Business Context and Reporting Period
Company: GRAVITY Co., Ltd. (NasdaqGM: GRVY), a South Korean online game developer and publisher.
Reporting Period: Third quarter ended September 30, 2008.
Filing Date: November 17, 2008.
Context: The Company reported its first profitable quarter since restructuring efforts began under new management appointed in June 2008. Principal products include Ragnarok Online, commercialized in 22 markets.
Key Financial Metrics
| Metric | Q3 2008 (KRW) | Q3 2008 (USD) |
|---|---|---|
| Total Revenue | 12,782 million | 10,128 thousand |
| Net Income | 932 million | 737 thousand |
| Gross Profit | 6,056 million | 4,799 thousand |
| Operating Income | 241 million | 190 thousand |
| Cash & Equivalents | 52,583 million | 41,666 thousand |
| Total Assets | 96,051 million | 76,110 thousand |
| Total Liabilities | 18,818 million | 14,911 thousand |
Note: USD amounts converted at KRW 1,262.00 to US$1.00.
Material Changes vs. Prior Periods
- Revenue Growth: Total revenue increased 36.8% year-over-year (YoY) and remained flat quarter-over-quarter (QoQ) compared to Q2 2008.
- Profitability Turnaround: The Company recorded a net income of KRW 932 million, reversing a net loss of KRW 665 million in Q2 2008 and a significant loss of KRW 12,576 million in Q3 2007.
- Revenue Drivers:
- Royalties: Increased 28.9% YoY, driven by Japan revenues and a 28.7% weakening of the Korean Won against the Japanese Yen.
- Subscription: Increased 35.6% YoY due to micro-transaction models in Korea and commercialization of "Requiem" in the US, Canada, and Russia.
- Mobile Games: Increased 100.5% YoY due to new releases from subsidiary NEOCYON, though down 22.3% QoQ.
- Expense Reduction: Operating expenses decreased 67.9% YoY. This was primarily due to the absence of a KRW 8,619 million impairment loss recognized in Q3 2007 related to Perpetual Entertainment, Inc., and reduced marketing spend.
Outlook, Risks, and Management Commentary
- Management Commentary: Profitability is attributed to broad restructuring efforts led by the new management team. Cost of revenues increased YoY due to higher headquarters salaries and amortization of development costs for new games (Emil Chronicle Online, Pucca Racing, Requiem).
- Forward-Looking Statements: The filing contains forward-looking statements regarding future performance, which are subject to risks and uncertainties. The Company assumes no duty to update these statements.
- Risks: The filing references standard risks associated with the gaming industry and foreign currency fluctuations, though specific new risks for the upcoming period are not detailed beyond the general safe-harbor disclaimer.
Investor Verification Checklist
- Verify the sustainability of the profitability turnaround given the one-time nature of the prior year's impairment loss.
- Monitor the impact of the weakening Korean Won on future royalty revenues from Japan.
- Assess the performance of the new free-to-play micro-transaction model in Korea.
- Review the commercialization progress of "Requiem" in international markets (US, Canada, Russia).
- Confirm the status of subsidiary NEOCYON's mobile game portfolio.