CD Projekt S.A. (OTGLF) Q1 2023 Earnings Name Transcript

CD Projekt S.A. (OTCPK:OTGLF) Q1 2023 Earnings Convention Name Might 29, 2023 12:00 PM ET

Firm Contributors

Adam Kicinski – President and Joint CEO

Piotr Nielubowicz – CFO

Michal Nowakowski – SVP of Enterprise Growth and Member of the Administration Board

Convention Name Contributors

Matthew Walker – Credit score Suisse

Alexey Philippov – JPMorgan

Nick Dempsey – Barclays

Operator

Women and gents, thanks for standing by and I wish to welcome you to CD Projekt’s Q1 Earnings Convention Name, on the twenty ninth of Might 2023. At the moment, all participant traces are in hear solely mode. The format of immediately’s recorded name can be a presentation by CD Projekt’s administration group, adopted by a query and reply session.

With out additional ado, I might now prefer to cross the road to the Firm’s CEO Adam Kicinski. Please go forward, sir.

Adam Kicinski

Good afternoon. Welcome to name on CD Projekt Group’s monetary outcomes. As we speak we’ll briefly sum up the primary quarter of 2023. My title is Adam Kicinski, and I’ll run this presentation along with Piotr Nielubowicz, Michal Nowakowski, will be a part of us for the Q&A session.

Earlier than speaking about Q1, I wish to share with you some excellent news. I am very proud to say that The Witcher 3 Wild Hunt hit 50 million copies bought. This, in line with public knowledge, ranks the Witcher 3 among the many 10 best-selling video video games of all time. On the similar time, the entire trilogy, which is 1, 2 and three, has reached a complete of over 75 million copies bought. This clearly exhibits the energy of the franchise and we’re excited wanting ahead to our subsequent tasks throughout the Witcher universe.

Let’s now transfer to Slide 4, our developer’s involvement in ongoing tasks. As of the tip of April, The Phantom Liberty group working on the ultimate part of the venture was over 320 individuals sturdy, making them our greatest group. The Polaris group remains to be rising and has reached 220 builders. Making an allowance for latest developments, I wish to take the chance and make some feedback on two different groups.

First, Sirius. Following the analysis of the sport, we determined earlier this Might on a brand new framework for the venture. Because of this, the composition of the group has modified primarily on the Molasses Flood aspect. Subsequently, subsequent time the pink a part of the chart won’t be smaller.

Second, GWENT. Having determined to entrust its future into the palms of group, the assets and roles required are naturally declining. Over the previous 12 months, we have been transferring among the builders to different tasks. However on the similar time, now we have to half methods with quite a few group members. So the GWENT improvement group will proceed to progressively lower in dimension until the tip of this 12 months.

And final however not least on my website, the advertising marketing campaign for Phantom Liberty is kicking off quickly. Lower than two weeks from now, we’ll be participating in summer season recreation first play days in Los Angeles. We’ll have palms on classes for press and content material creators. And at a later date, we’re additionally planning loads of palms on alternatives for our group. So please keep tuned.

Now, let’s sum up the financials. Piotr, the ground is yours.

Piotr Nielubowicz

Thanks, Adam. Now let’s dive into our outcomes for the primary three months of this 12 months. Let’s begin with our consolidated revenue and loss account on Slide seven. Not like final 12 months, when in Q1 we had the premiere of Cyberpunk Subsequent-Gen version, throughout the first quarter of this 12 months, we had no particular gross sales occasions. Internally each improvement sensible and publishing sensible we give attention to preparations for a very powerful occasion of the 12 months, the launch of Phantom Liberty. Because of this, our gross sales income in comparison with final 12 months was naturally decrease, however nonetheless reached a strong PLN 175 million.

In distinction to whole group gross sales, our value of gross sales barely elevated, which comes largely from elevated depreciation because of the completion on launch of The Witcher 3 Subsequent-Gen version in This fall final 12 months.

Transferring on to working prices, our promoting bills decreased by PLN 15 million all the way down to PLN 39 million. This was primarily pushed by a lower in Cyberpunk servicing prices in addition to in Cyberpunk IT associated publishing bills. As regards administrative bills, they did not change a lot in comparison with final 12 months.

Transferring additional to different working earnings and bills, the constructive steadiness of over PLN 18 million it comes largely from a partial reversal of the Sirius impairment iOS, we made again in 2022 books and partial write-off of our Q1 ‘23 improvement expenditures associated to the venture. All in all, Sirius impairment changes improved our EBIT by practically PLN 90 million.

We’re glad that we have managed to work out a brand new framework for the venture and it is already set on its new formidable course. One other supporting driver is seen within the earnings tax line. Our earnings tax for the interval decreased by half in comparison with final 12 months. Primarily because of decrease withholding taxes paid overseas. All-in-all our internet revenue for the primary quarter of 2023, which PLN 69.7 million, which is barely above the strong results of the earlier Q1.

Let’s now transfer on to the following slide. Quantity eight, our consolidated steadiness sheet. Over the primary quarter of 2023, our steadiness of expenditures and improvement tasks elevated by PLN 71 million. This determine represents the steadiness of latest expenditures on improvement tasks for the interval, PLN 74 million, plus the already talked about a PLN 90 million impairment changes associated to venture Sirius and fewer the quantity we’ve acknowledged as prices for the interval of $22 million.

On the similar time, amongst present property, our commerce receivables decreased by PLN 91 million, which is customary for Q1 once we gather receivables for the previous This fall interval. And final however not least, the overall quantity of money deposits and treasury bonds included within the three property gadgets marked with an asterisk is a few that beneath the desk, and people PLN 1,112 billion as of the tip of March 2023.

I’ll stroll you thru our essential money move drivers in a second. Let’s transfer on to the second a part of the steadiness sheet, Slide 9. This time the scenario concerning fairness and liabilities is sort of easy. Our fairness grew primarily as a consequence of earnings for the present interval and our liabilities, largely commerce liabilities decreased for the reason that finish of 2022, equally to the lower in receivables.

Now please transfer on to the following slide, quantity 10. To the Projekt RED’s expenditures on analysis improvement and repair video games are represented quarterly since 2021 as an instance the adjustments occurring on the studio after the launch of Cyberpunk. I’ll now give attention to evaluating this Q1 to the previous This fall to focus on the latest change.

The yellow half represents our whole value of servicing our launch video games. The rise in Q1 comes from extra assist we allotted for the next-gen addition of the Witcher 3 launched lately in This fall, and in addition as we’re getting nearer to finishing Phantom Liberty, preliminary analysis works on new tasks are on the rise, primarily Hadar, and Orion. Therefore the marginally shorter blue bar and the extra seen inexperienced bar. The primary tasks included within the blue half in Q1 was Cyberpunk Phantom Liberty, Polaris and Sirius.

And now our simplified money move on slide 11. Money sensible this PLN 70 million in internet e-book revenue for the interval was supported by PLN 25 million in depreciation and amortization for the interval. On the similar time, when speaking about money bills, the Sirius impairment allowance adjustment within the quantity of PLN 90 million must be deducted. The already talked about change in our receivables and liabilities represented by the following two bars additionally considerably boosted our money flows this Q1.

We use the constructive working money flows to finance over PLN 70 million of expenditures on our improvement tasks, that are the core of our enterprise. Altogether, our monetary reserves saved in money financial institution deposits and T-bonds elevated by PLN 21 million over the primary quarter.

Our sturdy money place leads us to the following web page and the latest announcement concerning the beneficial allocation of revenue earned in 2022. The Board of CD Projekt beneficial to the overall assembly to allocate PLN 241 million to the reserve capital and to share PLN 100 million with our shareholders by means of a dividend payout. We proceed to imagine {that a} dividend is probably the most simple, on the spot and democratic manner of sharing earnings on equal phrases with all shareholders.

That is all from me for now. Thanks to your consideration, we are able to now transfer on to the Q&A piece.

Query-and-Reply Session

Operator

[Operator Instructions] Our first query comes from Mr. Matthew Walker from Credit score Suisse. Please go forward, sir. Your line is open.

Matthew Walker

Thanks. Hope you may hear my questions? The primary query is simply on Reuters and elsewhere, there’s been some rumors round Sony being within the enterprise. Up to now, you have made it fairly clear, you wish to stay impartial. So simply an replace in your ideas on that may be useful?

After which should you’ve bought any extra readability across the Phantom Liberty, I do know you’d have not introduced a specific launch date but. However should you may give us a little bit of assistance on the modeling, and is it extra prone to be within the third quarter or the fourth quarter of this 12 months? Thanks.

Adam Kicinski

Hey, are you able to hear me?

Matthew Walker

Sure.

Adam Kicinski

All proper. So I am going to take the primary one. Nothing has modified on our finish. So I can repeat what we have been saying all through the years. CD Projekt shouldn’t be on the market. We wish to stay impartial. We’ve — I imagine wonderful technique, not straightforward to execute. For certain. But it surely’s very thrilling to comply with our personal path. So it is a pure comment [ph].

Matthew Walker

Okay.

Piotr Nielubowicz

Hey. And I am going to take the second. We’re sadly not guiding particularly on the discharge date. Sorry, I am muted. I’ve some technical difficulty. So we’re not guiding particularly on the discharge dates, we’ll give extra particulars from June, so very, very quickly, as now we have beforehand talked about in our communication.

Matthew Walker

Okay, only a fast follow-up if I can. Is there any extra reversals of bills across the Sirius venture to come back? Or is that mainly completed now?

Adam Kicinski

We naturally imagine there isn’t a extra reversals or write-offs for tasks Sirius, every little thing we knew, we adopted into the monetary report that was printed immediately. In order for immediately, and I hope nothing will change sooner or later. This has been a establishment.

Matthew Walker

Okay. Thanks a lot. Good luck.

Operator

Thanks very a lot. Our subsequent query comes from Mr. Alexey Philippov from J.P. Morgan. Please go forward, sir. Your line is open.

Alexey Philippov

Sure. Good night. And thanks very a lot for the chance to ask the query. The primary one on improvement prices, which accelerated quarter-on-quarter fairly considerably. On the similar time the variety of builders ought to have been broadly flat and also you’re mainly sustaining your key tasks. So lets deal with this improve because the underlying inflation in wages that you just capitalize?

And the second query on, are you able to please speak in regards to the withholding tax impact? Was it a one off? And the way shall they mannequin the efficient tax fee for the remainder of the 12 months? Thanks.

Adam Kicinski

So, initially, I am undecided what are the thesis that’s a part of the primary bullet is so your first query is true. Money sensible, so far as I keep in mind, and because it was introduced on the presentation, the expenditures and improvement we had in Q1 had been similar to what we had in This fall final 12 months, really had been barely decrease. And sure, a bit increased than in earlier quarters.

So that is what occurred. However then again, we are able to count on the bills on improvement that are primarily pushed by salaries to extend as a pure manner of wage inflation and adopting new salaries and new remuneration coverage speed up in 2023.

Relating to the withholding tax, tips on how to mannequin it, it is actually arduous to information on this respect you concerning the long run, because the withholding tax is determined by our worldwide companions withholding this tax from funds to us. And we’re on the finish of the chain on this respect receiving the studies beneath declarations on what taxes had been withheld and this isn’t instantly in our management. Having mentioned that, — I used to be by some means on mute.

Having mentioned that, in lots of jurisdictions, some the taxes withheld are being deducted nonetheless on some issues the treaties whole and signed with partnering international locations their withholding tax is to not be utilized.

Alexey Philippov

Thanks, and if I could, yet another query on the upcoming recreation fest. So what can be occurring there particularly, are you able to clarify that in additional particulars, please? You’ll be displaying the gameplay, otherwise you’re not disclosing at this level? Thanks.

Michal Nowakowski

So I am going to take that. We’ve a [indiscernible]. So it is meant to be a shock, so if it is nonetheless meant to be shocked come June I can not disclose it right here. So I might nonetheless — we’d nonetheless should ask you to be a little bit bit extra affected person. However we critically hope it’ll be price it for you and for the followers of the sport. So please have some endurance.

Alexey Philippov

Very clear. Thanks very a lot.

Operator

Thanks very a lot. Our subsequent query comes from Nick Dempsey from Barclays. Please go forward, sir, your line is open.

Nick Dempsey

Sure. Good night, guys. I’ve simply bought one query. I imply, if we have a look at slide 10. I am occupied with how this chart phases over the remainder of the 12 months broadly and in numbers phrases in conceptual phrases. Can we get any of the brand new Boston studio touchdown inside right here earlier than the tip of the 12 months, so that may stack up a brand new factor maybe in improvement expenditure? Then when Phantom Liberty is launched, presumably among the improvement expenditure field will go into the P&L — a brand new P&L line. I am simply occupied with within the parts that may feed into Q2, Q3, and This fall for slide 10.

Adam Kicinski

So, concerning the Boston studio, it’s included within the numbers on the bars introduced on slide quantity 10. For the reason that Boston studio is doing this venture for to the PROJEKT RED, who’s the writer, and we accumulate the entire expenditures on the Sirius venture in our books. That is why Sirius is a part of the expenditures you see on slide 10.

Nick Dempsey

Sure, sorry, I did not imply the Molasses flood. So I do know it is complicated with Boston, I meant your new deliberate personal studio in Boston and in addition in Vancouver engaged on Mission Orion if I am not unsuitable?

Adam Kicinski

So as soon as we accelerated our engagement on Orion, it is going to be first seen among the many analysis carts. After which sooner or later as soon as we transfer to the event part, it should energy the blue improvement expenditures a part of the chart.

Nick Dempsey

And so ought to I see it pushing up the inexperienced line right here throughout the second half of 2023 or that is not one thing I needs to be contemplating in my modeling.

Adam Kicinski

We imagine the studio ought to begin operation starting of 2024. Nonetheless, we have already got some bills associated to Mission Orion and Mission Hadar. Each included within the inexperienced half, as soon as the studio is about up and begins working in 2024, the inexperienced bars ought to improve.

Nick Dempsey

Okay, certain. After which there can be — as soon as Phantom Liberty is launched, there can be — the P&L a part of this bar will go up and the blue half will go down.

Adam Kicinski

As soon as Phantom Liberty is launched, we’ll positively have to dedicate some assets to patching and updating Phantom Liberty. This can be represented by the yellow service prices half. Some individuals will be a part of Polaris that’s already within the improvement part. So it ought to increase the Polaris a part of the blue half. And a few will be a part of Orion that can be initially current that inexperienced among the many analysis part bills.

Nick Dempsey

Nice, that is actually useful. Thanks.

Operator

Thanks very a lot. I’m seeing no additional voice questions. I’ll cross the road to the administration group for — to take any textual content questions that now we have obtained.

Adam Kicinski

So simply talking, I learn the primary query from [indiscernible]. May you clarify what’s Cyberpunk anti-publishing service in promoting prices?

Piotr, I believe is for you.

Piotr Nielubowicz

Positive. So final 12 months, within the first quarter of 2022, a lot of the prices had been associated to the next-gen version of Cyberpunk that was then premiered. Nonetheless, this 12 months throughout the first quarter of this 12 months a lot of the quantities of PLN 9 million was associated to our preparation of marketing campaign devoted to Phantom Liberty launch. There was additionally some quantity coming from instantly from supporting Cyberpunk itself the bottom version of the sport, however most is to be attributable to the preparations on publishing marketing campaign for the Phantom Liberty.

Adam Kicinski

All proper, the following query is from Bloomberg. You gave whole variety of Witcher 3 gross sales. What can we are saying about copies of Cyberpunk bought? Nonetheless, no subsequent massive degree reached?

Michal Nowakowski

Okay, I am going to take this one. So, on the subject of that query, I imply, now we have introduced the brand new thresholds of the Witcher 3. And once we’ll have a subsequent spherical of thresholds of Cyberpunk we’ll share the information as nicely. So I am going to go away that as a solution.

Adam Kicinski

All proper, as now we have no extra questions. Thanks very a lot for becoming a member of us immediately. You probably have any comply with up questions don’t hesitate to contact our IR group instantly by mail or by cellphone. Have a pleasant night. Goodbye.

Operator

Thanks very a lot. This concludes our convention name. We’ll now be closing all of the traces. Thanks and goodbye.