GungHo Online Entertainment : Supplementary Material on Consolidated Operating Results for the 3rd Quarter of Fiscal Year Ending December 31, 2022

November 14, 2022

GungHo Online Entertainment, Inc.

Consolidated Financial Results for the 3rd Quarter of FY 2022

Supplementary Material

Net sales decreased Yoy but increased QoQ

1. Summary of Quarterly Consolidated Financial Results

【Net sales】

As for existing games, "Puzzle & Dragons" (referred to as "P&D" henceforth) has had continuous updates and events held, such as adding new dungeons, improving game contents, and collaborating with famous characters from other companies, all with the main objective of providing players with the ability to have continued long-term enjoyment of the game, and MAU continued to be firm. The P&D service marked the 10- year anniversary of its launch on February 20, 2022, so events were held to celebrate this milestone and efforts were made to encourage activity by its active users.

The MAU of a smartphone MMORPG "Ragnarok Origin" has been stable after follow-on updates and events. The Nintendo SwitchTM "Ninja-Gum" action game "Ninjala" is continuing to expand its user base through collaboration events, online competitions, TV anime broadcasts, and a wide range of cross-media deployment, and the MAU continues to be firm even after the worldwide cumulative downloads exceeded nine million.

As for a new game, a multi-player online survival action game "DEATHVERSE: LET IT DIE" was launched on PlayStation®5 and PlayStation®4 on September 28, 2022*2.

Looking at the businesses of our subsidiaries, the Ragnarok-related titles distributed by Gravity Co., Ltd. and its consolidated subsidiaries are continuing to contribute to our consolidated financial results with ongoing updates and events.

As a result of the above, net sales for the 3rd quarter of the year was 25,836 million yen (an increase of JPY 3,155 million quarter on quarter).

【Gross profit】

Consolidated gross profit for the current 3rd quarter was JPY 14,297 million (an increase of JPY 1,323million yen from the previous quarter) because of an increase in net sales. The gross profit margin slightly decreased to 55.3% quarter on quarter.

【Operating profit】 [Salary and allowances]

As of the end of the current 3rd quarter, the number of GungHo non-consolidated employees was 415 (an increase of 1 year on year and an increase of 2 quarter on quarter), and the number of consolidated employees

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was 1,432 (an increase of 59 year on year and an increase of 8 quarter on quarter). As a result, the salary allowance of the 3rd quarter was JPY 1,173 million (a decrease of JPY 43 million quarter on quarter).

[Advertising expenses]

In regard to advertising expenses of the 3rd quarter, we continued to advertise existing titles such as "P&D," and "Ninjala" and advertised new titles, the advertising expenses for the 3rd quarter increased by JPY 367 million from the previous quarter to JPY 3,007 million.

As a result, operating income for the 3rd quarter of the year was JPY 6,655million (an increase of JPY 920 million quarter on quarter).

■P&D MAU continued to remain solid mainly due to 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

2012.246810122013.246810122014.246810122015.246810122016.246810122017.246810122018.246810122019.246810122020.246810122021.246810122022.2468

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 60 million as of November 2022. Additionally, the number already accounts for over 80% 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.

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■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 10 11 12 2021.1 2 3 4 5 6 7 8 9 10 11 12 2022.1 2 3 4 5 6 7 8 9

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

・MAU of P&D continues to remain solid with various events including collaborations planned to be held in the 4th Quarter of the fiscal year.

・Remain favorable due to global distribution of multiple Ragnarok-related titles.

Trend of consolidated net sales

40,000							Consolidated net sales excluding Gravity			Gravity
				35,073
35,000
			30,337
														31,210
30,000															29,146
				12,976											28,142 25,447
													25,444	9,996								25,836
25,000																		23,954
			10,886				23,603 23,363			22,206			9,314
21,899											21,889 10,907			22,680
		20,807
									19,351									8,294			9,926
20,000								6,685	5,821
									11,324							7,731
		19,056						19,982
6,360									7,426
6,073												7,739				9,243
		4,250								6,015
									6,402
15,000
				22,097							21,214
10,000
			19,451				16,918 17,542						19,831
15,539 14,733 14,806												17,234	17,153	16,223
											14,150		15,909
							13,967	14,780 14,119							13,437
										12,949
5,000
0
	1Q	2Q	3Q	4Q	1Q	2Q	3Q	4Q	1Q	2Q	3Q	4Q	1Q	2Q	3Q	4Q	1Q	2Q	3Q
		2018					2019			2020				2021			2022

*Net sales indicate figure after consolidated adjustment

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■ Consolidated Balance Sheet

(Millions of yen)

		2018			2019			2020			2021			2022
	1Q	2Q	3Q	4Q	1Q	2Q	3Q	4Q	1Q	2Q	3Q	4Q	1Q	2Q	3Q	4Q	1Q	2Q	3Q
Current assets	69,677	74,065	73,990	88,376	95,244	92,233	94,066	94,840	90,409	97,323	102,282	114,120	118,886	126,504	126,726	127,510	122,823	128,567	130,503
Cash and deposits	56,377	62,088	63,049	74,322	79,066	79,414	82,786	86,225	79,427	84,955	89,718	102,725	102,743	112,579	111,793	115,008	110,299	115,965	113,730
Accounts receivable-trade	9,766	8,439	8,582	11,739	14,210	9,837	8,989	6,775	8,370	10,068	9,999	9,801	13,730	11,160	11,861	9,608	9,144	8,736	12,879
Short-term investment securities	1,896	1,585	145	394	442	1,397	450	282	531	331	759	0	662	611	1,328	1,455	1,578	2,148	2,172
Work in process	278	331	394	68	24	87	86	43	155	88	180	115	69	208	178	65	291	193	39
Deferred tax assets	106	196	95	250	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0
Others	1,250	1,422	1,723	1,599	1,499	1,496	1,752	1,513	1,924	1,879	1,625	1,478	1,681	1,944	1,564	1,373	1,509	1,523	1,680
Non-current assets	6,930	7,321	7,193	7,656	8,656	9,484	9,989	10,168	10,538	11,226	10,469	8,136	7,934	7,082	6,735	7,420	7,591	8,058	7,735
Property,plant and equipment	465	475	418	325	651	689	747	746	866	806	738	810	879	968	1,028	1,211	1,162	1,259	1,134
Intangible assets	1,753	1,856	1,794	2,077	2,731	3,507	3,807	3,678	4,088	4,627	4,147	1,384	1,458	421	398	390	379	483	454
Goodwill	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0
Software	567	668	573	141	130	195	670	265	229	2,882	2,443	257	238	213	190	191	174	281	242
Software in progress	1,080	1,077	1,110	1,821	2,485	3,203	3,022	3,287	3,722	1,607	1,562	961	1,045	29	25	0	4	4	4
Others	105	110	110	115	115	108	114	124	135	137	140	165	174	179	181	198	200	197	207
Investments and other assets	4,711	4,989	4,979	5,252	5,273	5,287	5,433	5,742	5,583	5,792	5,584	5,941	5,596	5,692	5,309	5,818	6,048	6,315	6,146
Investment securities	108	73	75	74	74	71	72	72	72	71	56	55	59	59	59	62	119	132	137
Deferred tax assets	1,658	1,735	1,715	2,183	2,214	2,160	2,193	2,669	2,464	2,601	2,322	2,876	2,484	2,602	2,227	2,557	2,762	2,891	2,750
Others	2,943	3,180	3,189	2,995	2,984	3,055	3,167	3,000	3,047	3,119	3,205	3,010	3,053	3,030	3,022	3,198	3,166	3,291	3,258
Total assets	76,607	81,386	81,184	96,032	103,900	101,718	104,055	105,008	100,948	108,549	112,751	122,257	126,821	133,587	133,461	134,930	130,415	136,626	138,238
Current liabilities	10,821	11,820	8,211	16,774	17,400	15,288	14,217	13,327	11,074	13,070	12,501	16,200	14,896	14,170	13,403	14,893	14,205	14,826	12,867
Notes and accounts payable-trade	3,296	2,554	1,842	6,725	7,657	3,574	3,917	3,303	3,549	3,598	4,722	3,797	4,773	3,543	4,665	3,156	3,508	3,935	4,728
Short term loans payable	0	0	0	0	0	0	0	0	35	0	0	0	10	0	0	0	0	0	0
Current portion of long-term loans payable	138	145	177	159	187	169	138	125	150	218	212	198	187	183	197	193	213	197	196
Income taxes payable	2,039	3,792	1,508	4,427	3,663	5,711	3,132	4,086	1,643	3,538	1,499	4,973	3,373	5,473	3,260	5,542	2,807	4,038	1,086
Others	5,347	5,327	4,682	5,462	5,892	5,832	7,028	5,812	5,696	5,715	6,066	7,231	6,553	4,969	5,280	6,000	7,675	6,654	6,855
Non-current liabilities	1,382	1,348	1,275	1,147	1,273	1,147	966	914	992	1,074	1,469	1,330	1,219	1,325	1,342	1,364	1,346	1,353	1,310
Long term loans payable	125	130	159	132	162	133	104	148	175	264	302	416	364	367	350	315	358	318	340
Others	1,257	1,218	1,116	1,014	1,111	1,014	862	766	816	810	1,167	913	854	957	991	1,049	987	1,034	970
Total liabilities	12,203	13,169	9,486	17,922	18,674	16,435	15,183	14,242	12,067	14,145	13,971	17,530	16,116	15,495	14,745	16,258	15,551	16,179	14,177
Shareholder's equity	61,227	64,775	67,866	73,850	80,276	80,355	83,873	85,194	83,559	88,146	91,683	96,500	101,238	107,739	107,994	107,329	102,302	106,158	110,401
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	5,475	5,475	5,487	5,487	5,487	5,487	5,487	5,487	5,487	5,487	5,487	5,487	5,488	5,488	5,487	5,487	5,487	5,487	5,487
Retained earnings	130,528	134,077	137,066	143,051	149,394	154,247	157,706	159,046	160,358	164,933	168,475	173,321	178,055	184,563	189,806	181,675	181,634	185,496	189,747
Treasury shares	-80,115	-80,115	-80,027	-80,027	-79,944	-84,718	-84,659	-84,678	-87,624	-87,613	-87,618	-87,646	-87,644	-87,651	-92,638	-85,172	-90,158-90,164-90,171
Total Accumulated other comprehensive income	26	-129	-109	-148	-219	-357	-513	-282	-634	-493	-443	21	100	179	-198	31	355	719	-186
Foreign currency translation adjustment	26	-129	-109	-148	-219	-357	-513	-282	-634	-493	-443	21	100	179	-198	31	355	719	-186
Others	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0
Stock Option	780	864	839	885	856	904	835	862	893	925	953	988	1,006	1,033	1,040	1,039	1,045	1,078	1,111
Non Controlling Interests	2,369	2,706	3,101	3,522	4,312	4,379	4,676	4,991	5,062	5,826	6,586	7,216	8,359	9,139	9,879	10,272	11,159	12,489	12,733
Total non-current assets	64,403	68,217	71,697	78,110	85,226	85,282	88,871	90,765	88,881	94,404	98,780	104,727	110,704	118,092	118,715	118,672	114,863	120,446	124,060
Total assets	76,607	81,386	81,184	96,032	103,900	101,718	104,055	105,008	100,948	108,549	112,751	122,257	126,821	133,587	133,461	134,930	130,415	136,626	138,238

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■ Consolidated Profit and Loss Sheet

(Millions of yen)

			2018					2019					2020					2021				2022
	1Q	2Q	3Q	4Q	Total	1Q	2Q	3Q	4Q	Total	1Q	2Q	3Q	4Q	Total	1Q	2Q	3Q	4Q	Total	1Q	2Q	3Q
Net sales	21,899	20,807	19,056	30,337	92,101	35,073	23,603	23,363	19,351	101,392	19,982	22,206	25,444	31,210	98,844	29,146	21,889	28,142	25,447	104,626	23,954	22,680	25,836
Cost of sales	9,796	9,098	7,987	15,758	42,640	17,226	10,678	10,886	9,376	48,168	9,156	9,541	11,732	13,059	43,490	12,194	8,748	11,907	10,715	43,566	9,323	9,706	11,538
Cost of sales ratio	44.73%	43.73%	41.91%	51.94%	46.30%	49.12%	45.24%	46.60%	48.45%	47.51%	45.83%	42.96%	46.11%	41.84%	44.00%	41.84%	39.97%	42.31%	42.11%	41.64%	38.92%	42.80%	44.66%
Gross profit	12,103	11,708	11,069	14,578	49,460	17,846	12,925	12,477	9,975	53,223	10,825	12,665	13,711	18,151	55,354	16,951	13,141	16,235	14,731	61,059	14,631	12,974	14,297
Total selling, general and administrative expenses	5,642	5,937	6,036	5,267	22,883	4,843	5,488	7,413	7,129	24,874	5,554	5,591	7,001	7,049	25,196	6,378	6,488	7,102	8,287	28,256	7,123	7,238	7,641
Salaries, wages and bonuses etc.	834	862	827	1,125	3,649	877	886	808	1,017	3,590	816	930	967	1,267	3,982	1,098	1,137	1,241	1,399	4,877	1,218	1,216	1,173
Advertising & marketing	2,593	2,703	2,724	1,739	9,760	1,632	2,145	3,953	3,434	11,165	2,016	2,234	2,741	2,782	9,775	2,197	2,152	2,786	3,391	10,526	2,528	2,639	3,007
Others	2,214	2,371	2,484	2,402	9,473	2,333	2,456	2,651	2,677	10,118	2,722	2,426	3,291	2,998	11,438	3,083	3,198	3,073	3,497	12,852	3,376	3,382	3,460
Operating profit	6,461	5,771	5,033	9,311	26,577	13,003	7,436	5,063	2,845	28,349	5,270	7,074	6,710	11,101	30,157	10,572	6,653	9,132	6,444	32,802	7,507	5,735	6,655
Operating profit ratio	29.50%	27.74%	26.41%	30.69%	28.86%	37.07%	31.51%	21.67%	14.70%	27.96%	26.38%	31.86%	26.37%	35.57%	30.51%	36.27%	30.39%	32.45%	25.32%	31.35%	31.34%	25.29%	25.76%
Non-operating profit	22	24	117	-43	120	94	17	157	47	316	88	96	139	105	430	379	91	205	188	864	408	764	653
Interest income	18	22	24	26	91	36	45	39	36	156	33	25	19	22	99	23	28	32	49	134	66	88	119
Foreign exchange gains	0	0	84	-84	0	51	-49	110	-6	106	34	-34	0	0	0	333	-19	157	134	606	327	662	522
Others	4	2	9	13	29	6	20	7	17	52	20	105	120	83	330	22	82	14	4	123	15	13	11
Non-operating expenses	211	-169	-35	31	38	7	22	6	11	48	13	35	147	188	385	10	4	10	12	37	6	5	5
Interest expenses	2	0	0	1	5	6	7	5	8	28	6	4	5	5	22	4	2	3	3	14	3	3	3
Treasury stock acquisition costs	0	0	0	0	0	0	13	0	0	13	7	0	0	0	7	0	0	6	6	13	1	0	0
Equity in losses of affiliates	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0
Foreign exchange losses	208	-171	-36	29	29	0	0	0	0	0	0	26	141	170	338	0	0	0	0	0	0	0	0
Others	1	1	0	0	2	1	1	0	2	5	0	4	0	12	16	5	2	0	2	10	1	1	1
Ordinary profit	6,272	5,965	5,185	9,236	26,659	13,089	7,430	5,215	2,881	28,617	5,345	7,135	6,702	11,018	30,202	10,941	6,740	9,328	6,619	33,629	7,909	6,493	7,304
Extraordinary profit	0	0	0	0	0	0	0	89	0	89	0	0	0	0	0	0	3,191	0	16	3,207	0	0	0
Gain on sale of shares of subsidiaries and affiliates	0	0	0	0	0	0	0	89	0	89	0	0	0	0	0	0	3,191	0	0	3,191	0	0	0
Gain on liquidation of investment securities	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	16	16	0	0	0
Others	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0
Extraordinary loss	61	334	326	507	1,229	23	18	0	988	1,029	36	18	398	2,899	3,352	0	66	15	49	131	0	0	0
Impariment loss	61	303	325	507	1,197	23	18	0	988	1,029	36	18	384	2,899	3,338	0	66	15	49	131	0	0	0
Loss on valuation of investment securities	0	31	0	0	31	0	0	0	0	0	0	0	14	0	14	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	0	0	0	0	0	0
Profit before income taxes and Non Controlling Interests	6,211	5,630	4,859	8,728	25,430	13,066	7,412	5,306	1,893	27,677	5,309	7,116	6,304	8,119	26,849	10,941	9,865	9,312	6,586	36,705	7,909	6,493	7,304
Profit Attributable To Owner Of Parent	4,052	3,548	3,000	5,984	16,585	8,485	4,852	3,467	1,340	18,146	3,402	4,578	3,542	4,845	16,369	6,770	6,508	5,254	4,351	22,883	4,822	3,861	4,250

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