GRAVITY Co., Ltd. Q1 2017 Financial 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 first quarter ended March 31, 2017. The company's principal product is Ragnarok Online, which is offered in 78 markets. The filing includes a business update regarding the launch of new titles and market expansions.
Key Financial Metrics
| Metric | Q1 2017 (KRW) | Q1 2017 (USD) | Q4 2016 (KRW) | Q1 2016 (KRW) |
|---|---|---|---|---|
| Total Revenue | 23,352 million | 20,897 thousand | 17,500 million | 9,094 million |
| Gross Profit | 9,383 million | 8,397 thousand | 7,703 million | 2,475 million |
| Operating Income | 3,298 million | 2,952 thousand | 1,944 million | (561 million) |
| Net Income (Parent) | 2,170 million | 1,942 thousand | 470 million | (1,701 million) |
| Cash & Equivalents | 19,696 million | 17,625 thousand | 16,720 million | N/A |
| Total Assets | 62,409 million | 55,848 thousand | 55,190 million | N/A |
Liquidity: As of March 31, 2017, cash and cash equivalents plus short-term financial instruments totaled KRW 42,196 million (US$ 37,760 thousand).
Material Changes vs. Prior Periods
- Revenue Growth: Total revenue increased 33.4% quarter-over-quarter (QoQ) and 156.8% year-over-year (YoY).
- Subscription Revenue: Decreased 2.5% QoQ due to declines in Ragnarok Online in Taiwan and Korea, though it rose 361.2% YoY.
- Royalty & License Fees: Increased 49.9% QoQ and 32.9% YoY, driven by growth in Japan, Indonesia, and Thailand.
- Mobile Games: Surged 148.6% QoQ and 184.9% YoY, primarily from IP-based mobile games in China and the launch of Ragnarok R in Taiwan.
- Cost of Revenue: Rose 42.6% QoQ and 111.0% YoY, attributed to higher commissions for mobile and web game services in Taiwan and Thailand.
- Operating Expenses: Increased 5.7% QoQ and 100.4% YoY. The QoQ rise was mainly due to pre-launch advertising for Ragnarok R.
- Profitability: The company returned to profitability, recording a net income of KRW 2,170 million compared to a net loss of KRW 1,701 million in Q1 2016.
Outlook, Management Commentary, and Risks
- Business Updates:
- Ragnarok R: Launched in Korea on April 13, 2017, reaching the fourth rank on Apple App Store and Google Play Store at its peak. Plans exist to launch in additional markets.
- Ragnarok Prequel: Launched in the US and Canada on March 27, 2017, under the name Ragnarok Journey.
- Ragnarok Online: Plans to re-launch in the Philippines in Q3 2017 via licensee Electronics Extreme Ltd.
- Development: Two new in-house mobile games are in development, with launches planned for 2017 and 2018.
- Risks and Contingencies: The filing includes standard forward-looking statements regarding future launches and market performance. Rankings cited for games are based on public statistical data and do not necessarily reflect actual profits. The company notes that foreign currency fluctuations impacted results (foreign currency loss of KRW 46 million in Q1 2017).
Investor Verification Checklist
- Verify the sustainability of the 148.6% QoQ growth in mobile game revenues, which was driven by specific regional launches (China, Taiwan).
- Monitor the performance of the newly launched Ragnarok R in Korea and its expansion into other markets.
- Assess the impact of rising commission costs on gross margins as mobile game revenue scales.
- Confirm the timeline and success of the Ragnarok Online re-launch in the Philippines scheduled for Q3 2017.
- Review the company's cash burn rate relative to its KRW 42.2 billion liquidity position to ensure sufficient runway for development and marketing.