GRAVITY Co., Ltd. — FY2015 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2015; filed April 20, 2016. This is an annual report, not a standalone Q4 filing. The supplied filing text does not provide a clear set of Q4-only financial results. Financial statements are prepared under U.S. GAAP; amounts below are in Korean won (₩), millions, unless stated otherwise.
Business context
Gravity develops and publishes online and mobile games, led by the mature MMORPG Ragnarok Online. It also earns revenue from mobile games and applications, game licensing, and related products and services. The company reports that Ragnarok Online contributed 41.5% of FY2015 revenue. GungHo Online Entertainment, its Japanese licensee and majority shareholder, owned 59.3% of its common shares and generated 26.5% of FY2015 revenue.
Key financial metrics
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | ₩35,660 | ₩39,889 |
| Gross profit / margin | ₩5,378 / 15.1% | ₩5,701 / 14.3% |
| Operating loss / margin | ₩17,229 / (48.3%) | ₩11,829 / (29.7%) |
| Net loss attributable to parent | ₩16,965 | ₩20,907 |
| Operating cash flow | (₩5,978) | (₩6,147) |
| Cash and cash equivalents, year-end | ₩24,909 | ₩28,382 |
Revenue mix in FY2015: online-game subscriptions ₩6,521 (down 18.1%); royalties and license fees ₩11,010 (down 15.9%); mobile games and applications ₩15,078 (up 0.2%); character merchandising, animation and other revenue ₩3,051 (down 19.3%). Mobile games and applications represented 42.3% of total revenue.
Current assets were ₩43,676 and current liabilities ₩8,804 at year-end. Cash plus short-term financial instruments totaled ₩36,409. Total liabilities were ₩15,737; the company reported no long-term debt obligations. Total equity was ₩29,992. The company used ₩3,473 of cash overall during the year.
Material changes versus the prior comparable period
- Revenue declined 10.6%, continuing the decline reported in 2014. Management attributed the 2015 decrease mainly to weaker Ragnarok Online royalties in Japan, lower Ragnarok Online II subscriptions in the United States/Canada and Taiwan, and reduced third-party web-services revenue.
- Gross margin improved by 0.8 percentage points, as cost of revenue fell 11.4%, but gross profit still decreased 5.7%.
- Operating loss widened by 45.7%, primarily as operating expenses rose 29.0%. Impairment losses on intangible assets and goodwill increased to ₩5,849 from ₩1.
- Net loss attributable to the parent narrowed to ₩16,965 from ₩20,907, partly reflecting lower income tax expense (₩1,351 versus ₩10,147) and higher other income.
- Online-game segment revenue fell to ₩18,147 from ₩22,153; its operating loss widened to ₩7,038. Mobile-segment revenue was ₩15,350 versus ₩15,649, while its operating loss widened to ₩9,701 from ₩7,196.
- Cash and cash equivalents declined ₩3,473 during 2015. Research and development expense rose 8.9% to ₩5,277, while the company’s employee count also declined.
Outlook, risks and unusual items
- Management said available cash and expected operating cash flows should meet capital needs through at least the first quarter of 2017, while cautioning that changed conditions or significant investments could accelerate cash use. No specific revenue or earnings guidance is provided.
- FY2015 impairment charges included ₩4,605 for capitalized Ragnarok Online II development costs and ₩1,210 for NeoCyon goodwill. At year-end, capitalized software development costs and goodwill were reduced to nil.
- After year-end, the Japan Ragnarok Online II license was terminated. Gravity agreed to refund US$5 million of initial payments in four equal installments by December 2017; the filing says this did not affect FY2015 results.
- Key risks include dependence on aging Ragnarok Online and major licensees, intense competition, difficulty producing successful new games, foreign-exchange exposure, regulation and data-security risks, and GungHo’s control and potential conflicts of interest. The company believed it was a passive foreign investment company (PFIC) for 2008–2015 and saw significant risk of PFIC status in 2016, potentially creating adverse U.S. tax consequences for investors.
- The company reported no material off-balance-sheet arrangements and no pending legal proceeding expected to materially affect its business. It had not paid dividends and stated no intention to pay them in the near future.
- Management concluded disclosure controls and internal control over financial reporting were effective at year-end. The external auditor expressed an unqualified opinion on the financial statements but did not audit internal control effectiveness.
Important facts for investors to verify
- Whether Ragnarok Online user trends and Japanese royalties continue to weaken, and whether newer games can offset that decline.
- The timing and cash-flow effect of the US$5 million Ragnarok Online II refund, and the outlook for other license terminations and renewals.
- Whether cash burn, operating losses, and mobile-game segment losses improve enough to support management’s liquidity outlook through Q1 2017.
- The assumptions behind the ₩5,849 impairment charge and the recoverability of remaining intangible assets and tax attributes.
- Revenue concentration in GungHo and other licensees, related-party arrangements, and the governance implications of GungHo’s 59.3% ownership.
- PFIC status and the related U.S. tax reporting and investor consequences; consult an appropriate tax adviser.