BRIDGE REPORT
(3912)

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Mobile Factory, Inc. (3912)
President Yuji Miyajima
President
Yuji Miyajima
Corporate Profile
Company
Mobile Factory, Inc.
Code No.
3912
Exchange
TSE 1st Section
Industry
Information, Communication
President
Yuji Miyajima
Address
1-24-2 Higashi-gotanda, Shinagawa-ku, Tokyo
Year-end
December
URL
Stock Information
Share Price Number of shares issued
(excluding treasury shares)
Total market cap ROE (Actual) Trading Unit
¥1,358 9,448,106 shares ¥12,831 million 25.2% 100 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (Actual) PBR (Actual)
- - - - ¥235.32 5.8 times
* The share price is the closing price on January 19. The number of shares issued was obtained by subtracting the number of treasury shares from the number of outstanding shares as of the end of the latest quarter.
 
Earnings Trends
Fiscal Year Net Sales Operating
        Income
Ordinary
    Income
Net Income EPS DPS
Dec. 2014 (Actual) 1,540 211 212 118 58.08 -
Dec. 2015 (Actual) 1,751 314 305 185 40.03 20.00
Dec. 2016 (Actual) 2,072 611 611 411 43.64 27.00
Dec. 2017 (Actual) 2,437 736 722 511 54.18 17.00
Dec. 2018 (Forecast) - - - - - -
* The forecasted values were provided by the company.
* It adopted consolidated accounting from FY ended December 2015. From FY ended December 2016, net income is profit attributable to owners of the parent. Hereinafter the same shall apply.
* In November 2014, it implemented a 50-to-1 stock split. In October 2016, it implemented a 2-to-1 stock split. In July 2017, it implemented a 2-to-1 stock split. EPS in FY ended December 2016 are retroactively adjusted.

This report outlines Mobile Factory's financial results for the term ending December 2017 and its earnings estimates for the term ending December 2018.
 
Key Points
 
 
 
Fiscal Year December 2017 Earnings Results
 
 
Driven by "Station Memories!," sales grew 17.6% and operating income increased 20.5% year-on-year.
Sales were 2,437 million yen, up 17.6% year-on-year. Out of this, social application services accounted for 1,525 million yen, showing an increase of 26.9% year-on-ye
ar. Multiple smart novel titles were completed as planned, but sales of smart novels declined. However, "Station Memories!" for iOS and Android drove the increase in sales due to an increase in charges made, which is led by the effects of promotion and operation policies and a greater number of DAUs (Daily Active Users: users/day for the service). Content services were 840 million yen, up 3.3% year-on-year. While "StaMelo: Stamp & Melody Torihodai" (App Pass version) was healthy, the Company launched "Comedy Life" for au Smart Pass.

Operating income was 736 million yen, up 20.5% year-on-year. In addition to the rapid amortization of expenses for "Rekishi to Connect (Connecting Histories)" which began distribution on March 15, 2017, and aggressive investment in advertising in the second half, the Company amortized expenses associated with halting the development of a new product scheduled for release in FY ending December 2018. Operating expenses increased 16.5% year-on-year to 1,701 million yen, but were absorbed by the increase in sales. The cost for publicly listing stock on the First Section of the Tokyo Stock Exchange amounting to 13 million yen was posted as non-operating expenses, but net income increased 24.2% year-on-year to 511 million yen due to a decrease in the tax burden ratio (32.7% → 29.2%).

Furthermore, 110 million yen was invested into the new title, for which development was halted. The Company cleared its losses out and recorded 70 million yen of that as expenses in the 4th quarter. Although the title was in the development stage, the Company judged that it would be difficult to get a return on investment, and decided instead to invest management resources into developing blockchain-related services for release during FY ending December 2018.
 
 
 
Sales were 690 million yen, up 21.4% from the previous quarter. Due to the effects of aggressive advertising continued from the 3rd quarter, and contribution from the original version's 3rd anniversary event, "Station Memories!" for iOS and Android grew significantly, leading to an increase in sales.
Operating income was 190 million yen, up 27.6% from the previous quarter. Regarding sunk costs after the development of a new title was halted, 70 million yen in development expenses and capitalized assets were recorded as expenses in the 4th quarter, leading cost of sales to increase by 42.5%. The Company also continued to invest in high level advertising in the form of web promotion and transit advertising, etc., but costs were absorbed due to the large increase in sales.
 
 
 
 
 
Total assets at the end of the term were 2,559 million yen, up 331 million from the end of the previous term. Major factors affecting the increase are cash and deposits, and net assets. Cash and deposits account for approximately 70% of total assets, and equity ratio was 86.9% (82.3% as of the end of the previous term).
 
 
 
[Promotion and operations for "Station Memories!"]
Measures to improve activity rate
In FY ended December 2017, 16 O2O events were held throughout Japan, hosting 415,000 customers (11 events and 170,000 customers in FY 12/16). Of these, 6 took place in the Kanto area and its effects are estimated to be 1,100 million yen, and 4 took place in the Kansai area and its effects are estimated to be 640 million yen.

In collaboration with Chiba Urban Monorail (Chiba City, Chiba prefecture), the Company utilized monorails to conduct an event targeting the area surrounding tourist destinations. In addition to the operation of monorails with a collaborative design on the head car and one-day monorail passes with a collaborative design, monorail cars were also decorated in a "Station Memories!" theme. As Chiba is their hometown, Sakusabe Chiko and Sakusabe Mako (Denko) also commemorated the collaboration, and were recognized as the official characters for Chiba Urban Monorail, invigorating the collaboration.
 
 
Measures to acquire new users
The Company collaborated with the movie "DESTINY Kamakura Monogatari" and with the popular puzzle game "Puyo Puyo" by Sega Games, Inc.

In the collaboration with the movie "DESTINY Kamakura Monogatari," the Company used a game to conduct a campaign to actually visit six stations/locations in Kanagawa Prefecture's Kamakura/Fujisawa area which appear in the movie. When checking in at one of these stations or locations, one can get wallpapers of scenes from the movie, enter a lottery for original goods, as well as many other special gifts.
Also, in the collaboration with the popular puzzle game "Puyo Puyo" by Sega Games, Inc., points can be earned by visiting (checking in) 4 stations with the same attributes, making it possible to enjoy new ways to play using each station's attributes.
 
 
Fiscal Year Ending December 2018 Earnings Estimates
 
The forecast for FY ending December 2018 was not disclosed, as "business in the smartphone application market is highly volatile and the status of new services is highly uncertain, making it difficult to calculate appropriate and reasonable figures."

The main service, "Station Memories!," which brought in a record number of users and sales in FY ended December 2017, has not lost momentum although three years have passed since its release. Aiming to be the domestic industry leader in location-based games, the Company will continue to improve functions for increasing user engagement, strengthen marketing for increasing user numbers, and provide new user experiences for retaining current users, as well as making efforts towards regional revitalization. Meanwhile, for miscellaneous services, the Company will continue to operate while checking cost effectiveness, and for content services it will work on structural improvements and strengthening content distribution for "StaMelo: Stamp & Melody Torihoudai." In addition to the above, as a new business following games that incorporate GPS, the Company will proceed with development of a service that utilizes blockchain technology, aiming to release it during FY ending December 2018.
 
[About "Blockchain-related Services"]
Bitcoin 2.0
Blockchain-related services are not the mainstream "centralized" applications currently on the internet, but fall into a category of service called "decentralized" applications. In the case of centralized applications, there is a company, or "platformer," in the center which is responsible for such things as transaction rules, security, and managing the application's market, but because decentralized applications can provide services that do not depend on an entity in the center, blockchain-related services will increase the potential of the Company. By using the blockchain technology, it is possible that the concept of software, the structure of finance, and the methods for determining regulations and rules could change drastically, giving birth to an economic zone that cannot be measured by the current system. Blockchain-related service is a promising field.

Furthermore, the blockchain technology is used in cryptocurrency applications such as Bitcoin, and recently it has begun to be used for developing games, tools to make life easier, etc. This trend (improving the blockchain technology and using it in non-financial fields) is referred to as "Bitcoin 2.0."
 
The release of "Blockchain-related services" is expected in FY ending December 2018.
Development has begun on a game that uses a cryptocurrency considered akin to real money trading. It will be offered on a new platform based on the blockchain technology, but the way users view it is the same. According to the University of Tokyo's Graduate School of Public Policy, Bitcoin began operating in 2009, but as of August 2017 there are over 1000 different cryptocurrencies, and the market capitalization is more than 99 billion US dollars. Also, according to the Company's explanation, Coinbase, the largest cryptocurrency exchange in the United States, was founded in June 2016, but the number of accounts created for trading cryptocurrencies has already reached 13 million (As of the end of November 2017, Nomura Securities has about 53 million accounts). In Asia, the amount of applications to open an account at Hong Kong Binance is said to be over 250,000 in one day. The Company intends to incorporate the rapidly expanding cryptocurrency market into games, and provide enjoyment like that found in real money trading.

According to the Company's explanation, AxiomZen, a company with bases in San Francisco and Vancouver, released a game in November 2017 called "Crypto Kitties" in which users can buy, raise, and sell virtual cats using the cryptocurrency ".Ethereum" Already, more than 3 million dollars are traded on a daily basis, with some kittens selling for over 50 ETH (50 × about 128,000 yen = about 6,400,000 yen). AxiomZen's monthly sales reportedly reached 2 billion yen in just two and a half months.
However, the Company's goal is a service that applies the blockchain technology, and although the first item to be provided will be a game, the Company's target is not limited to games. By applying the blockchain technology, it is possible to replace existing large-scale services such as EC malls and flea markets.
 
[Return to shareholders]
Up until now, the policy on return to shareholders was a "consolidated dividend payout ratio of 30%," but from FY ending December 2018 it was changed to a "total return ratio of 30%." The reason for this decision was because, in order to return profits to shareholders, invest in sustainable growth, keep retained earnings in a more balanced manner, repurchase of treasury stock is necessary as part of shareholder return.
 
Total return ratio (%) = (Dividend amount + Amount paid for purchasing treasury stock) ÷ Consolidated net income × 100
 
 
Conclusions
 
For the main service, "Station Memories!," the increase of members through advertisement and the monetization of those members is proceeding as expected. Because there are two aspects of "Station Memories!," one being a game and the other a travel tool, member withdrawal rate is low, and the life cycle differs from that of other games. The Company plans to draw on this strength and link it to sustainable growth by engaging in promotion that emphasizes retention rate, various collaborative hands-on events, and even regional revitalization. Content services are also steadily developing, therefore while sustaining the continuous growth with both of these services, the Company enters a new "blockchain-related service" business. The first item in "blockchain-related service" is a game. Since a blockchain is characterized by trading being possible, the Company plans to design a game that utilizes this. We would like to have high hopes for the future developments.
 
 
 
Company Overview
 
The Company's two main pillars are the Social Apps Service led by location-based games and the Contents Service that provides contents such as ringtones. The Contents Service, for which the Company has over 10 years of experience, is a stable profit source, and the Social Apps Service, for which the Company has established its unique style, is the driving force of its growth. The Group companies include the Company and its 100% subsidiary, G1dash, Inc., which deals with development and operation of social apps.
Its management philosophy is "To make the people of the world happy through the things we create." The brand message is "Take your experiences with you".
 
Corporate history
In October 2001, it was founded as Mobile Factory, Ltd. and began provision of ringtone service. The ringtone business had expanded, and in April 2003, it became a stock company and changed its name to Mobile Factory, Inc. After that, the Company grew its contents business by adding services for mobile phones such as wallpaper, decoration mail, fortune telling, etc.
Provision of the Social Apps Service began in December 2009. In March 2011, it released a location-based game titled "Eki Dash" (GREE platform). This game triggered the Company's dramatic growth. In October 2011, it entered into the Smart Novel (dating simulation game for males) industry. In December 2011, it released a location-based game titled "Eki Dash PLUS" on the GPS service platform "Colopl" operated by Colopl, Inc. In June 2014, it released a location-based game titled "Station Memories!". In May 2014, it began a business partnership with Fuji Television Network, Inc. (current Fuji Games, Inc.) and released iOS and Android versions of "Station Memories!" in November 2014.
In March 2015, the Company began stock listing in the Mothers section of the Tokyo Stock Exchange. In October 2015, it concluded a partnership agreement with Iwate Prefecture. In June 2017, it switched to the First Section of the Tokyo Stock Exchange.
 
Business contents
Business contents are the Social Apps Service led by location-based games and the Contents Service that provides contents such as ringtones, .While the Social Apps Service offers free-to-play games but charges money for in-game items, the Contents Service charges a monthly flat-rate fee (there are some exceptions). Also, the Group companies apply both the own-company model (distribution under its name) in which services are directly offered to the users through a platform and the OEM model (distribution under other companies' names) in which business partners under the OEM contracts provide services through a platform. While usage charges are recorded in the sales for the former, usage charges excluding platform fees (50% to 70% of the usage charges) are recoded in the sales for the latter.
 
 
Social Apps Service
Social apps require social interaction (e.g. collaborating, competing) between players. The Company distributes location-based games and Smart Novels through SNS platforms (i.e. GREE, Mobage, mixi, Colopl) and app market (i.e. App store, Google play). Part of illustration and scenario development are outsourced, but system development is carried out internally.

In location-based games, the Company also offers 3 other titles in addition to the main service "Station Memories!," such as the "Eki Dash" series. The "Eki Dash" series, which was released in March 2011, has 3 elements: a competition element in which the players compete to seize nearby stations, a life-log element in which the locations that the players actually visited are logged, and a collection element in which the players collect seized stations, train lines and titles. "Station Memories!," which was released in June 2014, pursued the excitement of collecting stations, in addition to the fun of fighting to seize stations from the "Eki Dash" series. "Rekishi to Connect" is a game set in Japanese history, where players can fight for lands across Japan alongside unique "Ijin" as if in the Sengoku era. (The game allows players to collect historical heritage that they actually visited, and train the "Ijin," which are characters in the motif of historical heroes.)
 
 
Contents Service
For the Contents Service, the Company mainly offers contents such as stamp images and ringtones through services operated by communication carriers. For ringtones provision, it has "Newest Songs Unlimited Downloads" as own-company model and "RecoChoku Melody" in partnership with RecoChoku Co., Ltd. as OEM model targeting smartphones and feature phones. Users can download unlimited ringtones from 100 yen (excluding tax) to 300 yen (excluding tax) per month.

One of the Company's strengths is high-quality sound developed internally as well as its system and know-how to add the sound from dramas, movies or TV commercials while they are still popular. The creation of ringtones' sound sources and development and operation of websites are managed internally (there are some exceptions). Other than ringtones, it offers an all-you-can-get service for stickers and melodies at a fixed rate. Since the launch of the service in May 2004, it has gained over 10 years of experience. By incorporating effective advertisement methods by the moment, it has been increasing users. Although the number of fee-paying members is on the decrease, the profitability is still high, because products are, in principle, developed internally and the profit of the remaining players is high. The Social Apps Service is given a priority for the distribution of management resources.
 
 
<Reference: Regarding Corporate Governance>
 
 
◎ Corporate Governance Report
Updated on December 15, 2017
The Group companies recognize that establishing the corporate ethics based on legal compliance is the highest priority in order to respond to trust and expectations from the customers, shareholders and entire society and maximize the corporate value. To achieve it, the Company will strengthen risk management and supervision functions and elevate soundness and transparency of the management to contribute to development of the economic society.
 
<Reasons for Non-compliance with the Principles of the Corporate Governance Code (Excerpts)>
[Principle 4-8]
One of the Company's two independent outside directors resigned on December 15, 2017. As a result, there will be only one independent outside director from December 16, 2017, but in the Board of Directors, the independent outside director and an independent outside auditor provide advice from an independent and objective standpoint, so the supervisory function of the Company's directors is thoroughly guaranteed. Looking ahead, we will consider appointing a new independent outside director from the perspective of further strengthening corporate governance and efforts to enhance corporate value.
 
<Disclosure Based on the Principles of the Corporate Governance Code (Excerpts)>
Principle 1-4
The Company may hold shares of other listed companies as strategic shareholdings, if it determines that they will contribute to maintaining or improving their corporate value such as strengthening partnerships. At this point, the Company does not hold any shares of other listed companies.

Principle 1-7
The Company examines if the transactions are rational or not, before it engages in transaction with related parties. Furthermore, with a focus on the appropriateness of the transaction conditions compared with the other transactions, the Company makes it a requirement to obtain an approval for the transaction at a Board of Directors meeting.

[Principle 3-1]
(1) The Company's corporate philosophy is disclosed on our company website and in securities reports, notices of convocation, financial results briefings, etc.
(2) The Company's basic policy on corporate governance is stated in the Corporate Governance Report.
(3) The remuneration of directors is decided by the Board of Directors, within the total remuneration range is determined at the General Meeting of Shareholders.
(4) When appointing directors and auditors, candidates are nominated after considering their knowledge, experience, and ability, as well as the person as a whole.
(5) The reasons for appointing candidates for directors and auditors are stated in the notice of convocation.

[Principle 4-1-(1)]
The Company's Board of Directors discusses and resolves matters which are stipulated in the regulations for the Board of Directors. It is also charged with the management of the Company based on "Organizational Regulations," "Regulations for Work Allocation," "Job Authority Regulations," and "Regulations for Approval."
 
Disclaimer
This report is intended solely for information purposes, and is not intended as a solicitation for investment. The information and opinions contained within this report are made by our company based on data made publicly available, and the information within this report comes from sources that we judge to be reliable. However we cannot wholly guarantee the accuracy or completeness of the data. This report is not a guarantee of the accuracy, completeness or validity of said information and opinions, nor do we bear any responsibility for the same. All rights pertaining to this report belong to Investment Bridge Co., Ltd., which may change the contents thereof at any time without prior notice. All investment decisions are the responsibility of the individual and should be made only after proper consideration.

Copyright (C) 2018 Investment Bridge Co., Ltd. All Rights Reserved.
 
 
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