Business Context and Reporting Period
Company: GRAVITY Co., Ltd. (NasdaqGM: GRVY)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Third Quarter ended September 30, 2012
Filing Date: November 21, 2012
Business Overview: Gravity is a South Korean online game developer and publisher, best known for the Ragnarok Online franchise, which operates in 79 markets.
Key Financial Metrics
| Metric | Q3 2012 (KRW) | Q3 2012 (US$) | Q2 2012 (KRW) | Q3 2011 (KRW) |
|---|---|---|---|---|
| Total Revenue | 14,012 million | 12,847 thousand | 14,084 million | 14,785 million |
| Gross Profit | 4,951 million | 4,539 thousand | 4,393 million | 8,355 million |
| Operating Loss | (2,500) million | (2,292) thousand | (1,728) million | 2,980 million |
| Net Loss (Parent) | (1,393) million | (1,277) thousand | (1,126) million | 3,417 million |
| Cash & Equivalents | 55,424 million | 50,815 thousand | As of Sept 30, 2012 |
Note: US$ amounts converted at KRW 1,090.7 to US$ 1.00.
Material Changes vs. Prior Periods
- Revenue Decline: Total revenue decreased 0.5% quarter-over-quarter (QoQ) and 5.2% year-over-year (YoY).
- Royalties & Licenses: Increased 1.4% QoQ due to Ragnarok Online performance in Japan and Asia, but decreased 13.7% YoY due to the absence of a one-time lump-sum license fee recognition for Dragonica in Q3 2011.
- Subscription Revenue: Decreased 12.4% QoQ and 31.6% YoY, driven by declines in Finding Neverland Online (Korea) and Ragnarok Online (Korea, US, Canada).
- Mobile Revenue: Increased 45.4% QoQ and 38.6% YoY, primarily driven by the May 2012 launch of Ragnarok Online - Uprising: Valkyrie.
- Merchandising: Decreased 59.6% QoQ due to the absence of mobile phone goods sales in the current quarter, though up 355% YoY due to Ragnarok Odyssey on PS Vita.
- Cost & Expenses:
- Cost of Revenue: Decreased 6.5% QoQ (absence of mobile goods COGS) but increased 40.9% YoY due to amortization of intangible assets for Ragnarok Online II.
- Operating Expenses: Increased 21.7% QoQ and 38.6% YoY. The primary driver was a KRW 2,161 million impairment loss on intangible assets for Dragonica due to significant revenue declines. R&D expenses also increased.
- Profitability: The company swung from a net income of KRW 3,417 million in Q3 2011 to a net loss of KRW 1,393 million in Q3 2012, largely due to the Dragonica impairment charge and declining subscription revenues.
Outlook, Risks, and Business Updates
- Product Launches:
- Ragnarok Online II planned for North America and the Philippines in H1 2013 (following Singapore/Malaysia launch in Dec 2012).
- Steal Fighter (action RTS RPG) scheduled for Korea launch in Q1 2013, with overseas expansion to follow.
- Ragnarok Online - Uprising: Valkyrie to launch in China and Taiwan by end of 2012; has exceeded 600,000 downloads in Korea.
- Risks & Contingencies:
- Impairment Risk: The company recognized a significant impairment loss on Dragonica due to revenue declines, indicating ongoing valuation risks for legacy titles.
- Revenue Concentration: Heavy reliance on the Ragnarok franchise; declines in key markets (Korea, US, Japan) significantly impact overall performance.
- Forward-Looking Statements: Future launch dates and market performance are subject to change and do not guarantee future results.
Investor Verification Checklist
- Verify the sustainability of mobile game revenue growth following the launch of Uprising: Valkyrie.
- Monitor the performance of Ragnarok Online II in upcoming North American and Philippine markets.
- Assess the impact of the Dragonica impairment on future intangible asset valuations and potential further write-downs.
- Review the trajectory of subscription revenue declines in core markets (Korea, US, Japan) to determine if stabilization has occurred.
- Confirm the timeline and success of the Steal Fighter launch in Q1 2013.