Hello and welcome to the presentation of the Q2 report for 2025 for Paradox Interactive. My name is Fred.
I'm Alex. Welcome everyone.
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, we always want to present our quarters, right? That's me. I always have my name first so people know who I am. You can summarize this quarter as that we're building step by step for the future. 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. We also postponed the Bridges and Ports expansion for Cities: Skylines II, which lowered the revenue and profit a bit. We still stand at, if you take rolling 12 months backwards, we still stand at a healthy profit EBIT margin of 41%.
We had two good launches with Age of Wonders 4 and Victoria 3. Victoria 3 is now in a very positive sentiment in the market. 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. The reviews on Steam have changed to mostly positive. The new expansion received the highest for a DLC in many years for Paradox and 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. Mostly we're looking forward to talking more about, yeah?
Did we skip something?
Did we skip it?
I don't know. Maybe.
I don't know. Did we want to talk about this?
If you want to.
Yeah, we want to talk about it. I think so. Yeah, yeah, yeah. We have two major releases that were already announced that we're building for and worth mentioning as well in this stream. So Europa Universalis V 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. Did I skip one? I skipped the releases in the quarter. Thank you. Yeah, yeah, yeah. I took it in the wrong order here. Yeah, yeah, yeah. On the grand strategy side, we released three DLCs for PC and one for console.
Console was the Legacy of Persia for Crusader Kings III and the PC ones Biogenesis for Stellaris, Charters of Commerce for Victoria 3, and console 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 2021. We had a couple of releases on Paradox Arc as well: Escape the Mad Empire and Darfall were new games that we tried out, and the two minor DLCs for the game Across the Obelisk, Two Lovers: Spider Queen and The Sunken Temple, namely. Now I leave the word to Alex to go through the numbers.
Thank you very much. Let's drill down a bit into the numbers. Revenues came in at SEK 469 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 two years ago, the second quarter was very busy, especially last year. We were down. Last year we made SEK 576 million. It's a 20% decrease. Mainly three drivers of the decrease. If we 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. This is the format that we have chosen. Let's compare as always with the same quarter of the previous year. Down 20%. What are the drivers? Three of them. Currency, of course. The U.S.
dollar is down roughly 10% compared to the second quarter of last year. The pound and euro sum somewhere around 5%. That means that our revenue, even if we do the same sales, is down, I don't know, 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 foreign currency as well, but not near to the same extent as we have the revenues in foreign currencies. That was one explanation of the lower revenues. The other is that last year's second quarter 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.
Up on launch.
Exactly. How we treat that is that all the premium edition sales that we make from launch up until that release, for Victoria 3, it's a year and a half. For Age of Wonders 4, it's a full year. We put that on a balance sheet. When we release the content, we also recognize the revenues. 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 packs. It came with a lot of revenue recognition from several months of sales.
Right.
This year we didn't have anything similar. 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. Of course, it's a mix of releases. If you remove these three items, I think the quarters are very similar and comparable to each other. Top contributors, we have Cities: Skylines and Cities: Skylines II. We have top contributors to revenue: Cities: Skylines, Cities: Skylines II, Crusader Kings III, Age of Wonders 4, Stellaris. We have also added Victoria 3 and Age of Wonders 4. We have seven on the list now because the distance between number four and seven is very, very small. 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 been, they've had the potential, I think, so far.
Now it's.
Proven.
Yeah.
If you want to say.
I think so. I think so, which is very, very satisfying. Operating profit, SEK 133 million. It's up a lot since last year when we did SEK 29 million. 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. 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. Profit after financial items is higher than operating profit for us because we have the benefit of having a substantial amount of cash on our bank account. Instead of having financial costs, we have financial income, which is, of course, great. Profit before tax margins, that's what we call profit margin, 30% in the quarter compared to 6% in the same quarter last year.
As we mentioned, 41% over 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? It depends a lot on the releases. Rolling 12 months is a very relevant KPI, and we are at 41%, which we think is a healthy place to be at. Equity-to-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. Why is that? We pay dividends. We paid out a little more than SEK 500 million in dividends. That lowered it, but still 81%. Average number of employees during the quarter is 640, up 46% compared to the same period last year. That's, of course, the addition of our colleagues in Bulgaria, in Haemimont Games, that joined us in February. We've also increased a bit in other foreign studios.
Tinto have increased a bit, so has Iceflake and Triumph. We closed down the Tectonic Studio, the developers of Life by You, since last year's second quarter. Therefore, it's 640. Let's move on. Our cost structure, I know that at least we have a bunch of analysts that are interested in the different items here. Let's go through them. Revenues, we've already talked about. The cost, three main items: COGS, selling expenses, and admin expenses. COGS, SEK 232 million compared to SEK 456 million. Big decrease. It's the write-down we had in the second quarter of last year of SEK 208 million that we had zero write-downs this second quarter. 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 last year. It's a decrease.
This amount is driven by what we release in the quarter, but also the next quarters leading up to this quarter, especially if we release something that has this degressive amortization model, so new games. Now it's some time since we released anything big, so we see the amortizations coming down. We amortize. When we acquire assets and companies like Haemimont Games, we also acquired Stranded.
Yeah, from Paradox Interactive.
Yes, in Q2. 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. That we are applying to both Stranded: Alien Dawn and Haemimont Games. That means that we take costs every quarter. In Q2, we had SEK 19 million of amortizations of acquired businesses and assets. Last year, it was SEK 14 million. The increase comes from Haemimont Games and Stranded: Alien Dawn. We think this is a very, it holds down the results. Perhaps it's not necessary because our expectation of, especially on Haemimont Games, is that that studio in five years from now is going to be worth a bigger value than it has today. Still, this is how we create it because we think it's prudent.
Yeah. The fastest way to do it. For sure. For sure.
And we like that. Royalties, SEK 26 million compared to SEK 19 million. 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 drive 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 earnout continues up until April next year. We have had it for, is it eight years now? I think it's eight years. It means that we put that as a royalty. In Q2 last year, we had a lot of revenues, but as we already talked about, from recognizing prepaid revenues. The royalties, we didn't recognize in the same month.
We paid and recognized that royalty already when we received the payments. Therefore, especially percentage-wise, royalties were low last Q2. They might seem high this second quarter. I would say this second quarter, the royalties are at a reasonable level. 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 second Q1 compared to SEK 110 million second Q2. Most of the stuff that we do through our new games team in Paradox Arc ends up here. Instead of putting that development cost on the balance sheet, we take the cost immediately. It's down from SEK 110 million last year to SEK 101 million this year.
That has to do with Life by You because when we decided in, I think it was the 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 it costs immediately. Other income, other expenses, that is currencies.
From when we issue the invoice to the date that the invoice is paid, right?
Exactly. 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. Whatever the difference is, we put here as other income or other expense. This quarter, the dollar has gone down during the quarter. Therefore, we have a negative impact of net. On the cost side, it's - 15. On the income side, it's + 2. Net negative impact. Financial items, that's the interest on our bank accounts. Therefore, we have an EBT that is higher than our EBIT. Let's take one more slide. 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. We can see two things. One, it's volatile between the quarters.
That is driven by what we release. Also, if we happen to cancel any big project and have big write-downs, we've had that historically in three quarters. If you look over a longer period of time, it's a clear trend going upwards, both in terms of revenue and operating profit. 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. When you look at cash flow, it will differ from operating income due to amortization of the write-downs, but also due to timing.
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 or to the next quarter. 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, yeah, same quarter of last year. We have two reasons why it differs. It was exceptionally high this year because in the SEK 208 million, we have the acquisition of Stranded: Alien Dawn.
Yeah.
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 use to get slightly more interest on our savings. We sold that, and that has a kind of a positive impact on the cash flow. If we just look at investments in game development, last year it was SEK 150 million compared to SEK 161 million this year. It's slightly up. You shouldn't see this as a trend because it differs between the quarters depending on when we receive big invoices.
Yeah.
I think it's very similar these years. I think this is the last slide. Total equity and total non-current assets. We have.
Total equity goes down because of the dividend payout, I guess.
Yes, exactly. 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. It's the SEK +500 million second dividends that we paid. Total equity is pretty much, it's our aggregated profits over all years minus what we have paid in dividends.
Yeah. The non-current assets is going to continue to go down. Now it's going up because of the, is it Haemimont Games and Stranded: Alien Dawn again?
That has for sure impacted it in the first and second quarter of this year.
of Vampire: The Masquerade – Bloodlines 2 and Europa Universalis V, we're going to see this going down.
Yeah, next year.
Same period next year, I guess it's going to be a bit lower than this one.
Yeah, for sure. We're in SEK 1.9 billion second total. Out of that, SEK 1.6 billion is capitalized development.
Right.
That has also gone up over the last year because we haven't released anything big. As you point out, with the releases of Vampire: The Masquerade – Bloodlines 2, Europa Universalis V, Prison Architect 2, it's going to come down significantly.
Yeah.
That was pretty much what we had planned.
We will go over to Q&A.
Yes.
Yes, we have a couple of questions that have come in that we'll try to explain as good as we can. Right.
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 day-to-day basis on what we call our live games or the evergreen games. We develop expansions and DLCs to the big franchises, and that's a profitable business that we feel comfortable in doing. Of course, we want to achieve growth in other ways as well. One way is to make sequels, for example. We have Europa Universalis V coming out. At those stages, we know pretty much the audience. We know how to develop it. It's a known entity for us. We don't want to stop there because we want to do things that are somewhat adjacent, maybe to Grand Strategy or to what Age of Wonders is doing.
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. That's one of the ways to avoid big write-offs in the future. You will see we take more directly on the revenue sheet and we take less on the balance sheet. That's a part of the strategy. When we do totally new things, the success rate is going to be lower. Hopefully, the plan at least is that we won't announce anything to the public and then shut it down. That's the big difference. We'll shut it down when it's still small and hasn't cost too much. There is an industry crisis, but I think the industry is divided into either you make money or you don't type of companies.
I've never seen, I think Paradox Interactive is in a great spot as a company. I think we're doing well. This quarter is, as I pointed out in the beginning, uneventful. If this is an uneventful quarter, I mean, we have a lot to look forward to in the future, in my opinion.
I think they can win out of this. It's a good question because it's important to have the balance between profitability now and profit growth in the long term. 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.
We would also load the balance sheet with all development costs, even projects that are just started from scratch. 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.
Yeah. Some projects take time. I think Victoria 3 is one good example of that. It has been, is it almost three years ago we released the base game now?
Yeah, in October.
During these three years, it hasn't been that profitable. If we would have wanted to maximize profitability during those three years, we would ask people to work on more expansions on Crusader Kings III and Stellaris instead. We didn't. We believed in Victoria 3, and now it has turned around and now it has established itself as a solid franchise. That's how we build long-term profits.
For sure, it's been a slow cooker.
Yeah.
Alex, given Paradox's strong cash flow, should shareholders expect a higher dividend in the near future, or will the focus remain on reinvesting in major new titles?
Yeah, it's a good question. 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. That is investing in expansions, 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. 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. The last examples are Stranded: Alien Dawn and Haemimont Games. The money that we don't need for this, that is pretty much should be paid out to the shareholders in dividends.
Yeah, there are a lot of assets out for sale in the market at the moment. We'll take a look, but we're not too desperate to buy assets.
No.
It needs to be the right fit, and it needs to be the right thing. Yeah.
Yeah.
A quick one for you again here, Alex. Is it currently possible to buy shares in Paradox Interactive? If so, how can individual investors do this?
Yeah, of course. Our shares are listed on NASDAQ First North. 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 Universalis V, Hearts of Iron IV, Stellaris, Crusader Kings III, Cities: Skylines II, 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? Are these games still expected to receive major content for years to come? How can Paradox address the perception of the high cumulative cost for DLC for older games?
Good question. Another one. 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. They expect more content for the games and they enjoy the content, mostly the content that we put out there. 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. There is also, as we know, a big modding scene and people are doing mods as well, both for new assets and for old. You can also use these ones mostly for free, I think. On top of this, we are aware that the whole catalog of DLCs 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.
We are looking at both models actually going forward. We will see how we develop it in the future. The most important thing is that people get the chance to enjoy our games to as large extent as possible.
If you're completely new into an old franchise that has several DLCs, you can buy the base game, and then you can buy one month of subscription. You can try out as many DLCs as you have time for.
For sure.
If you like them, if you find a DLC that you think, oh, this one I want to play for several, several months, you can buy that one.
Yeah, for sure.
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?
Tinto is a good example. It has worked out very well. We kind of separated the Europa Universalis team and that has, I think, created a lot of healthy, beneficial focus onto both EU4 and especially Europa Universalis V.
Yeah.
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're fully focused on integrating Haemimont Games. That's priority one. Yeah, 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 Interactive's position for long-term success?
That was, we could probably talk about this. Yeah, I could probably talk about this all day. 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 in our strategy for the past seven, eight years. 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. Sometimes you need some new people to come in and help with a certain game and then you change because of that. Teams get new managers all the time. You move around a bit. We want people to be able to grow their careers within Paradox Interactive as well.
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. The more you put on the balance sheet, the more like sunk cost fallacy you're going to have. We're going to continue canceling games because that's how we find the new diamonds in the rough that we grow out to be major successes in the future. The trick is to cancel early and fast.
Our priorities, as mentioned, it's active games 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. 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. It can help us with many things, for sure to develop more content. 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.
I think one of the underlying questions here is, are you planning to get rid of staff and replace with AI? 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 it.
Yeah.
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, Age of Wonders 4 compared to last year?
Yeah, 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%. We have a natural hedge there. For sure, FX impacts COGS as a percentage of revenue. In terms of royalties compared to last year, we went through this. 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 roadmap on this game and your expectations for the next 12 - 24 months?
Of course, I can't give you an updated roadmap, unfortunately, because we decide this. I mean, we have an overarching idea on like three to five years, obviously, but we decide it more on a year-to-year basis, depending on the reception of the game, et cetera. We like the team to communicate this, so I shouldn't do this in the live stream. Whenever they come up with something new, it will be communicated with the Victoria team together with the publishing department. 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, Victoria is a great addition to our portfolio, so I'm really glad to see that.
Alex, solid price increase on Age of Wonders 4 expansion, but given the strong FX headwinds, how much do you think you could raise prices to mitigate this effect?
Someone says that the price increase is solid. If it's not a player that asks the question, then you know it's an investor.
Yeah, outrageous, like no, something like that.
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. We check general pricing in the region and how competitors are priced. 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. 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.
You have to remember that the dollar is still, at this level, historically quite strong compared to the krona. I mean, we shouldn't panic too much, I think.
No, for sure.
Out of time.
Yeah, we're out of time, they say here from the studio.
If you have posted any questions or sent them in that we haven't answered, or if you come up with questions, continue to send them in in the different email form or the ways you can, and we'll answer them after the stream.
Yeah.
Perfect. Thank you very much for watching. We'll see each other next quarter then.
Yes.
It's not before.
October, end of October.
Perfect. Thank you for watching.
Thank you.
Have a good day.
Bye-bye.
Bye.