Earnings Transcript for OTGLF - Q2 Fiscal Year 2021

Operator: 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 turn the conference over to Adam Kicinski, please go ahead.

Adam Kicinski: 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 for 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 brief summary of what we've accomplished so far with regard to supporting the game. In the first half of the year, we are focused on supporting Cyberpunk by rolling out success improvements. So far four patches and three hotfixes have been delivered. What's more recently we released Patch 1.3 also included additional free content, we set to as DLC. With each update, we address multiple performance and stability issues, improving the overall gameplay experience for players. Reinstalling Cyberpunk 2077 to the digital station 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 number 4. Our target date for the release of the next-gen update is late 2021. Please note however, that as the plan is still in development, production 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're currently working on the first expansion for the game. Although, I can't say anything more about it at this point in time. Now let's move on to The Witcher franchise. Please move on to the next slides. The two most significant events related to Witcher Universe took place after the close of the reporting period in July together with Netflix we organized the first ever edition of The Witchercon, a two day virtual event for fans of The Witcher Universe. This event attracted great community attention and was streamed by a number of key influencers. At The Witchercon, apart from interviews and panels attended by the project creators as well as the Witcher series, staff and cast members. We announced that the base editions of The Witcher 3 Wild Hunt along with its next-generation will regardless the platform contains some extra content inspired by Netflix series. As the Cyberpunk 2077, our target date for the release of the next-gen version 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 companies, SPOKKO was launched on the 21st of July. We are very satisfied with how the game has been reviewed and raised by gamers. Its rating currently stands at 4.5 on our store and 4.1 on Google Play, regular users as well as experts on to among others strong focus on storytelling in the games immersive nature driven by AR. We are in process of collecting and analyzing data in game thoughts 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 season's Monster Slayer. And now, let's move to slide 9. In July following the signing of takeover agreement, Digital Scapes, formerly became a member of CD Projekt firm. The studio was subsequently rebranded as the CD Projekt RED VANCOUVER. The Canadian studio has 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 third breaks, efforts related to technology and gameplay programming for the studio's core IP. Let's move to the final slide of this part of the presentation, 11. In accordance with our promise to gamers, we intend to keep improving Cyberpunk four as I said, as long as it takes. 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 first expansion of 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.

Piotr Nielubowicz: The profit and loss account for the first half of this year. So this year, our revenues from sales of products reached PLN 367 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 revenues half this year and most of the 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. This year, we were adjusting and utilizing them. We've analyzed the situation and possible settlements of contracts with our distributors and have decided to decrease part of all unused sales provision by nearly PLN 40 million, which boosted our product sales revenues. And at the same time, we didn't increase our cost provisions related to our operation with CP distributors by PLN 14 million, which boosted our cost of product sold. These two 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 one more important new element in the cost of products and services sold line. During the first half of last year, it included mostly the depreciation of The Witcher 3 switch addition 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 there's zloty got visibly stronger against the dollar, while at the correct graph the line decrease at phase of relative low margin physical goods and materials on the way to the Cyberpunk. This year it's back to normal in this respect, hence lower sales and cost of goods and materials sold at the product rate. All-in-all, our total sales revenues for this year reached PLN 470 million and was 29% above the sales of the first half of 2020. Our gross profit from sales reached PLN 308 million which is one is more than a year ago. Moving to the operating costs; our selling costs increased this year to PLN 131 million and driven by the Cyberpunk servicing costs. 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 were also increased versus last year, among others; we included in disposition some of the early project research phase costs in the amount of PLN 11 million and also a PLN 10 million increasing costs of our incentive program compared to a year ago. Our financial activity presents a negative outcome due to the negative effects differences and using interest on deposits due to the low interest rates. Now 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 net profits were generated back to the pipeline. Perspective, let's go to the next slide number 13. Each of the four bars represents revenues for the first six 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 the year before. Please go to the next slide. Presents CP service and costs. This is our commitment to gamers but also, I believe an extensive guarding nature. The yellow slice represents the depreciation of CP77 natural after release yet non-existing last year and has a non monetary nature this year. And the red part these are the early phase research expenses mostly of Q1. And finally, the dark gray pattern up represents adjustments would increase the sales revenues 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 number 15, our consolidated balance sheet. Also 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. Asset that 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 six months of 2021 and 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 on development projects as I wanted to share with you one more slide, please go to the next page number 16. That's expenditures on research, development and service release games quarter continuation of what I was presenting during our Q1 conference. In Q2, the yellow part, our total cost of servicing our release games decreased visibly versus Q1. Since the release of Cyberpunk this part is mostly dedicated to CP. 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 and new projects visibly increased. This is in line with what Adam was presenting just now regarding involvement of RT 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 dividends with the amount of PLN 503 million and decreasing our long and short-term liabilities and provisions by PLN 366 million. Altogether with the PLN 105 million in net profit for the period is increased our financial reserves by PLN 255 million, up to PLN 1,129 million 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: [Operator Instructions] We'll take our first question from Omar Sheikh with Morgan Stanley.

OmarSheikh: Thanks very much and good evening, everyone. I've got three questions if I could. So first of all, I wanted to just check in on the timing of the releases 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 four months, you broadly anticipate the release of these two 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. And secondly, I don't know whether I missed it, Piotr. But I just thought if you could just clarify what percentage of the total revenues or maybe the percentage of the sales of product came from Cyberpunk in Q2 that would be helpful. And then thirdly, just want to refer to slide 10. I can see from what you said there that if you look at other projects, does that include the next AAA release? 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 be seen that's the next thing that we'll see in terms of a big release. Thank you very much.

Michal Nowakowski: Okay, this Michal Nowakowski and I'll start with the first one. Hi, Omar. So thanks for the questions, I'll tackle the first one, which I believe was about the next-gen releases of Cyberpunk and Witcher, I think you've 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 take 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 has been tackled by the external team mainly, which is Cyber 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 processes ongoing, and we cannot be absolutely 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 no more specific at this moment in time. Thank you.

Piotr Nielubowicz: 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 the leading source of revenue for us during the first half of 2021.

Adam Kicinski: Hi, Omar, Adam here, I'll take the third one regarding slide 10. So the yellow part is strictly related to Cyberpunk 2077, the game which is already released that may be the part which is not covered there yet, because we are in the transformation is technology because technology again that we will be a separate and part of technology would be a separate division. But for now it's for now it's assigned to projects but besides this the yellow part just represents working on the game itself Cyberpunk 2077 and the other projects are our AAA, which are not announced yet. So we do not provide any comments on obviously on the 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 one which you can see on the slide as well.

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

Nick Dempsey: Yes, good afternoon, guys, I have three. So first up, just looking at these provisions. So to understand that 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 want to understand about drag. And secondly, can we expect any other provisions in the rest of the year in relation to these areas? The second question, did you sell more or fewer units of Cyberpunk 77 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, that the comments 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 Q2?

Piotr Nielubowicz: I'll take the first two 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 you could decrease of sales provisions and the 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 116 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 them up to our best knowledge estimated as for the publication date. And yes, that's what our judgment is on the future, potential settlements with distributors in the contracts we have is reflected into this amount. And this amount also includes provisions for bonuses for the team for the first half of this year. I hope it answers the question.

Michal Nowakowski: Actually, hold on. I don't think we answered all the questions. Sorry, there were two more actually. Sorry. And this is me, Michal Nowakowski. Regarding the Q2 versus Q1 CP units, we're not really commenting the number of units sold 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.

Piotr Nielubowicz: Guiding on future sales results, our future profits that usually the third quarter of the year is the weakest quarter. It covers the summer time; it misses the big promo events like the summer promo or the promos that happen around like 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 rule. And I'm not intending to guide you on any specific results we may achieve this particular third quarter. Now we have finished, yes.

Operator: We'll take our next question from Matthew Walker.

Matthew Walker: Thanks everyone. Can you hear me? Okay? Thanks a lot. Yes. So 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 dissolve 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 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?

Piotr Nielubowicz: Question was why we took the provisions in the first place. So we said some provisions in the first place back in 2020, upon releasing Cyberpunk, and the provisions included both expected cost of releasing the game that were not imposed to us back in 2020. And we expected these losses to come into 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 originated 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 this 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 incomes 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 the note 12, as far as I remember, other provisions of our financial statements. And there are two tables precisely showing what safe 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 cancelled over the first six months. I believe this will be much more convenient than describing all of the numbers right now. If you 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 two provision questions.

Michal Nowakowski: And Michal Nowakowski again, I'll jump in on the third and fourth questions regarding the how many units were sold on CT when we came back to the Sony store, we're not really commenting the units, as we mentioned before, so I can't go deeper in that question, either. Regarding the fourth question about the expansion that Adam mentioned in his opening statement, this is the first, I'd actually like to first focus on the naming conventions here. Because we actually make a distinction when we say about -- when we speak about DLCs, we mean, small things like a skin for the character, like a new jacket, or a new color of the hair or something similarly, while not sizable, when we speak about expansions, then yes, we're talking about a bigger thing, like in the past was 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 didn't mean the bigger one, which historically has been paid. I hope that explains.

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

Ken Rumph: Hello, everybody. I suppose I'll try our further go at the provisions just to see if I understand it in real world terms. So we 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 question is, however, we're 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 the perhaps more going on in terms of development of that game than I had realized it's a bigger share of the total than I would have expected? Thank you.

Adam Kicinski: Once 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, this sort of that number of units generated this result, we cooperate with a number of distributors and with some of them, and we were adjusting the reserves this way with other the other way. And we came to a conclusion, closing the books for the first half of this year. That's all-in-all the sales provisions should be smaller, but at the same time provisions for costs of cooperation with the distributors, and certainly our accounts with them should also be higher. It happens that both amounts are close to being equal. 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 unit sold, the effect of total calculation of a number of contracts with distributors and number of markets we evaluated for this purpose.

Ken Rumph: Okay, again, we move on to the stock. Thanks.

Adam Kicinski: 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, and 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 the end of 2020. So no big changes there and in terms of churn are comparable what we had with after Witcher, so far nothing unexpected. About GWENT, well, this is related to the project and GWENT team 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.

Ken Rumph: Okay. Could I ask a couple of supplementaries? One is to say without going too much into current trading, but is where do we stand in at the end of August in terms of employees? Just that 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 kind of included within the other groups largely within the Cyberpunk yellow bar. What's your idea? Do you think for how large that group would be either an 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. Thank you.

Adam Kicinski: So after the end of July, there was no dramatic changes, I mean, and nothing new in terms of what we had the end of H1. In terms of technology, it is still in discussion so hard to say, where we'll be in a year from now, definitely a big part of the tech world support more than one project at a time, but it is still in discussion. We are in the middle first part in the middle of transformation. So hard to hard to say anything precise regarding numbers, but definitely the people working on technology, not necessarily at least booking wise, assigned to projects.

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

Matti Littunen: Thank you. Good afternoon. 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 RED ENGINE 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 RED ENGINE while you're also working on the game? Thank you.

Adam Kicinski: So we have revenues from Digital storefronts, specifically in Steam PlayStation. So all of the sales by the end of June that were 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 we achieved by the end of June. The July sales, the finish of the summer promo will be part of the Q3 report from us.

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

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

Vladimir Bespalov: Hello and thank you for taking my questions. I have actually two. And during the first quarter conference call, you mentioned that each quarter fewer 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 support costs. 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're going to consolidate, what could we expect in terms of revenues costs just the overall effect on the project financial? Thank you.

Adam Kicinski: Question with regard cyberpunk, we realized the game still needs improvements, 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 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 of directly booked into the P&L. That's probably more proper to put it this way.

Piotr Nielubowicz: In SPOKKO Company, so we have certain rules for consolidating 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 is 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 was what 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 and that we've not calculated this yet ourselves. So please be patient. Please be with us on total coverage as soon as we have some news to share.

Operator: We'll take our next question from Maria Mickiewicz with WOOD & Co.

Maria Mickiewicz: Good afternoon. I've got two 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 our provision for returns. That actually are those created in first half are almost PLN 43 million, but dissolve or relief provisions are seem to be PLN 82 million. So like, first look could imply that the impact on your P&L would be still positive, but you're saying it's useful and referring to release forbearance 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 would 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 positive impact of provision, so if we just adopt this PLN 40 million provisions for the second quarter, it would be feel like quite visibly higher revenues than in third quarter. So I'm aware that you are not commenting specifically on the number for Cyberpunk, or Witcher but maybe you could just at least say whether this growth came mostly from Cyberpunk sales increased quarter-on-quarter or Witcher or anything else. That's all from my side. Thank you.

Piotr Nielubowicz: The PLN 40 million I referred towards 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 then I mentioned in my presentation, as I said, there is more than one customer there was more than one contract that we monitor. And that's we reflect in our provisions assessment and the around PLN 40 million net effect is the outcome of all of the calculations. The second question was what influenced the Q2 results any better than the 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 some sunny PlayStation Store. Cyberpunk came back to sales. It wasn't for us, but it also allowed us to generate some extra revenues that were not present in the Q1. And also other cyber funding other stores like Steam added to the service and all-in-all, made Q2 better in this respect than Q1. And comments from the top of my head for now, thank you very much.

Operator: We'll take our next question from Tomasz Rodak with BOŚ Brokerage House.

Tomasz Rodak: Yes, hi. Can you hear me well? Hi, thank you for taking my questions. First question once again, is related to the provisions, it is reduction of provision? And it's fairly simple, I think, does it -- does the fact that you reduce the provision, does it to any extent mean that the sale of Cyberpunk in the physical channels is better than you expected when you was creating this provision? Or is it at all not connected with this and with regard to the second half of this year, and you will probably be maybe reducing the provisions in the future and 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 give, could you give us some information on the digital versus physical revenue structure in first quarter and second quarter? And, yes, and that's it. Thank you.

Adam Kicinski: So distributors have 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 under a site, the fact that we dissolve part of the sales provisions. But increased cost provisions does not necessarily mean that we expect better sales on the sales side or worse sales on the cost side of the provisions. That the effect of our estimation of what the future may bring in respect of our settlements with distributors, it happens to be close to neutral for the gross profit, but it's based on the amounts we contractually expect to be selling to the distributors and not directly on the unit sold by that. So your question whether we could be reevaluating the provisions in the third or fourth quarter 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'll 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 in tables; digital was definitely the most important part of, the most important source of revenues for us. 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 the most of the revenue with physical distribution partners are selling right now on the level of provisions. So the new royalties and new revenues prior to the product growth are generated mostly via the distribution channels for now.

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

Adam Kicinski: Hello, Adam here. I'll take the question from chat. As 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 because I think that you're running this project, if you may?

Piotr Nielubowicz: The brokerage house which mediated the take up of shares at the beginning of the program, when we were making it back in 2020, we'll 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 Projekt to inform the market ahead of time how such sales orders should be carried out. As with transactions carried out last year, our sales order replaced by our shareholders will 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 discussed it 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 fall on this I can share right now.

Michal Nowakowski: And next question I have is we have here, sorry this is Michal Nowakowski, is from [Indiscernible], from Bloomberg News. And there are two questions actually. So the first one is regarding expansion to -- regarding the expansion to Cyberpunk, when should we expect it? And the question is for 2022, is it finally agreed it will be paid? And what scale of price should we expect too much, which are expansions. So I'll cover that first then I'll read the other one 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 given month, but we still would like to keep up the rule that we're not committing that date, until we're ready to deliver that. So I'll refrain from going deeper here. And regarding the price, what it will be paid? Let's go with price. Should we expect I mean, historically, expansions have been -- having paid, as you we have rightly noted with the Witcher. However, it is definitely way too early to talk about prices since we're not even given the date. So again, I cannot give any detail. So then the second question that was asked here was regarding new cover of report, you came back to girl theme. Does it suggest that you refocus on Witcher 3 next-gen or Witcher 4 maybe? So while the choice, of course is very often purely aesthetic, relying on aesthetics. I don't think any of us actually thought about it. Like you said, just the fear but obviously, there's a Witcher 3 next-gen coming. So I guess you could say to that, I hope that that top is the question. And I'm switching off now. Thank you.

Adam Kicinski: All right. The time; this is 7 PM in Poland, and 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.

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