August 15, 2017

Interim report January - June 2017

Second quarter 2017

Revenues amounted to SEK 289.4 (234.9) million, an increase by 23 % compared to the same period last year.
Operating profit amounted to SEK 162.3 (142.3) million, an increase by 14 %.
Profit before tax amounted to SEK 162.3 (142.9) million, and profit after tax amounted to SEK 126.3 (110.6) million.
Cash flow from operating activities amounted to SEK 139.7 (62.1) million, and cash flow from investing activities amounted to SEK -68.9 (-25.1) million.
By the end of the period cash and short term placements amounted to SEK 253.2 (143.2) million.
Earnings per share amounted to SEK 1.20 (1.05) per share.
Revenue from the second quarter of 2017 are mainly attributable to Stellaris, Cities: Skylines, Europa Universalis IV, Hearts of Iron IV and Steel Division: Normandy 44.

Important events in the second quarter

The new game Steel Division: Normandy 44 developed by Eugen Systems was released.
Cities: Skylines Xbox One Edition was released, for the first time ported to console. Cities: Skylines for PS4 was announced with a scheduled release date in August 2017.
Prison Architect: Mobile, developed by Introversion Software and Tag Games was released to tablets.
The new game Surviving Mars, developed by Haemimont Games, was announced with planned release in 2018.
The new game Battletech, developed by Harebrained Schemes, was announced with planned release in 2017.
Pillars of Eternity: Complete Edition was announced to PS4 and Xbox One with scheduled release in August 2017.
Several expansions were released during the period; Death or Dishonor to Hearts of Iron IV, Mandate of Heaven to Europa Universalis IV, Third Rome to Europa Universalis IV, Mass Transit to Cities: Skylines, as well as Utopia to Stellaris.
Paradox own game fair PDXCon took place in Stockholm in May.
Paradox Publisher Weekend at Steam started April 6 and lasted until April 10.
Steam Summer Sale started June 22 and continued until July 5.

Words from CEO

In it for the long haul

There’s an enduring myth about the games industry that has its roots in a time when sales of physical copies in stores was the only way to create awareness and gain revenue. The myth in question dictates that only full-priced games contribute to revenue, and that the first week sales of a new game determines its success or failure.

The truth is somewhat different. Most companies in the industry today count on one out of five games becoming a resounding success straight off the bat. It’s how well companies handle the other four releases that builds long term success.

At Paradox we avoid over-optimistic prognoses and generally keep very conservative forecasts. However we always make sure we have a “go-big” plan prepared in case the game receives an unexpectedly positive reception on the market. The plan enables us to hit the gas pedal quickly when it comes to the development of new content and greater marketing efforts. To put it very simply, you could say that we always hope for the best but plan for the worst.

That philosophy - where we don’t plan for monster hits for every launch, but rather count on longer sales periods where our long-tail generates a large part of the revenue - ensures that we can run the company in a sustainable and long term manner.

Our second quarter 2017 in many ways illustrates this strategy perfectly. We have released two full-priced games - Steel Division: Normandy 44 and Cities: Skylines for Xbox.

Steel Division is co-published together with developer Eugen Systems, which in this case meant we came into the development processes towards the end to assume responsibility over sales, marketing and distribution. The IP is kept by the developer. The pre-order campaign surpassed our expectations significantly and the game has taken a clear position in our portfolio, where we believe it will have a longer period of long-tail sales. Establishing a relationship with Eugen Systems has also been valuable. We now have a working partnership with a developer that has many similarities to our own development studio, Paradox Development Studio. Like them, Eugen Systems are very established and well-known within their niche and have built a large and dedicated community around their games.

It was also exciting to release Cities: Skylines on a new platform. In part because there are not many similar titles on Xbox One, but also due to the game’s popularity. The game shot onto several toplists at launch and the reception has been very positive among critics and gamers. Now we are preparing to release Cities: Skylines on Playstation 4 and Pillars of Eternity: Complete Edition on both Xbox: One and PS4.

We have also continued to develop our DLC-model, with expansions leading to increased user scores and a steady number of growing active players. Stellaris: Utopia, our best selling expansion to date, is an excellent example of this. During the quarter we have also released the expansions “Death or Dishonor” for Hearts of Iron IV, “Mandate of Heaven” for Europa Universalis IV and “Mass Transit” for Cities: Skylines. All of which have contributed to increased activity in their respective franchises.

We ran a Paradox Publisher Weekend on Steam during the quarter, as well as participated in their yearly summer sale. Few things illustrate the strength of our broad portfolio as clearly as the successful sales campaigns during these two activities, something that was also reflected in the financial results from the period. In 2016 we released two large full price titles during Q2 - Hearts of Iron IV and Stellaris. The same quarter 2017 has looked very different yet we increased both our revenue and profit. It’s important to stress yet again that comparing financial results quarterly in the games industry is seldom productive. I have chosen to do so here only to stress the importance of a broad portfolio - comprised of base games, expansions, new and old IPs - and to highlight the important role longtail sales play to create a steady flow of income over time.

At the end of the quarter, we had the privilege to welcome Triumph Studios to Paradox. The formal transaction happened during quarter 3, but we announced the acquisition at the end of June. It’s a genuine pleasure to welcome a new and established studio to Paradox, but it’s also a great responsibility. I, and my management team, spent a lot of time in discussions with the co-founders of Triumph Studios throughout the spring to ensure that we had taken a wide range of perspectives under consideration in the acquisition. We looked at the business case, our development methods, future plans and of course company culture. Triumph Studios are a great and natural fit to the Paradox portfolio and now we look forward to an exciting future together.

I want to finish up by saying a few words about PDXCon. It’s an event we’ve had at Paradox for more than ten years and its main objective has always been to gather journalists and our developers under one roof, to give the games the media coverage they deserve. Our philosophy has always been to let developers and the games take the spotlight and PDXCon has therefore been characterized by accessibility, personality and not in the least a genuine passion for our games.

This year we decided to open PDXCon to the public for the first time. One of the goals was to keep the personal and intimate atmosphere while increasing the number of attendees almost tenfold. During a Thursday to Sunday in May, 750 people from more than 22 countries (including Australia and South Korea) gathered for a proper Paradox party. With a 91% approval rating from our visitors and more than double the media exposure for our titles (compared to GDC and Gamescom) we are more than happy with the outcome of the event. Perhaps the most remarkable feat of all was that, despite of the massive increase in scale, almost every attendee remarked upon how unique the personal interaction with our developers at the event was.

For those of us who have been at Paradox a long time, it’s both inspiring and a real energy boost to meet and talk to fans from all over the world. For our developers, those meetings give a very clear understanding of the massive impact their work has on people's lives. For our new employees (many of whom join us as fans), it’s a fantastic introduction to the company and the company culture that they are now a part of.

For me personally, PDXCon is an annual stimulant and an event that in many ways feel like a family reunion. To be able, now and in the future, to welcome our players into that setting is something that I consider to be a great honour.

Fredrik Wester, CEO

Presentation of interim report

Fredrik Wester and Andras Vajlok will host a live stream to answer report and financial related questions on our Twitch channel on August 15 at 12:00 PM CET https://www.twitch.tv/paradoxinteractive.

Submit your questions before via our forum https://forum.paradoxplaza.com/forum/index.php?threads/quarterly-report-q2-q-a-stream-tuesday-aug-15-at-12-00-noon-cest.1039154/, by e-mailing them to ir@paradoxplaza.com or directly in the Twitch chat. The Twitch chat is open for anyone to view but to post comments or question you will need to create an account.