GRAVITY Co., Ltd. Q3 2016 Financial Summary
Business Context and Reporting Period
This Form 6-K filing reports the unaudited financial results for GRAVITY Co., Ltd. (NasdaqCM: GRVY), a South Korean developer and publisher of online and mobile games, for the third quarter ended September 30, 2016. The company's principal product is Ragnarok Online, which is commercially offered in 80 markets.
Key Financial Metrics
| Metric | Q3 2016 (KRW) | Q3 2016 (USD) | Q2 2016 (KRW) | Q3 2015 (KRW) |
|---|---|---|---|---|
| Total Revenue | 15,746 million | 13,143 thousand | 9,057 million | 8,671 million |
| Cost of Revenue | 6,734 million | 5,621 thousand | 6,846 million | 7,185 million |
| Gross Profit | 9,012 million | 7,522 thousand | 2,211 million | 1,486 million |
| Operating Expenses | 5,466 million | 4,562 thousand | 3,717 million | 4,135 million |
| Operating Income | 3,546 million | 2,960 thousand | (1,506) million | (2,649) million |
| Net Income (Parent) | 3,087 million | 2,577 thousand | (1,605) million | (2,460) million |
| Cash & Equivalents | 35,792 million | 29,877 thousand | N/A | N/A |
Note: USD amounts are converted at the rate of KRW 1,197.98 to US$ 1.00 as of September 30, 2016.
Material Changes vs. Prior Periods
- Revenue Growth: Total revenue increased 73.9% quarter-over-quarter (QoQ) and 81.6% year-over-year (YoY).
- Subscription Revenue: Surged 265.8% QoQ and 332.4% YoY, driven by direct service of Ragnarok Online and Xianjing RO Chuanshuo WEB in Taiwan.
- Royalty & License Fees: Increased 36.4% QoQ and 35.1% YoY, primarily due to Ragnarok Online performance in Thailand and Japan.
- Mobile Games: Declined 13.0% QoQ and 31.3% YoY due to decreased revenue from Ragnarok: Path of Heroes and Battle Ship.
- Profitability Turnaround: The company returned to profitability, recording a net income of KRW 3,087 million compared to a net loss of KRW 1,605 million in Q2 2016 and KRW 2,460 million in Q3 2015.
- Expense Increases: Operating expenses rose 47.1% QoQ, mainly due to increased commissions and advertising expenses in Taiwan.
- Cost Reduction: Cost of revenue decreased 1.6% QoQ and 6.3% YoY, attributed to lower salaries and the absence of amortization for Ragnarok Online II (fully impaired in Dec 2015).
Guidance, Outlook, and Risks
The filing contains forward-looking statements regarding future performance but does not provide specific numerical guidance for future quarters. Management highlighted the successful relaunch of Ragnarok Online in Thailand and the direct service launch in Taiwan as key growth drivers. Risks include the volatility of mobile game revenues and foreign currency fluctuations, which resulted in a net foreign currency loss of KRW 153 million for the quarter.
Investor Verification Checklist
- Verify the sustainability of the 265.8% QoQ growth in subscription revenue from Taiwan following the June 2016 direct service launch.
- Monitor the continued decline in mobile game revenues, specifically regarding Ragnarok: Path of Heroes.
- Assess the impact of increased operating expenses (commissions and advertising) on future gross margins.
- Review the balance sheet for the significant increase in deferred revenue (KRW 8,884 million) and its recognition timeline.
- Confirm the exchange rate sensitivity given the company's significant international revenue exposure.