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
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
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
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.
Note: Figures may differ from company materials due to differences in rounding methods.
Note: Figures may differ from company materials due to differences in rounding methods.
Note: Gross profit figures were calculated by Shared Research on the basis of the company’s GPM data.
Consolidated results for cumulative Q3 FY04/22
*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.
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 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.
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
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
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
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.
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.
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%.
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.
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.
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.
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.
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.
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)
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.
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
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%.
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])