Business context and reporting period
Gravity Co., Ltd. filed this annual report on Form 20-F on April 26, 2019, covering the fiscal year ended December 31, 2018. The audited consolidated financial statements are prepared under IFRS. This is an annual filing, not a quarterly report; the filing text does not provide clear standalone fourth-quarter financial results.
Gravity develops and publishes online and mobile games. Its business shifted sharply toward mobile, led by Ragnarok M: Eternal Love. GungHo Online Entertainment owned 59.3% of Gravity and was its controlling shareholder.
Financial performance and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | KRW 286,770 million (US$257.7 million) | KRW 141,623 million |
| Gross profit / margin | KRW 76,726 million / 26.8% | KRW 47,389 million / 33.5% |
| Operating profit / margin | KRW 33,368 million / 11.6% | KRW 14,035 million / 9.9% |
| Profit attributable to parent owners | KRW 31,443 million | KRW 13,319 million |
| Basic earnings per share | KRW 4,525 | KRW 1,917 |
| Operating cash flow | KRW 35,972 million | KRW 26,136 million |
- Mobile games and applications generated KRW 239,489 million, 83.5% of revenue, up 189.9%. Ragnarok M: Eternal Love alone contributed 75.1% of total revenue.
- Online subscription revenue declined 28.9% to KRW 25,897 million; online royalties and license fees fell 16.5% to KRW 13,556 million.
- Cash and cash equivalents were KRW 86,051 million at year-end, versus KRW 39,095 million a year earlier. Current assets were KRW 160,168 million and current liabilities KRW 93,521 million. The current ratio was approximately 1.7.
- Total liabilities were KRW 97,622 million and total equity KRW 75,552 million. The company reported no long-term debt obligations; liabilities were primarily accounts payable and deferred revenue.
- Investing activities provided KRW 10,823 million, largely reflecting a KRW 13,000 million decrease in short-term financial instruments. Financing activities used KRW 197 million, mainly for lease-liability repayments.
- Gross margin fell as platform commissions, royalties and outsourcing costs rose with mobile-game growth. Operating margin improved as revenue growth outpaced operating expenses.
Changes, outlook, risks and unusual items
- Management attributed revenue growth mainly to Ragnarok M: Eternal Love launches in Taiwan, Korea and Southeast Asia. Traditional Ragnarok Online revenue declined to 11.2% of total revenue from 26.5% in 2017.
- Management said available cash and expected operating cash flow should meet capital needs through at least the first quarter of 2020, while noting that changed business conditions or investments could accelerate cash use. No formal revenue or earnings guidance is provided.
- Growth plans include developing games in-house, publishing third-party titles, entering additional markets and expanding related uses of its intellectual property. Management cautioned that new games may not succeed and mobile games generally have shorter life cycles and lower margins.
- Revenue concentration is substantial: Ragnarok-based games accounted for 82.7% of 2018 revenue, and Ragnarok M: Eternal Love accounted for 75.1%. Third-party mobile platforms generated 79.6% of revenue; the company also relies on third-party developers, notably Dream Square.
- The company reported material weaknesses in internal control over financial reporting, particularly the control environment and risk assessment, IT general controls for mobile-game data, and mobile revenue recognition and deferred-revenue calculations. Management and the auditor concluded controls were ineffective as of December 31, 2018. Remediation plans include additional personnel, training, reconciliations and stronger review controls.
- Gravity recognized KRW 623 million of intangible-asset impairment in 2018, principally related to a game license. It also reported KRW 7,413 million of deferred tax assets, whose realization depends on future taxable income.
- Key risks include dependence on Ragnarok titles and a single hit mobile game; competition and changing player preferences; platform policy or fee changes; foreign-exchange exposure (71.8% of revenue was denominated in foreign currencies); regulation and data privacy; cybersecurity and cheating; licensee and developer dependence; and GungHo’s control and potential conflicts of interest.
- Management reported no material litigation or material off-balance-sheet arrangements. Gravity had not paid dividends and stated it had no intention to do so in the near future. It planned to adopt IFRS 16 in 2019; the estimated present value of operating lease payments was KRW 4,358 million.
Most important facts for investors to verify
- Whether Ragnarok M: Eternal Love revenue and player engagement remained sustainable after its rapid 2018 expansion, given its 75.1% revenue concentration.
- Whether mobile platform commissions and other game-service costs continue to pressure gross margin.
- Whether the company implemented and independently tested remediation of the disclosed material weaknesses, especially mobile revenue and deferred-revenue controls.
- Whether operating cash flow and liquidity remain adequate as receivables and payables grow, and whether management’s cash runway estimate remains valid.
- Whether foreign-exchange exposure, third-party developer and licensee reliance, and GungHo-related governance conflicts have changed.