LINE Earnings Watch

LINE Corporation reported Q42018 and full year earnings on January 31, 2019

LINE Corporation reported Q42018 and full year earnings on January 31, 2019. This was a great opportunity to not only hear the latest about the LINE Financial strategy, but also understand how much resources are being deployed to achieve that vision. But let us take a look at the financial highlights first.

Financial highlights

For the first time, LINE generated more than ¥200bn ($1.8bn) in revenue. LINE Pay surpasses ¥1trn ($9bn) in transaction volume, and is now accepted at more than 1 million merchants in Japan.

Annual results overview

While LINE is dominant in Japan, and was able to extend its position with a remarkable 7.7% increase in monthly active users (MAUs), it has lost significant market position in Indonesia, which caused the overall MAU to decline. Taiwan and Thailand have held steady. Across these four core markets, user engagement has increased by two percentage points as measured by the ratio of daily active users (DAUs) to MAUs.

LINE now splits out their reporting across two core segments, Ads, which currently makes up just over half of revenues, and Communication & Content, which represents one third of revenues. Communication & Content has been declining overall, despite significant growth rates in LINE Manga (44.4%) and LINE Music (80.8%), albeit from a low base. The Strategy Business segment includes LINE Pay, LINE Financial and Commerce & AI. We will all take a closer look at the first two.

LINE Pay segment reporting

As mentioned in the financial highlights, LINE Pay surpassed ¥1trn ($9bn) in transaction volume, more than doubling during the fiscal year. LINE also introduced bar code payments, its branded debit card through JCB and contactless payments via NFC (near field communications). LINE Pay is now the largest payment services provider in Taiwan, which generally leads to transaction spikes in the second and fourth quarter, due to seasonal insurance premium payments.

LINE Pay strategy

LINE Pay targets 10m MAUs during 2019, which implies a doubling of the current user base. There could possibly be a special situation related to the hike in consumption tax, whereby the government is considering point rewards for cashless payments (or other measures) to mitigate the impact on consumption and at the time time promote its “Cashless Vision” (see “Japan Cashless Promotion Council”). It is also noteworthy that LINE talks about Japan/Taiwan/Thailand cross-border cooperation, clearly deprioritizing Indonesia as a market.

LINE Financial segment reporting

LINE Financial, only created at the beginning of 2018, had a stellar year in shaping up their strategic vision, with a number of joint ventures established, and two actual products launched, namely LINE Smart Invest together with Folio, and LINE Insurance through Sompo Holdings (see “LINE Insurance launched in October”). The road map for 2019 and 2020 also seems fairly well defined (see also: “The LINE Financial ecosystem is taking shape”).

Pivoting the business from “Core” to “Strategic” does not come cheap. While revenues in the Strategic segment increased by 60% during fiscal 2018, operating losses almost doubled. However, in Q42018, the entire LINE business still sported a healthy 12.9% operating margin (excluding one-time items), and while total revenue increased by over 50%, operating expenses moved up by only 33%, demonstrating fiscal discipline. One would expect, however, that the preparatory companies created with Nomura and Mizuho to apply for securities brokerage and banking licenses respectively, as well as a similar process in Taiwan, will require significant outlay over the next 24–36 months.

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