Business Context and Reporting Period
GRAVITY Co., Ltd. (Nasdaq: GRVY), a Korean online game developer and publisher, issued a financial and business update on May 24, 2006, covering the fiscal year ended December 31, 2005. The company operates primarily through its flagship title, Ragnarok Online, and is currently finalizing US-GAAP financial statements for inclusion in its upcoming Form 20-F.
Key Financial Metrics
| Metric | 2005 Value (KRW) | 2005 Value (USD) | 2004 Value (KRW) | 2004 Value (USD) |
|---|---|---|---|---|
| Revenue | 49.26 billion | $51.85 million | 58.90 billion | $62.00 million |
| Operating Expenses | 51.14 billion | $53.83 million | 24.50 billion | $25.79 million |
| Net Income/Loss | (3.45 billion) | ($3.63 million) | Not specified | Not specified |
| R&D Expenses | 9.14 billion | $9.62 million | 1.92 billion | $2.02 million |
| Commissions | 9.89 billion | $10.41 million | 5.27 billion | $5.55 million |
Note: USD conversions based on an exchange rate of KRW 950 to US$ 1.00. Cash flow and debt figures are not provided in this filing.
Material Changes vs. Prior Period
- Revenue Decline: Revenue decreased 16% year-over-year, attributed to intensifying market competition and the maturity of the Ragnarok Online franchise.
- Expense Surge: Operating expenses more than doubled, driven by a 376.7% increase in R&D (due to STYLIA licensing and development of Ragnarok II and Requiem) and an 88% increase in commissions.
- Profitability Shift: The company recorded a net loss of KRW 3.45 billion in 2005, a negative shift from the prior year, primarily due to the revenue decline and increased costs related to the investigation of accounting irregularities.
Outlook, Risks, and Management Commentary
Management views recent challenges as "growing pains" and confirmed that the investigation into the former Chairman's diversion of royalty payments is complete. The company is implementing stricter corporate governance measures. Strategic focus remains on the "Star Strategy" to diversify the portfolio, with the sequel "Ragnarok II" targeted for release in early 2007.
Risks and Contingencies: The filing highlights risks regarding revenue diversification, collection of license fees from overseas partners, and the ability to compete in a highly competitive industry. The company also notes that financial statements for 2002, 2003, and 2004 have been restated.
Investor Verification Checklist
- Verify the final US-GAAP financial statements upon the filing of the Form 20-F (expected by end of June 2006).
- Confirm the timeline and market reception for the upcoming release of "Ragnarok II" in early 2007.
- Review the restated financial statements for fiscal years 2002, 2003, and 2004 to assess historical accuracy.
- Monitor the effectiveness of new corporate governance measures in preventing future irregularities.
- Assess the company's ability to diversify revenue streams beyond the maturing Ragnarok Online title.