GRAVITY Co., Ltd. — 2016 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2016; filed April 28, 2017. This is an annual report, not a fourth-quarter filing. Separate Q4 results are not provided clearly in the filing text. Financial statements are prepared under U.S. GAAP; amounts below are in millions of Korean won (₩), unless stated otherwise.
Business context
Gravity develops and publishes online and mobile games, led by the long-running Ragnarok Online franchise. Its business includes directly operated game services and licensing games to overseas operators. GungHo Online Entertainment, which publishes Ragnarok Online in Japan, held 59.3% of Gravity’s common shares and accounted for 21.1% of 2016 revenue.
Key financial metrics
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | ₩51,396 | ₩35,660 |
| Gross profit / margin | ₩21,401 / 41.6% | ₩5,378 / 15.1% |
| Operating income (loss) / margin | ₩3,423 / 6.7% | ₩(17,229) / (48.3)% |
| Net income (loss) | ₩179 | ₩(17,029) |
| Net income (loss) attributable to parent | ₩250 | ₩(16,965) |
| Basic and diluted EPS | ₩36 | ₩(2,441) |
| Net cash from (used in) operating activities | ₩2,428 | ₩(5,978) |
| Cash and cash equivalents at year-end | ₩16,720 | ₩24,909 |
| Short-term financial instruments at year-end | ₩22,000 | ₩11,500 |
| Total assets / total liabilities | ₩55,190 / ₩25,096 | ₩45,729 / ₩15,737 |
| Current assets / current liabilities | ₩53,391 / ₩20,686 | ₩43,676 / ₩8,804 |
Revenue rose 44.1%. Online-game subscriptions increased 253.7% to ₩23,065, royalties and license fees rose 16.9% to ₩12,867, while mobile games and applications declined 20.1% to ₩12,041. Ragnarok Online contributed ₩29,446, or 57.3% of total revenue. Online games generated segment operating income of ₩11,157; mobile games recorded an operating loss of ₩7,939.
Cash and short-term financial instruments together totaled ₩38,720 at year-end. Investing activities used ₩10,667, mainly reflecting a net increase in short-term financial instruments; financing activities used ₩5. The company reported no long-term debt obligations. The filing describes only ₩5 of borrowing repayment in 2016.
Material changes versus 2015
- The company moved from substantial operating and net losses to operating and net income, with the improvement reflecting higher online-game revenue and much lower impairment and amortization charges.
- Growth was concentrated in Taiwan: Gravity began directly operating Ragnarok Online there in June 2016 and launched Ragnarok Prequel in July. Taiwan/Hong Kong/Macau revenue rose to ₩16,705 from ₩2,763.
- Cost of revenue was nearly flat at ₩29,995, while gross margin expanded substantially. SG&A increased 39.4% to ₩16,000; R&D fell 62.6% to ₩1,973.
- Cash from operations turned positive, but year-end cash and cash equivalents declined by ₩8,189. Short-term financial instruments increased by ₩10,500.
- Mobile revenue remained weaker, and mobile operations continued to report an operating loss.
Outlook, risks and unusual items
- Management said available cash and expected operating cash flow should meet capital needs through at least the first quarter of 2018, while noting that changing business conditions or investments could accelerate cash use. No specific revenue or earnings guidance was provided.
- Revenue concentration remains significant: Ragnarok Online supplied 57.3% of revenue, and overseas license fees and royalties supplied 25.0%. The filing warns that Ragnarok Online is mature and its global user base has declined from its 2005 peak.
- GungHo is both the controlling shareholder and an important licensee; the filing identifies potential conflicts of interest and dependence on this relationship. A US$5.0 million initial payment related to terminated Ragnarok Online II Japan rights is being refunded in four equal payments by the end of 2017; US$2.5 million had been repaid by April 21, 2017.
- Revenue and cash flow are exposed to competition, game popularity and product launches, licensee performance, regulation, foreign-exchange movements, cybersecurity and privacy events, and reliance on app-store platforms. About 71.3% of 2016 revenue was denominated in foreign currencies; Gravity reported no outstanding currency forward contracts.
- Gravity believed it was a PFIC in 2008–2016 and expected a significant risk of PFIC status in 2017, potentially creating adverse U.S. tax consequences for U.S. investors.
- Management concluded disclosure controls and internal control over financial reporting were effective at year-end 2016; the external auditor did not attest to internal-control effectiveness. The 2016 financial statements received an unqualified audit opinion. No material litigation or material off-balance-sheet arrangements were reported. Gravity had not paid dividends and stated it had no near-term intention to do so.
Important facts for investors to verify
- Whether the 2016 improvement is sustainable and how much reflects Taiwan’s direct-operation transition, currency effects, and reduced impairment/amortization rather than recurring growth.
- Current Ragnarok Online user trends, revenue concentration, and the performance of newer games, particularly mobile titles.
- Collection and renewal terms for material licensees, GungHo’s ongoing contribution, and completion of the US$5.0 million Ragnarok Online II refund.
- Cash conversion, the composition and liquidity of short-term financial instruments, and management’s stated funding runway through Q1 2018.
- The impact of PFIC status, foreign withholding taxes, and foreign-exchange exposure on shareholder returns.