Hello, and welcome to the Paradox Interactive Q3 2021 Release Stream. My name is Fredrik Wester, and with me, Alexander Bricca, the CFO of the company. Cool. We released the report this morning, and we're gonna walk you through it with a couple of comments to start. I'm gonna start with comments from myself, and then we'll move over to the numbers which Alex will take you through. All in all, you could say the quarter is disappointing for many different reasons. It's on revenue, the worst quarter in two years. On profit, it's the worst quarter ever in the company history, which has to do with a write-off of a couple of different projects that have been going for too long and have been too costly. Combined with the fact that we haven't released too much in the quarter either, which brings down the revenue a bit. The effects of the write-offs are typically due to low control internally that we should have maybe been able to cut the projects earlier on in production. We have taken measures now to make sure this doesn't happen in the future. There's a lot to do, obviously, but we're already on the ball. The steps we're taking now to both sharpen the dev and the publishing areas are a pipeline of projects after cancellations. We are reallocating resources for more promising projects. We're starting projects in a smaller scale and trying to scale them up instead of starting projects big, which costs a lot of money and will be very expensive before we know that they're gonna be finished or not. It's kind of a new way to approach new games. It doesn't mean we're not taking risks. It doesn't mean that we're not engaging in new gaming projects. It just means that we're taking smarter and better, in our opinion, risks than we've done in the past couple of years. We're also overviewing our framework for quality assurance, see what do we need to focus on to achieve the quality we can stand behind. We hope to, as well, as a part of this process, to bring decisions closer to development as well. Bring all decisions in the company, doesn't only have to do with development teams, also on the publishing side, bring decisions closer to where the problem actually is. Obviously, refocus a lot of our activities on actual revenue driving activities instead of only sourcing for new projects that are gonna come out in three-five years. Long term, we're gonna continue to develop and maximize a couple of niches where we're dominant and where we do a good job. That's mainly strategy and management games. We're gonna play to our strength. In these, we know we have over five million active customers in October, so we have a lot of people who actually play our games and enjoy what we do. We're obviously gonna be better at prioritizing where we are focusing our resources, so not all the eggs are in the same basket. We're also gonna be more conservative when estimating and forecasting external projects, so we're not putting false hopes into something that could have been. Of course, we're gonna explore more ways to make money as well. New revenue streams, more monetization models, and new, more maybe innovative games as well, but in a smaller scale. Things that makes us develop as a company and makes us take new steps in new cool gaming directions as well. Summary of the releases this quarter, it's been one expansion, one content pack, which is a bit dry, but it's what we managed to release. We had a strategy weekend on Steam that brought up the sales a bit, not enough to beat anything in the last two years, as I mentioned, but still a bit up. The top earner for this quarter was Cities: Skylines, Crusader Kings III, Europa Universalis IV, Hearts of Iron IV, and Stellaris. What's worth mentioning here is that a game like Hearts of Iron IV today has more than twice the number of players that it had in its release month, which is really impressive for a game, a single player game of the type that the Hearts of Iron is, which speaks a lot to the dedication of the Hearts of Iron team and the dedication and passion of our gamers as well. We have a lot to work with. We have a lot of fans out there who enjoy playing our games and hanging out with the company in general. We have things that we're gonna do after the quarter has been closed as well. Some of these has already been released, like Origins for Europa Universalis IV. Necroids Species Pack for Stellaris Console was released just the other day. Surviving the Aftermath is released today, so I urge you all to go and buy the game and play it on Steam. It's a neat survival management game that takes place in the near future. We also have Make It Count DLC for Empire of Sin, Aquatic Species Pack for Stellaris, and No Step Back DLC for Hearts of Iron IV, all releasing by the end of November. There's a lot of activity going on, and we look forward to bringing this to market. With those words, I leave the word to Alex- Thank you. For all the numbers that we have. Yes. Let's have a look. Revenues for the quarter came in at SEK 289 million. That is 42% lower than Q3 of last year when we did SEK 495 million. That, as most of you might remember, was a very special quarter when we released Crusader Kings III. Very successful release. It sold almost one million copies already during the first month, and that itself generated roughly SEK 200 million. Without that game, we are of course down quite a lot. As Fred mentioned, what did we do in Q3 in terms of releases? Well, the big release was the Surviving Mars DLC, Below and Beyond. But that is a considerably much smaller game, of course, in our top five contributors. Also, we were not super happy with the quality of the game, so that also made the revenues come in less good. During the last quarters, we have talked a lot about FX or foreign currencies and how it impacts the quarter's revenues compared to last year's quarter's revenue. If we compare Q3 this year and last year, it's not much change. Fairly stable FX development since a year back. Top five contributors, Fredrik mentioned them, the five usual suspects which makes up our core franchises. Operating profit for the quarter reached SEK -45 million. Of course, impacted quite a lot by the write-off of SEK 135 million. Last year's Q3, we had write-offs of SEK 28 million. That was not super small. It's still more than we have had on average over the last years if we compare the write-offs in relation to the capitalized development. If we would have had more normal write-offs of 1.5%-2% of the capitalized development, we would have made the result of SEK 70 million this Q3, to give you a perspective of how much these write-offs of the kind of cleanup that we have been doing has made. Top-line revenue, not much releases compared to same quarter last year and the one-off write-off that came this quarter. That makes the whole pretty much the whole difference between a record quarter like last year of SEK 188 million in operating profit, and this year's kind of record profit on the other extreme, SEK -45 million. Operating margins -15% compared to +38 last year, and profit before tax came in at SEK -45 million compared to SEK 187 million last year. Profit after tax, SEK -33 million versus SEK 149 million last year. Equity to assets ratio increased a lot to 65%. That has to do with the fact that assets have come down a little bit due to the write-offs. Therefore, that ratio goes up. Employees, we have continued to increase a lot, especially after the summer. Now when we close the quarter, the Q3 of the year, we were 742 colleagues. One year ago, 606. Quite a lot of increase during a pandemic and during a work-from-home situation. This chart shows our revenues in the green line and our three main costs in the yellow, which is the COGS, the blue, the selling expenses, and the red, the administrative expenses. There you can see that the revenues is quite volatile with if you match this with what we have released in the quarter, you will see that it matches it very well. Fredrik mentioned it's the lowest revenue for eight quarters. If you go back and check column Q3 2019, you will see that we had very similar revenues at that point. Cost-wise, the total cost of the COGS, the selling expenses, and the administrative expenses amounted to SEK 342 million compared to SEK 303 million last year or Q3 of last year. In those SEK 342 million, we have SEK 135 million of write-offs. With the same write-offs as of last year, the SEK 28 million, the total cost in Q3 would have been around SEK 237 million. Which would have been the lowest cost for eight quarters. If it wouldn't been for this write-offs, the cost would have been fairly low. Let's dive a bit more into the COGS. We can go back in the COGS. The yellow line that represents all our costs for our nine internal studios. The cost for the development that is performed by the external studios we have, the royalties we pay for the games that have been developed by external studios and are performing well. We also include depreciation on licenses and brands that we have acquired over the years. We also have costs in this line for the publishing organization that works with tech development. It can be game development or development support or tech maintenance or hosting, but performed by our publishing organization. All in all, SEK 278 million in COGS, compared to SEK 219 million the same quarter last year. In those SEK 278 million the biggest cost is the write-off of SEK 134 million. Amortization, which means the planned amortization of the capitalized development reached SEK 45 million in Q3 this year, which can be compared to SEK 61 million in Q3 one year ago. The reason why we have substantially lower amortization one year later is that a year back, we started with a new amortization model where we are more aggressive and take more costs early on. That applied for Crusader Kings III and Empire of Sin. Now when we have gone through the first half year since launch of both those games, we are seeing quite small amortizations left to make. Therefore the cost goes down. What else do we have in the COGS? I mentioned the amortizations we do on the amortized business. We allocate as much as we can to assets when we acquire companies like Harebrained Schemes, when we acquired an IP catalog like World of Darkness, when we acquired Triumph, Playrion, Prison Architect. We allocate the purchase amount to assets, and we depreciate those assets mostly over five years. That means that every quarter we take SEK 20 million as an additional cost due to depreciating all these assets. You can of course debate whether the value of these assets go down or go up, but we include the costs every quarter. SEK 20 million this quarter. It was very similar Q3 of 2020. Royalties and the tech cost, as I mentioned, SEK 71 million Q3 this year, compared to SEK 94 million last year. That has gone down a little bit. Royalties are lower because we had less sales in the quarter from especially Cities compared to one quarter ago. Let's move on to selling expenses, the blue line. That goes down this quarter, and it's SEK 38 million compared to SEK 51 million last year's Q3. It jumps a bit between the quarters depending on releases of new games. Last Q3 or last year's Q3, we released Crusader Kings III, and we also started to prepare for the release of Empire of Sin, so therefore we had significant selling expenses of the SEK 51 million. This Q3 has been very slow in terms of selling activities, and therefore we come in with considerably lower selling expenses. Administrative expenses on the red line, similar SEK 26 million this year compared to SEK 33 million last year. We are doing a decrease there as well year-over-year. Normally we see both in revenues and costs lower Q3s because staff is on vacation, so less activities, less costs and less revenues. It was last year's Q3 that was a bit exceptional. Let's move on. This is a chart that shows the quarterly revenues in the green bars and the quarterly profit or loss on the yellow line. As you can see, up to Q3 last year, we had quite, I would say like a stable growth or let's back up. Up to Q3 two years ago, you could see that it was very volatile. Revenues and profits fluctuated quite a lot quarter to quarter. We went into a period of four quarters where it looked to be very stable. When we announced Q3 last year, I pointed out that this stability isn't real in the sense that it's a trend that we should expect going forward, but we should expect a more fluctuating result in revenue going forward, as we have seen in the past. Now, we have something that looks like a downward going trend in terms of revenues. I'm gonna say the same going forward. I'm gonna say the same as I did one year ago, that going forward it's probably gonna fluctuate quite a lot on a similar extent that it has been if you look back at the period before Q3 2019. That is much more in line with how it is at Paradox since revenues and profits are so dependent on the content that we release in the quarter. Of course, this is just a visualization of the numbers we've gone through. The line furthest to the right shows the impact of the SEK 134 million write-off of the canceled projects. Let's move on to the next slide. This is summarized the rolling twelve months of the last four quarters. We did some SEK 1.5 billion in revenues almost the last twelve months, and SEK 239 million in profit before tax. This has a downward going trend, or it has had a downward going trend, and that has quite a lot to do with I would say four things. We compare with very strong quarters up to a year ago where we had I think we had SEK 160 million in profit before tax almost each of the four quarters. Very strong comparative numbers. After that, we have gone through quite a big hit from the U.S. dollar going down. In Q1, in Q2, we saw, I think there were drops of 12%-14% compared to a year back. We have released less content than we had planned for, plus the write-off that we have taken. All these four things add up, of course, and makes it to a downward trajectory up until this quarter. Cash flow. Green bars, cash flow from operating activities came in at SEK 59 million compared to SEK 213 million Q3 last year. Total cash flow from the operating activities during the last four quarters amount to SEK 850 million. In the quarter, we invested SEK 151 million in game development. Q4 summarized, SEK 711 million invested in game development. So SEK 850 million in operating cash flow, SEK 711 million in investment in game development. And that is how we want to spend our cash. We want operating activities to generate quite a good extra cash, and we want to invest as much as possible of that into game development. Of course, from quarter to quarter, this varies a bit. Some quarters we have a positive cash flow all in all, and some quarters like this, we have a negative cash flow. This quarter is quite similar to the Q3 of last year in terms of cash flow from the operating activities. Let's take this last slide before we can go to the questions, I think. Equity and fixed assets. Green bars shows our total equity, yellow bar our total non-current assets. That is especially our capitalized development, but also the value of our acquired IPs that we haven't depreciated yet. Also since a year or two back, due to accounting changes, we have all our lease agreements, our office rent agreements as an asset and as a debt. What this chart shows is that all our non-current assets are covered with total equity. We have financed the growth in assets, especially capitalized development, by equity generation and not by debt in any way. All right. Let's see. I know that we have gotten in quite a lot of questions. How much time do we have? Yes. Yeah, we have. Let's dig in. 25 minutes, I think. We're gonna take every other question. I'll take one, Alex takes the next one. Good We'll move from there. Alex asks the questions because he doesn't need reading glasses. Fire away. Okay. The first one to you then. Are you changing the focus of all dev teams to favor quality over quantity now in terms of buggy, game balance, etc? It's a very good question, and I would say that, first of all, there is no inherent conflict in between the two, even if some a lot of content needs more time and more effort to actually be of the quality that you want it to be. But we obviously strive for both. There's a lot of things that needs to be done structurally, internally and externally as well for us to make this work. Some of it has to do with method, about how we work. Some of it has to do with where the decisions are being made, and we want the decisions to be made closer to the team and within the framework of the goals that we've set for the company. Why not both? If I only have to choose one, I would choose quality still. That's it. Good. Next question. What are some real steps your company has taken to improve the welfare of your coworkers since the leaked questionnaire? All right. We have communicated this before. We have engaged an external firm that is helping us to investigate to what extent there have been different forms of harassment or discrimination over time. This we can do two things with. One is to take actions in the actual cases that have occurred. The other is, what the firm is also helping us out with, is how can we improve our processes? Because we have quite a lot of processes in place, but since we haven't detected 100%, we want to do that. They are helping us to structure processes so they are a bit better, so we can detect and consequently prevent and correct any kind of harassment or discrimination as early as possible. The external firm have performed a lot of interviews. They recently sent out a survey, and they will present the findings for us and recommendations for further actions. The plan is to do it by end of this year. At that point, we expect to know more, but we have already also started to train the managers again in victimization, how can they detect and how can they prevent the victimization going forward. All right, next question. Can you give us any legally safe details on games that have been canceled over the past couple of years? Genres, anything? What has the reason been? Right. No, I can't really, because we're not gonna focus on the games that we've closed. We're gonna focus on the games that we're gonna develop going forward. Some of the games might have shown promise, but we were not able to handle it. Some of the games were just not up to the standard that we expect at Paradox, and therefore we had to close them. Like I said, the most important thing now when we move forward is that we use a process to close. If a game isn't good enough, we'll detect it earlier on in the process, and will not cost as much because the most important thing in this whole process is not to be scared about making new things because innovation and doing new things and trying new ways to operate has been a part of the Paradox DNA since at least I joined. As long as we are still in the operational mode that we can try new things and close the games early that doesn't work, I think we're in a good spot, and this is what we're doing at the moment. Thank you. Next question. Will you, going forward, adjust your approach to capitalizing costs and be more prudent in this area, or will you continue as before? That's a good question. We have already done two changes that we believe will, in the long run, mean less write-offs. The first and most fundamental change is how we approach new projects, and we approach them differently now, dependent on whether it's a proven game or it's an unproven game. With proven games, which means that it's an IP, a studio, a genre where we have proven to have a track record before, then we can invest substantially from the start. Why would we like to invest substantially from the start? Well, it's to prioritize speed and quality from the beginning, regarding these games. With unproven games, that is the opposite. There we will invest less at the beginning of each project, but be ready to ramp up, but only when we see good signs that makes us confident in that game project. I think this in itself means less investment in high-risk projects. In addition to this, we have also changed how we capitalize on the unproven project. The proven project, we start capitalizing as before when the project is launched, when the board has approved the project and the project has gotten a budget. With the unproven projects, we wait, and during the first development stage, we take all the cost as cost over the P&L and start only to capitalize when we have moved further to later development stages. This is a question for you. Paradox has grown the headcount of their teams by a significant amount, but we don't see this in product quality or quantity yet. Quite the contrary, DAU numbers dropped. No new games in 2020. What are the driving forces behind this drop in efficiency, and what are your plans to get more efficient levels again? Big question. I would say it's twofold, it's probably more explanations than that. One of them has been some teams have been reshuffled, some people have quit, we have to replace, which takes time, and it leads to less efficiency. Another thing has been COVID and work from home, which brings down efficiency a bit. Obviously, we have also been focusing more on games in the future than we have on our current releases and our current games that actually make up for a lion's share of the revenue that we make today. We need to approach all these areas in order to succeed in the future. I think we're on our way to arrive there, and we're working on it as we speak. All right. Shareholder returns. With the current share price at its three-year low, would you consider starting share buybacks? It's an easy answer to that, no, because we can't buy back shares on the list we are at First North. Yeah, so that's a short answer. If we would be allowed, this would be, of course, a shareholder question. Next question. How are the mobile ambitions going? Seems you made a spin-off of Stellaris and bought at least one studio, the airline manager one, but I don't recall hearing of many initiatives since. Is growing on mobile still a priority? With the things that we have, like Playrion in Paris, it's obviously a priority. It's an internal studio, but I wouldn't point out mobile gaming as a specific priority because there are so many other areas of priority that we have first. We still see mobile as an interesting platform where we think our IPs belong as well and where we should grow. It's not a top three priority today to bring things actively mobile. All right. Under this new leadership, will IP and company acquisitions carry on at the same pace or slow down? That might be because of you, but I will answer it. I would say it's not gonna slow down. It's not gonna change much. We're always looking for good IPs and good studios that we can use as production resources to complement or add on the assets we already have. Even though Fred hasn't been the boss in his role as Executive Chairman, he has been the most involved in the M&A activities and been responsible for the acquisitions of Prison Architect, Playrion, et cetera. I wouldn't expect it to change. What I really loved about Paradox was that the company had a strong portfolio of profitable franchises, but also had the courage to reach for the stars, so-called moonshots. Is this still in your DNA? Will you still go for moonshots now and then? Of course, we will. I think that is spot on what we're trying to achieve. Obviously, every time you release a game, you want the game to succeed, so you have high hopes for everything. It's just that the things I mentioned before about how we run projects, the way that we try to make these moonshots happen, like we did with Cities: Skylines, it was a part of a long process and a long planning together with Colossal Order, the developers. Of course, we will not disregard this. The plan for every game that we make and everything that we sign on our more maybe experimental stance in some cases and more safe ways otherwise, is to have another breakaway hit, and they will come sooner or later, hopefully sooner than later. All right. Will you continue to support console editions of your games? Can we expect more console ports in the future? Yes. We have quite a lot of fans that like to play our games on console. We will for sure continue to come out with our games on console. Next up is Crusader Kings III and the Shadowrun that is coming out. Well, we haven't announced any date yet, but hopefully in the not too distant future. It was reported that several games were canceled to focus on the company core. Are any new games considered? Would some games get more attention? Will changes be made in the update and DLCs for your core games to reflect this shift in focus? We got several questions in one. Well, first of all, we already have our core games working on our core franchises, and they will, it will be business as usual for them. The games that were canceled was not mostly due to lack of focus, it was due to lack of perceived quality. So it wasn't really, like, only the focus of the games. Are new games considered? New games are considered every day at this company, and we have this discussion every day, almost every hour. We're considering, I would say, we're looking at a handful of games every week, at least. We're gonna pick games that we think fit our portfolio, that our gamers wanna play, and that we can continue to support for a long time. Things that match really well with the company DNA, basically, are the types of games that we're looking for. All right. Any news on Bloodlines 2 or its developer? No, not much. Bloodlines 2, game that we think has very high potential, very strong fan base for the IP, a big RPG market. The new developer is doing quite well, and we are happy with the progress of the project now. But it's still quite some time before we can start to talk about release dates ourselves. We prefer to give the studio a situation where they can focus fully on the game development and not having to address fans reaching out to them. Therefore, we have so far not disclosed the name of the studio, and we are very happy to keep it that way for still some time. Do you have more question? Yes. Publishing business. Do you see publishing play a larger or smaller part than today in the PDX future? What makes external studios choose Paradox as a partner? If we start with the external studios, I think, if you work with someone who are super focused at bringing the kind of experience that we're bringing to the market, if you wanna do that too, I think Paradox is a great partner to team up with, because we know the gamers really well, and we know the market really well. If publishing is a bigger or smaller part of Paradox portfolio, we'll see. Some of the games that we have right now show a lot of promise. They're far from being released, though, so you never know. On the other hand, a couple of games that we have in development show a lot as well. It's hard to tell what the percentages are gonna be like between published games and the internally developed, but I think it will be an interesting race to follow in the coming two years because we have a lot of cool stuff in the pipeline. Good. Do you have any new IPs in development? We give away very little, but I think I can say yes. We have disclosed that we have 15 new games in development, whereof four have been announced. Out of these 15, some are sequels on existing games, and some are new IPs. To point out when this topic is on the table, these 15 games, they include, for example, ports to console, like Crusader Kings III and Shadowrun, but they do not include the DLCs that we do on our live games. All those DLCs are on top of these 15 new games. Okay, let's try to mix them up. A lot of financial questions, but I'll try to make one for you here. Fredrik, what is your initial analysis of why quality has been lacking both from internal and external content in the past 12 months? Well, I think it's, like I said, it's a mix of different factors. You have the COVID factor, which you shouldn't blame external factors too much. I also think a bit of shuffling on the teams has had some things to do with it. Actually also, you shouldn't underestimate that, a willingness from the teams to deliver on time and budget. It's been a mix of different features, but I think we have a good plan going forward on how to address the recent quality issues and how to tackle it in the near and far future. We're cautiously optimistic on that part. Right. Capitalized development was down quarter-over-quarter. Is that due to the changed focus from external development, even lower run rate or something else? It depends what you mean. Capitalized development as an asset on the balance sheet is down versus last quarter because we took a big write-off of SEK 134 million. In terms of investments into new game development, we have less in Q3 than in Q2. That has to do with one-off effects, I would say, from the fact that in Q2, we paid a little bit on a big project in advance, for example, that we didn't have to take those costs. We took those costs in Q2 instead of Q3. Yes, in general, it depends a bit when we get the invoices for the external developers milestones. They can be substantial. Sometimes we can get two milestones in one quarter or even three, four milestones in one quarter, and then very little in the next. It can fluctuate quite a bit due to that. Of course, one of the bigger projects that we terminated that we communicated, I think it was the last day of September, that was for an external studio, and that will have an impact on the capitalization going forward, that it will be less investment in capitalized development on that project. That didn't show up in Q3 already. What else? A Victoria 3 question for you maybe. Yeah, sure. Why not? Does Victoria 3 have the potential to be a core franchise? Yeah, the six core franchise. Yeah. How big are your ambitions for the game? Victoria 3, yes. I played it quite a bit myself. No, it's a good game. It's a great team. It's a great and dedicated team who has a strong vision. I'm not gonna put too much pressure on the team by saying it's a great game, but I enjoy it. That's all I can say. I hope we can continue to support this game for a long period of time. Then Victoria has historically been more niche than our other titles, but I think there are elements in this game that might make it more accessible without saying too much. I really love the game. That's all I can say. Right. Soon I'll start talking about features in the game. That's not the purpose of this stream. Okay. Let's take a couple more questions. Cash flow, that is more purpose of this stream. Cash flow looked light in the Q3. Given the write-downs were non-cash, we expected cash to be higher. Can you talk around the puts and takes on cash flow, both in the Q3 and what you expect for the full year? Yes. Especially the cash flow from the operating activities, that varies quarter to quarter, of course, with the revenue. It was low this quarter, this Q3, but it also varies with when we get the payment. If we had a lot of revenues at the beginning of the quarter, we will have the cash from that revenue. If we had a lot of revenues in the last month of the quarter, we won't have any cash on that. If you look, for example, at the Q3 two years ago, 2019, we had similar cash flow from operating activities at that point. I wouldn't speak of any kind of trend, but I agree it was low, the operating cash flow this quarter. Cool. Maybe, let's see if we have anything else. Yeah. Approximately how many of your employees studios are working with your core franchises, and how many is working with unproven games? It's hard. We're not really disclosing those numbers, but it's a good question. Yeah, it's a relevant question. I mean, you could say that, for example, everyone here in Stockholm at PDS works with proven games within our core segments. Yeah. Yeah, for sure. That's our biggest studio. There was one more question up here, I think. Can you talk about underlying profitability in the quarter excluding the write-downs? Is the gross margin higher when there are fewer releases in the mix? Should depend on how the release does, right? Yeah. Yeah, yeah. The worst thing we can have now with this degressive amortization model is to have a release in the quarter of a fairly big game like Empire of Sin that doesn't sell well. That is the worst thing from a profitability standpoint because we take a big amortization on the capitalized development, but we get very little revenue. The best thing we can have is release of the DLCs on our big top five franchises because we get a lot of revenues and the capitalized development for developing those DLCs are normally relatively low. Relatively low, exactly. All right. Cool. Are we gonna call this a day now and just say I think so? Yeah. Thank you so much for watching. It's been a pleasure to present this and we would like to welcome you back next quarter with some more positive numbers, hopefully. Let's hope for that. Mid of February for the Q4 report. Perfect. It's a date. See you then. See you then. Thank you for watching. Bye.