Business Context and Reporting Period
Company: GRAVITY Co., Ltd.
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2009
Business Overview: Gravity is a leading developer and publisher of online games, primarily based in Korea. Its principal product is the MMORPG Ragnarok Online, which accounted for approximately 73.7% of total revenues in 2009. The company operates through a mix of direct publishing in key markets (Korea, U.S., Canada, Russia, CIS, France, Belgium) and licensing agreements with overseas operators in other regions, most notably Japan.
Key Financial Metrics (Year Ended Dec 31, 2009)
| Metric | Amount (Won Millions) | Amount (US$ Thousands) |
|---|---|---|
| Total Revenues | 57,403 | 50,746 |
| Gross Profit | 36,233 | 32,031 |
| Operating Income | 10,854 | 9,595 |
| Net Income (Parent Company) | 6,917 | 6,114 |
| Cash and Cash Equivalents | 51,333 | 45,379 |
| Total Assets | 102,438 | 90,557 |
| Total Liabilities | 18,828 | 16,644 |
| Net Cash from Operating Activities | 15,861 | 14,021 |
Margins:
- Gross Profit Margin: 63.1%
- Operating Profit Margin: 18.9%
- Net Profit Margin: 12.0%
Material Changes vs. Prior Period (2008)
- Revenue Growth: Total revenues increased 8.0% to W57.4 billion, driven by a 13.0% increase in royalties and license fees (primarily due to the weakening of the Korean Won against the Japanese Yen) and a 14.5% increase in mobile game revenues. This was partially offset by a 22.0% decline in character merchandising revenue.
- Profitability Turnaround: The company returned to profitability, recording a net income of W6.9 billion compared to a net loss of W2.8 billion in 2008. Operating income surged from a loss of W236 million to W10.9 billion.
- Cost Reduction: Cost of revenues decreased 23.8% due to lower amortization of intangible assets (fully amortized in 2008) and reduced salaries following the liquidation of the U.S. subsidiary L5 Games Inc.
- Foreign Currency Impact: While the depreciation of the Won against the Yen boosted royalty revenues, net other income decreased 65.0% due to a shift from a foreign currency gain of W3.2 billion in 2008 to a loss of W225 million in 2009.
Guidance, Outlook, Risks, and Unusual Items
Outlook and Guidance:
- The company expects to launch Ragnarok Online II in the fourth quarter of 2010, though delays have occurred.
- Management believes available cash and operating cash flows will be sufficient to meet capital needs through at least the first quarter of 2011.
- No dividends are expected to be paid in the near future.
Material Risks and Contingencies:
- Product Concentration: Heavy reliance on Ragnarok Online (73.7% of revenue), which is in a mature stage with declining user bases in principal markets.
- Licensee Dependence: 55.7% of 2009 revenue came from GungHo Online Entertainment, Inc. (Japan), which is also the company's majority shareholder (59.3%).
- Internal Controls: Management identified a material weakness in internal controls over financial reporting regarding monitoring of significant transactions at the subsidiary level.
- Geopolitical Risks: Tensions with North Korea and regulatory uncertainties in China, Taiwan, and Thailand pose risks to operations.
Unusual Items:
- Litigation Settlement: Recognized a loss of W1.6 billion in 2009 related to a settlement with Softstar Entertainment Inc. regarding R.O.S.E. Online in Taiwan/Hong Kong/Macau.
- Impairment: Recorded W241 million in impairment losses on goodwill related to the Russian subsidiary (Gravity CIS).
Key Facts for Investor Verification
- Revenue Concentration: Verify the sustainability of revenue from Ragnarok Online and the specific performance of the Japanese market (GungHo), which accounts for over half of total revenue.
- Internal Control Weakness: Assess the remediation plan for the identified material weakness in internal controls over financial reporting, specifically regarding subsidiary monitoring.
- Ragnarok Online II Launch: Monitor the actual launch date and market reception of Ragnarok Online II, as delays have already impacted royalty payments from licensees.
- Foreign Exchange Exposure: Evaluate the impact of Won appreciation against the Japanese Yen and U.S. Dollar on future royalty revenues, given that ~80% of revenue is denominated in foreign currencies.
- Related Party Transactions: Review the terms of agreements with GungHo Online Entertainment, Inc., given its dual role as majority shareholder and primary licensee.