Business Context and Reporting Period
Company: GRAVITY Co., Ltd. (NasdaqGM: GRVY)
Reporting Period: Second Quarter ended June 30, 2014 (Unaudited)
Filing Date: August 27, 2014
Business Overview: Gravity is a South Korean online game developer and publisher. Its principal product is Ragnarok Online, commercially offered in 60 markets. The company also operates mobile games and character merchandising.
Key Financial Metrics
| Metric | Q2 2014 (KRW) | Q2 2014 (US$) | Q1 2014 (KRW) | Q2 2013 (KRW) |
|---|---|---|---|---|
| Total Revenue | 10,248 million | 10,130 thousand | 10,767 million | 12,788 million |
| Gross Profit | 1,366 million | 1,350 thousand | 1,300 million | 4,349 million |
| Operating Loss | (2,703) million | (2,672) thousand | (2,878) million | (2,806) million |
| Net Loss (Parent) | (3,031) million | (2,996) thousand | (2,969) million | (1,617) million |
| Cash & Equivalents | 24,415 million | 24,135 thousand | 31,222 million | N/A |
| Short-term Financial Instruments | 19,500 million | 19,276 thousand | 18,000 million | N/A |
| Total Liquidity | 43,915 million | 43,411 thousand | 49,222 million | N/A |
Note: US$ amounts converted at KRW 1,011.6 to US$ 1.00.
Material Changes vs. Prior Periods
- Revenue Decline: Total revenue decreased 4.8% quarter-over-quarter (QoQ) and 19.9% year-over-year (YoY).
- Royalties/Licensing: Down 4.8% QoQ and 38.6% YoY, driven by declines in Ragnarok Online in Taiwan, Hong Kong, Macau, Japan, and China.
- Subscription: Down 15.9% QoQ and 44.0% YoY, primarily due to declines in Korea and North America (Ragnarok Online II).
- Mobile Games: Down 4.6% QoQ but up 15.7% YoY. The YoY increase was driven by Ragnarok: Path of Heroes.
- Merchandising: Increased 15.4% QoQ and 33.9% YoY.
- Cost of Revenue: Decreased 6.2% QoQ due to reduced salaries (fewer employees) but increased 5.2% YoY due to higher outsourcing fees and commissions.
- Operating Expenses: Decreased 2.6% QoQ and 43.1% YoY. The significant YoY drop was due to the absence of Ragnarok Odyssey Ace development costs, advertising reductions, and no impairment losses on intangible assets (which occurred in Q2 2013).
- Profitability: Net loss attributable to the parent company widened slightly QoQ (from KRW 2,969 million to KRW 3,031 million) and significantly YoY (from KRW 1,617 million).
Outlook, Risks, and Commentary
- Management Commentary: The company attributed revenue declines to specific regional performance drops in legacy titles. Mobile revenue growth was highlighted as a positive trend driven by new launches.
- Forward-Looking Statements: The filing includes standard safe-harbor language regarding forward-looking statements, noting they are subject to risks and uncertainties. The company assumes no duty to update these statements.
- Liquidity Position: As of June 30, 2014, the company held KRW 43,915 million in cash and short-term financial instruments, providing a buffer against operating losses.
- Risks: Continued reliance on the Ragnarok franchise, which is showing significant revenue erosion in key markets (Japan, China, US/Canada). The company is not currently profitable.
Key Facts for Investor Verification
- Revenue Trend: Verify the sustainability of the 19.9% YoY revenue decline and the specific performance of Ragnarok Online in China and Japan.
- Mobile Growth: Assess whether the 15.7% YoY mobile revenue growth can offset the decline in subscription and royalty revenues.
- Cash Burn: Monitor the rate of cash consumption given the consistent net losses (KRW 3,031 million in Q2 2014) against the KRW 43.9 billion cash balance.
- Cost Structure: Confirm if the QoQ reduction in operating expenses (due to headcount reduction) is a one-time benefit or a sustainable structural change.
- Merchandising: Evaluate the 33.9% YoY growth in character merchandising as a potential diversification strategy.