GRAVITY Co., Ltd. Q3 2011 Financial Summary
Business Context and Reporting Period
This Form 6-K filing reports the unaudited financial results for GRAVITY Co., Ltd. (NasdaqGM: GRVY), a South Korean online game developer and publisher, for the third quarter ended September 30, 2011. The results are prepared in accordance with U.S. GAAP.
Key Financial Metrics
| Metric | Q3 2011 (KRW) | Q3 2011 (USD) | Q2 2011 (KRW) | Q3 2010 (KRW) |
|---|---|---|---|---|
| Total Revenue | 14,785 million | $13,410 thousand | 14,584 million | 13,668 million |
| Net Income (Parent) | 3,417 million | $3,099 thousand | 1,721 million | 2,646 million |
| Operating Income | 2,980 million | $2,703 thousand | 1,952 million | 3,474 million |
| Cash & Equivalents | 57,695 million | $52,331 thousand | - | - |
| Earnings Per Share (Basic) | 492 KRW | $0.45 | 247 KRW | 381 KRW |
Note: USD conversions based on an exchange rate of KRW 1,102.5 to US$ 1.00.
Material Changes vs. Prior Periods
- Revenue Growth: Total revenue increased 1.4% quarter-over-quarter (QoQ) and 8.2% year-over-year (YoY). Royalties and license fees grew 5.6% QoQ, driven by the weakening Korean Won against the Japanese Yen. Subscription revenue decreased 5.8% QoQ due to the deconsolidation of Gravity EU SASU (ownership reduced to 25%) but increased 37.4% YoY due to the shift to a free-to-play model in Korea and North America.
- Profitability Surge: Net income attributable to the parent company more than doubled QoQ (up 98.5%) to KRW 3,417 million. This was primarily driven by a 16.0% decrease in operating expenses and a significant foreign currency gain of KRW 548 million.
- Expense Management: Operating expenses dropped significantly QoQ due to reduced commissions and a gain on the disposition of investment in Gravity EU SASU, partially offset by an impairment loss on intangible assets related to "Eternal Destiny."
- Cost of Revenue: Increased 3.1% QoQ and 42.8% YoY, attributed to higher commissions and increased salaries following the acquisition of Gravity Games Corp.
Outlook, Risks, and Unusual Items
- Unusual Items: The Q3 results included a one-time gain on the disposition of investment related to the reduction of equity interest in Gravity EU SASU. Conversely, the company recorded an impairment loss on intangible assets for the game "Eternal Destiny."
- Strategic Shifts: The company continues to transition key titles like Ragnarok Online from subscription-based models to free-to-play with micro-transactions in Korea, the U.S., and Canada.
- Forward-Looking Statements: The filing contains standard forward-looking statements regarding future performance, which are subject to risks and uncertainties. The company assumes no duty to update these statements.
- Guidance: The filing text does not provide specific numerical guidance or forecasts for future quarters.
Investor Verification Checklist
- Verify the sustainability of the Q3 profit surge, which was heavily influenced by a one-time gain on investment disposition and foreign currency fluctuations.
- Monitor the impact of the deconsolidation of Gravity EU SASU on future revenue streams and consolidation reporting.
- Assess the long-term viability of the free-to-play transition strategy for Ragnarok Online in key markets (Korea, U.S., Canada).
- Review the status and potential future impairment risks associated with the "Eternal Destiny" project.
- Confirm the exchange rate sensitivity of revenues, particularly regarding the Korean Won and Japanese Yen.