GRAVITY Co., Ltd. Form 6-K Summary
Business Context and Reporting Period
GRAVITY Co., Ltd. (NasdaqGM: GRVY), a South Korean online game developer and publisher, reported unaudited financial results for the second quarter ended June 30, 2007. The company's principal product is Ragnarok Online, which is commercially offered in 22 markets.
Key Financial Metrics
| Metric | Q2 2007 (KRW) | Q2 2007 (US$) | Q1 2007 (KRW) | Q2 2006 (KRW) |
|---|---|---|---|---|
| Total Revenues | 9,408 million | 10,029 thousand | 10,513 million | 11,294 million |
| Cost of Revenues | 4,283 million | 4,566 thousand | 3,964 million | 4,814 million |
| Gross Profit | 5,125 million | 5,463 thousand | 6,549 million | 6,480 million |
| Operating Expenses | 7,977 million | 8,503 thousand | 7,612 million | 2,242 million |
| Net Loss | (3,415) million | (3,640) thousand | (973) million | 4,469 million (Income) |
| Cash & Short-term Instruments | 75,640 million | 80,631 thousand | 75,588 million | 81,530 million |
Note: US$ amounts are converted at a rate of KRW 938.10 to US$ 1.00.
Material Changes vs. Prior Periods
- Revenue Decline: Q2 2007 revenues decreased 10.5% quarter-over-quarter (QoQ) and 16.7% year-over-year (YoY). Royalty and licensing fees dropped 22.8% QoQ and 19.2% YoY, driven by increased global competition and the strengthening of the Korean Won against the Japanese Yen. Subscription revenues fell 10.5% QoQ due to competition affecting Ragnarok Online in Korea.
- Mobile Growth: Mobile game revenues surged 77.4% QoQ and 9.2% YoY, attributed to the mobile item shop of "Time N Tales."
- Expense Surge: Operating expenses increased 4.8% QoQ due to advertising for Ragnarok Online II and Emil Chronicle Online. YoY operating expenses rose 255.8%, primarily due to the reimbursement of fees related to an investigation into alleged accounting fraud by the former Chairman and the sale of company property in the prior year.
- Profitability: The company recorded a net loss of KRW 3,415 million in Q2 2007, a significant deterioration from a net loss of KRW 973 million in Q1 2007 and a net income of KRW 4,469 million in Q2 2006.
Outlook, Risks, and Unusual Items
- Unusual Items: The Q2 2006 results included a gain of KRW 4,947 million from proceeds related to the former chairman's fraud and a gain of KRW 1,081 million from the disposal of assets, which inflated prior-year comparables. Q2 2007 included litigation charges of KRW 4,648 million recorded in the six-month period.
- Foreign Exchange Risk: The strengthening of the Korean Won against the Japanese Yen negatively impacted royalty revenues, as 68.8% of royalty revenue is derived from the Japanese market.
- Competition: Management cited increased competition in both the global online gaming market and the domestic Korean market as primary drivers for revenue declines in core segments.
- Guidance: The filing contains forward-looking statements but does not provide specific numerical guidance for future periods.
Investor Verification Checklist
- Verify the sustainability of mobile game revenue growth following the 77.4% QoQ increase.
- Assess the impact of the Korean Won's exchange rate on future royalty revenues from Japan.
- Review the status of the litigation charges (KRW 4,648 million) and any remaining contingencies related to the former Chairman's fraud investigation.
- Monitor the competitive landscape for Ragnarok Online in Korea and the performance of new titles like Ragnarok Online II.
- Confirm the company's liquidity position given the shift from net income to net loss, despite holding KRW 75.6 billion in cash and short-term instruments.