Business Context and Reporting Period
Company: GRAVITY Co., Ltd. (NasdaqGM: GRVY)
Reporting Period: First Quarter ended March 31, 2014 (Unaudited)
Filing Date: May 22, 2014
Business Overview: Gravity is a South Korean online game developer and publisher. Its principal product is Ragnarok Online, commercially offered in 60 markets. The company also develops mobile games and provides character merchandising services.
Key Financial Metrics
| Metric | Q1 2014 (KRW) | Q1 2014 (US$) |
|---|---|---|
| Total Revenue | 10,767 million | 10,113 thousand |
| Cost of Revenue | 9,467 million | 8,892 thousand |
| Gross Profit | 1,300 million | 1,221 thousand |
| Operating Expenses | 4,178 million | 3,924 thousand |
| Net Loss (Parent Company) | 2,969 million | 2,789 thousand |
| Cash & Short-term Instruments | 46,776 million | 43,936 thousand |
| Total Assets | 83,855 million | 78,763 thousand |
| Total Liabilities | 17,789 million | 16,709 thousand |
Material Changes vs. Prior Periods
- Revenue Trends: Total revenue increased 4.6% quarter-over-quarter (QoQ) but decreased 8.7% year-over-year (YoY).
- Royalty/License Fees: Decreased 25.8% QoQ and 46.3% YoY. The QoQ drop was due to the absence of a lump-sum license fee recognition for Ragnarok Online II in China that occurred in Q4 2013 prior to its termination. The YoY drop was driven by lower revenues from Ragnarok Online in Japan.
- Subscription Revenue: Increased 107.5% QoQ (driven by Ragnarok Online in Korea) but decreased 3.0% YoY (due to declines in the US and Canada).
- Mobile Games: Increased 15.5% QoQ and 85.8% YoY, driven by "Ragnarok Online – Uprising: Valkyrie" and the January 2014 launch of "Road to Dragons."
- Profitability: The company recorded a net loss of KRW 2,969 million, a significant improvement from the KRW 13,538 million loss in Q4 2013. This improvement was primarily due to the absence of KRW 5,088 million in impairment losses on intangible assets recorded in the prior quarter.
- Expenses: Operating expenses decreased 61.7% QoQ and 29.8% YoY. The QoQ decrease was largely due to the non-recurrence of impairment losses. The YoY decrease was attributed to reduced salaries (fewer employees) and lower R&D expenses.
- Liquidity: Cash and short-term financial instruments totaled KRW 46,776 million as of March 31, 2014.
Guidance, Outlook, and Risks
- Forward-Looking Statements: The filing contains standard forward-looking statements regarding future performance, subject to risks and uncertainties. The company assumes no duty to update these statements.
- Key Risks/Contingencies:
- Revenue Volatility: Significant reliance on specific titles (Ragnarok Online) and regions (Japan, China, Korea). The termination of the China license agreement for Ragnarok Online II in November 2013 materially impacted royalty revenue.
- Impairment Risk: The company recorded significant impairment losses on intangible assets in Q4 2013, indicating potential valuation risks for its game assets.
- Market Dependence: Subscription revenue declines in the US and Canada highlight regional market risks.
- Management Commentary: Management highlighted the successful launch of "Road to Dragons" and the growth of mobile game operations as key drivers for the current quarter's mobile revenue increase.
Investor Verification Checklist
- China License Termination: Verify the long-term impact of the November 2013 termination of the Ragnarok Online II license in China on future royalty streams.
- Mobile Game Sustainability: Assess the longevity of revenue growth from "Road to Dragons" and "Uprising: Valkyrie" to determine if mobile growth can offset declines in legacy PC subscription revenue.
- Impairment History: Review the nature of the KRW 5,088 million impairment loss in Q4 2013 to evaluate the risk of future write-downs on intangible assets.
- Regional Exposure: Monitor subscription revenue trends in the US and Canada, which showed a YoY decline, to gauge market saturation or competitive pressure.
- Cash Burn Rate: Although the company holds significant cash (KRW 46.8 billion), verify the runway given the continued net losses and the absence of the one-time Q4 impairment charge in future quarters.