Business context and reporting period
Gravity Co., Ltd. filed this Form 20-F on April 30, 2014, reporting its audited fiscal year ended December 31, 2013, under U.S. GAAP. This is an annual filing, not a standalone fourth-quarter report; the filing text does not provide clear Q4-only financial results. Amounts below are in millions of Korean won (₩), unless stated otherwise.
Gravity develops and publishes online and mobile games. Its mature flagship, Ragnarok Online, generated 45.2% of 2013 revenue. GungHo Online Entertainment, Gravity’s majority shareholder and Japan licensee, accounted for 38.2% of revenue in 2013.
Key financial metrics
| Metric | 2013 | 2012 |
|---|---|---|
| Revenue | ₩47,685 (US$45.2 million) | ₩57,781 |
| Gross profit / margin | ₩12,286 / 25.8% | ₩22,875 / 39.6% |
| Operating loss / margin | ₩16,730 / (35.1%) | ₩18,494 / (32.0%) |
| Net loss | ₩19,751 | ₩20,540 |
| Net loss attributable to parent / margin | ₩18,588 / (39.0%) | ₩12,224 / (21.2%) |
| Operating cash flow | ₩(3,244) | ₩(726) |
| Cash and cash equivalents | ₩31,222 | ₩36,455 |
| Short-term financial instruments | ₩18,000 | ₩17,500 |
| Total assets / total liabilities | ₩87,765 / ₩18,765 | ₩110,555 / ₩20,477 |
| Current assets / current liabilities | ₩58,651 / ₩11,400 | ₩67,929 / ₩10,375 |
There were no long-term debt obligations. Financing cash outflow in 2013 included ₩619 million of borrowing repayments. Management said available cash and expected operating cash flows should meet capital needs through at least the first quarter of 2015. Cash and short-term financial instruments together totaled ₩49,222 million at year-end.
Material changes versus the prior comparable period
- Revenue fell 17.5%. Online-game royalties and license fees declined 32.8%, subscription revenue fell 19.2%, and character merchandising, animation and other revenue declined 53.9%.
- Mobile games and applications revenue increased 75.6% to ₩14,504 million, but did not offset declines in the online-game business. Ragnarok Online revenue fell to ₩21,531 million from ₩32,308 million.
- Cost of revenue increased 1.4% despite lower revenue, compressing gross margin by 13.8 percentage points. Management cited higher commissions and salaries.
- Operating expenses declined 29.9%, including lower selling, general and administrative, R&D and impairment expenses. Operating loss narrowed in absolute terms, but operating margin deteriorated because revenue fell.
- Parent-attributable net loss widened 52.1%, reflecting, among other factors, higher income tax expense. Operating cash outflow increased to ₩3,244 million.
- Year-end cash and cash equivalents declined 14.4%; current assets fell while current liabilities increased.
Outlook, commentary, risks and unusual items
- Outlook: No specific revenue or earnings guidance is provided. Management’s stated liquidity assessment extends through at least Q1 2015. Its strategy includes developing and publishing additional games and expanding markets, but success is uncertain.
- Product and customer concentration: Ragnarok Online has been in the market since 2002 and its user base has declined from its 2005 peak. Other titles have not matched its commercial success, and several games were discontinued after failing to gain popularity.
- Licensee concentration: Overseas royalties and license fees represented 43.7% of revenue. GungHo generated 38.2% of total revenue and held 59.3% of Gravity’s shares; related-party revenue and governance conflicts are material considerations.
- Impairments: 2013 impairment loss on intangible assets was ₩5,822 million, including ₩2,653 million of Gravity Games goodwill and ₩1,424 million related to Dragonica. The company also reported substantial prior-year impairments.
- Accounting item: 2013 results include a ₩981 million out-of-period adjustment relating primarily to in-game item revenue that was not properly deferred in 2012. Management considered the impact not material. Revenue categories were also reclassified across prior periods, with no effect on total revenue.
- Tax and currency: 2013 income tax expense was ₩5,108 million despite a pretax loss, largely due to deferred-tax effects. The company reported ₩8,606 million of net deferred tax assets and warned that realization depends on future taxable income. About 67.5% of revenue was denominated in foreign currencies; no forward contracts were outstanding at year-end.
- Other risks: Risks include intense competition, changing player preferences, regulatory changes, cybersecurity and service interruptions, intellectual-property disputes, foreign-exchange and licensee-payment risks, and possible U.S. PFIC tax consequences for investors. The company reported no material weakness in internal controls and no lawsuit it believed would have a material adverse effect; one subsidiary-funds dispute had previously resulted in a partial ruling for the plaintiff and was appealed.
- Audit: Deloitte Anjin issued an unqualified opinion on the 2013 financial statements. PwC resigned in July 2013 because of a conflict-of-interest issue involving its non-audit work for a SoftBank sister company; the filing reports no disagreements with PwC over accounting or audit matters.
Most important facts for investors to verify
- How much of the decline in Ragnarok Online royalties, particularly from Japan, is continuing, and whether new titles can replace that revenue.
- The basis and period effects of the ₩981 million revenue adjustment, and the underlying controls for deferring in-game item revenue.
- Cash burn, cash availability and the assumptions supporting management’s liquidity outlook through Q1 2015.
- Revenue, receivables and contractual dependence on GungHo and other major licensees, including related-party terms and potential conflicts.
- Further impairment exposure, deferred-tax-asset recoverability, and the company’s PFIC status and related U.S. tax implications for shareholders.