GRAVITY Co., Ltd. — 2019 Form 20-F Summary
Business context and reporting period. This is an audited annual report for the fiscal year ended December 31, 2019, filed April 29, 2020—not a standalone fourth-quarter report. Gravity develops and publishes online and mobile games, reporting under IFRS as issued by the IASB. Amounts below are in millions of Korean won unless otherwise noted; translated U.S. dollar amounts use the filing’s December 31, 2019 exchange rate.
Financial performance and position
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | 360,967 | 286,770 | +25.9% |
| Gross profit / margin | 95,179 / 26.4% | 76,726 / 26.8% | Profit +24.1%; margin down 0.4 percentage points |
| Operating profit / margin | 48,663 / 13.5% | 33,368 / 11.6% | Profit +45.8% |
| Profit attributable to parent owners | 39,876 | 31,443 | +26.8% |
| Basic and diluted EPS | W5,738 | W4,525 | +26.8% |
| Operating cash flow | 26,371 | 35,972 | Down 26.7% |
Revenue growth was led by mobile games, up 26.1% to W301,903, representing 83.6% of revenue. Online subscription revenue rose 18.7% to W30,751, royalties and license fees fell 14.6% to W11,571, and other revenue more than doubled to W16,742. Cost of revenue rose 26.5% to W265,788, chiefly as mobile-platform commissions, royalties and outsourcing costs increased. Selling, general and administrative expense was W36,873 and research and development expense was W9,503. Net finance income was W2,593; income tax expense increased to W11,526 from W3,053, and the effective tax rate rose to 22% from 9%.
At December 31, 2019, cash and cash equivalents were W79,428 and short-term financial instruments were W39,500. Current assets were W155,863 and current liabilities W55,787. Total assets were W175,425, total liabilities W59,659 and total equity W115,766. The company reported no long-term debt obligations. IFRS 16 adoption resulted in W4,994 of lease liabilities at year-end, including W1,986 current and W3,008 non-current. Contractual obligations totaled W6,610, including leases, purchase obligations and accrued severance benefits.
Investing activities used W32,526, primarily reflecting a W30,000 increase in short-term financial instruments; financing activities used W1,686, mainly for lease-liability repayments. Cash declined W6,623 over the year. Management stated that cash and operating cash flow were expected to fund capital needs through at least the first quarter of 2021.
Material changes versus 2018
- Expansion of Ragnarok M: Eternal Love into Southeast Asia, the Americas, Oceania, Japan and Europe helped lift mobile revenue. Growth in those markets partly offset declines in Taiwan and Korea, where the game faced increased competition and weaker demand.
- Ragnarok M: Eternal Love represented 80.0% of total 2019 revenue, up from 75.1% in 2018. Revenue from the broader Ragnarok-based game portfolio was approximately 83.1% of total revenue.
- Online royalties and license fees declined, including from Ragnarok Online in Thailand and Brazil. Online subscription revenue increased, partly due to Taiwan performance and the launch of Ragnarok Prequel II there.
- Operating profit grew faster than revenue, while gross margin edged down because of mobile-game fees and commissions. Operating cash flow weakened, partly due to higher income tax payments and payments of accounts payable associated with Ragnarok M.
- IFRS 16 was adopted using the modified retrospective approach; 2018 comparative figures were not restated. Accordingly, some balance-sheet and expense comparisons are not directly comparable.
Outlook, commentary and key risks
- Outlook: The filing provides no quantified revenue or earnings guidance. Management’s stated priorities include developing and publishing games, expanding into markets, and improving profitability and cost efficiency. It cautions that historical growth may not continue.
- Concentration and platforms: The business is highly dependent on Ragnarok titles, one mobile game and third-party developers; the filing says 82.4% of 2019 revenue was generated through third-party mobile platforms. Changes to app-store terms, fees, access or visibility could affect results.
- Third-party dependence: The filing says 84.5% of revenue came from games developed by third parties, with a substantial share tied to Dream Square. Delays, weaker updates or a deterioration in developer relationships could impair game performance.
- Controls and audit: Management concluded that disclosure controls and internal control over financial reporting were ineffective at year-end due to material weaknesses involving the control environment, risk assessment, IT general controls and data supporting deferred-revenue measurement. KPMG issued an adverse opinion on internal control effectiveness, while issuing an unqualified opinion on the 2019 financial statements. Management described remediation steps, including additional personnel, training and stronger access controls.
- Other risks: The filing highlights competition, changing user preferences, regulatory and privacy requirements, cybersecurity, foreign-exchange movements, political and economic developments in key markets, and COVID-19 uncertainty as of the filing date. It also identifies GungHo’s 59.3% ownership and related-party and governance conflicts as risks. No material legal proceeding or material off-balance-sheet arrangement was reported.
- Capital returns: Gravity had not paid dividends and said it had no intention to do so in the near future.
Most important facts for investors to verify
- Whether Ragnarok M: Eternal Love’s revenue concentration and performance in newer markets remain sustainable, and whether declines in Taiwan and Korea continue.
- Whether platform commissions and other mobile-game costs keep pressuring gross margins and cash generation.
- Progress and independent evidence of remediation of the material weaknesses, particularly the controls over game-server data and deferred-revenue calculations.
- Cash conversion, receivable collection, and the composition and accessibility of short-term financial instruments; operating cash flow was below reported profit in 2019.
- Exposure to Dream Square, mobile-platform providers, GungHo and foreign currencies, as well as the company’s COVID-19 and regulatory developments after the filing date.