CD Projekt, the Polish gaming studio behind the wildly popular Witcher franchise and the ambitious Cyberpunk 2077, has just released their Q3 2023 earnings transcript. On the surface, the numbers paint a picture of success: booming expansion sales, record profits, and a robust cash reserve exceeding PLN 1 billion. But a deeper dive reveals a curious anomaly, a phantom dividend lurking beneath the surface, hinting at a potential windfall for patient shareholders.

The company explicitly states that they will consider shareholder distributions after the close of the financial year. This is standard practice. However, the transcript also emphasizes a relentless commitment to ambitious parallel development of multiple AAA games – a strategy unprecedented in the company's history. This suggests a significant need for capital reinvestment, seemingly counterintuitive to dividend payouts.

Here's where the phantom dividend emerges. The company has opted for an aggressive, front-loaded depreciation schedule for Cyberpunk 2077 and its Phantom Liberty expansion. They will depreciate 40% of the combined development costs (PLN 451 million) in Q3 and Q4 2023 alone. This strategic accounting maneuver, while perfectly legitimate, achieves two significant things.

Firstly, it accelerates the recognition of expenses, thereby reducing reported profits and potentially minimizing tax liabilities in the current fiscal year. Secondly, and more intriguingly, it rapidly reduces the carrying value of Cyberpunk assets on the balance sheet, freeing up significant cash flow in the coming years.

Consider this: the accelerated depreciation schedule will reduce the book value of Cyberpunk assets by PLN 180.4 million (40% of PLN 451 million) by year-end. Assuming a conservative 5% sales decline for Cyberpunk products in 2024, the company would still generate estimated operating cash flow of approximately PLN 200 million. This, coupled with the freed-up cash from depreciation, creates a considerable surplus.

This surplus, the phantom dividend, presents CD Projekt with a fascinating dilemma. They can choose to reinvest this surplus entirely into new game development, fueling their ambitious parallel strategy. Or, they could consider a substantial shareholder payout – a move likely to be celebrated by investors, especially after the turbulent Cyberpunk launch.

Adding to the intrigue is the company's recent management transition. Adam Kicinski, the outgoing CEO, emphasizes a unified board committed to the existing strategy, while acknowledging the ambitious nature of their plans. This implies a measured approach, potentially balancing both reinvestment and shareholder rewards.

Projected Free Cash Flow (Excluding New Development Expenditures)

Let's examine a hypothetical scenario. Assuming CD Projekt maintains a 5% annual sales decline for Cyberpunk products and a 20% net profit margin, their projected free cash flow (excluding new development expenditures) for the next three years would look like this:

Even with an assumed 5% sales decline, CD Projekt is projected to generate over PLN 770 million in free cash flow over the next three years, excluding development expenditures for new projects. This significant cash flow, fuelled in part by the phantom dividend from accelerated depreciation, presents a compelling case for shareholder payouts.

Of course, several factors could influence the ultimate decision, including the performance of the Ultimate Edition, the pace of new game development, and the global economic climate. However, the phantom dividend offers a compelling glimpse into CD Projekt's financial maneuvering, hinting at a potential boon for long-term investors.

Perhaps CD Projekt, known for its captivating narratives and immersive gameplay, is crafting a real-world financial narrative just as enthralling. One where strategic accounting and a commitment to innovation converge to create a win-win scenario for both the company and its shareholders.

Cyberpunk 2077 Sales Growth and Depreciation

The chart below illustrates the hypothetical sales decline of Cyberpunk 2077 products and the impact of the accelerated depreciation schedule on free cash flow.

Key Takeaways

CD Projekt's aggressive depreciation schedule for Cyberpunk 2077 is creating a 'phantom dividend' by freeing up significant cash flow. The company has a choice: reinvest the surplus or reward shareholders. The outcome will be influenced by the performance of Cyberpunk products, new game development progress, and the global economic climate.

"Fun Fact: Cyberpunk 2077's Phantom Liberty expansion features the voice and likeness of renowned actor Idris Elba, adding to the game's star-studded cast."