Earnings Transcript for OTGLY - Q3 Fiscal Year 2022

Operator: Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the CD Projekt Group Q3 2022 Financial Results Investors Conference. Throughout today’s recorded presentation all participants will be in a listen-only mode. [Operator Instructions] I would now like to turn the conference over to Adam Kiciński, President of the Board and Joint CEO. Please go ahead.

Adam Kiciński: Good afternoon. My name is Adam Kiciński, and I'll be your host during today's conference dedicated to the CD Projekt Group's financial results for the third quarter of 2022. I'll run this presentation together with Piotr Nielubowicz, Michal Nowakowski, will join us for the Q&A session. All right, let's get started down from the short summary of the past months. In the Cyberpunk franchise, two important events took place in September. On the sixth, we released Patch 1.6 and the EDGERUNNERS update bringing another batch of substantial updates to Cyberpunk 2077. This was followed a week later by our first Anime series, Cyberpunk

Piotr Nielubowicz: Thank you, Adam. Now, let's start into our 2022 Q3 results. Let's start with Slide 10, consolidated profit and loss account. Although due to seasonality, Q3 is usually the weakest quarter of the year. This year, so far, it was the strongest one for us. In total, our sales revenue reached PLN 245 million, which is 70% higher than for the third quarter of 2021. The Cyberpunk game was the main contributor to the [indiscernible] revenues. As you know, since its release, we've dedicated a lot of efforts into patching and updating it. In February this year, we released the Next-Gen update. And as Adam mentioned just now, in September, we released another significant one, called the EDGERUNNERS update. It brought further enhancements and improvements to the game, but also additional content related to the anime, that was to be released one week later. And so it happens on the 13th of September, Cyberpunk

Operator: [Operator Instructions] The first question is from the line of Omar Sheikh with Morgan Stanley. Your question please.

Omar Sheikh: Hi there everyone. I've got three questions, if I may. First of all, on Cyberpunk sales in the quarter, I know you don't normally give an absolute number for units, but if you could maybe just tell us whether you thought this quarter's sales or the quarter you just reported was the biggest so far for Cyberpunk, excluding the launch quarter, obviously? That would help us understand where the number is coming from? And then secondly, on Phantom Liberty, you haven't yet given us a date for which part of 2023 you're planning to launch in or which quarter you're, sort of currently targeting? I wonder if you could just give us an update on that? And then finally, the Witcher Next-Gen, could you just give us a sense of what the marketing campaign will look like? If you benchmarked it against previous expansion marketing campaigns, how should we sort of think about it? Is it going to be along the lines of Blood and Wine or is it going to be more in-line with some of the major game releases? Thank you very much.

Piotr Nielubowicz: So, I'll start with the first one. Definitely, this year, this was the best quarter of sales for Cyberpunk. I cannot tell you [by hard] [ph] how this Q3 result differentiates from the last year's Q4, which is also very good. But looking at the data I have in front of me for this year only. This quarter was the best one for Cyberpunk game.

Michal Nowakowski: Okay. For the second question, it's Michal Nowakowski. We are unfortunately not disclosing the specific quarter for the launch of the Phantom Liberty yet. So, I'll have to ask you for a little bit more patience here. We'll talk about it when we're ready. I'll actually take the third question as well. I think the question was whether the market campaign level is going to be comparable to what it was with Blood and Wine? I'd say, it's very difficult. It's not [indiscernible] to compare one to the other. It's not apples-to-apples. The market circumstances have changed, the installed bases are different. So, I don't think we're really able to super specifically hone in on what that number might be. But of course, it would not be the size of the marketing campaign of the full game launch, and it will be adequate to the expectations we have with the expansion. It's a big expansion. So, yes, there will be marketing support, but I would not draw a simple equal sign between the Blood and Wine campaign and what we're going to prepare for the Phantom Liberty.

Omar Sheikh: Okay, sounds good thanks a lot.

Operator: The next question is from the line of George Brown with Deutsche Bank. Your question please.

George Brown: Good afternoon guys and thanks to take my questions. I have two, if I may. Firstly, just thinking about the trend in Cyberpunk sales, you've obviously seen a big spike in sales with the recent update on the Netflix series this quarter. Has that since normalized back to the trends level before the release of EDGERUNNERS or has it remained higher? And then secondly, is there any guidance in terms of the developer headcount you will need to reach, in order to execute upon the strategy you announced recently, with a significant step-up in release activity? Does headcount need to double or even triple from the current level for this to happen or is this the wrong way to think about things? Thanks guys.

Michal Nowakowski: Hi, it's Michal Nowakowski. I'll take the first one and then pass on to Adam, I think. So, when it comes to the trend of the sales of Cyberpunk pre-EDGERUNNERS, right now, I can confirm that the sales level we are seeing right now is higher than prior to the EDGERUNNERS' launch and straight after the EDGERUNNERS has launched. So, we see that the stable bar has raised to a level higher than what it was pre-EDGERUNNERS' launch.

Adam Kiciński: And I'll take the second one. Adam Kiciński speaking. So, the final – I mean, there is no final goal in terms of the size of the team. Our goal is to keep growing. And we'll see actually whether it will double size of the current team in the, I don't know, 5 or 10 years or – I mean I don't want to close ourselves in those numbers. It highly depends on the average skill of new team members, especially in the new North American studio, which we are going to open – to start opening next year. Even though the Vancouver is already existing and then growing, but I don't want to refer to any numbers, but we want to keep growing. I mean, this year, net, we've grown so far around [100] [ph] and we’ll keep growing, and it will be according to our needs. We believe that for – we have very good start with this team, which we already have to continue developing Polaris and then to jump to Orion next year.

George Brown: Thank you.

Michal Nowakowski : Thank you so much.

Operator: The next question is from the line of Nick Dempsey with Barclays. Your question please.

Nick Dempsey: Hi, good evening guys. So, first question, given that so many people have bought the Witcher 3 already, a huge success over many years, and those people get the Next-Gen update for free, do you expect to get a notable step-up in revenue during Q4 around that launch or just a kind of a boost for the community of Witcher 3 rather than a step-up in revenue? The second question, when do you expect to start ramping up the cash spend on the Boston studio? Will that initially be expensed in the P&L or will it be capitalized because it will – from the beginning, be associated with a new yet to be released game? And third question, just when we're thinking about Q4 versus Q3, historically, you've seen a seasonal boost in Q4 versus Q3, you saw the spike in September and now you've helpfully talked about that coming off, but at a higher level. When we're thinking about balancing out those two quarters, should we still have a seasonal step-up when we consider all of that?

Michal Nowakowski: Okay. I'll start with the first one, [indiscernible], here again. So, first and foremost, we do not really provide the guidance when it comes to revenue for any of our launches really, and that is true also under Witcher 3 Next-Gen update. I may just make a comment that it's obviously, it's free of charge for people who previously owned the copy of the game. But obviously, if you never own the copy of the game, and I believe there are people like that still around – they would obviously be needing to purchase the game, one way or another. So, I would just like to add that little point. But we do not provide that guidance per se to any of the launches. So…

Nick Dempsey : Thank you.

Piotr Nielubowicz : I will take the second and the third question. When do we expect to start ramping up the Boston studio? Basically, after launching Cyberpunk Phantom Liberty, we will accelerate the works on the Orion project done by the new Boston studio. And the second part of the question was whether we will be expensing the cost of this development into P&L or we'll be capitalizing them. So, initial phases, research phases will be expensed directly into our P&L. And once we move to the actual development phase, it will be capitalized. So, we will use the same formula as we used to use also on recent developments. The third question was about the seasonal boost in Q4 and Q4 proportion versus Q3. And first of all, as you know, we are not guiding. Secondly, the Q4 is still up and running. Definitely, Q3 was our best – this Q3 was our best Q3 in history. So, the base for comparison with Q4 is definitely high. However, for this Q4 we have the Witcher 3 Next-Gen additions still in front of us, which will definitely support the sales and revenues we may expect from this quarter. So there is no precise answer I could give you, especially that we intend not to guide on future results.

Nick Dempsey: Thank you.

Operator: [Operator Instructions] The next question is from the line of Matthew Walker with Credit Suisse. Your question please.

Matthew Walker: Hi guys. Thanks for taking the question. I've just got two, if that's okay. I think you've indicated that with Sirius and Canis Majoris, I think you've indicated that one of those will come after the Witcher 4 launch. The other one, which I think is Sirius, is that coming before Witcher 4 or afterwards? And how do you think about the size of that game? And the second question is, if Cyberpunk costs something like 570 million to develop, what do you think the average cash flow development cost of the titles that you've outlined will be to help us model? Thank you.

Adam Kiciński: Adam speaking. I will take the first one. And starting from Sirius. We are not guiding anyhow, anything about design of this game. So, we are not talking about the size or what type of game it is. We just said that – the design is to be accessible for broader audience, and that's it. And there is a very clear business purpose for that because we have to prepare ourselves in the right moment to communicate the product to games. As the product is very different from anything we’ve released so far, we have to be sure that gamers first will understand properly what the game is about. So, that's why we are not saying anything, and we are not describing what type of game and what kind of size of the game it is. And coming back to the [indiscernible] and when things will come, yes, it will come after for Polaris, which is a consequence of how we think about this project. We think that remake will be based in big part on technologies from Polaris. So, it will be developed parallel to Polaris, but once Polaris is launched, everything for Polaris will be then in the final shape and it will be partially be produced in remake. But we are not saying whether Sirius will be before Polaris or after. We just said that all those three, Witcher games will be the first games we are going to launch in our pipeline, but this is the only thing I can say as for now.

Piotr Nielubowicz: The second question was about budgets or cash outflows for the titles we plan to develop. So, we've not revealed any budgets for any of our future games, and that was always so prior to using them. Once we release a game, then we usually share the budgets, but we're definitely not in this position yet. Having said that, we will develop a [indiscernible] games and all those products announcing this strategy update gradually. And at the same time, we still continue selling our historic titles. We will be releasing some new products like the Witcher Next-Gen addition or the Cyberpunk Phantom Liberty, which will also allow us to increase the cash inflowing to the company. So, we will use this daily incoming or monthly rather incoming cash to also finance the developments and the investments into new products.

Matthew Walker: Okay, thank you.

Operator: We have currently no other questions, and I hand it back to Adam.

Adam Kiciński: Thank you. And we have two questions in the chat window. The first is, when do you plan to publish the results/targets for the incentive program? Piotr, you can take it, right?

Piotr Nielubowicz: Yes. So, this question requires a bit broader answer. So, the nature of the new program is different from our historic programs. It's divided into two parts. Part A, where shares will be sold at nominal value and which will therefore account for the bulk of the program's costs, there are no results goals at all. The scheme is based on the concept of deferred remuneration, payable insures after three years of employment. The aim of the program here is to promote retention. And in Part B, 3, 4, or 5-year goals will be set in due course for each stage separately throughout the program's 5 years duration. But what is also important, the exercise price for each stage within this program of Part B will be based on the stock price on the corresponding ground date. This means that in order for participants to benefit from the program it will be necessary for the subsidiary stock to gain value and also for the company to achieve its long-term goals. Part B aimed at members of the Management Board and the other top managers is much more demanding in terms of requirements than Plan A. And as I said, the goals will be set year-by-year over the duration of the program. And given our policy to avoid guidance on future earnings, not to publicly reveal the internally planned release dates, we purposely decided not to reveal our financial goals throughout the duration of the program.

Adam Kiciński: The second question, do you think about opening more studios outside of Poland in the next year? Well, let's open CD Projekt RED America first, and this is the plan for the next year. And it's very ambitious. So, we have no plans for further – for opening further studios, but of course, I mean we can think about things like this in the future, but no plan is for now for opening any other studios as CD Projekt RED North America. And the third one is, do you expect to enter pre-production size of Cyberpunk sequel in the next year? And I can take it as well. Yes, after releasing Phantom Liberty, we will start working on the next Cyberpunk game. Of course, initially, it will be a conceptual phase, which from the very formal perspective, it's not a pre-production because there are two perspectives. I mean our common language in development and then the formal language linked to how we allocate costs. So, initial phases or from the very formal perspective, research phases and all costs are going directly into P&L. Once concepts are ready, we start development. This is very, very formal approach. I mean, how we make it in our books. And development starts from pre-production. So, from a very formal perspective, pre-production probably won't start next year as this is the first part of development, but of course, we'll start working on the game in a conceptual phase next year. Of course, in smaller team than it's now working on Phantom Liberty as some developers will join Polaris and will help in development of Polaris. And the next question is, are you planning a second season of Cyberpunk

Michal Nowakowski: Yes, I can take it. So, while we're not confirming any specific plans, second season of EDGERUNNERS or anything super specifically, we did say a number of times that we have an appetite for, you now to do more in the transmedia so in the linear visual animation or live action. And those plans have not changed. So, when we are ready, you may expect to see more announcements in that regard coming from us.

Adam Kiciński: All right. As we have no more questions, 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 mail. Have a nice evening, and goodbye.

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