Business Context and Reporting Period
Company: GRAVITY Co., Ltd. (NasdaqCM: GRVY)
Reporting Period: First Quarter ended March 31, 2015
Filing Date: May 27, 2015
Business Overview: Gravity is a South Korean developer, operator, and publisher of online and mobile games. Its principal product is Ragnarok Online, which is commercially offered in 71 markets.
Key Financial Metrics
| Metric | Q1 2015 (KRW) | Q1 2015 (US$) | Q4 2014 (KRW) | Q1 2014 (KRW) |
|---|---|---|---|---|
| Total Revenue | 9,069 million | 8,187 thousand | 9,330 million | 10,767 million |
| Cost of Revenue | 7,676 million | 6,930 thousand | 8,031 million | 9,467 million |
| Gross Profit | 1,393 million | 1,257 thousand | 1,299 million | 1,300 million |
| Operating Expenses | 3,952 million | 3,567 thousand | 4,639 million | 4,178 million |
| Operating Loss | (2,559) million | (2,310) thousand | (3,340) million | (2,878) million |
| Net Loss (Parent Company) | (2,628) million | (2,372) thousand | (11,871) million | (2,969) million |
| Cash & Short-term Instruments | 42,694 million | 38,543 thousand | 42,882 million | N/A |
Note: US$ amounts are converted at the rate of KRW 1,107.71 to US$ 1.00.
Material Changes vs. Prior Periods
- Revenue Decline: Total revenue decreased 2.8% quarter-over-quarter (QoQ) and 15.8% year-over-year (YoY).
- Mobile Games: Increased 26.5% QoQ due to third-party apps and "Ragnarok Online—Uprising: Valkyrie," but decreased 2.6% YoY due to lower third-party service revenue and "Road to Dragons."
- Royalties & Licenses: Decreased 13.2% QoQ and 29.7% YoY, primarily driven by lower "Ragnarok Online" revenue in Japan and the strengthening of the Korean Won against the Japanese Yen.
- Subscription: Decreased 26.9% QoQ and 10.2% YoY, attributed to declines in Korea, the US, and Canada.
- Merchandising: Decreased 17.1% QoQ and 33.4% YoY.
- Cost Reductions: Cost of revenue fell 4.4% QoQ (lower outsourcing and depreciation) and 18.9% YoY (lower salaries and severance). Operating expenses dropped 14.8% QoQ (lower commissions and R&D) and 5.4% YoY (lower salaries and advertising).
- Profitability Improvement: While the company remains unprofitable, the net loss attributable to the parent company improved significantly to KRW 2,628 million from KRW 11,871 million in Q4 2014. The Q4 2014 loss included a significant income tax expense of KRW 9,007 million, whereas Q1 2015 tax expense was KRW 287 million.
Outlook, Risks, and Commentary
- Management Commentary: The filing highlights specific drivers for revenue changes, including the impact of currency exchange rates (KRW vs. JPY) and the performance of specific titles like Ragnarok Online in various regions.
- Forward-Looking Statements: The filing contains standard safe-harbor language regarding forward-looking statements. The company assumes no duty to update these statements to reflect new events.
- Risks: The company faces risks related to currency fluctuations, reliance on specific game titles (Ragnarok Online), and declining subscription revenues in key markets (US, Canada, Korea).
- Unusual Items: The Q4 2014 period included a substantial income tax expense (KRW 9,007 million) which significantly impacted the net loss for that quarter compared to Q1 2015.
Investor Verification Checklist
- Verify the sustainability of the 26.5% QoQ growth in mobile game revenues.
- Monitor the impact of the strengthening Korean Won on future royalty revenues from Japan.
- Assess the trajectory of subscription revenue declines in the US, Canada, and Korea.
- Review the composition of the KRW 42.694 billion cash balance to ensure liquidity for ongoing operations and R&D.
- Confirm the absence of significant one-time tax expenses in future quarters to accurately gauge operating performance.