Gravity Co., Ltd. Form 20-F: Fiscal Year Ended December 31, 2007

Gravity Co., Ltd. reported a fiscal year marked by declining profitability and heightened operational risk, driven largely by its flagship MMORPG, Ragnarok Online. Total revenue fell 1.8% to KRW 40,229 million (US$42.99 m), with the game contributing 77% of sales but experiencing a drop in subscription and royalty income that pushed the company into a net loss of KRW 23,201 million (US$24.79 m). The decline was compounded by rising operating expenses, a widening gross‑profit margin contraction from 70% to 56.7%, and significant impairment losses on investments, including the liquidation of TriggerSoft and a $9 million write‑down of Perpetual Entertainment holdings.

Revenue concentration remains high, with 72% derived from overseas license fees and royalties, heavily weighted toward GungHo (44%) and Soft‑World (6%). This dependence exposes Gravity to payment inaccuracies, regulatory non‑compliance, and limited control over distribution. The company’s international footprint spans Korea, Japan (47% of revenue), and the U.S./Canada, with additional markets in Taiwan, Hong Kong, Thailand, and China. Currency exposure is substantial—approximately 72% of revenue in USD/JPY—and the firm lacks hedging instruments, amplifying financial volatility.

Governance and internal control weaknesses surfaced, including a material deficiency in financial reporting controls linked to outsourced IT functions. Ownership is dominated by GungHo (59%), raising potential conflicts of interest, while complex cross‑border share transactions and subsidiary restructurings add legal and regulatory complexity. Cybersecurity, intellectual‑property infringement, and evolving internet‑café regulations further threaten operational stability.

Despite these challenges, Gravity continues to pursue new titles and diversify its revenue model through micro‑transactions and free‑to‑play servers. However, sustaining profitability will require successful launch of new games, tighter control over licensing dependencies, and remediation of internal‑control gaps to restore investor confidence.