 Conference Call. My name is George. I'll be coordinator for today's event. Please note, this conference is being recorded. [Operator Instructions]. I'd like to turn the call over to your host today, Mr. Michal Nowakowski to begin this conference. Please go ahead, sir.

All right. Thank you, George. Sorry for jumping again a little bit. Good afternoon, everybody. My name is Michal Nowakowski, and I'll be your host during today's conference, where we will sum up the first half of 2024. I will be copresenting with Piotr Nielubowicz and after the presentation, we invite you to participate in a Q&A session. With all hands on deck focused on development the first half of 2024, it can be seen as a quiet period in terms of big announcements. However, during that time, we organized plenty of activities to support sales of gains from our back catalog. We offer players free trial versions, seasonal sales and even markets. All these initiatives had a positive impact not only on sales but also on the longevity and community engagements around our games. And that's not all, as our franchise flywheel has been continuously offering players new opportunities to interact with our brands, such as stable top games, apparel and even pop-up NMA stores, like the one we recently opened up in Japan. And now, as always, let me sum up the current project engagements of our development teams. As you can see on the chart, the situation in our ongoing projects this year is pretty stable. And they have been progressing at a consistent pace. As a result, the differences between the end of April and the end of July are marginal. The sizes of each team have changed only slightly since the last status update we shared 3 months ago. The Polaris team is maintaining the right scale to enter the production phase very soon. while our work on both announced and unannounced projects is steadily progressing. That's all for me. And now let's dive into the financials, which obviously means Piotr Nielubowicz.

Thank you, Michal, and good evening, everyone. As usual, let's start with our consolidated profit and loss account on the next slide. Our group sales revenue for the first half of 2024 reached PLN 425 million, nearly 1/3 more than in the comparative period. The growth was primarily driven by Cyberpunk, which was supported and reinvigorated by Phantom Liberty. We achieved this despite the very strong policy later this year and both to the PROJEKT RED and GOG.com enjoyed year-over-year increases in sales. Our cost of sales increased as well, mainly driven by the amortization of Phantom Liberty and Cyberpunk. Moving on to operating costs. Our selling expenses decreased by PLN 24 million down to PLN 61 million. This was mainly due to a decrease in maintenance costs for our release products and lower publishing expenses at Phantom Liberty launch is already behind. As regards administrative expenses, the increase in this category comes directly from expenses on early phase works and new projects presented as research work costs and was driven mainly by Orion, Canis Majoris and Hadar. Out of these three, we believe that although we need more time to start the preproduction stage, Orion is not far from completing all the required formal operations and recommendation to start being capitalized. Moving further to our operating income and expenses. The positive balance of PLN 25 million during the comparative period was supported partial reversal and partial write-off of our development expenditures related to Project Sirius. This year, now such one-off transactions supported our results. The surplus for financial operations reported for 2024 H1 at PLN 35 million came from the usual drivers such as interest from deposits and bonds. Moving further to our income tax. Last year, we recorded a relatively high amount of withholding tax that was not possible to be deducted from our local tax settlements, which increased the overall value of current income tax reported for that period. This year, the influence of non-recoverable, nonwithholding tax was much lower, hence, the decrease in the current income tax line. At the same time, during the first half of this year, we recognized an increase in the value of R&D tax relief available to the company, which led to an increase in the deferred tax assets calculation. All in all, our total income tax included in the P&L statement for the first half of this year amounted to PLN 5 million. And finally, our net profit for the first half of this year amounted to a nice round PLN 170 million, 88% more than what we've achieved in the comparative period. The overall net profitability of the group reached 40%, while for the PROJEKT RED alone, this factor was close to 50%. And as far as financial efficiency is concerned, what I would also like to draw your attention to is that from the PLN 100 million of additional revenue compared to last year, we generated PLN 80 million in additional net profit. Now we can move on to the next slide, #6, our consolidated balance sheet. On the asset side, first, the usual expenditures on development projects. The balance here increased by PLN 59 million during the first half of 2024. The new developments, mainly Polaris and Sirius were responsible for PLN 112 million increase parallel to the decrease coming from depreciation, driven mainly by the already released Cyberpunk and Phantom Liberty. In preparation for future growth of the company, we continue investing into our local infrastructure as visible in the PLN 34 million increase on the -- of the property, plant and equipment position. This growth was mainly driven by the ongoing construction of a new building on our Warsaw campus, where the new Polaris Trilogy dev team is planned to be located. At the same time, among current assets, our trade receivables decreased by PLN 110 million, thanks to this year's collection of the high post Q4 receivables. And as usual, the total value of cash deposits and bonds which are included in the three asset items marked with an asterisk. The total is summed up under the table and amounts to PLN 1.360 billion at the end of June '24. I will have a separate slide to give some more insight on our main cash flow drivers this year. Moving forward to the second part of the balance sheet, Slide 7. The most noticeable change here is the increase in our equity driven on the positive side by the strong financial performance in the first half of this year and on the other side by the 2023 dividend paid out at the end of June this year. Among liabilities, a visible change comes in the provisions line. Compared to the level at the end of last year, our provisions decreased by PLN 26 million, which resulted mainly from this year's settlements of results dependent bonuses for 2023 when Phantom Liberty was released. Now please move on to the next Slide #8, to the PROJEKT RED expenditures on research works development and cost of product maintenance presented here quarterly since 2023. After the premier of Phantom Liberty at the end of the third quarter of '23, we visibly regrouped our dev teams. During the fourth quarter, following the release, extra effort was dedicated to servicing the fresh expansion and the Cyberpunk ultimate addition released at that time. And starting this year, we have been continuously growing our engagement in both research and development of future projects. And finally, our simplified cash flow on Slide 9. The PLN 170 million book net profit, which included PLN 46 million costs attributed to the research works that I have permitted myself to extract on the next bar -- was supported by PLN 60 million in depreciation and amortization for the period. Collection of receivables, despite a decrease in liabilities and provisions allowed us to generate PLN 61 million during the first 6 months of the year. At the same time, PLN 37 million was expensed for the acquisition of tangible and intangible assets, as discussed on the balance sheet slide. Summing up all the above, thanks to the longevity and continued strong performance of our games. We came up with an estimation of over PLN 300 million generated by the ongoing business. At the same time, we continue to work on new projects and technologies, both in the already mentioned research phase and development phase, PLN 46 billion and PLN 107 million, respectively. And last but not least, at the end of June, we shared with our shareholders a nearly PLN 100 million dividend. All in all, our financial reserves kept in cash, bank deposits and bonds increased by PLN 56 million over the reporting period, reaching PLN 1.37 billion. Summing up the whole financial part, even though this year, we had no new releases, H1 results show that our existing catalog is healthy and strong allowing us to not only finance work on multiple new projects, but also yet another year in a row, pay out the dividend to our shareholders. That's all from me for now. We can now move on to the Q&A session. Thank you.

[Operator Instructions]. Your first question will come from Nick Dempsey from Barclays.

I've got two questions. First of all, in Q2, you had PLN 57 million loss of cash spend on development projects. Is that a sensible way to think about Q3 and Q4 levels? Or should it logically continue to increase as your two main areas of focus in terms of development build? And the second question, have you had any discussions since we last heard from you with third parties regarding the licensing of your IP for the creation of mobile games?

Hello. So I'll take the first question. In terms of our expenses and development, yes, we are slowly progressing and increasing as it was visible on the slide with servicing research and development works. Moreover, as I mentioned with Orion, we are close to moving from the research phase to the development phase in IFRS terms. So this part that expenditures that was so far booked in our P&L, we'll soon become treated as development expenses and presented as capitalized in our balance sheet.

I'll take the second question. In terms of the licensing IPs for mobile games, we don't have any announcement to share here now. Should there be anything, we can share with a wider group of people will be doing that in the Q2.

[Operator Instructions]. We do not appear to have any further audio questions. We'd like to take questions that have been submitted through webcast at this time. Thank you.

So I'll read the first question from [indiscernible], BDM. Can you tell us more about your work. Its Unreal engine, thus working on a game with such a large open world as Witcher 4 pose the challenge for this technology.

I can answer this question. So nothing is easy in life, nothing worth doing, obviously. But at the same time, we feel quite confident with our choice and of Unreal technology in our collaboration with Epic on working, making this technology buyable for the open well game. We're working on a lot of tailored tools for ourselves as well. So in due time when we're going to be showcasing what we're working on, you will have a chance to judge yourself, but we're confident with our choice. And I can maybe read the next question. Would you rather follow the [indiscernible] of sharing use dependently on your own? Or are you more inclined to use big gathering global events and so on. I can maybe try this one as well. I think the way we look at it is maybe a mix of both, to be perfectly honest. As we did in the past, I mean sometimes we do things on our own, like streams, sharing news with the fans, but we are not staying away from global events like festivals or first-party online or physical events. So I think it's a mix of both for us in our case.

Another question comes from Christoph Scotch, BDM. After redefining the framework of the Sirius project, do we still have to take into account that it's potentially experimental project. And that you may abandon the project at some stage if it does not meet your expectations? So work on Sirius definitely progressing. The game is being developed by Molasses Flood and Autonomous Studio. And it's a different type of game compared to our AAA single-player RPGs. So in this sense, it may be treated as experimental. But at the same time, we closely monitor results of development work on an ongoing basis, and thus, we are satisfied with them.

Okay. And the next 2 questions actually from [indiscernible]. The first one is how has Gamescom from your point of view, any fruitful meetings. And the second one is, could you give us some update on the live action project. So as for Gamescom, I thought it was a very good Gamescom. We had lots of updates, lots of catch-ups, and kind of opportunities meetings. You have to understand, though, that probably meeting to things happening, it can take, yes. So but in general, we were very, very happy with -- our Gamescom together for us from any possible angle to be honest. As for the live action, we don't have any new update beyond what we already so far, but we're happy with the pace at which things are progressing on that front. So again, when the time is right, we're going to be sharing some more news for sure.

Next question comes from Maria Mickiewicz from Wood. When should we expect your development team to start growing more visible? So in general terms, the biggest part of the team works on Polaris right now and in this respect, we feel the team is kind of complete. Probably, it will grow a bit, but we believe we have the force, we have all or absolutely most of the people that are required for the project. So in this part of our activity, we do not expect any significant increases. At the same time, Sirius and Orion probably with the Orion first and foremost, we expect future growth also next year. And Orion that was presented on one of the slides right now is around 60 people. And we believe that over the course of next year, it should probably double the headcount. Sirius will also grow, but probably not that dynamically. And on the other projects, we also keep growing. However, as some of them are made together with external partners. The headcount on our side is limited.

Okay. And the next one is coming from Christoph Scotch, BDM. The question is when creating the framework for the new Polaris saga, did you rely on any surveys about what players expect? Or are the assumptions on this project made entirely on your own intuition. So we never actually in our development history, relied on any surveys to be honest. It's a mix of knowing your niche being the expert in it and relying on your guts. We do obviously have research and some trials when it comes to user experience or interface. So that's the thing we do research, but not in terms of -- if I understood the question correct, of course, not in terms of how the story line should go or something, I mean, none of them which is or side of [indiscernible] were down this way and we don't see that happening in the future. So how we are planning the next strategy is actually in line with what we've been thinking about for a long, long time in high level and obviously, getting into more detail as we get closer to the launch of the first of the three. So I guess that will be my answer.

Next questions come from Piotr Bogusz, Erste. How is the team building going for the Orion project? When can the team grows for this project be expected to accelerate? What might be the target size of the team working on the Polaris project. So the first Orion, as I already mentioned, we plan to kind of double the team over the next year. Right now, the team works from 3 locations: Poland, Vancouver and Boston. It's a mix of people working cooperating together, and we definitely plan to growing it. What might be the next -- the second question was about the size of the Polaris target size of the Polaris team. It's slightly above 400 right now, and I believe that we should continue the development of the game with 400-something. The team may somehow increase, but still, I believe we will stay with 400-something people on this project. The next question comes from Daniel Pachkowski, Stock Pall. What about building a portfolio in [indiscernible] pulp culture? Will the series Cyberpunk Edgerunners have a continuation? Michal, I think that's for you.

Okay. So yes, we are planning, of course, to have more in the sphere flywheel of pop culture. This is very much at the other in our interest. When it comes to specifically Cyberpunk Edgerunners having a continuation, I'd rather bring back the words I said before, which is we are definitely planning to do more in terms of animation with Cyberpunk. So I hope that's enough as an answer. So expect to see more for sure. But that's as far as I can right now with you. And I can maybe read the next question as well. Can you please comment on when you will be able to -- sorry, this is coming from Alex Filippo from JPMorgan. Can you please comment on when you will be able to update the market with the Hadar release dates of the next game or perhaps what milestone do you need to see to be in the position to set the release date. So we will update the market on the release date when we will be kicking off the preorders. That's honestly the answer and there's no more magic to it. And I can probably narrow it down because the -- for example, the console digital storefronts allow you to start the preorders no longer than a 1-year pre-launch date. So that gives you sort of an idea. And when it comes to the milestones and so on, we don't really comment on that, that specifically. Next question comes from Maria Mickiewicz from Wood. As for now, Polaris team seems visibly smaller than Cyberpunk in the peak. Should it grow going forward or stay around the current level? Is the Orion target team expected to be also smaller than Cyberpunk, more like Polaris? So basically, yes, as I mentioned before, one of the learnings from Cyberpunk development was that the team was, in our opinion, a big to big, and we would like to work on future developments. We've slightly limit the teams versus the Cyberpunk one. And that's the approach we are trying to apply both on Polaris right now and both on planning or Orion over the next years.

And the next one is from Simon Silverston from Shantel. The question is, once a AAA game enters the production phase, how long does it usually take to be ready to launch? Is there any reason why Polaris will take a shorter or longer amount of time? So I think the answer to that question really differs from game to game in general, when I'm talking to in general because there are people, again, are pretty sure that I that are maybe made around maybe 3 years, and then there are games that have been in production for a very long time. Historically, for us, we've been launching our games from the moment we start till the month we launched in about like 4 or 5-ish sort of period of time. Is there any reason why Polaris will take longer, shorter amount of time? Nothing that would really come to mind. I mean, it's cuts every tool possible at its disposal to just progress the regular path. And the next one is Alex Filippo from JPMorgan. You mentioned that your work on the unannounced project is progressing. Are we talking about the potentially new game that you have not been announcing? I'm sorry, you meant other projects around existing franchises.

I'll take this one. So unfortunately, it's too early for us to share anything with you today on the unannounced projects. But as always, we have new ideas that we are researching, testing and assessing internally.

Since we have no further questions, I would like to thank you all in today. And should you have any additional questions, please do not hesitate to reach out to our Investor Relations team. Have a nice evening, and goodbye. Thank you.

Thank you, and goodbye.