Business Context and Reporting Period
Company: GRAVITY Co., Ltd. (NasdaqGM: GRVY)
Reporting Period: Second Quarter ended June 30, 2008 (Unaudited)
Filing Date: October 14, 2008
Business Overview: GRAVITY is a South Korean online game developer and publisher. Its principal product is Ragnarok Online, commercially offered in 23 markets. The company also operates mobile games and character merchandising businesses.
Key Financial Metrics
| Metric | Q2 2008 (KRW) | Q2 2008 (US$) | Q1 2008 (KRW) | Q2 2007 (KRW) |
|---|---|---|---|---|
| Total Revenues | 12,662 million | 10,597 thousand | 12,529 million | 9,408 million |
| Cost of Revenues | 7,505 million | 6,281 thousand | 7,504 million | 4,283 million |
| Gross Profit | 5,157 million | 4,316 thousand | 5,025 million | 5,125 million |
| Operating Expenses | 5,881 million | 4,922 thousand | 6,711 million | 7,977 million |
| Operating Loss | (724) million | (606) thousand | (1,686) million | (2,852) million |
| Net Loss | (665) million | (557) thousand | (1,370) million | (3,415) million |
| Cash & Equivalents | 51,750 million | 43,311 thousand | 53,588 million | n/a |
| Short-term Instruments | 2,679 million | 2,242 thousand | 8,715 million | n/a |
Note: US$ amounts converted at KRW 1,194.85 to US$1.00 (October 1, 2008 rate).
Material Changes vs. Prior Periods
- Revenue Growth: Total revenue increased 1.1% quarter-over-quarter (QoQ) and 34.6% year-over-year (YoY).
- Subscription Revenue: Increased 7.8% QoQ and 67% YoY, driven by the micro-transaction model in Korea and US/Canada commercialization of Requiem.
- Mobile Games: Increased 46.1% QoQ and 48.7% YoY due to newly released titles.
- Royalties: Decreased 2.2% QoQ (due to lower Japan revenues) but increased 19.8% YoY (aided by a 27% weakening of the Korean Won against the Yen).
- Merchandising: Decreased 43.6% QoQ due to the non-recurrence of a one-time sale of mobile accessories to LG Electronics in Q1.
- Cost Structure: Cost of revenues rose 75.2% YoY due to higher headquarters salaries, amortization of development costs for new games, and increased rent for international subsidiaries. Operating expenses decreased 12.4% QoQ and 26.3% YoY, primarily due to reduced rent expenses (office move) and lower R&D and advertising costs.
- Profitability: The company returned to a pre-tax profit of KRW 220 million in Q2 2008, compared to losses in Q1 2008 and Q2 2007. Net loss narrowed significantly to KRW 665 million from KRW 1,370 million in Q1 and KRW 3,415 million in Q2 2007.
Outlook, Risks, and Commentary
- Management Commentary: The improvement in results is attributed to the successful commercialization of new titles (Emil Chronicle Online, Pucca Racing, Requiem) and the shift to free-to-play micro-transaction models. The company capitalized R&D costs after open beta testing, which reduced operating expenses but increased cost of revenues upon commercialization.
- Liquidity: As of June 30, 2008, the company held KRW 54,429 million in cash, cash equivalents, and short-term financial instruments. Total liabilities were KRW 19,829 million.
- Risks and Contingencies: The filing includes standard forward-looking statement disclaimers regarding future performance. No specific new material risks or contingencies were detailed in this summary text beyond standard operational and market risks inherent to the gaming industry.
Investor Verification Checklist
- Revenue Sustainability: Verify the recurring nature of the Q2 2008 revenue growth, specifically the impact of the micro-transaction model versus one-time merchandising sales.
- Cost Amortization: Review the schedule for amortization of capitalized development costs for new games to understand future pressure on Cost of Revenues.
- Currency Exposure: Assess the impact of the Korean Won's fluctuation against the Japanese Yen on future royalty revenues.
- International Expansion: Monitor the performance of new commercializations in the US, Canada, and other international markets mentioned (e.g., Requiem).
- Cash Position: Confirm the trend in short-term financial instruments, which decreased significantly from KRW 8,715 million in Dec 2007 to KRW 2,679 million in June 2008.