Business context and reporting period
GRAVITY Co., Ltd. filed this Form 20-F on April 29, 2021 for the fiscal year ended December 31, 2020. It is an annual report, not a standalone fourth-quarter filing; the supplied filing text does not provide a clear standalone Q4 financial result. The company develops and publishes online and mobile games, with revenue heavily tied to the Ragnarok intellectual property. Financial statements are prepared under IFRS as issued by the IASB; amounts below are in Korean won (₩) millions unless stated otherwise.
Key financial metrics
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Revenue | ₩405,953 | ₩360,967 | +12.5% |
| Gross profit / margin | ₩166,908 / 41.1% | ₩95,179 / 26.4% | +75.4%; margin +14.7 percentage points |
| Operating profit / margin | ₩88,368 / 21.8% | ₩48,663 / 13.5% | +81.6%; margin +8.3 percentage points |
| Profit for the year | ₩62,556 | ₩39,730 | +57.5% |
| Profit attributable to parent owners | ₩62,703 | ₩39,876 | +57.2% |
| Operating cash flow | ₩69,856 | ₩26,371 | Increased |
| Cash and cash equivalents at year-end | ₩110,632 | ₩79,428 | Increased |
Revenue mix in 2020: mobile games ₩298,324 (73.5% of revenue), online games ₩89,545 (22.0%), and other revenue ₩18,084 (4.5%). Net finance costs were ₩357, versus net finance income of ₩2,593 in 2019. Income tax expense was ₩25,455, and the effective tax rate rose to 29% from 22%.
At December 31, 2020, current assets were ₩246,585 and current liabilities ₩82,720; total assets were ₩265,372, total liabilities ₩88,024, and equity ₩177,348. Cash plus short-term financial instruments totaled ₩181,632. The company reported no long-term debt obligations; lease liabilities were ₩5,900, while accounts payable was ₩54,090. The reported debt-to-equity ratio, calculated using total liabilities, was 50% (52% in 2019). No material off-balance-sheet arrangements were reported.
Material changes versus the prior comparable period
- Online-game revenue more than doubled, up 111.6% to ₩89,545, primarily following the May 2020 relaunch of Ragnarok Online in Thailand.
- Mobile-game revenue declined 1.2% to ₩298,324. Ragnarok M: Eternal Love revenue fell 38.7% to ₩177,192, partly offset by launches of Ragnarok Origin in Korea and Ragnarok X: Next Generation in Taiwan, Hong Kong and Macau.
- Cost of revenue fell 10.1% to ₩239,045, mainly due to lower commissions and costs associated with Ragnarok M. Selling, general and administrative expense rose 69.2% to ₩62,400, including advertising expense of ₩30,084, about double 2019. R&D expense increased 58.2% to ₩15,034.
- Accounts receivable rose to ₩59,761 from ₩32,253. The company recorded ₩712 of bad-debt expense in 2020, compared with ₩281 in 2019.
- Operating cash flow improved, while investing activities used ₩36,049 and financing activities used ₩2,547. Investing outflows included a ₩31,500 net increase in short-term financial instruments.
Outlook, commentary, risks and unusual items
- Management provided no specific revenue or earnings guidance. It stated that cash and operating cash flow were expected to cover capital needs through at least the first quarter of 2022, while cautioning that conditions or investments could accelerate cash use.
- Management intends to broaden its game portfolio through in-house development, outsourcing, licensing, publishing and expansion into additional markets. A technical-support and profit-sharing agreement with key developer Dream Square expired in March 2021; the company did not plan to renew it and was discussing successor service arrangements.
- Revenue concentration remains significant: Ragnarok Online and games based on Ragnarok content together generated 94.8% of 2020 revenue. Ragnarok M: Eternal Love alone represented 43.6%; Ragnarok Origin represented 17.1% and Ragnarok X: Next Generation 7.8%. The filing also states that 74.5% of revenue came from third-party-developed online and mobile games.
- Platform dependence is material: 65.0% of 2020 revenue was generated through third-party mobile platforms. The filing highlights competition, changing player demand, game-launch and developer dependence, platform policy changes, regulation, privacy and cybersecurity, foreign-exchange movements, geopolitical conditions and COVID-19 as risks.
- Foreign-currency exposure is substantial: 72.9% of revenue was denominated in foreign currencies, and the company had no outstanding currency-forward contracts at year-end. A hypothetical 10% adverse movement in the relevant currency rates was estimated to reduce revenue by ₩23,871.
- Impairment losses totaled ₩1,571 in 2020, including ₩115 on intangible assets and ₩1,456 on other non-current assets, primarily minimum guaranteed royalties for games. These charges reduced earnings but were non-cash.
- The financial-statement audit opinion was unqualified. However, both management and the auditor concluded internal control over financial reporting was ineffective as of year-end; the auditor issued an adverse opinion on ICFR. Material weaknesses involved control environment and risk assessment, and IT program-change controls affecting mobile-game deferred revenue. Remediation plans included training, improved risk assessment and tighter approval and monitoring of program changes.
- The company had not paid dividends and stated it had no intention to pay dividends in the near future. GungHo Online Entertainment owned 59.3% of common shares, creating control and potential conflict-of-interest considerations.
Important facts for investors to verify
- Whether Dream Square’s post-PTSA service arrangements and any replacement partners preserve game updates, technical support and distribution economics.
- Whether the 2020 internal-control weaknesses are remediated and whether deferred-revenue records and related system-generated data are complete and accurate; mobile-game deferred revenue included ₩4,468 of unsatisfied obligations.
- Whether new releases can offset continued declines in Ragnarok M: Eternal Love and sustain revenue and margins without materially higher marketing or platform costs.
- Accounts-receivable collection, aging and credit-loss allowances, given the sharp year-over-year increase in receivables and bad-debt expense.
- Foreign-exchange sensitivity, platform concentration, and the financial and operational effects of the Dream Square transition and other third-party dependencies.
- The filing reports parent-attributable profit of ₩62,703, exceeding total profit for the year of ₩62,556 because of the non-controlling-interest loss; investors should confirm the presentation against the audited statements.