GRAVITY Co., Ltd. Q3 2007 Financial Summary
Business Context and Reporting Period
GRAVITY Co., Ltd. (NasdaqGM: GRVY), a South Korean online game developer and publisher, reported unaudited financial results for the third quarter ended September 30, 2007. The company's principal product is Ragnarok Online, which is commercially offered in 22 markets.
Key Financial Metrics
| Metric | Q3 2007 (KRW) | Q3 2007 (US$) | Q2 2007 (KRW) | Q3 2006 (KRW) |
|---|---|---|---|---|
| Total Revenues | 9,341 million | 10,014 thousand | 9,408 million | 9,846 million |
| Cost of Revenues | 4,533 million | 4,860 thousand | 4,283 million | 4,620 million |
| Gross Profit | 4,808 million | 5,154 thousand | 5,125 million | 5,226 million |
| Operating Expenses | 18,135 million | 19,441 thousand | 7,977 million | 8,684 million |
| Net Loss | (12,576) million | (13,482) thousand | (3,415) million | (2,198) million |
| Cash and Equivalents | 66,337 million | 71,116 thousand | n/a | n/a |
Material Changes vs. Prior Periods
- Revenue Decline: Total revenue decreased 0.7% quarter-over-quarter (QoQ) and 5.1% year-over-year (YoY). Royalty and licensing fees fell 11.5% YoY due to increased global competition.
- Subscription Growth: Subscription revenue increased 41.4% QoQ and 25.8% YoY, driven by micro-transaction sales in Ragnarok Online and the August 2007 launch of Emil Chronicle Online.
- Mobile Revenue Drop: Mobile game revenue fell 42.3% QoQ due to lowered individual purchase limits (from KRW 300,000 to KRW 100,000).
- Operating Expense Surge: Operating expenses jumped 127.3% QoQ and 108.8% YoY. This was primarily caused by a KRW 8,619 million impairment charge related to the liquidation of Perpetual Entertainment, Inc., alongside increased advertising for new titles and the Gravity Festival.
- Widening Loss: Net loss expanded significantly to KRW 12,576 million, a 367.5% increase QoQ and 324.8% increase YoY.
Outlook, Risks, and Unusual Items
- Unusual Items: The quarter included a significant non-cash impairment charge of KRW 8,619 million for Perpetual Entertainment, Inc. Additionally, the company recognized proceeds from the former chairman due to fraud (KRW 4,947 million) and a gain on disposal of assets held for sale (KRW 1,081 million) in the nine-month period, though these did not offset the Q3 operating loss.
- Management Commentary: Management noted success in reducing the overall rate of revenue decline through micro-transaction sales despite market headwinds.
- Risks: The filing highlights increased competition in the global online gaming market and regulatory changes affecting mobile game purchase limits. Forward-looking statements are subject to risks and uncertainties as defined in the Private Securities Litigation Reform Act of 1995.
Investor Verification Checklist
- Verify the impact of the KRW 8,619 million impairment charge on the company's long-term asset valuation and future profitability.
- Confirm the sustainability of the 41.4% QoQ growth in subscription revenue driven by micro-transactions.
- Assess the liquidity position given the KRW 66,337 million cash balance against the widening net loss trend.
- Review the status of the former chairman fraud proceedings and the realization of the KRW 4,947 million proceeds.
- Monitor the performance of newly commercialized titles (Emil Chronicle Online, Pucca Racing) to determine if they can offset declining royalty revenues.