Overview of CD Projekt Annual Report for 2019
CD Projekt sales revenue made $137M in 2019, while Net Cash Flow loss reached $14.8 million
In my first article, I will try to show the key findings and my thoughts about CD Projekt Annual Financial Report which was released On April 8
CD Project is a Polish video game developer, publisher and distributor based in Warsaw, founded in May 1994 by Marcin Iwiński and Michał Kiciński. The department responsible for developing original games, CD Projekt Red, best known for The Witcher series, was formed in 2002. In 2008, CD Projekt launched the digital distribution service GOG.com.
I plan to move on analyzing other public companies annual reports’ and see this as an additional test of my expertise
Key findings of the report:
Sales Revenue
· Total sales revenue reached $137.6M in 2019, demonstrating 42.1% growth compared to $96.8M in 2018
· Almost 80% of revenues come from digital sales, which generated $110M (+25% year by year) in 2019
· North America remains the key market, providing 59% of all sales revenue. Europe is the second-biggest source of revenue with 28.6% of all sales revenue. Asia keeps the third place with 8%
· Despite the fact that 27.9% of the “the Witcher 3” sales in 2019 come from the Asian Region, Asia’s share in total revenue has only changed by 6 basis points (0.06%). These are the two key factors responsible for that:
1. Strict censorship of the Chinese market. Violence, blood, inappropriate language, nudity, etc. are prohibited in all kinds of video games. Special license required before entering the market
2. Visual specific of the “The Witcher” games. All the games in the “The Witcher” series take place in middle-aged Eastern Europe — like locations. This kind of visual style is not so popular in Asian Countries
· The Group’s digital marketplace GOG.com revenue reached $38.8M (+12.5%) in 2019
“The Witcher 3”
· “The Witcher 3” remains the Group’s top-selling game with 6.25M copies sold in 2019. This is the second-highest year result since the game launch in 2015 when sales reached 9 million copies
· 53% of all sales in 2019 came from PC
· Almost 0.6M copies in 2019 came from the Nintendo Switch version
· Despite the release of the Nintendo Switch version, sales proportion between PC and Consoles remains almost the same as in previous years
Key factors for Company Growth in 2019:
· Successful launch of the “The Witcher” TV series on Netflix in 2019
· Nintendo Switch version release of the “The Witcher 3” on October 15, 2019
· “GWENT” release for iOS devices on 29 October 2019. The game is based on the “the Witcher” universe.
Cash Flow
· Total Net Operating Cash Flow reached $57.2M in 2019, showing 61% growth compared to $35.5M in 2018
· Total net cash flow (Operating Cash Flow + Investment Cash Flow + Financing Cash Flow) loss reached $14,5M in 2019
There are two main reasons for that:
1. Expenditure on developing projects in 2019 amounted to $43.5M, showing 65% growth compared to 2018. This number represents 43% of cumulative expenditure on games development of CD Projekt. I strongly believe that most of 2019 expenditures were allocated to the “Cyberpunk 2077” development
2. On May 23rd the General Meeting of the CD Projekt Shareholders voted to allocate $26.6M of the Group profit obtained in 2018 to dividends. Last time dividends (amounted to $29M) were paid in 2017
· For the further expanding the Group purchased the commercial campus in Warsaw for $9.3M
· Cash and equivalents balance at the end of 2019 reduced from $27.8M to $13M, which lowers the company’s ability to cover short-term obligations
Share Pricing
· Current Company Market Capitalization (The total number of shares outstanding x market price per share) equals to $7.9B
· For the last 52 weeks, the highest and lowest share price was $82.86 and $47.11 respectively
· We can see that CD Projekt share price shows stable growth, but there were several cases that had an impact on shares’ overall performance:
1. January 16 CD Projekt postponed “Cyberpunk 2077” launch from April 2020 to September 2020 which resulted in share price decrease by 6% from $74.24 per share to $69.69 on January 17
2. Several share price drops were caused by COVID-19 impact. On February 28 stock price ($70 per share) dropped by 13% compared to opening week price of $90. On March 12 share price went down to $54.59 per share which is a 23.6% drop compared to the opening week price
3. On April 8 the Company released its annual report which shows the significant growth of the revenue and net profit. The impact of this report was instantaneous. CD Projekt share price went up from $74 per share on April 8 to $82 per share (+10.95%) on April 15
Other findings:
· Even with cash loss in 2019, Company has significant cash reserves and almost $42.6M of current unearned revenue which will be counted in 2020
· CD Projekt plans to continue expanding its headcount. In 2019 average headcount was 1045 people
Main conclusion
2019 was a great year for the company. It’s revenue went up, shareholders received dividends, company capitalization continues to grow, the “The Witcher” game series popularity increased
The company believes in its strong performance in 2020. According to the president and CEO of the CD Projekt Adam Kiciński, despite switching to remote work because of the Coronavirus (COVID-19) pandemic, he is strongly confident to release Cyberpunk 2077 on September 2020
However, following the latest COVID-2019 updates I can conclude that for CD Projekt 2020 might not be as good as most people think or expect. As the “Last of Us II” developer Naughty Dog already pushed the release indefinitely because of Coronavirus pandemic, CD Projekt might also have to push the release date of “Cyberpunk 2077”
Furthermore, the ongoing quarantine and growing unemployment rate will affect the household income of the CD Projekt’s key markets: North America and Europe, as a result of which, “Cyberpunk 2077” sales could be significantly lower than the projected ones. Overall, CD Projekt sales revenue can be lower up to 30% compared to 2019 results, and with the growing development expenditures and personnel expenses, the company could have additional cash loss which could affect not only company development of the “Cyberpunk 2077”, but all company operating activities
