Paradox Interactive Q1 results show positive momentum By Investing.com

Paradox Interactive (PDX.ST), the Swedish video game publisher, discussed its first-quarter performance in a recent earnings call. CEO Fredrik Wester and CFO Alexander Bricca highlighted the company’s positive sales momentum compared to the same period last year.

Despite a lack of revenue from subscription services that contributed significantly in the previous year, the company maintains a strong financial position with no debt and robust cash flow. Efforts to improve game quality have led to the rescheduling of key releases, including Prison Architect 2 and Victoria 3’s DLC. The company’s financials revealed stable revenues year-over-year with a slight dip in operating profit.

The cost of goods sold decreased, primarily due to lower amortization costs, and the company’s equity to asset ratio improved. Despite recent acquisitions, the average number of employees has decreased. Paradox Interactive’s revenue and profit are subject to quarterly fluctuations influenced by their game release schedule, but the trend remains positive over time.

Key Takeaways

• Strong underlying sales momentum compared to Q1 of the previous year.
• No revenue from subscription services this year.
• Delayed releases of Prison Architect 2 and Victoria 3’s DLC due to quality improvement efforts.
• Upcoming early access releases for Foundry and Life by You, plus DLCs for Stellaris, Victoria 3, and Europa Universalis IV.
• Stable revenue with a slight decrease in operating profit.
• Decrease in cost of goods sold, mainly due to lower amortization costs.
• Equity to asset ratio increased, while the average number of employees decreased.
• Acquisitions include Arctic, Thalassic, and Harebrained Schemes.
• Cash flow from operating activities decreased due to timing differences in revenue recognition.
• Long-term success strategy focusing on deepening, stocking up, and breaking out in game development.

Company Outlook

• Paradox Interactive is focused on delivering quality games and is in a strong financial position.
• The company’s long-term strategy aims to deepen its game development with a focus on operational efficiency and fair pricing policy adjustments.

Bearish Highlights

• Absence of subscription service revenue compared to the previous year.
• Temporary increase in administrative expenses due to additional invoices.
• Decreased cash flow from operating activities year-over-year.

Bullish Highlights

• Positive sales momentum and stable revenues.
• Successful cost management and operational efficiency initiatives.
• Well-received experimentation with a subscription model for Stellaris expansions.

Misses

• Delay in the release of anticipated titles such as Prison Architect 2 and Victoria 3’s DLC.
• A small refund impact expected in Q2 for Cities: Skylines II – Beach Properties.

Q&A Highlights

• DLC development decisions are based on staff resources and market demand.
• Commitment to one or two DLCs per game at release, with continuation dependent on player interest.
• Use of parallel and external teams to improve DLC release cadence.
• Upcoming presentation scheduled for the end of July.

In conclusion, Paradox Interactive’s Q1 performance demonstrates the company’s resilience and adaptability in the face of changing market conditions. With a strong financial foundation and a clear focus on quality and operational efficiency, the company is poised to maintain its positive trajectory in the gaming industry.

Full transcript – Paradox Interactive (PDXI) Q1 2024:

Fredrik Wester: Hello everyone, and welcome to the Paradox Interactive Q1 livestream with me, Fred, and —

Alexander Bricca: I’m Alex. Welcome, everyone.

Fredrik Wester: And we’re going to take you through, some of the things that has happened this quarter, and obviously, the numbers of the quarter as well. So, we might just as well jump right into it, and that’s my name right there. To summarize, where the company is, not over this quarter, but in general. Our core business has really good momentum. We can see that our underlying sales are really good. So if you compare to Q1 last year, it was basically the same in terms of sales numbers — gross sales. But this year, we didn’t have any revenue from subscription services, for example, which accounted to at least some revenue last year. I don’t remember how much. But —

Alexander Bricca: It’s an undisclosed amount, but it was significant.

Fredrik Wester: It was a significant amount. We are also, as an industry, experiencing probably the most turbulent period that I’ve seen since I joined almost 21 years ago into this industry. And we have a very good position with no debt, money in the bank, good cash flow, and with a good delivery on our key IPs. So a lot of opportunities will present itself in a market like this, and we hope to be able to take advantage of at least a few of those. And obviously, I mean, we have a clear area of improvement for the future, and it’s increasing the quality of what we do in all delivery across the whole company. So quality, if we talk about that specifically. On some of the recent releases, technical quality has been a bit below what we are to be expected. Our first rule here at the company is to give service to our gamers. It’s the rule that we’ll live by and the first thing that people hear when they enter Paradox as well as employees. And, we strive always to have a good and consistent quality in what we do. We’ve failed a couple of times, as I mentioned recently, but we have a pretty good idea on how to get back on track. And there’s, obviously, no silver bullet, no one thing that we can do, but checking the game. How we check and work with quality control late in the projects is one of those key things we think are going to lift the quality level to where we can expect to be, and where we want — where we do expect to be, I would say. A couple of effects that this has had is the delay of Prison Architect 2, slated for early September release and also a small postponement of Victoria 3’s Sphere of Influence DLC that is now releasing in June instead of in May. So if we move into — there’s been a couple of questions about Cities: Skylines II, so I might just as well, do a preemptive strike and take that right away up front. So when it released in October last year, it didn’t live up to player expectations, and we have started the journey with the game to take it to the level where it should be. It’s most notably it has been on the performance side. Therefore, we have delayed the DLC Bridges and Ports to 2025 to ensure proper time to actually improve the base game in the meanwhile. We have not yet committed to a console release window, so we want to ensure that we have the quality right before we actually set a date, so the console players can enjoy a really great experience with the game. And as we’ve said before, Cities Skylines and Cities Skylines II are both long-term engagements for us. It’s an important franchise for Paradox, and we look forward to working with this game for a long time.

Alexander Bricca: Yes.

Fredrik Wester: Releases in the quarter. The 4x game, Millennia, was released. Trial of Allegiance for Hearts of Iron IV, Primal Fury for Age of Wonders 4, and the first DLC in Chapter III for Crusader Kings III, namely Legends of the Dead, with more to come later on this year. Also, a smaller content creator pack called North African Attire. On the management side, we released Beach Properties that we later gave away for free to all gamers, considering, as some sort of a gift for the game not really living up to the expectations so far. Worth mentioning as well is the release of Across the Obelisk on Nintendo Switch (NYSE:), which marks our absolute first Nintendo Switch release from the company on the publishing side. We have had Cities: Skylines before on Switch, but it was through Nintendo, so it wasn’t through our own publishing efforts. So that’s a small, but not insignificant milestone for the company. So after the quarter, what happened? Prison Architect 2 delayed, as I said, to September. Foundry is releasing Early Access now in May. It’s just a couple of weeks from now. Life by You releasing an Early Access in June. We really look forward to seeing that releasing. We also announced a couple of DLCs for our main games, Machine Aid Machine Age for Stellaris, Sphere of Influence for Victoria 3, and Winds of Change for Europa Universalis IV, all to be released within quarter 2.

Alexander Bricca: Yes.

Fredrik Wester: So exciting. A lot of releases coming up. And over to you, Alex. Let’s go through the numbers.

Alexander Bricca: Let’s look at them a bit more in detail. So revenues came in at almost the same level as in last year’s Q1. Last year, we did SEK 483 million this year, we do SEK 482 million, so very similar. And also the fundamentals of the businesses has been very similar between the quarters.

Fredrik Wester: And worth noting is that the currency is basically same level as last year, so the krona hasn’t strengthened, it hasn’t weakened since the Q1 last year interim report.

Alexander Bricca: That’s right. That normally affects us if you compare to quarter-to-quarter. But dollar has been flat towards the krona, euro has been flat, the pound moved a little bit. What else? Well, more importantly than FX and currency, of course, is what we released in the quarter.

Fredrik Wester: Yes.

Alexander Bricca: And there are the same goals. The quarters have been very similar in terms of the releases. You just went through what we released this Q1. If you look at last year’s Q1, it was very similar. We had the DLC on Stellaris, we had some CCP, Content Creator Packs and Radio Station on Cities. We had something on Victoria 3. We had the console ports on Stellaris and so on. So in sizes and numbers, very, very similar. And therefore, the revenue ends up being very similar. We always disclose the top 5 contributors of the quarter, and it’s Cities: Skylines I and II, occupies 2 of the —

Fredrik Wester: Top 5 spots.

Alexander Bricca: …top 5 spots. And then CK III, HoI4, and Stellaris. No surprises there.

Fredrik Wester: No. And as we said, we have no revenue this quarter from subscription services that has been paid, so compared to last year, so that’s a small step forward.

Alexander Bricca: It is for sure. Operating profit, the same goes there — almost the same, SEK 154 million this Q1 compared to SEK 156 million last year’s Q1. So it’s down 1%. So evidently, also the costs are very similar to last year’s Q1. We will, of course, go through them a bit more in detail. But then if you look at the next line there, we have some differences. So profit after financial items, last year it was very much the same as the operating profit, but this year it is SEK 10.5 million more than the operating profit, and this has to do with our financial income. So interest on our quite massive cash position. And the interests have been going up over the last years. And if you have debt, it means additional cost. If you have cash, it means additional income, and that’s the case for us. Profit margin, of course, if the profit is the same as last year and the revenue is the same as last year, the profit margin is going to be the same as last year, so up —

Fredrik Wester: No surprises.

Alexander Bricca: — 1% from 33% to 34%. Worth mentioning, it looks very similar, but some of the fundamentals are different. You mentioned one thing, we got the extension on one of the major subscription services last year’s Q1 that that actually pushed up the revenue in Q1 2023 quite a lot.

Fredrik Wester: Yes.

Alexander Bricca: This year we haven’t had that one.

Fredrik Wester: Yes.

Alexander Bricca: But nevertheless, we are reaching the same revenue. So that, says quite a lot about the strength in under — in our underlying sales, in our core franchises —

Fredrik Wester: Indeed.

Alexander Bricca: — which is very good to see, of course. Also something that makes this quarter a bit more challenging than last year’s Q1 is that we have had increased marketing costs this year. So it’s mainly 2 things that drives our marketing costs. One, what are we releasing in this very quarter? And there — as just said, the quarters have been very similar. The other thing is, what are we going to release next quarter?

Fredrik Wester: Yes.

Alexander Bricca: So now we’re looking forward to Life by You, Foundry and Prison Architect 2.

Fredrik Wester: Yes.

Alexander Bricca: 3 games that drives marketing costs already now. Last year, we pretty much only had Age of Wonders 4 as a new game in Q2. So we didn’t have the same amount of early marketing costs this — last year as we have this. But still, we are managing to reach the same profit level. So that’s good. Equity to asset ratio, steadily increasing from 75% last year to 78% this year. Average number of employees goes down from 665 last year’s Q1 to 594 Q1 this year. So this is, we closed during the last 12 months Arctic, Thalassic and Harebrained Schemes. So almost 100 FTEs. But then we have increased number of FTEs here in Stockholm, a bit in Iceflake Studios —

Fredrik Wester: In Tampere, yes.

Alexander Bricca: Yes. And in Berkeley for Tectonic. But all in all, less FTEs. Let’s move on and go through the costs a bit more. So this chart, if you have seen the streams before, you have seen this chart before. It shows the revenue over time on the green line, and on the yellow, blue, and red line, you have our 3 main costs over time. So the revenue we have been through already, but what is very clear here is how much our revenue, and thus profit, fluctuates over the quarters. Last year — last quarter Q4 was extreme, but even if you look a bit further, it swings quite a lot between the quarter and that all has to do with what we released in the quarter. And if you go 5, 6, 7 quarters back, it’s quite clear that we, for some reason, we tend to group the releases to one quarter. So every second quarter we release quite a lot, and every second quarter we release quite a little. And that’s —

Fredrik Wester: But a steady curve is pointing upwards over time.

Alexander Bricca: Over time, it’s pointing upwards. So I will show you another slide that that that makes it a bit easier to see. So that’s about the revenue. So let’s discuss the cost a bit. So cost of goods sold, the biggest one in yellow, massive swing, up in Q4 and similar massive swing down now in Q1. SEK 268 million Q1 compared to SEK 263 million Q1 last year. So compared to Q1 last year, very much the same. But in Q4 last year, it was SEK 712 million, so —

Fredrik Wester: Huge amount about the write down on Lamplighters League, obviously.

Alexander Bricca: Yes. Lamplighters was a big reason to this. And so what does this consist of, the cost of goods sold? Amortization is a big one, of course. So we amortized SEK 120 million Q1 this year and SEK 110 million Q1 last year, so very similar. But Q4 last year, it was SEK 300 million. And the amortization there, you mentioned it Lamplighters, I think we amortized it, SEK 150 million. Then we also released Cities II and Star Trek. That had also came with big amortization. So those are — Lamplighters, this is 0 now, because we wrote the rest off. Cities II and Star Trek have still some amortizations, but less. So I think that explains the whole decrease from SEK 300 million to SEK 120 million in just one quarter. We take another SEK 14 million as costs for amortizations of acquired businesses and assets. So when we acquire IPs, studios, or games like we have done with World of Darkness, Prison Architect, Playrion, Harebrained Schemes, we — in almost all cases, we allocate the — what we have paid for this — for the asset to specific assets that we amortize over time. We have EUR 2 million as goodwill. EUR 2 million, that’s all we have as goodwill. The rest has been either developed games or intellectual property in some way that that we’ll mostly depreciate over 5 years.

Fredrik Wester: Yes.

Alexander Bricca: So this this item used to be 2021, SEK 22 million per quarter. Now it’s only SEK 14 million. And the reason is that since last year, both Harebrained Schemes and the Prison Architect have been fully amortized.

Fredrik Wester: All right.

Alexander Bricca: So Prison Architect, we acquired it for a decent amount. Now we’re coming out with Prison Architect 2, so the acquired asset still has a very important value for us. But in the book we have already taken all the costs.

Fredrik Wester: Right. So it’s worth 0 on the balance sheet.

Alexander Bricca: On the balance sheet, it’s worth 0, but we know it’s worth something for us.

Fredrik Wester: Indeed. Yes.

Alexander Bricca: So — and we think this is a prudent way to handle acquired assets. It pushes down the profit for us, but it also takes down the risk and builds for the future. What else is included in COGS? Well, other amortizations, SEK 9 million, that’s especially the rent for all the studios that shows up as amortization since changes in accounting rules a few years back. Write downs in the quarter, 0. Q1 last year, we had SEK 10 million on an unannounced project.

Fredrik Wester: Project Smurfs?

Alexander Bricca: Project Smurfs.

Fredrik Wester: Which doesn’t pay anything to anyone.

Alexander Bricca: No. Which doesn’t have to do anything with the brand Smurfs?

Fredrik Wester: No.

Alexander Bricca: It’s just an internal —

Fredrik Wester: Internal name.

Alexander Bricca: — name. And in Q4, of course, it was massive. There we had SEK 171 million on Lamplighters. So in addition to the SEK 115 million amortizations, so significant. What else is in COGS? Well, royalties is sometimes or quite often a big one, SEK 40 million in Q1 this year, SEK 30 million in Q1 last year, and SEK 112 million in Q4 of last year. It was super high in Q4 because we released Cities: Skylines II, which generated significant revenues and therefore significant royalties. Now SEK 40 million is higher than SEK 30 million of last year, because it used to be at SEK 30 million quite consistently.

Fredrik Wester: Yes.

Alexander Bricca: But now the reason why it’s up SEK 10 million is due to Age of Wonders 4. We mentioned this in Q2 last year when we had elevated royalty cost. Because we when we acquired the studio Triumph that develops Age of Wonders 4, we agreed on earn out that is based on how especially Age of Wonders 4 performs, but also Planetfall.

Fredrik Wester: Right.

Alexander Bricca: And since Age of Wonders 4 has been performing quite good, there is — as long as it continues to do that, there will be an elevated royalty to expect.

Fredrik Wester: Right.

Alexander Bricca: And this will continue, well, as long as the game continues to perform, but then there is a cut off — a very last cut off date in 2 years from now. I think it’s April 2026.

Fredrik Wester: Right. Yes.

Alexander Bricca: It’s written in the report, so if you want to check it out. Then we have the last item in COGS, which we called non-capitalized development costs and tech cost for the publishing, you could say. So —

Fredrik Wester: Right.

Alexander Bricca: And the non-capitalized development costs, all of this amounted to SEK 86 million and it was SEK 83 million Q1 last year, so very much the same. It was SEK 100 million in Q4, so it’s down against Q4. And the reason also there was Lamplighters actually, because we — after the release of Lamplighters, we took all the development we did in Q4, because we’d committed to make at least one small DLC and all the development we took as cost. We didn’t capitalize it, but we took it as cost. So that is some SEK 15 million less in this Q1.

Fredrik Wester: Right.

Alexander Bricca: So 86 million all in all. So that amounts to COGS of SEK 268 million. Selling expenses, SEK 55 million compared to SEK 48 million. We touched a bit upon that that. That it’s slightly elevated compared to last year because we’re preparing for —

Fredrik Wester: Big releases in Q2.

Alexander Bricca: Yes. Life by You, Prison Architect 2, now it’s going to come —

Fredrik Wester: September?

Alexander Bricca: Yes, but still we have had some marketing costs for it, and also Foundry. Admin expenses, normally stays very flat. It’s SEK 26 million compared to SEK 23 million last year, so it’s up a little bit. Most of this is due to temporary reasons. We got a couple of more invoices that accumulated and were sent to us in this quarter.

Fredrik Wester: Yes.

Alexander Bricca: So that’s why it’s a bit higher this quarter. Then we have the rows other income, other expenses, adds SEK 21 million to us this quarter, added SEK 7 million last Q1 — last year’s Q1. So this is almost everything is currency movements within the quarter.

Fredrik Wester: Right.

Alexander Bricca: So between us sending the invoice and booking that, to us getting the cash, the difference ends up at this row. And we said compared to last year’s Q1, the currencies didn’t move much. That’s right. But during Q1, it has moved. So the dollar went up from almost 10 to 11 in one quarter, so it’s back up in high levels or the Swedish krona is down —

Fredrik Wester: Yes.

Alexander Bricca: — depending how you want to look at it. Then also mentioned before, financial items, SEK 10.5 million, so this is interest on our bank accounts and bonds and the ways we —

Fredrik Wester: So interest rates going up is not necessarily a bad thing for us, not if you have money.

Alexander Bricca: All right. Let’s move on. Let’s try to identify the trends a bit. So here we have grouped the revenues and profits in 2 years, so 12 months rolling. And here you can see the trend that Fred was talking about, especially for revenue, it’s very, very clear. It has been year-after-year going up quite significantly. Profit is also trending upwards, but there it’s being held down, especially now in Q4 and Q1 by — to a large extent, Lamplighters. It has had a negative impact. If you look at rolling 12 months, it’s probably some SEK 300 million in the negative impact.

Fredrik Wester: Yes.

Alexander Bricca: And that that will continue to show on that yellow line for —

Fredrik Wester: Another couple of quarters.

Alexander Bricca: Another couple of quarters.

Fredrik Wester: Q4.

Alexander Bricca: So we will be reminded about that project, which might be good for us. All right. Cash flow. Now this might need some explanations, but the explanations are quite simple. So cash flow from operating activities amounted to SEK 134 million. Q1 of last year was SEK 245 million. So SEK 110 million better cash flow from operating activities last year compared to this Q1. How come? If the operating profit was almost identical, how come? Well, this is also just due to timing. So it turns out that this year’s Q1, a fairly significant amount or share of the revenues came into March. We had good sales in March. So that the cash flow from those sales don’t show up in Q1 this year. Last year, for some reason, we had the revenues — or for some reason this was due to when we released games and DLCs, we had significant revenues in January February. And also more in the month before, so December of ’22 was significant revenues. So that’s why it looks or that’s why the cash flow is lower in Q1 this year. But if you look at it over further some time, it shouldn’t be any different. Cash flow from investing activities, SEK 48 million, that looks very low and it looks like we have stopped investing. We haven’t. We invested SEK 178 million in game development. So that’s even SEK 9 million more than Q1 last year when it was SEK 169 million. The reason why it nets at only SEK 48 million is that, let’s say, last summer, we decided to invest, SEK 200 million in different bonds —

Fredrik Wester: Yes.

Alexander Bricca: Short term, and they paid back now. And instead of reinvesting it in bonds, we placed them on bank accounts that actually yields better interest. So therefore, it looks or the total investment decreases because the money we got back from the bonds takes down the net. And that’s also why it was extra high in Q3, as you can see. That’s when we invested some SEK 200 million. So it goes the other way now. Equity, non-current assets. Total equity amounts to SEK 2.8 billion, so this is mainly our profit after tax throughout the years, minus what we have paid in dividends. So this is what we have accumulated, you could say, over the years.

Fredrik Wester: Yes. And the assets on our balance sheet there, namely, game development projects.

Alexander Bricca: Yes.

Fredrik Wester: That’s been going down. You’ve mentioned Lamplighters League, for example, with a chunk of that. So we have a couple of internal games there. We have, the Vampire game, Bloodlines 2 there. We have Life by You and a couple of other games. So —

Alexander Bricca: Yes, a few ones that, of course, we haven’t mentioned. I think we have — it says in the report 10. I think we have 10 games in the pipeline.

Fredrik Wester: Yes.

Alexander Bricca: So those adds up to the larger extent of it. But then of course also the DLCs on the live games we have until we release them, they are on the balance sheet. So capitalized development is the biggest part. I think it’s SEK 1.8 billion. The rest is — no, sorry, the total noncurrent asset is SEK 1.8 billion and the capitalized development is SEK 1.5 billion. The rest is acquired IPs that we haven’t yet amortized and also the right of use assets, you know, the way that we account for the rent agreements since a few years back.

Fredrik Wester: Right.

Alexander Bricca: That was all we had planned to go through.

Fredrik Wester: Yes.

Alexander Bricca: We — I know that we have already got some questions.

Fredrik Wester: Yes.

Alexander Bricca: Should we dig into them?

Fredrik Wester: We’ll go straight in.

A – Alexander Bricca: Okay. This one is for you Fred. What is Paradox Interactive’s outlook on its current business strategy, and are there plans for adjustments to ensure long term success? Good question.

Fredrik Wester: It’s a good question. And the fact is long term success requires long term thinking. That’s the first thing. And therefore, we panned out and explained our strategy, last year. Was it in May?

Alexander Bricca: Yes.

Fredrik Wester: On our Paradox Deep Dive Day that we had, and we summarized it into dig in, stock up, and break out, the ways we work with our current games, our sequels and similar games, and the games that are totally new to us. They’re totally new IPs, totally new type of games. And that hasn’t changed, so we’re continuously working on that and working and trying to grow in every area of those. But, obviously, there are other ways we need to focus as well. I mentioned quality as a big important part on how we’re going to grow, because gamers today expect more than gamers did 5 or 10 years ago. So — but all-in-all, we stay true to our strategy and we believe a lot that this is going to bear fruit, hopefully soon, but we’re we’ve always been long-term. So it’s more about making — creating a value for our gamers. It’s going to be the key to the Paradox’s long term success as well. That was a long answer as well.

Alexander Bricca: Good one.

Fredrik Wester: So, Alex, how has Paradox Interactive managed costs in light of recent financial pressures, and what initiatives are in place to ensure operational efficiency?

Alexander Bricca: Also relevant question. But financial pressure, that’s nothing that we experience. We have a very solid revenue, as we could see. We have seen it quarter-after-quarter. I know that the markets — before we have been presenting the quarters for the last, I think, like 5, 6 quarters now — have been worried about what will you — what are you experiencing in terms of market economics. And we have quarter-after-quarter not experienced much, not on a full level. Because the difference we see is that our big franchise, they continue to deliver and sell as ever before.

Fredrik Wester: Yes.

Alexander Bricca: There — we see challenges with new and especially smaller franchises, and that seems to be an industry trend. So we are extremely happy to have at least 5 super strong franchises.

Fredrik Wester: Indeed. Yes.

Alexander Bricca: Yes. So thanks to top line, not much financial pressures. We have very good margins, as always, 35% or 34% Q1 this year. I think we can do better. Cash position, very strong. It’s above SEK 1 billion, and we have 0 debt — 0 debt on the balance sheet. So —

Fredrik Wester: Yes.

Alexander Bricca: But having said that, we are always, of course, prudent about costs. We launched several initiatives — when you came back, Fred, 2.5 years, almost 3 years ago now, where we did a lot of cost — some cost efficiency measures. So, we ended up, closed down 3 studios last year. And this is, of course, related to costs. In PDX, our publishing business, I think we took it down 2 years ago from 250 to 170 FTEs. So I think we were doing a lot of stuff early on that is paying off now. But also there are other things like the implementation of NGT and how we approach high risk projects. That’s also a very efficient way to decrease costs on high risk projects.

Fredrik Wester: Yes.

Alexander Bricca: And I think I’ve answered it pretty much.

Fredrik Wester: Yes, and one way is that we’ve changed also the way we activate costs, because we don’t anymore on new projects that we’re only experimenting with, which is a good way to avoid the sunk-cost fallacy, which is very strong in projects in the games industry in general. So I think that has kind of changed a lot of how we operate and the kind of awareness of how costs work in projects. So that’s been very good for us.

Alexander Bricca: Yes.

Fredrik Wester: But we hope to see the result of that in the coming year or 2 years.

Alexander Bricca: Yes. And in terms of our more proven projects, there we do capitalize from the start. But there we have also adjusted a bit how we invest between the stages and invest lesser in the early stages and more in the later stages, because that all also enables us to adjust the direction without losing too much cost or money or time.

Fredrik Wester: Indeed.

Alexander Bricca: Do we have more questions? Yes. Yes. Fred, will your pricing policy change?

Fredrik Wester: Well, we adjust our pricing policy a bit all the time to reflect a couple of different things. One of them is, obviously, fairness over how a game is priced in different parts of the world. Another is purchasing power. But we harmonize our prices on an annual basis, and adjust a bit prices on new DLCs depending on how much time and money we spend on it internally and the value we believe it holds. So it’s going to be — we’re not going to experiment too much, obviously. But there are going to be some adjustments here and there going forward as well for sure.

Alexander Bricca: Okay. Cool.

Fredrik Wester: So Alex, what criteria does Paradox Interactive use to determine when to cease updating a game? How do sales performance or sequel releases factor into these decisions? It’s a good one.

Alexander Bricca: Yes. So these several reasons or several things we take into consideration. One is, of course, we have limited resources. Cash is not an issue for now, but staff resources is especially, and especially in certain skill sets. So then it comes down to a where do we allocate these resources and get the most out of it. So that is often the reason why we don’t continue to develop DLCs on certain games, because we think that we can get better yield investing those resources elsewhere. But then another way to see it is that, we want to — of course, we continue to make DLCs as long as there is a will among enough amount of players —

Fredrik Wester: Yes.

Alexander Bricca: — that is willing to buy more content. If they want to buy more content, we are happy to continue to develop more content. So, when we release a game, we normally have committed already to make one or 2 DLC, sometimes more, and that we always deliver on. But then we look at what is the market and player saying. Do they do want more or are they happy with the content they have got and don’t want more? That’s the main input to our decision making for that.

Fredrik Wester: There’s a range of factors that play into, if we stop supporting a game. But we want to support all our games forever, if given the possibility. It just has to make some sort of financial sense as well.

Alexander Bricca: And it always pretty much makes financial sense if there are enough players that’s willing to buy a game —

Fredrik Wester: For sure.

Alexander Bricca: — game editions. Was that the last question? No, there are more? Fred, what was the idea behind the Stellaris expansion subscription? Do you think it’s a good value or just an experiment? I’m curious how this model is working out.

Fredrik Wester: Well, it’s — subscription is something we’re still, kind of experimenting with. We started with Hearts of Iron IV and Europa IV. And, it’s panned out fairly well from what I understand, and, it’s a good way for gamers to get access to the full game and try out the full game without having to buy all the DLCs for the game at one go. And Stellaris has built up a strong catalog of expansions so, that — it is a good way to kind of get over the threshold of a DLC value. And we believe that it creates a lot of good value for the gamers. And, we are also, in general, interested in finding new ways for people to access our games, and enjoy our games. So it’s one way. But at the moment it’s been an experiment and so far, I think, people are happy about it.

Alexander Bricca: Yeah. One more for you, Fred.

Fredrik Wester: All right.

Alexander Bricca: How far do you feel you have come in improving the release cadence for DLC?

Fredrik Wester: Right. That’s a good one. That’s the never ending or a never ending story. Right?

Alexander Bricca: Yes.

Fredrik Wester: It’s an ongoing work. I always say it’s an ongoing work as well most things are, so we continue working with things, obviously behind the scenes. But we have different ways to improve this, and one is that you have parallel teams. On the same team you have teams that in parallel work. For example, the Hearts of Iron team works that way — the Hearts of Iron IV team. And we can use external teams from time-to-time. Stellaris, for example, has used an external team to help us, for example, release Astral Planes in Q1. And then we’re also working together with content creators like we did in North African Attire for CK III, but we’ve also worked a lot with content creators on Cities: Skylines. So those are, like 3 main examples on how to release DLCs with higher cadence and hopefully with a lot of value to our gamers as well. So Alex, the refund of Cities: Skylines II – Beach Properties, did that hit Q1 or will it come in Q2?

Alexander Bricca: Right. We, as we have mentioned, we will refund the standalone sales on Beach Properties. So those will show up in Q2. Unfortunately, it was a quite small amount because not many acquired it. We’re not doing any refunds on the Ultimate Edition. There instead, we are making sure that players are getting happy by giving them some more stuff.

Fredrik Wester: Yes.

Alexander Bricca: They’re getting a couple of CCP, Content Creator Packs and Radio Station instead.

Fredrik Wester: Yes.

Alexander Bricca: So there will be a small refund impact in Q2, but it will — it will not be noticeable, I would say.

Fredrik Wester: No. Probably not. And like you said, it’s very important that we compensate everyone about the Ultimate Edition —

Alexander Bricca: Yes.

Fredrik Wester: as well, because they are the core and the most important of our players as well. And that’s it for this quarter. Thank you, Alex.

Alexander Bricca: Thank you.

Fredrik Wester: And it’s — as always, it’s been great to present to you, and please stay in touch on Twitter or X or whatever you call it, or if you have any questions you can always send it in to the [email protected].

Alexander Bricca: Yes.

Fredrik Wester: And…

Alexander Bricca: See you next Q2 presentation. It’s in July I think, July 26 or something like that.

Fredrik Wester: End of July when summer has come to Stockholm, so we look forward to that as well. And in the meanwhile, take care, and see you next time. Thank you for watching.

Alexander Bricca: Bye.

Fredrik Wester: Bye.

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