GRAVITY Co., Ltd. Form 6-K Summary
Business Context and Reporting Period
GRAVITY Co., Ltd. (NasdaqCM: GRVY), a South Korean developer and publisher of online and mobile games, reported unaudited financial results for the second quarter ended June 30, 2016. The company's principal product is Ragnarok Online, which is commercially offered in 80 markets.
Key Financial Metrics
| Metric | Q2 2016 (KRW) | Q2 2016 (US$) | Q1 2016 (KRW) | Q2 2015 (KRW) |
|---|---|---|---|---|
| Total Revenue | 9,057 million | 7,848 thousand | 9,094 million | 9,217 million |
| Cost of Revenue | 6,846 million | 5,932 thousand | 6,619 million | 7,401 million |
| Gross Profit | 2,211 million | 1,916 thousand | 2,475 million | 1,816 million |
| Operating Expenses | 3,717 million | 3,221 thousand | 3,036 million | 4,481 million |
| Operating Loss | (1,506) million | (1,305) thousand | (561) million | (2,665) million |
| Net Loss (Parent) | (1,605) million | (1,390) thousand | (1,701) million | (2,763) million |
| Cash & Equivalents | 13,945 million | 12,082 thousand | 24,909 million | N/A |
| Short-term Instruments | 23,500 million | 20,361 thousand | 11,500 million | N/A |
Liquidity: As of June 30, 2016, the combined balance of cash, cash equivalents, and short-term financial instruments was KRW 37,445 million (US$ 32,443 thousand).
Material Changes vs. Prior Periods
- Revenue: Decreased 0.4% quarter-over-quarter (QoQ) and 1.7% year-over-year (YoY).
- Royalty/License Fees: Down 18.7% QoQ due to service suspension of Ragnarok Online in Taiwan (May 31, 2016) and decreased revenue in Japan.
- Mobile Games: Down 4.6% QoQ and 32.6% YoY, driven by declines in third-party applications and Ragnarok: Path of Heroes.
- Subscription: Increased 8.7% QoQ and 20.9% YoY, primarily due to direct service commencement for Ragnarok Online in Taiwan (June 15, 2016).
- Merchandising: Increased 54.3% QoQ and 84.2% YoY due to recognition of deferred revenue from a new game development agreement.
- Costs & Expenses: Cost of revenue increased 3.4% QoQ (higher commissions) but decreased 7.5% YoY (reduced amortization of impaired R&D costs). Operating expenses increased 22.4% QoQ (advertising and commissions) but decreased 17.0% YoY (lower R&D spend).
- Profitability: Net loss attributable to the parent company narrowed to KRW 1,605 million from KRW 1,701 million in Q1 2016 and KRW 2,763 million in Q2 2015.
Outlook, Risks, and Commentary
The filing contains forward-looking statements regarding future performance but does not provide specific numerical guidance for future quarters. Management highlighted the strategic shift to direct service in Taiwan as a driver for subscription growth. Key risks include the volatility of mobile game revenues and the impact of foreign exchange rates (notably the Japanese Yen against the Korean Won).
Investor Verification Checklist
- Verify the sustainability of the 20.9% YoY subscription revenue growth following the transition to direct service in Taiwan.
- Assess the long-term impact of the 32.6% YoY decline in mobile game revenues on future product pipelines.
- Confirm the status of the new game development and publishing agreement that drove the 84.2% YoY increase in merchandising revenue.
- Monitor the company's cash burn rate given the continued net losses and the significant increase in short-term financial instruments.
- Review the impact of foreign currency fluctuations on reported US dollar figures, as the filing notes a specific exchange rate of KRW 1,154.15 to US$ 1.00.