Business Context and Reporting Period
Company: GRAVITY Co., Ltd.
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2017
Accounting Standard: First-time adoption of International Financial Reporting Standards (IFRS) for the 2017 period; prior year (2016) restated for comparability.
Business Overview: A leading developer and publisher of online and mobile games, primarily based on the "Ragnarok" intellectual property. The company operates globally with significant markets in Taiwan, Korea, Japan, and the United States.
Key Financial Metrics
| Metric (KRW Millions) | 2017 | 2016 |
|---|---|---|
| Total Revenues | 141,623 | 51,396 |
| Gross Profit | 47,389 | 21,809 |
| Operating Profit | 14,035 | 3,834 |
| Net Profit (Attributable to Owners) | 13,319 | 657 |
| Cash and Cash Equivalents | 39,095 | 16,720 |
| Total Assets | 115,883 | 55,744 |
| Total Liabilities | 71,885 | 25,097 |
| Net Cash from Operating Activities | 26,136 | 2,494 |
Margins (2017 vs 2016):
- Gross Profit Margin: 33.5% (down from 42.4%)
- Operating Profit Margin: 9.9% (up from 7.5%)
- Net Profit Margin: 9.4% (up from 1.3%)
Material Changes vs. Prior Period
- Revenue Surge: Total revenue increased 175.6% to W141.6 billion. This was driven primarily by a 586.2% increase in mobile game revenue (W82.6 billion) due to the success of "Ragnarok M," "Ragnarok R," and "RO: Idle Poring."
- Profitability Expansion: Net profit attributable to owners increased 1,927% to W13.3 billion. This was significantly aided by the recognition of deferred tax assets (W3.0 billion) in 2017, which were not recognized in 2016.
- Cost Structure: Cost of revenues increased 218.5%, largely due to higher commissions paid to mobile platform providers (W76.5 billion vs W11.4 billion in 2016). Operating expenses rose 85.6%, driven by a 419.5% increase in advertising expenses and a 165.5% increase in R&D costs.
- Liquidity: Cash and cash equivalents more than doubled to W39.1 billion, supported by strong operating cash flow of W26.1 billion.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management expects continued growth driven by mobile game expansion and the diversification of the game portfolio beyond the core "Ragnarok Online" title. The company anticipates sufficient capital resources through at least Q1 2019.
- Key Risks:
- IP Concentration: While diversifying, "Ragnarok Online" and related IP still generated approximately 85.7% of total revenue in 2017 (26.5% from the original game and 59.2% from derivative games).
- Licensee Dependence: Significant revenue relies on overseas licensees (e.g., GungHo in Japan, Electronics Extreme in SE Asia). Deterioration in these relationships or licensee performance poses a material risk.
- Regulatory Environment: Subject to varying laws in Korea, Japan, Taiwan, and the US regarding game ratings, data privacy, and speculative game definitions.
- Foreign Exchange: Approximately 79.7% of revenue is denominated in foreign currencies (NT dollar, JPY, USD). Appreciation of the Korean Won could materially reduce reported profits.
- Unusual Items:
- Accounting Transition: The 2017 financials represent the first year of IFRS adoption. 2016 figures have been restated to ensure comparability.
- Deferred Tax Recognition: A significant reduction in income tax expense (from W3.2 billion in 2016 to W1.1 billion in 2017) was due to the realization of previously unrecognized deferred tax assets.
- Impairment: Recognized W230 million in impairment losses on intangible assets related to "Sword and Fairy: Mirror's Mirage."
Investor Verification Checklist
- Mobile Game Sustainability: Verify the user retention and revenue trends of the new mobile titles ("Ragnarok M," "Ragnarok R") to ensure the 2017 growth is not a one-time launch spike.
- Licensee Performance: Monitor the financial health and operational stability of key overseas licensees, particularly in Japan and Southeast Asia, given the high dependency on royalty streams.
- Deferred Tax Realizability: Assess the assumptions used to recognize the W3.0 billion deferred tax asset and the company's ability to generate future taxable income to utilize these assets.
- Foreign Exchange Exposure: Review the company's hedging strategy (or lack thereof) given that nearly 80% of revenue is in foreign currencies while costs are primarily in Korean Won.
- IP Diversification: Evaluate the pipeline of non-Ragnarok titles to mitigate the risk associated with the aging "Ragnarok Online" franchise.