GRAVITY Co., Ltd. annual report, Q4 FY2021

Business context and reporting period

Gravity Co., Ltd. filed this Form 20-F on April 28, 2022, reporting on the fiscal year ended December 31, 2021. The filing is an annual report, not a standalone fourth-quarter report; it does not provide a clear set of Q4-only financial results. Financial statements are prepared under IFRS as issued by the IASB and presented in Korean won (₩).

Gravity develops and publishes online and mobile games, principally under the Ragnarok franchise. Mobile games generated 77.4% of 2021 revenue. The company reported 6,948,900 common shares outstanding at year-end.

Key financial metrics

Revenue mix shifted: online game revenue declined 15.8% to ₩75,370 million, while mobile game revenue increased 7.3% to ₩320,164 million. Other revenue was ₩18,404 million, up 1.8%. Ragnarok X: Next Generation contributed ₩126,336 million (30.5% of total revenue); Ragnarok M: Eternal Love contributed ₩112,486 million (27.2%); and Ragnarok Origin contributed ₩66,385 million (16.0%).

Cost of revenue fell 6.2% to ₩224,173 million, largely reflecting lower commissions and costs associated with Ragnarok M, partly offset by higher costs for Ragnarok X. Selling, general and administrative expenses rose 21.2% to ₩75,631 million, including advertising expense of ₩35,948 million. Research and development expense increased 10.2% to ₩16,570 million.

Liquidity, debt and cash flows

• Year-end cash and cash equivalents were ₩99,105 million, down from ₩110,632 million. Short-term financial instruments were ₩148,000 million, up from ₩71,000 million; together these were ₩247,105 million.
• Operating cash inflow was ₩74,183 million. Investing activities used ₩82,471 million, including a ₩77,000 million net increase in short-term financial instruments. Financing activities used ₩3,306 million, principally lease-liability repayments. Ending cash decreased by ₩11,527 million.
• Total liabilities were ₩80,685 million and equity was ₩246,841 million; the reported debt ratio was 33%. The company reported no long-term debt obligations. Lease liabilities totaled ₩8,730 million.
• Management said available cash and expected operating cash flows should cover capital needs through at least 2023, while cautioning that changed conditions or significant investments could require additional funding.

Material changes versus the prior comparable period

• Revenue growth was modest overall, but the business mix moved further toward mobile licensing: mobile royalties and license fees rose to ₩155,518 million from ₩46,364 million, while mobile micro-transaction revenue declined to ₩164,646 million from ₩251,960 million.
• Ragnarok X revenue increased sharply following its Southeast Asia launch in June 2021. Ragnarok M revenue fell to ₩112,486 million from ₩177,192 million. Online revenue declined, mainly because of lower Ragnarok Online revenue in Thailand after the prior-year relaunch comparison.
• Gross and operating margins improved as cost of revenue declined, despite higher marketing, salary and R&D spending. Income tax expense rose to ₩33,421 million from ₩25,455 million; the effective tax rate increased to 34% from 29%.
• Online-segment operating profit fell 30.7% to ₩31,266 million, while mobile-segment operating profit increased 53.4% to ₩65,179 million, before inter-segment eliminations.
• Assets increased to ₩327,526 million from ₩265,372 million, and equity increased to ₩246,841 million from ₩177,348 million. Short-term financial instruments increased substantially as cash was transferred into those investments.

Outlook, risks and unusual items

The filing provides no numeric revenue or earnings guidance. Management’s stated priorities include expanding and diversifying game offerings, launching games in additional markets, and improving profitability. It says future growth depends on sustaining existing titles and introducing successful new games. Management also notes that mobile game life cycles are generally shorter than online game life cycles.

• Concentration and execution: Ragnarok titles accounted for approximately 93% of revenue, and third-party-developed online and mobile games generated 77.8% of revenue. Dream Square was a key developer. The publishing and technical support agreement with Dream Square expired in March 2021 and Gravity had no plans to renew it; replacement service arrangements were being discussed.
• Licensee and platform exposure: Mobile game royalties and license fees represented 37.6% of total revenue; 81.2% of that revenue was attributable to Nuverse. Third-party mobile platforms generated 39.8% of revenue, and their policies, fees or availability may change.
• Cybersecurity and service interruptions: The company disclosed two 2021 security incidents involving in-game currency creation and unauthorized changes to player data; it said no personal information was compromised in the March incident and described remediation steps. A fire at an Indonesian third-party data center in December 2021 temporarily disrupted services; the company said data and servers were restored and there was no material operating-results impact. A March 2022 DDoS attack caused intermittent instability for about two weeks in some Southeast Asian services and was mitigated with AWS Shield.
• Impairments and estimates: 2021 impairment losses included ₩281 million on intangible assets and ₩1,087 million on other non-current assets, primarily minimum guaranteed royalties. Revenue recognition depends in part on estimated user life cycles and balances of virtual currency and items.
• Audit and controls: KPMG issued unqualified opinions on the 2021 financial statements and internal control over financial reporting. A material weakness identified in 2020 was reported as remediated by year-end 2021. The audit identified mobile-game deferred revenue as a critical audit matter, citing the need for extensive procedures because of prior deficiencies in program-change controls and the complexity of the IT environment. The audit committee selected PwC for the 2022–2024 audits, subject to acceptance and engagement formalities.
• Governance, currency and market risks: GungHo owned 59.3% of Gravity and is also a major licensee; the filing highlights potential conflicts and controlled-company governance exemptions. Approximately 82.2% of 2021 revenue was denominated in currencies other than Won; the company had no outstanding FX forward contracts. It cited regulatory, competitive, geopolitical, COVID-19 and foreign-exchange uncertainties.
• Other: Gravity reported no legal proceeding that it believed would have a material adverse effect. It has not paid dividends and stated it had no intention to pay them in the near future.

Important facts for investors to verify

• Review the audited financial statements and notes for cash-flow classification, short-term financial instruments, lease liabilities, tax expense and impairment details.
• Track revenue and profitability by game and by direct micro-transactions versus licensing, especially the performance of Ragnarok X and the decline in Ragnarok M.
• Assess Nuverse and Dream Square concentration, current license and technical-service terms, and the availability of replacement support.
• Monitor whether the remediated IT controls remain effective and how deferred revenue estimates are supported, given the audit’s critical audit matter.
• Evaluate foreign-exchange exposure, major market concentration, platform dependence, and the company’s ability to fund development and marketing without additional capital.