Hello and welcome to the Paradox Interactive quarterly report stream for Q1 2022. My name is Fred, and this is Alex.
Hi. Welcome, everyone.
We're gonna guide you through the report and the numbers for the first quarter of 2022, and we'll get right to it. Starting out with, that's me, by the way. I hope you already knew that, but let's see. We are getting tailwinds into 2022 with a quite good quarter to start off the year. We're quite happy, and we're continuing to increase the depth and the width of our core portfolio with a couple of releases. The biggest one being Royal Court for Crusader Kings III. We have worked a lot with cost control, namely, cutting a bit on overhead for the project, but also, closing a couple of projects as you already know, from last quarter that didn't fit into the portfolio, and thereby also substantially reducing operating costs overall.
The good news this quarter is that it's the highest profit we've ever recorded in a quarter, which is driven by a couple of different things, namely the said expansion for Crusader Kings III, but overall, a stable and good quarter. Another thing worth mentioning is that we will from now on be reviewing pricing on an ongoing basis. We got the question previously if $29.99 is a new level for our DLCs. It will probably not be all of them, but since we've been quite low on prices compared to our peers when it comes to DLCs and extra material, we are reviewing all prices across the line for upcoming releases. As I mentioned, we boosted our core portfolio with the Royal Court for Crusader Kings III.
We also passed a big milestone for the base game with 2 million copies sold. We sold 1 million copies in total of Royal Court, part of it as a part of the pre-order campaign for the original Crusader Kings III, but part of it also on the release. On the grand strategy side, we also released a smaller music pack for Europa Universalis IV, this quarter. On the management simulation part, we released Airports for Cities: Skylines and also a DLC for Prison Architect. Following the Airports DLC for Cities, we did a couple of different content creator packs as well to further boost retention and revenue.
If you look at the pipeline, the projects that we have, we are now focusing the majority, the lion's share of our investments into the core pipeline of strategy and management games. We also have a more experimental pipeline. We try to keep all new and experimental games at a smaller scale to begin with. We fail fast and fail cheap, instead of putting a lot of money into projects that has to change course, dramatically or has to be closed due to lack of performance. We will continue throughout the year to deliver on our core pipeline with games like Victoria 3 in the pipeline already. So far this year, we earlier in Q1 as well released Crusader Kings III for console, as well. In the core pipeline, we have 15 games.
Very few of them are announced. We have a number of undisclosed projects in our experimental pipeline, smaller but promising projects that we have decided to put under our new games team. Hopefully we'll see the first release already this year. We talk a lot about cadence and DLC releases in at Paradox at the moment. Main focus of 2022 when it comes to our live games is increasing the cadence for these, not only for 2022, but also going forward. We see this as a four-step plan. We've started with producing solid dev and studio plans to make sure that we plan and aim for the right things and set the right KPIs and goals for all studios and for all business units.
We are now ensuring the access to experienced people who can actually deliver on these plans, these ambitious plans, I dare to say. We're also using external studios, outsourcing, etc., to increase the utilization of resources so we can actually increase the pipeline as well. Obviously, this is not stopping there, but we're looking at continuous improvements on how to improve the pipeline and how to improve the production processes to keep the cadence at the level where we wanna be going forward. We always say that it's a marathon and not a sprint, and cadence is not something that just happens overnight. It will increase incrementally step by step, and it will obviously be different depending on the studio and the studio needs as well. Everything is done on a studio-by-studio or a game-by-game basis.
When it comes to community and the Paradox fans, we saw a big boost in the beginning of the pandemic, and we are happy to say that the player influx we got during the first parts of the pandemic, most of these players have stayed with us, so we can now say that we have a stable now over 5 million and growing. This is a big testament to the longevity and replayability of our games in the portfolio. We will, during the year, prioritize taking care of and strengthen the communities around the games by first improving the player experience in the games by releasing more and better content, but also not only DLCs, but also free content that comes with the DLCs.
The more people we have playing our games, the easier it will be for us to release new games once we start announcing them. We have obviously announced PDXCON 2022, and we have said that this is gonna be focused on the gamers and the games experiences of the games that we have out first and foremost, so there will be no new games announcements. It doesn't mean that we're not announcing any games throughout 2022. We most probably will because we have a big pipeline, and we're super happy about it, so we can't wait to tell you more. It's just that PDXCON is gonna change a bit to being more gamer-focused and being more focused on the titles that are already out there and what we're doing for those titles.
What happened after the quarter, we're looking at price adjustments in certain markets, because of a few different things. Most of all, there's been an imbalance in between different markets when it comes to pricing, but also partly inflation-driven, where you see inflation rise in certain markets, almost a global phenomenon by now. We also released a couple of things after the quarter end, Fate of Iberia for Crusader Kings III coming later on in May. The Shadowrun Trilogy on consoles coming June 22nd, and Stellaris: Overlord DLC announced as well, coming next week on May 12th, if I remember correctly.
Yep.
Right. Perfectly, with those words, I wanna hand over to Alex,
Thank you.
to help you with the numbers.
Yeah. Let's have a look at them. Let's start off with the revenues, SEK 476 million this year, sorry, the Q1 this year. It's a 31% increase if you compare it to the revenues of the Q1 of 2021. As always, the revenues for us is driven by the content releases. If we compare the two quarters, there are two main differences, that makes this year's Q1 perform better. The biggest is the release of Royal Court.
Okay
We did disclose already that we have sold more than 1 million copies of that expansion, and it's a $29 expansion, $29.99 expansion. That, of course, did generate quite a lot of the revenues. As Fred mentioned, we did already sell quite a lot of it when we did the release of the base game back in September 2020. I think almost half of the sales we did at that point were for the Royal Edition that included the three first DLCs. We got the cash in already a year and a half ago, but we put it on the balance sheet, and we release it now. That drove up the revenues and profits quite significantly this quarter.
We also, as Fredrik showed, we have had a release on a full expansion. I think it was priced at $13, though, for Cities: Skylines, and that's our biggest game. Of course, when we do a release on Cities: Skylines of a DLC, that generates revenues. Those were the main differences if we compare it to Q1 of last year. Operating profit comes in at SEK 208 million, and profit before tax almost the same, also rounded off to SEK 208 million. This is a 125% increase against the profit from last year. We have costs that are almost the same if we compare the quarters, and we have a revenue that is more than SEK 100 million higher.
That is, of course, a good recipe for a strong profit that we have seen.
Mm-hmm.
If you look down and see the operating margin, we are now up to 44% for the quarter, which we of course like and would like to continue to see, compared to 25% last year. The equity to asset ratio continues to be strong, and we have continued to adapt our organization to the fact that we have a much tighter and more focused portfolio and business plan going forward. We are now 692 employees. We were at 642 half a year ago. Let's continue. This is our classic chart that shows how the revenue in green and the three main costs have developed over time.
You can see that revenue had somewhat of a downward trend over two to three quarters, but now it has turned up for two quarters in a row at the same time as the cost stays fairly flat. If we examine the cost a bit more, it's our three main costs, COGS, selling expenses, and admin expenses. If you add them all together, the COGS came in at SEK 215 million, which is slightly higher than the Q1 one year before. That has to do with the fact that we did come out with the Royal Court release. That is one of the main drivers. The last time we released something on Crusader Kings III was Q1 2021.
That means pretty much an entire studio has worked on this expansion for a year. That, of course, we put all the development cost we have for that studio onto the balance sheet during the development time. When we release the DLC, we take the cost. We take the cost over 18 months, but as you might remember, a year and a half ago, we introduced this degressive depreciation model, which means that we take 1/3 of the full development cost already the first month, and then we take another third spread out over the next three months, and the final third over between month seven and 18. This means that we have taken almost 50% of the full cost in Q1.
Therefore, of course, the COGS goes up, and it's, if you drill down into the report a bit further, you will find it under amortization. You will see that amortization has gone up if you compare the quarters. One important thing, I think we have also if you read the report thoroughly, you will see that we have had no write-offs in Q1 this year, so no canceled projects, and that is something we a bit unfortunately have grown accustomed to over the last quarters. Or I should say it's not a problem that we do cancel games. We could cancel games each quarter, I think, which would be fine or game project. But it's when we do it's so important that we do it in early stages.
Yeah, it's also worth adding, sorry for interrupting, but in the new games team, we have also changed the way we report. We don't put the new games team games on the balance sheet anymore.
That's correct.
Everything is taken as running costs to have a better view of the risk in the portfolio and how we do things. Maybe we already told people that last quarter. I don't remember.
Yeah. Yes, we have informed about that, but it's well worth repeating, I think. When we start a new proven project, we capitalize from the start.
Yes.
When the games are not considered proven, we let the new games team be in charge, and we don't capitalize during the first phases. We take that as cost immediately.
Mm.
Coming back to the fact that we didn't have any write-offs in Q1 this year, we've had it for the last, I think, five, six quarters. The problem with that, I think, has been that we have been way too slow to decide to cancel projects.
Mm.
That has meant that when we have canceled the project, the capitalized development on each project has been a bit too high, so the write-offs have been higher than we would have liked to. We did a big you could almost call it cleanup project back in September, where we went through the portfolio and canceled several game projects, and we took a substantial write-off. I think it was 135 million SEK. That has, of course, improved the portfolio. Fred mentioned earlier that this is the best or most solid portfolio he has seen, and this is part of it. We have considerably lower risk in the portfolio. It's still game development, so there is still risk in it.
If we compare it to what it looked like one year ago, we have changed the balance between high risk and less risk project, I would say. So that I think we are seeing the fruits of that now in Q1 with no write-offs and no cancellations. Hopefully this is a trend that we will continue to see. As Fred mentioned, the fact that we don't capitalize the early stages of the highest-risk projects will also help. We still need to cancel those projects for sure, but it won't result in any write-offs because we have already taken the cost. In COGS, we also have royalties, and royalties is for us mainly driven by the sales of Cities: Skylines.
Since we released several DLCs on Cities: Skylines in Q1, that meant the revenue went up and it also meant that the royalty did go up. Yeah, we can say something about selling expenses and admin expenses. They are down, I would say considerably compared to Q1 of last year. They do tend to vary a bit quarter-to- quarter. As the rest of our numbers, it doesn't necessarily make 100% sense to compare one quarter to one quarter. For sure, this is a trend. This is a result of the better cost efficiency that we have had that we have found during the last half year, I would say. Especially, marketing, I think has been very good at becoming highly efficient on how they spend the marketing money.
Yes. Here you can see easily, I think that, if you look at the green bars that represent the revenues, we didn't quite break the revenue record this quarter. It's the second highest quarter ever. The highest quarter was when we released the base game of Crusader Kings III back in Q3 2020. We're almost there. I think we are SEK 20 million short. I would say more importantly, the profit line, the yellow line, that is for the first time up and above SEK 200 million. That is, of course, very good to see. Something else you see in this chart, the revenues and the profits tend to fluctuate quite a lot from quarter to quarter.
There have been a couple of periods during the last two years where it looked like there was a trend. We never give forecast about the quarters or the years, but I can still say that it most likely gonna continue to fluctuate. You're gonna see heavy ups and heavy downs if you compare it to single quarters for sure.
Mostly heavy ups.
Mostly heavy ups, I think. Let's group it all together in 12 months. We see a bit more of a trend here, and you can see it's up until the pandemic broke out. It was fairly stable growth. The growth accelerated with the pandemic and the strength of the dollar and everything, and we saw the opposite effect. We started to see our negative side from the pandemic, meaning lower cadence, and we started to see a stronger SEK, so the dollar went down compared to our accounting currency. You started to see the trend downwards. Last quarter, we broke that trend in terms of profit, so we went up. You can see in Q1 we're continuing that trend.
In Q1, we are also breaking the revenue trend from going down four quarters in a row, we are now finally turning it upwards. Let's keep our fingers crossed that it continues like this. Cash flow continues to be strong in terms of operating activities. As you know, we do invest almost everything our operating activities generate into game development. If we look over the last four, it varies from quarter to quarter. Some quarters we have a surplus of cash, some we don't. But over a longer period, it's fairly similar what our operating activities generate and what we invest. I think it generated over last year SEK 828 million and we invested SEK 735 million or something like that.
Very similar. Equity and non-current assets. Our non-current assets is especially our capitalized development that has continued to go up. I think it's a higher quality capitalized development, if I could say so, because
Yeah
Back to what you said, Fred, at the beginning of the stream, the pipeline is more solid. We have less high-risk project in that pipeline and in that capitalized development. We are confident in these numbers. That's all I had planned to go through. I know we have already received some questions before the stream, and perhaps there are coming in some during the stream. Here's the first one for you, Fred. Crusader Kings had a life of eight years before the sequel, Crusader Kings II. Does this correspond to the way you see the natural life cycle of PDX IP major titles?
No. I would say that we don't have a set life cycle for our games. If you look at the games like Hearts of Iron IV, it has 3x the number of players now than it had the month of the release. I would say that we wanna keep on supporting our games as long as people are playing the games. There might be technical reasons or other gameplay-related reasons to make a sequel or even a financial reason. We don't count just because for the sake of it in the life cycles for a game. It has to do with other things. Like I said, if people keep on playing the game, we wanna keep on supporting the game, and that's the basic rule that we follow.
Next one is for Alex: Do you plan to port more games on consoles in the future?
Yes. Console has proven to be a very interesting platform for us, both for our strategy and management titles. I would say especially management titles being Cities.
Yeah.
There we have had very strong performance on the console. I think, over the last three years, we have had some between 12%-15% of our revenues are coming from console games. And then you should, of course, know that not all of our games are on console. We released CK3 on console back in March 29th. We only had the three days of sales in the quarter, so we don't have many conclusions to draw from that. For sure it continues to be an interesting platform. We will make a decision on a case-by-case basis.
It's not all games that we believe are made or suitable for console, but some will be for sure.
Great.
All right. PDX games have great modding support. How do you, if at all, evaluate both its cost and benefits, impact on player acquisition, retention, indirect marketing, HR? How do you evaluate that from a business perspective?
We think the modding community adds a lot to the Paradox universe and great for many reasons. First and foremost, they create a lot of cool content for our players to use and play, and we appreciate that and try to be supportive of the modding community as well to as large extent as possible. Of course, it's also a great platform for us to find new talented people if we wanna recruit, and some of our recruits come from the modding community. Historically has been a lot. Obviously all in all, it helps us create an ecosystem in the grand strategy world. First and foremost, grand strategy, but there's also a very active modding community, for example, Cities: Skylines and many of our games.
All in all, we're super positive and we hope to deepen and strengthen the relationship with the modding community going forward as well. Next one for you, Alex, is does the war in Ukraine affect Paradox in any way, and how and by how much?
Well, of course this is a massive tragedy and our thoughts goes to the ones that are suffering and being impacted by the war. If we just look at Paradox from a business perspective, I think this is the second time in a row now where there have been a global crisis, pandemic being the first one, where we have been lucky to not being financially impacted. We have no on-site personnel, neither in Ukraine or in Russia. We have very limited sales in those countries, and we have had some suppliers from both countries, and we have not been able to continue with the Russian supplier due to the different sanctions. All in all, very little impact.
We can support our employees. We have several employees from both Russia and Ukraine working here in Stockholm and on other sites, so we are, of course, trying to help them get along as good. One question for you. You have repeatedly said that it's the best pipeline in the history of Paradox. Why is this better than previous pipelines? Can we expect it to be stable?
Right. First, Alex touched on that in the presentation that the pipeline in our view has lower risk today, and the reason for that is that we consider the games to be very good that we play. The only way to know or to speculate or to guess or whatever you wanna call it if a game is good or not when it's in development is to look at the game yourselves. I would say that the internal reaction to the games we have in the pipeline is overwhelmingly positive, and hence, I am positive too. I have personally played a lot of those games and can therefore say that from my perspective it looks strong and it looks very solid. Now, game development is game development, and you never know what's gonna happen until a game is actually released.
That being said, we're cautiously optimistic about what we have and the development looks very promising. The progression as well, I think we're on track now. The fifth revised plan, we're finally on track. The pandemic has hit a bit when it comes to delay and such, but I would say that we have a good idea on how and why and when we're releasing the games, and we're gonna tell you more, hopefully, before the end of the year, but we'll see. A game is ready when a game is ready, and that's how we work. For Alex, the next one. Should we expect stable lower running costs now, or is this an effect of a one-time cost cut?
We have had several initiatives to become more cost-efficient, and that you could see the impact in the numbers, and that is not a one-time impact. However, we're also a growing company, so if you look at our own studios, we are still continuing to grow. I would guess that our development cost will probably continue to grow as long as we find good projects to invest in. We are not afraid to increase costs, but what we are very focused on now are the margins. We only take investments or spend money if we can see strong correlations with added revenue.
That is that I think you saw the impact on the 44% margin this quarter, and for sure this is something that we're gonna continue to focus on.
Absolutely.
Do we have more questions? Fredrik, one for you. You noted that there will be price changes. What can we expect from your new pricing policy? Have players accepted them?
Well, prices will continue to vary over DLCs and over titles, depending on content depth and obviously how much we put into them as well. We are still gonna be flexible on how we price. However, at least my impression, and this can be correct or it might be wrong, is that we are typically pricing lower than our peers in the industry, so we will have to look at if a price increase should be done, and I think it should. We have also done some changes in different markets, like I mentioned before in the presentation, mostly because of market imbalances that some regions have had much lower prices than others, some of them just without explanation. It's too early to say what the exact effect is gonna be.
I think the players react fairly positive. I think the most important thing for us is still to continue to release high quality content, and I think most players are aware that that quality also will cost money. I think we're in a good place. For Alexander Bricca, this is the second quarter in which the number of full-time employees decrease. How come?
We had a few reasons. We made several strategic changes back at the beginning of the fall where we decided to tighten the business, to have a more focused business, focus more on our proven core games. With that, of course, that meant one, not everyone approving of that and wanting to stay on, so some left for that reason. We also discontinued a few projects, meaning that people left due to that. We had, as most other companies, an increased personnel turnover from the work from home situation. I think mainly was the driving factor. We have taken this opportunity, you could call it, to review our size. We have been very picky when we have done the replacement recruitments and not replacing everyone.
This has been the reason why it has gone down from 742 to 692. One question for you, Fredrik: When can we expect to see a higher release cadence? What is a reasonable number of releases to expect 2022, 2023 and 2024? That's a tough one.
That is a good question. I'm gonna sound like a politician now, so, of course, this is a focus area for us, and, we're gonna spend a lot of 2022 focusing on how to increase the cadence in most of our games and this will have, of course, vary depending on the game, depending on what content we release, and depending on what we basically can release technically as well. But the aim is at least to improve it over time, and that's the only thing I can say right now, and hopefully we'll see the effects right now quite soon. But also game development is a long-term process, and we might need to change more in the way we work and more on the technical side.
It's important at least that we communicate the goals and the ambitions now and hopefully we'll see the results sooner than later. For Alex, I would just like to understand why the revenue and earnings growth seem to exceed the growth of the player base. Has anything increased the player lifetime value?
If we look historically, you can see that our revenue growth has gone fairly much hand in hand with our growth in monthly active users. This varies, of course, from one quarter to another. If we have a quarter like in Q1 when we do releases of expansions on two of our biggest IPs, that will increase the spending on the existing users, of course. That will drive up average revenue per user more than it drives up monthly active users. I think you can see these fluctuations from quarter to quarter, but over time, I think we will continue to see a steady MAU growth, but hopefully also an ARPU growth.
Yeah.
For you, Fred: What are the main hurdles for accomplishing increased cadence on development of content to your live games?
It's a lot of different things. It can be technical. It can be how we utilize resources both internally and externally if we wanna do outsourcing, for example. But first and foremost, I would say that it's also part of it planning. If you don't plan for releases, it's not gonna happen obviously since that's the first step in the ladder that we showed you in the presentation. It's a couple of different things working together, but most importantly, I think it is setting the goals and the ambitions and then work towards trying to execute on it.
I think for sure it also helps that the entire company is now to a much larger extent focused on the proven business.
Yeah
Compared to how it was one to two years ago when we had a lot of focus on the unproven business.
Yeah. No, that's for sure. Alex, fail fast and cheap.
Mm-hmm
the new expensing versus capitalizing approach, does that mean that write-downs will no longer be as significant? We almost already answered this.
Yeah.
I'm happy about that.
No, for sure that's the intention. I think we will obtain less and smaller write-offs for a couple of reasons. One is that we invest much less in high-risk projects. Two, when we invest in high-risk projects, we don't capitalize. Three, I would add, we are much more on our toes now in terms of evaluating and being quicker to terminate the game projects that are not going in the right direction.
Correct.
it's for sure our intention to see smaller or less significant write-downs in the future. All right, here's a long one for you, Fred.
Oh.
On Cities, there have not been any major releases on that IP for a while now with player activity going down as a result probably. What can you say on the status on that game now after the Airports release? What are your thoughts on the quality of that DLC and your thought on player activity as well? Also, any comment on incremental improvements this quarter in restoring quality issues in general?
Oh, wow. That's a big one. Honestly, first and foremost, I think we've never had more players playing Cities: Skylines than we have at the moment, and Alex might correct me if I'm wrong. I look at the numbers almost every day, and it looks spectacular. When it comes to the Airports release specifically, I have to admit, I'm super sorry I haven't played it yet. That's my mistake, but if I understand correctly, now, this is just something I shoot from the hip here, so it might be completely wrong. We are quite happy with the reception, but I understand it's also dual, that some people think it's a bit too, like, detailed and too much micromanagement, if I understood correctly.
Overall, we're happy with the reception, and we have also a stronger quality control process in place which we continue to support not only the Cities team, but all the teams throughout Paradox. Hopefully we'll keep an even and high level of release quality in all the DLCs going forward. All in all, Cities is in great shape, and a lot of people play the game, and we're super happy with that.
Cool. Is that it? Okay, more questions.
Oh, Alex, could you provide an update regarding the Prison Architect acquisition and an update regarding your M&A strategy and roadmap?
All right. Prison Architect, that's a game that was a live, successful game. It had been successful for several years. We acquired it, I think it was back in December 2018.
Mm.
Maybe 2019. I think it's 2018, so some three years ago. I think we have released some five, six DLCs on it. It's going quite well. I think it hasn't ever been on the top five list, for sure, but it's a contributor. In terms of M&A strategy, we might continue to do acquisitions like that if we find interesting IPs or it could even be an interesting studio, like we have done in the past, we might be interested in acquiring. As in the past, these are kind of production resources that we acquire that we can use in our business. Our focus is to grow our revenues organically. We are not an M&A-driven company.
Okay, more questions coming in all the time. Okay, let's see how many we have time for. Would you say that productivity is back at pre-COVID-19 levels, or is it still inhibited?
It's always well, it's always hard to say. I will say that we're on the right path, and we're getting there step by step. It's obviously easier to do the projects, especially the projects with a lot of people in it, when you can meet and sit down together and have meetings in the office and coordinate the different resources and create things together, so it makes things easier, just as it is. I would also say that being more focused and being more clear about the goals and KPIs that we have been in the last couple of months also help people being more productive and knowing to a larger extent what to do. I'm not sure we're at pre-COVID levels.
It's hard to say, but I would say that we're really on track. That's for sure.
All right. That seems to be all the questions.
Okay
We have. If we have missed anything, send us an email at the IR email address, and we will try to answer it after the stream.
Perfect. Thank you so much for watching, and thanks for asking so many good questions. We'll see you at the next quarterly report.
Yeah. Thank you. See you on August 2nd in the middle of the summer.
Perfect.
Cheers.
Bye.
Bye.