Paradox Interactive AB (publ) (PDX) Earnings Call Transcript & Summary

Hi, everyone, and welcome to the year-end report for 2020 as well as the Q4 report for 2020. My name is Ebba, Ebba Ljungerud, and I'm CEO.

And I'm Alexander Bricca, I'm the CFO. Welcome to the stream.

Yes. How are you today?

I'm good. Busy time of the year, as always. How about you?

Yes, good also. Very good. Lots of snow in Stockholm. It's starting to slip away, but it's been very snowy. So that's very nice. But if we move over to our report.

Let's do it.

Let's do it. Yes. So 2020 has been the best year in the history of Paradox, actually. We have grown a lot during the year, and we've also built a foundation for the future. If we look at revenue year-on-year, it's up 39%. For Q4, it was 14%. If we look at the profits, it's up 35% year-on-year. Q4 was down almost 50%. And there are a few reasons for this, where we will go into detail on them during the presentation. But we still feel that it's a good and solid quarter for the future to build for our future. And this, I would like to connect to the fact that we have grown our accounts by 50% year-on-year. So that means that we now have 18 million Paradox accounts, and we also have a MAU, which means monthly active users or players, that has grown 25% year-on-year. So now over 5 million. And the reason the accounts are very important to us is that this is a way for us to build our network for the future. As you know, we sell our games anywhere where our players want to buy them. We are not so concerned if you want to buy them through your Xbox or through Steam or GOG or something else. But for us then it means that we also want to have a connection to you as a player. So that's why the accounts become super important for us. So we do spend a lot of energy making sure that we give something back to anyone who signs up for an account for the future. And this is, of course, then also what we use for the future. The last circle here that I would like to mention is our capitalized development, which is also a very, very important measure for us. This is up 59% year-on-year, which means that we have SEK 920 million in capitalized development. And this is basically investments into games that are yet to be released mainly and that we -- to a very large extent, haven't announced either yet. So things that are going to come for the future. And if you look at how that grows over time, you can also see that it's an increasing investment for the future for us.

Yes. So this shows a bit of an indication of the assets we have built that we have not yet consumed on.

Yes, exactly. Yes. If we move on, I think the year and the quarter has been strange in many ways with COVID, but it has also been for us a year where we've continued to build on our strategy and continued to build on our strength. We had Crusader Kings III launching in Q3, and of course, continuing through the quarter. We also launched a new game, Empire of Sin. If you -- Alex is in charge of switching slides. So that's why. So Empire of Sin is a game that we have made with a studio based in Ireland, called Romero Games. It launched on December 1. We are a little bit disappointed in the release, especially the critical reception from players. That's nothing -- we never want to release a game where the players aren't happy with the game. So it's a failure on our part and my part to do that. When we -- when this happens, which it did in this case, we continue to build on the game. So we have made several small releases and one larger release to fix some of the issues. So it's getting to a better state, and we will continue to work on the game to make sure that it gets to a stage where we're happy with it, and also our players are happy with it. So that's a big thing for the quarter. And then we've had 2 DLCs. Star Kings for Planetfall performed very well. It's not -- Planetfall for isn't one of our biggest games, so -- but it still performed super well. Same for Battle for the Bosporus, which was a smaller expansion of $10 at cost, performed extremely well for Hearts of Iron. Hearts of Iron -- our Hearts of Iron fans are very loyal and stick around and play for a very long time. So anything we release there, we always see a very good return. We didn't have a Steam Publisher Weekend! this year, which we did the year before, but we did have the Steam Winter Sale. It started on 22nd of December. We have changed our amortization model for the full quarter. We announced this already for Q3. Basically, previously when we have started amortization on the development costs for a game, we have split the cost evenly over 18 months. And we decided to be a bit more aggressive from that perspective because we want to match the revenues of the game a bit better, which means we take a full third of the first month and then we take another 1/3 between month 2 and 6. So this, of course, affects the profits quite substantially for a quarter now when we had both Crusader Kings and Empire of Sin being effected here. It doesn't really change from how we did things before in the long run, but in the short term, it does. We canceled a project. This is also something we do quite regularly. I would say we cancel 2 to 3 projects a year. We have for many years. If you look at the percentage of CapEx, it's actually quite stable over time. I think last year, we ended up on 6.1% total in 2020.

Yes, in 2020. Yes.

And before, it's varied between 6% and 8% over the years. So this is nothing strange. It's always very sad to do it because the games are built with a lot of love and heart. But it is a lot better for us to cancel than to continue to develop something we don't think will last. This project specifically was done by an internal studio, our studio in Umeå. And they have now -- they're called Arctic. They have now -- or we in the Umeå studio have now sort of turned a little bit to support -- to a much larger scale, to support the Grand Strategy games, which I think is great for the future to give more people working on the Grand Strategy games and make it possible for us to release more content and just build for the future because, as you know, the Grand Strategy games live on for such a long time. So we want to make sure that we have the capacity to deliver all the content that our players want really.

And for us, a big part of our task is to allocate capital in the most efficient way. So sometimes we have these projects that we can sell that perhaps wouldn't be failures, but we see that the money would be -- money and time would be better invested somewhere else. So that is often the reason why we cancel projects.

That's very trues. Last but not least, we're still in the COVID-19 world, we and everyone else. It has had a mixed impact on our business. It's both short term, especially during the spring, it had a very good effects on our player numbers. But if we look a bit longer term, we also see that it is disturbing, our development pace and our speed. So we have made the decision to push some releases further into the future. Also normal, also something we do continuously. But now we -- and for us, it's also very important that we work with all our studios and with all our teams to make sure that we have all the tools we need to get over this hurdle, but we also see some delays. So it's important to note. After the quarter, we also announced something around Bloodlines this morning. So Bloodlines 2 is a game that we've been working on for a long time, and we announced it also a long time ago. We have had a really tough couple of months here, deciding what to do with the game. We are very committed to the game. So we definitely want to release it. But we have decided to switch studios and Hardsuit Labs won't be leading the development. We are working with a new studio. We are yet to announce what studio that is, but we hope, of course, to be able to do it soon. It's been a really difficult decision, I have to say, but we are convinced that this is the right way forward to give the game what it needs. And HSL has done a really great job in building the foundation. So now it's more about getting it over the end line, so to speak. So more information will come around this continuously, absolutely. Other things that we've done this quarter in Q1, Going Green for Prison Architect was released, and also MegaCorp for Stellaris console, both of them were released in January. Last week, we released the content pack for Imperator: Rome - Heirs of Alexander. It's been going really, really well. It's fantastic to see how Imperator has really increased in popularity over time and the reviews have increased, et cetera. So that's fantastic. We've announced 2 new expansions, Leviathan for EUIV and also Nemesis for Stellaris that are going to come later on. And last but not least, we also last week actually launched a subscription on Crusader Kings II, which is now live. This is something we've tried on EUIV in a smaller test version. And Crusader Kings II, the base game is free these days. But now you can buy all of the content, it's like it's hundreds of dollars of content, if you would not buy it on sale. So we think it's a very good way for someone who's new to the game to try and see what you like and what you don't like in terms of DLC and extra content. So that's super exciting, and we're going to -- and that will be live from last week going forward. Together with Steam, we did that. So that's a little bit about the quarter. Do you want to talk more about the numbers, specifically?

I definitely do. So let's dig into them. So revenues to start with for the quarter came in at SEK 434 million. That is a 14% year-on-year increase compared to Q4 2019 when we did SEK 381 million. And top 5 grossing games, we can disclose Cities: Skylines, Europa Universalis, Crusader Kings, Stellaris and Hearts of Iron. So the 5 usual suspects, they're often on a top 5 list.

We actually did a -- we did a free weekend with the Cities: Skylines in December, which was very popular as well. So it's cool to see those -- how a game that's been around for so long can also get a lot of new players on doing something like that.

Operating profit for the quarter came in at SEK 80 million compared to SEK 163 million Q4 2019. So that's a 51% decrease. This decrease comes from, first of all, as we have said many times, our quarters vary financially because they vary in the business.

I think we say it every quarter.

We say it every quarter.

It's very important to remember.

And the financial outcome always have to do with what we release in the quarter and how much we release and how well received those games are. But if we compare specifically these 2 quarters, there are 2, I would say, a bit of distorting factors to consider as well or keep in mind. One is, as Ebba mentioned, we are, since September, applying this aggressive amortization model, which we didn't last year. And that means that we take on much more costs in Q4 2020 then we would have done if we used the same model as last year. The other thing is that in Q4 2019, we had a positive impact from a one-off contingent liability release. It regards...

Very financial term there.

Yes. It was debt on our balance sheet for a possible additional purchase price to pay. But we realize that it's not going to be paid, so we could release it. So that had positive SEK 44 million impact on 2019 Q4 results. So if we look away from those 2 impact then we are almost at the same level in Q4 on an operating profit, Q4 2020 as we were in 2019. And then there are, as always, several things that impact the profit development. The most striking things, I think, if we compare these 2 quarters are the FX impact. We have almost all our revenues coming in, in external currencies. And the U.S. dollar is, I think, a little more than 10% weaker Q4 2020 compared to Q4 2019. British pound similar, and euro is almost the same. So this impacts us quite a lot, of course. Ebba, you mentioned Steam in Q4 2019, we had this Publisher Weekend! with Steam, which always generate a lot of additional revenue and profit. We didn't have it in Q4 2020, but we had it in Q2 2020, and these things add up quite a lot. Ebba also mentioned the write-down on the canceled game. This is something we do now and then. Some quarters we do it a lot like this and also Q3, some quarters we don't do it at all. Q4 2019, I think we wrote off SEK 8 million; in this quarter, SEK 24 million. So it's quite a lot more. So there are many reasons why the profit for Q4 2020 is less than the quarter before.

And again, I think it's -- I mean it varies over time. And that's why we always look at rolling 12 months than the [ profits ] by quarter.

Exactly. And especially in the year. So when we summarize this report, I mean, we look at the 2020 year, 1 quarter is a very short period for Paradox to look at. But let's move on. Profit after financial items for the quarter, SEK 79 million compared to SEK 157 million the year before. Profit after tax, SEK 60 million compared to SEK 131 million the year before. And you can see in the column to the right there, you have the yearly numbers. So more than SEK 1.7 billion in revenues and SEK 628 million in earnings before tax. Operating margins, 18% for Q4 2020. This is low compared to Paradox standards. And this is the effect, I think, of having this new amortization model, if we release a new game that doesn't sell immediately well, then the operating margins and profit margins are going to go down for that quarter. And I think this is a fair way to show it. But you should all be aware that this profit margin will swing between the quarters for this reason. And also, of course, the write-down that we did also impact the profit margin. Equity through asset ratio, 60%. And number of employees, 479 when we started 2020, now we are at 662. So that is almost 190 new colleagues that we've added on in a year.

Partly due to Playrion and Iceflake joining the family, the 2 studios that we bought in Q3.

Exactly. Yes. But a lot of organical growth as well. So this is kind of a main chart for us, where we show our 3 cost items and our revenue item in green. And as you can see, it fluctuates a lot from quarter-to-quarter. We have discussed, and I think if you look at the last 3 quarters, the revenue didn't fluctuate that much. It had an upgoing trend. But as we mentioned already on that stream, we said that is an anomaly for Paradox, if you look historically, and we think it's going to be an anomaly also looking forward. Going forward, we're going to see that we have been seeing for most of the years, an up and down in revenues and even more up and down in profit. So very similar to what we have seen before. So we mentioned -- if we look at the revenues first, we mentioned the reason why it differs from Q4 2019 to Q4 this year. If you want to analyze a bit what differs from Q3 to Q4 to help you a bit understand the business a little bit. So in Q3 2020, we released Crusader Kings III, and that sold almost 1 million copies in 1 month. That of course, as you can derive from our new amortization model, that gives you a guidance of what we expect the revenues to be distributed roughly over the 18 months. So there, if you want to estimate what the revenues are likely to be in Q4 and in Q1, you can take lead from that. And of course, the Q4 revenues from Crusader Kings III are much lower than they were in Q3, even though it was just 1 month live in Q3. So -- and then, of course, we released a new game, Empire of Sin. But that has not sold, I mean, far -- not close to Crusader Kings III. So I think it's...

I mean, I think it's fair to add also that our games vary a lot in size, even in the flattening. So it's also -- it's normal that they vary over time.

Definitely. And also FX impact. The dollar was quite strong, especially in September when we made most of the sales from Crusader Kings III compared to what they were throughout Q4. So those are the reason why the revenues goes down from Q3 to Q4. And this shift, we're going to continue to see it's going to go up and it's going to go down. If we take a look at the costs. Here, they are separated, but if you add them together, these 3 costs will, for Q4 2020, add up to SEK 334 million. That is up 30% from last year, so from Q4 2019, and it's up 10% from Q3 2020. And this is -- if we -- this is something that comes from the fact that we are in the growth stage. If we look back the last 4, 5 years, the quarterly average growth rate of the cost has been 9%. So quarter-over-quarter, we increased 9% in average. Some quarters, it goes up 20% and some quarters, it also goes down. But in average, it goes up 9%. And that's going to continue as long as we are in the growth phase. And then also Q3 to Q4, some seasonal effect. We tend to spend -- have less cost in Q3 because it's summer months. So most of us are on vacation, which means that we eat from this vacation debt, we call it, so it doesn't affect P&L... And we do a bit of less activities, having less consultants on and do less events during summer times as well. So therefore, we normally have a bump up from Q3 to Q4 in costs. So if we should look a bit more in details, you can see the largest cost is cost -- COGS or cost of goods sold. This is all the cost for our studios, the cost for the part of our publishing department that works with the game -- kind of game development. It includes all royalties that we pay to our external studios, where we pay royalties. And all the depreciation of the licenses and brands that we have acquired. So when we have acquired Playrion, Harebrained Schemes, Triumph, World of Darkness and so on, we depreciate those purchase sums and it all ends up on this COGS row. And also the amortization that we have discussed, the new model, the write-downs, they all end up on this yellow line as COGS. And if we compare a bit to 2019, so Q4 2019, the yellow line, it has gone up quite a lot. Couple of reasons. One, the aggressive amortization model impacted a lot. The fact that we have grown the organization, we invest more. I mean we invested -- we're going to come to that, but we invested SEK 160 million in Q4 in game development. And that is what we capitalize. But with that also come a lot of costs surrounding the development that we take as cost immediately. And yes, also, the final thing, why COGS is up from 2019. We have a considerable tech development going on in the publishing part of the business. We develop stuff for the games that can be used by more of our games. That during 2020, all their efforts have been focused on game-related development. So therefore, it's all part of the COGS. But in 2019, the development was more connected to administrative parts of the business, you could say. So therefore, that the COGS goes up significantly during 2020. So I think it's good. And as you can see, the red line, which is administrative expenses, that has actually gone down from Q4 2019 to Q4 2020. So it's good to read these lines together also to get like the full cost development picture. Blue line, selling expenses went up slightly from Q3 to Q4, also from -- that's normal. We tend to do more activities in Q4 than in Q3. And it went down a bit from Q4 last year, but that was -- we had PDXCON last year. So that was a bit of a special year, PDXCON and Steam Publisher Weekend!, which we supported with some extra additional marketing. Let's move on. Yes, so this is the slide that shows our revenues quarter-by-quarter and our operating profit quarter-by-quarter. I think this shows 2 things. One, what we continue to repeat, the red...

It fluctuates a lot.

It fluctuates a lot. There can be 2 quarters where it looks stable, but rest assured, it's going to continue to fluctuate. I think that is pretty clear. The other clear thing is the trend, both in revenues and in profits. You can see both the peaks and valleys are going upwards. And the profits are being held back the profit. That they -- the profits aren't increasing in the same pace as the revenues, and that has to do that we are in such a massive growth phase, and we invest a lot. And with that, comes more cost, which we will kind of reap the benefits of in the future in terms of more revenues. But it's going to look like this as long as we are in a growth phase. So to give it perhaps a bit more easy-to-analyze picture. We have grouped the quarters into 4. So we see rolling 12 months. It's the same picture, but it looks a bit more small. And here, it's perhaps easier to see that trend. It has a healthy increasing trend from all the way back to normal. But again, since our quarters vary, you will see what happened now in Q4 and that has happened in other quarters, there will be quarters where it go downwards. And it's going to be like that in the future as well. So cash flow. This is a record -- sorry, record year as well. But let's start with the quarter. We -- our operating activities generated more cash than ever. And this is -- perhaps this can be a bit -- the reasonable question is why, if the profit isn't a record. But this has to do with, of course, when we get the money into our account. And what happened between Q3 and Q4 was that we had lots of revenues in Q3 from the Crusader Kings release, but we got the money from in Q4. But this also shows how kind of sensitive these quarters are, because depending on when in the quarter we released a game, it has a huge impact on the P&L in one quarter and the cash flow in another quarter. But we are, of course, super happy with the cash flow from the operating business because this is like the blood stream for us. And...

Yes. And it builds stability for the future, and it builds our ability to invest in the future as well.

Yes. Yes, I sometimes say this is real money, the P&L is accounting. And if you group the last 4 quarters or the full 2020 year together, we generated more than SEK 1 billion, actually more than SEK 1.1 billion in 2020, and that is up 55% compared to 2019. So that we are very pleased with. And what do we do with the money? We invest, which is the yellow bar. So that is in all our investments. But in Q4, we mainly invested in game development. So it was a record high, as it often is, when we sit here and present this quarterly report, SEK 160 million into game development. And for the full year, SEK 614 million. That's up 45%. So we invested 45% more in 2020 into game development than we did in 2019. And this all adds up -- this builds up to this capitalized development that Ebba mentioned, that is at SEK 920 million today that we're going to kind of capitalize on going forward. So what this picture shows is we are kind of -- our noncurrent assets, where capitalized development is the biggest one, the others are the licenses and brands and the similar rights that we've acquired, and then we have the lease agreement that is up here. But we can see that all these noncurrent assets are covered by our equity, so it's not debt finance. And that is also a very central part of our business. We finance all our development with our own business. So the cash flow from operating activities fuels the investment into our games. That's all I had planned to talk about.

We have loads of questions. So I will shoot straight away.

Right. Let's do so.

Let me just find the thing here. What are your plans for -- I'm just going to jump straight into it? What are your plans for game streaming services like Stadia, xCloud, et cetera? Will we see Paradox games there?

Yes. Good question. I mean we say that we want to be on the platforms and according to the payment models that our players are. And it's clearly possible that gaming is going to take the same route as video and music ad and go to streaming. So we are testing this out.

We have a lot of games on already.

Yes, yes, yes. Exactly. So it's on GeForce Now. I think you can play all our games that you have purchased on Steam. And this is something that we continue to kind of explore. So we are at the forefront of this.

Yes. With new hirings, are you planning to have more parallel game projects to diversify your risk or more people per ongoing game project to improve quality per game to get more loyal fans over time? Also a good question. Both, I would say, is the answer. There was also another question, which is how many people are going to be end of this year? Now there's no self-interest in growing an amount of people, it's more about what are we building for the future. So when we are adding game projects, then it's quite natural to also add people. But that -- what drives it is what games we are developing. And I think that we have very different sizes when it comes to teams, some are quite small and some are actually quite large. So it depends a little bit on how complex the game itself is. So there's no one size fits all, so to speak, for a game team. Okay. Is Paradox looking into a model where you subscribe to your games rather than buying them and expansions? It seems like an obvious model. Do you want to answer?

Yes. I mean, yes, we -- as you just mentioned that, we released the Crusader Kings II expansion subscription. So this is something -- because we want to test it and we want to explore. But then we are on Microsoft Game Pass. We've been there, I think, since 2018, with -- for the Xbox. And since 2019, when -- from the first day they launched Game Pass for PC. We've been there with several of our games. And as you might remember, it was when we launched Crusader Kings III, day in date, we released it on Game Pass as well. And we have a considerable part of our revenues coming from -- indirectly from these subscription services already. And of course, we don't know where this is going to go in terms of how much of the revenues in the future are going to come from this, but as with streaming, it might take the same way as video and music. So we want to be prepared if it happens.

There is also a specific question on CK III for Game Pass. And what we've seen is that it's been good for the game to be on Game Pass. It's expanded the type of people who try out the game. And it's also -- so it hasn't really cannibalized on the base game sales through other channels. We don't know how that will look for the future, but we do think it's an interesting way to explore. And we think that it is a way for add-on -- adding on a new base of fans, basically, to our games in general. There's one more subscription question here. Should the increasing use of subscription services by Paradox be seen as an indicator that your company is wanting to focus more on multiplayer experiences in the future in your existing or new games? Well, not by default, I would say. In general, yes, I think multiplayer is very interesting. So we explore that. We explore subscriptions as well. But it's really about that we want to be where our players are and we also want our players to be able to play the games in the way that you guys want to. So it's very much about balancing the 2. So we will continue with both of these as well. Do you plan to port any of your PC console titles to mobile devices? That's a tough one. What's your general interest in mobile? What do you think, Alex?

I mean, technically, not port them. The mobile device is so different from a PC console in terms of computing power, screen sizes and so on. But we would -- I mean, we are very interested in the mobile platform, and we would love to come out with our beloved IPs and mobile. We are doing it with Stellaris: Galaxy Command. And now since July when Playrion joined us, we are, of course, looking into how can we use their expertise and skills in the mobile game development and publishing to do something.

Yes. And the game Playrion has -- so the airlines manager. It is a very Paradox-y game in the sense that it's a deep management game on mobile. So it fits very well with us. And of course, we're hoping to be able to expand that in the future. And I also think that the whole mobile screen is interesting from a cloud gaming point of view. Because there, it comes down to that you can play on any device that you want to. It's just about will the screen size fit for all the menus and things like that. So of course, from a UI perspective, that's also very interesting going forward. Are you looking to outsource game-testing more than currently? Or the opposite, increase QA testing in-house? We do both today, we have all our studios of QA in-house, and we also outsource both. QA is quite varying in size over time. So it's good to be able to do both. It's a very important part of making games. So I foresee that we will continue to do both. Has Paradox ever spoken to governments, spatial planning authorities about bespoke models as visualization tools to help aid city planning engagement for particular places?

Yes. I mean we have several cities or city councils and schools that use Cities: Skylines for...

And the historical games as well.

Yes. Yes. And I mean, we are happy to support them with that. This is kind of, in the best business way, a way to spread the IP and build the IP and brand, but it's not something that we consider to be a financial big part of our business.

How heavily does PDX intend to lean into the World of Darkness IP in gaming? Will Paradox try to cater to the cult following of World of Darkness or will try to market to make it more mass-market appeal? Or a balanced approach? Well, I mean, I personally think that the World of Darkness has great potential to grow further. And I think that it's also so broad, so you can cater for both sides of this. And we will continue to invest. And there are a lot of games coming out and a lot of also other types of products coming out in the World of Darkness world. So even though we have made the tough decision to delay Bloodlines, there are still things to do in the World. Are there going to be other games ported to PlayStation, Xbox, et cetera? A lot of folks would like to see the strategy games, the historical ones on console.

Yes. I mean, for sure, we're going to continue to develop games for the console. It's -- I don't remember exactly when we started, but a few years back, we didn't have any console games.

Cities was the first.

Cities and then Stellaris.

Surviving Mars, I think was one. But, yes. Yes.

But I mean we don't have that many games in console yet. But still, in 2020, we had 14% of the revenues coming from those console games. And so they are clearly very popular amongst our players. So -- and we mentioned that it's difficult to port to mobile. It's, of course, much easier to do it from PC to console. Yes, so this is definitely something that we are continuing to focus on.

Some of the older games are very hard from a code base point of view. So it depends a little bit on that as well, but yes. I've been seeing reports about Microsoft developing a program for developers and publishers to submit PC and Xbox games for accessibility testing? Paradox has in the past tried to take a role, maybe even a lead role in making games accessible. Will Paradox participate in that Microsoft program? If not, why not? Well, yes, you are right. Accessibility is super important to us from lots of aspects. Not least that our games tend to be very complex. So we want to have a way in and also way for various types of players to access the games. We haven't really made a decision on this. So that's definitely something for us to consider for the future. Will studio openings and IP acquisitions continue at the current pace? Or in light of the continued developmental issues with Bloodlines, will these be halted and a full audit of all current studios and projects be undertaken so that future releases are not continually marketed and delayed?

Our growth will continue.

Yes.

So we are continuing to look at IPs. We're probably going to acquire more IPs in the future. We are probably going to establish new studios. And we are probably going to acquire new studios. But at the same time, of course, we always review our studios as our publishing business and processes and learn from what we have done in the past. And then you have certain years or periods where we do a lot. So in July, we acquired 2 studios and opened 1 studio. So of course, it -- just as our kind of everything else with Paradox, it's not evenly spread out in a constant pace.

But I mean, I think it's also very important to point out that canceling games is not -- you can't see that as a failure. You can have the best idea in the world that you really want to try to build and then it just doesn't come out as a good game. And it would be a bigger failure for us, I think, not to dare to start projects. So we have -- so we're going to continue to do that going forward as well. And then you could argue that we can announce games a little bit later, which I can agree with that. So -- and that's also why we have a very large pipeline going forward, but we haven't announced a lot because we want to know a bit more about when the game can release before we announce.

And this review, I mean, this is something that applies to our own internal studios as well as the partnerships we have with external studios. And I think it was mentioned, Vampire: the Masquerade, HSL is an external studio. I mean, we own a minority stake in it, but it's run by themselves.

Yes. Okay. Next question. We have lots left, so let's try to run through them. After the huge initial success of CK III, why have we not heard very much about it? Well, since launch, we have delivered an extensive free update. It was launched in late November and that had a lot of new functions, actually like a Ruler Designer, which I know is super popular, if you haven't tried that. But also a lot of bug fixes and things like that, that will continue. And while we haven't announced any new content yet, we are hard at work. And there is a dev diary coming later today that you might want to check out for some teaser. Yes. Why are your core titles, which still bring in the majority of your income, neglected with small team sizes and huge delays? Well, I would argue they're not. We focus a lot on our live games, and we continue to work. But even the DLC takes a long time to develop. So it's not a small endeavor to make a DLC. We have, as I said it before, we have very varying game team sizes. You could argue that you would always want them to be bigger, but it depends a bit on what it is when it's building. Like if you look at the -- I think the original team who built the original Cities: Skylines was 8 people or something like that. So it's not always -- size isn't always what matters here. Why was Empire of Sin released in that quality? Yes, that's a very good question. I wish it weren't and it's -- you always make a judgment call because our teams are very good at pointing out. And also, in this case, the studio that built the game challenges. And then from a management point of view, we made the wrong call. That's how we -- what it is. And then, of course, even though that's not something that we want to do, as I said before we want to release good games, it's important to continue to build on it and make it into a good game. So that's what we're doing now. But it is -- it's always a judgment call when you release a game. So -- and of course, we want to be more right in that. So we take a lot of learnings from Empire of Sin. If you ignore the changes in working capital, you are quite close to negative free cash flow in the quarter because of weaker profits and higher investments. Are you comfortable with that? Are you comfortable with negative free cash flow in some words?

Yes. Yes, definitely. I mean, at the end of the day, we have at year-end more than SEK 700 million on the bank account. So I mean, that's -- we are fine to having that decrease in certain quarters. So far, it has -- I think it has gone up almost every quarter since I started 3 years ago. But that's not a necessity. I think SEK 700 million is way too much, perhaps, to have on the bank account. So that...

It [ needs to work ].

Yes.

Okay. I think this one is for you as well, Alex. Could you explain what mean parent company and group? Those names are in financial statements. Both of them have balance sheets, income statements, et cetera, what shareholder owns at Stockholm Exchange Group or parent company. I looked into the IPO prospect in Swedish and I didn't find any info about this. It's the parent company.

Yes. Yes, so -- yes. Well, the parent company owns everything else. So -- but then we make financial statement about the parent company isolated. And then we make a financial statement for the parent company including its subsidiaries. And when you include the subsidiaries, you get the company group financial statements.

And when you're a shareholder, what do you own?

Technically own a share in the parent company. But since the parent company indirectly owns the other, your own part of the group.

Yes.

So you -- so I think it depends what you're analyzing, but most of us focus on the company group financials.

Can you give a rough sense of expectations for overall revenue and profit growth in 2021? Well, we don't give forecasts like that. But of course, we hope to announce gains here in the year that is coming from this investment that we're doing.

Yes, yes.

So stay tuned. Could you please provide some justifications as to why you are venturing into role-playing games when your grand strategy franchise is so successful? Why not stick with your core competence? That -- it's a very good question. It's something we've discussed a lot over the years. I -- we do invest a lot in our core and we will continue to invest a lot in our core. That means both the live games and future games coming. But we also want to look at adjacencies and things that are close to us. In the case of the role-playing games, it was very much connected to the investment in the IP of World of Darkness. And we have other games that we've added throughout the year. So if you go back in time, we have Mount & Blade, we have Magicka, we have Cities. So we have expanded like this over the years, and I think we will continue to do so as well. How does what happened in 2021 regarding game development, some success and failures, change your thinking on the role of M&A in terms of getting the right talent into the group? I think 2020. Do you want to...

It's probably 2020. But I think 2020 has been a year that has been very Paradox. We see what we have seen for many, many times. Once we establish a brand and a franchise, we are able to get a lot of revenues from that game and a lot of player liking from that game for a long time, not only through the expansions over the actual game lifetime, but also as you can see, with CK III, we can build expansions and stretch this out. But as we see with Empire of Sin, it's not that easy to add on new franchises, but that we knew. So...

It's very much building over time, right?

Yes, it's a building over time. So when we added Cities: Skylines, that was not something we took for sure what's going to happen either. But now it's one of our absolutely biggest contributors. So it's a bit difficult to know in advance, unfortunately. But we're continuing to invest in new games, and the hope is that they are going to turn into these. So I mentioned that we had this usual 5 suspects on top grossing games, we, of course, hope that new games are going to turn into the usual 7 suspects.

So we have time for 3 more questions. I'm going to pick very financial ones for you.

Okay. Sure.

What happens with your investment in Hardsuit Labs? You had 33%, if I remember correctly?

Yes. Yes, and...

We keep it.

We keep it. And I guess they refer to the announcement regarding Bloodlines. And we think Hardsuit Labs has a good future, and it's going to be a healthy company. So we're going to keep that, and we're going to keep our good relationship with Hardsuit Labs, and we'll see what will happen.

Is there any impairment of capitalized development because of the change of direction with Bloodlines 2?

Always. I mean, we always do impairment assets. That means that we look at this total capitalized development is SEK 920 million. That is spread out over different franchises, and we always look at them and see is this something that is kind of supported by the future potential cash flow. So if a certain game holds a capitalized development of SEK 100 million, we want to have a forecast adjusted, that the game generates at least SEK 100 million over the next years. So we always look into this. But the fact that we have taken on a new lead studio for Bloodlines 2, that does not impact that. They are going to continue to build what target labs has built.

On what we have. Okay. And then we have -- there was a fairly big step down in gross margin in 2020 because of the COGS step-up. Should we expect gross margin to rebound in 2021? Or will it take time for gross margins to move back to plus 60%?

I think -- so there will be a pressure down on the gross margins as long as we are growing, and especially during this kind of transformation period when we're moving into new -- this new amortization model.

Yes, that's true. That makes a big difference.

Yes. Because once we are past that with 1 year, maybe 18 months, then we are seeing kind of the benefits from that as well, having a lot of the capitalized development in those games having been amortized. But I would say as long as we are in a kind of big growth mode, there will be pressure on holding the margins back?

Yes, that's true. That's it for us, but I will have one bonus question, which is when can we attend the next PDXCON? We also really want to attend the next PDXCON. Right now, we don't have anything to share, unfortunately, because of you know what, going on around us in the world. So we've had to rethink all of our event planning. But we really want to have a PDXCON again. So hopefully, stay tuned. Thank you very much for tuning in.

Thank you.

And we will have our next quarterly report.

I think it is May 11.

May 11. See you then.

See you then.

Thank you, and bye.

Bye.