Business Context and Reporting Period
Company: GRAVITY Co., Ltd. (NasdaqGM: GRVY)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Second Quarter ended June 30, 2012
Filing Date: August 29, 2012
Business Overview: Gravity is a South Korean online game developer and publisher, best known for its flagship title Ragnarok Online, which is commercially offered in 79 markets.
Key Financial Metrics
| Metric | Q2 2012 (KRW) | Q2 2012 (US$) |
|---|---|---|
| Total Revenue | 14,084 million | 12,455 thousand |
| Cost of Revenue | 9,691 million | 8,570 thousand |
| Gross Profit | 4,393 million | 3,885 thousand |
| Operating Expenses | 6,121 million | 5,413 thousand |
| Operating Loss | (1,728) million | (1,528) thousand |
| Net Loss (Parent Company) | (1,126) million | (996) thousand |
| Cash & Short-term Instruments | 55,288 million | 48,895 thousand |
Note: US$ amounts are converted at an exchange rate of KRW 1,130.75 to US$ 1.00.
Material Changes vs. Prior Periods
- Revenue Decline: Total revenue decreased 13.9% quarter-over-quarter (QoQ) and 3.4% year-over-year (YoY).
- Royalties & Licensing: Down 6.9% QoQ and 10.2% YoY, driven by lower Ragnarok Online revenues in Japan, Taiwan, Hong Kong, and Macau.
- Subscription Revenue: Down 49.3% QoQ and 26.4% YoY. The QoQ drop was due to Finding Neverland Online and Ragnarok Online in Korea. The YoY drop included the deconsolidation of Gravity EU SASU (France) and declines in the US/Canada.
- Mobile Games: Increased 10.3% QoQ but decreased 9.0% YoY.
- Merchandising: Increased 15.3% QoQ and 886.3% YoY, driven by mobile phone goods and the PS Vita game Ragnarok Odyssey.
- Cost Increases: Cost of revenue surged 42.0% QoQ and 55.5% YoY. Primary drivers were amortization of intangible assets (specifically Ragnarok Online II development), increased cost of goods sold for mobile merchandise, and higher salaries for the Ragnarok Online launch.
- Profitability Swing: The company swung from a net income of KRW 1,128 million in Q1 2012 to a net loss of KRW 1,126 million in Q2 2012. Operating expenses decreased 25.2% QoQ due to reduced advertising spend and a gain on the disposition of a 25% equity interest in Ingamba LLC (Russia).
Guidance, Outlook, and Management Commentary
- Expansion Plans: Ragnarok Online is scheduled to launch in Singapore and Malaysia in Q4 2012, with an English version planned for other markets. The CEO noted that while performance in Korea is below expectations, technical issues have been resolved.
- Mobile Strategy: Gravity is strengthening its mobile presence. Ragnarok Online - Uprising: Valkyrie achieved over 430,000 cumulative downloads in three months in Korea. The company plans to release this title in China and Taiwan in 2012.
- Forward-Looking Statements: The filing includes standard disclaimers regarding forward-looking statements, noting that actual results may differ due to risks and uncertainties.
Investor Verification Checklist
- Revenue Sustainability: Verify the trajectory of Ragnarok Online revenues in key Asian markets (Japan, Taiwan) given the reported declines.
- Cost Structure: Assess the impact of high amortization costs related to Ragnarok Online II on future margins.
- Mobile Growth: Confirm the success of Ragnarok Online - Uprising: Valkyrie in international markets (China, Taiwan) to offset declines in subscription revenue.
- Liquidity Position: Review the cash balance of KRW 55,288 million to ensure sufficient runway for development and marketing despite the current net loss.
- Deconsolidation Impact: Understand the long-term financial impact of the reduced ownership in Gravity EU SASU on future consolidated results.