GRVY Gravity Co Ltd

– GRAVITY Co., Ltd. (NasdaqCM: GRVY) (“Gravity” or “Company”), a developer and publisher of online and mobile games based in South Korea, today announced its unaudited financial results for the third quarter ended September 30, 2018, prepared in accordance with international Financial Reporting Standards as issued by the International Accounting Standards Board. 

THIRD QUARTER 2018 HIGHLIGHTS

• Total revenues were KRW 44,201 million (US$ 39,829 thousand), representing a 29.9% decrease from the second quarter ended June 30, 2018 (“QoQ”) and an 86.3% increase from the third quarter ended September 30, 2017 (“YoY”).
• Operating profit was KRW 7,084 million (US$ 6,383 thousand), representing a 14.9% decrease QoQ and a 107% increase YoY.
• Profit before income tax expenses was KRW 7,329 million (US$ 6,604 thousand), representing a 15.2% decrease QoQ and a 102.4% increase YoY.
• Net profit attributable to parent company was KRW 6,312 million (US$ 5,687 thousand), representing a 4.6% decrease QoQ and a 134.1% increase YoY.

REVIEW OF THIRD QUARTER 2018 FINANCIAL RESULTS

Revenues

Subscription revenues for the third quarter of 2018 were KRW 6,005 million (US$ 5,411 thousand), representing a 1.8% decrease QoQ from KRW 6,116 million and a 34.2% decrease YoY from KRW 9,126 million. The decrease QoQ was mainly attributable to decreased revenues from Ragnarok Online and Ragnarok Prequel in Taiwan and Ragnarok Online in the United States and Canada, which was partially offset by increased revenue from Ragnarok Online in Korea. The decrease YoY was largely due to decreased revenues from Ragnarok Online and Ragnarok Prequel in Taiwan, which partially offset by increased revenue from Ragnarok Online in Korea.  

Royalty and license fee revenues for the third quarter of 2018 were KRW 2,961 million (US$ 2,668 thousand), representing a 7.7% decrease QoQ from KRW 3,209 million and a 15.2% decrease YoY from KRW 3,492 million. The decrease QoQ was primarily due to decreased revenue of Ragnarok Online in Japan. This decrease was partially offset by increased revenue from Ragnarok Online in Russia, which was re-launched on August 15, 2018. The decrease YoY resulted mainly from decreased revenues from Ragnarok Online in the Philippines and Japan, which was partially offset by increased revenue from Ragnarok Online in Russia.

Mobile game and application revenues were KRW 33,387 million (US$ 30,085 thousand) for the third quarter of 2018, representing a 35.5% decrease QoQ from KRW 51,789 million and a 243.1% increase YoY from KRW 9,730 million. The QoQ decrease was mainly due to decreased revenues from Ragnarok M in Korea and Taiwan and RO: Idle Poring in global markets except for China and Japan. The increase YoY was primarily due to revenue contribution of Ragnarok M in Korea and Taiwan, which partially offset by decreased revenues from Ragnarok R in Taiwan, Korea, and Thailand.

Character merchandising and other revenues were KRW 1,848 million (US$ 1,665 thousand) for the third quarter of 2018, representing 3.3% decrease from KRW 1,912 million and a 34.4% increase YoY from KRW 1,375 million.

Cost of Revenue

Cost of revenue was KRW 29,806 million (US$ 26,858 thousand) for the third quarter of 2018, representing a 30.9% decrease QoQ from KRW 43,150 million and a 114.1% increase YoY from KRW 13,923 million. The decrease QoQ was mainly due to decreased commission paid for mobile game services related to Ragnarok M in Taiwan and Korea and outsourcing fees. The increase YoY was mostly from increased commission paid for mobile game services related to Ragnarok M in Taiwan and Korea and salaries.

Operating Expenses

Operating expenses were KRW 7,311 million (US$ 6,588 thousand) for the third quarter of 2018, representing a 36.7% decrease QoQ from KRW 11,553 million and a 14.6% increase YoY from KRW 6,378 million. The decrease QoQ was mainly attributable to decreased advertising expenses for marketing for Ragnarok M in Korea. The increase YoY was mostly increased research and development expenses related to mobile games and salaries.

Profit before income tax expenses

Profit before income tax expenses was KRW 7,329 million (US$ 6,604 thousand) for the third quarter of 2018 compared with profit before income tax expense of KRW 8,642 million for the second quarter of 2018 and profit before income tax expenses of KRW 3,621 million for the third quarter of 2017.

Net Profit

As a result of the foregoing factors, Gravity recorded a net profit attributable to parent company of KRW 6,312 million (US$ 5,687 thousand) for the third quarter of 2018 compared with net profit attributable to parent company of KRW 6,615 million for the second quarter of 2018 and a net profit attributable to parent company of KRW 2,696 million for the third quarter of 2017.

Liquidity

The balance of cash and cash equivalents and short-term financial instruments was KRW 65,779 million (US$ 59,273 thousand) as of September 30, 2018.

Note: For convenience purposes only, the KRW amounts have been expressed in U.S. dollars at the exchange rate of KRW 1,109.76 to US$ 1.00, the noon buying rate in effect on September 28, 2018 as quoted by the Federal Reserve Bank of New York.

GRAVITY BUSINESS UPDATE

Ragnarok Online IP-based Games

• Ragnarok M, an MMORPG mobile game

Gravity launched Ragnarok M in Southeast Asia (“SEA”) on October 31, 2018. Pre-registration of this Southeast Asia version began on September 19, hit over 2,500,000 signups via Official website/Google Play/Apple App store. The SEA version is available in five languages including English, Simplified Chinese, Thai, Indonesian and Vietnamese. The launch areas are 11 countries including Thailand, Indonesia, the Philippines, Singapore, Malaysia and Vietnam. Gravity plans to start pre-registration Ragnarok M in North and South America and Oceania during 2018 and launch in the first quarter of 2019. Also, Gravity is preparing for the service in Japan.

• Ragnarok R, a card RPG mobile game

Ragnarok R locally named as Ragnarok Rush was launched in Indonesia on September 12, 2018 by the local publisher, Gravindo. Based on revenues, such game ranked the third in Google Play Store after launching, at its peak.

• Ragnarok Prequel, a web browser-based MMORPG game

Ragnarok Prequel 2, the sequel Ragnarok Prequel with 3D visual is scheduled to be launched in Taiwan in the first half of 2019.

• Other Ragnarok Online IP-based games

A 3D MO Action RPG mobile game, Spear of Odin, is expected to be launched in Taiwan in the first half of 2019.

Investor Presentation

Gravity issued an investor presentation. The presentation contains the Company’s recent business updates, results of the third quarter in 2018 and Gravity’s business plan. The presentation can be found on the Company’s website under the IR Archives section at http://www.gravity.co.kr/en/ir/pds/list.asp. Korean and Japanese versions of the presentation are also provided on the website.

About GRAVITY Co., Ltd. ---------------------------------------------------

Based in Korea, Gravity is a developer and publisher of online and mobile games. Gravity's principal product, Ragnarok Online, is a popular online game in many markets, including Japan and Taiwan, and is currently commercially offered in 81 markets and countries. For more information about Gravity, please visit http://www.gravity.co.kr.

Forward-Looking Statements:

Certain statements in this press release may include, in addition to historical information, "forward-looking statements" within the meaning of the "safe-harbor" provisions of the U.S. Private Securities Litigation Reform Act 1995. Forward-looking statements can generally be identified by the use of forward-looking terminology, such as "may," "will," "expect," "intend," "estimate," "anticipate," "believe", "project," or "continue" or the negative thereof or other similar words, although not all forward-looking statements contain these words. Investors should consider the information contained in our submissions and filings with the United States Securities and Exchange Commission (the "SEC"), including our annual report for the fiscal year ended December 31, 2017 on Form 20-F, together with such other documents that we may submit to or file with the SEC from time to time, on Form 6-K. The forward-looking statements speak only as of this press release and we assume no duty to update them to reflect new, changing or unanticipated events or circumstances.

Contact:

Mr. Heung Gon Kim Chief Financial Officer Gravity Co., Ltd. Email: kheung@gravity.co.kr

Ms. Sang Eun Sung IR Manager Gravity Co., Ltd. Email: ir@gravity.co.kr Telephone: +82-2-2132-7800

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GRAVITY Co., Ltd.Consolidated Statements of Financial Position

(In millions of KRW and thousands of US$)

			As of
			31-Dec-17						30-Sep-18
			KRW			US$			KRW			US$
Assets			(audited)			(unaudited)			(unaudited)			(unaudited)
Current assets:
	Cash and cash equivalents		39,095			35,228			42,279			38,097
	Short-term financial instruments		22,500			20,275			23,500			21,176
	Accounts receivable, net		42,168			37,997			20,751			18,699
	Other receivables, net		698			629			128			116
	Prepaid expenses		3,027			2,728			2,251			2,028
	Other current assets		1,383			1,246			2,047			1,845
		Total current assets	108,871			98,103			90,956			81,961
Property and equipment, net			946			852			1,615			1,455
Intangible assets			1,036			934			526			474
Deferred tax assets			3,036			2,736			3,036			2,736
Other non-current financial assets			1,394			1,256			1,492			1,344
Other non-current assets			600			541			1,131			1,019
		Total assets	115,883			104,422			98,756			88,989
Liabilities and Equity
Current liabilities:
	Accounts payable		44,410			40,018			18,720			16,869
	Deferred revenue		16,100			14,508			12,361			11,139
	Withholdings		1,439			1,297			1,307			1,178
	Accrued expense		1,037			934			930			838
	Income tax payable		1,628			1,467			97			87
	Other current liabilities		130			117			117			105
		Total current liabilities	64,744			58,341			33,532			30,216
Long-term deferred revenue			6,581			5,930			4,393			3,959
Other non-current liabilities			560			505			493			444
		Total liabilities	71,885			64,776			38,418			34,619
Share capital			3,474			3,130			3,474			3,130
Capital surplus			27,164			24,477			27,140			24,456
Other components of equity			(40	)		(36	)		(118	)		(106	)
Retained earnings (Accumulated deficit)			13,962			12,581			30,438			27,427
		Equity attributable to owners of the Parent Company	44,560			40,152			60,934			54,907
		Non-controlling interest	(562	)		(506	)		(596	)		(537	)
		Total equity	43,998			39,646			60,338			54,370
		Total liabilities and equity	115,883			104,422			98,756			88,989

* For convenience purposes only, the KRW amounts are expressed in U.S. dollars at the rate of KRW 1,109.76 to US$ 1.00, the noon buying rate in effect on September 28, 2018 as quoted by the Federal Reserve Bank of New York.

GRAVITY Co., Ltd.Consolidated Statements of Comprehensive Income

(In millions of KRW and thousands of US$ except for share and ADS data)

			Three months ended												Nine months ended
			30-Jun-18			30-Sep-17			30-Sep-18						30-Sep-17			30-Sep-18
			(KRW)			(KRW)			(KRW)			(US$)			(KRW)			(KRW)			(US$)
			(unaudited)			(unaudited)			(unaudited)			(unaudited)			(unaudited)			(unaudited)			(unaudited)
Revenues:
	Online games-subscription revenue		6,116			9,126			6,005			5,411			28,766			21,017			18,938
	Online games-royalties and license fees		3,209			3,492			2,961			2,668			11,513			10,788			9,721
	Mobile games and applications		51,789			9,730			33,387			30,085			30,033			136,573			123,065
	Character merchandising and other revenue		1,912			1,375			1,848			1,665			3,791			5,160			4,650
		Total net revenue	63,026			23,723			44,201			39,829			74,103			173,538			156,374
Cost of revenue			43,150			13,923			29,806			26,858			42,714			118,740			106,996
Gross profit			19,876			9,800			14,395			12,971			31,389			54,798			49,378
Operating expenses:
	Selling, general and administrative		9,470			4,943			5,602			5,048			17,048			28,899			26,041
	Research and development		1,742			1,436			1,760			1,586			3,340			5,376			4,844
	Others, net		341			(1	)		(51	)		(46	)		(93	)		296			267
		Total operating expenses	11,553			6,378			7,311			6,588			20,295			34,571			31,152
Operating profit			8,323			3,422			7,084			6,383			11,094			20,227			18,226
Finance income(costs):
	Finance income		892			200			58			52			1,117			1,540			1,387
	Finance costs		(573	)		(1	)		187			169			(648	)		(679	)		(611	)
Profit before income tax			8,642			3,621			7,329			6,604			11,563			21,088			19,002
Income tax expenses(profits)			2,042			914			1,024			923			3,159			4,659			4,198
		Profit for the period	6,600			2,707			6,305			5,681			8,404			16,429			14,804
Profit attributable to:
	Non-controlling interest		(15	)		11			(7	)		(6	)		(17	)		(47	)		(42	)
	Owners of Parent company		6,615			2,696			6,312			5,687			8,421			16,476			14,846
Earning per share
		- Basic and diluted	952			388			908			0.82			1,212			2,371			2.14
Weighted average number of shares outstanding
		- Basic and diluted	6,948,900			6,948,900			6,948,900			6,948,900			6,948,900			6,948,900			6,948,900
Earning per ADS(1)
		- Basic and diluted	952			388			908			0.82			1,212			2,371			2.14

* For convenience, the KRW amounts are expressed in U.S. dollars at the rate of KRW 1,109.76 to US$ 1.00, the noon buying rate in effect on September 28, 2018 as quoted by the Federal Reserve Bank of New York.

 (1) Each ADS represents one common share.