GungHo Online Entertainment : Supplementary Material on Consolidated Operating Results for the 2nd Quarter of Fiscal Year Ending December 31, 2019

August 8, 2019

GungHo Online Entertainment, Inc.

Consolidated Financial Results for the 2nd quarter of FY Ending December 31, 2019

Supplementary Material

Sales and income continue to increase YoY but decrease QoQ

• Summary of Financial Results for the 2nd Quarter of FY Ending December 31, 2019 (Trends of Quarterly Performance)

(Millions of yen)		2018			2019
1st quarter	2nd quarter	3rd quarter	4th quarter	1st quarter	2nd quarter
Net sales		21,899	20,807	19,056	30,337	35,073		23,603
Cost of sales		9,796	9,098	7,987	15,758	17,226		10,678
Gross profit		12,103	11,708	11,069	14,578	17,846		12,925
Selling, general and	5,642	5,937	6,036	5,267	4,843		5,488
administrative expenses
Salary and		834	862	827	1,125	877		886
allowances
Advertising expenses	2,593	2,703	2,724	1,739	1,632		2,145
Others		2,214	2,371	2,484	2,402	2,333		2,456
Operating income	6,461	5,771	5,033	9,311	13,003		7,436
Operating	income	29.5%	27.7%	26.4%	30.7%	37.1%		31.5%
margin
Ordinary income		6,272	5,965	5,185	9,236	13,089		7,430
Quarterly Profit	before	6,211	5,630	4,859	8,728	13,066		7,412
income taxes
Quarterly Profit
attributable to owners of	4,052	3,548	3,000	5,984	8,485		4,852
parent

• Net sales and income continued to increase YoY owing to "Puzzle & Dragons" and "Ragnarok M" but decreased QoQ.

【Net Sales】

As for existing games, "P&D" continues to be updated and release events, such as adding new dungeons, etc., improving game content, collaboration with popular characters from other companies, and more, with a focus on continued long-term enjoyment. In addition to hosting an e-sport event at "GungHo Festival 2019" in May, "P&D" held in-game events to keep the game enjoyable and MAU continued to perform well.

As for new games, "Ragnarok Masters", a Japanese version of "Ragnarok M: Eternal Love", an online RPG for smartphones distributed by our subsidiary GRAVITY Co., Ltd. in Asia, North America, South America, and Oceania, began service in Japan from June 5, 2019, and it has made a good start. In addition, the smart phone card game "TEPPEN" jointly developed with Capcom Co., Ltd. was launched on July 4, 2019 in North America and Europe, and service in Asia and Japan was also launched on August 8.

With regard to our subsidiary's business, although sales in the existing distribution area of "Ragnarok M: Eternal Love", which is distributed by GRAVITY Co., Ltd., are settling down compared with the initial release, it continues to contribute to the consolidated performance of the Group, and measures will be implemented for continuous enjoyment in the future through regular updates.

As a result, net sales for the second quarter of the year were JPY 23,603 million, an increase against the previous year by JPY 2,796 million, a decrease against the previous quarter by JPY 11,469 million.

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【Gross profit】

Although the cost of sales for the second quarter decreased to JPY 10,678 million (decrease JPY 6,548 million compared to the previous quarter), gross profit ratio increased to 54.7% (up 3.9p from the previous quarter) due to an increase of contribution from sales related to "Puzzle & Dragons," which has a high gross profit margin. Gross profit came to JPY 12,925 million, an increase against the previous year by JPY 1,216 million, a decease against the previous quarter by JPY 4,921 million.

【Operating income】 (Salaries and allowances)

As of the end of the second quarter of this fiscal year, the number of stand-alone employees of GungHo was 395 (increased 3 compared to the previous quarter), and the number of consolidated employees was 1,204 (increased 55 compared to the previous quarter), salary and allowances increased JPY 9 million to JPY 886 million on a quarter-by-quarter basis.

(Advertising expenses)

In the second quarter, advertising expenses increased to 2,145 million yen (an increase of 512 million yen compared to the previous quarter) due to the holding of events such as GungHo Festival and advertising expenses for the new title "Ragnarok Masters" which began distribution in Japan on June 5, 2019, in addition to the ongoing TV commercials for "Puzzle & Dragons" within Japan.

As a result, operating income for the second quarter of the year was JPY 7,436 million, an increase against the previous year by JPY 1,665 million, a decrease against the previous quarter by JPY 5,566 million.

• MAU remained at a high level

Trend of P&D MAU and payment rate in Japan

P&D MAU

Payment rate

Start of TV commercial

Word-of-mouth

2012.2	4 5 6 7 8	10 11	2013.1	3 4 5 6 7 8	10 11	2014.1	3 4 5 6 7 8	10 11	2015.1	3 4 5 6 7 8	10 11	2016.1	3 4 5 6 7 8	10 11	2017.1	3 4 5 6 7 8	10 11	2018.1	3 4 5 6 7 8	10 11	2019.1	3 4 5 6
3	9	12	2	9	12	2	9	12	2	9	12	2	9	12	2	9	12	2	9	12	2

P&D was released for iPhone in February 2012. Initially, we carried out promotional activities mainly based on a word-of-mouth approach. Subsequently, when the Android version was released in September 2012, we launched a TV commercial in the following month. With the rapid penetration of smartphones, the number of DLs grew. The number of DLs continued to increase steadily thereafter and exceeded 52 million as of May 2019. Additionally, the number already accounts for over 70% of the smartphone users of 67,520,000 (source: Nielsen Digital Co., Ltd., as of May 2018), reflecting a wide reach of P&D in the current market with one of the highest popularityin the nation.

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• GungHo non-consolidated monthly net sales

Non-consolidated monthly net sales

2016.1

2 3 4 5 6 7 8 9

10 11 12

2017.1

2 3 4 5 6 7 8 9

10 11 12

2018.1

2 3 4 5 6 7 8 9

10 11 12

2019.1

2 3 4 5 6

Regarding the non-consolidated monthly sales of GungHo, as a result of implementing monthly in-game events, etc. the Company has been posting high profits for a long time backed by a stable, outstanding level of MAU despite some fluctuations of sales in results from month to month.

• Trend of consolidated net sales

・Net sales continued to increase YoY owing to "P&D" and "Ragnarok M"

・Second quarter net sales decreased due partly to a rebound after the strong showing from the "P&D" new year and anniversary events held in the first quarter of 2019.

・Although net sales from "Ragnarok M" in Southeast Asia, North America, South America and Oceania made almost a full contribution in the first quarter of 2019, second quarter net sales decreased because of a slow-down in regions where distribution began in and after the fourth quarter of 2018.

Trend of consolidated net sales

						Consolidated net sales excluding Gravity			GRAVITY
（Unit：millions of yen）												35,073
35,000
															30,337
30,000
	25,7231,945		23,432				22,309								12,976	23,603
25,000			20,840	21,899	20,807				10,886
20,000				2,404			19,056			6,685
							2,111		6,582	6,360	6,073	4,250
15,000
23,778	21,027												22,097
10,000	18,728							19,451
			15,727	15,539	14,733	14,806	16,918
5,000
0
	1Q	2Q		3Q	4Q	1Q	2Q	3Q		4Q	1Q	2Q
				2017				2018					2019

*Net sales indicate figure after consolidated adjustment.

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■Consolidated Balance Sheet													(Millions of yen)
		2016			2017			2018		2019
	1Q	2Q	3Q	4Q	1Q	2Q	3Q	4Q	1Q	2Q	3Q	4Q	1Q	2Q
Current assets	97,959	108,669	35,731	47,183	49,721	58,240	59,940	70,913	69,677	74,065	73,990	88,376	95,244	92,233
Cash and deposits	85,629	95,813	25,726	33,876	36,375	44,613	46,424	56,031	56,377	62,088	63,049	74,322	79,066	79,414
Accounts receivable-trade	9,263	9,443	6,579	9,063	10,462	10,518	8,870	10,694	9,766	8,439	8,582	11,739	14,210	9,837
Short-term investment securities	1,120	1,015	1,245	1,302	1,352	1,326	3,079	1,949	1,896	1,585	145	394	442	1,397
Work in process	29	48	68	82	53	103	141	174	278	331	394	68	24	87
Deferred tax assets	407	793	311	517	156	307	130	233	106	196	95	250	0	0
Others	1,509	1,553	1,800	2,341	1,322	1,370	1,294	1,829	1,250	1,422	1,723	1,599	1,499	1,496
Non-current assets	9,785	10,066	9,583	7,848	6,674	6,240	6,414	7,157	6,930	7,321	7,193	7,656	8,656	9,484
Property,plant and equipment	509	1,067	913	814	746	665	576	522	465	475	418	325	651	689
Intangible assets	3,802	3,677	2,973	2,397	1,443	880	1,205	1,642	1,753	1,856	1,794	2,077	2,731	3,507
Goodwill	0	0	0	0	0	0	0	0	0	0	0	0	0	0
Software	600	572	833	1,876	871	184	230	307	567	668	573	141	130	195
Software in progress	3,123	3,017	2,052	433	478	599	876	1,112	1,080	1,077	1,110	1,821	2,485	3,203
Others	77	87	87	88	93	96	99	221	105	110	110	115	115	108
Investments and other assets	5,473	5,321	5,697	4,636	4,484	4,694	4,632	4,991	4,711	4,989	4,979	5,252	5,273	5,287
Investment securities	1,524	1,392	1,368	349	335	334	336	481	108	73	75	74	74	71
Deferred tax assets	621	677	981	1,116	1,097	1,497	1,397	1,691	1,658	1,735	1,715	2,183	2,214	2,160
Others	3,327	3,251	3,347	3,170	3,051	2,861	2,897	2,818	2,943	3,180	3,189	2,995	2,984	3,055
Total assets	107,745	118,735	45,315	55,032	56,396	64,480	66,355	78,070	76,607	81,386	81,184	96,032	103,900	101,718
Current liabilities	11,930	15,286	8,199	12,822	9,990	11,617	7,545	14,097	10,821	11,820	8,211	16,774	17,400	15,288
Notes and accounts payable-trade	354	467	348	561	1,023	1,334	1,114	4,230	3,296	2,554	1,842	6,725	7,657	3,574
Short term loans payable	772	765	0	0	271	200	0	0	0	0	0	0	0	0
Current portion of long-term loans payable	214	193	178	195	147	143	133	146	138	145	177	159	187	169
Income tax payable	4,736	9,593	3,230	6,948	2,909	6,150	2,656	4,707	2,039	3,792	1,508	4,427	3,663	5,711
Others	5,852	4,265	3,677	4,312	5,638	3,788	3,441	4,812	5,347	5,327	4,682	5,462	5,892	5,832
Non-current liabilities	720	1,139	1,101	1,225	1,183	1,524	1,389	1,560	1,382	1,348	1,275	1,147	1,273	1,147
Long term loans payable	105	62	87	123	100	139	111	154	125	130	159	132	162	133
Others	614	1,077	1,014	1,101	1,083	1,384	1,277	1,406	1,257	1,218	1,116	1,014	1,111	1,014
Total liabilities	12,651	16,425	9,301	14,047	11,173	13,142	8,935	15,658	12,203	13,169	9,486	17,922	18,674	16,435
Shareholder's equity	93,310	100,920	34,278	39,023	42,965	48,923	54,845	59,303	61,227	64,775	67,866	73,850	80,276	80,355
Capital stock	5,338	5,338	5,338	5,338	5,338	5,338	5,338	5,338	5,338	5,338	5,338	5,338	5,338	5,338
Capital surplus	5,469	5,469	5,469	5,469	5,469	5,469	5,474	5,474	5,475	5,475	5,487	5,487	5,487	5,487
Retained earnings	124,817	132,427	103,601	108,346	112,288	118,246	124,151	128,609	130,528	134,077	137,066	143,051	149,394	154,247
Treasury shares	-42,314	-42,314	-80,130	-80,130	-80,130	-80,130	-80,118	-80,118	-80,115	-80,115	-80,027	-80,027	-79,944	-84,718
Accumulated other comprehensive income
Foreign currency translation adjustment	-28	-282	-237	-164	-38	-68	-89	32	26	-129	-109	-148	-219	-357
Others	0	0	0	0	0	0	0	0	0	0	0	0	0	0
Total Accumulated other comprehensive income	-28	-282	-237	-164	-38	-68	-89	32	26	-129	-109	-148	-219	-357
Non Controlling Interests	1,560	1,344	1,604	1,696	1,805	1,894	1,993	2,348	2,369	2,706	3,101	3,522	4,312	4,379
Total non-current assets	95,094	102,309	36,013	40,984	45,222	51,338	57,420	62,412	64,403	68,217	71,697	78,110	85,226	85,282
Total assets	107,745	118,735	45,315	55,032	56,396	64,480	66,355	78,070	76,607	81,386	81,184	96,032	103,900	101,718
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■Consolidated Profit and Loss Sheet																(Millions of yen)
			2016					2017					2018			2019
	1Q	2Q	3Q	4Q	Total	1Q	2Q	3Q	4Q	Total	1Q	2Q	3Q	4Q	Total	1Q	2Q
Net sales	31,699	29,743	25,970	25,043	112,457	25,723	23,432	20,840	22,309	92,306	21,899	20,807	19,056	30,337	92,101	35,073	23,603
Cost of sales	10,438	10,023	9,487	8,873	38,822	9,219	8,552	7,521	10,471	35,765	9,796	9,098	7,987	15,758	42,640	17,226	10,678
Cost of sales ratio	32.93%	33.70%	36.53%	35.43%	34.52%	35.84%	36.50%	36.09%	46.94%	38.75%	44.73%	43.73%	41.91%	51.94%	46.30%	49.12%	45.24%
Gross profit	21,261	19,719	16,483	16,170	73,635	16,503	14,880	13,318	11,837	56,540	12,103	11,708	11,069	14,578	49,460	17,846	12,925
Total selling, general and administrative expenses	7,126	7,187	6,600	6,638	27,553	6,369	5,575	4,581	5,628	22,155	5,642	5,937	6,036	5,267	22,883	4,843	5,488
Salaries, wages and bonuses etc.	878	874	817	1,067	3,638	844	820	760	1,155	3,582	834	862	827	1,125	3,649	877	886
Advertising & marketing	4,053	4,019	3,636	3,265	14,973	3,356	2,595	1,712	2,560	10,224	2,593	2,703	2,724	1,739	9,760	1,632	2,145
Others	2,195	2,293	2,147	2,305	8,941	2,168	2,159	2,108	1,912	8,349	2,214	2,371	2,484	2,402	9,473	2,333	2,456
Operating profit	14,134	12,531	9,882	9,532	46,081	10,134	9,304	8,737	6,209	34,384	6,461	5,771	5,033	9,311	26,577	13,003	7,436
Operating profit ratio	44.59%	42.13%	38.05%	38.06%	40.98%	39.40%	39.71%	41.92%	27.83%	37.25%	29.50%	27.74%	26.41%	30.69%	28.86%	37.07%	31.51%
Non-operating profit	32	25	21	18	98	21	30	16	21	88	22	24	117	-43	120	94	17
Interest income	22	12	12	12	60	13	14	13	16	57	18	22	24	26	91	36	45
Foreign exchange gains	0	0	0	6	6	0	0	0	0	0	0	0	84	-84	0	51	-49
Others	9	12	9	0	31	7	15	2	4	31	4	1	9	13	29	6	20
Non-operating expenses	201	188	133	-423	98	132	7	-29	11	122	211	-169	-35	31	38	7	22
Interest expenses	7	7	6	6	28	5	3	3	3	16	2	0	0	1	5	6	7
Treasury stock acquisition costs	0	0	53	0	53	0	0	0	0	0	0	0	0	0	0	0	13
Equity in losses of affiliates	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0
Foreign exchange losses	186	179	67	-404	28	125	-3	-32	4	95	208	-171	-36	29	29	0	0
Others	7	1	5	-26	-11	1	7	0	2	10	1	1	0	0	2	1	1
Ordinary profit	13,965	12,368	9,771	9,975	46,081	10,022	9,326	8,783	6,218	34,351	6,272	5,965	5,185	9,236	26,659	13,089	7,430
Extraordinary profit	0	0	0	0	0	0	0	0	180	180	0	0	0	0	0	0	0
Gain on sales	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0
Gain on liquidation of investment securities	0	0	0	0	0	0	0	0	180	180	0	0	0	0	0	0	0
Loss on valuation of stocks of subsidiaries and affiliates	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0
Others	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0
Extraordinary loss	0	514	-14	1,724	2,225	773	612	0	36	1,422	61	334	326	507	1,229	23	18
Impariment loss	0	514	-14	564	1,064	773	612	0	0	1,385	61	303	325	507	1,197	23	18
Loss on valuation of investment securities	0	0	0	1,160	1,160	0	0	0	36	36	0	31	0	0	31	0	0
Others	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0
Profit before income taxes and Non Controlling Interests	13,965	11,854	9,785	8,250	43,856	9,249	8,714	8,783	6,362	33,109	6,211	5,630	4,859	8,728	25,430	13,066	7,412
Profit Attributable To Owner Of Parent	9,197	7,609	6,358	4,744	27,911	6,075	5,957	5,905	4,457	22,397	4,052	3,548	3,000	5,984	16,585	8,485	4,852

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