Gravity Reports First Quarter of 2018 Results and Business Updates

GRAVITY REPORTS FIRST QUARTER OF 2018 RESULTS AND BUSINESS UPDATES

Seoul, South Korea – April 27, 2018 – 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 first quarter ended March 31, 2018, prepared in accordance with international Financial Reporting Standards as issued by the International Accounting Standards Board. 

FIRST QUARTER 2018 HIGHLIGHTS

• Total revenues were KRW 66,311 million (US$ 62,499 thousand), representing a 1.8% decrease from the fourth quarter ended December 31, 2017 (“QoQ”) and a 184.0% increase from the first quarter ended March 31, 2017 (“YoY”).
• Operating profit was KRW 4,820 million (US$ 4,543 thousand), representing a 63.9% increase QoQ and a 46.1% increase YoY.
• Profit before income tax expenses was KRW 5,117 million (US$ 4,823 thousand), representing a 76.8% increase QoQ and a 51.3% increase YoY.
• Net profit attributable to parent company was KRW 3,549 million (US$ 3,345 thousand), representing a 27.5% decrease QoQ and a 63.5% increase YoY.

REVIEW OF FIRST QUARTER 2018 FINANCIAL RESULTS

Revenues

Subscription revenues for the first quarter of 2018 were KRW 8,896 million (US$ 8,385 thousand), representing a 16.1% increase QoQ from KRW 7,661 million and a 9.7% decrease YoY from KRW 9,855 million. The increase QoQ was mainly attributable to increased revenues from Ragnarok Online in Korea and Ragnarok Prequel in the Philippines. Ragnarok Prequel was launched in the Philippines on December 12, 2017. The decrease YoY was largely due to decreased revenues from Ragnarok Prequel and Ragnarok Online in Taiwan, which was partially offset by increased revenues from Ragnarok Online in Korea..

Royalty and license fee revenues for the first quarter of 2018 were KRW 4,619 million (US$ 4,353 thousand), representing a 2.4% decrease QoQ from KRW 4,731 million and a 3.2% increase YoY from KRW 4,475 million. The decrease QoQ was primarily due to a revenue recognition related to Ragnarok Online II in china based on a game development and publishing agreement in the fourth quarter 2017, which did not incur in the first quarter of 2018. This decrease was partially offset by increased revenue from Ragnarok Online in Japan. The increase YoY resulted mainly from increased revenues from Ragnarok Online in Japan, Philippines, Singapore, Malaysia.

Mobile game and application revenues were KRW 51,396 million (US$ 48,441 thousand) for the first quarter of 2018, representing a 2.3% decrease QoQ from KRW 52,592 million and a 537.4% increase YoY from KRW 8,063 million. The decrease QoQ resulted primarily from decreased revenues from global service of RO: Idle Poring, except for Japan and China; and Ragnarok M in Taiwan. Such decrease was partially offset by increased revenues from Ragnarok M, which was officially launched in Korea on March 14, 2018. The increase YoY was primarily due to revenues from Ragnarok M in Taiwan and Korea, which was launched on October 12, 2017 and on March 14, 2018, respectively.

Character merchandising and other revenues were KRW 1,400 million (US$ 1,320 thousand) for the first quarter of 2018, representing 44.8% decrease from KRW 2,537 million and a 46% increase YoY from KRW 959 million

Cost of Revenue

Cost of revenue was KRW 45,784 million (US$ 43,152 thousand) for the first quarter of 2018, representing a 11.1% decrease QoQ from KRW 51,521 million and a 234.8% increase YoY from KRW 13,675 million. The decrease QoQ was mainly due to decreased commission paid for mobile game services and outsourcing fees. The increase YoY was mostly from increased commission paid for game services related to Ragnarok M in Taiwan and Korea; and RO: Idle Poring in global markets except for China and Japan.

Operating Expenses

Operating expenses were KRW 15,707 million (US$ 14,804 thousand) for the first quarter of 2018, representing a 20.3% increase QoQ from KRW 13,059 million and a 146.3% increase YoY from KRW 6,378 million. The increase QoQ was mainly attributable to increased advertising expenses related to pre-launch marketing for Ragnarok M and RO: Idle Poring in Korea. The increase YoY was mostly resulted from increased advertising expenses for Ragnarok M and RO: Idle Poring in Korea; and research and development expenses.

Profit before income tax expenses

Profit before income tax expenses was KRW 5,117 million (US$ 4,823 thousand) for the first quarter of 2018 compared with profit before income tax expense of KRW 2,895 million for the fourth quarter of 2017 and profit before income tax expenses of KRW 3,382 million for the first quarter of 2017.

Net Profit

As a result of the foregoing factors, Gravity recorded a net profit attributable to parent company of KRW 3,549 million (US$ 3,345 thousand) for the first quarter of 2018 compared with net profit attributable to parent company of KRW 4,898 million for the fourth quarter of 2017 and a net profit attributable to parent company of KRW 2,170 million for the first quarter of 2017.

Liquidity

The balance of cash and cash equivalents and short-term financial instruments was KRW 57,397 million (US$ 54,097 thousand) as of March 31, 2018.

Note: For convenience purposes only, the KRW amounts have been expressed in U.S. dollars at the exchange rate of KRW 1,060.99 to US$ 1.00, the noon buying rate in effect on March 30, 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 Korea on March 14, 2018. Based on revenues, Ragnarok M ranked first in Apple’s App Store and third in Google Play Store in Korea, at its peak. Gravity plans to launch Ragnarok M in more markets during 2018.

• RO: Idle Poring, a text RPG mobile game

The Company launched RO: Idle Poring in Korea on January 30, 2018.

• Ragnarok R, a card RPG mobile game

The Company launched Ragnarok R in the United States and Canada on January 23, 2018.

• Other Ragnarok Online IP-based games

A 3D MO Action RPG mobile game, Spear of Odin, is expected to be launched in South East Asia in 2018.

Ragnarok Online

The Company plans to launch new versions of Ragnarok Online in various markets during 2018. Ragnarok Online RE:START was launched in the United States and Canada on June 27, 2017; and in Taiwan on January 31, 2018. Ragnarok Zero was launched in Korea on December 29, 2017.

Investor Presentation

Gravity issued an investor presentation. The presentation contains the Company’s recent business updates, results of first 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: [e-mail]

Ms. Ji Hee Kim IR Manager Gravity Co., Ltd. Email: [e-mail] Telephone: [phone]

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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						31-Mar-18
			KRW			US$			KRW			US$
Assets			(audited)			(unaudited)			(unaudited)			(unaudited)
Current assets:
	Cash and cash equivalents		39,095			36,848			29,571			27,871
	Short-term financial instruments		22,500			21,207			27,826			26,226
	Accounts receivable, net		42,168			39,744			41,811			39,408
	Other receivables, net		698			658			431			406
	Prepaid expenses		3,027			2,853			2,532			2,386
	Other current assets		1,383			1,303			2,577			2,430
		Total current assets	108,871			102,613			104,748			98,727
Property and equipment, net			946			892			972			916
Intangible assets			1,036			976			947			893
Deferred tax assets			3,036			2,861			3,037			2,862
Other non-current financial assets			1,394			1,314			1,384			1,304
Other non-current assets			600			566			704			664
		Total assets	115,883			109,222			111,792			105,366
Liabilities and Equity
Current liabilities:
	Accounts payable		44,410			41,857			38,248			36,049
	Deferred revenue		16,100			15,175			14,639			13,797
	Withholdings		1,439			1,356			1,667			1,571
	Accrued expense		1,037			977			970			914
	Income tax payable		1,628			1,534			1,828			1,723
	Other current liabilities		130			123			112			107
		Total current liabilities	64,744			61,022			57,464			54,161
Long-term deferred revenue			6,581			6,203			5,997			5,652
Other non-current liabilities			560			528			549			517
		Total liabilities	71,885			67,753			64,010			60,330
Share capital			3,474			3,274			3,474			3,274
Capital surplus			27,164			25,603			27,164			25,603
Other components of equity			(40	)		(37	)		220			208
Retained earnings (Accumulated deficit)			13,962			13,159			17,511			16,504
		Equity attributable to owners of the Parent Company	44,560			41,999			48,369			45,589
		Non-controlling interest	(562	)		(530	)		(587	)		(553	)
		Total equity	43,998			41,469			47,782			45,036
		Total liabilities and equity	115,883			109,222			111,792			105,366

* For convenience purposes only, the KRW amounts are expressed in U.S. dollars at the rate of KRW 1,060.99 to US$ 1.00, the noon buying rate in effect on March 30, 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
			31-Dec-17						31-Mar-17						31-Mar-18
			(KRW)			(US$)			(KRW)			(US$)			(KRW)			(US$)
			(unaudited)			(unaudited)			(unaudited)			(unaudited)			(unaudited)			(unaudited)
Revenues:
	Online games-subscription revenue		7,661			7,221			9,855			9,288			8,896			8,385
	Online games-royalties and license fees		4,731			4,459			4,475			4,218			4,619			4,353
	Mobile games and applications		52,592			49,569			8,063			7,600			51,396			48,441
	Character merchandising and other revenue		2,537			2,391			959			904			1,400			1,320
		Total net revenue	67,521			63,640			23,352			22,010			66,311			62,499
Cost of revenue			51,521			48,558			13,675			12,889			45,784			43,152
Gross profit			16,000			15,082			9,677			9,121			20,527			19,347
Operating expenses:
	Selling, general and administrative		10,964			10,334			5,528			5,210			13,827			13,032
	Research and development		1,899			1,790			863			813			1,874			1,766
	Others, net		196			185			(13	)		(12	)		6			6
		Total operating expenses	13,059			12,309			6,378			6,011			15,707			14,804
Operating profit			2,941			2,773			3,299			3,110			4,820			4,543
Finance income(costs):
	Finance income		758			714			535			504			590			556
	Finance costs		(804	)		(758	)		(452	)		(426	)		(293	)		(276	)
Profit before income tax			2,895			2,729			3,382			3,188			5,117			4,823
Income tax expenses(profits)			(2,015	)		(1,899	)		1,228			1,158			1,593			1,501
Profit for the year			4,910			4,628			2,154			2,030			3,524			3,322
Profit (loss) attributable to:
	Non-controlling interest		12			11			(16	)		(15	)		(25	)		(23	)
	Owners of the parent company		4,898			4,617			2,170			2,045			3,549			3,345
Earnings per share - Basic and diluted			705			0.66			312			0.29			511			0.48
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
Earnings per ADS(1)- Basic and diluted			1,410			1.32			624			0.58			1,022			0.96

* For convenience, the KRW amounts are expressed in U.S. dollars at the rate of KRW 1,060.99 to US$1.00, the noon buying rate in effect on March 30, 2018 as quoted by the Federal Reserve Bank of New York.

 (1) Each ADS represents two common shares.