Zappallas 3770

ザッパラス

Recent Updates

2021-10-05

Q1 FY04/22 report update

2021-09-10

Q1 FY04/22 flash update

2021-07-19

Full-year FY04/21 report update

Get in touch

Midtown Tower, 9-7-1 Akasaka, Minato-ku Tokyo, Japan 150-0002

https://www.zappallas.com/

03-6434-1036

Summary

Zappallas runs a web-based business, mainly offering digital contents centered on divination. The company excels in customer relationship management (CRM), i.e., accurately understanding and analyzing users’ preferences and behavioral and psychological patterns based on their profile, content access log, and online activities. Utilizing its database, Zappallasprovides users with various content and products via email publications and online advertising.

Interactive Media & Services

Key dates

2013-03-25

Coverage initiation

Full Report

2021-10-05

Q1 FY04/22 flash update

2021-09-10

Full-year FY04/21 flash update

2021-06-15

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Executive summary

A web-based business, mainly offering digital content centered on divination

Zappallas runs a web-based business, mainly offering digital content centered on divination. The company excels in customer relationship management (CRM), i.e., accurately understanding and analyzing users’ preferences and behavioral and psychological patterns based on their profile, content access log, and online activities. Utilizing its database, Zappallas provides users with various content and products via email publications and online advertising.

The company was founded around the time of NTT Docomo Inc.’s (TSE1: 9437) i-mode launch (2000), which it used to deliver many types of content. When it listed on the Tokyo Stock Exchange’s Mothers market (May 2005), Zappallas narrowed its focus to divination, as it encouraged frequent visits to the company’s websites and presented a chance to create a database of accurate user information using their online registrations (see Business section).

Trends and outlook

In FY04/21, sales were JPY4.8bn (+26.5% YoY), operating profit was JPY357mn (+698.0% YoY), recurring profit was JPY376mn (JPY2mn in FY04/20), and net income attributable to owners of the parent was JPY286mn (net loss of JPY227mn in FY04/20).

The company's FY04/22 earnings forecast calls for sales of JPY4.9bn (+2.3% YoY) and operating profit of JPY250mn (-29.9% YoY). Zappallas expects the performance of its divination-related services to remain firm in FY04/22. At the same time, the forecast reflects the company's intent to actively invest in advertising and new service development with an eye on sustainable growth for the medium to long term.

Moving away from ad placements via telecom carriers (mobile network operators), Zappallas is working to reach customers by establishing its own contact points. Since FY04/16, its focus has been on bolstering services for smartphone users. The company expects to cultivate latent customers by expanding the lineup of smartphone app services to create a wider point of entry. It plans to make divination a part of mainstream culture and develop a wide following for its services through initiatives like AgaruTV, a video content delivery service giving users access to divination whenever and wherever they want, and fortune-telling festivals offering the largest opportunity for users to experience divination in person. For the medium term, the company intends to return to growth trajectory centering efforts on AgaruTV.

Previously, the company had outsourced content creation to divination experts with proven track records, but in FY04/21, the company launched initiatives through which it develops divination experts who handle content creation internally. In December 2020, the company teamed up with Yoshimoto Kogyo Co., Ltd. (an entertainment company that primarily employs comic celebrities) to establish Luck Out, Inc. Through this new company, Zappallas will plans to develop divination experts and strengthen their degree exposure in mass media. Also in December 2020, the company launched operations at Uranai Academy, an online divination school. As of May 2021, 12,000 individuals had registered with the school, and its cumulative total of attendees exceeded 5,000.

Strengths and weaknesses

Shared Research views Zappallas’ main strengths as its strong financial position, support from women aged 20–49, and power to draw divination experts. Weaknesses include a dependence on feature phone platforms, existing businesses focus on a niche market and current businesses relying on domestic market (see Strengths and weaknesses).

Key financial data

Income statement		FY04/12	FY04/13	FY04/14	FY04/15	FY04/16	FY04/17	FY04/18	FY04/19	FY04/20	FY04/21	FY04/22
(JPYmn)		Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Est.
Sales		10,088	8,890	8,155	7,582	5,559	4,847	4,409	4,170	3,789	4,792	4,900
	YoY	-14.6%	-11.9%	-8.3%	-7.0%	-26.7%	-12.8%	-9.0%	-5.4%	-9.1%	26.5%	2.3%
Gross profit		6,861	6,118	5,396	4,549	3,328	3,131	2,920	2,702	2,446	3,383
	YoY	-12.0%	-10.8%	-11.8%	-15.7%	-26.8%	-5.9%	-6.7%	-7.5%	-9.5%	38.3%
	Gross profit margin	68.0%	68.8%	66.2%	60.0%	59.9%	64.6%	66.2%	64.8%	64.6%	70.6%
Operating profit		2,584	1,423	722	517	240	295	-696	-342	45	357	250
	YoY	-15.9%	-44.9%	-49.2%	-28.4%	-53.6%	22.9%	-	-	-	698.0%	-29.9%
	Operating profit margin	25.6%	16.0%	8.9%	6.8%	4.3%	6.1%	-	-	-	-	5.1%
Recurring profit		2,594	1,655	752	729	161	299	-701	-300	2	376	-
	YoY	-16.0%	-36.2%	-54.5%	-3.2%	-78.0%	86.1%	-	-	-	-
	Recurring profit margin	25.7%	18.6%	9.2%	9.6%	2.9%	6.2%	-	-	-	-
Net income		1,579	917	376	242	-539	135	-864	-358	-227	286	-
	YoY	-2.9%	-41.9%	-59.0%	-35.5%	-	-	-	-	-	-
	Net margin	15.7%	10.3%	4.6%	3.2%	-9.7%	2.8%	-	-	-	-
Per-share data (split-adjusted; JPY)
Shares issued (year-end; '000 shares)		13,471	13,531	13,651	13,651	13,651	13,651	13,651	13,651	13,651	13,651
EPS		126.7	73.0	29.7	19.0	-42.4	10.6	-67.8	-28.1	-17.8	22.4	-
EPS (fully diluted)		124.6	72.3	29.6	-	-	-	-	-	-	-
Dividend per share		42.0	42.0	22.0	10.0	-	-	-	-	-	7.00	-
Book value per share		635.6	661.8	652.7	663.8	605.2	615.9	542.4	514.2	497.9	520.0
Balance sheet (JPYmn)
	Cash and cash equivalents	4,800	4,693	5,081	5,738	5,520	6,278	5,223	5,208	4,879	5,406
Total current assets		7,098	6,724	6,879	7,277	6,959	7,079	5,999	5,756	5,454	6,061
Tangible fixed assets		175	137	129	89	53	56	149	86	73	48
Investments and other assets		1,053	850	864	1,088	704	734	723	741	625	658
Intangible assets		1,092	2,415	2,185	1,714	712	571	508	507	506	387
Total assets		9,417	10,126	10,057	10,169	8,429	8,440	7,378	7,090	6,658	7,155
	Accounts payable	332	304	377	349	135	131	118	116	107	176
	Short-term debt	32	191	184	194	160	120	0	0	0	0
Total current liabilities		1,320	1,085	1,182	1,337	603	598	401	490	303	515
	Long-term debt	63	631	484	341	120	0	0	0	0	0
Total fixed liabilities		64	632	485	341	120	0	60	39	1	1
Total liabilities		1,384	1,716	1,667	1,678	723	598	460	529	304	516
Total net assets		8,033	8,410	8,390	8,491	7,706	7,841	6,918	6,561	6,353	6,639
Total interest-bearing debt		95	821	668	535	280	120	0	0	0	0
Cash flow statement (JPYmn)
Cash flows from operating activities		1,637	1,475	1,313	1,124	315	613	-526	125	-3	604
Cash flows from investing activities		-841	-2,126	-272	-88	275	-422	-456	-159	27	-356
Cash flows from financing activities		-584	213	-660	-416	-289	-161	-182	-1	0	5
Financial ratios
ROA (RP-based)		28.5%	16.9%	7.5%	7.2%	1.7%	3.5%	-8.9%	-4.1%	0.0%	5.4%
ROE		21.1%	11.2%	4.5%	2.9%	-6.7%	1.7%	-11.7%	-5.3%	-3.5%	4.4%
Equity ratio		84.4%	82.4%	82.6%	83.1%	91.4%	92.9%	93.6%	92.5%	95.4%	92.7%

Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods. Note: Gross profit adjusted for sales returns. Note: Per-share data adjusted for the 100-for-1 stock split in FY04/14.

Recent updates

Q1 FY04/22 report update

2021-10-05

Shared Research updated the report following interviews with Zappallas, Inc.

Q1 FY04/22 flash update

2021-09-10

Zappallas, Inc. announced earnings results for Q1 FY04/22; see the results section for details.

Trends and outlook

Quarterly trends and results

Earnings		FY04/21				FY04/22				FY04/22
Cumulative (JPYmn)		Q1	Q1-Q2	Q1-Q3	Q1-Q4	Q1	Q1-Q2	Q1-Q3	Q1-Q4	% of Est.	FY Est.
Sales		1,015	2,097	3,397	4,792	1,197				24.4%	4,900
	YoY	14.7%	18.7%	20.4%	26.5%	17.9%					2.3%
Gross profit		725	1,484	2,412	3,383	854
	YoY	23.3%	28.2%	31.9%	38.3%	17.8%
	Gross profit margin	71.4%	70.7%	71.0%	70.6%	71.4%
SG&A expenses		680	1,397	2,239	3,026	737
	YoY	9.1%	17.1%	22.9%	26.0%	8.4%
	SG&A ratio	67.0%	66.6%	65.9%	63.2%	61.6%
Operating profit		45	86	173	357	117				46.8%	250
	YoY	-	-	-	698.0%	159.8%					-29.9%
	Operating profit margin	4.4%	4.1%	5.1%	7.4%	9.8%					5.1%
Recurring profit		21	67	153	376	122
	YoY	-	-	-	-	468.2%
	Recurring profit margin	2.1%	3.2%	4.5%	7.8%	10.2%
Net income		3	34	97	286	88
	YoY	-	-	-	-	-
	Net margin	0.3%	1.6%	2.9%	6.0%	7.3%
Earnings		FY04/21				FY04/22
Quarterly (JPYmn)		Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4
Sales		1,015	1,082	1,300	1,395	1,197
	YoY	14.7%	22.8%	23.3%	44.0%	17.9%
Gross profit		725	758	928	971	854
	YoY	23.3%	33.2%	38.3%	57.4%	17.8%
	Gross profit margin	71.4%	70.1%	71.4%	69.6%	71.4%
SG&A expenses		680	717	841	788	737
	YoY	9.1%	25.9%	33.9%	35.8%	8.4%
	SG&A ratio	67.0%	66.3%	64.7%	56.5%	61.6%
Operating profit		45	41	87	183	117
	YoY	-	-	102.3%	392.9%	159.8%
	Operating profit margin	4.4%	3.8%	6.7%	13.1%	9.8%
Recurring profit		21	45	86	223	122
	YoY	-	488.4%	79.0%	-	468.2%
	Recurring profit margin	2.1%	4.2%	6.6%	16.0%	10.2%
Net income		3	31	63	189	88
	YoY	-	-	-	478.5%	-
	Net margin	0.3%	2.9%	4.8%	13.5%	7.3%

Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.
Note: Gross profit adjusted for sales returns.
Note: Net income refers to net income attributable to owners of the parent.

Quarterly cost of sales and SG&A expenses

Earnings		FY04/21				FY04/22
Cumulative (JPYmn)		Q1	Q1-Q2	Q1-Q3	Q1-Q4	Q1	Q1-Q2	Q1-Q3	Q1-Q4
Sales		1,015	2,097	3,397	4,792	1,197
	YoY	14.7%	18.7%	20.4%	26.5%	17.9%
Cost of sales		290	614	985	1,409	343
	YoY	-2.3%	0.8%	-0.6%	4.9%	18.2%
	Cost ratio	28.6%	29.3%	29.0%	29.4%	28.6%
	Labor costs	72	153	232	323	86
	Royalties	80	179	307	437	122
	Outsourcing costs	35	66	108	145	42
	Merchandise costs	66	136	222	347	62
	Other costs	62	126	189	253	63
	Transfer to other accounts	-25	-46	-71	-94	-31
Gross profit		725	1,484	2,412	3,383	854
	YoY	23.3%	28.2%	31.9%	38.3%	17.8%
	Gross profit margin	71.4%	70.7%	71.0%	70.6%	71.4%
SG&A expenses		680	1,397	2,239	3,026	737
	YoY	9.1%	17.1%	22.9%	26.0%	8.4%
	SG&A ratio	67.0%	66.6%	65.9%	63.2%	61.6%
	Personnel expenses	168	333	503	682	177
	Advertising expenses	195	411	711	966	221
	Collection agency fees	131	274	449	619	163
	Amortization of goodwill	31	62	92	123	31
	Other costs	155	317	483	636	145
Operating profit		45	86	173	357	117
	YoY	-	-	-	698.0%	159.8%
	Operating profit margin	4.4%	4.1%	5.1%	7.4%	9.8%
Earnings		FY04/21				FY04/22
Quarterly (JPYmn)		Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4
Sales		1,015	1,082	1,300	1,395	1,197
	YoY	14.7%	22.8%	23.3%	44.0%	17.9%
Cost of sales		290	324	371	424	343
	YoY	-2.3%	3.7%	-2.9%	20.7%	18.2%
	Cost ratio	28.6%	29.9%	28.6%	30.4%	28.6%
	Labor costs	72	81	79	91	86
	Royalties	80	99	128	130	122
	Outsourcing costs	35	31	42	37	42
	Merchandise costs	66	70	86	125	62
	Other costs	62	64	63	64	63
	Transfer to other accounts	-25	-21	-25	-23	-31
Gross profit		725	758	928	971	854
	YoY	23.3%	33.2%	38.3%	57.4%	17.8%
	Gross profit margin	71.4%	70.1%	71.4%	69.6%	71.4%
SG&A expenses		680	717	841	788	737
	YoY	9.1%	25.9%	33.9%	35.8%	8.4%
	SG&A ratio	67.0%	66.3%	64.7%	56.5%	61.6%
	Personnel expenses	168	165	170	179	177
	Advertising expenses	195	216	300	255	221
	Collection agency fees	131	143	175	170	163
	Amortization of goodwill	31	31	30	31	31
	Other costs	155	162	166	153	145
Operating profit		45	41	87	183	117
	YoY	-	-	102.3%	392.9%	159.8%
	Operating profit margin	4.4%	3.8%	6.7%	13.1%	9.8%

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

Quarterly earnings by segment

Earnings			FY04/21				FY04/22
Cumulative (JPYmn)			Q1	Q1-Q2	Q1-Q3	Q1-Q4	Q1	Q1-Q2	Q1-Q3	Q1-Q4
Sales			1,015	2,097	3,397	4,792	1,197
	YoY		14.7%	18.7%	20.4%	26.5%	17.9%
	Mobile services		805	1,669	2,715	3,781	1,003
		YoY	19.6%	27.4%	34.5%	41.5%	24.6%
	Overseas		114	232	344	461	121
		YoY	14.0%	14.4%	6.0%	6.2%	5.7%
	Other		95	193	335	550	74
		YoY	-14.4%	-23.1%	-29.5%	-19.5%	-22.5%
Operating profit			45	86	173	357	117
	YoY		-	-	-	698.0%	159.8%
	Mobile services		135	262	429	688	226
		YoY	48.0%	24.1%	24.7%	51.5%	67.4%
	Overseas		20	47	66	83	19
		YoY	764.7%	316.3%	77.1%	91.3%	-4.4%
	Other		1	7	23	51	-19
		YoY	-	-	-	-	-
	Adjustments		-111	-229	-345	-466	-109
Earnings			FY04/21				FY04/22
Quarterly (JPYmn)			Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4
Sales			1,015	1,082	1,300	1,395	1,197
	YoY		14.7%	22.8%	23.3%	44.0%	17.9%
	Mobile services		805	864	1,045	1,065	1,003
		YoY	19.6%	35.7%	47.6%	63.3%	24.6%
	Overseas		114	118	111	115	121
		YoY	14.0%	14.9%	-8.0%	6.5%	5.7%
	Other		95	98	142	213	74
		YoY	-14.4%	-30.0%	-36.6%	2.9%	-22.5%
Operating profit			45	41	87	183	117
	YoY		-	-	102.3%	392.9%	159.8%
	Mobile services		135	127	167	259	226
		YoY	48.0%	5.9%	25.7%	135.2%	67.4%
	Overseas		20	27	19	18	19
		YoY	764.7%	201.1%	-26.4%	172.4%	-4.4%
	Other		1	6	16	29	-19
		YoY	-	-	-	25.7%	-
	Adjustments		-111	-118	-116	-121	-109

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

Quarterly earnings in the Mobile Services segment

Earnings			FY04/21				FY04/22
Cumulative (JPYmn)			Q1	Q1-Q2	Q1-Q3	Q1-Q4	Q1	Q1-Q2	Q1-Q3	Q1-Q4
Sales			805	1,669	2,715	3,781	1,003
	YoY		19.6%	27.4%	34.5%	41.5%	24.6%
Cost of sales			213	461	735	1,017	275
	YoY		12.4%	22.6%	27.3%	32.1%	28.8%
	Cost ratio		26.5%	27.6%	27.1%	26.9%	27.4%
	Labor costs		52	113	172	239	62
		YoY	4.0%	8.7%	13.9%	17.2%	19.2%
	Royalties		77	172	296	422	117
		YoY	18.5%	35.4%	53.4%	65.5%	51.9%
	Outsourcing costs		26	51	83	107	31
		YoY	-10.3%	-7.3%	2.5%	1.9%	19.2%
	Other		56	121	178	239	64
		YoY	27.3%	40.7%	21.9%	22.6%	14.3%
Gross profit			592	1,208	1,979	2,764	728
	YoY		22.4%	29.4%	37.4%	45.3%	23.1%
	Gross profit margin		73.5%	72.4%	72.9%	73.1%	72.6%
SG&A expenses			457	946	1,550	2,076	502
	YoY		16.5%	30.9%	41.4%	43.4%	10.0%
	SG&A ratio		56.7%	56.7%	57.1%	54.9%	50.1%
	Personnel expenses		67	132	200	269	70
		YoY	-26.4%	-18.0%	-12.3%	-9.4%	4.5%
	Advertising expenses		177	376	652	873	201
		YoY	35.1%	60.0%	85.2%	101.2%	13.6%
	Collection agency fees		136	284	466	642	169
		YoY	44.7%	59.6%	54.8%	56.6%	24.3%
	Other		75	150	226	285	60
		YoY	0.0%	3.4%	7.1%	-5.3%	-20.0%
Operating profit			135	262	429	688	226
	YoY		48.0%	24.1%	24.7%	51.5%	67.4%
	Operating profit margin		16.8%	15.7%	15.8%	18.2%	22.5%
Earnings			FY04/21				FY04/22
Quarterly (JPYmn)			Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4
Sales			805	864	1,045	1,065	1,003
	YoY		19.6%	35.7%	47.6%	63.3%	24.6%
Cost of sales			213	248	274	280	275
	YoY		12.4%	32.9%	36.2%	47.1%	28.8%
	Cost ratio		26.5%	28.7%	26.2%	26.3%	27.4%
	Labor costs		52	61	59	67	62
		YoY	4.0%	13.0%	25.5%	26.4%	19.2%
	Royalties		77	95	124	126	117
		YoY	18.5%	53.2%	87.9%	103.2%	51.9%
	Outsourcing costs		26	25	32	24	31
		YoY	-10.3%	-3.8%	23.1%	0.0%	19.2%
	Other		56	65	57	61	64
		YoY	27.3%	54.8%	-5.0%	24.5%	14.3%
Gross profit			592	616	771	785	728
	YoY		22.4%	36.8%	52.2%	70.0%	23.1%
	Gross profit margin		73.5%	71.3%	73.8%	73.7%	72.6%
SG&A expenses			457	489	604	526	502
	YoY		16.5%	48.0%	61.6%	49.6%	10.0%
	SG&A ratio		56.7%	56.6%	57.8%	49.4%	50.1%
	Personnel expenses		67	65	68	69	70
		YoY	-26.4%	-7.1%	1.5%	0.0%	4.5%
	Advertising expenses		177	199	276	221	201
		YoY	35.1%	91.3%	135.9%	169.5%	13.6%
	Collection agency fees		136	148	182	176	169
		YoY	44.7%	76.2%	48.0%	61.5%	24.3%
	Other		75	75	76	59	60
		YoY	0.0%	7.1%	15.2%	-34.4%	-20.0%
Operating profit			135	127	167	259	226
	YoY		48.0%	5.9%	25.7%	135.2%	67.4%
	Operating profit margin		16.8%	14.7%	16.0%	24.3%	22.5%

Source: Shared Research based on company data
Note: Gross profit figures were calculated by Shared Research on the basis of the company’s GPM data.

Overseas: Quarterly earnings (local currency basis)

Earnings		FY04/21				FY04/22
Cumulative (USD'000)		Q1	Q1-Q2	Q1-Q3	Q1-Q4	Q1	Q1-Q2	Q1-Q3	Q1-Q4
Sales		1,061	2,179	3,250	4,339	1,100
	YoY	16.1%	16.0%	8.6%	8.7%	3.7%
Operating profit		369	807	1,175	1,526	358
	YoY	79.1%	70.6%	32.0%	35.0%	-3.0%
	Operating profit margin	34.8%	37.0%	36.2%	35.2%	32.5%
Earnings		FY04/21				FY04/22
Quarterly (USD'000)		Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4
Sales		1,061	1,118	1,071	1,089	1,100
	YoY	16.1%	16.0%	-3.9%	9.1%	3.7%
Operating profit		369	438	368	351	358
	YoY	79.1%	64.0%	-11.8%	46.3%	-3.0%
	Operating profit margin	34.8%	39.2%	34.4%	32.2%	32.5%

Source: Shared Research based on company data Note: The figures for operating profit show those before goodwill amortization.

Q1 FY04/22 results

Sales: JPY1.2bn (+17.9% YoY)
Operating profit: JPY117mn (+159.8% YoY)
Recurring profit: JPY122mn (+468.2% YoY)
Net income*: JPY88mn (approximately 29x YoY)
*Net income/loss attributable to owners of the parent

Comparison with Q1 FY04/21

The Mobile Services segment drove a YoY increase in sales as the company strove to strengthen its business primarily by enhancing content created by its divination experts, who have encountered greater opportunities for appearances in mass media.

Gross profit rose YoY due to the upturn in sales, reaching JPY854mn (+17.8% YoY). GPM came to 71.4% (roughly flat YoY).

SG&A expenses came to JPY737mn (+8.4% YoY). Personnel expenses amounted to JPY177mn (+5.4% YoY) while advertising expenses came to JPY221mn (+13.3% YoY) due to heightened online advertising for its internally operated fortune-telling site. Additionally, the company incurred collection agency fees of JPY163mn, up 24.4% YoY, benefiting from higher sales.

The company reported increases on all profit lines as gross profit increased at a higher rate than SG&A expenses. By segment, profits dropped in Overseas and Others, while Mobile Services saw a rise in profit.

Comparison with Q4 FY04/21

On a QoQ comparison basis, sales were down by 14.2%. After the conventional mass media started to feature Zappallas’ divination services in Q1 FY04/21 (May-July 2020), demand for its divination continued to rise through Q4 FY04/21 (February-April 2021). The company says that while demand for divination remained robust in Q1 FY04/22, sales dropped in Mobile Services due to the weakened effect of SEO measures caused by the algorithm changes in the search engine. Sales also declined in the Others segment, which mainly involves the operation of “cuna select,” an online shopping website for mothers. Consolidated sales declined QoQ due to these factors. According to the company, sales and profits of "cuna select" tend to focus in Q3 (November-January) and Q4 (February-April) due to the concentration of gift-giving events in those quarters. Examples of such events include year-end/new year holidays, the Doll Festival for girls in March, and Children's Day in May.

Operating profit fell by 36.2% QoQ, resulting in a double-digit drop as SG&A expenses fell by a mere 6.4%, while sales fell by 14.2%.

Progress versus company forecast

Progress of Q1 performance against the full-year forecast for FY04/22 was 24.4% for sales (21.2% in Q1 FY04/21 versus full-year results) and 46.8% for operating profit (12.6%). Zappallas made no changes to its full-year forecast despite the favorable progress of operating profit (exceeding 25%). This is because the company has been considering strengthening the exposure through television and other media since Q2 FY04/22 (August-October 2021).

Initiatives

In Q1, while maintaining its teleworking arrangements to prevent the spread of COVID-19, Zappallas sought to promote its businesses, for example by expanding course selections for its Uranai Academy online divination school, holding its tenth "Fortune-telling Festival" event in July 2021, and continuing to enhance existing divination content.

Starting with Q1, the company is applying the Accounting Standards for Revenue Recognition (Accounting Standards Board of Japan Statement No. 29). Compared to the previous accounting method, the change had a negative impact of JPY1mn on Q1 sales and JPY5mn each on Q1 operating profit, recurring profit, and pre-tax net income.

The COVID-19 pandemic has had little impact on the company's mainstay divination service business, since it involves online services via smartphones and PCs.

Mobile Services segment

Sales: JPY1.0bn (+24.6% YoY)
Operating profit: JPY266mn (+67.4% YoY)

Sales in the Mobile Services segment grew YoY, driven primarily by an increase in divination-related sales. As mentioned, the change in the search engine algorithm had a negative impact on sales, but demand for divination remained robust after conventional mass media featured the company's divination services. Telephone/chat fortune-telling services also performed well.

Gross profit came to JPY728mn (+23.1% YoY), and GPM was 72.6% (-0.9pp YoY). The decline in GPM was due mainly to an increase in royalties paid, which increased 51.9% YoY to JPY117mn.

Operating profit rose YoY on the rise in gross profit, despite higher SG&A expenses of JPY502mn (+10.0% YoY). The rise in SG&A expenses was due to intensified advertising for the company’s internally operated fortune-telling site and an upturn in collection agency fees. Personnel expenses were JPY70mn (+4.5% YoY), advertising expenses were JPY201mn (+13.6% YoY), and collection agency fees were JPY169mn (+24.3% YoY).

Collection agency fees: In addition to company-managed divination websites, the company also provides divination services through platforms such as those operated by mobile phone carriers or official websites maintained by internet service providers (ISPs). Customer payment for the use of these services is collected and later issued to the company by these carriers and ISPs. In return, the company pays the carriers and ISPs collection agency fees commensurate with corresponding commission rates.

Overseas segment

Sales: JPY121mn (+5.7% YoY)
Operating profit: JPY19mn (-4.4% YoY)

On a local currency basis, the segment sales were USD1.1mn (+3.7% YoY) and operating profit before amortization of goodwill was USD358,000 (-3.0% YoY).

Others segment

Sales: JPY74mn (-22.5% YoY)
Operating loss: JPY19mn (versus JPY1mn operating profit in Q1 FY04/21)

Through its Others segment, the company operates "cuna select," an online shopping site, renders application services (providing software or software operating environments via the Internet) to companies, designs VR content, and runs a travel business. In Q1 FY04/22, "cuna select" accounted for about 70% of segment sales.

In Q1 FY04/22, segment sales declined YoY on lower revenue from "cuna select.” In Q1 FY04/21, the growing stay-at-home consumption had resulted in robust sales of products such as playmats for children. However, Q1 FY04/22 saw no such heightened demand. The segment posted a loss in Q1 due to the downturn in sales.

Full-year company forecast

Company forecasts		FY04/20			FY04/21			FY04/22
(JPYmn)		1H Act.	2H Act.	FY Act.	1H Act.	2H Act.	FY Act.	FY Est.
Sales		1,767	2,022	3,789	2,097	2,695	4,792	4,900
	YoY	-15.9%	-2.3%	-9.1%	18.7%	33.3%	26.5%	2.3%
Cost of sales		609	734	1,343	614	795	1,409
Gross profit		1,158	1,288	2,446	1,484	1,899	3,383
	YoY	-14.9%	-3.9%	-9.5%	28.1%	47.5%	38.3%
	Gross profit margin	65.5%	63.7%	64.6%	70.7%	70.5%	70.6%
SG&A expenses		1,193	1,208	2,401	1,397	1,629	3,026
	SG&A ratio	67.5%	59.8%	63.4%	66.6%	60.5%	63.2%
Operating profit		-35	80	45	86	270	357	250
	YoY	-	-	-	-	239.2%	698.0%	-29.9%
	Operating profit margin	-	3.9%	1.2%	4.1%	10.0%	7.4%	5.1%
Recurring profit		-61	63	2	67	310	376
	YoY	-	-	-	-	394.6%	23,512.6%
	Recurring profit margin	-	3.1%	0.0%	3.2%	11.5%	7.8%
Net income		-92	-135	-227	34	252	286
	YoY	-	-	-	-	-	-

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

The company aims to strengthen and expand its customer base, and in this way, elevate its corporate value in the medium to long term. To this end, it says it will continue to expand content services that match user demand and improve satisfaction among existing customers while expanding touchpoints with potential customers.

The company plans to cultivate the demographic of potential customers by tapping into various facets (online videos, social media, and the conventional mass media) to create a new customer experience. Initiatives along this line include hosting an online fortune-telling festival, launching an online divination school with diverse course offerings, and promoting divination experts through Luck Out (a talent management company specializing in fortune tellers). Apparently, the company is also considering efforts to secure opportunities for exposure through television and other media.

In the mainstay divination business, the company will work to improve profitability of the existing business at subsidiary cocoloni. It also plans to design and develop new types of divination services that better match customers' individual needs and circumstances.

Medium-term outlook

Stagnant earnings between FY04/12 and FY04/16 due to popularization of smartphones

When feature phones were popular, Zappallas grew earnings and successfully differentiated itself by focusing on divination services. However, the spread of smartphones and fall in feature phone content sales—its earnings’ driver—has forced the company to rethink its strategy. According to the company, the quality of its content and the monthly ARPU (average revenue per user) has remained consistent. The company’s former model for attracting customers focused on advertising through carriers weakened with the spread of smartphones.

Zappallas aims to make a shift from advertising through carriers to establishing its own contact points with customers. Since FY04/16, the company is reinforcing its services aimed at smartphone users, an area in which its offering has been thin to date. By expanding its lineup of smartphone app services—the market’s mainstay—it plans to provide a wider point of entry to attract customers, and pursue potential customers.

Due to the spread of smartphones, sales and profit continued to drop from FY04/12 to FY04/16. Sales decreased from JPY10.1bn in FY04/11 to JPY5.6bn in FY04/16 while operating profit fell from JPY3.1bn to JPY240mn in the same period (due partly to a restructuring of the Commerce business in FY04/15).

Earnings recovery since FY04/17

In FY04/17, the rate of sales decline slowed down as decline in revenue from content for feature phones bottomed out. Furthermore, cost control increased margin. This raised operating profit YoY for the first time in six years.

From FY04/18–FY04/20, the company expanded customer contact points through Uranai Festival and AgaruTV

The company placed the creation of new mechanisms with which to attract customers as its top priority beginning in FY04/18, and strove to improve and extend content and services that suit user needs while expanding touchpoints with potential users. The intent was to establish and strengthen the company group’s customer base and improve enterprise value over the mid- to long-term.

Between FY04/18 and FY04/19, the company focused advertising efforts to increase customers for fortune-telling festivals and viewers for AgaruTV, generating operating losses as a result. In FY04/20, Uranai Festival and AgaruTV did not contribute to profit. In response, the company has decided to push forward with initiatives related to Uranai Festival in the future and also scaled down its management structure by absorbing Wanaps, Inc., which operated AgaruTV, into the parent company.

Hosting fortune-telling festivals:
Fortune-telling festival is an event where a total of about 100 divination experts are on site to tell the fortunes of those visiting. It also includes stage shows by divination experts, entertainers, and celebrities, and attractions where visitors can enjoy various types of divination.
The admission fee for fortune-telling festivals varies between JPY2,000-3,000, changing each time the event is held. However, the contribution from tickets to earnings is limited. Costs associated with renting the venue and setting it up are significant and can exceed revenue. But that said, these events present an opportunity for participants to meet the divination experts in person and develop a relationship, and the company hosts them to promote follow-up content usage by such participants. Nevertheless, the company aims to post profit from fortune-telling festivals in the medium- and long-term.

Broadcasting AgaruTV (formerly Fortune-telling TV):
In July 2017, the company launched an online broadcast station Fortune-telling TV (now, “AgaruTV”) to broadcast various divination-related programs 24/7.
AgaruTV is available for free on smartphone apps (iOS and Android) and on web browsers. All the programs are divination-related, created by the company. The station originally offered content such as luck-bringing cooking, makeup techniques for good luck, introduction of sites with spiritual energy, fortune forecast, advice on troubles, and an information program combining the latest trends or news topics with divination. In addition to divination experts, entertainers and celebrities appeared in programs, as did models and performers with a strong following among young females on social networking sites.

FY04/21 and onward: Target higher business performance by training content-creating divination experts and using television-based media

Previously, the company had outsourced content creation to experienced external divination experts. However, since FY04/21, Zappallas has been internally developing divination experts who will develop content for the company in the future.

In December 2020, the company teamed up with Yoshimoto Kogyo Co., Ltd. (an entertainment company that primarily employs comic celebrities) to establish Luck Out, Inc. Through Luck Out, the company plans to train divination experts and enhance their exposure through various forms of mass media. In December 2020, the company also established Uranai Academy, an online divination school. As of May 2021, 12,000 individuals had registered with the school, and the cumulative total of its attendees exceeded 5,000.

Business

Business description

Zappallas runs a web-based business, mainly offering digital content centered on divination. The company excels in customer relationship management (CRM), i.e., accurately understanding and analyzing users’ preferences and behavioral and psychological patterns based on their attributes, content access log, and online activities. Utilizing such a database, the company provides users with various content and products via email publications, online advertising, etc.

The company was founded around the time of NTT Docomo Inc.’s (TSE1: 9437) i-mode launch (2000), which it used to deliver many types of content. When it decided to list on the Tokyo Stock Exchange’s Mothers market (listed in May 2005), the company narrowed its focus to divination because the topic encouraged frequent visits to the company’s websites and presented an opportunity to create a valuable database of accurate information that users themselves register online.

The company’s websites cover a wide range of divination genres. Broad categories include augury, which uses randomly generated images from Tarot cards, for example, to divine how certain matters or circumstances will develop. Other methods, such as astrology and the Four Pillars of Destiny, involve inherent characteristics (such as birthdays) for divination.

Domestically, the company had worked to develop its former Contents and Commerce segments. In order to take advantage of smartphone demand following the device’s rapid spread, however, Zappallas dissolved the Commerce segment in Q4 FY04/15 and initiated a strategy that focuses management resources on its core Contents segment. In line with this strategy, the company changed the name of the Contents segment to “Mobile Services” and eliminated its Commerce segment (accounted for 22.2% of sales in FY04/15) in FY04/16 through the sale of some subordinate businesses and the transfer of remaining subordinate businesses into the Others segment.

In FY04/21, Mobile Services segment made up 78.9% of total sales, the Overseas segment 9.6%, and the Others segment 11.5%.

Segments and business details

Segment	Business details
Mobile Services	Planning, creation, and development of digital content such as divination and games that are provided mainly via mobile devices; provision of divination-related services such as telephone divination; operation of media sites; provision of other mobile services; and related advertisement delivery
Overseas	Provision of content and advertisement delivery in the US via mobile devices and the internet
Others	Products and services originating from business activities other than those described above; operation of online baby goods shopping site and new divination-related businesses

Performance by segment

Old segments			FY04/12	FY04/13	FY04/14	FY04/15	New segments			FY04/15	FY04/16	FY04/17	FY04/18	FY04/19	FY04/20	FY04/21
(JPYmn)			Cons.	Cons.	Cons.	Cons.	(JPYmn)			Retroactive adjustments	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.
Sales			10,088	8,890	8,155	7,582	Sales			7,582	5,559	4,847	4,409	4,170	3,789	4,792
	YoY		-14.6%	-11.9%	-8.3%	-7.0%		YoY		-	-26.7%	-12.8%	-9.0%	-5.4%	-9.1%	26.5%
	Contents		7,911	6,741	5,644	4,408		Mobile Services		4,585	3,841	3,717	3,259	2,887	2,672	3,781
		YoY	-11.3%	-14.8%	-16.3%	-21.9%			YoY	-	-16.2%	-3.2%	-12.3%	-11.4%	-7.5%	41.5%
		% of total	78.4%	75.8%	69.2%	58.1%			% of total	60.5%	69.1%	76.7%	73.9%	69.2%	70.5%	78.9%
	Commerce		1,811	1,649	1,620	1,686
		YoY	-31.4%	-9.0%	-1.7%	4.1%
		% of total	17.9%	18.5%	19.9%	22.2%
	Overseas		-	141	495	517		Overseas		517	508	406	463	479	434	461
		YoY	-	-	250.4%	4.4%			YoY	-	-1.8%	-20.0%	14.2%	3.4%	-9.4%	6.2%
		% of total	-	1.6%	6.1%	6.8%			% of total	6.8%	9.1%	8.4%	10.5%	11.5%	11.5%	9.6%
	Others		366	359	396	971		Others		2,480	1,210	724	686	804	683	550
		YoY	44.6%	-1.9%	10.3%	145.1%			YoY	-	-51.2%	-40.2%	-5.1%	17.2%	-15.0%	-19.5%
		% of total	3.6%	4.0%	4.9%	12.8%			% of total	32.7%	21.8%	14.9%	15.6%	19.3%	18.0%	11.5%
Operating profit			2,584	1,423	722	517	Operating profit			517	240	295	-696	-342	45	357
	YoY		-15.9%	-44.9%	-49.2%	-28.4%		YoY		-	-53.6%	22.9%	-	-	-	698.0%
	Contents		3,234	2,536	1,948	1,637		Mobile Services		1,240	733	759	-255	78	454	688
		YoY	-14.6%	-21.6%	-23.2%	-16.0%			YoY	-	-40.9%	3.6%	-	-	481.3%	51.5%
		% of total	96.2%	112.7%	130.7%	117.3%			% of total	127.7%	99.3%	98.2%	-	57.7%	92.2%	83.6%
	Commerce		-85	-71	-164	-194
		YoY	-191.8%	-16.6%	132.1%	18.0%
		% of total	-2.6%	-3.2%	-12.4%	-16.1%
	Overseas		-	-1	-78	-83		Overseas		-83	-12	12	64	67	44	83
		YoY	-	-	-	-			YoY	-	-	-	430.3%	5.5%	-35.3%	91.3%
		% of total	-	0.0%	-5.2%	-5.9%			% of total	-8.5%	-1.7%	1.6%	-	49.8%	8.9%	10.1%
	Others		128	-285	-380	-158		Others		-186	18	2	13	-10	-5	51
		YoY	204.2%	-	-	-			YoY	-	-	-87.7%	491.4%	-	-	-
		% of total	3.8%	-12.7%	-25.5%	-11.3%			% of total	-19.2%	2.4%	0.3%	-	-	-	6.2%

Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Segment sales and operating profit are before adjustments.

Business model

Mobile Services segment (78.9% of FY04/21 sales, 83.6% of operating profit prior to adjustments and deductions)

This segment includes the content business, which provides digital content (including divination and games), the media business, which focuses on advertising sales and directing users to paid content, and the telephone divination business. At over 90% of segment sales, the content business plays a major role. The content business plans, develops, and provides content targeted to users of feature phones, smartphones, and PCs.

In the 2000s, the company saw earnings growth mainly in provision of divination content for feature phones. As users move from feature phones to smartphones, the company is following suit. In the past few years, segment sales were on a continued decline, as smartphone-related sales have struggled to make up for the fall in feature phone sales.
In FY04/21, sales rose YoY as mass media featured a series of divination-themed content.

Mobile Services segment (former Contents segment) sales

Source: Shared Research based on company dataNote: The company changed its Contents segment to the Mobile Services segment in FY04/16.

Sales in the Mobile Services segment

Mobile Services sales breakdown			FY04/16	FY04/17	FY04/18	FY04/19	FY04/20	FY04/21
(JPYmn)			Cons.	Cons.	Cons.	Cons.	Cons.	Cons.
Sales: Mobile services			3,841	3,717	3,259	2,887	2,672	3,781
	YoY		-	-3.2%	-12.3%	-11.4%	-7.5%	41.5%
	Divination		3,138	3,201	2,871	2,578	2,429	3,570
		YoY	-	2.0%	-10.3%	-10.2%	-5.8%	47.0%
		% of total	81.7%	86.1%	88.1%	89.3%	90.9%	94.4%
	Other content		584	424	336	260	222	193
		YoY	-	-27.4%	-20.8%	-22.6%	-14.7%	-13.0%
		% of total	15.2%	11.4%	10.3%	9.0%	8.3%	5.1%
	Other		119	93	52	49	21	19
		YoY	-	-22.0%	-43.9%	-5.9%	-56.4%	-11.5%
		% of total	3.1%	2.5%	1.6%	1.7%	0.8%	0.5%

Source: Shared Research based on company data

In FY04/15, smartphone sales in the Contents business drove the majority of sales for the first time. The company has not disclosed details since that time, but the ratio of smartphone sales continued to climb, and the impact of falling feature phone sales mostly died down in FY04/19. Since FY04/16, the company has been working on restructuring its Mobile Services segment, where it will focus most of its resources. Therefore it has temporarily cut back on its other segments. The company will promote acceleration of development in the Mobile Services segment, centering on fortune telling, where the company is strong.

Feature phones are traditional mobile phones whose main function is telephone conversations; they may also have cameras and “one-seg” TV-broadcasting capability. Smartphones are multifunction mobile terminals that replicate many of the capabilities of PCs, such as iPhones and Android phones.

The Mobile Services segment provides official content, i.e., the content that phone carriers and Internet service providers (ISPs) have screened and approved. Zappallas uses pure advertising or affiliate advertising to invite users to one of its websites. Pure ads can be traditional or online formats, and the advertiser specifies the media to use (i.e., not involving particular ad networks). Affiliate ads are online ads with fees based on the purchase of goods or the number of clicks. Once on the website, users register as subscribers and receive daily content. The content may be free or paid, though the free content is a gateway product for the paid content. Ideally, users become paying members after using the free service, though some users are paying members from the start.

Mobile Services segment transaction flow

Source: Shared Research based on company data

The company’s feature phone services cost JPY300 per month, and charges appear on users’ phone bills.

The smartphone business model is slightly different, offering monthly and pay-as-you-go plans. Those charges vary depending on the volume of items and individual menus that user’s access. The company also pays fees to Google and Apple when it sells services through the App Store for iPhone and Google Play for Android phones. Users become subscribers via natural inflows (users who seek out the service); pure and affiliate advertisements; social media and word of mouth.

Smartphone-based service member inflow

Source: Shared Research based on company data

For PC content, Zappallas has an agreement with Yahoo Japan Corp. (TSE1: 4689) that includes charges for each use. The price points for PC content are higher than for mobile content. The company pays fees to Yahoo, and because settlement is by credit card Zappallas also pays interchange fees to credit card companies.

The company’s main users are the F1 (women 20–34) and F2 demographics (women 35–49). Their usage pattern starts with a “trigger” (trouble in work or love, for example) that prompts them to use, and sometimes pay for, the service. Once the “trigger” has been resolved, most users stop for a while, but for many, the next time a trigger occurs, they come back to use divination and other content services.

The company aims to increase customer Life Time Value (LTV), which is a prediction of the revenue attributed to the entire future relationship with the customer. Average monthly revenue from smartphone services is more than JPY300, according to the company. In contrast, a face-to-face interaction with a divination expert can cost several tens of thousands of yen per hour.

According to Zappallas, competitive advantages in its core divination services depend on the quality of divination experts, how easily the divination expert communicates with customers, and the ability to produce a high volume of content. Divination experts with high media exposure are popular, and the brand power of the famous astrologers is enough to bring in customers, so it is important to obtain popular prognosticators. It is common to market to and contract with divination experts who are just starting to get media exposure, but the company sometimes takes fledgling seers and promotes them. This also benefits the divination expert’s professional image, so there is a tendency to want to link up with a large company. Accordingly, scale may serve as a barrier to entry and a differentiation factor. The company updates fortunes daily. The company uses algorithms to identify patterns in users’ characteristics in order to prepare a month’s worth of content (daily fortunes) for each user in advance. Zappallas’ writers create the custom content, overseen by a divination expert.

Since FY04/21, the company has been internally developing divination experts through whom it will create content in the future. In December 2020, the company teamed up with Yoshimoto Kogyo Co., Ltd. (an entertainment company that primarily employs comic celebrities) to establish Luck Out, Inc. Through Luck Out, the company plans to train divination experts and enhance their exposure through various forms of mass media. In December 2020, the company also established Uranai Academy, an online divination school. As of May 2021, 12,000 individuals had registered with the school, and the cumulative total of its attendees exceeded 5,000.

The company hopes that offering such a wide range of content will maximize customers’ LTV because it allows the company to provide user-oriented content and products online through effective CRM.

The company analyzes each customer’s psychological tendencies, behavioral trends, preferences, and interests based on information collected from the websites (age, occupation, gender, hobbies) and usage (usage history, action history). The company uses the findings to offer a broad range of content popular among female users (e.g., divination, “decome (email decorations),” “standby screen designs,” “lifestyle”) through email publications, online ads, etc.

Structure of Mobile Services segment expenses

Through FY04/17, sales and operating profit had remained stable despite increases in personnel and outsourcing costs stemming from efforts to expand the range of new content. In FY04/18, the segment booked an operating loss owing to strategic investment in fortune-telling festivals and AgaruTV, with a view to enhancing longer-term growth prospects. In FY04/19, however, the company reduced investments and generated operating profit.

Cost of sales in the segment includes labor, royalties, outsourcing, and other costs. At 25–30% of segment sales in FY04/21, this means high margins. As the divination results are basically text, the service requires little bandwidth (low server costs) and simple programming (low software development and running costs). The individual divination webpages are also inexpensive to develop, feeding off standard development routines developed in-house and essentially replicated for each new site.

Performance in the Mobile Services segment

Mobile Services earnings			FY04/16	FY04/17	FY04/18	FY04/19	FY04/20	FY04/21
(JPYmn)			Cons.	Cons.	Cons.	Cons.	Cons.	Cons.
Sales			3,841	3,717	3,259	2,887	2,672	3,781
	YoY		-	-3.2%	-12.3%	-11.4%	-7.5%	41.5%
Cost of sales			1,144	1,059	848	751	770	1,017
	YoY		-	-7.4%	-19.9%	-11.4%	2.5%	32.1%
	Cost ratio		29.8%	28.5%	26.0%	26.0%	28.8%	26.9%
	Labor costs		393	363	263	240	204	239
		YoY	-	-7.6%	-27.5%	-8.7%	-15.0%	17.2%
	Royalties		367	344	313	289	255	422
		YoY	-	-6.3%	-9.0%	-7.7%	-11.8%	65.5%
	Outsourcing costs		248	130	134	98	105	107
		YoY	-	-47.6%	3.1%	-26.9%	7.1%	1.9%
	Other		129	215	138	117	195	239
		YoY	-	66.7%	-35.8%	-15.2%	66.7%	22.6%
Gross profit			2,697	2,658	2,411	2,136	1,902	2,764
	YoY		-	-1.4%	-9.3%	-11.4%	-11.0%	45.3%
	Gross profit margin		70.2%	71.5%	74.0%	74.0%	71.2%	73.1%
SG&A expenses			1,964	1,899	2,667	2,058	1,448	2,076
	YoY		-	-3.3%	40.4%	-22.8%	-29.6%	43.4%
	SG&A ratio		51.1%	51.1%	81.8%	71.3%	54.2%	54.9%
	Personnel expenses		428	362	442	396	297	269
		YoY	-	-15.4%	22.1%	-10.4%	-25.0%	-9.4%
	Advertising expenses		756	803	1,343	838	434	873
		YoY	-	6.2%	67.2%	-37.6%	-48.2%	101.2%
	Collection agency fees		499	449	416	416	410	642
		YoY	-	-10.0%	-7.3%	0.0%	-1.4%	56.6%
	Other		275	280	451	400	301	285
		YoY	-	1.8%	61.1%	-11.3%	-24.8%	-5.3%
Operating profit			733	759	-255	78	454	688
	YoY		-	3.6%	-	-	481.3%	51.5%
	Operating profit margin		19.1%	20.4%	-	2.7%	17.0%	18.2%

Source: Shared Research based on company data
Note: Royalties include those for editorial supervisors and revenue shared with outsourced contributors.

SG&A expenses accounted for 54.9% of segment sales in FY04/21 (54.2% in FY04/19). The SG&A expense ratio ranged between 35–55% from FY04/14 to FY04/17, but it was over 70% in FY04/18 and FY04/19 due to advertising and promotional spending related to Uranai Festival and AgaruTV, which are both aimed at enhancing longer-term growth prospects. Starting in FY04/19, the company limited advertising and promotion for Uranai Festival and AgaruTV, lowering the SG&A expense ratio to about 55% as a result.

Advertising and promotion form the bulk of the segment’s SG&A expenses. The company says that it is keeping customer-acquisition costs (for services other than fortune-telling festivals and AgaruTV) steady. In smartphone services with emphasis on sales promotion, however, Shared Research estimates that customer-acquisition costs are higher than for feature phone services.

Overseas segment (9.6% of FY04/21 sales, 10.1% of operating profit prior to adjustments and deductions)

In this segment, wholly owned subsidiary Zappallas, Inc. (US) offers divination content. Advertising revenue is the main earnings driver for the US divination content business.

Pre-FY04/16, the segment had been posting losses due to amortization of goodwill (USD1.6mn/year), but saw recovery as the company took measures such as revising its cost structure. In FY04/16, the segment posted a goodwill impairment loss of JPY772mn as an extraordinary loss, causing goodwill amortization to decrease. As a result, the segment has remained in the black since FY04/17.

Others segment (11.5% of FY04/21 sales, 6.2% of operating profit prior to adjustments and deductions)

This segment includes online shopping website management and new business development.

In FY04/15, about 70% of the segment’s sales were attributable to the Commerce business, but Zappallas worked to downsize the business as its strategy became concentrated on the Mobile Services segment. As of end April 2021, the commerce business comprised only of cuna select, an online specialty boutique for baby and children’s goods.

Main products

Noting users’ tendency to visit many different content sites, Zappallas has expanded the amount of content it offers. The company offers products and services mainly focused on the F1 and F2 demographics (women aged between 20 and 49).

Examples of content sites (as of June 2020)

Divination

Content	Category	Details
	Telephone/chat/email fortune-telling services, consulting	Customers choose a fortune teller and have a consultation over the phone or via chat or email. The rate is JPY200/minute for telephone divination and JPY2,000/message for e-mail divination. Telephone consultations provided by staff who are not divination experts start at JPY110/minute, while email consultations of this nature start from JPY6,000/message. Also available is a complaint listening service through which customers can speak with an unspecified member of the company’s staff for JPY60/minute.
	Chat-based fortune telling	An online fortune-telling parlor where users can easily consult with professional fortune tellers. Single sessions are ten minutes or longer.
	Fortune-telling marketplace	Through WORDS, fortune tellers can register and offer their varied services (chat-based fortune telling using tarot cards, telephone-based fortune telling concerning marriage prospects, etc.) free of charge. WORDS also allows customers to purchase and receive these services. The company provides fortune tellers with necessary customer data concerning Western and Four-Pillars astrology and also operates a payment service.

Media

Content	Category	Details
	Fortune-telling COLLECTION	Introduces carefully selected fortunes from “safe, reliable, and genuine” fortune-telling brand “cocoloni.” Free trial available for love-life readings and personality assessments from popular fortune tellers including Yukari Ishii, Tamako Suisho, and Ginza no Haha.
	Fortune-telling portal	A portal site for women with romance-related concerns.
	Fortune-telling news	Offers over 200 types of free fortune-telling services, overseen by more than 100 divination experts. Also features columns, personality quizzes, and psychological tests, renewed on a daily basis.

Profitability snapshot, financial ratios

Profit margins	FY04/12	FY04/13	FY04/14	FY04/15	FY04/16	FY04/17	FY04/18	FY04/19	FY04/20	FY04/21
(JPYmn)	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.
Gross profit	6,861	6,118	5,396	4,549	3,328	3,131	2,920	2,702	2,446	3,383
Gross profit margin	68.0%	68.8%	66.2%	60.0%	59.9%	64.6%	66.2%	64.8%	64.6%	70.6%
Operating profit	2,584	1,423	722	517	240	295	-696	-342	45	357
Operating profit margin	25.6%	16.0%	8.9%	6.8%	4.3%	6.1%	-	-	1.2%	7.4%
EBITDA	2,909	1,998	1,288	978	568	517	-479	-141	268	583
EBITDA margin	28.8%	22.5%	15.8%	12.9%	10.2%	10.7%	-10.9%	-3.4%	7.1%	12.2%
Net margin	15.7%	10.3%	4.6%	3.2%	-	2.8%	-	-	-	-
Financial ratios
ROA (RP-based)	28.5%	16.9%	7.5%	7.2%	1.7%	3.5%	-8.9%	-4.1%	0.0%	5.4%
ROE	21.1%	11.2%	4.5%	2.9%	-6.7%	1.7%	-11.7%	-5.3%	-3.5%	4.4%
Total asset turnover	1.11	0.91	0.81	0.75	0.60	0.57	0.56	0.58	0.55	0.69
Inventory turnover	89.3	52.9	29.0	20.0	22.4	156.4	87.2	50.8	70.7	43.5
Days in inventory	4.1	6.9	12.6	18.3	16.3	2.3	4.2	7.2	5.2	8.4
Working capital	1,786	1,471	1,295	1,025	612	593	467	333	318	405
Current ratio	537.7%	620.0%	581.9%	544.2%	1,154.2%	1,183.1%	1,497.1%	1,173.6%	1,797.1%	1,177.0%
Quick ratio	529.8%	595.1%	567.2%	523.0%	1,041.1%	1,171.5%	1,443.7%	1,144.8%	1,747.2%	1,149.8%
OCF / Current liabilities	1.03	1.23	1.16	0.89	0.33	1.02	-1.05	0.28	-0.01	1.48
OCF / Total liabilities	1.18	0.86	0.79	0.67	0.44	1.02	-1.14	0.24	-0.01	1.17
Cash conversion cycle (days)	39.3	42.8	40.5	40.6	39.8	28.7	26.5	20.9	15.1	7.6
Change in working capital	-185	-315	-175	-270	-413	-19	-126	-134	-15	88

Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.
Note: Gross profit excludes provision for sales returns.

Market and value chain

Market overview

Spread of smartphones

According to Media Teiten Chosa 2021 (Teiten Chosa: fixed point survey) released by Hakuhodo DY Media Partners Inc., smartphone ownership ratio in 2021 (in Tokyo) was 94.7%, an increase of approximately 500% over the ten years following 2011, when the ratio was 16.5%.

				2012	2013	2014	2015	FY2016	FY2017	2018	2019	2020	2021
Smartphone ownership ratio (Tokyo)				31.0%	45.0%	59.1%	69.2%	70.7%	77.5%	79.4%	82.2%	93.2%	94.7%
	YoY change			14.5%	14.0%	14.1%	10.1%	1.5%	6.8%	1.9%	2.8%	11.0%	1.5%

Size of mobile content-related market

The rapid spread of smartphones is driving significant change in the mobile content market. According to Mobile Contents Forum (a General Incorporated Association), the mobile content related market—comprising mobile content and commerce—in 2019 was JPY6.9tn (+11% YoY). As shown in the chart below, the feature phone content market is shrinking, while the smartphone content market continues to expand. (Source: 2019 Survey on the Structure of the Mobile Content Industry, Mobile Content Forum [July 2020])

Mobile content and mobile commerce market trends