GungHo Online Entertainment : Supplementary Material on Consolidated Operating Results for the 3rd Quarter of Fiscal Year Ending December 31, 2020

November 13, 2020

GungHo Online Entertainment, Inc.

Consolidated Financial Results for the 3rd Quarter of FY 2020

Supplementary Material

Revenue increased QoQ due to stable revenue of P&D and new game released by GRAVITY

1. Summary of Quarterly Consolidated Financial Results

		2019				2020
(Millions of yen)
	1Q	2Q		3Q	4Q	1Q	2Q	3Q
Net sales	35,073	23,603		23,363	19,351	19,982	22,206	25,444
Cost of goods	17,226	10,678		10,886	9,376	9,156	9,541	11,732
Gross profit	17,846	12,925		12,477	9,975	10,825	12,665	13,711
SG&A	4,843	5,488		7,413	7,129	5,554	5,591	7,001
Salary and allowances	877	886		808	1,017	816	930	967
Advertising expenses	1,632	2,145		3,953	3,434	2,016	2,234	2,741
Others	2,333	2,456		2,651	2,677	2,722	2,426	3,291
Operating income	13,003	7,436		5,063	2,845	5,270	7,074	6,710
（Operating income margin）	37.1%	31.5%		21.7%	14.7%	26.4%	31.9%	26.4%
Ordinary income	13,089	7,430		5,215	2,881	5,345	7,135	6,702
Profit before income tax	13,066	7,412		5,306	1,893	5,309	7,116	6,304
Profit attributable to	8,485	4,852		3,467	1,340	3,402	4,578	3,542
owners of parent

■Stable revenue of P&D and new title "Ragnarok Origin" released by GRAVITY contributed

to the results

【Net sales】

Regarding the 3rd quarter, MAU for "P&D" has also remained steady due to the popularity of collaboration events and new original events. "Ragnarok Masters" made the 1st anniversary since the start of the service, an event to commemorate this anniversary was held, and MAU has remained stable.

As for new games, the Ninja Gum Battle Action game "Ninjala" for Nintendo Switch™, released on June 25, 2020, held collaboration event for the first time from September 24, 2020 and started season 3, which provides new map and new weapons, in order to expand user bases. As a result, the world total number of downloads exceeded 5 million as of October 25, 2020.

Regarding subsidiary-related business, the trend has continued to be steady and firm due to continuous updates and events for "Ragnarok M: Eternal Love," which is being distributed by GRAVITY Co., Ltd. and its consolidated subsidiaries. On July 7, 2020, GRAVITY launched smartphone game "Ragnarok Origin" in South Korea and its revenue has been favorable. Furthermore, consolidated subsidiary in Thailand of GRAVITY started direct service of PC online game "Ragnarok Online" on May 28, 2020, and its trend also has been favorable and contributed to the results.

As a result of the above, net sales increased at 25,444 million yen (an increase of JPY 3,237 million quarter on quarter).

【Gross profit】

Consolidated gross profits for the current 3rd quarter was JPY 13,711 million (an increase of JPY 1,045 million quarter on quarter) due to an increase in net sales. The gross profit margin decreased to 53.9% (a decrease of 3.1% quarter on quarter) due to a change in the sales distribution ratio and an increase of amortization of new games.

【Operating income】 [Salary and allowances]

As of the end of the 3rd quarter, the number of GungHo non-consolidated employees was 405 (an increase of 14 from the previous year, and a decrease of 2 from the previous quarter), and the number of consolidated employees was 1,321 (an increase of 114 from the previous year, and an increase of 15 from the previous quarter). In the 3rd quarter, salary allowances increased by JPY 36 million from the previous quarter to JPY 967 million.

1

[Advertising expenses]

In regard to advertising expenses for the current 3rd quarter, we continued to advertise existing titles such as "P&D," and advertised "Ninjala", its service started from June 25, 2020. Furthermore, GRAVITY advertised "Ragnarok Origin", its service started from July 7, 2020, the advertising expenses for the 3rd quarter increased by JPY 507 million from the previous quarter to JPY 2,741 million.

As a result, operating income for the 3rd quarter of the year was JPY 6,710 million (an increase of JPY 363 million quarter on quarter).

■P&D MAU remains stable due to the collaboration events

Trend of P&D MAU and payment rate in Japan

P&D MAU in Japan		Payment rate

Start of TV

CM

Word-of-mouth 2012.2 4 6 8 10 12 2013.2 4 6 8 10 12 2014.2 4 6 8 10 12 2015.2 4 6 8 10 12 2016.2 4 6 8 10 12 2017.2 4 6 8 10 12 2018.2 4 6 8 10 12 2019.2 4 6 8 10 12 2020.2 4 6 8

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 55 million as of August, 2020. Additionally, the number already accounts for over 70% of the smartphone users of 70,090,000 (source: Nielsen Digital Co., Ltd., as of May 2019), reflecting a wide reach of P&D in the current market with one of the highest popularity in the nation.

■Trend of monthly non-consolidatednet sales

Monthly non-consolidated net sales

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 7 8 9 10 11 12 2020.1 2 3 4 5 6 7 8 9

2

Regarding the non-consolidated monthly sales of GungHo, despite fluctuations in month-to-month net sales, as a result of implementing in-game events and other activities on a monthly basis, we have been generating high profits over the long term backed by a sustained, overwhelmingly stable MAU. In the mobile-phone game market, games were often expected to have short lifecycles. However, smartphone games have stronger characteristics as online games, and by continuously developing games and holding events based on customer responses as well as implementing those events in a manner that matches those responses, it has become possible to provide games that can offer long-term enjoyment to users.

■Trend of consolidated net sales

・Puzzles & Dragons' MAU was able to maintain its high levels in Q3, and the P&D appreciation celebration event and collaboration events with famous IP will be held in Q4.

• GRAVITY started its in-house distribution of Ragnarok Online in Thailand on May 28, 2020 and started distribution of Ragnarok Origin in South Korea on July 7, 2020. Furthermore, Ragnarok X was launched on October 15 in Taiwan, Hong Kong and Macau.

Trend of consolidated net sales

Consolidated net sales excluding GRAVITY GRAVITY

（Unit: millions of yen）

									35,073
35,000
								30,337
30,000									12,976
	25,723													25,444
25,000	1,945	23,432		22,309	21,899			10,886		23,603 23,363			22,206
		2,40420,840	20,807
				19,056					19,351 19,982
20,000			2,111						6,685	5,821		11,324
		6,582	6,360							7,426
			6,073	4,250						6,015
15,000										6,103
	23,778	21,027 18,728						22,097
10,000						19,451
	15,727 15,539 14,733 14,806		16,918	17,542
						13,247 13,967 14,780 14,119
5,000
0
	1Q	2Q	3Q	4Q	1Q	2Q	3Q	4Q	1Q	2Q	3Q	4Q	1Q	2Q	3Q
		2017			2018			2019			2020

*Net sales indicate figure after consolidated adjustment

3

■ Consolidated Balance Sheet																		（Millions of yen）
		2016			2017			2018			2019			2019
	1Q	2Q	3Q	4Q	1Q	2Q	3Q	4Q	1Q	2Q	3Q	4Q	1Q	2Q	3Q	4Q	1Q	2Q	3Q
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	94,066	94,840	90,409	97,322	102,282
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	82,786	86,225	79,427	84,955	89,718
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	8,989	6,775	8,370	10,068	9,999
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	450	282	531	331	759
Work in process	29	48	68	82	53	103	141	174	278	331	394	68	24	87	86	43	155	88	180
Deferred tax assets	407	793	311	517	156	307	130	233	106	196	95	250	0	0	0	0	0	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	1,752	1,513	1,924	1,878	1,625
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	9,989	10,168	10,538	11,226	10,469
Property,plant and equipment	509	1,067	913	814	746	665	576	522	465	475	418	325	651	689	747	746	866	806	738
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	3,807	3,678	4,088	4,627	4,147
Goodwill	0	0	0	0	0	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	670	265	229	2,882	2,443
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	3,022	3,287	3,722	1,607	1,562
Others	77	87	87	88	93	96	99	221	105	110	110	115	115	108	114	124	135	137	140
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	5,433	5,742	5,583	5,792	5,584
Investment securities	1,524	1,392	1,368	349	335	334	336	481	108	73	75	74	74	71	72	72	72	71	56
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	2,193	2,669	2,464	2,601	2,322
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	3,167	3,000	3,047	3,119	3,205
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	104,055	105,008	100,948	108,549	112,751
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	14,217	13,327	11,074	13,070	12,501
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	4,018	3,303	3,549	3,598	4,722
Short term loans payable	772	765	-	-	271	200	-	-	0	0	-	-	0	0	-	-	35	0	0
Current portion of long-term loans payable	214	193	178	195	147	143	133	146	138	145	177	159	187	169	138	125	150	218	212
Income taves 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	3,132	4,086	1,643	3,538	1,499
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	6,927	5,812	5,696	5,715	6,066
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	966	914	992	1,074	1,469
Long term loans payable	105	62	87	123	100	139	111	154	125	130	159	132	162	133	104	148	175	264	302
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	862	766	816	810	1,167
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	15,183	14,242	12,067	14,145	13,971
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	83,873	85,194	83,559	88,145	91,683
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	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	5,487	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	157,706	159,046	160,358	164,933	168,475
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	-84,659	-84,678	-87,624	-87,613	-87,618
Accumulated other comprehensive income
Foreign currency translation adjustment	-28	-282	-237	-164	-38	-68	-89	32	26	-129	-109	-148	-219	-357	-513	-282	-634	-493	-443
Others	0	0	0	0	0	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	-513	-282	-634	-493	-443
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	4,676	4,991	5,062	5,826	6,586
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	88,871	90,765	88,881	94,404	98,780
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	104,055	105,008	100,948	108,549	112,751

4