LINE: The First Major Messaging IPO is a Mixed Bag

Naver, the Korean parent company of messaging app LINE, is planning to list the company on the Tokyo and New York stock exchanges for the first time. This represents the first IPO for a major standalone messaging company and, as such, is an interesting test case for the category. But it’s also a great chance to get a peek at the financials of one of the largest Asian messaging apps which have only been disclosed in part by the parent company in the past. What you see when you dig through those financials is a mixed bag of positive trends and causes for concern.

Four markets dominate LINE’s business

The first thing to understand about LINE is its business is dominated by four major markets, with Japan still, by far, the most important. Only around a quarter of its monthly active users are in Japan, but it generated 70% of its revenue there over the past year. Taiwan, Thailand, and Indonesia round out its top four markets. In those markets, user trends are still somewhat positive but elsewhere, things have turned south, as the chart shows:LINE MAUs by geography

As you can see, growth continues in the four major markets, though it’s slowed down in Japan recently. Outside of those markets, monthly active user numbers have actually declined significantly over the past year. Fairly soon, the company will again have more users in Japan alone than in the “rest of world” outside the top four markets. This reflects, in part, a decision by the company to focus on those big markets, where it is most likely to gain the critical mass required to be successful and profitable, given the network effects associated with messaging services. But it also highlights a big challenge: unlike Facebook and WhatsApp – which have global audiences – and WeChat, which has a massive domestic audience, LINE’s dominance is spread across four markets, none of which is large enough to compete with the global leaders.

Other user trends also look a little wobbly at the moment. The number of monthly active users for LINE games has declined over the past five quarters from a peak of just under 40 million in Q4 2014, and downloads of those games and the LINE messaging app itself have also begun to fall. Given such downloads are the main driver of future revenue growth, there’s room for concern there.

Messaging volumes appear to have plateaued

Messaging volumes on LINE are significant, with a daily average of 15-16 billion received by users over the past year and around four billion messages sent by LINE users per day (the difference between the two is likely caused by group messages, which count as one sent but several received, with the ratio between the two fairly constant over the past year at a little under four). That’s quite a bit smaller though than WhatsApp, which reported earlier this year its users send 42 billion messages a day, or around ten times as many. And WhatsApp and Facebook Messenger between them carry 60 billion sent messages every day, highlighting the scale differences and the challenges facing LINE. The bigger problem for LINE is these numbers appear to have plateaued over the past year:

LINE messages sent and received

This is troubling since messaging is the core of LINE’s value proposition and acts as a funnel for even non-messaging-related revenues. If usage growth is slowing, that suggests engagement isn’t growing. LINE doesn’t provide historic daily active user numbers in its F-1 filing but did provide a snapshot for March 2016, in which DAUs represented 61.4% of total MAUs and 73% of MAUs in its four major markets. The first of those numbers is roughly on par with Facebook’s numbers in Asia, while the major markets number is a little lower than Facebook’s equivalent number in North America and Europe, where it has the highest engagement.

Profitability is elusive despite significant revenues

The other interesting thing about LINE is that, despite decent revenues, it’s not yet consistently profitable. The company generated around a billion dollars in revenue (120 million Japanese yen) in 2015 but had a small net loss. It had been ever so slightly profitable in 2014 but was unprofitable before that, too. A bad investment in MixRadio, acquired from Microsoft after it absorbed Nokia’s devices business, was partly to blame but it’s a worrying sign that user growth is slowing when LINE has yet to generate meaningful profits.

The source of the revenue is interesting too. Like other Asian messaging apps, LINE makes money from a variety of revenue streams, including Stickers (mostly in Japan), game and in-app purchases, merchandise, and advertising. The company generates around a quarter of its revenue from messaging itself (the vast majority from Stickers sold in Japan), a little under half from games, and a growing proportion from advertising, mostly Official Accounts and Sponsored Stickers in the LINE messaging app. Another interesting element is that LINE shares some business model characteristics with game developers, in that only a small portion of its users pay for anything in any given month – typically around 4%. As such, even though it has over 200 million total monthly active users, just eight million or so of those pay for stickers, games or in-app purchases monthly.

Another problem is LINE hasn’t been keeping its costs in check as its revenues have risen – other than marketing costs, which have fallen as a percentage of revenues, several other cost items have either remained constant or risen, not the least of which are employee compensation, which has grown from just over 20% of revenue in 2013 to almost 30% in 2015. Just under a quarter of revenue goes to Apple, Google, and others who process payments for app downloads and in-app purchases. As with WhatsApp, the actual infrastructure that runs a sizable messaging service costs relatively little – slightly over 5% of revenue in 2015.

An interesting experiment for unicorn IPOs

In a year when we’ve had very few tech IPOs so far, LINE is a rare example of a tech company proceeding down this route. However, it’s worth remembering that LINE first filed back in 2014 and its valuation was quite a bit higher then. The company is now valued at around $5.5 billion but, in 2014, it was deemed to be worth about $4 billion more. Unlike many unicorns, LINE has pretty healthy revenue and has flirted with profitability, but the key issue is the negative trends we’ve discussed. The trajectory for LINE is not as promising today as it was in 2014 and that’s reflected in the lower valuation. Response to the IPO in the US and Japan will be worth watching in a market that’s been starved for IPOs but this likely isn’t a blockbuster. Given most of the other major messaging apps are part of larger companies, however, it may well be the only significant messaging-centric IPO we get in the foreseeable future.

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Jan Dawson

Jan Dawson is Founder and Chief Analyst at Jackdaw Research, a technology research and consulting firm focused on consumer technology. During his sixteen years as a technology analyst, Jan has covered everything from DSL to LTE, and from policy and regulation to smartphones and tablets. As such, he brings a unique perspective to the consumer technology space, pulling together insights on communications and content services, device hardware and software, and online services to provide big-picture market analysis and strategic advice to his clients. Jan has worked with many of the world’s largest operators, device and infrastructure vendors, online service providers and others to shape their strategies and help them understand the market. Prior to founding Jackdaw, Jan worked at Ovum for a number of years, most recently as Chief Telecoms Analyst, responsible for Ovum’s telecoms research agenda globally.

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