and factory / 7035 COVERAGE INITIATED ON: 2019.04.12 LAST UPDATE: 2020.03.26 Shared Research Inc. has produced this report by request from the company discussed in the report. The aim is to provide an “owner’s manual” to investors. We at Shared Research Inc. make every effort to provide an accurate, objective, and neutral analysis. In order to highlight any biases, we clearly attribute our data and findings. We will always present opinions from company management as such. Our views are ours where stated. We do not try to convince or influence, only inform. We appreciate your suggestions and feedback. Write to us at [email protected] or find us on Bloomberg. Research Coverage Report by Shared Research Inc. and factory/7035 RCoverage LAST UPDATE: 2020.03.26 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp INDEX How to read a Shared Research report: This report begins with the trends and outlook section, which discusses the company’s most recent earnings. First-time readers should start at the business section later in the report. Executive summary ----------------------------------------------------------------------------------------------------------------------------------- 3 Key financial data ------------------------------------------------------------------------------------------------------------------------------------- 5 Recent updates ---------------------------------------------------------------------------------------------------------------------------------------- 6 Highlights ------------------------------------------------------------------------------------------------------------------------------------------------------------ 6 Trends and outlook ----------------------------------------------------------------------------------------------------------------------------------- 7 Quarterly trends and results ----------------------------------------------------------------------------------------------------------------------------------- 7 Q1 FY08/20 results ------------------------------------------------------------------------------------------------------------------------------------------------ 9 Business ------------------------------------------------------------------------------------------------------------------------------------------------ 15 Business description -------------------------------------------------------------------------------------------------------------------------------------------- 15 Segment overview and business model ----------------------------------------------------------------------------------------------------------------- 17 Smartphone Apps business (in FY08/19, 45.7% of sales, 74.3% of operating profit) ---------------------------------------------------- 17 IoT business (in FY08/19, 41.7% of sales and 22.8% of operating profit) -------------------------------------------------------------------- 24 Other businesses (8.4% of sales in FY08/19) ----------------------------------------------------------------------------------------------------------- 28 Market and value chain---------------------------------------------------------------------------------------------------------------------------- 29 E-book industry -------------------------------------------------------------------------------------------------------------------------------------------------- 29 Online game industry ------------------------------------------------------------------------------------------------------------------------------------------ 31 IoT industry -------------------------------------------------------------------------------------------------------------------------------------------------------- 32 Internet advertising market ---------------------------------------------------------------------------------------------------------------------------------- 33 Real estate industry --------------------------------------------------------------------------------------------------------------------------------------------- 35 Competitors ------------------------------------------------------------------------------------------------------------------------------------------------------- 36 Strengths and weaknesses ------------------------------------------------------------------------------------------------------------------------------------ 39 Historical results and financial statements -------------------------------------------------------------------------------------------------- 41 Income statement ----------------------------------------------------------------------------------------------------------------------------------------------- 41 Balance sheet ----------------------------------------------------------------------------------------------------------------------------------------------------- 43 Cash flow statement -------------------------------------------------------------------------------------------------------------------------------------------- 44 Historical performance ---------------------------------------------------------------------------------------------------------------------------------------- 45 Full-year FY08/19 results -------------------------------------------------------------------------------------------------------------------------------------- 45 Q3 FY08/19 results ---------------------------------------------------------------------------------------------------------------------------------------------- 46 1H FY08/19 results ---------------------------------------------------------------------------------------------------------------------------------------------- 48 Q1 FY08/19 results ---------------------------------------------------------------------------------------------------------------------------------------------- 49 Other information ---------------------------------------------------------------------------------------------------------------------------------- 51 Mission -------------------------------------------------------------------------------------------------------------------------------------------------------------- 51 News and topics ------------------------------------------------------------------------------------------------------------------------------------------------- 52 Corporate governance and top management --------------------------------------------------------------------------------------------------------- 56 Dividend policy -------------------------------------------------------------------------------------------------------------------------------------------------- 57 Major shareholders --------------------------------------------------------------------------------------------------------------------------------------------- 57 Employees --------------------------------------------------------------------------------------------------------------------------------------------------------- 58 Profile ---------------------------------------------------------------------------------------------------------------------------------------------------------------- 59 02/60 and factory/7035 RCoverage LAST UPDATE: 2020.03.26 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp Executive summary Business overview ◤ A startup company with businesses in two areas, smartphone apps and IoT. Established in September 2014, and factory has already achieved a significant level of growth and profitability. In FY08/19, sales were JPY3.9bn, operating profit was JPY512mn, and the operating profit margin was 13.1%. CAGR for sales in the four years through FY08/19 was 143%. The company moved into the black on an operating basis in the second year after its establishment, and CAGR for operating profit was 145% in the three years through FY08/19. The company listed on the Mothers market of the Tokyo Stock Exchange in the fourth year after its establishment. ◤ As of August 31, 2019, in the Smartphone Apps business (in FY08/19, 45.7% of sales and 75.5% of operating profit) the company developed and offered entertainment-oriented apps, such as manga apps and gamer-forum apps (online message boards for players of social media games). The company has developed free-to-use manga apps with Square Enix and large publishers such as Hakusensha, Shueisha, and Shogakukan. and factory develops gamer-forum apps mostly in house. In manga apps, the company obtains revenue by charging e-comic download fees (rental fees). These apps also draw advertising revenue based on the number of clicks made on banner ads placed through ad networks. Gamer-forum apps also take in advertising revenue (affiliate revenues and revenue from clicks on ad network-based banner ads). Monthly active users (MAUs) in Q1 FY08/20 numbered approximately 6.68mn, mainly young people. (In manga apps, the company has roughly 6.41mn MAUs, ranking it first in the industry despite its late entry. In gamer-forum apps, MAUs number around 270,000). Average revenue per user, or ARPU, after revenue sharing is approximately JPY29 for manga apps and JPY78 for gamer-forum apps. ◤ In the IoT business (in FY08/19, 52.5% of sales and 24.5% of operating profit), the company plans, develops, and operates the &AND HOSTEL brand of smart hostels, where visitors can experience services made possible by IoT. In this segment, the company also provides IoT solutions for lodging facilities, including innto (a property management system) and tabii (a tablet-based service). &AND HOSTEL (11 locations planned as