EUR 850.00 For Business Accounts Only

Morningstar | While Line’s Quarterly Results Are Disappointing, Indicators Suggest Its Solid User Base Is Intact

We expect the stagnation of Line’s advertisement business to disappoint the market in the short run. Cost per mille, or CPM (advertisement revenue paid over 1,000 impressions) dropped to JPY 380 from JPY 434 in the previous quarter and JPY 491 in the prior-year period, as an increase in overseas ads and the transition to new ad platforms worsened the product mix. As a result, display ad revenue growth in the September quarter was 13%, representing a slowdown from 62% in the June quarter; consequently, the operating margin of its core segment dropped to 13.4% from 16.1%. While Line expects that growth in CPM will reignite in 2019 as the transition to the new ad platforms is completed, we are concerned that Line’s monetization in the ad business appears to be slower than anticipated. We thus trim our fair value estimate to JPY 5,000 from JPY 5,200 per share and to $45 from $48 per U.S. ADR, but we retain our view that Line will remain one of the most attractive platforms for advertisers, as its user base covers more than 90% of smartphone users in Japan, Taiwan, and Thailand.

While financial results were disappointing, we observe some positive indicators. First, Line’s domestic monthly active users amounted to 78 million, up from 76 million in the previous quarter, covering more than 90% of domestic smartphone users, and the DAU/MAU ratio is 85%, which shows strong user engagement. Second, the number of display ad impressions increased 46% from the previous year, suggesting that Line is becoming an attractive platform for advertisers in three major countries. Third, Line will achieve its target of 1 million locations adopting Line Pay, its mobile payment service, within 2018. We believe these numbers demonstrate the strength of Line's ecosystem, which is the source of our narrow economic moat rating.