GungHo Online Entertainment : Supplementary Material on Consolidated Operating Results for the 1st Quarter of Fiscal Year Ending December 31, 2023

May 11, 2023

GungHo Online Entertainment, Inc.

Consolidated Financial Results for the 1st Quarter of FY 2023

Supplementary Material

Existing titles continued to be solid, with a decrease in net sales but an increase in profit QoQ while they increased YoY

1. Summary of Quarterly Consolidated Financial Results

【Net sales】

As for existing games, Puzzle & Dragons (referred to as "P&D" henceforth) celebrated the 11th anniversary of its service launch on February 20, 2023. P&D has had continuous updates, such as adding new dungeons and other items, improving game contents, and collaborating with famous characters from other companies, and events including the 11th anniversary commemorative events. These have all had the main objective of ensuring players continue to enjoy the game over the long term, and MAU (Monthly Active Users: the number of users who log into the game at least once a month) continued to be firm. 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 total number of downloads exceeded 10 million worldwide on February 14, 2023.

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, consolidated net sales for the 1st quarter of the year was 30,722 million yen (a decrease of JPY 2,310 million quarter on quarter).

【Gross profit】

Consolidated gross profit for the current 1st quarter was JPY 15,120 million (a decrease of JPY 1,397 million yen from the previous quarter) because of a decrease in net sales. The gross profit margin slightly decreased to 49.2% quarter on quarter.

【Operating profit】 [Salary and allowances]

As of the end of the 1st quarter, the number of GungHo non-consolidated employees was 408 (a decrease of

3 year on year, and a decrease of 4 quarter on quarter), and the number of consolidated employees was 1,451 (an increase of 26 year on year and no change quarter on quarter). For the 1st quarter, there were no bonus

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payments made unlike in the previous quarter, and the salary allowance was JPY 1,240 million (a decrease of JPY 462 million quarter on quarter).

[Advertising expenses]

In regard to advertising expenses of the 1st quarter, we continued to advertise existing titles such as "P&D," and "Ninjala". The advertising expenses for the 1st quarter decreased by JPY 861 million from the previous quarter to JPY 1,872 million.

As a result, operating income for the 1st quarter of the year was JPY 8,483 million (an increase of JPY 731 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 10 12 2021.2 4 6 8 10 12 2022.2 4 6 8 10 12 2023.2

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 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-consolidated net sales
  Monthly non-consolidated net sales

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 in the 2nd Quarter of the fiscal year.

・The net sales of Gravity remain favorable due to global distribution of multiple Ragnarok-related titles.

Trend of consolidated net sales

40,000		35,073													Consolidated net sales excluding Gravity		Gravity							33,033
35,000
																							31,210	29,146																							30,722
30,000																																		28,142
12,976																		25,444										25,447							25,836
					23,603 23,363												9,996										23,954
25,000
											22,206							9,314	21,889	10,907						22,680				17,558	16,501
														19,982																8,294							9,926
						6,685			5,821
20,000									19,351				11,324														7,731
													7,426
							6,015							7,739										9,243
15,000											6,402
22,097																					21,214
10,000																							19,831
			16,918 17,542				13,967 14,780 14,119					17,234	17,153	16,223	13,437 15,909 15,444 14,221
											12,949							14,150
5,000
0
		1Q		2Q		3Q		4Q		1Q		2Q		3Q		4Q		1Q		2Q		3Q			4Q		1Q		2Q		3Q		4Q		1Q
					2019											2020									2021										2022						2023
*Net sales indicate figure after consolidated adjustment

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■ Consolidated Balance Sheet													(Millions of yen)
		2020			2021			2022		2023
	1Q	2Q	3Q	4Q	1Q	2Q	3Q	4Q	1Q	2Q	3Q	4Q	1Q
Current assets	90,409	97,323	102,282	114,120	118,886	126,504	126,726	127,510	122,823	128,567	130,503	141,788	139,487
Cash and deposits	79,427	84,955	89,718	102,725	102,743	112,579	111,793	115,008	110,299	115,965	113,730	125,950	122,633
Accounts receivable-trade	8,370	10,068	9,999	9,801	13,730	11,160	11,861	9,608	9,144	8,736	12,879	12,983	12,405
Short-term investment securities	531	331	759	0	662	611	1,328	1,455	1,578	2,148	2,172	1,258	2,234
Work in process	155	88	180	115	69	208	178	65	291	193	39	0	2
Deferred tax assets	0	0	0	0	0	0	0	0	0	0	0	0	0
Others	1,924	1,879	1,625	1,478	1,681	1,944	1,564	1,373	1,509	1,523	1,680	1,596	2,211
Non-current assets	10,538	11,226	10,469	8,136	7,934	7,082	6,735	7,420	7,591	8,058	7,735	10,421	10,456
Property,plant and equipment	866	806	738	810	879	968	1,028	1,211	1,162	1,259	1,134	992	890
Intangible assets	4,088	4,627	4,147	1,384	1,458	421	398	390	379	483	454	0	379
Goodwill	0	0	0	0	0	0	0	0	0	0	0	0	0
Software	229	2,882	2,443	257	238	213	190	191	174	281	242	215	180
Software in progress	3,722	1,607	1,562	961	1,045	29	25	0	4	4	4	0	0
Others	135	137	140	165	174	179	181	198	200	197	207	205	198
Investments and other assets	5,583	5,792	5,584	5,941	5,596	5,692	5,309	5,818	6,048	6,315	6,146	0	9,187
Investment securities	72	71	56	55	59	59	59	62	119	132	137	138	192
Deferred tax assets	2,464	2,601	2,322	2,876	2,484	2,602	2,227	2,557	2,762	2,891	2,750	5,366	5,322
Others	3,047	3,119	3,205	3,010	3,053	3,030	3,022	3,198	3,166	3,291	3,258	3,503	3,672
Total assets	100,948	108,549	112,751	122,257	126,821	133,587	133,461	134,930	130,415	136,626	138,238	152,210	149,944
Current liabilities	11,074	13,070	12,501	16,200	14,896	14,170	13,403	14,893	14,205	14,826	12,867	17,924	16,486
Notes and accounts payable-trade	3,549	3,598	4,722	3,797	4,773	3,543	4,665	3,156	3,508	3,935	4,728	7,136	6,001
Short term loans payable	35	0	0	0	10	0	0	0	0	0	0	0	0
Current portion of long-term loans payable	150	218	212	198	187	183	197	193	213	197	196	181	228
Income taxes payable	1,643	3,538	1,499	4,973	3,373	5,473	3,260	5,542	2,807	4,038	1,086	2,717	2,414
Others	5,696	5,715	6,066	7,231	6,553	4,969	5,280	6,000	7,675	6,654	6,855	7,889	7,841
Non-current liabilities	992	1,074	1,469	1,330	1,219	1,325	1,342	1,364	1,346	1,353	1,310	1,450	1,453
Long term loans payable	175	264	302	416	364	367	350	315	358	318	340	308	382
Others	816	810	1,167	913	854	957	991	1,049	987	1,034	970	1,141	1,071
Total liabilities	12,067	14,145	13,971	17,530	16,116	15,495	14,745	16,258	15,551	16,179	14,177	19,375	17,940
Shareholder's equity	83,559	88,146	91,683	96,500	101,238	107,739	107,994	107,329	102,302	106,158	110,401	116,498	114,784
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
Capital surplus	5,487	5,487	5,487	5,487	5,488	5,488	5,487	5,487	5,487	5,487	5,487	5,487	5,487
Retained earnings	160,358	164,933	168,475	173,321	178,055	184,563	189,806	181,675	181,634	185,496	189,747	195,829	187,135
Treasury shares	-87,624	-87,613	-87,618	-87,646	-87,644	-87,651	-92,638	-85,172	-90,158	-90,164	-90,171	-90,157	-83,177
Total Accumulated other comprehensive income	-634	-493	-443	21	100	179	-198	31	355	719	-186	752	608
Foreign currency translation adjustment	-634	-493	-443	21	100	179	-198	31	355	719	-186	752	608
Others	0	0	0	0	0	0	0	0	0	0	0	0	0
Stock Option	893	925	953	988	1,006	1,033	1,040	1,039	1,045	1,078	1,111	1,130	1,163
Non Controlling Interests	5,062	5,826	6,586	7,216	8,359	9,139	9,879	10,272	11,159	12,489	12,733	14,453	15,447
Total non-current assets	88,881	94,404	98,780	104,727	110,704	118,092	118,715	118,672	114,863	120,446	124,060	132,834	132,004
Total assets	100,948	108,549	112,751	122,257	126,821	133,587	133,461	134,930	130,415	136,626	138,238	152,210	149,944

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■ Consolidated Profit and Loss Sheet															(Millions of yen)
			2020					2021					2022			2023
	1Q	2Q	3Q	4Q	Total	1Q	2Q	3Q	4Q	Total	1Q	2Q	3Q	4Q	Total	1Q
Net sales	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	33,033	105,505	30,722
Cost of sales	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	16,515	47,084	15,602
Cost of sales ratio	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%	50.00%	44.63%	50.78%
Gross profit	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	16,518	58,420	15,120
Total selling, general and administrative expenses	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	8,766	30,771	6,637
Salaries, wages and bonuses etc.	816	930	967	1,267	3,982	1,098	1,137	1,241	1,399	4,877	1,218	1,216	1,173	1,703	5,312	1,240
Advertising & marketing	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	2,733	10,908	1,872
Others	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	4,329	14,549	3,524
Operating profit	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	7,751	27,649	8,483
Operating profit ratio	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%	23.47%	26.21%	27.61%
Non-operating profit	88	96	139	105	430	379	91	205	188	864	408	764	653	-466	1,360	351
Interest income	33	25	19	22	99	23	28	32	49	134	66	88	119	183	458	221
Foreign exchange gains	34	-34	0	0	0	333	-19	157	134	606	327	662	522	-712	799	123
Others	20	105	120	83	330	22	82	14	4	123	15	13	11	61	102	7
Non-operating expenses	13	35	147	188	385	10	4	10	12	37	6	5	5	6	24	6
Interest expenses	6	4	5	5	22	4	2	3	3	14	3	3	3	5	16	3
Treasury stock acquisition costs	7	0	0	0	7	0	0	6	6	13	1	0	0	0	2	1
Equity in losses of affiliates	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0
Foreign exchange losses	0	26	141	170	338	0	0	0	0	0	0	0	0	0	0	0
Others	0	4	0	12	16	5	2	0	2	10	1	1	1	1	6	0
Ordinary profit	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	7,278	28,985	8,828
Extraordinary profit	0	0	0	0	0	0	3,191	0	16	3,207	0	0	0	0	0	0
Gain on sale of shares of subsidiaries and affiliates	0	0	0	0	0	0	3,191	0	0	3,191	0	0	0	0	0	0
Gain on liquidation of investment securities	0	0	0	0	0	0	0	0	16	16	0	0	0	0	0	0
Others	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0
Extraordinary loss	36	18	398	2,899	3,352	0	66	15	49	131	0	0	0	47	47	0
Impariment loss	36	18	384	2,899	3,338	0	66	15	49	131	0	0	0	47	47	0
Loss on valuation of investment securities	0	0	14	0	14	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
Profit before income taxes and Non Controlling Interests	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	7,230	28,937	8,828
Profit Attributable To Owner Of Parent	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	6,087	19,022	5,150

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