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 name 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 and -- but mostly building actually for the releases to come.

And we also postponed the Bridges & Ports expansion for Cities: Skylines II, which lowered the revenue and profit a bit. And -- but we still stand at -- if you take rolling 12 months backwards, we still stand at a healthy profit -- EBIT margin of 41%.

So we had 2 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 portfolios -- or 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 Paradox, the highest for 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. But mostly, we're looking forward to talking more about, yes.

Did we skip -- did we skip something, no?

Did we skip it?

I don't know, may be.

I don't know. Did we want to talk about this?

If you want to?

Yes, I want to talk about it. I think so.

yes, yes. We have 2 major releases that were already announced that we're building for and worth mentioning as well in this stream.

So Europa Universalis 5 and Vampire: The Masquerade - Bloodlines 2, you already know about it. 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? Yes, I skipped the releases in the quarter.

I was -- so thank you. Yes, yes I took it in the wrong order, yes, yes.

So on the Grand Strategy side, we released 3 DLCs for PC and 1 for console. Console was the Legacy of Persia for CK III and the PC one's BioGenesis for Stellaris, Charters of Commerce for Victoria 3 and Khans of the Steppe for Crusader Kings III again.

Age of Wonders 4 got the DLC Giant Kings, and we released the final piece of the puzzle 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 '21. We had a couple of releases on Paradox Arc as well, Escape the Mad Empire, Darfall was new games that we tried out and 2 minor DLCs for the game Across the Obelisk: Tulah, the Spider Queen and The 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.

So revenues came in at SEK 459 million, mid-quarter for being Paradox, some releases on expansions, but not as much as we have been used to in the second quarter of the year, both last year and 2 years ago, second quarter was very busy, especially last year. So we were down -- last year, we made SEK 576 million.

So it's a 20% decrease. So mainly 3 drivers of the decrease.

So 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 a 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? 3 of them.

Currency, of course. The U.S.

dollar is down roughly 10% compared to second quarter of last year and the pound and euro somewhere around 5%. So that means that our revenue, even if we do the same sales is down, I don't know, roughly 7% top line.

It 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 lower revenues. The other is that last year second quarter, we had especially high revenues from Victoria 3 and Age of Wonders 4 because in the second quarter of last year, we released the big expansions from the initial premium edition packs launch.

Exactly. So -- and how we treat that is that all the premium edition sales that we make from launch up until that release.

So for Victoria 3, it's 1.5 years. For Age of Wonders 4 it's a full year.

We put that on the balance sheet and when we release the content, we also recognize the revenues. So last year, we released a big expansion for Victoria 3 and one for Age of Wonders 4, 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 SEK 100 million less revenues this year compared to last. Then of course, it's a mix of releases.

But if you remove these 3 items, I think the quarters are very similar and comparable to each other. Top contributors you may -- so we have Cities 1 and 2.

We have top contributors to revenue, Cities 1 and 2, Crusader Kings III, Hearts of Iron IV, Stellaris. We have also added Victoria 3 and Age of Wonders 4.

So we have 7 on the list now because the distance between #4 and 7 is very, very small. So it's very encouraging to see that both Victoria 3 and Age of Wonders 4 are establishing themselves, as you mentioned, you call them evergreens.

They have bit -- they have been -- they have had the potential, I think, so far. But now it's…

Proven, if you want to say.

I think so. I think so, which is very, very satisfying.

So operating profit, SEK 133 million. There, it's up a lot since last year when we did SEK 29 million.

But as you might remember, last year's Q2, we canceled a big project called Life by You, which came with a SEK 208 million 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, SEK 139 million compared to SEK 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% in the quarter compared to 6% in the same quarter last year.

And as we mentioned, 41% over the 12 months.

Yes, I think that's a more relevant KPI, yes, because single quarters can be highs and lows. I think in Q4, we had -- was it 57% 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%, which we think it's a healthy place to be at.

Equity through asset ratio, 81%, very solid company, up from 77% 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 SEK 500 million in dividends. So that lowered it, but still 81%.

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 Haemimont that joined us in February. We have also increased a bit in other foreign studios.

Tinto have increased a bit, so has Iceflake and Triumph. But then we closed down the Tectonic Studio, the developers of Life by You since last year's second quarter.

So therefore, it's SEK 640 million. 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, 3 main items, COGS, selling expenses and admin expenses. COGS, SEK 232 million compared to SEK 456, big decrease.

And of course, it's the write-down we had in the second quarter of last year of SEK 208 million that we had 0 write-downs this second quarter. So that has a huge impact.

If we look at amortizations, that came in at SEK 79 million this year compared to SEK 96 million this same second quarter but last year. So, it's a decrease.

And this amount is driven of what we released in the quarter, but also the next quarters leading up to this quarter. And especially if we release something that has this aggressive amortization model of new games.

And now it's some time since we released anything big. So therefore, we see the amortizations coming down.

Then we amortize. So when we acquire assets and companies like Haemimont, we also acquired Stranded: Alien Dawn, yes.

From Frontier.

Yes, 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 5 years.

And that we are applying to both Stranded: Alien Dawn on and Haemimont. So that means that we take costs every quarter.

So in Q2, we had SEK 19 million of amortizations of acquired businesses and assets. Last year, it was SEK 14 million.

So the increase comes from Haemimont and Stranded: Alien. But we think this is a very -- it holds down the results.

And perhaps it's not necessary because our expectation of -- especially on Haemimont is that studio in 5 years from now is going to be worth -- have a bigger value than it has today. But still, this is how we treat it because we think it's prudent.

Yes.

Safest way to do it.

For sure, for sure, and we like that. Royalties, SEK 26 million compared to SEK 19 million.

And here, I have already gotten some questions. It's, it's -- it was extra low in the second quarter of last year for 2 reasons.

One is we have mainly 2 games that drives royalties for us. One is Cities: Skylines and the other is Age of Wonders because on Age of Wonders 4, we have still an earnout to the sellers from the acquisition of Triumph that made the game.

That earn-out continues up until April next year. So we have had it for -- is it 8 years now?

I think it's 8 years. So it means that we put that as a royalty.

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 that royalty already when we received the payments. So therefore, especially percentagewise, 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 costs still within the COGS item, non-capitalized development costs and tech costs that we have within publishing, we have SEK 101 million in Q1 compared to SEK 110 million in Q2. So, 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 cost immediately.

It's down SEK 110 million from SEK 110 million last year to SEK 101 million this year, and that has to do with Life by You because when we decided it in -- I think it was beginning of June last year to not complete the project. We decided all the costs that we had at the end of the quarter, we didn't put on the balance sheet but recognized that cost immediately.

Other income, other expenses, that is currencies.

From when we issued the invoice to the date that the invoice is paid, right?

Exactly. So when we issue invoice, we translate that into SEK, put that on the top line as revenue.

Then 30 days later, roughly when we receive the money, that might translate to another SEK amount. And whatever the difference is, we put here as 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 SEK 15 million on the income side, it's plus SEK 2 million.

So net negative impact. Financial items, that's the interest on our bank accounts.

So therefore, we have an EBT 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 2 things.

One, it's volatile between the quarters. That is driven by what we release and also if we happen to cancel any big project and have big write-downs, we had that historically in 3 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, SEK 262 million in the second quarter of this year. It's down from SEK 391 million 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 current quarter to next quarter. So that's not always easy to compare.

Cash flow from investing activities, SEK 208 million, which sounds high compared to -- was it SEK 80 million -- SEK 81 million, yes, same quarter of last year. So we have 2 reasons why it differs.

It was exceptionally high this year because in the SEK 208 million, we have the acquisition of Stranded: Alien Dawn. So if we just look at investment in game development, it was SEK 161 million this year.

Last year, we sold some of our short-term bonds. It's a way that we used to get slightly more interest on our savings.

So we sold that, and that has kind of a positive impact on the cash flow. But if we just look at game -- investments in game development last year, it was SEK 150 million compared to SEK 160 million this year.

So it's slightly up. But again, you shouldn't see this as a trend because it differs between the quarters depending on when we receive big invoices.

So I think it's very similar these years. I think this is the last slide.

Total equity and total noncurrent assets. So we have...

Total equity goes down because of the Dividend payout, I guess?

Yes, exactly. So it drops from -- it's up from the same quarter of last year, but you're pointing it out correctly.

We're down from Q1, and it's the plus SEK 500 million in dividends that we paid. And total equity is pretty much -- it's our aggregated profits overall years, minus what we have paid in dividends.

Yes. And the noncurrent assets is going to continue to go down.

And now it's going up because of -- is it Haemimont and Stranded: Alien Dawn on again?

That has, for sure, impacted it in the first and second quarter of this year.

But with the release of Bloodlines 2 and Europa V, we're going to see this going down. Yes, same period next year, I guess, it's going to be a bit lower than this.

Yes, for sure. So we're SEK 1.9 billion in total.

Out of that, SEK 1.6 billion is capitalized development. And that has also gone up over the last year because we haven't released anything big.

But as you point out, with the releases of Bloodlines 5, [indiscernible] 2, it's going to come down significantly. That was pretty much what we had planned.

So we go over to Q&A?

Yes.

We have a couple of 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 investments 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 day-to-day basis on what we call our live games or the evergreen games.

And we develop expansions of 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 V coming out. And we -- at those stages, we know pretty much the audience.

We know how to develop it. It's a known entity for us.

But we don't want to stop there because we want to do things that are somewhat adjacent maybe to brand 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 one of the ways to avoid big write-offs in the future. So you will see we take more directly on the revenue sheet and we 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 a 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 industry is divided into either you make money or you don't type of companies.

And I've never seen -- I think Paradox is in a great spot as a company. I think 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 you can add on.

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 if we wanted to maximize profit, over this and next year, 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 projects that are just starting from scratch. So there are many ways to kind of enhance the profitability, but we're choosing to kind of work a bit stricter on that side to avoid big hits in the future.

Yes. And some project takes time.

So I think Victoria 3 is one a good example of that. It has been -- is it almost 3 years ago, we released the base game now.

In October.

Yes. So during these 3 years, it hasn't been that profitable.

So if you would have wanted to maximize profitability during those 3 years, we would ask people to work on more expansions on Hearts of Iron and Stellaris instead. But we didn't -- we believed in Victoria 3 and now it has turned around and now it has established itself as a 6 solid franchise.

So that's how we build long-term profits.

For sure. It's been a slow cooker.

So Alex, given Paradox's strong cash flow, should shareholders expect a higher dividend in the near future? Or will the focus remain on reinventing reinvesting -- not reinventing, reinvesting in major new titles?

Yes, it's a good question. So priority one when it comes to applying money is always to invest in game development.

That is the most profitable and value-generating thing we can do. And that is investing in expansions, which is very -- which is a no-brainer, 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, 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 Haemimont. The money that we don't need for this, that is pretty much -- should be paid out to the shareholders and dividends.

Yes. But there are a lot of assets out for sale in the market at the moment.

So we'll take a look. But we're not too desperate to buy assets.

It needs to be the right fit and it needs to be the right thing. So yes.

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?

Yes. Of course, our shares are listed on NASDAQ 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, Europa V, EU IV, Stellaris, CK III, Cities: Skylines, et cetera, 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 -- the games 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 put out there.

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 models 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 DLCs is over time tends to be a bit costly. And therefore, subscription has been a good sort of alternative way to enjoy our games as a gamer as well.

So we're looking at both models actually going forward. So we'll see how we develop it in the future.

The most important thing is that people get the chance to enjoy our games to a large extent as possible.

Especially if you're completely new into an old franchise that has several DLCs, you can buy the base game and then you can buy 1 month of subscription, and you can try out as many DLCs as you have time for. And if you like them, if you find a DLC that you think this is one I want to play for several, several months, then you can buy that one.

Yes, for sure. So Alex, is Paradox planning to establish more internal studios like Paradox Tinto, which is based in Spain, in other regions, particularly in Europe or new markets?

Well, yes Tinto, is a good example. It has worked out very well.

So we've kind of separated the Europa Universalis team, and that has, I think, created a lot of healthy beneficial focus on to both EU 4 and especially Europa Universalis V. 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.

Now we are fully focused on integrating Haemimont. So that's priority one.

But yes, 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 is positioned for long-term success?

That was -- we could probably talk about this -- Yes, 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 7, 8 years. And organizational changes, I think it needs to happen continuously.

You see how the team develops and then you try to form how it's actually structured depending on what happens around it, basically, what type of games you're doing, how the games are received by the audience, et cetera. And sometimes you need some new people to come in and help with a certain game and they 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 the games industry as well. The most important thing is that we canceled, as I described earlier, that we canceled 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 sunk cost fallacy you're going to have.

So -- we're going to continue canceling 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 in 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. It 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 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 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 produce more great content for our gamers. That's the way we see.

So Alex, cost of goods sold as a 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 compared to last year?

I think we touched on this extensively in the presentation. I can't tell you exactly how much that is FX.

But for sure, FX impacts COGS as a percentage of sales because we have -- I think we have 97% of our revenues coming in other currencies than SEK. We have some costs in foreign currencies as well, but roughly 50%.

So we have a natural hedge there. 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 Victoria 3 expansion given some fixes in core mechanics.

Could you give us an updated road map on this game and your expectations for the next 12 to 24 months? .

Player.

Yes, of course. I can't give you an updated road map, unfortunately, because we decide this -- I mean, we have an over idea --overarching idea on like 3 to 5 years, obviously, but we decide it more on a year-to-year basis, depending on the reception of the game, et cetera.

And we like 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 the Victoria team together with the publishing department.

So -- but 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, yes, Victoria is a great addition to our portfolio.

So I'm really glad to see that. Alex, solid price increase on H1 4 expansion, but given the strong FX headwinds, how much do you think you could raise prices to mitigate this effect?

We say that the price increase is solid. It's not a player that asks a question, and you know it's an investor.

They could be -- yes, yes, outrageous like, something like that. Yes.

So the way we set prices in each region and for each product is based on the players in that region and how 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 pricing, I would say. I mean the distributors are paid as a percentage of the actual revenue in the local currencies.

So they are following along with the ride as well as we are.

Yes. You have to remember that the dollar is still at this level historically quite strong compared to the krona.

So I mean, we shouldn't panic too much, I think.

No, for sure.

Out of time. Out of time, they say here from the studio.

So...

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

Yes. 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.

Bye.