Paradox Interactive Q1 2019 Results – Record Investments Reduce Profits


Sadly this is a bit of a late look at the Q1 results of Paradox Interactive (FRA:ETA), primarily due to the company being one of my pet projects when it comes to financial coverage and the fact that I've either been in Paris or deathly ill. I don't believe there is a connection. But enough about me, let's talk about the ongoing success of the Swedish publisher which had a record-breaking year in 2018.

Actually, the first quarter doesn't look too strong Paradox Interactive, not until you look a little closer. As found on the quarterly report, revenue for the three months ending March 31st, 2019, actually fell 11% year-on-year, to SEK 238.3 million. Operating profit took a larger tumble, falling 55% YoY to just SEK 62.7 million.

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Paradox Interactive: Investing in the Future

The CEO of Paradox Interactive, Ebba Ljungerud, made it quite clear as to the cause of this sizable fall in profits as a result of record investments by the publisher and developer.

During the quarter, we invested more in both game development and marketing than we did in any previous quarter. Among other things, we carried out our largest marketing campaign ever when we announced the game Vampire: the Masquerade - Bloodlines 2. We have also gradually invested in building an organisation that will be able to develop and publish our growing game portfolio.

This was also continued by stating

These investments in development, marketing and organisation need to be done well in advance of the games being released and thus before we get a return on these investments. This means that our margins are lower when we are in a strong development phase, an effect that will be very noticeable when we simultaneously have a quarter with fewer major game releases.

The latter point is the clearest point as the three months covering the first quarter saw very few releases. There were no releases at all within core games, with the company also only seeing the console re-release of Stellaris, with three expansion packs for back-catalogue titles. These are Man the Guns for Hearts of Iron IV as well as Parklife and Green Cities for Cities: Skylines. Those games that have been bought as pre-orders during this quarter, such as Imperator: Rome, only count as revenue when the game is released.

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Still, despite the lack of new releases, the expansions and other legacy titles have performed above expectations. Listed titles in this area are Cities: Skylines, Hearts of Iron IV, Stellaris, Europa Universalis IV and Crusader Kings, frequently strong titles for the company.

Paradox and the Grand Strategy

There's little doubt that the games that made Paradox as a developer and publisher are grand strategy titles before the company expanded elsewhere. This is why the Hearts of Iron, Europa Universalis and Crusader Kings titles still perform incredibly strong for the company.

This isn't to say that the company is focusing just on this though. While the current financial year will only see the expansion of current titles as well as full releases of a similar genre, Paradox is expanding. A game that has already been released, Imperator: Rome, has already been a successful launch for the publisher. The company had this to say about the game:

Imperator: Rome is developed by our Stockholm-based studio Paradox Development Studio and is now the fifth active grand strategy game in our portfolio. So far, Imperator: Rome has exceeded our sales targets.

However, the company has noted that user-reviews have been lower than expected, despite a strong reception from critics. As such, they are looking to work with these user-reviews and working on the game's roadmap as a direct response to them. This is the primary way in which the company has always worked on their titles, helping to increase user satisfaction and help with the long-tail strategy the company has had in place for a long time.

Further afield, Age of Wonders: Planetfall will launch in August. Also, expansions for current titles will also be released. Last week saw the Green Planet expansion of Surviving Mars, with next month bringing us the Urban Warfare expansion for BATTLETECH. All of this should help to build towards a strong year for the publisher, with the companies biggest named title coming in 2020, this being Vampire: The Masquerade Bloodlines 2.

All things considered, you should expect a strong and stable year for Paradox Interactive, with investments building into what will likely be a record year pushed by Vampire: The Masquerade Bloodlines 2 in 2020.

The author has no position in any of the stocks mentioned. WCCF TECH INC has a disclosure and ethics policy.