KLab 3656

KLab

Recent Updates

2022-05-13

Q1 FY12/22 flash update

2022-03-25

Establishment of blockchain business subsidiary BLOCKSMITH&Co.

2022-03-22

Full-year 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

2020-08-05

Coverage initiation

Full Report

2022-05-13

Q1 FY12/22 flash update

2022-05-13

Full-year FY12/21 flash update

2022-02-10

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 98.6% of total revenue and 94.5% gross profit in FY12/21. With FY12/21 revenue of JPY23.9bn, 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 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, and idol-raising rhythm action game Love Live! School Idol Festival All Stars (hereafter Love Live! All Stars). These three titles account for the majority of Game business revenue. The company also operates rhythm action adventure game Love Live! School Idol Festival and rhythm action game Utano☆Princesama Shining Live. 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 FY12/21, KLab’s overseas revenue composition ratio was 41.9%. 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 88.6% in FY12/21. 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 15–20%, 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 is 5–7%.

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 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 FY12/21, the company booked revenue of JPY23.9bn (-29.6% YoY), an operating loss of JPY1.1bn (versus profit of JPY2.1bn in FY12/20), a recurring loss of JPY1.0bn (versus profit of JPY1.6bn), and a net loss attributable to owners of the parent of JPY3.5bn (versus net income of JPY767mn). The company posted losses in all profit items. Revenue contribution from the new title was limited, and existing games tapered off at a faster pace than in the past.

The company did not disclose an earnings forecast for FY12/22 as of the beginning of the year, citing the difficulty in accurately predicting the short-term performance of existing titles due to the accelerated pace of change in the environment surrounding the Game business. Further, the company anticipated contributions from a game title jointly developed with Electronic Arts Inc., which was scheduled to be released during FY12/22. However, the exact date of release was yet to be determined, making it difficult to make reasonable estimates of earnings contributions from the new title. The company said it would promptly disclose an earnings forecast once it becomes possible to make reasonable estimates, taking into account its performance going forward.

In February 2022, the company revised the medium-term management plan it unveiled in February 2021. Following the revision, the revenue target for FY12/24 is JPY40.0bn (CAGR of 18.7% from FY12/21) and operating profit of JPY10.0bn (versus a loss of JPY1.1bn in FY12/21). 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. The company further aims to enter blockchain-related business.

In its medium-term management plan announced in February 2021, the company had planned for revenue of JPY50.0bn and operating profit of JPY10.0bn for FY12/23.

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		FY08/12	FY12/13	FY12/14	FY12/15	FY12/16	FY12/17	FY12/18	FY12/19	FY12/20	FY12/21	FY12/22
(JPYmn)		Parent	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Est.
Revenue		15,210	20,993	21,375	20,913	19,600	26,778	32,674	31,110	33,952	23,895	-
	YoY	168.5%	-	1.8%	-2.2%	-6.3%	36.6%	22.0%	-4.8%	9.1%	-29.6%
Gross profit		5,830	4,835	6,862	6,714	5,192	9,565	10,549	7,031	6,992	2,720
	YoY	155.8%	-	41.9%	-2.2%	-22.7%	84.2%	10.3%	-33.4%	-0.5%	-61.1%
	Gross profit margin	38.3%	23.0%	32.1%	32.1%	26.5%	35.7%	32.3%	22.6%	20.6%	11.4%
Operating profit		2,811	-1,224	2,164	2,198	1,275	4,891	4,995	1,674	2,149	-1,106	-
	YoY	192.3%	-	-	1.6%	-42.0%	283.7%	2.1%	-66.5%	28.4%	-
	Operating profit margin	18.5%	-	10.1%	10.5%	6.5%	18.3%	15.3%	5.4%	6.3%	-
Recurring profit		2,820	-942	2,564	1,919	830	4,854	4,998	1,626	1,565	-1,028	-
	YoY	196.4%	-	-	-25.1%	-56.7%	484.5%	3.0%	-67.5%	-3.7%	-
	Recurring profit margin	18.5%	-	12.0%	9.2%	4.2%	18.1%	15.3%	5.2%	4.6%	-
Net income		1,623	-2,564	1,793	700	-814	3,127	2,570	384	767	-3,468	-
	YoY	195.0%	-	-	-60.9%	-216.2%	-484.1%	-17.8%	-85.1%	99.9%	-
	Net margin	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)		26,050	33,059	37,292	37,798	37,946	38,288	37,696	38,172	38,475	38,631
EPS		63.78	-93.58	52.15	19.26	-22.26	84.89	69.03	10.20	20.08	-90.38
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		119.36	124.07	249.71	269.26	248.50	337.21	387.36	406.91	430.74	336.84
Balance sheet (JPYmn)
	Cash and cash equivalents	1,862	4,518	7,250	4,852	4,661	6,695	4,749	8,298	8,618	4,753
Total current assets		4,122	6,868	10,516	8,480	7,918	11,771	9,246	13,822	13,728	9,896
Tangible fixed assets		263	300	216	308	302	313	394	450	274	325
Investments and other assets		955	908	1,214	2,424	2,633	3,035	4,489	5,270	6,720	5,599
Intangible assets		51	621	785	1,422	1,281	3,491	5,117	4,128	2,769	2,887
Total assets		5,391	8,698	12,731	12,633	12,134	18,610	19,245	23,670	23,491	18,708
	Accounts payable	427	724	1,255	1,094	1,310	2,204	2,315	2,655	2,407	1,917
	Short-term debt	30	2,750	0	0	0	0	0	642	742	542
Total current liabilities		2,273	4,580	3,593	2,733	3,000	6,036	4,672	5,173	5,903	5,119
	Long-term debt	120	97	60	30	0	0	103	1,303	1,004	462
Total fixed liabilities		142	110	62	33	3	5	106	1,303	1,004	782
Total liabilities		2,415	4,690	3,655	2,766	3,003	6,041	4,779	6,475	6,907	5,901
Total net assets		2,976	4,007	9,076	9,867	9,131	12,569	14,467	17,195	16,585	12,807
Total interest-bearing debt		150	2,847	60	30	0	0	103	1,944	1,746	1,004
Cash flow statement (JPYmn)
Cash flows from operating activities		2,260	-1,316	2,825	1,228	1,553	5,073	3,796	1,505	3,975	-1,279
Cash flows from investing activities		-1,087	-2,507	-912	-4,912	-458	-3,458	-5,111	-2,849	-2,342	-1,930
Cash flows from financing activities		-32	6,363	524	15	49	454	-705	2,855	318	-1,045
Financial ratios
ROA (RP-based)		71.3%	-	23.9%	15.1%	6.7%	31.6%	26.4%	7.6%	6.6%	-4.9%
ROE		75.8%	-	27.6%	7.6%	-8.6%	28.9%	19.0%	2.6%	4.8%	-23.6%
Equity ratio		55.2%	45.5%	70.8%	77.7%	75.1%	67.4%	75.1%	65.3%	70.5%	68.4%

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

Establishment of blockchain business subsidiary BLOCKSMITH&Co.

2022-03-25

On March 24, 2022, KLab Inc. announced that it would establish BLOCKSMITH&Co., a subsidiary engaging in the blockchain business.

The company announced that it would establish BLOCKSMITH&Co. (BLOCKSMITH) as a subsidiary that oversees Web3 services that utilize the blockchain and tokens (crypto assets) to move into the blockchain business. KLab's founder, director and chairman Tetsuya Sanada will be president and representative director of BLOCKSMITH.

Business

Development, provision, and operation of GameFi. GameFi is a new game category that aims to combine games and finance by use of the blockchain and token economy. GameFi is a play-to-earn model of gaming.
Issue and sale of NFTs
Development and provision of metaverse (in the broader sense) and GameFi platforms; ad distribution, e-commerce and other services using the platform
Web3-related business

Points of difference

Unique business model: GameFi requires an understanding of the blockchain, which is a hurdle for beginners who wish to take part. Maintaining the token economy can be difficult when the number of users and demand decline, because it is designed on the assumption that prices of NFTs and tokens appreciate. Further, earnings tend to take priority over enjoyment of playing games. The company aims to create its own GameFi model that solves these problems.

To utilize popular IPs: The company believes that as of March 2022, NFT games that use popular IPs are almost nonexistent. Taking advantage of the ability to acquire IPs that KLab has fostered, BLOCKSMITH will provide NFT games that harness popular IPs.

To operate global service: BLOCKSMITH plans to provide a global service centered around Europe, North America, and Asia.

A scheme that is compliant with existing legal and accounting frameworks: GameFi is an out-of-the-box service that is beyond the assumptions of existing legal and accounting frameworks. Existing GameFi games present various problems for these regulatory frameworks in Japan and overseas. This means GameFi cannot be advertised, which is an obstacle for making it more popular. BLOCKSMITH has devised its own scheme, business model, and systems that can be considered compliant with the accounting and legal frameworks of Japan and the US, and has applied for patents for part of the scheme.

Outlook

BLOCKSMITH will take over two internal projects that have been in progress at KLab since 2021. The subsidiary aims to begin limited services in 2022 and roll out more services in stages. It plans NFT presales before launching services.

Trends and outlook

Quarterly trends and results

Quarterly results

Cumulative		FY12/21				FY12/22
(JPYmn)		Q1	Q1–Q2	Q1–Q3	Q1–Q4	Q1	Q1–Q2	Q1–Q3	Q1–Q4
Revenue		6,393	12,337	18,709	23,895	4,111
	YoY	-13.8%	-22.6%	-29.0%	-29.6%	-35.7%
Cost of revenue		6,065	11,407	16,729	21,175	3,502
	YoY	-1.2%	-11.4%	-18.4%	-21.5%	-42.3%
	Cost ratio	94.9%	92.5%	89.4%	88.6%	85.2%
Gross profit		328	930	1,980	2,720	609
	YoY	-74.3%	-69.7%	-66.3%	-61.1%	85.5%
	Gross profit margin	5.1%	7.5%	10.6%	11.4%	14.8%
SG&A expenses		833	1,772	2,709	3,825	891
	YoY	-32.9%	-23.6%	-25.1%	-21.0%	6.9%
	SG&A ratio	13.0%	14.4%	14.5%	16.0%	21.7%
Operating profit		-505	-842	-729	-1,106	-282
	YoY	-	-	-	-	-
	Operating profit margin	-	-	-	-	-
Recurring profit		-387	-819	-850	-1,028	-123
	YoY	-	-	-	-	-
	Recurring profit margin	-	-	-	-	-
Net income		-1,384	-1,706	-1,767	-3,468	-177
	YoY	-	-	-	-	-
	Net margin	-	-	-	-	-
Quarterly		FY12/21				FY12/22
(JPYmn)		Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4
Revenue		6,393	5,944	6,371	5,187	4,111
	YoY	-13.8%	-30.3%	-38.8%	-31.7%	-35.7%
	QoQ	-15.8%	-7.0%	7.2%	-18.6%	-20.7%
Cost of revenue		6,065	5,343	5,321	4,447	3,502
	YoY	-1.2%	-20.7%	-30.1%	-31.3%	-42.3%
	Cost ratio	94.9%	89.9%	83.5%	85.7%	85.2%
	QoQ	-6.3%	-11.9%	-0.4%	-16.4%	-21.2%
Gross profit		328	602	1,050	740	609
	YoY	-74.3%	-66.4%	-62.5%	-33.9%	85.5%
	QoQ	-70.7%	83.3%	74.5%	-29.5%	-17.7%
	Gross profit margin	5.1%	10.1%	16.5%	14.3%	14.8%
SG&A expenses		833	939	937	1,117	891
	YoY	-32.9%	-12.8%	-27.9%	-8.8%	6.9%
	QoQ	-31.9%	12.7%	-0.2%	19.2%	-20.2%
	SG&A ratio	13.0%	15.8%	14.7%	21.5%	21.7%
Operating profit		-505	-337	113	-376	-282
	YoY	-	-	-92.5%	-	-
	QoQ	-	-	-	-	-
	Operating profit margin	-	-	1.8%	-	-
Recurring profit		-387	-432	-31	-178	-123
	YoY	-	-	-	-	-
	QoQ	-	-	-	-	-
	Recurring profit margin	-	-	-	-	-
Net income		-1,384	-322	-62	-1,701	-177
	YoY	-	-	-	-	-
	Net margin	-	-	-	-	-

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			FY12/21				FY12/22
(JPYmn)			Q1	Q1–Q2	Q1–Q3	Q1–Q4	Q1	Q1–Q2	Q1–Q3	Q1–Q4
Revenue			6,393	12,337	18,709	23,895	4,111
	YoY		-13.8%	-22.6%	-29.0%	-29.6%	-35.7%
	Game		6,273	12,128	18,414	23,564	3,971
		YoY	-14.7%	-23.4%	-29.5%	-29.8%	-36.7%
	Other		119	209	294	331	140
		YoY	75.5%	67.6%	17.1%	-9.4%	17.1%
Gross profit			328	930	1,980	2,720	609
	YoY		-74.3%	-69.7%	-66.3%	-61.1%	85.5%
	Gross profit margin		5.1%	7.5%	10.6%	11.4%	14.8%
	Game		258	812	1,820	2,570	644
		YoY	-79.4%	-73.2%	-68.5%	-62.4%	150.0%
		Gross profit margin	4.1%	6.7%	9.9%	10.9%	16.2%
	Other		71	118	160	150	-35
		YoY	151.7%	203.2%	83.6%	-5.7%	-
		Gross profit margin	59.1%	56.5%	54.4%	45.4%	-
	Adjustments		-	-	-
Quarterly			FY12/21				FY12/22
(JPYmn)			Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4
Revenue			6,393	5,944	6,371	5,187	4,111
	YoY		-13.8%	-30.3%	-38.8%	-31.7%	-35.7%
	Game		6,273	5,855	6,286	5,150	3,971
		YoY	-14.7%	-30.9%	-38.9%	-31.1%	-36.7%
	Other		119	90	85	37	140
		YoY	75.5%	58.2%	-32.7%	-67.9%	17.1%
Gross profit			328	602	1,050	740	609
	YoY		-74.3%	-66.4%	-62.5%	-33.9%	85.5%
	Gross profit margin		5.1%	10.1%	16.5%	14.3%	14.8%
	Game		258	554	1,008	750	644
		YoY	-79.4%	-68.9%	-63.4%	-28.4%	150.0%
		Gross profit margin	4.1%	9.5%	16.0%	14.6%	16.2%
	Other		71	47	42	-10	-35
		YoY	151.7%	336.0%	-12.9%	-	-
		Gross profit margin	59.1%	53.0%	49.2%	-	-
	Adjustments		-	-	-	-	-

Source: Shared Research based on company data

Revenue breakdown by region (Japan, Overseas)

Cumulative			FY12/21				FY12/22
(JPYmn)			Q1	Q1–Q2	Q1–Q3	Q1–Q4	Q1	Q1–Q2	Q1–Q3	Q1–Q4
Revenue			6,393	12,337	18,709	23,895	4,111
	YoY		-13.8%	-22.6%	-29.0%	-29.6%	-35.7%
	Japan		3,948	7,366	10,976	13,879	2,249
		YoY	-22.8%	-29.1%	-35.7%	-37.2%	-43.0%
	Overseas		2,445	4,971	7,733	10,016	1,862
		YoY	5.9%	-10.6%	-16.7%	-15.5%	-23.8%
Quarterly			FY12/21				FY12/22
(JPYmn)			Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4
Revenue			6,393	5,944	6,371	5,187	4,111
	YoY		-13.8%	-30.3%	-38.8%	-31.7%	-35.7%
	QoQ		-15.8%	-7.0%	7.2%	-18.6%	-20.7%
	Japan		3,948	3,418	3,609	2,904	2,249
		YoY	-22.8%	-35.2%	-46.0%	-42.1%	-43.0%
		QoQ	-21.3%	-13.4%	5.6%	-19.6%	-22.5%
	Overseas		2,445	2,526	2,762	2,283	1,862
		YoY	5.9%	-22.3%	-25.9%	-11.3%	-23.8%
		QoQ	-5.0%	3.3%	9.3%	-17.3%	-18.4%

Source: Shared Research based on company data

Cost and expenses

Cumulative			FY12/21				FY12/22
(JPYmn)			Q1	Q1–Q2	Q1–Q3	Q1–Q4	Q1	Q1–Q2	Q1–Q3	Q1–Q4
Cost of revenue			6,065	11,407	16,729	21,175	3,502
	YoY		-1.2%	-11.4%	-18.4%	-21.5%	-42.3%
	Change		-76	-1,469	-3,760	-5,785	-2,562
	Labor costs		1,046	2,111	3,187	4,246	1,045
		YoY	2.8%	3.5%	4.8%	4.9%	-0.1%
		Change	28	71	147	198	-1
	Outsourcing costs		1,308	2,637	3,997	5,419	1,066
		YoY	10.3%	11.7%	11.7%	12.2%	-18.5%
		Change	122	276	419	590	-242
	Royalties and commission fees		3,089	6,014	9,012	11,472	1,765
		YoY	-15.7%	-23.8%	-28.5%	-28.8%	-42.9%
		Change	-576	-1,883	-3,586	-4,645	-1,324
		% of Game revenue	49.2%	49.6%	48.9%	48.7%	44.4%
	Depreciation		547	575	608	670	105
		YoY	49.9%	-21.3%	-53.4%	-64.1%	-80.8%
		Change	182	-156	-696	-1,197	-442
	Other		335	644	937	1,205	244
		YoY	0.9%	-4.8%	-14.3%	-16.9%	-27.0%
		Change	3	-33	-157	-246	-90
	Transfer to other accounts		-260	-574	-1,012	-1,837	-723
		Change	165	256	113	-485	-463
SG&A expenses			833	1,772	2,709	3,825	891
	YoY		-32.9%	-23.6%	-25.1%	-21.0%	6.9%
	Salaries and allowances		215	440	655	867	213
	Advertising expenses		237	544	865	1,313	220
	Other		380	785	1,184	1,639	457
Quarterly			FY12/21				FY12/22
(JPYmn)			Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4
Cost of revenue			6,065	5,343	5,321	4,447	3,502
	YoY		-1.2%	-20.7%	-30.1%	-31.3%	-42.3%
	QoQ		-6.3%	-11.9%	-0.4%	-16.4%	-21.2%
			94.9%	89.9%	83.5%	85.7%	85.2%
	Labor costs		1,046	1,065	1,076	1,059	1,045
		YoY	2.8%	4.2%	7.6%	5.1%	-0.1%
		QoQ	3.8%	1.8%	1.0%	-1.6%	-1.3%
	Outsourcing costs		1,308	1,329	1,360	1,422	1,066
		Outsourcing expenses
		Outsourcing expenses
		YoY	10.3%	13.1%	11.8%	13.7%	-18.5%
		QoQ	4.6%	1.6%	2.3%	4.6%	-25.0%
	Royalties and commission fees		3,089	2,925	2,998	2,460	1,765
		YoY	-15.7%	-30.9%	-36.2%	-30.1%	-42.9%
		QoQ	-12.2%	-5.3%	2.5%	-17.9%	-28.3%
		% of Game revenue	49.2%	50.0%	47.7%	47.8%	44.4%
	Depreciation		547	28	33	62	105
		YoY	49.9%	-92.3%	-94.2%	-89.0%	-80.8%
		QoQ	-2.8%	-94.9%	17.9%	87.9%	69.4%
	Other		335	310	292	269	244
		YoY	0.9%	-10.3%	-29.8%	-24.8%	-27.0%
		QoQ	-6.4%	-7.5%	-5.6%	-8.2%	-9.1%
	Transfer to other accounts		-260	-314	-438	-825	-723
SG&A expenses			833	939	937	1,117	891
	YoY		-32.9%	-12.8%	-27.9%	-8.8%	6.9%
	QoQ		-31.9%	12.7%	-0.2%	19.2%	-20.2%
	Salaries and allowances		215	225	215	212	213
	Advertising expenses		237	307	321	448	220
	Other		380	405	399	455	457

Source: Shared Research based on company data

Q1 FY12/22 results

Revenue: JPY4.1bn (-35.7% YoY, -20.7% QoQ)
Operating loss: JPY282mn (loss of JPY505mn in Q1 FY12/21, loss of JPY376mn in Q4 FY12/21)
Recurring loss: JPY123mn (loss of JPY387mn, loss of JPY178mn)
Net loss attributable to owners of the parent: JPY177mn (net loss of JPY1.4bn, net loss of JPY1.7bn)

Existing titles gave a typical weak performance in Q1, but one that was within expectations. Revenue fell stemming from the transfer of operations of Love Live! All Stars and the significant YoY loss of that title's revenue.

Q1 FY12/22 revenue

By region, revenue in Japan was JPY2.2bn (-43.0% YoY, -22.5% QoQ) and revenue overseas was JPY1.9bn (-23.8% YoY, -18.4% QoQ).

QoQ performance of major titles was as follows.

Love Live! School Fest: Revenue was down QoQ for both the Japanese and global versions. Despite the downward trend, revenue was generally in line with the company's initial expectations.

BLEACH: Brave Souls: Revenue from the Japanese version was flat QoQ and from the global version was up QoQ. Revenue from the collaboration with Burn the Witch in December was steady. The PS4 version, which was launched on March 14, 2022, performed better than expected.

Captain Tsubasa: Revenue from the Japanese and global versions was down QoQ. While campaigns launched in January 2022 resulted in robust performance, February and March saw weaker earnings.

Utano☆Princesama Shining Live: Revenue from the Japanese and global versions increased QoQ. The title performed favorably, although it remained on a downtrend.

Q1 FY12/22 expenses and profits

KLab booked an operating loss of JPY282mn in Q1 (loss of JPY505mn in Q1 FY12/21, loss of JPY376mn in Q4 FY12/21).

The operating loss narrowed YoY. Cost of revenue fell due to lower revenue in the Game business, which led to lower commissions and other expenses. SG&A expenses increased due to the recording of goodwill from GlobalGear Co., Ltd., which became a subsidiary in April 2021, despite cost reductions from curbing hiring and reviewing other costs.

The operating loss also narrowed QoQ. Cost of revenue decreased due to lower revenue in the Game business, which led to lower commissions and outsourcing expenses. SG&A expenses decreased due to lower advertising expenses for Captain Tsubasa and Lapis Re:LIGHTS.

Cost of revenue was JPY3.5bn (-42.3% YoY, -21.2% QoQ). Labor costs were JPY1.0bn (-0.1% YoY, -1.3% QoQ) and outsourcing costs were JPY1.1bn (-18.5% YoY, -25.0% QoQ). Royalties and commissions were JPY1.8bn (-42.9% YoY, -28.3% QoQ) and depreciation was JPY105mn (-80.8% YoY, +69.4% QoQ). Transfer to other accounts was JPY723mn (+178.1% YoY, -12.4% QoQ).

Both YoY and QoQ, cost of revenue fell due to a decrease in royalties and commissions in line with the decline in revenue, a decrease in outsourcing expenses due to a decline in the number of titles under management due to transfers and withdrawals, and cost cutting efforts.

SG&A expenses were JPY891mn (+6.9% YoY, -20.2% QoQ). Advertising expenses fell 50.9% QoQ. The company did not run any large campaigns in Q1.

Both YoY and QoQ, profitability improved at the operating level, and the recurring loss and net loss narrowed.

FY12/22 forecast

The company did not disclose an earnings forecast for FY12/22 as of the beginning of the year, citing the difficulty in accurately predicting the short-term performance of existing games due to the accelerated pace of change in the environment surrounding the Game business. Further, the company anticipated contributions from a game jointly developed with Electronic Arts Inc., which was scheduled to be released during FY12/22. However, the exact date of release was yet to be determined, making it difficult to make reasonable estimates of earnings contributions from the new title. The company said it would promptly disclose an earnings forecast once it becomes possible to make reasonable estimates, taking into account its performance going forward.

Factors in revenue fluctuation

Existing games

In FY12/21, while Lapis Re:LiGHTs (released in December 2021) was the only new game, revenue from existing games continued to decline. As a result, revenue decreased 29.6% YoY. According to the company, as of February 2022, the rate of decline of revenue from existing games was larger YoY. Shared Research believes that the airing of the BLEACH: Brave Souls related TV animation and the FIFA World Cup Qatar 2022 could increase existing game revenue.

In 2022, the TV animation BLEACH: Thousand Year Blood War is scheduled to be aired in October, and the FIFA World Cup Qatar 2022 is slated to take place in November. Shared Research understands that this could have a positive impact on the earnings of BLEACH: Brave Souls and Captain Tsubasa, as it could trigger the return of previous users and boost the conversion rate. The FIFA World Cup 2018 in Russia saw record revenue from Captain Tsubasa, thanks to a collaborative event with the national team.

Growth in revenue in FY12/22 will be driven by the full-year contribution of Lapis Re:LiGHTs, which contributed less than one month of revenue in FY12/21. According to the company, as of February 2022, the conversion rate and average revenue per paying user (ARPPU) for Lapis Re:LiGHTs were relatively high compared with the company's other games. However, in Q4 FY12/21 (October–December 2021), the number of downloads (300,000 as of February 2022) was lower than expected at the start of development as a result of adjustments to promotional measures to control advertising expenses. The company intends to step up promotions to boost the number of downloads.

The company transferred publisher operations of Love Live! All Stars to Bushiroad Inc. (TSE Mothers: 7803) and operations of the title to Mynet Inc. (TSE1: 3928) in January 2022. It expects this will reduce revenue. In February 2022, the company also terminated its Tales of Crestoria service.

New games

The company is developing a sports simulation game associated with Electronic Arts Inc.'s (NASDAQ) game brand EA Sports. The release is set for mid-2022, but the specific date has not yet been determined.

Electronic Arts Inc. (EA): EA 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.

In addition, the company plans to release a simplified Chinese version of Lapis Re:LiGHTs in the future. As of February 2022, due to the tightening of gaming regulations by the Chinese government, the company has not been able to obtain a version number for its game distribution license.

Costs and Expenses

The company anticipates that the withdrawal from Love Live! All Stars and Tales of Crestoria will reduce personnel, outsourcing, and advertising expenses. As the personnel operating the withdrawn games will be assigned to the development of new games, transfer to other accounts is expected to increase, leading to a drop in the cost of revenue. Other factors contributing to the decrease in expenses include the review of the operational and personnel structures, and other general expenses, which was conducted in FY12/21.

Cost reduction measures implemented in FY12/21 were as follows.
Operational structure of existing games: Review of operational items, consideration of scaling down or withdrawal from or transfer of operations, review of development status of supported languages, regions, multi-device/platform support, etc.
Personnel structure: Reallocation of personnel in parallel with the operating structure review, outsourcing cost reduction, implementation of headcount control
Other general expenses: Suspension or postponement of expenditures and measures that do not directly affect earnings; review of some operations with excessive quality; redefinition of appropriate quality from the perspective of objective and cost-effectiveness, and partial cancellation of floors at the Tokyo, Osaka, and Fukuoka locations

Development pipeline

The new game development pipeline as of March 2022 was as follows.

Lapis Re:LiGHTs: A joint media mix project with KADOKAWA Corporation, with the IP rights jointly owned between the two companies. The game is of the idol-raising RPG genre, and was co-developed with China's Shengqu Games. The company released the Japanese version in December 2021. A Simplified Chinese version will be released by the Chinese company bilibili Inc.

EA Sports related game: A sports simulation game related to EA's sports game brand EA Sports is under development; EA will own the IP rights and the company will develop and operate the games. The release is scheduled for 2022.

Game based on DanMachi: A PC and mobile game based on the TV animation series Is It Wrong to Try to Pick Up Girls in a Dungeon? is under development. The IP holder is the DanMachi4 Project, and development will be conducted in partnership with Aiming Inc. (TSE Mothers: 3911). Distribution is planned for the global market. The company will release the game on its own without going through a publisher.

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.

In addition, subsidiary GlobalGear Co., Ltd. plans to distribute one or two casual games per month.

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.

Other initiatives

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 FY12/22, 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 development of a game featuring Kumamon has been suspended as of February 2022 due to the restructuring of the development system at the partner's request.

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.

Medium- to long-term outlook

In its medium-term management plan announced in February 2021, the company had planned for revenue of JPY50.0bn and operating profit of JPY10.0bn for FY12/23.

The revised plan reflects the tapering off of existing games in FY12/21 and the withdrawal from certain games against this backdrop, leading to a downward revision of the planned revenue figure. In addition, the assumed release dates for the undisclosed new games (two) were changed from 2023 to 2024, pushing back the achievement date by one year. The company expects profit margins to rise as a result of the revision of the operating and personnel structure and other fixed costs implemented in FY12/21. Accordingly, the change in operating profit was limited to a delay in the achievement date, and the company left the previous target unchanged. The company announced a new entry into blockchain-related business.

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.

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.

Additional methods for monetization

The lion’s share of the company’s revenue in FY12/21 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.

The subscription price ranges from several hundred to 3,000 yen. The system will be designed to suit the game in which it is introduced, while also taking into consideration the customer base and affinity with the game.

Suppressing tapering through long-term stable operation

The company intends to operate in a user-first manner by fortifying data usage. Moreover, the company will focus on improving efficiency and reducing costs to maintain long-term operations.

User-first: Incorporate trends into measures, enhance communication with customers, and conduct online and virtual events

Enhanced data utilization: Improve data sharing among projects, enhance analysis of customer behavior

Efficiency and cost reduction: Automate routine operations, pursue AI-based operational efficiency

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. By doing so, the company aims to bolster the hit ratio in new games. Over the medium term, the company aims to release one to two new games each year. It 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 February 2022 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 simulation, 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) and Captain Tsubasa (sports simulation).

The company will promote joint development with outside developers in FY12/22 and beyond. 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, through these collaborations, KLab aims to increase its development pipeline while limiting the decline in profits as a result of fluctuations. In the recovery plan announced in FY12/21, the company stated it would make the selection criteria for outside development companies more stringent to enhance game quality.

The development pipeline

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.

In addition, the company has two other undisclosed development pipelines as of February 2022. The release is set for 2023–2024.

Profits

The company posted an operating loss in FY12/21, but it aims to improve OPM by FY12/23 to 25.0%. From FY12/22 onward, the company plans 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. It believes such measures will improve its GPM and OPM. During the last five years, the company's highest OPM was 18.3% in FY12/17.

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 FY12/21, the ratio of labor and outsourcing costs to Game business revenue was 41.0%. Royalties and commissions are another significant item in cost of revenue. The ratio of royalties and commissions to Game business revenue was 48.7% in FY12/21.

The ratio of labor costs and outsourcing costs to Game business revenue was 18.8% in FY12/17, 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. In FY12/21, the development of an EA Sports related game began in earnest as existing games continued to decline at a faster pace than before, and the ratio of labor and outsourcing costs to Game business revenue rose to 41.0%.

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 FY12/17 to FY12/21, the ratio of royalties and commissions to Game business revenue has been approximately 50%.

SG&A ratio trended downward from FY12/17 to FY12/20, reaching 14.3% in FY12/20 (17.5% in FY12/17). In FY12/21, the contribution from the new title was limited, while revenue from existing games continued to decline. As a result, SG&A ratio rose to 16.0%.

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.

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.

GlobalGear results

(JPYmn)	FY12/18	FY12/19	FY12/20
Net assets	320	475	620
Total assets	361	593	693
Revenue	322	478	508
Operating profit	109	237	211
Recurring profit	121	237	213
Net income	84	155	145

Source: Shared Research based on company data

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 FY12/22, 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 development of a game featuring Kumamon has been suspended as of February 2022 due to the restructuring of the development system at the partner's request.

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.

Entering blockchain-related business

The company announced its entry into blockchain-related business in February 2022. At the time of the announcement, there were two NFT/metaverse-related projects and two blockchain game projects in progress. Looking at the NFT/metaverse-related projects, the company is considering assigning NFTs to IP content and distributing it within the metaverse space. As for the blockchain games, items and characters in the game developed by the company will be sold or distributed with NFTs. Characters and items can be bought and sold between individuals, and the company is considering using digital currency (tokens) issued by KLab for payment.

Non-fungible tokens (NFTs): NFTs are based on blockchain technology and, when embedded in digital data, serve as an unforgeable certificate of authenticity and ownership. Conventional digital data can be duplicated, making it difficult to distinguish between original and duplicated data, but NFTs make it possible to distinguish between original and duplicated data.

Initiatives for original IP (original development)

The company had promoted its original IP works as large-scale media mix projects, including the release of game versions. From FY12/21, its policy is to cultivate IP fans by limiting the media it uses, such as video sites, manga, SNS, without necessarily releasing game versions, and building up a following while gauging user and reader reactions.

The company unveiled a new original IP, aoppella!?, in March 2021. aoppella!? is an original, music-based project combining the themes of youth and a cappella, and features a cast of 11 famous Japanese voice actors. The company is promoting the project through a media mix of original and J-POP cover songs streamed from its video channel.

The company has released the first and second CDs for aoppella!? by February 2022. It said that sales of both have been strong. Pre-orders for the first album began in March 2022.

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 JPY23.9bn in FY12/21 (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 98.6% of total revenue and 94.5% of gross profit in FY12/21.

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 FY12/21, 41.9% came from overseas operations. This figure is comparable to GungHo Online Entertainment’s 39.3%, 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	FY12/21
(JPYmn)			Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.
Revenue			20,913	19,600	26,778	32,674	31,110	33,952	23,895
	YoY		-2.2%	-6.3%	36.6%	22.0%	-4.8%	9.1%	-29.6%
	Game		20,869	19,284	26,602	32,371	30,744	33,587	23,564
		YoY	-2.1%	-7.6%	38.0%	21.7%	-5.0%	9.2%	-29.8%
		% of total	99.8%	98.4%	99.3%	99.1%	98.8%	98.9%	98.6%
	Other		44	316	175	303	366	365	331
		YoY	-23.2%	612.8%	-44.5%	72.7%	20.8%	-0.1%	-9.4%
		% of total	0.2%	1.6%	0.7%	0.9%	1.2%	1.1%	1.4%
Gross profit			6,714	5,192	9,565	10,549	7,031	6,992	2,720
	YoY		-2.2%	-22.7%	84.2%	10.3%	-33.4%	-0.5%	-61.1%
	Gross profit margin		32.1%	26.5%	35.7%	32.3%	22.6%	20.6%	11.4%
	Game		6,703	5,437	9,504	10,441	6,972	6,833	2,570
		YoY	-2.2%	-18.9%	74.8%	9.9%	-33.2%	-2.0%	-62.4%
		Gross profit margin	32.1%	28.2%	35.7%	32.3%	22.7%	20.3%	10.9%
		% of total	99.8%	104.7%	99.3%	99.0%	99.2%	97.7%	94.5%
	Other		11	-245	62	107	58	159	150
		YoY	44.1%	-	-	72.1%	-45.5%	172.9%	-5.7%
		Gross profit margin	25.0%	-	35.5%	35.4%	16.0%	43.6%	45.4%
		% of total	0.2%	-4.7%	0.7%	1.0%	0.8%	2.3%	5.5%
	Adjustments		-	-	-1	1	-	-	-
SG&A expenses			4,516	3,917	4,674	5,554	5,357	4,843	3,825
	YoY		-3.9%	-13.2%	19.3%	18.8%	-3.5%	-9.6%	-21.0%
	SG&A ratio		21.6%	20.0%	17.5%	17.0%	17.2%	14.3%	16.0%
Operating profit			2,198	1,275	4,891	4,995	1,674	2,149	-1,106
	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	FY12/21
(JPYmn)			Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.
Revenue			20,913	19,600	26,778	32,674	31,110	33,952	23,895
	YoY		-2.2%	-6.3%	36.6%	22.0%	-4.8%	9.1%	-29.6%
	Japan		19,060	16,317	21,780	21,167	20,355	22,092	13,879
		YoY	-5.9%	-14.4%	33.5%	-2.8%	-3.8%	8.5%	-37.2%
		% of total	91.1%	83.2%	81.3%	64.8%	65.4%	65.1%	58.1%
	Overseas		1,853	3,283	4,998	11,506	10,755	11,860	10,016
		YoY	65.9%	77.2%	52.2%	130.2%	-6.5%	10.3%	-15.5%
		% of total	8.9%	16.8%	18.7%	35.2%	34.6%	34.9%	41.9%

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,” 68.3% of the population in Japan owned smartphones in 2020. Given the population in the country as of October 2020 of 126.15mn (based on Ministry of Internal Affairs and Communications statistics), there were roughly 86.16mn 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 2020 was 39.76mn.

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 Utano☆Princesama Shining Live. 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 55.2% 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.

Main 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 40 million downloads worldwide.
BLEACH: Brave Souls	Released July 2015. A 3-D slashing action battle game based on the BLEACH anime franchise. Over 60 million downloads worldwide.
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 50 million downloads worldwide.	Jointly operated with Bushiroad Inc. (TSE: 7803)
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.

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.

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.

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