KLab 3656

KLab

Recent Updates

2021-11-10

Q3 FY12/21 flash update; revision to full-year earnings forecast

2021-11-10

Q3 FY12/21 flash update

2021-09-21

1H FY12/21 report update

Get in touch

6-10-1 Roppongi, Minato-ku, Tokyo, Japan

https://www.klab.com/jp/

Summary

KLab Inc. plans, develops, and operates mobile games. The majority of the company’s revenue and profits comes from the Game business. The company is a medium-sized specialist company as a mobile game industry.

SoftwareEntertainment

Key dates

2022-02-09

Next earnings announcement

2020-08-05

Coverage initiation

Full Report

2021-11-10

Q3 FY12/21 flash update

2021-11-10

1H FY12/21 flash update

2021-08-05

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Executive summary

Business overview

Business description: KLab Inc. plans, develops, and operates mobile games*¹. The majority of the company’s revenue and profits comes from the Game business, which accounted for 98.9% of total revenue and 97.7% of gross profit in FY12/20. With FY12/20 revenue of JPY34.0bn, KLab is a medium-sized specialist company compared with industry leader Mixi, which logged a segment revenue of JPY100.6bn in its Digital Entertainment business in FY03/21.

Characteristics of KLab’s games: The most popular games of competitors GungHo Online Entertainment, Inc. (TSE1: 3765) and Mixi, Inc. (TSE1: 2121) are based on their own intellectual property (IP). In contrast, KLab’s mainstay games are based on existing IPs from anime and manga. Although the company’s mainstay games vary in genre (sports, rhythm action, and action RPG), they share elements in common: each captures the feeling of the world of its respective IP, each includes rare characters that can be developed by the player, and each allows the player to form teams from multiple characters. Many mobile games fail to generate revenue despite being based on well-known anime or manga. Simply being fun to play is not enough to guarantee commercial success—games need to have mechanisms that encourage players to make in-game purchases. Shared Research thinks KLab has become highly accomplished at encouraging players to spend on games. The company has leveraged its years of experience in developing and operating collectible card games since they boomed in popularity in the early 2010s to incorporate elements of collecting and training rare characters into its games in clever ways.

Mainstay games: The company’s mainstay games are sports simulation Captain Tsubasa: Dream Team (hereafter Captain Tsubasa), action RPG BLEACH: Brave Souls, rhythm action game Love Live! School Idol Festival (hereafter Love Live! School Fest), rhythm action RPG Love Live! School Idol Festival All Stars (hereafter Love Live! All Stars) (see “Business”). These four titles account for the majority of Game business revenue. Competitors are highly reliant on a single game to drive results: 55.2% of GungHo Online Entertainment’s FY12/19 revenue came from its puzzle RPG Puzzle & Dragons, and over 60% of Mixi’s FY03/19 revenue came from its co-op RPG Monster Strike. KLab’s earnings, by contrast, are diversified across multiple games and therefore not easily affected by the potential decline of any single one.

High overseas revenue ratio: KLab’s games are basically free to play. However, many players purchase in-game currency to use on gacha*² to help them progress through the game. The resulting revenue is the company’s main source of income. In FY12/20, KLab’s overseas revenue composition ratio was 34.9%. The company plans, develops, and operates games based on Japanese anime and manga that are well known overseas. It also develops games with the intention of releasing them overseas as well as in Japan, and is thus able to release global versions of its games at nearly the same time as the Japanese versions, which boosts overseas revenue. Developing games under the assumption of releasing them in both Japan and overseas also helps to curb overall development costs.

Revenue, number of users, average spend: Revenue per game = monthly active users (MAU) × conversion rate (ratio of paying users to MAU) × average revenue per paying user (ARPPU; average monthly revenue for one player). The company says it cannot present average values for each KPI because they fluctuate even for the same game due to seasonal events and campaigns. ARPPU in particular can range widely, occasionally swinging from several thousand yen to as much as tens of thousands of yen.

Costs and expenses: The cost of revenue ratio was 79.4% in FY12/20. Royalties paid to IP rights holders and commissions (platform fees) paid to platform operators (app stores) form the main component in cost of revenue. Royalties and commissions are variable costs, typically around 50% of revenue, and account for over 60% of cost of revenue. The remaining 40% of cost of revenue comprises fixed costs such as labor and outsourcing. The SG&A-to-revenue ratio is roughly 20%, with SG&A expenses mainly comprising salaries and allowances and advertising expenses. Salaries and allowances are mostly fixed costs while advertising expenses are mostly variable owing to performance-based advertising and the company’s ability to adjust the advertising budget according to revenue. The advertising expense-to-revenue ratio hovers around 7%.

Investment in new games (software): According to FY12/19 results, large in-house titles such as Love Live! All Stars and Tales of Crestoria take about two years to develop and call for approximately JPY1.0bn–JPY2.0bn in upfront spending. Games are recorded as software (intangible fixed assets) at the time of release, and are amortized over two years using the straight-line method. KLab aims to rein in game production costs by promoting joint development with external development companies, narrowing its focus to genres such as rhythm action, action RPG, and sports that have produced a hit in the past, and standardizing basic app functions through the development of a common structure.

Earnings trends

In FY12/20, revenue was JPY34.0bn (+9.1% YoY), operating profit was JPY2.1bn (+28.4% YoY), recurring profit was JPY1.6bn (-3.7% YoY), and net income attributable to owners of the parent was JPY767mn (+99.9% YoY). Total revenue rose on growth in revenue from existing games. Gross profit fell YoY as a decline in transfer to other accounts outweighed revenue growth, but operating profit grew on lower SG&A expenses.

KLab lowered its full-year FY12/21 company forecast at the time of its Q3 FY12/21 earnings announcement (November 2021). The company’s revised forecast calls for revenue of JPY24.0bn (-29.3% YoY), operating loss of JPY1.6bn (versus operating profit of JPY2.1bn in FY12/20), recurring loss of JPY1.7bn (versus recurring profit of JPY1.6bn), and net loss attributable to owners of the parent of JPY2.3bn (versus net income of JPY767mn in FY12/20). The company revised its forecast downward again after downward revisions in May and August 2021. It expects revenue to fall short of the low end of the previous forecast by JPY1.5bn as revenue from games in operation declined faster than the company had expected. Operating profit (loss) is expected to be at the bottom of the previous forecast range as a result of cost reduction effects.

Along with the FY12/20 results, the company unveiled its medium-term management plan, which targets FY12/23 revenue of JPY50.0bn (up 47.3% from FY12/20) and operating profit of JPY10.0bn (+365.2%). The company aims to grow earnings through stable management of existing titles while growing revenue and profit from new titles. Over the course of the plan, it also intends to secure new sources of earnings other than conventional game development and operations, such as through casual games and overseas game development support.

Strengths and weaknesses

Shared Research sees the company’s strengths as: 1) its practice of developing games based on popular IPs, 2) its ability to profitably operate games over a long period of time, and 3) its excellent overseas expansion capability. We see KLab’s weaknesses as: 1) the need to shoulder a greater burden than competitors when developing new games due to its relatively small revenue, 2) reluctance to take risks to produce blockbusters, and 3) a lack of proven ability in developing games based on proprietary IPs. (See “Strengths and weaknesses” for details.)

*1 Mobile games: Most mobile games are free to play. However, players can pay to roll gacha (electronic lottery) to acquire rare characters and items that will help them progress through the game in an advantageous manner. Revenue earned through gacha is the main source of revenue for game operating companies. Players who pay to roll gacha are a small subset of total players. Game companies make use of player psychology to increase their willingness to spend on games, including the desire to collect rare characters, attachment to the characters they develop in the game, and desire to perform well in ranked competition with other players. In addition, companies can use the mobile game interface to add content that keeps players interested, such as by delivering large-scale updates, holding limited-time events, and providing limited-time missions.

*2 Gacha: A mechanism in mobile games by which users can obtain in-game items or characters that are randomly selected for them. The use of the term gacha in this sense is an extension of its original use to refer to toy vending machines (where the user does not know what toy they will get). The word “gacha” is said to sound like the noise these vending machines make. Players use in-game currency purchased with real money to roll gacha. For example, in one of the company’s mainstay games, Captain Tsubasa, players can roll gacha to acquire characters for a cost of five “Dreamballs” (the in-game currency). Dreamballs are JPY120 each, but are more cost-effective the more a player purchases at a time, costing as little as JPY57 each when purchased at the bulk-buy limit of 175. By setting the probability of getting rare items and characters through gacha at a low level, game operating companies encourage players to roll gacha multiple times, thereby increasing their opportunities to earn revenue.

Scale of mobile game market: According to the JOGA Online Game Market Research Report 2020, the size of the mobile game market in Japan in 2019 was JPY1.4tn (+3.3% YoY).

Key financial data

Income statement		FY08/11	FY08/12	FY12/13	FY12/14	FY12/15	FY12/16	FY12/17	FY12/18	FY12/19	FY12/20	FY12/21
(JPYmn)		Parent	Parent	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Est.
Revenue		5,665	15,210	20,993	21,375	20,913	19,600	26,778	32,674	31,110	33,952	24,000
	YoY	91.8%	168.5%	-	1.8%	-2.2%	-6.3%	36.6%	22.0%	-4.8%	9.1%	-29.3%
Gross profit		2,279	5,830	4,835	6,862	6,714	5,192	9,565	10,549	7,031	6,992
	YoY	95.2%	155.8%	-	41.9%	-2.2%	-22.7%	84.2%	10.3%	-33.4%	-0.5%
	Gross profit margin	40.2%	38.3%	23.0%	32.1%	32.1%	26.5%	35.7%	32.3%	22.6%	20.6%
Operating profit		962	2,811	-1,224	2,164	2,198	1,275	4,891	4,995	1,674	2,149	-1,600
	YoY	538.7%	192.3%	-	-	1.6%	-42.0%	283.7%	2.1%	-66.5%	28.4%	-
	Operating profit margin	17.0%	18.5%	-	10.1%	10.5%	6.5%	18.3%	15.3%	5.4%	6.3%	-
Recurring profit		951	2,820	-942	2,564	1,919	830	4,854	4,998	1,626	1,565	-1,700
	YoY	624.0%	196.4%	-	-	-25.1%	-56.7%	484.5%	3.0%	-67.5%	-3.7%	-
	Recurring profit margin	16.8%	18.5%	-	12.0%	9.2%	4.2%	18.1%	15.3%	5.2%	4.6%	-
Net income		550	1,623	-2,564	1,793	700	-814	3,127	2,570	384	767	-2,300
	YoY	162.4%	195.0%	-	-	-60.9%	-216.2%	-484.1%	-17.8%	-85.1%	99.9%	-
	Net margin	9.7%	10.7%	-	8.4%	3.3%	-4.2%	11.7%	7.9%	1.2%	2.3%	-
Per-share data (split-adjusted; JPY)
Shares issued ('000)		4,681	26,050	33,059	37,292	37,798	37,946	38,288	37,696	38,172	38,475
EPS		23.51	63.78	-93.58	52.15	19.26	-22.26	84.89	69.03	10.20	20.08	-59.94
EPS (fully diluted)		-	59.11	-	50.21	18.86	0.00	81.34	66.59	10.02	19.89
Dividend per share		-	-	-	-	-	-	9.00	-	-	-	-
Book value per share		55.77	119.36	124.07	249.71	269.26	248.50	337.21	387.36	406.91	430.74
Balance sheet (JPYmn)
	Cash and cash equivalents	721	1,862	4,518	7,250	4,852	4,661	6,695	4,749	8,298	8,618
Total current assets		2,113	4,122	6,868	10,516	8,480	7,918	11,771	9,246	13,822	13,728
Tangible fixed assets		44	263	300	216	308	302	313	394	450	274
Investments and other assets		263	955	908	1,214	2,424	2,633	3,035	4,489	5,270	6,720
Intangible assets		99	51	621	785	1,422	1,281	3,491	5,117	4,128	2,769
Total assets		2,519	5,391	8,698	12,731	12,633	12,134	18,610	19,245	23,670	23,491
	Accounts payable	138	427	724	1,255	1,094	1,310	2,204	2,315	2,655	2,407
	Short-term debt	101	30	2,750	0	0	0	0	0	642	742
Total current liabilities		1,084	2,273	4,580	3,593	2,733	3,000	6,036	4,672	5,173	5,903
	Long-term debt	117	120	97	60	30	0	0	103	1,303	1,004
Total fixed liabilities		130	142	110	62	33	3	5	106	1,303	1,004
Total liabilities		1,214	2,415	4,690	3,655	2,766	3,003	6,041	4,779	6,475	6,907
Total net assets		1,305	2,976	4,007	9,076	9,867	9,131	12,569	14,467	17,195	16,585
Total interest-bearing debt		218	150	2,847	60	30	0	0	103	1,944	1,746
Cash flow statement (JPYmn)
Cash flows from operating activities		471	2,260	-1,316	2,825	1,228	1,553	5,073	3,796	1,505	3,975
Cash flows from investing activities		-85	-1,087	-2,507	-912	-4,912	-458	-3,458	-5,111	-2,849	-2,342
Cash flows from financing activities		-90	-32	6,363	524	15	49	454	-705	2,855	318
Financial ratios
ROA (RP-based)		47.2%	71.3%	-	23.9%	15.1%	6.7%	31.6%	26.4%	7.6%	6.6%
ROE		53.4%	75.8%	-	27.6%	7.6%	-8.6%	28.9%	19.0%	2.6%	4.8%
Equity ratio		51.8%	55.2%	45.5%	70.8%	77.7%	75.1%	67.4%	75.1%	65.3%	70.5%

Source: Shared Research based on company data
Notes: Figures may differ from company materials due to differences in rounding methods.
*FY12/13 was an irregular 16-month period resulting from a change in the company’s accounting period.

Recent updates

Q3 FY12/21 flash update; revision to full-year earnings forecast

2021-11-10

On November 9, KLab Inc. announced earnings results for Q3 FY12/21; see the results section for details.

On the same day, the company announced a revision to its full-year FY12/21 forecast.

Revised full-year FY12/21 forecast

Revenue: JPY24.0bn (previously JPY25.5–28.5bn)
Operating profit: -JPY1.6bn (-JPY1.6–JPY1.0bn)
Recurring profit: -JPY1.7bn (-JPY1.5–JPY1.1bn)
Net income attributable to owners of the parent: -JPY2.3bn (-JPY2.0bn–JPY20mn)
EPS: -JPY59.94 (-JPY52.17–JPY0.52)

Reasons for revision

The company changed its full-year forecast from a range format to specific figures to reflect results through Q3 (July–September 2021) and outlook for Q4 (October–December 2021).

The company lowered its revenue forecast to JPY24.0bn, below the bottom of the previous forecast range. The revenue decline starting at the beginning of FY12/21 continued through Q3 despite the contribution of anniversary campaigns for several game titles. The company assumes that this trend will continue through Q4. The postponed release date of Lapis Re:LiGHTs versus the scheduled date at the time of the previous forecast was also a negative factor.

The company expects operating profit to be at the bottom end of the previous forecast range thanks to cost reduction effects, while net income attributable to owners of the parent is likely to fall short of the low end of the previous forecast due to negative forex impact.

Trends and outlook

Quarterly trends and results

Cumulative		FY12/20				FY12/21				FY12/21
(JPYmn)		Q1	Q1–Q2	Q1–Q3	Q1–Q4	Q1	Q1–Q2	Q1–Q3	Q1–Q4	% of Est.	FY Est.
Revenue		7,420	15,949	26,361	33,952	6,393	12,337	18,709		78.0%	24,000
	YoY	14.7%	7.7%	17.8%	9.1%	-13.8%	-22.6%	-29.0%			-29.3%
Cost of revenue		6,141	12,876	20,489	26,960	6,065	11,407	16,729
	YoY	27.3%	17.8%	21.7%	12.0%	-1.2%	-11.4%	-18.4%
	Cost ratio	82.8%	80.7%	77.7%	79.4%	94.9%	92.5%	89.4%
Gross profit		1,280	3,073	5,872	6,992	328	930	1,980
	YoY	-22.2%	-20.8%	6.0%	-0.5%	-74.3%	-69.7%	-66.3%
	Gross profit margin	17.2%	19.3%	22.3%	20.6%	5.1%	7.5%	10.6%
SG&A expenses		1,242	2,319	3,618	4,843	833	1,772	2,709
	YoY	-0.9%	-9.9%	-5.5%	-9.6%	-32.9%	-23.6%	-25.1%
	SG&A ratio	16.7%	14.5%	13.7%	14.3%	13.0%	14.4%	14.5%
Operating profit		37	754	2,254	2,149	-505	-842	-729		-	-1,600
	YoY	-90.4%	-42.2%	31.7%	28.4%	-	-	-			-
	Operating profit margin	0.5%	4.7%	8.6%	6.3%	-	-	-			-
Recurring profit		-84	568	1,803	1,565	-387	-819	-850		-	-1,700
	YoY	-	-52.8%	14.9%	-3.7%	-	-	-			-
	Recurring profit margin	-	6.7%	17.3%	20.6%	-	-	-			-
Net income		-135	16	856	767	-1,384	-1,706	-1,767		-	-2,300
	YoY	-	-98.0%	-29.6%	99.9%	-	-	-			-
	Net margin	-	0.1%	3.2%	2.3%	-	-	-			-
Quarterly		FY12/20				FY12/21
(JPYmn)		Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4
Revenue		7,420	8,528	10,412	7,591	6,393	5,944	6,371
	YoY	14.7%	2.2%	37.6%	-13.1%	-13.8%	-30.3%	-38.8%
Cost of revenue		6,141	6,735	7,613	6,471	6,065	5,343	5,321
	YoY	27.3%	10.2%	29.0%	-10.6%	-1.2%	-20.7%	-30.1%
	Cost ratio	82.8%	79.0%	73.1%	85.2%	94.9%	89.9%	83.5%
Gross profit		1,280	1,793	2,799	1,120	328	602	1,050
	YoY	-22.2%	-19.7%	68.4%	-24.8%	-74.3%	-66.4%	-62.5%
	Gross profit margin	17.2%	21.0%	26.9%	14.8%	5.1%	10.1%	16.5%
SG&A expenses		1,242	1,077	1,299	1,225	833	939	937
	YoY	-0.9%	-18.5%	3.4%	-19.8%	-32.9%	-12.8%	-27.9%
	SG&A ratio	16.7%	12.6%	12.5%	16.1%	13.0%	15.8%	14.7%
Operating profit		37	716	1,500	-105	-505	-337	113
	YoY	-90.4%	-21.6%	269.1%	-	-	-	-92.5%
	Operating profit margin	0.5%	8.4%	14.4%	-	-	-	1.8%
Recurring profit		-84	652	1,235	-238	-387	-432	-31
	YoY	-	-18.6%	239.0%	-	-	-	-
	Recurring profit margin	-	7.6%	11.9%	-	-	-	-
Net income		-135	151	840	-89	-1,384	-322	-62
	YoY	-	-70.0%	101.4%	-	-	-	-
	Net margin	-	1.8%	8.1%	-	-	-	-

Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.

Quarterly earnings by segment

Cumulative			FY12/20				FY12/21
(JPYmn)			Q1	Q1–Q2	Q1–Q3	Q1–Q4	Q1	Q1–Q2	Q1–Q3	Q1–Q4
Revenue			7,420	15,949	26,361	33,952	6,393	12,337	18,709
	YoY		14.7%	7.7%	17.8%	9.1%	-13.8%	-22.6%	-29.0%
	Game		7,352	15,824	26,109	33,587	6,273	12,128	18,414
		YoY	16.2%	8.3%	18.1%	9.2%	-14.7%	-23.4%	-29.5%
	Other		68	125	251	365	119	209	294
		YoY	-52.4%	-39.7%	-7.2%	-0.1%	75.5%	67.6%	17.1%
Gross profit			1,280	3,073	5,872	6,992	328	930	1,980
	YoY		-22.2%	-20.8%	6.0%	-0.5%	-74.3%	-69.7%	-66.3%
	Gross profit margin		17.2%	19.3%	22.3%	20.6%	5.1%	7.5%	10.6%
	Game		1,252	3,034	5,785	6,833	258	812	1,820
		YoY	-20.6%	-20.2%	5.7%	-2.0%	-79.4%	-73.2%	-68.5%
		Gross profit margin	17.0%	19.2%	22.2%	20.3%	4.1%	6.7%	9.9%
	Other		28	39	87	159	71	118	160
		YoY	-59.2%	-48.4%	31.5%	172.9%	151.7%	203.2%	83.6%
		Gross profit margin	41.2%	31.2%	34.7%	43.6%	59.1%	56.5%	54.4%
Quarterly			FY12/20				FY12/21
(JPYmn)			Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4
Revenue			7,420	8,528	10,412	7,591	6,393	5,944	6,371
	YoY		14.7%	2.2%	37.6%	-13.1%	-13.8%	-30.3%	-38.8%
	Game		7,352	8,472	10,285	7,478	6,273	5,855	6,286
		YoY	16.2%	2.3%	37.1%	-13.4%	-14.7%	-30.9%	-38.9%
	Other		68	57	127	114	119	90	85
		YoY	-52.4%	-11.4%	97.2%	20.4%	75.5%	58.2%	-32.7%
Gross profit			1,280	1,793	2,799	1,120	328	602	1,050
	YoY		-22.2%	-19.7%	68.4%	-24.8%	-74.3%	-66.4%	-62.5%
	Gross profit margin		17.2%	21.0%	26.9%	14.8%	5.1%	10.1%	16.5%
	Game		1,252	1,782	2,751	1,048	258	554	1,008
		YoY	-20.6%	-20.0%	64.6%	-30.0%	-79.4%	-68.9%	-63.4%
		Gross profit margin	17.0%	21.0%	26.7%	14.0%	4.1%	9.5%	16.0%
	Other		28	11	48	72	71	47	42
		YoY	-59.2%	61.0%	-	-	151.7%	336.0%	-12.9%
		Gross profit margin	41.2%	19.2%	38.1%	63.4%	59.1%	53.0%	49.2%

Source: Shared Research based on company data

Revenue breakdown by region (Japan, Overseas)

Cumulative			FY12/20				FY12/21
(JPYmn)			Q1	Q1–Q2	Q1–Q3	Q1–Q4	Q1	Q1–Q2	Q1–Q3	Q1–Q4
Revenue			7,420	15,949	26,361	33,952	6,393	12,337	18,709
	YoY		14.7%	7.7%	17.8%	9.1%	-13.8%	-22.6%	-29.0%
	Japan		5,112	10,391	17,075	22,092	3,948	7,366	10,976
		YoY	28.9%	11.6%	19.4%	8.5%	-22.8%	-29.1%	-35.7%
	Overseas		2,308	5,558	9,286	11,860	2,445	4,971	7,733
		YoY	-7.8%	1.1%	15.0%	10.3%	5.9%	-10.6%	-16.7%
Quarterly			FY12/20				FY12/21
(JPYmn)			Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4
Revenue			7,420	8,528	10,412	7,591	6,393	5,944	6,371
	YoY		14.7%	2.2%	37.6%	-13.1%	-13.8%	-30.3%	-38.8%
	Japan		5,112	5,278	6,684	5,017	3,948	3,418	3,609
		YoY	28.9%	-1.3%	34.1%	-17.2%	-22.8%	-35.2%	-46.0%
	Overseas		2,308	3,250	3,728	2,574	2,445	2,526	2,762
		YoY	-7.8%	8.5%	44.5%	-3.8%	5.9%	-22.3%	-25.9%

Source: Shared Research based on company data

Cost and expenses

Cumulative			FY12/20				FY12/21
(JPYmn)			Q1	Q1–Q2	Q1–Q3	Q1–Q4	Q1	Q1–Q2	Q1–Q3	Q1–Q4
Cost of revenue			6,141	12,876	20,489	26,960	6,065	11,407	16,729
	YoY		27.3%	17.8%	21.7%	12.0%	-1.2%	-11.4%	-18.4%
	Labor costs		1,018	2,040	3,040	4,048	1,046	2,111	3,187
		YoY	6.4%	6.8%	4.8%	3.8%	2.8%	3.5%	4.8%
	Outsourcing costs		1,186	2,361	3,578	4,829	1,308	2,637	3,997
		YoY	-2.1%	3.1%	-0.3%	2.1%	10.3%	11.7%	11.7%
	Royalties and commission fees		3,665	7,897	12,598	16,117	3,089	6,014	9,012
		YoY	16.1%	11.5%	18.3%	7.7%	-15.7%	-23.8%	-28.5%
		% of Game revenue	49.8%	49.9%	48.3%	48.0%	49.2%	49.6%	48.9%
	Depreciation		365	731	1,304	1,867	547	575	608
		YoY	46.6%	0.4%	10.3%	2.8%	49.9%	-21.3%	-53.4%
	Other		332	677	1,094	1,451	335	644	937
		YoY	-1.0%	-7.9%	-4.1%	-6.0%	0.9%	-4.8%	-14.3%
	Transfer to other accounts		-425	-830	-1,125	-1,352	-260	-574	-1,012
SG&A expenses			1,242	2,319	3,618	4,843	833	1,772	2,709
	YoY		-0.9%	-9.9%	-5.5%	-9.6%	-32.9%	-23.6%	-25.1%
	Salaries and allowances		280	575	844	1,098	215	440	655
	Advertising expenses		547	916	1,546	2,105	237	544	865
	Other		414	825	1,223	1,633	380	785	1,184
Quarterly			FY12/20				FY12/21
(JPYmn)			Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4
Cost of revenue			6,141	6,735	7,613	6,471	6,065	5,343	5,321
	YoY		27.3%	10.2%	29.0%	-10.6%	-1.2%	-20.7%	-30.1%
	Labor costs		1,018	1,022	1,000	1,008	1,046	1,065	1,076
		YoY	6.4%	7.2%	0.9%	1.0%	2.8%	4.2%	7.6%
	Outsourcing costs		1,186	1,175	1,217	1,251	1,308	1,329	1,360
		YoY	-2.1%	8.8%	-6.3%	9.7%	10.3%	13.1%	11.8%
	Royalties and commission fees		3,665	4,232	4,701	3,519	3,089	2,925	2,998
		YoY	16.1%	7.8%	31.6%	-18.4%	-15.7%	-30.9%	-36.2%
		% of Game revenue	49.8%	50.0%	45.7%	47.1%	49.2%	50.0%	47.7%
	Depreciation		365	366	573	563	547	28	33
		YoY	46.6%	-23.6%	26.2%	-11.2%	49.9%	-92.3%	-94.2%
	Other		332	345	417	357	335	310	292
		YoY	-1.0%	-13.7%	3.0%	-11.4%	0.9%	-10.3%	-29.8%
	Transfer to other accounts		-425	-405	-295	-227	-260	-314	-438
SG&A expenses			1,242	1,077	1,299	1,225	833	939	937
	YoY		-0.9%	-18.5%	3.4%	-19.8%	-32.9%	-12.8%	-27.9%
	Salaries and allowances		280	295	269	254	215	225	215
	Advertising expenses		547	369	630	559	237	307	321
	Other		414	411	398	410	380	405	399

Source: Shared Research based on company data

Cumulative Q3 FY12/21 results

Revenue: JPY18.7bn (-29.0% YoY)
Operating loss: JPY729mn (versus operating profit of JPY2.3bn in cumulative Q3 FY12/20)
Recurring loss: JPY850mn (versus recurring profit of JPY1.8bn in cumulative Q3 FY12/20)
Net loss attributable to owners of the parent: JPY1.8bn (versus net income of JPY856mn in cumulative Q3 FY12/20)

Revenue and profit declined YoY, because revenue from games released relatively recently, such as Love Live! All Stars and Tales of Crestoria, was slow, while older titles continued to decline.

Cumulative Q3 FY12/21 revenue

By region, revenue in Japan was JPY11.0bn (-35.7% YoY) and revenue overseas was JPY7.7bn (-16.7% YoY).

Cumulative Q3 FY12/21 expenses and losses

KLab recorded an operating loss of JPY729mn versus operating profit of JPY2.3bn a year earlier. Gross profit was down YoY on the decline in revenue. The company posted an operating loss despite a decrease in SG&A expenses.

Cost of revenue was JPY16.7bn (-18.4% YoY). Royalties and commissions decreased in tandem with revenue.

SG&A expenses were JPY2.7bn (-25.1% YoY).

The operating profit erosion resulted in lower profit from the recurring line downward. A factor in the net loss attributable to owners of the parent was the booking of a JPY1.5bn impairment loss in Q1 for Love Live! All Stars and Tales of Crestoria (JPY499mn recorded in cumulative Q3 FY12/20).

Q3 FY12/21 (July–September 2021) results

Revenue: JPY6.4bn (-38.8% YoY, +7.2% QoQ)
Operating profit: JPY113mn (-92.5% YoY, operating loss of JPY337mn in Q2 FY12/21)
Recurring loss: JPY31mn (versus recurring profit of JPY1.2bn in Q3 FY12/20, recurring loss of JPY432mn in Q2 FY12/21)
Net loss attributable to owners of the parent: JPY62mn (versus net profit of JPY840mn in Q3 FY12/20, net loss of JPY322mn in Q2 FY12/21)

Q3 FY12/21 revenue

By region, revenue in Japan was JPY3.6bn (-46.0% YoY, +5.6% QoQ) and revenue overseas was JPY2.8bn (-25.9% YoY, +9.3% QoQ). Revenue declined YoY, with falling across all titles. Revenue was up QoQ on contributions from the Japanese and global versions of BLEACH: Brave Souls as result of anniversary campaigns.

QoQ performance of major titles was as follows.

Love Live! School Fest: Anniversary events took place in the previous quarter, but there none in Q3. Revenue from the Japanese version was down QoQ and revenue from the global version was flat.

BLEACH: Brave Souls: Revenue from the Japanese and global versions was up QoQ and down YoY. Revenue grew QoQ due to the effect of anniversary events.

Captain Tsubasa: Revenue from the Japanese and global versions was flat QoQ. Merchandise sales related to anniversary events in the previous quarter were brisk in July, but performance slowed from August onward.

Utano☆Princesama Shining Live: Revenue from the Japanese and global versions was flat QoQ. Although the company held anniversary events, merchandise sales were sluggish.

Love Live! All Stars: Japanese version revenue was down QoQ and the global version was flat. The anniversary event held in September made a limited contribution to revenue.

Tales of Crestoria: Revenue from the Japanese and global versions grew QoQ, boosted by the first anniversary event.

Q3 FY12/21 expenses and profits

KLab booked operating profit of JPY113mn (-92.5% YoY, versus operating loss of JPY337mn in Q2 FY12/21). Gross profit was JPY1.1bn (-62.5% YoY) on lower revenue and operating profit declined YoY. The company turned profitable at the operating profit level, because gross profit increased 74.5% QoQ on higher revenue and lower cost of revenue, and SG&A expenses declined.

Cost of revenue was JPY5.3bn (-30.1% YoY, -0.4% QoQ). Labor costs were JPY1.1bn (+7.6% YoY, +1.0% QoQ) and outsourcing costs rose to JPY1.4bn (+11.8% YoY, +2.3% QoQ). Royalties and commissions were JPY3.0bn (-36.2% YoY, +2.5% QoQ) and depreciation was JPY33mn (-94.2% YoY, +17.9% QoQ). Transfer to other accounts was JPY438mn (+48.5% YoY, +39.5% QoQ).

On a YoY basis, royalties and commissions declined on falling revenue, while a drop in depreciation also contributed to lower cost of revenue. This is due to booking an impairment loss on Love Live! All Stars and Tales of Crestoria in Q1 FY12/21.

On a QoQ basis, keeping labor costs and outsourcing expenses down amid development of new games and an increase in transfer to other accounts helped to lower cost of revenue.

SG&A expenses were JPY937mn (-27.9% YoY, -0.2% QoQ).

On a YoY basis, all profit lines from recurring profit downward deteriorated due to lower operating profit. On a QoQ basis, the company turned profitable at the operating profit level, and the recurring loss and net loss narrowed.

Full-year company forecasts

		FY12/20			FY12/21
(JPYmn)		1H Act.	2H Act.	FY Act.	1H Act.	2H Est.	FY Est.
Revenue		15,949	18,003	33,952	12,337	11,663	24,000
	YoY	7.7%	10.5%	9.1%	-22.6%	-35.2%	-29.3%
Cost of revenue		12,876	14,084	26,960	11,407
Gross profit		3,073	3,919	6,992	930
	Gross profit margin	19.3%	21.8%	20.6%	7.5%
SG&A expenses		2,319	2,523	4,843	1,772
	SG&A ratio	14.5%	14.0%	14.3%	14.4%
Operating profit		754	1,396	2,149	-842	-758	-1,600
	YoY	-42.2%	278.2%	28.4%	-	-	-
	Operating profit margin	4.7%	7.8%	6.3%	-	-	-
Recurring profit		568	997	1,565	-819	-881	-1,700
	YoY	-52.8%	136.7%	-3.7%	-	-	-
	Recurring profit margin	3.6%	5.5%	4.6%	-	-	-
Net income		16	751	767	-1,706	-594	-2,300
	YoY	-98.0%	-280.9%	99.9%	-	-	-
	Net margin	0.1%	4.2%	2.3%	-	-	-

Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.

KLab revised its full-year FY12/21 forecast when it announced Q3 results in November 2021. The revised forecast calls for revenue of JPY24.0bn (-29.3% YoY), operating loss of JPY1.6bn (versus operating profit of JPY2.1bn in FY12/20), recurring loss of JPY1.7bn (versus recurring profit of JPY1.6bn in FY12/20), and net loss attributable to owners of the parent of JPY2.3bn (net income of JPY767mn in FY12/20).

Versus the bottom end of its previous forecast range announced in August 2021, the company lowered revenue by JPY1.5bn, recurring profit by JPY200mn, net income attributable to owners of the parent by JPY300mn, and left operating profit unchanged.

Reasons for the revision

The company changed its full-year forecast from a range format to specific figures to reflect results through Q3 (July–September 2021) and outlook for Q4 (October–December 2021).

Assumptions

The revised figures are based on the following assumptions.

The company plans to release one new game in FY12/21: Lapis Re:LiGHTs.
The revenue range took into consideration the revenue life cycle of existing games.
The company conservatively forecasts no revenue contribution from the parent's casual game business.

Regarding expenses,

The company assumes operational costs associated with the release of Lapis Re:LiGHTs (labor and outsourcing costs, and depreciation) will increase.
Other fixed expenses in Q4 are expected to be about the same as in Q3.

Other assumptions in the full-year forecast are as follows.

In Q1, the company booked an extraordinary impairment loss of JPY1.5bn. It expects Global Gear, a consolidated subsidiary since April 2021, to generate earnings in line with FY12/20 (revenue of JPY508mn and operating profit of JPY211mn).

The following is based on the company's comments regarding its previous forecast.

YoY comparison

In terms of new games, the company aims to release one (already announced) game in FY12/21, as well as one existing title in another language already released in May 2021. The company expects revenue from other existing games to decline YoY. Revenue from existing games improved in FY12/20, including for BLEACH: Brave Souls, which achieved record annual sales in the sixth year after its initial release.

In terms of factors other than new games impacting revenue, Tales of Crestoria was released in July 2020, contributing to revenue for about six months in FY12/20. The game is set to provide a full-year contribution in FY12/21. The game performed well right after its July 2020 release, but serious bug issues that later emerged put downward pressure on revenue. Although the most serious bugs have been fixed, the company says the outlook for the game’s recovery in FY12/21 is uncertain.

Since Tales of Crestoria is distributed by BANDAI NAMCO Entertainment as the publisher, profit for the game is booked at NAMCO BANDAI Entertainment. The company subsequently receives a revenue share from NAMCO BANDAI Entertainment based on an established fee rate. While the amount recorded as sales at the company may be relatively small, the profit margin is rather high, as there are no royalties or commissions to be paid.

Development pipeline

The company expects to release Lapis Re:LiGHTs, an idol-training RPG during FY12/21. Games expected to be released from FY12/21 include the Is It Wrong to Try to Pick Up Girls in a Dungeon? title and a game currently in development in cooperation with EA. In addition to a small-scale casual game, the company’s pipeline also includes two undisclosed games.

Lapis Re:LiGHTs is a media mix project with KADOKAWA CORPORATION, with IP rights jointly owned between the two companies. The game is being co-developed with Chinese company Shengqu Games. KLab Inc. is scheduled to release the Japanese version and Chinese firm bilibili Inc. is scheduled to release the Simplified Chinese version. While the company expected to release the game in 2020, the launch was postponed to 2021 to ensure product quality.

Multi-language development

The company released in May 2021 Love Live! All Star in a Simplified Chinese version, which is operated by Shengqu Games.

Other efforts

Expanding support for the development of games for overseas markets

The company aims to increase its experience in supporting the development of games for overseas markets. In these types of support efforts, KLab receives requests from Japanese companies that hold IP rights and are looking to make their games profitable overseas, with the company then using its offices in China to seek out overseas developers and co-develop games with them. Joint development involves the company being responsible mainly for project management and supervision, while overseas developers are in charge of game development and the development of the overseas markets.

In FY12/21, the company will promote the development of a game based on Kumamon, a game based on the animation series JoJo’s Bizarre Adventure, and a Touhou Project spin-off game. The company also has six other, as of yet undisclosed, pipeline projects.

Kumamon is the Kumamoto Prefecture PR mascot in the “Kumamoto Surprise” campaign first launched by the prefecture in 2010.

JoJo’s Bizarre Adventure anime series: This is an anime series based on the serial manga that was launched in Weekly Shonen Jump (Shueisha) in 1987. The original manga was a long-running series that was serialized for a period of over 30 years, with over 100 collected volumes and over 100mn total copies sold. The anime series commenced broadcast in 2012, and has attracted support across a wide range of generations due to its faithful reproduction of the manga’s world view and charm. The anime is also distributed overseas, and has garnered a certain number of overseas fans.

The Touhou Project: The name for a group of works created by the doujin circle Team Shanghai Alice and set in the fictional world of Gensokyo. The series originated from a PC game created in the 1990s by the original author ZUN. The series, which centers around games, books, and music CDs in the bullet hell shooting game genre, has gained many fans in Japan and worldwide.

Revenue sharing in operations supporting the development of games overseas is based on total game revenue. According to the company, the contribution to sales is smaller than that from mainstay games developed in house, but the profit margins are higher.

Development of casual games

The company has been developing casual games since FY12/20. There are two revenue models for casual games. The first requires that the player watch a video advertisement in order to play or acquire items, with revenue coming from the advertisers based on how many times the advertisement was viewed. The second is based on players purchasing items to further advance within the game. Investment per game ranges from a few million yen to JPY100mn at most, with the company developing multiple games of this type. The company from FY12/20 has been creating prototype games and distributing test versions in the US and other countries. Games with strong KPIs, including CPI (advertising cost per install), will be advanced to full development. The company produced several casual games in FY12/20, but the results of KPI testing showed performance falling short of the company’s standards.

Casual games are those that do not require complex strategies in order to achieve the given objectives. They are so easy to operate that they do not require detailed operating instructions.

Given uncertainties over future earnings of parent from casual games, management has indicated that while its FY12/21 forecasts factor in development costs for casual games, they do not factor in earnings for the same.

Point of comparison	Casual game	Traditional mobile games
Development period	One month to one year	About two years
Development cost	JPY100mn at most	JPY1.0bn–JPY2.0bn
Monetization	Advertising/item fees	Gacha/item fees
Target market	Smartphone users around the world	Fans of the IP around the world
Merits	Can launch with low advertising and development costs. Can be developed without use of IP.	Success can bring strong sales and could lead to next IP acquisition.

Source: Shared Research based on company data

KLab made GlobalGear into a consolidated subsidiary in April 2021. GlobalGear designs, develops, and operates mobile applications, with a focus on casual games. Having released over 100 games developed in-house to date, the company has the design capabilities to create hit titles with over 10 million downloads. Going forward, KLab expects synergies from the consolidation to accelerate business growth in casual games, including enhancing both companies’ development pipelines and leveraging KLab’s expertise and resources to help GlobalGear make further inroads into overseas markets. The company does not disclose the acquisition price for GlobalGear’s shares.

Costs

Factors expected to contribute to an increase in costs include a reduction in account transfers, the start of depreciation on software assets, and advertising in line with the release of Lapis: Re:LiGHTs. In terms of cost saving, the company said it would look to reduce costs such as labor and outsourcing costs. As of September 2021, the company was still considering specific cost reduction initiatives and stated it would review its current game management structure. The planned amount of cost reduction is approximately JPY600mn, based on the upper limit of the company's forecast.

Management in FY12/21 expects an uptick in labor and outsourcing costs in line with an increase in development personnel headcount as the company develops the Is It Wrong to Try to Pick Up Girls in a Dungeon? game and partners with EA in the joint development of other games. However, since labor and outsourcing costs related to games under development will be transferred to the software in progress account, they will play a factor in the increase in cost of sales in FY12/21.

Medium- to long-term outlook

Along with the FY12/20 results, the company unveiled its medium-term management plan, which targets FY12/23 revenue of JPY50.0bn (up 47.3% from FY12/20) and operating profit of JPY10.0bn (+365.2%).

The company in its targets is following a policy aimed at growing profit through the stable management of existing titles while simultaneously growing revenue and profit from the release of new titles. Over the course of the plan, it also intends to secure new sources of earnings other than conventional game development and operations, such as through casual games and overseas game development support.

Growing profit through the stable management of existing titles

While monthly revenue for existing games tends to deteriorate gradually each year following their release in each country, the company plans to limit the decline in existing game revenue by holding regular (e.g., anniversary events) and one-time events. The company also aims to expand sales by increasing monetization methods, providing multi-platform/multi-device compatibility, and expanding the area of distribution.

Expanding the distribution area

As of April 2019, the company distributed its games in up to 155 countries depending on title, localized in 10 languages. Taking the lead over its competitors in overseas development has allowed the company to amass a significant level of knowhow in the development and operation of games in overseas markets. KLab aims to strengthen its presence overseas based on the size and growth rate of each regional market, and in addition to China, where it has already found some success, is considering moving into the markets in Southeast Asia, the Middle East, North Africa, Russia, and South America.

Game design assuming overseas release; overseas operation know-how

When the company first launched development efforts overseas, it not only translated text in existing games, but also managed the binaries (data other than text) in each area, changing some of them to suit the local culture before releasing the game. With the idea of releasing the games in overseas markets, current development efforts are focused on standardizing the binaries by as much as possible, therefore making overseas development possible with only some updates, including the addition of language support.
The practice obviates the need to operate games by region, enabling unified operation of Japanese and global versions.
Regarding charging system, the ratio of players spending on gacha, which has an element of luck, may be low depending on the country or region. KLab has raised the ratio of paying players by introducing packs that contain predetermined characters. The company has put in place multiple mechanisms for players to make purchases in each of its games so that it can earn revenue regardless of region or culture.

Multi-platform/multi-device compatibility

The company is developing one game that will be available not only on smartphones, but also on PCs and gaming consoles, including PlayStation and Switch. Management believes this will increase the number of opportunities for users to play these games, and accordingly increase sales per game. In August 2020, the company began global distribution of BLEACH: Brave Souls for PCs through the Steam platform. Management intends to offer an increasing number of existing games on the same basis moving forward (Game names are abbreviations; for full names, see "Business" section; the same applies below).

Additional methods for monetization

The lion’s share of the company’s revenue in FY12/20 appears to have come from gacha charges. However, the company aims to improve existing game revenue through the introduction of a monthly subscription system for the purchasing of in-game currencies and items, and by promoting the sale of advertising space within the games.

Growing revenue and profit through new games

New games are developed based largely on globally popular animations and comics, and are limited to areas in which KLab has produced hits in the past. Moreover, by promoting cooperation with external development companies, the company aims to increase its development pipeline and bolster the hit ratio in new games. Over the medium term, the company aims to release one to two new games each year. The company has traditionally developed original IP as a large-scale media mix project, including turning this IP into a game. However, the company shifted this strategy in FY12/20, with a focus on fostering an IP fan base in line with user and reader comments taken from social networking, manga, and video sites, while limiting media and not necessarily converting IP into a game.

In terms of investment required for the development of a new game, the creation of large-scale games produced in house, such as Love Live! All Stars and Magatsu required about JPY2.0bn, though that cost has been reduced to about JPY1.0bn–JPY1.5bn as of March 2021 thanks to the company continually developing a common infrastructure for all games, limiting its field of development, and promoting joint development. The development of a single game takes about two years.

Development based on globally popular anime and manga

Based on the success it has had overseas with BLEACH: Brave Souls and Captain Tsubasa, KLab plans to develop games based on anime and manga that are popular around the world and distribute them globally. The company says there is little disparity in royalties for anime and manga with global popularity versus those whose fanbases are mostly in Japan.

Limiting development to areas where the company has produced hits in the past

KLab plans to limit game genres to action RPG, sports, and rhythm action, which have all produced hits in the past. This will lower the risk of game revenue falling below company estimates, while also putting downward pressure on costs thanks to the standardization of basic functions within an app through the development of a common structure in each area. The company has a track record of producing hits in these genres, including BLEACH: Brave Souls (action RPG), Captain Tsubasa (sports), and the Love Live! series (rhythm action).

Promoting joint development with external development companies

The improvement in game quality in line with the transition to 3-D graphics has contributed to higher development costs. The company has accordingly focused on reducing development costs through the use of outsourcing. In particular, the company through these collaborations aims to increase its development pipeline while limiting the decline in sales as a result of fluctuations in sales.

The development pipeline

KLab expects to launch Lapis Re:LiGHTs in FY12/21. Games slated for release from FY12/22 include the Is It Wrong to Try to Pick Up Girls in a Dungeon? title and a game stemming from the tie-up with Electronic Arts Inc. (EA). In addition to a small-scale casual game, the company’s pipeline also includes two undisclosed games.

Lapis Re:LiGHTs is a media mix project with KADOKAWA CORPORATION, with IP rights jointly owned between the two companies. The game is being co-developed with Chinese company Shengqu Games. KLab Inc. is scheduled to release the Japanese version and Chinese firm bilibili Inc. is scheduled to release the Simplified Chinese version. While the company expected to release the game in 2020, the launch was postponed to 2021 to ensure product quality.

Games based on the tie-up with EA: The company is promoting the development of a sports simulation game tied to the EA Sports brand of Electronic Arts Inc. The game is scheduled for FY12/21 release, but details have yet to be disclosed as of March 2021. Shared Research is of the understanding that the success of the global versions of Captain Tsubasa and BLEACH: Brave Souls contributed to the tie-up with EA, one of the world’s largest game publishers.

The company aims to develop a new PC and mobile game for global distribution based on the Is It Wrong to Try to Pick Up Girls in a Dungeon? animation series. Development will be conducted in partnership with Aiming (TSE Mothers: 3911), with the company releasing the game on its own without going through a publisher.

Electronic Arts Inc.: Electronic Arts Inc. is one of the largest game publishers in the world, with series such as: FPS games Apex Legends, Battlefield, and Medal of Honor; racing game Need for Speed; action RPG Mass Effect; and urban development simulation SimCity. It owns the label EA Sports, which specializes in sports games and develops series such as soccer series FIFA and basketball series NBA.
The Is It Wrong to Try to Pick Up Girls in a Dungeon? animation series is based on the Fujino Omori novel series of the same name launched in 2013 and published by GA Bunko (SB Creative). The first season of the animation series was aired in 2015, with the fourth season scheduled to air in 2022. The novel series has sold about 1.2mn copies.

Profits

The OPM was 6.3% in FY12/20, but the company aims to improve this figure by FY12/23 to 20.0%. From FY12/20 onward the company aims to develop large-scale hit games in-house to grow revenue while using the aforementioned strategies to lower development expenses and reduce the ratio of fixed costs to revenue. Since FY12/15, the company’s OPM has trended above 10% except in FY12/16, FY12/19 and FY12/20.

KLab’s cost of revenue ratio is affected by labor and outsourcing costs, and transfer to other accounts through which development expenses for new games are capitalized (recorded as assets on the balance sheet). In FY12/20, the ratio of labor and outsourcing costs to Game business revenue was 26.4%. Royalties and commissions are another significant item in cost of revenue. The ratio of royalties and commissions to Game business revenue was 48.0% in FY12/20.

Royalties are fees paid to IP rights holders and commissions are fees paid for the use of app distribution platforms such as those of Google and Apple. From FY12/16 to FY12/20, the ratio of royalties and commissions to Game business revenue hovered around 50%.

The ratio of labor costs and outsourcing costs to Game business revenue was 17.2% in FY12/16, but rose to 26.4% in FY12/20. Development and operation costs per game increased as games became higher in quality with the transition to 3-D graphics and other improvements.

The SG&A expense ratio has declined over the past five years, from 20.0% in FY12/16 to 14.3% in FY12/20.

Other growth measures

Development of casual games

The company started developing casual games in FY12/20. Casual games generate revenue in two ways. The first is through ad revenue for showing players video ads. Players watch these video ads to continue playing the game or obtain in-game items, and advertisers pay the company according to the number of views the ads get. Casual games also generate revenue by selling in-game items that give players advantages and allow them to advance more easily through the game. As mentioned above, the company plans to develop a number of these games for a cost of several million yen to at most 100 million yen per game.

Casual games are those that do not require complex strategies in order to achieve the given objectives. They are so easy to operate that they do not require detailed operating instructions.

Expansion of overseas game development support

KLab aims to build a track record in overseas game development support. In this line of business, the company receives an order to make a game from a Japanese IP rights holder looking to earn profit overseas. It then leverages its Chinese base and other resources to find an overseas developer with whom it co-develops the game. Under these arrangements, the company is mainly responsible for project management and supervision, with the overseas developer handling development and overseas publishing.

KLab has already collaborated in this manner with China’s Kunlun to release BLEACH Kyo・Kai-Tamashinokakusei：Shinigami in November 2018. In FY12/21, the company will promote the development of a game based on Kumamon, a game based on the animation series JoJo’s Bizarre Adventure, and a Touhou Project spin-off game. The company also has six other, as of yet undisclosed, pipeline projects.

The companies involved in overseas game development support will split game revenue based on a revenue-sharing agreement. According to KLab, although these projects contribute less to revenue than games developed in-house, they have higher profit margins.

Response to the start of 5G* service in Japan

Major Japanese telecommunication companies (NTT Docomo, KDDI, and SoftBank) started providing 5G services in March 2020. KLab says it will continue to develop games based on earlier network standards in line with its basic policy of developing games that can be played in any country because it thinks it will take time for 5G to become widespread globally.

*5G is the fifth-generation mobile telecommunication system characterized by high-speed and high-capacity data transfer, ultra-reliable low-latency communications, and multiple simultaneous connections.

Business

Business overview

KLab plans, develops, and operates mobile games, mainly for smartphones. It is a medium-sized specialist company in the mobile game development space with total revenue of JPY34.0bn in FY12/20 (versus industry-leader Mixi, Inc.’s segment revenue of JPY100.6bn in the Digital Entertainment business in FY03/21). The majority of the company’s revenue and profits comes from the Game business, which accounted for 98.9% of total revenue and 97.7% of gross profit in FY12/20.

GungHo Online Entertainment, Inc. (TSE 1: 3765) and Mixi, Inc. (TSE 1: 2121), which operate in the same industry, focus on games based on their own IPs. In contrast, KLab’s mainstay games borrow IPs from existing anime and manga. The genres of the company’s games vary from sports and rhythm action to action RPG. However, the games share elements in common: each captures the feeling of the world of its respective IP, each includes rare characters that can be developed by the player, and each allows the player to form teams from multiple characters.

Of the company’s total revenue in FY12/20, 34.9% came from overseas operations. This figure is comparable to GungHo Online Entertainment’s 39.7%, and higher than that of other companies in the same industry (Mixi and Colopl do not disclose these figures as they do not yet fall under the disclosure criteria for revenue by region). KLab plans, develops, and operates games based on IPs, especially Japanese anime and manga that are well-known overseas. The company assumes an overseas release from the outset when developing games, which enables it to boost overseas revenue by releasing global versions of its games almost at the same time as the Japanese versions.

Earnings by segment

			FY12/15	FY12/16	FY12/17	FY12/18	FY12/19	FY12/20
(JPYmn)			Cons.	Cons.	Cons.	Cons.	Cons.	Cons.
Revenue			20,913	19,600	26,778	32,674	31,110	33,952
	YoY		-2.2%	-6.3%	36.6%	22.0%	-4.8%	9.1%
	Game		20,869	19,284	26,602	32,371	30,744	33,587
		YoY	-2.1%	-7.6%	38.0%	21.7%	-5.0%	9.2%
		% of total	99.8%	98.4%	99.3%	99.1%	98.8%	98.9%
	Other		44	316	175	303	366	365
		YoY	-23.2%	612.8%	-44.5%	72.7%	20.8%	-0.1%
		% of total	0.2%	1.6%	0.7%	0.9%	1.2%	1.1%
Gross profit			6,714	5,192	9,565	10,549	7,031	6,992
	YoY		-2.2%	-22.7%	84.2%	10.3%	-33.4%	-0.5%
	Gross profit margin		32.1%	26.5%	35.7%	32.3%	22.6%	20.6%
	Game		6,703	5,437	9,504	10,441	6,972	6,833
		YoY	-2.2%	-18.9%	74.8%	9.9%	-33.2%	-2.0%
		Gross profit margin	32.1%	28.2%	35.7%	32.3%	22.7%	20.3%
		% of total	99.8%	104.7%	99.3%	99.0%	99.2%	97.7%
	Other		11	-245	62	107	58	159
		YoY	44.1%	-	-	72.1%	-45.5%	172.9%
		Gross profit margin	25.0%	-	35.5%	35.4%	16.0%	43.6%
		% of total	0.2%	-4.7%	0.7%	1.0%	0.8%	2.3%
	Adjustments		-	-	-1	1	-	-
SG&A expenses			4,516	3,917	4,674	5,554	5,357	4,843
	YoY		-3.9%	-13.2%	19.3%	18.8%	-3.5%	-9.6%
	SG&A ratio		21.6%	20.0%	17.5%	17.0%	17.2%	14.3%
Operating profit			2,198	1,275	4,891	4,995	1,674	2,149
	YoY		1.6%	-42.0%	283.7%	2.1%	-66.5%	28.4%
	Operating profit margin		10.5%	6.5%	18.3%	15.3%	5.4%	6.3%

Source: Shared Research based on company data

Revenue by region (Japan, Overseas)

			FY12/15	FY12/16	FY12/17	FY12/18	FY12/19	FY12/20
(JPYmn)			Cons.	Cons.	Cons.	Cons.	Cons.	Cons.
Revenue			20,913	19,600	26,778	32,674	31,110	33,952
	YoY		-2.2%	-6.3%	36.6%	22.0%	-4.8%	9.1%
	Japan		19,060	16,317	21,780	21,167	20,355	22,092
		YoY	-5.9%	-14.4%	33.5%	-2.8%	-3.8%	8.5%
		% of total	91.1%	83.2%	81.3%	64.8%	65.4%	65.1%
	Overseas		1,853	3,283	4,998	11,506	10,755	11,860
		YoY	65.9%	77.2%	52.2%	130.2%	-6.5%	10.3%
		% of total	8.9%	16.8%	18.7%	35.2%	34.6%	34.9%

Source: Shared Research based on company data

Definition of mobile games

Mobile games are games played by installing the game app on a smartphone. Most mobile games are free to play. Rare characters and items give the player advantages in the game, but must be purchased through a paid gacha* (electronic lottery). These gacha purchases are the main source of revenue for game operators. Only a limited number of players opt to purchase gacha. However, companies use psychological tactics to encourage players to make purchases, e.g., playing on their desire to collect rare characters, attachment to the characters that they develop, and drive to advance in ranked competition. In addition, mobile game operators can incorporate mechanisms that keep players interested, such as large-scale online updates, limited-time events, and limited-time missions.

*Gacha: A mechanism by which users obtain in-game items or cards that are randomly selected for them. The use of the term “gacha” in this sense is an extension of its original use to refer to toy vending machines (where the user does not know what toy they will get). The word “gacha” is said to sound like the noise these vending machines make.

According to the Ministry of Internal Affairs and Communications’ “White Paper on Information and Communications,” 67.6% of the population in Japan owned smartphones. Given the population in the country as of October 2019 of 126.16mn (based on Ministry of Internal Affairs and Communications statistics), there were roughly 85.28 million smartphone owners in Japan at that time. Versus this figure, according to Gz Brain Co., Ltd.’s “Famitsu Game White Paper,” the number of mobile game players in 2018 was 47.93 million.

Differences between mobile games and console games

A key difference between mobile games and console games is that console games require the purchase of game consoles and software, but mobile games can be played free of charge as long as the player owns a smartphone. Mobile games are thus able to target those who are merely looking to kill time in addition to players who actively seek out games as entertainment. Consequently, the mobile game player base is much larger than that of console games. Another key difference is that while many console games ultimately come to an end, mobile games do not because they operate under the assumption that play will go on indefinitely.

Console game: A game played on any of a variety of game hardware sets (consoles) meant for home use.

	Mobile games	Console games
Price	Paid gacha (electronic lottery) for several hundred yen per time	Around JPY8,000 per game software
Paid play	Only some players	All players
Period of play	Some players stop after a few days, but some continue playing for as long as several years	Several months to half a year
Graphics	Presupposes play on a smartphone. Image quality and character movement speed is not as advanced as on dedicated consoles due to limitations on smartphone specs and internet speeds.	Depends on console specs, but having a dedicated console often allows rendering of high-definition, high-quality graphics that have a sense of speed and flashiness.
Purpose of playing the game	Entertainment, occupying free time Some players begin playing simply as a means to kill time, but gradually devote more time to the game and eventually purchase gacha	Entertainment
Other	Games do not have clearly set endings.	Games often have endings such as saving the world from a villain or solving a mystery.

Features of KLab games

KLab games belong to the sports, rhythm action, and action RPG genres and are mostly based on IPs from anime and manga. Although the company’s mainstay games vary in genre, they share common elements such as the existence of rare characters, character training, and formation of teams of characters. The complex strategy required to advance in these games encourages player immersion as players collect rare characters via gacha, train them, and form them into teams in such a way as to leverage the attributes of each. The company is steadily developing heuristics, accumulating expertise, and polishing the logic of how to get these immersed players to make in-game purchases.

KLab’s main games, as shown in the table below, include Captain Tsubasa, BLEACH: Brave Souls, Love Live! School Fest, and Love Live! All Stars. For many competitors, their earnings depend on the performance of a single game. For example, GungHo Online Entertainment, Inc. (TSE1: 3765) depends on its puzzle RPG game Puzzle & Dragons for 56.9% of revenue. Meanwhile, Mixi, Inc. (TSE1: 2121) is heavily dependent on its hunting action RPG Monster Strike. In contrast, KLab earns revenue from multiple games without being overly reliant on a single one.

Mainstay games

Title	Overview	Notes
Captain Tsubasa: Dream Team (Captain Tsubasa)	Released June 2017. A sports simulation game based on the Captain Tsubasa manga, which is popular on a global scale. Over 30 million downloads worldwide.
BLEACH: Brave Souls	Released July 2015. A 3-D slashing action battle game based on the BLEACH anime franchise. Over 50 million downloads worldwide. Distributed worldwide except in East and Southeast Asia.
Love Live! School Idol Festival All Stars (Love Live! All Stars)	September 2019 release. A rhythm action RPG with training elements. Distributed globally, with the exception of mainland China. Over three million players.	Jointly operated with Bushiroad Inc. (TSE: 7803)
Love Live! School Idol Festival (Love Live! School Fest)	Released April 2013. A rhythm action and adventure game based on the anime Love Live! . Over 45 million downloads worldwide.	Jointly operated with Bushiroad Inc. (TSE: 7803)
Tales of Crestoria	Released July 2020. A turn-based RPG from the “Tales of” RPG series.	Operated by BANDAI NAMCO Entertainment, Inc.
Utano☆Princesama Shining Live	Released August 2017. A rhythm action game based on the anime Utano☆Princesama. Over five million downloads worldwide.	Jointly developed with Broccoli Co., Ltd.

Captain Tsubasa: A soccer manga series revolving around the achievements and growth of Tsubasa Ohzora serialized in Weekly Shonen Jump (Shueisha) from 1981. The plot follows Tsubasa as he meets teammates, beats a number of rivals, and ultimately expands his sporting career overseas. When the series was made into an anime in 1983, it caused new soccer clubs to pop up all over Japan. The 37th and final installment of the series was completed in 1988, but multiple sequels have since been published depicting the growth of Tsubasa and his friends. The manga Captain Tsubasa: Rising Sun was serialized in Shueisha’s Grand Jump through 2019, continuing on to Captain Tsubasa Magazine (a special issue of Grand Jump) in 2020. The cumulative number of copies published for the entire franchise has reached over 70 million in Japan. Overseas, it has been translated into 20 languages, and has exceeded 10 million officially translated volumes sold.

Love Live!: The first creation of a collaboration between KADOKAWA Future Publishing (ASCII Media Works), Lantis Company, Limited (Now BANDAI NAMCO Arts Inc.), and SUNRISE INC. The series was serialized beginning in 2016 in Dengeki G’s Magazine (KADOKAWA ASCII Media Works). The eponymous anime, Love Live!, was created by SUNRISE INC., with Season 1 (13 episodes) being broadcast in 2013 and Season 2 (13 episodes) the following year. A sequel movie, Love Live! The School Idol Movie, was released in 2015. The series depicts the struggles and growth of the fictional school idol group μ’s (“muse”) as the members come together to save their school from shutting down. The number of female fans increased after the airing of the anime, and an idol group composed of the show’s voice actresses and also going by the name μ’s (“muse”) made an appearance as competitors on the popular NHK New Year’s television special Kohaku Uta Gassen. The third anime series, Love Live! Nijigasaki High School Idol Club was aired in 2020.

BLEACH: A manga series that was serialized in Weekly Shonen Jump (Shueisha) from 2001 to 2016 (74 volumes in total). The cumulative number of copies published in Japan came to 90 million and reached 120 million worldwide. The anime version aired from 2004 to 2012 with 366 episodes. The franchise also produced four feature films. BLEACH depicts the adventures of high school student Ichigo Kurosaki who becomes a Soul Reaper to protect his family by exterminating evil spirits and so-called “Hollows” with a group of companions.

Captain Tsubasa compared with competitors’ mainstay games

	Captain Tsubasa	Puzzle & Dragons	Monster Strike	White Cat Project
Genre	Sports	Puzzle RPG	Co-op RPG	Quiz RPG
Company	KLab	GungHo Online Entertainment	Mixi	Colopl
Released	June 2017	February 2012	October 2013	July 2014
Charge system	・Obtaining characters ・Increasing the maximum number of characters held ・Obtaining uniforms ・Obtaining special moves	・Obtaining monsters ・Continuing play ・Increasing the maximum number of monsters held ・Increasing the maximum number of friends	・Obtaining monsters through limited gacha ・Continuing play ・Increasing the maximum number of monsters held	・Obtaining characters ・Obtaining weapons
Other	・Based on the manga of the same name ・Soccer strategy simulation leveraging smartphone features ・Uses collection and strengthening elements particular to card games	・Obtaining monsters ・Continuing play ・Increasing the maximum number of monsters held ・Increasing the maximum number of friends	・Original IP ・Occasional collaboration with other IPs ・Gameplay leveraging the smartphone swipe function	・Original IP ・Does not use a stamina system (no hit points, action points, etc.)

Source: Shared Research based on company data.

Overview of mainstay game Captain Tsubasa

Captain Tsubasa revolves around training characters and putting them together to form a “Dream Team,” which the player can use to play online matches against players from all over the world in real time. The mechanisms are complex, with multiple elements such as attributes and items intertwined into multifaceted gameplay that includes matches, training, and team formation. The characters and training elements are based on the original IP. There is also a league mode and a story mode where players can relive the Captain Tsubasa story, so even those who have never read the original can enjoy the world of Captain Tsubasa through play. Although it is possible to play the game for free, players who are mainly interested in online matches will find it is easier to collect characters and speed up their training by making in-app purchases of strengthening items.

Captain Tsubasa is a soccer simulation game centering on matches between human players. Players collect characters, train and strengthen their favorites, and form them into teams to play soccer matches.

The main elements of the game are character training, team formation, and matches. Players form a team with characters that they strengthen through training, and use this team in story mode (games that reproduce the original story interspersed with character dialogue; played against computer-controlled characters), limited-time events, league mode, competitive online matches, and so on. In league mode, players can play against teams formed by other players with the opponent controlled by the computer, and in online mode, players can play against other players in real time.

There are many ways to play the game and players can engage with it according to their preferences. Some players aim to achieve a high rank in league mode and online mode, while others are happy to relive the major developments of the manga in story mode. Still others simply enjoy collecting characters.

To win matches it is often necessary to win rare characters (cards) through gacha and train them to be more effective. Gacha must be purchased with “dreamballs,” tickets, or other in-game currency. The characters that can be obtained through gacha is not limited to the characters who appear in the manga, and may include actual players such as those on the Japanese national team or the Brazilian national team according to themed limited-time campaigns.

Matches

Matches have two parts: a field screen where players control characters by tapping and swiping, having them pass, shoot, or perform other actions, and a matchup screen where players choose moves for their characters to use versus opposing characters.

On the field, the player on offense can instruct the character with the ball to change direction, pass, or shoot, and the defender can press (approach the player with the ball). In addition, in both offensive and defensive situations, players can command their entire team to adopt an aggressive, balanced, or defensive stance.

The field screen in Captain Tsubasa

Source: Shared Research screen capture

When the player with the ball comes into contact with an opposing player on the field screen, the game switches to the matchup screen. The offensive player in a matchup can choose an action from four options: dribble, pass, one-two, or shoot. On the defensive side, players can choose from three options to try to prevent the offensive player’s action and regain possession: a tackle that is effective against dribbling, a pass cut that blocks passes and one-two moves, or a block that stops shots.

Matchups occur frequently during a match. These give players the opportunity to enjoy choosing tactics to fit the situation. For example, when a player is on the offensive side in a matchup, and has a teammate with a powerful special shooting ability in front of the goal, the player can try to pass to the teammate for a chance to score, or can try to dribble to break past the defender. The opponent must choose to either block the potential pass with a pass cut or tackle the ball handler to prevent him from dribbling through.

A matchup in Captain Tsubasa