Zappallas 3770

ザッパラス

Recent Updates

2022-03-30

Q3 FY04/22 report update

2022-03-10

Q3 FY04/22 flash update

2021-12-28

1H FY04/22 report update

Get in touch

Portal Point Harajuku Annex 3F, 3-51-7 Sendagaya, Shibuya-ku Tokyo, Japan 151-0051

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

2022-03-30

Q3 FY04/22 flash update

2022-03-10

1H FY 04/22 flash update

2021-12-09

Q1 FY04/22 flash update

2021-09-10

Full-year FY04/21 flash update

2021-06-15

Download

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

FY04/21 results: For FY04/21, the company reported consolidated sales of JPY4.8bn (+26.5% YoY), operating profit of JPY357mn (+698.0% YoY), recurring profit of JPY376mn (versus JPY2mn in FY04/20), and net income of JPY286mn (versus loss of JPY227mn in FY04/20).

FY04/22 forecast: Having revised its previous forecast for FY04/22 in December 2021, the company is currently projecting full-year consolidated sales of JPY4.9bn (+2.3% YoY) and operating profit of JPY180mn (-49.5% YoY)—leaving its sales estimate the same while cutting its operating profit estimate by JPY70mn. By way of explanation, the company said increases in advertising/promotional spending in support of the ongoing expansion of its divination-related services business is expected to go over budget, largely due to spending in connection with joint program production ventures with terrestrial TV channels. While top-line revenues at its divination-related services business are showing solid growth, the company now expects operating profit to finish the year down as a result of additional spending on the advertising, promotion, and new service development it needs to sustain growth over 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	180
	YoY	-15.9%	-44.9%	-49.2%	-28.4%	-53.6%	22.9%	-	-	-	698.0%	-49.5%
	Operating profit margin	25.6%	16.0%	8.9%	6.8%	4.3%	6.1%	-	-	-	-	3.7%
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.

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	2,359	3,616		73.8%	4,900
	YoY	14.7%	18.7%	20.4%	26.5%	17.9%	12.5%	6.4%			2.3%
Gross profit		725	1,484	2,412	3,383	854	1,658	2,529
	YoY	23.3%	28.2%	31.9%	38.3%	17.8%	11.8%	4.9%
	Gross profit margin	71.4%	70.7%	71.0%	70.6%	71.4%	70.3%	69.9%
SG&A expenses		680	1,397	2,239	3,026	737	1,479	2,352
	YoY	9.1%	17.1%	22.9%	26.0%	8.4%	5.9%	5.1%
	SG&A ratio	67.0%	66.6%	65.9%	63.2%	61.6%	62.7%	65.1%
Operating profit		45	86	173	357	117	179	176		98.0%	180
	YoY	-	-	-	698.0%	159.8%	107.0%	1.9%			-49.5%
	Operating profit margin	4.4%	4.1%	5.1%	7.4%	9.8%	7.6%	4.9%			3.7%
Recurring profit		21	67	153	376	122	218	228
	YoY	-	-	-	-	468.2%	227.4%	49.1%
	Recurring profit margin	2.1%	3.2%	4.5%	7.8%	10.2%	9.2%	6.3%
Net income		3	34	97	286	88	150	135
	YoY	-	-	-	-	-	336.5%	38.8%
	Net margin	0.3%	1.6%	2.9%	6.0%	7.3%	6.4%	3.7%
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	1,162	1,257
	YoY	14.7%	22.8%	23.3%	44.0%	17.9%	7.4%	-3.3%
Gross profit		725	758	928	971	854	804	871
	YoY	23.3%	33.2%	38.3%	57.4%	17.8%	6.0%	-6.2%
	Gross profit margin	71.4%	70.1%	71.4%	69.6%	71.4%	69.2%	69.3%
SG&A expenses		680	717	841	788	737	742	873
	YoY	9.1%	25.9%	33.9%	35.8%	8.4%	3.5%	3.8%
	SG&A ratio	67.0%	66.3%	64.7%	56.5%	61.6%	63.9%	69.5%
Operating profit		45	41	87	183	117	62	-2
	YoY	-	-	102.3%	392.9%	159.8%	49.5%	-
	Operating profit margin	4.4%	3.8%	6.7%	13.1%	9.8%	5.3%	-
Recurring profit		21	45	86	223	122	96	10
	YoY	-	488.4%	79.0%	-	468.2%	113.2%	-88.5%
	Recurring profit margin	2.1%	4.2%	6.6%	16.0%	10.2%	8.3%	0.8%
Net income		3	31	63	189	88	62	-15
	YoY	-	-	-	478.5%	-	101.3%	-
	Net margin	0.3%	2.9%	4.8%	13.5%	7.3%	5.4%	-

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	2,359	3,616
	YoY	14.7%	18.7%	20.4%	26.5%	17.9%	12.5%	6.4%
Cost of sales		290	614	985	1,409	343	701	1,087
	YoY	-2.3%	0.8%	-0.6%	4.9%	18.2%	14.2%	10.3%
	Cost ratio	28.6%	29.3%	29.0%	29.4%	28.6%	29.7%	30.1%
	Labor costs	72	153	232	323	86	176	264
	Royalties	80	179	307	437	122	242	368
	Outsourcing costs	35	66	108	145	42	82	133
	Merchandise costs	66	136	222	347	62	130	218
	Other costs	62	126	189	253	63	126	188
	Transfer to other accounts	-25	-46	-71	-94	-31	-54	-83
Gross profit		725	1,484	2,412	3,383	854	1,658	2,529
	YoY	23.3%	28.2%	31.9%	38.3%	17.8%	11.8%	4.9%
	Gross profit margin	71.4%	70.7%	71.0%	70.6%	71.4%	70.3%	69.9%
SG&A expenses		680	1,397	2,239	3,026	737	1,479	2,352
	YoY	9.1%	17.1%	22.9%	26.0%	8.4%	5.9%	5.1%
	SG&A ratio	67.0%	66.6%	65.9%	63.2%	61.6%	62.7%	65.1%
	Personnel expenses	168	333	503	682	177	353	539
	Advertising expenses	195	411	711	966	221	455	773
	Collection agency fees	131	274	449	619	163	316	489
	Amortization of goodwill	31	62	92	123	31	62	94
	Other costs	155	317	483	636	145	292	456
Operating profit		45	86	173	357	117	179	176
	YoY	-	-	-	698.0%	159.8%	107.0%	1.9%
	Operating profit margin	4.4%	4.1%	5.1%	7.4%	9.8%	7.6%	4.9%
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	1,162	1,257
	YoY	14.7%	22.8%	23.3%	44.0%	17.9%	7.4%	-3.3%
Cost of sales		290	324	371	424	343	358	386
	YoY	-2.3%	3.7%	-2.9%	20.7%	18.2%	10.6%	3.9%
	Cost ratio	28.6%	29.9%	28.6%	30.4%	28.6%	30.8%	30.7%
	Labor costs	72	81	79	91	86	90	88
	Royalties	80	99	128	130	122	120	126
	Outsourcing costs	35	31	42	37	42	40	51
	Merchandise costs	66	70	86	125	62	68	88
	Other costs	62	64	63	64	63	63	62
	Transfer to other accounts	-25	-21	-25	-23	-31	-23	-29
Gross profit		725	758	928	971	854	804	871
	YoY	23.3%	33.2%	38.3%	57.4%	17.8%	6.0%	-6.2%
	Gross profit margin	71.4%	70.1%	71.4%	69.6%	71.4%	69.2%	69.3%
SG&A expenses		680	717	841	788	737	742	873
	YoY	9.1%	25.9%	33.9%	35.8%	8.4%	3.5%	3.8%
	SG&A ratio	67.0%	66.3%	64.7%	56.5%	61.6%	63.9%	69.5%
	Personnel expenses	168	165	170	179	177	176	186
	Advertising expenses	195	216	300	255	221	234	318
	Collection agency fees	131	143	175	170	163	153	173
	Amortization of goodwill	31	31	30	31	31	31	32
	Other costs	155	162	166	153	145	147	164
Operating profit		45	41	87	183	117	62	-2
	YoY	-	-	102.3%	392.9%	159.8%	49.5%	-
	Operating profit margin	4.4%	3.8%	6.7%	13.1%	9.8%	5.3%	-

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	2,359	3,616
	YoY		14.7%	18.7%	20.4%	26.5%	17.9%	12.5%	6.4%
	Mobile services		805	1,669	2,715	3,781	1,003	1,976	2,987
		YoY	19.6%	27.4%	34.5%	41.5%	24.6%	18.4%	10.0%
	Overseas		114	232	344	461	120	216	323
		YoY	14.0%	14.4%	6.0%	6.2%	5.3%	-7.0%	-6.0%
	Other		95	193	335	550	74	166	304
		YoY	-14.4%	-23.1%	-29.5%	-19.5%	-22.5%	-14.2%	-9.4%
Operating profit			45	86	173	357	117	179	176
	YoY		-	-	-	698.0%	159.8%	107.0%	1.9%
	Mobile services		135	262	429	688	226	439	511
		YoY	48.0%	24.1%	24.7%	51.5%	67.4%	67.4%	19.1%
	Overseas		20	47	66	83	19	16	22
		YoY	764.7%	316.3%	77.1%	91.3%	-4.4%	-65.0%	-66.2%
	Other		1	7	23	51	-19	-54	-13
		YoY	-	-	-	-	-	-	-
	Adjustments		-111	-229	-345	-466	-109	-222	-344
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	1,162	1,257
	YoY		14.7%	22.8%	23.3%	44.0%	17.9%	7.4%	-3.3%
	Mobile services		805	864	1,045	1,065	1,003	973	1,011
		YoY	19.6%	35.7%	47.6%	63.3%	24.6%	12.6%	-3.3%
	Overseas		114	118	111	115	120	96	107
		YoY	14.0%	14.9%	-8.0%	6.5%	5.3%	-18.9%	-3.9%
	Other		95	98	142	213	73	92	138
		YoY	-14.4%	-30.0%	-36.6%	2.9%	-23.2%	-6.1%	-2.8%
Operating profit			45	41	87	183	117	62	-2
	YoY		-	-	102.3%	392.9%	159.8%	49.5%	-
	Mobile services		135	127	167	259	226	213	72
		YoY	48.0%	5.9%	25.7%	135.2%	67.4%	67.3%	-56.9%
	Overseas		20	27	19	18	19	-3	6
		YoY	764.7%	201.1%	-26.4%	172.4%	-4.4%	-	-69.1%
	Other		1	6	16	29	-19	-36	41
		YoY	-	-	-	25.7%	-	-	154.9%
	Adjustments		-111	-118	-116	-121	-109	-112	-122

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	1,976	2,987
	YoY		19.6%	27.4%	34.5%	41.5%	24.6%	18.4%	10.0%
Cost of sales			213	461	735	1,017	275	547	835
	YoY		12.4%	22.6%	27.3%	32.1%	28.9%	18.6%	13.6%
	Cost ratio		26.5%	27.6%	27.1%	26.9%	27.4%	27.7%	28.0%
	Labor costs		52	113	172	239	62	125	193
		YoY	4.0%	8.7%	13.9%	17.2%	19.2%	10.6%	12.2%
	Royalties		77	172	296	422	117	233	355
		YoY	18.5%	35.4%	53.4%	65.5%	51.9%	35.5%	19.9%
	Outsourcing costs		26	51	83	107	31	61	101
		YoY	-10.3%	-7.3%	2.5%	1.9%	19.2%	19.6%	21.7%
	Other		56	121	178	239	64	125	186
		YoY	27.3%	40.7%	21.9%	22.6%	14.3%	3.3%	4.5%
Gross profit			592	1,208	1,979	2,764	728	1,429	2,152
	YoY		22.4%	29.4%	37.4%	45.3%	23.1%	18.3%	8.7%
	Gross profit margin		73.5%	72.4%	72.9%	73.1%	72.6%	72.3%	72.0%
SG&A expenses			457	946	1,550	2,076	502	990	1,638
	YoY		16.5%	30.9%	41.4%	43.4%	10.0%	4.7%	5.7%
	SG&A ratio		56.7%	56.7%	57.1%	54.9%	50.1%	50.1%	54.8%
	Personnel expenses		67	132	200	269	70	137	222
		YoY	-26.4%	-18.0%	-12.3%	-9.4%	4.5%	3.8%	11.0%
	Advertising expenses		177	376	652	873	201	404	712
		YoY	35.1%	60.0%	85.2%	101.2%	13.6%	7.4%	9.2%
	Collection agency fees		136	284	466	642	169	328	508
		YoY	44.7%	59.6%	54.8%	56.6%	24.3%	15.5%	9.0%
	Other		75	150	226	285	60	121	196
		YoY	0.0%	3.4%	7.1%	-5.3%	-20.0%	-19.3%	-13.3%
Operating profit			135	262	429	688	226	439	511
	YoY		48.0%	24.1%	24.7%	51.5%	67.4%	67.4%	19.0%
	Operating profit margin		16.8%	15.7%	15.8%	18.2%	22.5%	22.2%	17.1%
Earnings			FY04/21				FY04/22
Quarterly (JPYmn)			Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4
Sales			805	864	1,045	1,065	1,003	973	1,011
	YoY		19.6%	35.7%	47.6%	63.3%	24.6%	12.6%	-3.3%
Cost of sales			213	248	274	280	275	272	288
	YoY		12.4%	32.9%	36.2%	47.1%	28.9%	9.8%	5.0%
	Cost ratio		26.5%	28.7%	26.2%	26.3%	27.4%	28.0%	28.5%
	Labor costs		52	61	59	67	62	63	68
		YoY	4.0%	13.0%	25.5%	26.4%	19.2%	3.3%	15.3%
	Royalties		77	95	124	126	117	116	122
		YoY	18.5%	53.2%	87.9%	103.2%	51.9%	22.1%	-1.6%
	Outsourcing costs		26	25	32	24	31	30	40
		YoY	-10.3%	-3.8%	23.1%	0.0%	19.2%	20.0%	25.0%
	Other		56	65	57	61	64	61	61
		YoY	27.3%	54.8%	-5.0%	24.5%	14.3%	-6.2%	7.0%
Gross profit			592	616	771	785	728	701	723
	YoY		22.4%	36.8%	52.2%	70.0%	23.1%	13.7%	-6.2%
	Gross profit margin		73.5%	71.3%	73.8%	73.7%	72.6%	72.0%	71.5%
SG&A expenses			457	489	604	526	502	488	648
	YoY		16.5%	48.0%	61.6%	49.6%	10.0%	-0.2%	7.1%
	SG&A ratio		56.7%	56.6%	57.8%	49.4%	50.1%	50.2%	64.0%
	Personnel expenses		67	65	68	69	70	67	85
		YoY	-26.4%	-7.1%	1.5%	0.0%	4.5%	3.1%	25.0%
	Advertising expenses		177	199	276	221	201	203	308
		YoY	35.1%	91.3%	135.9%	169.5%	13.6%	2.0%	11.6%
	Collection agency fees		136	148	182	176	169	159	180
		YoY	44.7%	76.2%	48.0%	61.5%	24.3%	7.4%	-1.1%
	Other		75	75	76	59	60	61	75
		YoY	0.0%	7.1%	15.2%	-34.4%	-20.0%	-18.7%	-1.3%
Operating profit			135	127	167	259	226	213	72
	YoY		48.0%	5.9%	25.7%	135.2%	67.4%	67.3%	-56.9%
	Operating profit margin		16.8%	14.7%	16.0%	24.3%	22.5%	21.8%	7.1%

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	1,979	2,926
	YoY	16.1%	16.0%	8.6%	8.7%	3.7%	-9.2%	-10.0%
Operating profit		369	807	1,175	1,526	358	519	755
	YoY	79.1%	70.6%	32.0%	35.0%	-3.0%	-35.7%	-35.7%
	Operating profit margin	34.8%	37.0%	36.2%	35.2%	32.5%	26.2%	25.8%
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	879	947
	YoY	16.1%	16.0%	-3.9%	9.1%	3.7%	-21.4%	-11.6%
Operating profit		369	438	368	351	358	161	236
	YoY	79.1%	64.0%	-11.8%	46.3%	-3.0%	-63.2%	-35.9%
	Operating profit margin	34.8%	39.2%	34.4%	32.2%	32.5%	18.3%	24.9%

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

Consolidated results for cumulative Q3 FY04/22

Sales: JPY3.6bn (+6.4% YoY)
Operating profit: JPY176mn (+1.9% YoY)
Recurring profit: JPY228mn (+49.1% YoY)
Net income*: JPY135mn (+38.8% YoY)
*Net income/loss attributable to owners of the parent

YoY comparison

The primary driver of top-line growth during the period was the Mobile Services segment. Sales of divination-related services rose, primarily by content curated by divination experts with high media exposure.

Gross profit rose 4.9% YoY to JPY2.5bn on higher sales. The gross profit margin declined 1.1pp YoY to 69.9%. GPM declined on increased spending on joint program production ventures with terrestrial TV channels (discussed later) and new service development, pushing up labor and outsourcing expenses.

Despite increased SG&A expenses, profit from the operating profit line down grew YoY on the back of higher gross profit. SG&A expenses were up 5.1% YoY to JPY2.4bn, on increased advertising spending related to production of TV programs and increased collection agency fees accompanying the rise in sales.

At the recurring profit level, the rise was largely due to the booking of a foreign exchange-related gain of JPY51mn (versus a year-earlier loss of JPY27mn); booked as non-operating income, this brought the recurring profit margin in well above the operating profit margin. Bolstered by the jump in recurring profit, net income was also up despite JPY6mn extraordinary loss booked in connection with the relocation/downsizing of the company's head office building in February 2022. The company said that headquarters rent following relocation would be roughly one third of its previous levels and help lower costs from Q4 FY04/22.

Starting the current fiscal year, the company is using the new accounting standards for revenue recognition (ASBJ Statement No. 29). Compared with calculations under the previous accounting standard, the change resulted in JPY1mn reduction in reported sales and JPY2mn reduction in operating profit, recurring profit, and net income respectively, versus the same nine-month the previous year.

Progress versus company forecast

The company revised its FY04/22 forecast in December 2021. It left its sales forecast intact, but reduced its operating profit forecast by JPY70mn. The company said advertising and promotional expenses would exceed earlier forecasts as it stepped up joint program production ventures with terrestrial TV channels in a bid to broaden its customer base in divination-related services.

Progress in cumulative Q3 versus the full-year FY04/22 forecast was 73.8% for sales (70.9% of full-year FY04/21 results in cumulative Q3 FY04/21) and 98.0% for operating profit (48.6%). Operating profit progress in Q3 FY04/22 exceeded that in Q3 FY04/21.
The company has been engaged in joint TV program production since October 2021, and said margins would be lower from Q3 FY04/22 onward.

Company initiatives

While maintaining its work-from-home arrangements to prevent new coronavirus infections, during the nine-month period, the company continued working to expand its businesses with the help of additional promotional measures. For example, at its divination-related services business, the company used co-production of programs shown on terrestrial TV channels, special online divination events, and other means to help raise the profile of group company Luck Out, Inc.
In cumulative Q3, the company was engaged in joint production of the TV programs Uranai Megane and Dokomade Itte Iidesuka.

Divination show Uranai Megane, jointly produced with TBS Television, was first broadcast in October 2021. In this show, one of the fortunetellers from group company Luck Out appears and tells the fortune of a female guest. It is broadcast locally in the Kanto region late-night Saturdays from 1:28 a.m. to 1:58 a.m.

Dokomade Itte Iidesuka is a divination-themed reality TV show with production partner TV Tokyo (regular broadcasts began in January 2022). In this show, four of the fortunetellers from Luck Out appear and tell guests’ fortunes. It is broadcast nationwide late on Fridays from 1:23 a.m. to 1:53 a.m.

The long shadow of the coronavirus 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: JPY3.0bn (+10.0% YoY)
Operating profit: JPY511mn (+19.0% YoY)

Sales rose YoY. On the profit front, gross profit grew YoY despite higher cost of sales, rising 13.6% YoY to JPY835mn and decline in gross profit margin by 0.9pp YoY to 72.0% thanks to the solid top-line growth. The larger rise at operating profit level was attributed to muted growth in SG&A spending due to higher gross profit.

Reasons for increase in cost of sales and SG&A expenses are shown below.

Cost of sales rose JPY102mn YoY to JPY1.1bn. Royalty payments were up JPY61mn YoY, labor costs were up JPY32mn YoY, and outsourcing expenses were up JPY25mn YoY. Royalties (content use fees paid to external contractors and divination fees) increased in line with sales. Labor and outsourcing costs rose due to TV program production and the development of new services. Product and other expenses declined.

SG&A expenses rose JPY114mn YoY to JPY2.4bn. Advertising and promotion expenses were up JPY62mn YoY, collection agency fees were up JPY40mn YoY, and personnel expenses were up JPY36mn YoY. Collection agency fees increased with sales. Advertising and promotion as well as personnel expenses rose due to TV program production. Increased headcount to develop new services also pushed up personnel expenses.

Collection agency fees: In addition to company-managed divination websites, the company provides divination services through platforms such as the official websites of mobile phone carriers and internet service providers. The mobile phone carriers and internet service providers collect usage fees from customers and pays the company. Based on agreed upon commission rates, the company pays the mobile phone carriers and internet service providers a collection agency fee.

For the three-month period of Q3 (November 2021–January 2022), the segment reports sales of JPY1.3bn (-3.3% YoY) and operating profit of JPY72mn (-56.9% YoY). Starting in Q1 FY04/21, content provided by fortunetellers with high media exposure performed well, for an uptrend in quarterly sales, but sales turned down in Q3 FY04/22. While sales declined, expenses such as TV program production increased, resulting in a double-digit YoY decline in operating profit.

Overseas segment

Sales: JPY323mn (-6.0% YoY)
Operating profit: JPY22mn (-66.2% YoY)

In cumulative Q3, sales declined YoY due to the loss of orders from major customers.

On a quarterly basis, sales were JPY120mn (-5.3% YoY) in Q1, JPY96mn (-18.9% YoY) in Q2, and JPY107mn (-3.9% YoY) in Q3. Sales fell at a double-digit pace in Q2 due to the loss of orders from major customers, but the decline narrowed in Q3 as the company acquired new customers.

On a local currency basis, segment sales were USD2.9mn (-10.0% YoY) and operating profit before amortization of goodwill was USD755,000 (-35.7% YoY).

Others segment

Sales: JPY304mn (-9.4% YoY)
Operating loss: JPY13mn (operating profit of JPY23mn in Q3 FY04/21)

In the Others segment, the company operates online shopping site "cuna select," provides a corporate ASP service (software and software operating environments over the internet), and operates Luck Out, a specialist fortuneteller production company. In cumulative Q3, "cuna select" accounted for over half of segment sales.

Sales declined YoY due to lower sales at "cuna select," which sells baby products online. Cumulative Q3 FY04/21 featured stay-at-home demand, but a similar demand boost was absent in Q3 FY04/22.

Full-year company forecast

Company forecasts		FY04/21			FY04/22
(JPYmn)		1H Act.	2H Act.	FY Act.	1H Act.	2H Est.	FY Est.
Sales		2,097	2,695	4,792	2,359	2,541	4,900
	YoY	18.7%	33.3%	26.5%	12.5%	-5.7%	2.3%
Cost of sales		614	795	1,409	701
Gross profit		1,484	1,899	3,383	1,658
	YoY	28.1%	47.5%	38.3%	11.8%
	Gross profit margin	70.7%	70.5%	70.6%	70.3%
SG&A expenses		1,397	1,629	3,026	1,479
	SG&A ratio	66.6%	60.5%	63.2%	62.7%
Operating profit		86	270	357	179	1	180
	YoY	-	239.2%	698.0%	107.0%	-99.5%	-49.5%
	Operating profit margin	4.1%	10.0%	7.4%	7.6%	0.0%	3.7%
Recurring profit		67	310	376	218
	YoY	-	394.6%	23,512.6%	227.4%
	Recurring profit margin	3.2%	11.5%	7.8%	9.2%
Net income		34	252	286	150
	YoY	-	-	-	336.5%

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

Having revised its full-year forecast for FY04/22 in December 2021, the company is currently projecting full-year consolidated sales of JPY4.9bn (+2.3% YoY) and operating profit of JPY180mn (-49.5% YoY).

The company left its estimate for full-year sales estimate unchanged but cut its operating profit estimate by JPY70mn. By way of explanation, the company said increases in advertising/promotional spending in support of the ongoing expansion of its divination-related services business is expected to go over budget, largely due to spending in connection with joint program production ventures with terrestrial TV channels.

While top-line revenues at its divination-related services business are still showing solid growth, the company now expects operating profit to finish the year down as a result of additional spending on the advertising, promotion, and new service development that it needs to sustain growth over the medium to long term.

Company initiatives being implemented during FY04/22

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 divination 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