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

Is that it?

Yes.

Yes. Let's move over to the Q&As.

Yes. We have received several questions during the morning and also during the stream, I think. First one, I think, is for you, Fred. Do you see potential in working with third-party owned IPs.

That's a good question. I mean we prefer as Paradox we always have to own our own IPs and work with our own games, our own trademarks, intellectual properties, all of it. If we see an opportunity, though, with something that matches our philosophy, matches our target audience, matches what we do and we can come in at a reasonable price with a good deal for both us and the partner, we're not alien to doing that deal. So we're getting -- I mean, the way the market looks right now, it's been a bit volatile out there. I think Paradox is still very stable. I think we're having a good growth path forward. I think we have a great strategy, great team. But it also gives us a lot of opportunity to work together with talented teams that are looking for either a publishing partner or funding or other things. So we can provide a lot of stability for a lot of gaming companies out there. So opportunities will come up for sure. That was a very long answer. But I think it was actually fulfilling to whoever asked the question. So Alex, can you quantify the nonrecurring main market listing costs and FX?

Yes. I think I did the main marketing listing cost was SEK 3 million roughly in this Q2. It's roughly the same in Q1. And we expect it to be close to 0 in Q3. Yes. And I also touched upon the admin cost in general. FX, I said we had roughly 2% headwind. Now these are estimates, and it's difficult to be exact for us when we talk about FX because we can, of course, see how much the different currencies have changed between the quarters. And we can weigh that change with the currency mix we see from our products when we look at Steam, for example. And that gives us in this quarter, 2% if we look at the average Q2 and compared to averaging of Q2 last year. But FX actually impacts us when the payments are happening. So it depends when are Steam getting the payments from the players and when we are -- and when are we getting the payments from Steam. And that timing differs from when we recognize the revenues in our income statement, for example, due to expansion passes. We got the payment for the Age of Wonders expansion pass already last year, but some of it comes up now in the revenue. So therefore, you can't just take this 2% and multiply it with SEK 459 million, which I think was the revenue from last year's quarter and just say that, that is the impact.

But over time, it kind of balances out. So that's the point as well because the expansion passes sell at different times as well.

Yes, exactly.

So every day for the whole period of the expansion pass. So it's more complex than just saying 2% that's the thing. But it balances out over time.

Right. Here's one for you, Fred. Could you give an update on Prison Architect 2 and any other games in the pipeline? Follow-up question on that. Can we expect something at Gamescom? Can you comment on rumors circulating about future management [indiscernible].

Three questions in one. Let's start with Prison Architect 2. So I've played some Prison Architect 2 yesterday. The new planning mode is absolutely brilliant. You can build like plans that are like transparent and then you can say, push play when you have the money in the bank, right? So it's really good. It's getting there. We're going to come out with news during fall. That was Prism Architect 2. Can we expect something at Gamescom? Yes, you can. It's going to be quite big for us this year. So -- and we already said at this stream, and I think I say that in words from the CEO in the quarterly report as well. So we're really hoping to follow our -- what we do with Gamescom basically and the release that we have because it's going to be a lot of fun. And can you comment on rumors circulating on a future management game? No, I can't. I'm sorry. You have to wait until we do official releases because if we comment on all the rumors out there, it's going to be a completely separate stream about that. So not today, but hopefully, we can iron out some details in a couple of weeks from now. So Alex, given quite a Q3 content schedule, how should we think about the sequential EBIT considering the higher headcount and ongoing amortization from Europa Universalis V and Bloodlines 2.

Right. So.

Good question.

Yes. What will EBIT be in Q3?

Exactly. Plus/minus 2%.

Yes. We don't give any guidance on EBIT or any other financials. But as the question points out, Q3 tends to be slower compared to Q2 if we count releases, and it's likely going to be like that this Q3 as well. Now -- so that, of course, impacts EBIT. Almost all Q3s are lower than the Q2. It's quite common for us as well, at least. Considering the higher headcount, yes, we have had significant headcount increase compared to last year. Most of that is in the studios. So that means that it's for developing, which means that it's been capitalized and goes into the balance sheet. So that doesn't impact the short-term profit. It will impact the quarter when we release the game. But the plan is that, that game is going to come with more revenues than amortizations, of course. But it won't impact Q3 that much. And also when we -- these are details, but when we speak about Q3, personnel costs tend to be significantly lower than other quarters because we have a lot of vacation and that has an impact on the P&L. Yes, there was also like a 3-part question. Amortizations from Europa Universalis and Bloodlines, yes, good point. That is coming down. We released both games in Q4 last year, and we have aggressive amortization model, which means that we take much more in the beginning. Now we are coming in, in the kind of final period, where we have amortized the vast majority of both games. So that is going to come down.

Right.

Next one is for you, Fred. Is the team in Iceflake still working on the console version for Cities: Skylines II? And can you give any additional color on the possible release?

Short answer is yes. Any color on release? No. Because like I said, we can -- we're going out with official releases whenever we are ready. But the progress is looking good. And we I don't actually know when we're releasing more info on this, but I think it's fairly soon. So we're in a good place with Cities: Skylines II on console. Alex, is SEK 200 million the entire amount up until the AGM? If so, why is that considering SEK 1 billion of cash post after dividend payment and the payment of the publisher contract?

So SEK 200 million refers to the share buyback program.

I guess so, yes.

I'm pretty sure.

Yes. It sounds like the round number that we agreed upon in the Board meeting yesterday.

Yes.

So yes.

Yes and that we announced later.

And why is it only SEK 200 million is the question I just have.

Yes. Well, the entire amount -- yes, it's a full amount that the Board decided on yesterday. So that's the total amount. But -- the Board made this decision based on the mandate that was given on the AGM that we had in May. And that mandate is bigger. So the Board has only used a part of that mandate. And technically, there's nothing hindering the Board to take a new decision later on.

I mean if I understand correctly, we can buy back almost 10% of the total shares, and that just takes a new Board decision. So this is -- but this Board decision has the mandate of SEK 200 million.

The decision was SEK 200 million, correct. Why isn't it more? Well, so the buyback program is SEK 200 million. Back in May, we distributed a little more than SEK 500 million in dividend. So it's SEK 700 million this year. If we complete the buyback program, a little more than SEK 700 million as shareholder distribution. Sure, we have more cash, but we think this is a good capital allocation for this year. As always, our main priority is to invest our cash in game development. And if the opportunity arises acquisitions like we have done in the past. What is not needed for that should, of course, be distributed to the shareholders. We have, during the last years, increased that distribution. It's not many years ago that we did SEK 100 million in distribution, and then we increased it to SEK 200 million to SEK 300 million and then to SEK 500 million. And now with the complete buyback, it's at SEK 700 million. So we are increasing it. Fred, when you think about releasing content more frequently across your main games, what's actually holding you back the most? Is it how much your teams can produce? How much players are willing to pay for or something else entirely?

I would say it's all of the above to different degrees. But the first and foremost, the ceiling is quality. I mean we've had uneven quality on some of our titles, some titles that do only things that get super reviews and some that are a bit up and down. But we need to be able to provide a strong player fantasy with quality content every time we release something. That's our goal. So I wouldn't say there is one like dominant factor holding us back, but we strive to produce as much quality content as we can for our gamers. So there's nothing -- we don't hold back for other reasons than that, I would say. I mean you could always argue we could have parallel teams and stuff like that, but it also increases complexity. But we have -- I would say that our live teams work really hard to provide the content that we come out with every year. And I think we found a good model with the season passes. We might do some adjustments to that in the future. But I think we found a good model. I mean if we're describing like the Paradox, if you want to call it flywheel, which is very popular to describe it as that, what we need to do now partly is finding more games to fit the Paradox model that already is working, as you can see. The no new releases this year, still stable. We can see that our portfolio can still grow the company. It's just adding new games on top of that is going to be icing on the cake or maybe more than icing, maybe a fully new cake. You never know. I have a really long answer to that. I don't know. I just feel sort of inspired. So regarding the SEK 30 million guaranteed to an external dev, how are the advances recouped and margins and revenue sharing economics from an investment standpoint? And what protections exist if the project is delayed or underperforms?

Okay. So several questions. How -- right. So to start, we can't comment on the particular contracts, but we're happy to explain our standard procedure. So when we publish games developed by other studios, the normal setup is that we as a publisher, we finance the full project. So we pay the full development costs, sometimes with a markup, sometimes just as cost basis. And then upon release of the game, we take often the full revenue from day 1. And then once we have reached a certain threshold, normally, it's related to when our investment is recouped, sometimes it can be more than that, then we start to share the revenue with the development partner.

And it depends on when we come into the equation as well. If we start the funding from the beginning, the terms are in our favor, mostly, and it might be more balanced if we come in late and can evaluate the product.

Yes.

So it depends a bit on that as well.

Yes. And in this project, we came in quite late.

We actually have a couple of projects that we can't really -- some that we can't talk about.

Sure. But as you say, when we come in late, a lot of the risk is already taken. So -- and that's, of course, very beneficial for us that the risk is smaller. And that's -- normally, that is something that you need to pay for through the terms. So if you take less risk, it's likely that you get equally less upside. So with less risk, you could a bit roughly expect slightly less margins.

Yes. But also, you have to remember that this is -- when you make a completely new product, it's quite high risk. When you come in later, the risk is significantly lower as well. So it's always.

And then there was a sub-question in it, what protection exists if the project is delayed or underperformed? Yes, I think the best way to handle the risk is, of course, to come in late. That reduces the risk, the most.

The most, yes.

And another equally important thing is to work with studios that have a good track record, work with projects that have -- is it a sequel that takes down the risk because it's a recognized brand. It has a player base already. So those things impact the risk much more than the contractual terms, I would say.

Also a sequel to a previous game is a lower risk than a fully new game. If you have a lot of overlap with the Paradox current portfolio, it's a lower risk for us because we know the target audience. So there are a lot of factors that come into account when you make the decisions on what to publish.

Fred, given how the EU 5 launch has gone, including the issues along the way, how has it changed how you think about Paradox focus on grand strategy games?

No, not really. Grand strategy games is still our core, and it's also our deepest expertise, and we will continue to invest and expand that. We will continue to experiment a bit on what is considered grand strategy and maybe trying to reach certain new target audiences without leaving behind the core audience that we already have because I think that's a mistake a lot of people do. But it means when we're looking at existing games and new titles, grand strategy is still at the core of what we do, even if we experiment with other things around it that fits the gaming formula and also the business formula of Paradox. So Alex, how should we think about the net royalty cost trajectory given the expiry of Age of Wonders 4 earn-out, but higher royalties from stronger Cities: Skylines and Cities 2 sales?

Good point. Short answer, it should decrease over time. As we already mentioned, we have 2 main drivers, as your question suggest, revenues from Cities: Skylines and Age of Wonders 4. We already said it Age of Wonders 4 is from now on royalty free, you could say. And Cities, yes, revenues have increased over the last quarters. But then we pay royalties on the sales of content developed by Colossal Order. And now when we and especially Iceflake have taken over the development, it means that revenue and sales on content that is produced by us, we don't pay any royalties on. So over time, the ratio of the revenue will likely swing towards own produced content. So that will decrease royalty rate as well even if the total revenue as we hope for will increase. More questions. This one is for you, Fred. Why the choice to work with external developers? If I'm not mistaken, Paradox shifted its strategy more towards in-house development. Does this studio have a strong proven track record, which measures are in place to develop -- to evaluate the developers' progress?

Well, I think we explained it previously, but it's not a shift of focus. I would say -- so in 2021, we had, I think, 9 or 10 external developments, and we pretty much closed all of them. And we've reevaluated who we work with and why we work with external developers. And I've explained it before, it has to meet the Paradox criteria for what a good game is or how we see games, also have a good overlap with how Paradox does business and what we value, including, for example, modding and other things that are important, both to drive revenue but also to drive player interest and make people more engaged in the game and basically drive player value. So all the studios that we work with have a strong proven track record, typically works with franchises that has been either proven before or has seen some sort of first touch with the market. So we have a couple of studios that we work with right now on the games that we will co-publish. And we think that's an excellent way to figure out ways to find new partners to work with over longer periods of time and sort of expand the Paradox universe for our gamers and for ourselves as well at a limited risk. So which measures are in place to evaluate developer progress? Well, we monitor everything closely from a milestone schedule, just like we do with our internal games. So I mean, we do have more than 1/4 of a century experience in making games, even if we fail from time to time as well, which is inevitable in the entertainment industry. I would say that -- we monitor all developments that we're a part of because we're invested in them so.

Good.

Monthly active users in Q2, what is your reasoning behind no longer reporting these figures in the quarterly report?

SEK 6 million, was SEK 6 million in Q2. It's in the report. But unfortunately, the read there has missed it. So we have done several format changes to the report. One is that we have brought forward and increased the KPI sheet that we used to have. So we have much more -- we have more KPIs in it. That has replaced the slide or the page where MAU was previously set out. Now you can find MAU in the company description in the report. We have a page that talks about Paradox. There you will find the MAU. Fred, I was wondering if you could break down your thoughts/rationale behind Transport Fever 3 in both qualitative fit in the context of Paradox portfolio more broadly and then how you think about ROI when you consider total sales of Transport Fever 2 so far? Several questions again in one.

I think we've kind of answered this in a lot of different ways. But you know what, I'll give it a new stab. First of all, I think the portfolio fit for this game is great, and we've done an extensive analysis on, for example, a wish list overlap in between this game, the Cities: Skylines series, Crusader Kings and a lot of other games in our portfolio and come to the conclusion that there are very few games out there that has more Paradox DNA than specifically the Transport Fever series. The game looks great. We've all played it. We got the opportunity to play it when we signed it. And that was the -- actually one factor that got us to sign it is actually trying out the game's quality. Just like I have with Prison Architect 2, it's much easier if you sit down with the game and actually play it yourself. It gives a totally different sort of feeling to is this game a good game? Can this game actually sell? Can it reach the audience it's supposed to reach? This is a great game. It's exactly what this type of gamer wants according at least to our own internal and to somewhat -- to some extent, external user research tests as well has indicated. So that's obviously -- it's a competent developer. They've done games before that is virtually the same thing. And it has everything we want, depth, replayability, engaged player base, modding scene. So pretty much this is what we do. It's just made in a different location than in the Paradox office. So we never share details of like contracts or partnerships like that because we've never done before. But yes, we think this is a good opportunity for us to find a new good partner, all in all.

Good. No more questions.

And with that long sort of explanation on Transport Fever 3, the Q&A session is over for this time. So thank you, Alex.

Thank you. Thank you for watching. And if we missed to answer any questions, e-mail us, and we will answer them by e-mail.

We will. And don't miss the Paradox announcement at Gamescom. It's going to be a lot of fun.

Of course.

And see you at latest at the Q3 report.

Yes.

Perfect. Bye.

Have a good day. Bye.