Business Context and Reporting Period
Company: GRAVITY Co., Ltd. (NasdaqGM: GRVY)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: First Quarter ended March 31, 2010
Business Overview: Gravity is a South Korean online game developer and publisher. Its principal product is Ragnarok Online, commercially offered in 59 markets including Japan, Taiwan, and Thailand.
Key Financial Metrics
| Metric | Q1 2010 (KRW) | Q1 2010 (US$) |
|---|---|---|
| Total Revenue | 11,119 million | 9,840 thousand |
| Cost of Revenue | 4,861 million | 4,302 thousand |
| Gross Profit | 6,258 million | 5,538 thousand |
| Operating Expenses | 4,996 million | 4,421 thousand |
| Operating Income | 1,262 million | 1,117 thousand |
| Net Income (Parent) | 381 million | 337 thousand |
| Cash & Equivalents | 66,057 million | 58,458 thousand |
Note: US$ amounts converted at KRW 1,130.00 to US$ 1.00.
Material Changes vs. Prior Periods
- Revenue Decline: Total revenue decreased 14.3% quarter-over-quarter (QoQ) and 33.0% year-over-year (YoY).
- Royalties/Licensing: Down 11.4% QoQ and 40.1% YoY, driven by lower Ragnarok Online revenue in Japan and a stronger Korean Won against the Japanese Yen.
- Subscription: Down 21.4% QoQ and 29.9% YoY, primarily due to declines in the U.S., Canada, and Korea.
- Mobile Games: Relatively stable, down 5.9% QoQ and 0.7% YoY.
- Profitability Improvement: Despite revenue drops, Net Income attributable to the parent company turned positive at KRW 381 million, compared to a net loss of KRW 290 million in Q4 2009. However, this represents a 78.4% decrease in pre-tax income compared to Q1 2009.
- Expense Reduction: Operating expenses fell 29.9% QoQ. This was largely due to the absence of a KRW 280 million impairment loss on intangible assets (Ice Age Online guarantee) and significant advertising costs incurred in Q4 2009.
- Liquidity: Cash and short-term financial instruments increased to KRW 66,057 million as of March 31, 2010, up from KRW 67,333 million (Cash + Short-term instruments) at year-end 2009, reflecting strong cash reserves.
Outlook, Risks, and Business Updates
- New Product Launch: Gravity entered a publishing agreement with SK i-media Co., Ltd. to publish "H.A.V.E. Online," a casual Third Person Shooter (TPS), in Korea and Japan. Release is expected in Q3 2010.
- Strategic Risks: The company faces continued revenue pressure from its flagship title, Ragnarok Online, particularly in key markets like Japan and the U.S. Currency fluctuations (KRW vs. JPY) remain a material risk to royalty revenues.
- Forward-Looking Statements: The filing includes standard disclaimers regarding forward-looking statements, noting that actual results may differ due to market conditions and other factors.
Investor Verification Checklist
- Revenue Sustainability: Verify the trajectory of Ragnarok Online user counts and revenue in Japan and the U.S., as these drove the majority of the Q1 decline.
- Currency Impact: Monitor the exchange rate between the Korean Won and Japanese Yen, as a stronger Won continues to negatively impact reported royalty revenues.
- New Title Performance: Track the launch and initial performance of "H.A.V.E. Online" in Q3 2010 to assess diversification efforts.
- One-Time Items: Confirm that the Q1 operating expense reduction was indeed due to the absence of Q4 2009 one-time costs (Ice Age impairment and championship advertising) rather than a structural cost reduction.