Paradox Interactive AB (publ)

Hello, everyone, and welcome to the Paradox Interactive Q1 live stream with me, Fred.

I'm Alex. Welcome, everyone.

And we're going to take you through some of the things that has happened this quarter and obviously the numbers of the quarter as well. So we might just as well jump right into it. And that's my name right there. To summarize where the company is, not only this quarter, but in general, our core business has really good momentum. We can see that our underlying sales are really good. So if you compare to Q1 last year, it was basically the same in terms of sales numbers, gross sales. But this year, we didn't have any revenue from subscription services, for example, which accounted to zero. At least some revenue last year. I don't remember how much. It's an undisclosed amount, but it was significant. It was a significant amount. We are also, as an industry, experiencing probably the most turbulent period that I've seen since I joined almost 21 years ago into this industry. And we have a very good position with no debt. money in the bank, good cash flow, and really good delivery on our key IPs. So a lot of opportunities will present itself in a market like this, and we hope to be able to take advantage of at least a few of those. And obviously, I mean, we have a clear area of improvement for the future, and it's increasing the quality of what we do in all delivery across the whole company. So quality, if we talk about that specifically, on some of the recent releases, technical quality has been a bit below what we are to be expected. Our first rule here at the company is to give service to our gamers. It's the rule that we live by and the first thing that people hear when they enter Paradox as well as employees. And we strive always to have a good and consistent quality in what we do. We failed a couple of times, as I mentioned recently, but we have a pretty good idea on how to get back on track. And there is obviously no silver bullet, no one thing that we can do. But checking the game, how we check and work with quality control late in the projects is one of those key things where we think are going to lift the quality level to where we can expect to be and where we want, where we do expect to be, I would say. A couple of effects that this has had is the delay of Prison Architect 2 slated for early September release and also a small postponement of Victoria 3's Sphere of Influence DLC that is now releasing in June instead of in May. so if we move into uh there's been a couple of questions about city skylines too so i might just as well do a preemptive strike and take that right away up front so when it released in october last year it didn't live up to player expectations and we have started the journey with a game to take it to the level where it should be it's most notably it has been on the performance side Therefore, we have delayed the DLC bridge and ports to 2025 to ensure proper time to actually improve the base game in the meanwhile. We have not yet committed to a console release window, so we want to ensure that we have the quality right before we actually set a date so the console players can enjoy a really great experience with the game. And as we've said before, Cities Skylines and Cities Skylines 2 are both long-term engagements for us. It's an important franchise for Paradox, and we look forward to working with this game for a long time. Releases in the quarter, the 4X game Millenia was released, Trial of Legions for Hearts of Iron 4, Primal Fury for Age of Wonders 4, and the first DLC in Chapter 3 for Crusader Kings 3, namely Legends of the Dead, with more to come later on this year. Also a smaller content creator pack called North African Attire. On the management side, we released Beach Properties that we later gave away for free to all gamers, considering as... some sort of a gift for the game not really living up to the expectations so far. Worth mentioning as well is the release of Across the Obelisk on Nintendo Switch, which marks our absolute first Nintendo Switch release from the company on the publishing side. We have had Cities Skylines before on Switch, but it was through Nintendo, so it wasn't through our own publishing efforts. So that's a small but not insignificant milestone for the company. So after the quarter, what happened? Prison Architect 2 delayed, as I said, to September. Foundry is releasing early access now in May. It's just a couple of weeks from now. Left By You releasing an early access in June. We really look forward to seeing that releasing. We also announced a couple of DLCs for our main games. Machine Aids for Stellaris, Sphere of Influence for Victoria 3, and Winds of Change for Europa Universalis 4. All to be released within quarter two. Exciting. A lot of releases coming up. And over to you, Alex. Let's go through the numbers.

Let's look at them a bit more in detail. So revenues came in at almost the same level as last year's Q1. Last year we did 483 million. This year we do 482 million. So very similar. And also the fundamentals of the businesses has been very similar between the quarters.

And worth noting is that the currency is basically the same level as last year. So the krona hasn't strengthened. It hasn't weakened since the Q1 last year.

That's right. The normal effects, as if you compare quarter to quarter, but dollar has been flat towards the krona. Euro has been flat. The pound moved a little bit. What else? Well, more importantly than FX and currency, of course, is what we release in the quarter. And there are the same goals. The quarters have been very similar in terms of releases. You just went through what we released this Q1. If you look at last year's Q1, it was very similar. We had the DLC on Stellaris. We had some content creator packs and radio stations on Cities. We had something on Victoria 3. We had the console ports on Stellaris and so on. in sizes and numbers very, very similar. And therefore, the revenue ends up being very similar. We always disclose the top five contributors of the quarter, and it's Cities Skylines 1 and 2. occupies two of the top five spots. And then CK3, Hoy4 and Stellaris. No surprises there.

No. And as we said, we have no revenue this quarter from subscription services that has been paid compared to last year. So that's a small step forward.

It is for sure. Operating profit, the same goes there, almost the same. 154 million this Q1 compared to 156 million last year's Q1. So it's down 1%. So evidently also the costs are very similar to last year's Q1. We will, of course, go through them a bit more in detail. But then if you look at the next line there, we have some differences of profit off the financial items. Last year, it was very much the same as the operating profit. But this year it is ten and a half million more than the operating profit. And this has to do with Our financial income, so interest on our quite massive cash position and interest have been going up over the last years. And if you have debt, it means additional cost. If you have cash, it means additional income. And that's the case for us. Profit margin, of course, if the profit is the same as last year and the revenue is the same as last year, the profit margin is going to be the same as last year. No surprises. 1% from 33% to 34%. Worth mentioning, it looks very similar, but some of the fundamentals are different. You mentioned one thing. We got the extension on one of the major subscription services last year's Q1 that actually pushed up the revenue in Q1 2023 quite a lot. This year, we haven't had that one. But nevertheless, we are reaching the same revenue. So that says quite a lot about the strength in our underlying sales in our core franchises, which is very good to see of course. Also something that makes this quarter a bit more challenging than last year's Q1 is that we have had increased marketing costs this year. So it's mainly two things that drives our marketing costs. One, what are we releasing in this very quarter? And I just said the quarters have been very similar. The other thing is, what are we going to release next quarter? Yeah. So now we're looking forward to life by you foundry and prison architect to three three games that drives marketing costs already. Now, last year, we pretty much only had the two wonders for us, a new game in Q2. So we didn't have the same amount of of early marketing costs this last year as we have this. But still, we are managing to reach the same profit level. So that's good. Equity through asset ratio steadily increasing from 75% last year to 78% this year. Average number of employees goes down from 665 last year's Q1 to 594 Q1 this year. So this is, we closed during the last 12 months Arctic, Talasic and Harbin schemes. Almost 100 FTEs. But then we have increased number of FTEs here in Stockholm, a bit in Iceflake Studios and in Berkeley for Tectonic. But all in all, less FTEs. Let's move on and go through the costs a bit more. So this chart, if you have seen the streams before, you have seen this chart before. It shows the revenue over time on the green line. And on the yellow, blue and red line, you have our three main costs over time. So the revenue we have been through already. But what is very clear here is how much our revenue and thus profit fluctuates over the quarters. Last quarter Q4 was extreme. But even if you look a bit further, it swings quite a lot between the quarter and it. All has to do with what we release in the quarter. And if you go five, six, seven quarters back, it's quite clear that we, for some reason, we tend to group the releases to one quarter. So every second quarter, we release quite a lot. And every second quarter, we release quite a little.

But a steady curve is pointing upwards over time.

Over time, it's pointing upwards. I will show you another slide that makes it a bit easier to see. So that's about the revenue. So let's discuss the cost a bit. So cost of goods sold, the biggest one in yellow. Massive swing up in Q4 and similar massive swing down now in Q1. 268 million SEC Q1 compared to 263 Q1 last year. So compared to Q1 last year, very much the same. But in Q4 last year, it was 712 million SEC.

A huge amount of that, the write-down of Lamparders League, obviously.

yeah lamplight this was a big reason to this and so so what uh what does this consist of the cost of goods sold amortization is a big one of course so we we amortized 120 million sec q1 this year and 110 million sec q1 last year so very similar but q4 last year it was 300 million sec And the amortization there, you mentioned it, lamplighters, I think we amortized 150 million. Then we also released Cities 2 and Star Trek that also came with big amortizations. So those are, lamplighters is zero now because we wrote the rest off. Cities 2 and Star Trek have still some amortizations, but less. So I think that explains the whole decrease from 300 to 120 in just one quarter. We take another 14 million SEC as costs for amortizations of acquired businesses and assets. So when we acquire IPs, studios or games like we have done with World of Darkness, Prison Architect, Playrion, Herbrand Schemes, we, in almost all cases, we allocate what we have paid for the asset to specific assets. That we amortize over time. We have 2 million euros as goodwill. 2 million euros, that's all we have as goodwill. The rest has been either developed games or intellectual property in some way that we mostly depreciate over five years.

Yeah.

So this item used to be 20, 21, 22 million SEK per quarter. Now it's only 14. And the reason is that since last year, both Herbrand Schemes and Prison Architect have been fully amortized. All right. So. Prison architect, we acquired it for a decent amount. Now we're coming out with prison architect too. So the acquired asset still has a very important value for us. But in the book, we have already taken all the costs.

So it's worth zero on the balance sheet.

On the balance sheet, it's worth zero, but we know it's worth something for us. And we think this is a prudent way to handle acquired assets. It pushes down the profit for us, but it also takes down the risk and builds for the future. What else is included in COGS? Well, other amortizations, 9 million SEK, that's especially the rent for all the studios that shows up as amortizations since changes in accounting rules a few years back. Write-downs in the quarter, zero. Q1 last year, we had 10 million SEC on an unannounced project. Project Smurfs. Project Smurfs.

Which doesn't say anything to anyone.

It didn't have to do anything with the brand Smurfs.

No.

It's just an internal name. And in Q4, of course, it was massive. There we had 171 million on Lamplighter. So in addition to the 115 amortizations, it's all significant. What else is in Cogs? Well, royalties is sometimes or quite often a big one. 40 million SEC in Q1 this year, 30 million in Q1 last year, and 112 million in Q4 of last year. It was super high in Q4 because we released Cities Skylines 2, which generated significant revenues and therefore significant royalties. 40 is higher than 30 of last year because it used to be at 30 quite consistently. But now the reason why it's up 10 million is due to Age of Wonders 4. We mentioned this in Q2 last year when we had elevated royalty costs because when we acquired the studio Triumph that develops Age of Wonders 4, We agreed on learn out that is based on how especially it's a wonderful performance, but also planet for right. And since it's a wonderful has been performing quite good, there is as long as continues to do that, there will be an elevated royalty to expect. Right. And this will continue, well, as long as the game continues to perform, but then there is a cutoff, a very last cutoff date in two years from now, I think it's April 2026. Right, yeah. It's written in the report if you want to check it out. Then we have the last item in COGS, which we called non-capitalized development costs and tech costs for the publishing, you could say. And the non-capitalized development costs, all of this amounted to 86 million. And it was 83 million in Q1 last year, so very much the same. It was 100 million in Q4, so it's down against Q4. And the reason... Also, there was lamplighters, actually, because after the release of lamplighters, we took all the development we did in Q4 because we had committed to make at least one small DLC. And all the development we took as cost. We didn't capitalize it, but we took it as cost. So that is some 15 million sec less in this Q1. So 86 million all in all. So that amounts to COGS of 268 million. Selling expenses, $55 million compared to $48 million. We touched a bit upon that, that it's slightly elevated compared to last year because we're preparing for big releases in Q2. Yeah, Life by You, Prison Architect 2, now it's going to come. September. Yeah, but still we have had some marketing costs for it and also Foundry. Yeah. Admin expenses normally stays very flat. It's 26 million compared to 23 million last year, so it's up a little bit. Most of this is due to temporary reasons. We got a couple of more invoices that accumulated and were sent to us in this quarter. So that's why it's a bit higher this quarter. Then we have the roles, other income, other expenses. Adds 21 million to us this quarter, added 7 million last year's Q1. So this is almost everything is currency movements within the quarter. Right. So between us sending the invoice and booking that to us getting the cash. The difference ends up at this row. And we said compared to last year's Q1, the currencies didn't move much. That's right. But during Q1, it has moved. So the dollar went up from almost 10 to 11 in one quarter. So it's back up in high levels. Or the Swedish krona is down, depending on how we want to look at it. And then also mentioned before financial items, 10.5 million. So this is interest on our bank accounts and bonds and the ways we interest rates going up is not necessarily a bad thing for us.

Not if you have money.

All right, let's move on. Let's try to identify the trends a bit. So here we have grouped the revenues and profits into years, so 12 months rolling. And here you can see the trend that Fred was talking about, especially for revenue. It's very, very clear. It has been year after year going up quite significantly. Profit is also trending upwards, but there it's being held down, especially now in Q4 and Q1 by, to a large extent, lamplighters. It has had a negative impact. If you look at rolling 12 months, it's probably some 300 million sec in negative impact. Yeah. And that will continue to show on that yellow line for for another couple of quarters, another couple of quarters. So we will be reminded about that project, which might be good for us. All right. Cash flow. Now, this might need some explanations, but the explanations are quite simple. So cash flow from operating activities amounted to 134 million SEC. Q1 of last year was 245 million SEX. So 110 million better cash flow from the operating activities last year compared to this Q1. how how come if the operating profit was almost identical how come well this is also just due to timing so it turns out that this this year's q1 a fairly significant amount or share of the revenues came in march we had good sales in march so that The cash flow from those sales don't show up in Q1 this year. Last year, for some reason, we had the revenues, or for some reason, it was due to when we released games and DLCs, we had significant revenues in January and February. Also more in the month before, so December of 22 was significant revenues. So that's why it looks or that's why the cash flow is lower in Q1 this year. But if you look at it over further sometime, it shouldn't be any difference. Cash flow from investing activities, 48 million SEC. That looks very low and it looks like we have stopped investing. We haven't. We invested 178 million SEC in game development. So that's even 9 million SEC more than Q1 last year when it was 169 million. The reason why it nets at only 48 million is that Let's say last summer, we decided to invest 200 million SEC in different bonds, short term. And they paid back now. And instead of reinvesting it in bonds, we placed them on bank accounts that actually yields better interest. So therefore, it looks, or the total investment, decreases because the money we got back from the bonds takes down the net. And that's also why it was extra high in Q3, as you can see. That's when we invested some $200 million, so it goes the other way now. Equity, non-current assets. Total equity amounts to 2.8 billion SEC. So this is mainly our profit after tax throughout the years minus what we have paid in dividends. So this is what we have accumulated, you could say, over the years.

Yeah, and the assets on our balance sheet there, namely game development projects. Yes. Something going down, you've mentioned Land Players League, for example, was a chunk of that. So we have a couple of internal games there. We have the Vampire game, Bloodlines 2 there. We have Life by You and a couple of other games.

A few ones that of course we haven't mentioned. I think we have, it says in the report, I think we have 10 games in the pipeline. So those adds up to the larger extent of it. But then of course also the the DLCs on the live games we have until we release them. They are on the balance sheet. So capitalized development is the biggest part. I think it's 1.8 billion SEC. The rest is, no, sorry, the total non-current asset is 1.8 billion SEC and the capital development is 1.5. The rest is acquired IPs that we haven't yet amortized. And also the right of use assets, you know, the way that we account for the rent agreements since a few years back. That was all we had planned to go through. I know that we have already got some questions. Should we dig into them?

We'll go straight in.

Okay. This one is for you, Fred. What is Paradox Interactive's outlook on its current business strategy? And are there plans for adjustments to ensure long-term success? Good question.

It's a good question. And the fact is long term success requires long term thinking. That's the first thing. And therefore we panned out and explained our strategy last year. Was it in May? Yes. On our paradox deep dive day that we had. And we summarized it into dig in, stock up and break out the ways we work with our current games. are sequels and similar games and the games that are totally new to us. They're totally new IPs, totally new type of games. And that hasn't changed. So we're continuously working on that and working and trying to grow in every area of those. But obviously there are other ways we need to focus as well. I mentioned quality as a big important part on how we're going to grow because gamers today expect more than gamers did five or ten years ago. So... But all in all, we stay true to our strategy and we believe a lot that this is going to bear fruit, hopefully soon, but we've always been long-term. So it's more about making, creating a value for our gamers is going to be the key to the Paradox long-term success as well. That was a long answer. So Alex, how has Paradox Interactive managed costs in light of recent financial pressures and what initiatives are in place to ensure operational efficiency?

Also relevant question, but financial pressure, that's nothing that we experience. We have a very solid revenue, as we could see. We have seen it quarter after quarter. I know that the markets before we have been presenting the quarters for the last, I think, like five, six quarters now have been worried about what are you experiencing in terms of market economics? And we have quarter after quarter not experienced much. not on that, not on a full level, because the difference we see is that our big franchise, they continue to deliver and sell as ever before. Yeah, there we see challenges with the new and especially smaller franchises. And that seems to be an industry trend. So we are extremely happy to have at least five super strong franchises. Indeed. Yeah. Yeah. So thanks to top line not much financial pressures uh we have very good margins as always uh 35 or 34 q1 this year i think we can do better uh cash position uh very strong it's above one billion sec and we have zero debt zero debt on the balance sheet so yeah but Having said that, we are always, of course, prudent about costs. We launched several initiatives when you came back, Fred, two and a half, almost three years ago now, where we did a lot of costs, some cost efficiency measures. So we ended up closed down three studios last year. This is, of course, related to costs. in PDX, our publishing business. I think we took it down two years ago from 250 to 170 AFTs. So I think we were doing a lot of stuff early on that is paying off now. But also There are other things like the implementation of NGT and how we approach high-risk projects. That's also a very efficient way to decrease costs on high-risk projects. I think I've answered it pretty much.

Yeah, and one way is that we've changed also the way we activate costs, because we don't anymore on new projects that we're only experimenting with, which is a good way to avoid the sunk cost fallacy, which is very strong in projects in the games industry in general. I think that has kind of changed a lot of how we operate and the kind of awareness of how costs work in projects. So that's been very good for us. We hope to see the result of that in the coming year or two years.

Yeah. And in terms of our more proven projects, there we do capitalize from the start, but there we have also adjusted a bit how we invest between the stages and invest lesser in the early stages than we were in the later stages, because that also enables us to adjust the direction without losing too much cost of money over time. Indeed. Do we have more questions? Yes. Fred, will your pricing policy change?

Well, we adjust our pricing policy a bit all the time to reflect a couple of different things. One of them is obviously fairness over how a game is priced in different parts of the world. Another is purchasing power. But we harmonize our prices on an annual basis and adjust a bit prices on new DLCs depending on how much time and money we spend on it internally and and the value we believe it holds so it's gonna it's gonna be uh we're not gonna experiment too much obviously but there are gonna be some adjustments here and there going forward as well for sure okay cool So Alex, what criteria does Paradox Interactive use to determine when to cease updating a game? How do sales performance or sequel releases factor into these decisions? It's a good one.

Yeah. So there's several reasons or several things we take into consideration. One is, of course, we have limited resources. Cash is not an issue for now, but staff resources is especially and especially in certain in certain skill sets. So then it comes down to a Where do we allocate these resources and get the most out of it? So that is often the reason why we don't continue to develop DLCs on certain games, because we think that we can get better yield investing those resources elsewhere. But then another way to see it is that we want to, of course, we continue to make DLCs as long as there is a will among enough enough amount of players that is willing to buy more content. If they want to buy more content, we are happy to continue to develop more content. So when we release a game, we normally have committed already to make one or two DLC, sometimes more, and that we always deliver on. But then we look at what is the market and players saying? Do they want more or are they happy with the content they have got and don't want more? That's the main input to our decision making for that.

There's a range of factors that play into if we stop supporting a game, but we want to support all our games for forever if given the possibility. It just has to make some sort of financial sense as well.

And it always pretty much makes financial sense if there are enough players willing to buy game editions. Was that the last question? No, there are more. Fred, what was the idea behind the Stellaris expansion subscription? Do you think it's a good value or just an experiment? I'm curious how this model is working out.

Well, subscription is something we're still kind of experimenting with. And we started with Hearts of Iron 4 and Europa 4. And it's panned out fairly well from what I understand. And it's a good way for gamers to get access to the full game and try out the full game without having to buy all the DLCs for the game at one go. And Stellaris has built up a strong catalog of expansions, so it is a good way to kind of get over the threshold of DLC value. And we believe that it creates a lot of good value for the gamers, and we are also in general, interested in finding new ways for people to access our games and enjoy our games. So it's one way, but at the moment, it's been an experiment. And so far, I think people are happy about it. Yeah.

One more for you, Fred. All right. How far do you feel you have come in improving the release cadence for DLC?

Right. That's a good one. That's the never-ending story, right? Yes. It's an ongoing work. I always say it's an ongoing work. It's what most things are. So we continue working with things, obviously, behind the scenes. But we have different ways to improve this, and one is that you have parallel teams on the same team. You have teams that in parallel work. For example, the Harts of Iron team works that way, the Harts of Iron 4 team. And we can use external teams from time to time. Stellaris, for example, has used an external team to help us, for example, release astral planes in Q1. And we're also working together with content creators like we did North African Attire for CK3, but we've also worked a lot with content creators on Cities Skylines. So those are like three main examples on how to release DLCs with a higher cadence and hopefully with a lot of value to our gamers as well. So Alex, the refund of Cities Skylines 2 beach properties, did that hit Q1 or will it come in Q2?

Right. As we mentioned, we will refund the standalone sales on beach properties. So those will show up in Q2. Unfortunately, it was a quite small amount because not many acquired it. We're not doing any refunds on the Ultimate Edition. There, instead, we are making sure that players are getting happy by giving them some more stuff. They're getting a couple of content creator packs and radio stations instead. So there will be a small refund impact in Q2, but it will not be noticeable, I would say.

No, probably not. And like you said, it's very important that we compensate everyone who bought the Ultimate Edition as well because they are the core and the most important of our players as well. And that's it for this quarter. Thank you, Alex. Thank you. As always, it's been great to present to you. And please stay in touch on Twitter or X or whatever you call it. Or if you have any questions, you can always send it in to the IR at paradoxinteractive.com.

See you next Q2 presentation. It's in July, I think, July 26 or something like that.

end of july when summer has come to stockholm so we look forward to that as well and in the meanwhile take care and see you next time thank you for watching bye