GRAVITY Co., Ltd. Form 6-K Summary
Business Context and Reporting Period
GRAVITY Co., Ltd. (NASDAQ: GRVY), a Korean online game developer and distributor, reported consolidated financial results for the second quarter ended June 30, 2005. The filing was submitted on August 22, 2005. The company's principal product is Ragnarok Online, commercialized in 20 markets globally.
Key Financial Metrics
| Metric | Q2 2005 | Q1 2005 | Q2 2004 |
|---|---|---|---|
| Total Revenue | $13.3 million | $15.6 million | $15.3 million |
| Cost of Revenues & OpEx | $10.2 million | $7.9 million | $5.5 million |
| Pre-tax Profit | $2.8 million | $7.2 million | $8.6 million |
| Net Income | $1.9 million | $5.4 million | $7.3 million |
| Diluted EPS | $0.07 | $0.22 | $0.33 |
| Cash & Short-term Instruments | $101.3 million | n/a | n/a |
Revenue Breakdown (Q2 2005):
- Royalties and license fees (overseas): $9.5 million (71.4% of total)
- Subscription revenue: $2.7 million (20% of total)
- Mobile revenue: $0.3 million (2.5% of total)
- Other revenues (animation): $0.8 million (6.1% of total)
Material Changes vs. Prior Periods
- Revenue Decline: Total revenue decreased 15.0% sequentially and 13.3% year-over-year. Overseas royalties fell 14.0% sequentially due to increased competition. Subscription revenue dropped 30.1% sequentially, attributed to competition in Korea and weak reception of a Ragnarok Online update.
- Expense Increase: Costs and operating expenses rose 30.7% sequentially and 85.5% year-over-year. This was primarily driven by a $1.5 million R&D expense for a license fee for the casual game portal STYLIA.
- Profitability Drop: Net income declined significantly to $1.9 million from $5.4 million in Q1 2005 and $7.3 million in Q2 2004.
- Mobile Growth: Mobile revenue surged 97.1% sequentially and 176.6% year-over-year.
Guidance, Outlook, and Risks
Management Commentary: CEO David Woong-Jin Yoon cited increased competition, lower-than-expected update results for Ragnarok Online in Korea, and delayed commercialization of R.O.S.E. Online as challenges. The company plans to focus on the casual game market via the STYLIA portal (open beta planned for October 2005) and expand publishing. New titles include Requiem (open beta H1 2006) and Ragnarok Online 2 (open beta H2 2006).
Strategic Partnerships: Gravity entered a licensing agreement with Shanda for Ragnarok Online in China, with system transfer completed on August 13, 2005.
Tax Contingency: Reported net income assumes a 24.75% tax rate based on the potential failure to renew "venture company" designation under Korean law. If the designation is renewed (expected decision in September 2005), the company would receive a 50% tax reduction, potentially raising Q2 2005 net income to $2.2 million.
Risks: Risks include revenue diversification, collection of overseas royalties, competition, product success rates, and global economic conditions. Casual games are noted to have shorter lifecycles and unpredictable popularity.
Investor Verification Checklist
- Verify the outcome of the Korean "venture company" designation renewal in September 2005 to confirm the applicable tax rate and adjusted net income.
- Monitor the performance of the STYLIA casual game portal following its open beta launch in October 2005.
- Track the commercialization progress and user adoption of Requiem and Ragnarok Online 2 against the stated 2006 timelines.
- Assess the impact of the new partnership with Shanda on revenue growth in the Chinese market.
- Review the sustainability of mobile revenue growth given its small current contribution to total revenue.