Tag Archive mobile game industry

Papers on MZ (Machine Zone) and Its Platforms – Satori, Cognant, LIT Token

Lawrence Abrams No Comments

 

Machine Zone (MZ): A $10 Billion Dollar Unicorn in the Making

“Lemons” and Antitrust : Two Forces Driving Facebook’s Work With MZ’s (Machine Zone) DSP Cognant®

 

The Facebook – Google Duopoly — Where They Differ?

The Bayshore is the New Madison Avenue

Edge Computing Use Cases for MZ’s (Machine Zone) Platform

Machine Zone and The Perversity of Unicorn Lists

 

Machine Zone (MZ): A $4 Billion Unicorn That Walks the Walk

 

Machine Zone: IPO or What?

Netmarble Games IPO: A Fast Fade for Lineage 2?

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Introduction

Netmarble is the largest mobile game publisher in South Korea.

The company has just secured investor commitments to buy 16.9 Million shares worth $2.3 Billion in a May 2017 IPO on the Korea KOSPI stock exchange.  

This IPO would value the company at $11 Billion based on investor demand at the high end of the offer range of $138 USD / share (or 157,000 Korean Won / share)

This is a very big deal. It would be the largest IPO on the Korean exchange since 2010 and second largest tech IPO in the world in the last two years after Snap and ahead of Line.

We will show in detail below that this is a highly speculative IPO, even for mobile game companies who are often dismissed by investors as being one hit wonders.

This IPO is unlike the disappointing mobile game IPOs of King Digital Entertainment in 2014 and Zynga in 2011 where both companies had enough audited numbers in their S-1s to suggest that their best days were behind them.

On the contrary, Netmarble’s best days are ahead of them.  But, investors are insane to give this company such a lofty valuation based entirely on unaudited revenue numbers of a single new game launched only four months ago.

We will present evidence hinting that early annualized revenue run rates (ARR) for the game have slipped noticeably in March 2017 — the third month since launch.  We predict that once investors realize this, the stock should drop 30+% from its expected IPO price.

Evidence of a Drop-off in ARR

On December 13, 2016 Netmarble launched a mobile role-playing game called Lineage ll: Revolution  (L2R) based on licensed IP from NCSoft’s legendary PC game Lineage. According to app analytics company App Annie, the game immediately rose to #1 on the S. Korean iOS Apple revenue rank charts and has remain so to this day.

 

 Just because L2R has remained ranked #1 on the S. Korean charts for the past four months, and likely will continue to do so for months, it is still possible that ARR has declined by $100s of Millions since release.

This is because there is a severe power function relation in the mobile game industry between ARR and revenue rank. Typically, at the top of the USA charts, there can be a $600 Million ARR difference between the #1 and #2 ranked game, say $2.2 Billion ARR for #1 and $1.6 Billion ARR for #2.

For example, below is a power function we derived in an earlier paper on the Netmarble IPO for top ranked games on USA iOS app store.

For the S. Korean chart now, it is conceivable that the gap between #1 ranked L2R and the #2 ranked Everybody’s Marble, also by Netmarble published on Kakao, could be $700 Million or more.

In January 2017, Netmarble told the Korean press L2R generated $176.6 Million in revenue between mid-December 2016 and mid-January 2017. That translates into $2+ Billion ARR.

Obviously, a $2 Billion ARR is not sustainable for the full year of 2017. This is because TOTAL Korean game revenue (mobile + console + PC) was only $4 Billion in 2016, according to Newzoo.

Netmarble has not made any official full year forecasts for L2R nor for the company as a whole. We do know that official 2016 revenue for the total company was $1.34 Billion.

In March 2017 analysts covering the company told The Korea Times  that they expect revenue to double to $2.7 Billion, largely based on the early success of L2R.  Assuming organic growth of around 25%, this implies that the 2017 forecast for L2R would be around $1 Billion.

We present two pieces of evidence that even a $1 Billion in total revenue for 2017 is unlikely.

The first piece of evidence is an App Annie trend chart showing L2R download rank. Note that while L2R was ranked #1 in downloads for the first month since release, downloads have steadily dropped below #30 by late March 2017.  

It is doubtful this drop off was caused by a drop off in advertising by Netmarble.  It is more likely due to a lack of strong word-of-mouth by early players that this is a great game.

The other piece of evidence of a drop off in ARR comes from a monthly summary report put out by SuperData listing the top grossing mobile games globally for that month.  

For February 2017, SuperData reported L2R was the top grossing game globally.  But, for March, it reported that L2R dropped to #10 (See below)

 

 

Valuing Netmarble Based on Realistic Expectations for L2R

As we stated earlier, Netmarble’s IPO is scheduled for May 2017.  Investors have already committed to buying 16.9 Million shares at the top end of the offering range of $138 USD / share or 157,000 Korean won / share.

This values the company at $11.7 Billion.  Dividing that valuation by analysts forecasts for 2017 revenue of $2.7 Billion,  we arrive at valuation of 4.3 time forward ARR.  This ratio enables comparisons with  market-derived valuation ratios of publicly-held companies. 

For example, in another paper of ours on the Netmarble IPO,  we derived a valuation ratio for Com2uS of 2.61.  Com2uS is a Korean-based mobile game company listed on KOSPI exchange.   Com2uS is much better known than Netmarble due to its global hit mobile game Summoners War.  

While Com2uS is growing slower than Netmarble, its future sales are more predictable. Based on this comparison, we concluded that Netmarble’s IPO was overpriced by 26%.

In the spreadsheet below,  we also break down Netmarble’s 2017 overall revenue growth forecast into estimates of organic growth versus new sales from L2R — which we peg at $1 Billion.

 

 The final spreadsheet presents “what if?” analysis of Netmarble’s value and stock price  if more solid evidence starts showing up indicating that L2R’s 2017 ARR will be closer to $600 Million than $1 Billion.

Note that when revenue forecasts are significantly cut back, there is usually a corresponding compression in valuation ratios.  So, we built into our “what if?” analysis a compression of Netmarble’s valuation ratio from 4.3 to 3.5 times forward ARR.  

Official sales figures will start coming from Netmarble a month or so after the end of its 2Q17 quarter in June 2017.  We expect management to guide 2017 revenue well short of initial forecasts of $2.7 Billion due to L2R’s ARR well below $1 Billion.

The stock should fall well below IPO prices.  We predict a decline on the order of 33% by July or August 2017.

Kabam: An $800 Million Bid That Is Both Lifeline and Death Knell

Lawrence Abrams No Comments

Kabam (Private:KABAM) is a mobile game startup based in San Francisco that had early success at developing games based on movie IP licensed from major studios like Disney’s Marvel studio, Warner Bros., and Lionsgate.

Beginning in 2014, Kabam started timing new releases to coincide with the releases of mega-hit movie sequels like Fast and Furious and the Hunger Games. The games had no long-term engagement value and “freemium” revenue plummeted within a few months after release. The result was a disastrous string of five failures and one success.

The one success was Marvel: Contest of Champions, a massively multiplayer online (MMO) game developed by Kabam’s Vancouver studio. It is the only game currently producing significant revenue and has a reportedly generated revenue totaling $471 Million since its late 2014 release. In July 2016, we wrote an article for SA saying that ” Kabam would be dead today” had it not been for the Marvel game.

On October 18, 2016, Venturebeat reported that Kabam received an unsolicited offer of $800 Million for its Vancouver studio. A day later the Wall Street Journal reported that Kabam has received multiple bids between $700 Million and $800 Million from Asian and U.S. gaming and media companies.

The bids are an opportunity that Kabam’s Board of Directors cannot refuse and represents both a lifeline and death knell.

The $800 Million bid implies a special value for the Vancouver studio of 100+ developers because our estimated (see derivation below) value of the whole company is at $775 Million, which, in turn, is below the previous $1 Billion valuation attributed to it by Alibaba in August 2014 when it invested $120 Million in the company.

We would be comfortable with the argument, presented in more detail below, that this “cherry-picked” bid implies minimal value for the company’s founders and C-suite executives based in San Francisco and Beijing. We would be comfortable with the argument that the work-in-progress and underlying game platforms coming out of Kabam’s other studios in San Francisco and Beijing, but not Los Angeles, also have minimal value.

In terms of return on investment, we will argue below that the proceeds from $800 Million should be paid out to stockholders rather than reinvested in either the Beijing or San Francisco studios.

In the rest of the paper, we will provide detailed answers to the following questions:

(1) What is current valuation of Kabam as a whole?

(2) Why might it be hard for Kabam to peel off the Vancouver studio?

(3) Who the likely bidder?

(4) What is likely to happen to the rest of the company?

What Is The Current Valuation of Kabam as a Whole?

Compared to other tech companies, valuation and revenue forecasting of mobile game companies is an order of magnitude easier due to the fact that analysts have access to monthly download and revenue rank data provided by such app analytics companies as App Annie. It is equivalent to the 1970s era of pure play movie studios where analysts had access to weekend box office data published by Variety.

We have developed a methodology for valuing and revenue forecasting of pure play mobile game companies based on three pieces of data (1) IOS Apple USA app store game revenue rank published by App Annie; (2) an estimate of a power function relation between annualized global revenue run rate (NYSE:ARR) and IOS Apple USA revenue rank; and (3) “market-derived” valuations of pure play mobile game companies as a multiple their ARR.

We have used this methodology to publish a number of articles on SA:

Kabam: A Mobile Game Unicorn No More?, July 2016

Kabam’s IPO Plans are Kaput, January 2015

Machine Zone: IPO or What?, July 2014

Zynga Is A Dog Without A Top 10 Mobile Hit, June 2014

Klab: An Undervalued Japanese Mobile Gaming Stock, June 2014

Mixi: A Rare Undervalued Mobile Gaming Stock, May 2014

We start with a screenshot of the revenue rank trend for Kabam’s Marvel game since its release in late 2014.

 

 

 

 

 

 

 

 

 

 

It shows 12 month run between mid-2015 and mid-2016 as a steady #5 to #10 revenue rank game. Based on an average #8 ranking, we estimate that this translates into a $350 Million ARR.

However, the graph reveals some slippage since mid-2016, possibly because of the Pokemon phenomenon. Because of the power function relation between revenue rank and revenue, a single digit slip to an average #9 ranking translates into a $250 Million ARR, which we use for our current valuation below.

This recent slippage is the kind of insight available to financial analysts of the mobile game industry that is unmatched elsewhere in the tech business world. Can you imagine having access to similar trend lines for Uber, Airbnb, Palantir, or Pinterest?

In terms of what multiple of ARR to use for valuing Kabam, we offer the latest “market driven” multiple for a pure play mobile game company. This is the June 2016 Tencent acquisition of Softbank’s 84.3% ownership of Supercell for $8.6 Billion. This put the full 100% valuation of Supercell at $10.2 Billion.

Even though Supercell is a private company based in Finland, it is required by law to report annual revenue to the government. In 2015, Supercell reported revenue of $2.326 Billion based largely on its hit games of Clash of Clans, Hay Day and Boom Beach. Now with the addition of #6 Clash Royale, we estimate that Supercell’s current ARR at $2.9 Billion, implying a valuation of 3.3 times ARR.

However, Supercell is a very profitable company with multiple hit games and an employee headcount reportedly less than 200. Kabam is currently a one hit game company with a current total ARR of around $310 Million and current employee headcount of around 689. Supercell’s ARR/employee is $14.5 Million, which is 32 times that of Kabam’s $.45 Million ARR/employee.

Since the mid-2016 slippage in the Marvel game ARR, we believe that Kabam is no longer profitable on a EBITDA basis and now is very likely running cash flow negative. With the IPO window closed, and tellingly, no new VC investments in two years, a $800 Million bid for the Vancouver studio is a lifeline that its Board cannot refuse.

There is no way you can value Kabam at Supercell’s 3.3 times ARR. We believe our often used 2.5 times ARR is appropriate here. We estimate Kabam’s current valuation at $775 Million, just below the reported top bid of $800 Million for the Vancouver studio.

 

 

 

 

 

 

 

 

Why might it be hard for Kabam to peel off the Vancouver studio?

The Vancouver studio started out as Exploding Barrel Games, which Kabam acquired in early 2013. The terms were not disclosed. The studio had 35 developers at the time and it was this core group that developed the gameplay engine for the Marvel game.

The CTO of Exploding Barrel Games was Jeff Howell. He is still with Kabam and has gone on to become Kabam’s first CTO. According to aKabam press release of his appointment in Nov 2, 2015, ” he also will continue to lead the development and implementation of Kabam’s proprietary technology engine “Fuse & Sparx.” (cute…Fuse & Sparx…then Kabam!!) Kabam also has announced that the Vancouver game engine would be deployed company-wide as the platform of all future MMO game development.

The bid obviously has to include CTO Jeff Howell and the game engine. Kabam has announced a planned 1Q17 release of a MMO game based on Transformer IP licensed from Hasbro. This game is currently in development at its Vancouver studio. The question is who gets the Transformer game? If Kabam retains the rights, how can it continue development at one of its other studios without the help of CTO Howell, the Vancouver team, and a copy of the game engine? These decisions will occupy Kabam’s Board as much as the actual bid amount.

Who the likely bidder?

The Wall Street Journal article mentioned that Kabam has multiple bids from Asian and U.S. gaming and media companies. The obvious guesses are the USA console gaming companies Electronic Arts or Activision Blizzard looking for a $1 Billion MMO mobile game to rival those of Supercell and Machine Zone (Private:MZ). Softbank is an unlikely bidder as it has been raising cash by shedding mobile game assets to make up for the losses of its Sprint acquisition. China’s Tencent would be another guess, although we think that Alibaba would be uncomfortable selling to its arch rival.

We would like to offer another likely bidder that has “one degree of separation” from the Vancouver studio and could seamlessly step in and run the studio. That company is the Tokyo-based gaming company Nexon (OTC:NEXOF) listed on the Tokyo stock exchange (T:3659). Nexon, founded in Korea in 1994, moved to Japan 12 years ago, went public 5 years ago, and is growing 20-25% a year. It currently has 4 of the Top 10 mobile games on the South Korean app store charts.

Nexon’s CEO is Owen Mahoney who has been VP of Corporate Development at Electronic Arts from 2000-2009. Nexon’s estimated 2016 revenue is around $1.7 Billion USD. Mahoney has said that Nexon is focused on expanding its mobile presence in the West. While the $800 Million price tag for the Vancouver studio would be a stretch for Nexon, the acquisition would be good fit.

Here is where the “one degree of separation” comes in. Two co-founders of Exploding Barrel Games — its President Scott Blackwood and General Manager Heather Price — plus the Kabam VP that led the Exploding Barrel Games acquisition — Chris Ko –left Kabam in 2015 to start an independent mobile game studio called The Game Studio. The studio is based where? Vancouver. Their mission is what? AAA mobile game developer. And who has recently signed on to become its global publishing partner? Nexon.

It would make perfect sense, and be almost a fairy-tale ending, if Nexon purchased Kabam’s Vancouver studio and re-united it with its original leadership led by creative director Scott Blackwood.

What is likely to happen to the rest of the company?

Kabam’s website lists eight on its Board of Directors with the majority of five being VC partners of investing firms. The VCs are in control here so founder and C-Suite job security would not be the dominant factor in this decision. Given the dearth of tech IPOs generally in the past two years, there is pressure on the Kabam’s Board to accept a bid, regardless of the difficulties it might present for the future success of the remaining company.

As we said earlier, the bid price is the least of Kabam’s Board worries. We discussed earlier the thorny issue of how to peel off the Vancouver studio and its game engine without crippling development in the rest of the company going forward.

A more thorny issue is what to do with the $800 Million cash, assuming it is cash and not stock. The basic decision comes down to return on investment with the choices being stock repurchase versus reinvestment in the remaining three studios.

Crunchbase has reported that Kabam has received a total of $244.5 Million from investors — $120M from Alibaba, and the remaining $144.5 Million from venture capitalists. Given the hunger for realized returns by VCs these day, we believe Kabam’s Board has to return a minimum of 2X to investors or $489 Million sooner than later.

In our opinion, we don’t see much remaining at Kabam that merits an investment, (details below) assuming the Vancouver game engine and the rights to the Transformer game goes with the winning bid. A minimum 2X payout still leaves $311 Million, which is way too much to reinvest in the company. We could see the company keeping only $150 Million, and paying out another $150 Million.

The company has announced only one other game in development — a MMO game based on Avatar IP licensed from James Cameron, the film maker who gave us Avatar, Titanic, Alien, and Terminator. The game is being developed by Kabam’s LA studio. It is scheduled to be release in conjunction with the release of Avatar 2 movie. It is not clear what game engine is behind this development.

On the one hand, investing in any creative project based on James Cameron IP seems like a winner. But, Cameron is known for being very fickle. The release date for Avatar 2 has been in a constant state of flux and has been pushed back another year to December 2017.

Also, it is hard for us to conceive Avatar as a MMO battle game like the hit games from Supercell or MZ. Avatar seem better suited as MMO role playing game, which does well in Asia, but not so well in the West.

Also, who’s to say that Cameron might change his mind and want a VR game instead of a MMO mobile game? Still, saving the LA studio of 80+ developers and reserving plenty of cash for the Avatar game seems like a good investment.

We have no clue what Kabam’s Beijing studio of 200+ is doing these days. The spectacular failure to localize the Marvel game for the Chinese market puts it at the top of our list for closure. This includes exits for two of Kabam’s co-founders — long time studio head Michael Li andHolly Liu who moved to Beijing in 2015 to help manage the studio.

The Chinese Marvel game did hit #1 on the Apple iOS China download charts — for one day. And Kabam cajoled Dean Takahashi of Venturebeat into writing an article with this headline: “How Kabam Self-Published Its Marvel Mobile Game in China — and Hit #1”

But, the game never caught on and has been on a steady downtrend with a current revenue rank around #250 on Apple’s iOS China app store.(see chart below).

 

 

 

 

 

 

 

 

 

 

The failure of Kabam to localize the Marvel game has reduced the likelihood that its leading investor Alibaba, or any other potential Chinese investor, to pour more money into the company.

Finally, what should Kabam’s Board do with its San Francisco HQ run by CEO and co-founder Kevin Chou and its studio numbering 279+ developers and support personnel?

The studio itself is responsible for three of the recent failed releases. Plus, we have argued that the cause of Kabam’s failure to release games with long-term engagement value has been a short-sighted, “talk the talk” culture coming out of its San Francisco HQ.

CEO Chou has admitted as much now saying that the company is focused on “bigger, bolder, fewer” game releases. But, in our opinion, he still doesn’t understand what it takes to create long-term player engagement. He thinks it is through mobile games with AAA console graphics including 3D. In our opinion, it is through “metagame” starting with a real-time, crowd-sourced chat translator similar to what MZ (formerly Machine Zone) developed three years ago.

For these reason, we could see the $800 Million bid as the death knell of Kabam’s San Francisco operations with a massive layoff numbering 250+ coupled with golden-parachute exits by CEO Kevin Chou and COO Kent Wakeford. Kabam could then downsize its HQ and relocate it in LA with the company headed by President of Studios and Chief Creative officer Mike Verdu.

Kabam’s Downfall: Talking the Talk

Lawrence Abrams No Comments

The growth in the numbers of technology startups valued over $1 Billion, so-called unicorns, has abruptly stopped and even reversed.

In the last several months, a number of unicorns have seen their valuations marked down by mutual funds. This has been accompanied by a number of titillating articles about frivolous spending — Dropbox’s Chrome Panda sculpture — and debauchery — Zenefits’ sex in the stairwells — claimed to be endemic to high flying unicorns.

Unlike stories of fallen unicorns, this article is about a company that “officially” is still on all unicorn lists. It is about the mobile game company Kabam, elevated to unicorn status by its last funding round in August 2014 of $120 Million by the Chinese platform company Alibaba.

Kabam had early success at developing games based on movie IP licensed from major studios like Disney’s Marvel studio, Warner Bros., and Lionsgate.

Beginning in 2014, Kabam started timing new releases to coincide with the releases of mega-hit movie sequels like Fast and Furious and the Hunger Games. The results have been a disastrous string of five failures and one success.

Kabam Timeline of Hits and Misses

Kabam Timeline of Hits and Misses

What caused this unicorn to stumble?

There is an inspiring YouTube video of a Keynote address given by Kabam co-founder Holly Liu at a Women 2.0 Conference in 2014.

She talks about key moments in the early history of Kabam when the founders decided to “Go Big” in her words. By this, she meant building products based on a vision of where a market was going rather where the market was at. Today, we use a hockey metaphor of “skating to where the puck is going” not “skating to where it is”

Kabam’s Downfall: “Skating to Where the Puck Is” after 2013

Specifically, for the Kabam founders it was deciding in 2007 to port their games to Facebook via its newly created API in a year when the dominant access to games was through the PC browser.

Then again, at the height of game company success on Facebook in 2010, Kabam founders were anticipating Facebook’s closure of its game API and made the visionary decision to develop only for the mobile phone.

Silicon Valley VCs have a bias toward supporting founders opinions over professional managers when startups periodically face existential choices.

This is because founders have vision (“skate to where the puck is going”) and want to build long-lasting companies. They have a Facebook “move fast and break things” mindset that is risky, but can result in outsized payouts in the end.

Whereas professional managers prefer risk-averse choices (“skate to where the puck is” ) that look to be the fastest path to cashing out via a buyout or an IPO.

Kabam stopped making visionary choices in 2013. What had happened was the emergence of a “talk the talk” culture championed by hired professional managers that favored strategies geared toward short-term revenue goals followed by an IPO.

In 2013, Kabam’s revenue grew 100% that year, fueled in part by the explosion of mobile phone purchases. Kabam had 3 hit games with greater than $100 Million in annualized revenue.

CEO Kevin Chou talked to the press about timetables for an IPO. He even announced publicly early April of 2014 that revenue was forecasted to grow 80+% or more and be in the range of $550 — $650 Million.

The safe bet to achieving these short term goals was to release as many games with $100 M in annualized revenue as possible. And that is what Kabam did, with disastrous results.

Visionary game founders in 2013 would have seen that only a company with multiple chart-topping $1 Billion games could ever have a chance at an IPO.

They would have known that another mobile game company Machine Zone (now MZ) was doing the visionary thing by building a ultra-low latency many-to-many game platform based on Erlang and investing in dedicated servers with field programmable gate arrays.

Visionary founders at Kabam would have stopped doing more of the same, and would have started building a new platform. They would have shut off all talk of IPO, stopped giving the press explicit financial numbers and revenue forecasts, and told investors that revenue would plummet in 2014.

In our opinion, the source of Kabam short-sighted culture was non-engineering managers brought in run Kabam’s operations. COO Kent Wakeford, a lawyer and former AOL executive, has been the face of Kabam to the press in matters of deals. To his credit, he consistently deflected any questions dealing with IPO specifics.

The real source of Kabam’s culture of “talk the talk” was former SVP of Corporate Communications Steve Swasey. The idea for making annual explicit financial disclosures can directly be traced Swasey.

The height of Kabam’s arrogance occurred in December 2013 when Kabam announced that it bought the naming rights for the Cal-Berkeley’s football field for $18 Million paid over 15 years. This idea had to be initiated by Steve Swasey. But, to be fair, this symbol of arriveste had to be approved by Kabam’s Board of Directors and founders.

One can understand the desire of Kabam’s co-founders — all three UC-Berkeley grads — to give back to their alma mater. But, founders should wait years after their IPO to give cash for University buildings. For example, buildings on the the Bay Area campus of Stanford and Berkeley include no less than Gates, Allen, Moore, Varian, Hewlett, Packard, and Wozniak.

In our opinion, we do not think Kabam can recover. It is running out of cash. The IPO window is permanently closed to mobile game companies after the Zynga and King Digital IPO debacles. Kabam’s only hope for more funds is Alibaba, its prime investor to date.

The naming of the football field at UC-Berkeley in December 2013 looks to be Kabam’s symbolic “Kiss of Death.”

Former SVP of Corporate Communications Steve Swasey at Cal Football Field Naming

KLab: An Undervalued Japanese Mobile Gaming Company

Lawrence Abrams No Comments

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KLab (3656:TYO) is a Japanese-based gaming company that had been slow to switch from developing feature phone and browser-based games to developing native freemium app games for smartphones.

But, that all changed in April, 2013 when KLab released an innovative role-playing game called “Love Live! School Idol Festival”. The game’s name and theme was licensed from ASCII Media Works who has developed a multimedia franchise — music CDs, anime music videos, TV shows, and manga adaptions. According to a company press release

“School Idol Festival follows the story of the nine members of the μ’s (pronounced Muse) as they train to become the best school idols. In addition to the main story, the game features challenges in which players tap along to the rhythm of popular μ’s songs. Players will encounter and collect the different members of μ’s throughout the game and will be able to build a custom group composed of nine members. To progress in the story, players participate in musical challenges that feature popular songs by the members of μ’s. Players can also level up amassed members and unlock individual members’ sidestory.”

Love Live! the game is innovative in that it makes streaming music a central feature of game play.

According to charts developed by analytics company App Annie, the game has ranked around #15 in app store revenue for both iOS Apple and the Google Play in Japan. While not a megahit like GungHo Online’s (3765:TYO) (GUNGF) Puzzle and Dragons at #1 or #2, or Colopl’s (3668:TYO) Quiz RPG at #5, Love Live! has distinguished itself by relatively long and steady run at #15.

Klab from april 2013(Source: App Annie)

google revenue from beginning(Source: App Annie)

A more detailed look reveals an uptick in ranking to around #10 in the last month.

Klab ios from April revenue(Source: App Annie)

The purpose of this article is to present the case that KLab’s stock has not fully capitalized the future stream of revenue  from Love Live! The stock is a BUY now even with the 17% run-up on May 26, 2014 after KLab released its 1Q2014 earnings, which was only a confirmation of a guidance issued two weeks earlier.

The stock jumped about 20% when the game was first released on April 15, 2013 for iOS Apple store in Japan and it quickly shot up to #15 in revenue ranking.

But the real run-up started two months later going from 525 JPY a share on June 14, 2013 and peaking at 1,297 JPY on July 9, 2013 for 261% gain.

KLab Inc  3656.T  2 yrs

(Source:Reuters)

The cause is hard to pin down. It could have been the brief run-up in downloads  right after Love Live! was released for Google Play store beginning June 13, 2013.

google download june july 2013

(Source: App Annie)
It could have been a Reuters report that Microsoft had signed a deal with KLab to convert some of its franchise console games to native apps for smartphones.

But the downloads on Google Play quickly faded and the reported partnership with Microsoft was never confirmed. In any case, the stock plummeted to 854 JPY by August 2013 and continued its decline for the rest of 2013 even though the game’s revenue ranking remained steady at #15.

KLab’s stock continued its downward trend in the first four month of 2014. As reported by indie navie, KLab announced a lay-off of 22% of Japan-based employees and 7% of employees based in other countries when they reported full year’s losses on February 14, 2014..

But, based on continuing success of Love Live!, KLab announced three months later on May 13, 2014 an upward revision of its 1Q2014 (ending March 2014) revenue guidance by 10% from 4,050 M JPY to 4,425 M JPY and an upward revision in its operating profit guidance from a loss of 90 M JPY to a gain of 96 M JPY.

The stock responded the next day going from 568 JPY to 624 JPY a share for a 9.9% gain, but dropped back down the next two days.

It was the actual release of 1Q2014 financials before the open on May 26, 2014 that propelled the stock 17% that day. Surprisingly, the actual results were not that much different than the guidance revision issued just two weeks earlier.

KLab Inc  3656.T  5 days

(Source: Reuters)

Even with this 17% run-up, we believe that KLab’s stock has not fully capitalized the future returns from Love Live! based on a comparison of the KLab’s current forward price sales ratio (P/S) with that of GungHo Online.
Below is a calculation of the trailing and forward P/S of KLab and GungHo Online. We have used GungHo Online’s estimated forward P/S of 3.31 as a benchmark for a mobile gaming company with a hit game with long running, steady revenue rank.

We estimate KLab’s forward P/S ratio currently to be 1.29, far below GungHo Online’s 3.31. At a minimum, we think that a forward ratio of 2.50 is justified by the long running, steady revenue ranking of Love Live!.

KLab is a BUY now for a potential near term price appreciation to 1,315 JPY per share for a 93% short term gain.

forward japan

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