Paradox Interactive AB (publ)

Hello and welcome to the presentation of the Q2 report for 2025 for Paradox Interactive. My name is Fred.

And I'm Alex. Welcome everyone.

And we're going to take you through the numbers and the releases of a pretty uneventful quarter in the history of Paradox Interactive, we must say anyways. But we always want to present our quarters, right? That's me. I always have my first, so people know who I am. So you can summarize this quarter as that we're building step by step for the future. So like we said, no major events taking place, but a good mix of different releases, a couple of new game ideas tested by Paradox Arc, but mostly building actually for the releases to come. And we also postponed the Bridges and Ports expansion for Cities Skylines 2, which lowered the revenue and profit a bit. But we still stand at, if you take rolling 12 months backwards, we still stand at a healthy profit margin of 41%. So we had two good launches with Age of Wonders 4 and Victoria 3. And Victoria 3 is now in a very positive sentiment in the market. And we are really happy to see that it joins one of the portfolio games as what we call the evergreen games that we continue to develop over time. So the reviews on Steam has changed to mostly positive and the new expansion received the highest for DLC in many years for the highest for a Victoria 3 DLC ever. We also released for Stellaris the base game and updated the base game as well and released a DLC for it. Oops. But mostly we're looking forward to talking more about, yeah. Did we

skip? Did we skip something?

No. Did we skip it? I don't know. Oh, did we want to talk about this? If you want to. Yeah, we want to talk about it. I think so. Yeah. We have two major releases that were already announced that we're building for and worth mentioning as well in this stream. So European Versailles 5 and Vampire the Masquerade Bloodlines 2. They already know about. I just wanted to make sure that we continue to talk about these and that we're really looking forward to talking more about the games when there is time. No. Did I skip one? Yeah, I skipped the releases in the quarter. I was so, thank you. Yeah, I took it in the wrong order here. Yeah. Yeah. So on the Grand Friday side, we released three DLCs for PC and one for console. Console was the Legacy of Persia for CK3 and the PC1's Biogenesis for Stellaris, Charters of Commerce for Victoria 3 and Console the Step for Crusader Kings 3 again. Age of Wonder IV got their DLC Giant Kings and released the final piece of the parcel for Empire of Sin to make it complete for what we promised the gamers upon release in 2021, was it, or 2020? 2020, December. December 2020. So end of 2020, almost 2021. We had a couple of releases on Paradox Arc as well, Escape the Mad Empire, Darfur was new games that we tried out and two minor DLCs for the game across the obelisk, Tula the Spider Queen and Sunken Temple, namely. And now I leave the word to Alex to go through the numbers.

Thank you very much. So let's drill down a bit into the numbers. Revenues came in at 459 million SEC, mid-quarter for being Paradox, some releases on expansions, but not as much as we have been in the second quarter of the year, both last year and two years ago. Second quarter was very busy, especially last year. So we were down, last year we made 576 million SEC, so it's a 20% decrease. So mainly three drivers of the decrease if you look. We always state, and we should repeat that here, that it doesn't make too much sense to compare quarter to quarter if you just look at single quarters, but this is the format that we have chosen. So let's compare as always with the same quarter of the previous year. So down 20%, what are the drivers? Three of them, currency of course. The US dollar is down roughly 10% compared to the second quarter of last year and the pound and euro somewhere around 5%. So that means that our revenue, even if we do the sales, is down roughly 7% top line. Also affects

the EBIT margin

obviously. Of course, it falls pretty much all the way down. Now we have costs in the foreign currency as well, but not near to the same extent as we have the revenues in foreign currencies. So that was one explanation of the revenues. The other is that last year's second quarter had especially high revenues from Victoria III and H.O. Wonders IV because in the second quarter of last year we released the big expansions from the initial premium edition packs. Up on launch. Exactly. And how we treat that is that all the premium edition sales that we make from launch up until that release, so for Victoria III it's a year and a half. For H.O. Wonders IV it's a full year. We put that on a balance sheet and when we release the content we also recognize the revenues. So last year we released a big expansion for Victoria III and one for H.O. Wonders IV, which were part of the original premium edition pack. So it came with a lot of revenue recognition from several months of sales. This year we didn't have anything similar, so that together with the currency are the main drivers why we see slightly more than 100 million less revenues this year compared to last. Then of course it's a mix of releases, but if you remove these three items I think the quarters are very similar and comparable to each other. Top contributors, so we have CITIS I and II. We have top contributors to revenue. CITIS I and II, Crucifix Kings III, Archivion IV, Stellaris. We've also added Victoria III and H.O. Wonders IV. So we have seven on the list now because the distance between number four and seven is very very small. So it's very encouraging to see that both Victoria III and H.O. Wonders IV are establishing themselves as you mentioned. You call them evergreens. They have had the potential I think so for but now it's proven if you want to say. I think so, which is very very satisfying. So operating profit, 133 million. There it's a lot since last year when we did 29 million but as you might remember last year's Q2 we cancelled a big project called Life by You which came with a 208 million sec write down. So that impacted of course last year's profit significantly. Profit margin for the quarter, or I can mention profit after financial items first 139 million compared to 37 million last year. So again profit after financial items is higher than operating profit for us because we have the benefit of having substantial amount of cash on our bank accounts. So instead of having financial costs we have financial income which is of course great. Profit before tax margins, so that's what we call profit margin. 30 percent in the quarter compared to six percent in the same quarter last year. And

as we mentioned 41 percent over 12

months. Yes I think that's a more relevant KPI because single quarters can be highs and lows. I think in Q4 we had 57 percent or something like that so it depends a lot on the releases but rolling 12 months is a very relevant KPI and we are at 41 percent which we think it's a healthy place to be at. Equity through asset ratio 81 percent, very solid company up from 77 percent last year. If you follow our reports you will remember it's down a little bit compared to Q1 and why is that? Because we paid dividends so we paid out a little more than 500 million sec in dividends so that lowered it but still 81 percent. Average number of employees during the quarter 640. So it's up 46 compared to the same period last year and that's of course the addition of our colleagues in Bulgaria in Hemimhont that joined us in February. We have also increased a bit in other foreign studios team to have increased a bit so has Iceflake and Triumph but then we closed down the Tectonic studio the developers of Lifebuyu since last year's second quarter so therefore it's 640. So let's move on. So our cost structure we have I know that at least we have a bunch of analysts that are interested in the different items here so let's go through them. Revenues we've already talked about. The cost three main items COGS selling expenses and admin expenses COGS 232 million compared to 456 big decrease and of course it's the write down we had in the second quarter of last year of 208 million that we had zero write downs this second quarter so that has a huge impact. If we look at amortizations that came in at 79 million this year compared to 96 million this same second quarter but last year so it's a decrease and this amount is driven of what we release in the quarter but also the next quarter's leading up to the aggressive amortization model so new games and now it's some time since we released anything big so therefore we see the amortization is coming down. Then we amortize so when we acquire assets and companies like Hey Mimont we also acquired Stranded from Frontier in Q2. So what we like to do is we put that on the balance sheet but then we depreciate it over time preferably not longer than five years and that we are applying to both Stranded, Alien Dawn and Hey Mimont so that means that we take costs every quarter so in Q2 we had 19 million of amortizations of acquired businesses and assets last year it was 14 million so the increase comes from Hey Mimont and Stranded, Alien Dawn but we think this holds down the results and perhaps it's not necessary because our expectation especially on Hey Mimont is that that studio in five years from now is going to have a bigger value than it has today but still this is how we look at it. Royalty is 26 million compared to 19 million and here I have already gotten some questions. It was extra low in the second quarter of last year for two reasons. One is we have mainly two games that drives royalties for us one is City Skylines and the other is Age of Wonders because on Age of Wonders 4 we have still an earn out to the sellers from the acquisition of Triumph that made the game that the earn out continues up until April next year so we have had it for is it eight years now I think it's eight years so it means that we put that as a and Q2 last year we had a lot of revenues but as we already talked about from recognizing prepaid revenues but the royalties we didn't recognize in the same month we paid and recognized it at royalty already when we received the payments so therefore especially percentage royalties were low last Q2 so therefore they might seem high this second quarter but I would say this second quarter the royalties are at a reasonable level. Then we have non-capitalized development cost still within the COGS item non-capitalized development cost and tech cost that we have within publishing we have 101 million second Q1 compared to 110 million second Q2 so this this is most of the stuff that we do through our new games team and ARC ends up here instead of putting that development cost on the balance sheet we take the cost immediately it's down 110 from 110 last year to 101 this year and that has to do with life by year because when we decided in I think it was beginning of June last year to not complete the project we decided all the balance sheet but recognize that cost immediately. Other income other expenses that is currencies from when we issue the invoice to the date that the invoice is paid right exactly so when we issue invoice we translate that into SEC put that on the top line as revenue then 30 days later roughly when we receive the money that might translate to another SEC amount and whatever difference is we put here is other income or other expense and this quarter the dollar has gone down during the quarter so therefore we have a negative impact of net so on the cost side it's minus 15 and on the income side it's plus two so also net negative impact. Financial items that's the interest on our bank accounts so therefore we have an EBIT that is higher than our EBIT. Let's take one more slide so revenues in green bars rolling 12 months to smoothen out the volatility between the quarters in order to see better trends and operating profit in the yellow line and we can see two things one it's volatile between the quarters that is driven by what we release and also if we happen to to cancel any big project and have big write downs we've had that in three quarters but if you look over a longer period of time it's a clear trend going upwards both in terms of revenue and operating profit and that is something we of course aim to continue. Perhaps most important cash flow very strong cash flow cash flow from operating activities 262 million SEC in the second quarter of this year it's down from 391 compared to the same quarter of last year it's mainly the revenue difference in the quarters that drives it but then when you look at cash flow it will differ from operating income due to amortization write-downs but also due to timing if we get if we have a lot of revenue in the first month of the quarter compared to if we have it in the last month of the quarter that will push the cash flow either into the the current quarter to the next quarter so that's that's not always easy to compare cash flow from investing activities 208 million which sounds high compared to was it 80 million 81 million yeah same quarter of last year so we have two reasons why it differs it was exceptionally high this year because in the 208 million we have the acquisition of stranded alien dawn yeah so if we just look at the investment in game development it was 161 this year last year we sold some of our short-term bonds it's a way that we use to get slightly more interest on our savings so we sold that and that has a kind of a positive impact on the cash flow but if we just look at game investments in game development last year it was 150 compared to 160 this year so it's slightly up but again you should you shouldn't see this as a trend because it differs between the quarters depending on when we receive big invoices so so so i think it's it's very similar these years i think this is the last slide total equity and total non-current assets so we have until

equity goes down because of the dividend payout

i

guess

yes exactly so it drops from it pointing it out correctly we're down from q1 and it's the plus 500 million second dividends that we paid and the total equity is pretty much it's our aggregated profits over all years minus what we have paid in dividends yeah

and the non-current assets is going to continue to go down and now it's going up because of the is it haven't mountain stranded alien dawn again

that has for sure impacted it in in the first and second quarter of this year

but with the release of bloodlines 2 and europa 5 we're going to see this going down yeah next period same period next year i guess it's it's going to be a bit lower than this one

yeah for sure so we're in 1.9 billion second total out of that 1.6 is capitalized development right and that has also lost the year because we haven't released anything big but as you point out with the releases of bloodlines u5 prison architect 2 it's it's going to come down significantly that was pretty much what we had planned so we'll go

over to q and a yes yes we have a couple questions that has come in that we'll try to explain as good as we

can right so the first one is for you fred how does paradox plan to balance ongoing investment in new projects with maintaining profitability especially in light of recent industry challenges and past write downs it's

a good question i mean we invest on a -to-day basis on on what we call our live games or the evergreen games and we develop expansions and dlcs to the big franchises and that's a profitable business that we feel comfortable in doing but of course we want to achieve growth in other ways as well so one way is to make sequels for example we have europa 5 coming out that we at those stages we know pretty much the audience we know how to develop it it's it's a there because we want to do things that are somewhat adjacent maybe to grand strategy or to what age of wonders is doing but when we do we pointed this out before when we do a new project we start out smaller and we kill it off before it becomes an item on the balance sheet basically so that's the one of the ways to avoid big write-offs in the future so you will see it would take more directly on the revenue sheet and would take less in the balance sheet so that's a part of the strategy and i mean and when we do totally new things the success rate is going to be lower but hopefully the plan at least is that we won't announce anything to the public and then shut it down so that's the big difference we'll shut it down when it's still small and hasn't cost too much and i mean there is an industry crisis but i think the industry is divided into either you make money or you don't type of companies and and i i've never seen i think paradox is in a great spot as a company i think we we're doing well i mean this quarter is as i pointed out in the beginning uneventful but i mean if this is an uneventful quarter i mean we have a lot to look forward to in the future in my opinion

and i think they're going to lose no it's a good question because it's important to have the balance between profitability now and profit growth in the long term because we know we know if we wanted to maximize profit over this and next year we would we would only do pretty much expansions for our big franchises that is the most profit generating thing we can do

and we would also load the balance sheet with all development costs even even projects that are just starting from scratch so so there are many ways to to kind of enhance the the profitability but we're choosing to kind of work a bit stricter on that side to avoid avoid big hits in the future yeah

and some project takes time so i think victoria 3 is one of a good example of that it has been it's almost three years ago we released the base game now

yeah

yeah in october yeah so during these three years it hasn't been that profitable so if you would have wanted to maximize profitability during those three years we would ask people to work on more expansions on hotch of iron and still are instead but we didn't we believed in victoria 3 and now it has solid franchise so that's how we build the long-term profits for

sure

it's

been a slow cooker so alex given paradox a strong cash flow should shareholders expect a higher dividend in the near future or will the focus remain on reinventing in reinvesting not reinventing reinvesting in major new titles yeah

yeah it's a good question so priority one when terms to applying money is always to invest in game development that is the most profitable and value generating thing we can do and that that is investing in expansions which is a very which is a no-brainer but but also investing in sequels to our most successful franchises with the right timing but also into new games of course so that is priority one i would say that when we want to apply our money priority two is to acquire assets which we think has a long-term and strategic benefit for us and comes with the right price so the last examples are stranded alien dawn and amy mont the money we don't need for this that that is pretty much should should be paid out to the shareholders and dividends yeah

there are a lot of assets out for sale in the market for the moment so we'll we'll take a look but we're not too desperate to buy assets you know it needs to be the right fit and it needs to be the right thing so yeah yeah a quick one for you again here alex is it currently possible to buy shares in paradox interactive and if so how can individual investors do this

yeah of course our shares are listed on nastak first north so you can buy them contact your bank or your brokerage firm and they will be happy to help you all right fred several of paradox franchises for example u5 hoy force delaris k3 city skylines 2 etc are long-running endless games with extensive dlc support is there a plan to gradually scale down these models such as moving toward subscription models or are these games still expected to receive major content for years to come it continues and how can paradox address the perception of the high cumulative cost for dlc for older games good

question another one so uh the games uh have had active player bases and that's the reason we continue to develop for them because basically people want more content for the games and they expect more content for the games and they enjoy the content mostly the content that we that we put out there um and we have chosen this business model because it's flexible for the gamers you can buy what you're interested in and skip the rest and there's also as we know a big modding scene and people are doing mods as well both for new assets and for old so you can also use these ones mostly for free i think but on top of this and we are aware that the whole catalog of dlc is is over time tends to be a bit costly and therefore subscription has been a good sort of of an alternative way to enjoy our games as a gamer as well so we're looking at at both models actually going forward so we'll see how we develop it in in the future the most important thing is that you know people get the chance to enjoy our games in us to as large extent as possible

especially if you're completely new into an old franchise that has several dlc's you can you can buy the base game and then you then you can buy one month of subscription and you can try out as many as the dlc's as you have time for and if you like them if you find a dlc that you think oh this one i want to play for several months then you can buy that one yeah for sure

so alex is perlux planning to establish more internal studios like perlux tinto which is based in spain in other regions particularly in europe or new markets

well yeah tinto is a good example it has worked out very well so we kind of separated the european initialis team and that has i think created a lot of healthy beneficial focus onto both u4 and especially ropen and choice five

yeah

so that has worked great and we're for sure open to do similar things in the future i don't think there are any plans at the moment and now we're fully focused on integrating heimimont so that's priority one but yeah it's a it's a it's a very good way to also open up a new kind of talent pool to recruit from by opening up an office in a different geographical region all right fred from a leadership perspective do you believe the major internal challenges of past several years for example project cancellations team restructuring shifting priorities have been resolved or are further organizational changes still underway to ensure paradox's position for long-term success

that was we could probably talk about this yeah i could probably talk about this all day but first of all shifting priorities we don't have really shifting priorities maybe it looks like that from the outside but we've been very clear on our strategy for the past seven eight years and organizational challenges changes i think it needs to happen continuously you see how the team is structured depending on on what happens around it basically what type of games you're doing how the games are received by the audience etc and sometimes it needs some new people to come in and help with with a certain game and then you change because of that and teams get new managers all the time you move around a bit and we want people to be able to grow their careers within paradox as well so it's a natural thing that that happens canceling projects is a natural part of games industry as well the most important thing is that we cancelled as i described earlier that we cancelled the games early and before it costs too much and before we have a big chunk of it on the balance sheet because the more you put on the balance sheet the more like sank cost fallacy you're going to have so we're going to continue cancelling games because that's how we find the new like diamonds in the rough that we grow out to be major successes in the future again the trick is to cancel early and fast so i mean our priorities as mentioned it's active games that we already that we already have out there live games with dlcs sequels and new games within the ip boundaries that we're already working with in the core and also cost effective bets in the adjacencies to our current games so that's the priority list of how we work alex what is paradox's position on integrating ai considering the community's mixed reaction how do you weigh innovation against player sentiment

i think ai is another tool that can help us to develop content can help us with many things but for sure to develop more content and anything that helps us to improve our content output and provide more content with the right quality to our players is something we for sure will embrace at this moment it's a bit difficult to say what impact it will have but but my personal guess is that in the long term it will have a great benefit for us

and i think one of the underlying questions here is are you planning to to get rid of staff and replace with ai and the answer now is no we have lean teams that work really tight together compared to a lot of other gaming companies but we think that ai is going to help the teams be more efficient and and produce more great content for our gamers that's the way we see

it

yeah so alex cost of goods sold as percentage of sales is up sequentially could you break down how much is related to fx items which is exchange rates or if you have more royalties this quarter for example h1 is four compared to last year

yeah i think we touched on this extensively in the presentation i can't tell you exactly how much that this fx but for sure fx impacts cogs as a percentage of sales because we have i think we have the 97 of our revenues coming in other currencies than sec we have some costs in foreign currencies as well but roughly 50 so we have a natural hedge there but but but for sure fx impacts cogs as a percentage of revenue and in terms of royalties compared to last year we went through this yes last year's q2 was i would say a bit extra low in terms of royalty this was a normal year i think do we have more questions yes we have one for you fred great reviews from the latest wiki3 expansion given some fixes in core mechanics could you give us an updated roadmap on this game and your expectations for the next 12 to 24 months you're with a player yeah

of course i can't give you an updated roadmap unfortunately because we decide this i mean we have an over idea over overarching idea on like three to five years obviously but we decided more on a -to-year basis depending on the reception of the game etc and we like to the team to communicate this so i shouldn't do this in the live stream so whenever they come up with something new it will be communicated with with the victoria team together with the publishing department so but seeing seeing the great reception is obviously increasing our confidence in the product and seeing how it can be a long-term franchise for us i mean yeah victoria is a great addition to our portfolios so i'm really glad to see them alex solid price increase on h1 there's for expansion but given the strong effects headwinds how much do you think you could raise prices to mitigate this effect

someone says that the price increase is solid it's not a player that asks the question and you know an investor they

would be yeah yeah outrageous like no something like that yeah

yes so the way we set prices in each region and for each product is based on the players in that region and how the that product is received and we check general pricing in the region we check how competitors are priced and we do this update on the prices regularly at least once per year but sometimes more often currency movement is not impacting our price pricing i would say i mean the distributors are paid as a percentage of the actual revenue in the local currencies so they they are following along with the ride as well as we are yeah

you have to you have to remember that the dollar is still still at this level historically quite strong compared to the dollar so i mean we shouldn't panic too much i think

no for sure out of time

you know all the time they say here from the studio so if

you have posted any questions or sent them in or that you have that we haven't answered or if you come up with questions continue to send them in in the in the different in the email form or the ways you can and we'll answer them after the stream

yeah perfect and thank you very much for watching and we'll see each other next quarter then yes if not before

october end of october perfect thank you for watching thank you have a good day bye bye