F-1 1 d728446df1.htm FORM F-1 Form F-1
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As filed with the Securities and Exchange Commission on June 10, 2016

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM F-1

REGISTRATION STATEMENT UNDER

THE SECURITIES ACT OF 1933

 

 

LINE Kabushiki Kaisha

(Exact name of Registrant as specified in its charter)

LINE Corporation

(Translation of Registrant’s name into English)

 

Japan   7370   Not Applicable

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

Shibuya Hikarie, 27th Floor

21-1 Shibuya 2-chome

Shibuya-ku, Tokyo 150-8510, Japan

+81-3-5155-1008

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

LINE Euro-Americas Corporation

5750 Wilshire Boulevard #640

Los Angeles, CA 90036

+1-323-591-0380

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Jinduk Han, Esq.

Cleary Gottlieb Steen &

Hamilton LLP

19F Ferrum Tower

19 Eulji-ro 5-gil

Jung-gu, Seoul 04539, Korea

+82-2-6353-8020

 

Craig B. Brod, Esq.

Jeffrey D. Karpf, Esq.

Cleary Gottlieb Steen &

Hamilton LLP

One Liberty Plaza

New York, NY 10006

+1-212-225-2000

 

Alan Cannon, Esq.

David Sneider, Esq.

Simpson Thacher & Bartlett LLP

Ark Hills Sengokuyama Mori

Tower, 41st Floor

9-10, Roppongi 1-chome

Minato-ku, Tokyo 106-0032

Japan

+81-3-5562-6200

 

Youngjin Sohn, Esq.

Simpson Thacher & Bartlett LLP

25th Floor, West Tower

Mirae Asset Center 1 Building

26 Eulji-ro 5-gil

Jung-gu, Seoul 04539, Korea

+82-2-6030-3800

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

 

CALCULATION OF REGISTRATION FEE

 

     

Title of each class of

securities to be registered

  

Proposed maximum aggregate

offering price (3)

   Amount of registration fee

Common stock, no par value (1)(2)

   US$708,400,000    US$71,336

 

(1) Includes (i) shares of our common stock that a certain representative of the underwriters has the option to purchase to cover over-allotments as well as shares a certain representative of the underwriters may borrow from NAVER Corporation to facilitate settlement during the over-allotment period, if any, and (ii) all shares of our common stock initially offered or sold outside the United States that are thereafter sold or resold in the United States. Offers or sales of our shares or American depositary shares outside the United States are being made pursuant to Regulation S under the Securities Act of 1933, as amended, and are not covered by this registration statement.
(2) American depositary shares issuable upon deposit of shares of our common stock registered hereby will be registered under a separate registration statement on Form F-6. Each American depositary share will represent all or a specified portion of a share of our common stock.
(3) Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended.

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell and it is not soliciting an offer to purchase these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION

PRELIMINARY PROSPECTUS DATED JUNE 10, 2016

PROSPECTUS

 

LOGO

LINE Corporation

35,000,000 Shares of Common Stock

in the form of Shares or American Depositary Shares

 

 

In our initial public offering, we are offering              shares of our common stock in the form of shares or American depositary shares (“ADSs”) in the United States and elsewhere outside Japan. We refer to this offering as the international offering in this prospectus. Each ADS represents one share of our common stock. Concurrently with the international offering, we are offering              shares of our common stock in Japan. We refer to this offering as the Japanese offering in this prospectus. These offerings are collectively referred to in this prospectus as the global offering. We have granted to Morgan Stanley & Co. LLC, as representative of the international underwriters, and to Nomura Securities Co., Ltd., as representative of the Japanese underwriters, the options, in the aggregate, to purchase up to an additional 5,250,000 shares of our common stock, in each case solely to cover over-allotments.

The reference price per share we have included in our Japanese registration statement is ¥2,800, equivalent to approximately $26.30 per ADS. Based on such amounts, we estimate that the initial public offering price of the ADSs will be between $25 and $28 and the initial public offering price of the shares will be between ¥2,660 and ¥2,980.

Prior to the global offering, there has been no public market for shares of our common stock or ADSs. We have received approval to list and trade shares of our common stock on the Tokyo Stock Exchange under the securities identification code “3938.” We will apply for listing of our ADSs on the New York Stock Exchange under the symbol “LN.”

Investing in our shares of common stock or ADSs involves risks which are described in “Risk Factors” beginning on page 19 of this prospectus.

 

 

 

         Per ADS              Total              Per Share            Total    

Public offering price

   $                               $                               ¥                               ¥                           

Underwriting discounts and commissions(1)

   $         $         ¥         ¥     

Proceeds, before expenses, to us

   $         $         ¥         ¥     

 

  (1) For a description of compensation payable to the underwriters, see “Underwriting.”

The figures in the U.S. dollar “Total” column above assume that all shares in the global offering are sold in the form of ADSs, while those in the Japanese yen “Total” column assume that no shares in the global offering are sold in the form of ADSs.

Neither the U.S. Securities and Exchange Commission (the “SEC”) nor any state securities commission or any other regulatory body has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver shares of our common stock to purchasers in Tokyo through the central clearing system in Japan, known as the Japan Securities Depository Center, Inc. (“JASDEC”), on or around July    , 2016, Tokyo time. The underwriters expect to deliver the ADSs to purchasers in New York through the facilities of The Depository Trust Company on or around July    , 2016, New York time.

 

 

Joint Global Coordinators

 

Morgan Stanley     Nomura

Goldman Sachs Japan Co., Ltd.

  J.P. Morgan

Joint Lead Managers and Bookrunners

 

Morgan Stanley    Goldman, Sachs & Co.    J.P. Morgan    Nomura
        

 

 

The date of this prospectus is             , 2016


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Table of Contents

 

Prospectus Summary

     1   

Conventions Used in This Prospectus

     18   

Risk Factors

     19   

Forward-Looking Statements

     50   

Industry Data and User Metrics

     52   

Use of Proceeds

     53   

Dividend Policy

     54   

Capitalization

     55   

Dilution

     56   

Exchange Rates

     58   

Unaudited Pro Forma Financial Information

     59   

Selected Historical Financial and Operating Data

     64   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     69   

Business

     119   

Regulation

     149   

Management

     152   

Principal Shareholder

     161   

Certain Relationships and Related Party Transactions

     162   

Description of Capital Stock

     164   

Description of American Depositary Shares

     174   

Shares and ADSs Eligible for Future Sale

     183   

Japanese Foreign Exchange Controls and Securities Regulations

     185   

Taxation

     188   

Underwriting

     195   

Expenses Relating to This Offering

     206   

Enforceability of Civil Liabilities

     207   

Where You Can Find Additional Information

     208   

Legal Matters

     209   

Experts

     209   

Change In Accountants

     209   

Index to Financial Statements

     F-1   

 

 

You should rely only on the information contained in this prospectus or in any related free writing prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus or in any related free writing prospectus. We are offering to sell, and seeking offers to buy, shares of our common stock and ADSs only in jurisdictions where such offers and sales are permitted. The information contained in this prospectus is current only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of shares of our common stock or ADSs.

Until             , 2016 (25 days after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

Each prospective purchaser who places an order for shares or ADSs offered in the international offering consents to the disclosure by the underwriters to us of the prospective purchaser’s identity, the details of such order and the actual amount purchased, if any.


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PROSPECTUS SUMMARY

Our Mission and Vision

Our mission is “Closing the Distance” by bringing people closer to each other as well as to a wide variety of information and services.

Our vision is to become the “smart portal” through which users can access the people, information, services, companies and brands that they choose, from anywhere they are and anytime they need to.

Overview

We are a leading global platform for mobile messaging and communication services, content distribution and advertising. Our mobile messaging application, which is the foundation of our LINE platform and operates on all major mobile operating systems, enables our users to communicate through free instant messaging and voice and video calls and serves as a smart portal to our other applications and services. We provide users with access to a wide range of social and interactive content and services that satisfy our users’ individual needs for access to information and entertainment such as mobile games and music through our “content platform,” as well as online-to-offline (“O2O”) services such as payment services and job posting, restaurant reservation and taxi booking services through our “life platform.” We believe that the integration on our LINE platform of content and services offers our users a convenient way to connect and have fun with their family and friends, explore and share their interests and satisfy their daily needs with greater ease, which we believe enriches the user experience and ultimately contributes to higher user loyalty.

Since the introduction of our mobile messaging application in Japan in June 2011, LINE has grown into a global platform with users in more than 230 countries and a strong user base in Asia. Our active user base has grown to 218 million monthly active users (“MAUs”) globally in March 2016, with 152 million MAUs located in our four largest markets of Japan, Taiwan, Thailand and Indonesia. We strive to localize our services to take into account cultural differences and user needs, and we currently provide our services in 19 languages. According to App Annie Inc. (“App Annie”), LINE was the fourth largest application publisher globally for the two years ended March 31, 2016, based on the number of downloads from the Social Networking category on iOS App Store and Social and Communication categories on Google Play, combined. We believe the scale and growth of our global user base provide us with powerful network effects, whereby LINE becomes more valuable to users, driving further user growth and engagement as well as attracting more advertisers and platform partners.

At the heart of our platform is the LINE mobile messaging application, which enables users to communicate with family, friends and other people they care about.

 

    We address people’s basic communication needs.  We focus on serving users’ everyday communication needs by supplying easy-to-use tools, including chat, voice call and video call, with reliable and secure connectivity wherever they are. In March 2016, our users exchanged an average of 20.4 billion messages per day and our average daily active users (“DAUs”) represented approximately 61.4% of our MAUs globally and 73.0% of our MAUs in our four largest markets of Japan, Taiwan, Thailand and Indonesia, indicating that our services are already a meaningful part of the daily lives of many of our users.

 

    We enable closed and real relationship-based communication.  We believe that the most rewarding and lasting forms of expression are those involving private, two-way exchanges between people with real relationships, which enhance intimacy and security. Our users can connect with other users they know by directly adding them as friends on LINE or by importing their mobile contact list into LINE. We believe that closer, intimate relationships are integral to the broader social web of activity, representing a more meaningful and influential subset of social networks.

 



 

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    We make communication more enriching and expressive.  We are a pioneer in the creation and design of Stickers, our larger and more expressive version of emoticons. Users can express their emotions or actions by sending a single Sticker instead of a thread of plain text. We believe that Stickers have made communication both more convenient and more enriching. Our users in aggregate sent an average of 389 million Stickers per day in March 2016.

Our user engagement is driven by such communication being coupled with activities that are an indispensable part of users’ daily lives. LINE has evolved into an extensive platform that provides not only the ability to communicate but also access to a wide range of localized entertainment content and lifestyle services, such as games, video, music, camera and news applications through our content platform as well as O2O services through our life platform, offering our users richer experiences. With an increasing amount of activity on the internet being conducted through mobile applications, we believe that LINE provides a fast, versatile and user-friendly platform for the discovery of content and services in the mobile era. Our broad array of mobile services, combined with our large and highly engaged user base, gives us unique opportunities to offer greater personalization in terms of the service and content offerings by introducing a range of application settings.

We believe that our user base provides attractive marketing opportunities for our advertisers. We provide a variety of targeted and interactive marketing solutions that enable advertisers to promote their brands and amplify their visibility and reach. We offer a wide variety of “messenger ads” or user-initiated advertising solutions that are offered through the LINE messaging application, such as Official Accounts, Sponsored Stickers and LINE Point Ads, allowing advertisers to direct their efforts and communication in a more targeted manner. We also offer impression-based “performance ads” such as Timeline Ads and other advertisements that utilize our various communication and content offerings, allowing advertisers to effectively reach a larger number of LINE users. Our performance ads have become our fastest growing advertisement products.

We generate revenues in a variety of ways and from various participants active on the LINE platform. Our revenues are primarily generated from games, Stickers and advertising services on the LINE platform, as well as from advertising on our web portals. We generated revenues of ¥39,586 million in 2013, ¥86,366 million in 2014, ¥120,406 million in 2015 and ¥33,456 million in the first three months of 2016. For the two years ended March 31, 2016, according to App Annie, LINE ranked as the world’s largest mobile publisher based on non-game gross revenue from iOS App Store and Google Play, combined.

 



 

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Our User Base

Since its launch in Japan in June 2011, our LINE messaging service has attracted users from around the world. Today, we believe LINE is the leading mobile messaging application in Japan, Taiwan and Thailand in terms of numbers of users, and we have gained substantial numbers of users in other parts of Asia, including Indonesia, Hong Kong, Singapore, Malaysia and Myanmar. In recent quarters, we focused our marketing efforts on our key countries as a part of our increased emphasis on monetization in markets where we have achieved leading market positions, which has led to an increase in our MAUs in our four key countries of Japan, Taiwan, Thailand and Indonesia as well as overall MAUs. We plan to continue to focus on areas in which we enjoy competitive advantages and to allocate resources effectively.

 

LOGO

 

LOGO   LOGO

According to App Annie, for the three months ended March 31, 2016, our LINE messaging application was the largest mobile application in Japan, Taiwan and Thailand in terms of MAUs both on iOS App Store and on Google Play, and the second and third largest mobile application in Indonesia on iOS App Store and Google Play, respectively. In September 2015 our LINE messaging application had the largest share of the total time spent on smartphones in Japan, accounting for 10.4% of the total time spent on all mobile phone applications during the month, according to data released by The Nielsen Company (“Nielsen”) in November 2015.

 



 

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LOGO

 

Source: Nielsen Mobile NetView, Sep. 2015

Our Value Proposition for Our Users

Communicate with people you know in real life.  We provide free mobile communication tools that allow our users to connect with their friends, family and others that they care about in a private and intimate way.

Choose the way you communicate.  Our users can send instant messages to, or chat with, a friend while watching TV, call their colleagues while traveling on business, or enjoy video calls with their family members who are residing overseas. Our Timeline provides users with open access to, and the ability to share, a broad range of content with other users, and our low-cost voice over internet protocol (“VoIP”) service allows users to place calls to mobile and fixed phone lines.

Know that you have been heard.  Our messaging tool provides the sender with confirmation whether their message has been read, and recipients are notified and reminded of unread messages specifically directed to them.

Be creative and expressive.  We continue to be a pioneer and leader in the creation and design of Stickers. Users are able to colorfully express their emotions in the form of a single Sticker, which depicts LINE - developed characters or third-party characters or celebrities. Users can also design and distribute their own Stickers through our Creators Market service.

Discover attractive content.  Our content platform introduces users to a host of highly appealing, localized content to enrich their daily lives, including games, news, music, video and more. The LINE characters we have created, such as Brown the Bear and Cony the Rabbit, are widely recognized within Japan, Taiwan, Thailand and Korea and are receiving increasing recognition in other regions of the world. In particular, our LINE Friends characters have recently become popular in China and Hong Kong, where we have established retail stores to leverage their popularity.

Share the fun.  Users on our platform can share mobile games and other applications that they enjoy with their friends directly through a chat or by posting on their Timelines. For example, our users can see how their scores compare against their friends’ scores on their favorite games and send each other in-game purchased virtual items or pictures taken and decorated with Stickers on our camera application. Our LINE Music service enables users to share songs with their friends or add songs to their Timelines, bringing interaction to an otherwise isolated activity.

Enjoy one-stop access.  Users are able to satisfy many of their mobile needs through our life platform, which provides seamless access and navigation across a wide range of applications and services that we provide. Through our smart portal, users in Japan, for example, are able to book taxis, make restaurant reservations,

 



 

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check job postings, get tailored news updates, purchase and read comic books and make individual and group calls. We believe that utilization of the LINE messaging application as a smart portal to the applications and services we offer on our life platform serves as an easy and convenient one-stop navigation path for mobile users.

Our Value Proposition for Our Advertisers and Business Partners

Large user base and high level of engagement.  Our platform provides a powerful medium through which advertisers can reach our large user base, thereby amplifying their visibility. By integrating our advertising products with our messaging application, we allow advertisers to benefit from the high level of user engagement driven by communication, which has become indispensable to many people’s daily lives.

Impactful and targeted reach.  We offer advertisers a variety of ways to connect with our users. We offer opt-in products such as Official Accounts, Sponsored Stickers, LINE@ and LINE Point Ads, which we call “messenger ads,” that allow advertisers to engage only those users who have voluntarily initiated such engagement, such as by adding an advertiser as a LINE friend, allowing advertisers to direct their efforts in a more targeted manner. In addition to these user-initiated advertising products, we offer targeted native mobile advertising across our content products such as Timeline, LINE News and LINE Live, which we call “performance ads” and which do not require users to opt in, allowing advertisers to effectively reach a larger number of LINE users.

Business solutions.  The LINE platform provides business partners with solutions beyond simply an advertising medium. For example, Business Connect allows businesses to develop customized applications that can be offered on the LINE platform, and LINE@ enables small- and medium-sized enterprises (“SMEs”) to communicate with customers through LINE chat messages. We focus on developing new opportunities for our business partners to leverage the LINE platform and our user base.

Our Value Proposition for Our Platform Partners

Real relationship-based social distribution.  Content providers on our platform, such as application developers, not only are able to utilize our social distribution platform but also benefit from our real relationship-based user base to maximize their distribution efforts. We believe that real relationship-based sharing of experiences enhances the legitimacy of user recommendations and amplifies the benefits of network effects.

Direct sales platform.  Our content platform functions as a direct publishing platform for various content, including games, video, music and online comic books, which has contributed to LINE becoming a leading game publisher, as well as non-games content publisher, on iOS App Store and Google Play.

Proven distribution channel of scale.  We provide content providers with access to our large and highly engaged global user base and the benefits of our continued expansion. For example, we distribute and maintain a line-up of quality games that are enjoyed by millions of users globally. As of March 31, 2016, our games exceeded a combined 654 million downloads, including 14 games that exceeded 10 million downloads each.

Online to Offline Integration. Our life platform provides traditionally offline service providers, such as taxi booking services, beauty salons, travel agencies and restaurants, the ability to appeal to more LINE users by offering aspects of their services online, increasing user engagement and convenience.

Our Market Opportunity

Mobile Messaging and Social Networking Opportunity

Mobile messaging and social networking are some of the most frequent activities of mobile internet users as they have emerged as a new means of connecting people online. For the two years ended March 31, 2016, according to App Annie, mobile messaging applications constituted four of the top ten applications excluding games based on the number of downloads from iOS App Store and Google Play, combined; two of the remaining six were social networking applications.

 



 

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Advertising Market Opportunity

Digital advertising accounted for 20.1% of the total advertising market in Japan in 2015, which was lower than the corresponding percentages in each of the United States, China, the United Kingdom and Germany, according to International Data Corporation (“IDC”).

 

LOGO

 

Source: IDC

From 2015 to 2020, the digital advertising markets in Taiwan, Thailand and Indonesia are projected to grow from $0.5 billion to $0.7 billion, from $0.3 billion to $0.5 billion and from $0.4 billion to $1.0 billion, respectively, according to IDC.

Mobile messaging and social networking platforms enable advertisers to execute highly targeted marketing initiatives and therefore are well-positioned to capture a greater share of advertising spending. The global mobile advertising market is projected to increase from $47.6 billion in 2015 to $173.6 billion in 2020, and the Asian mobile advertising market is projected to increase from $13.5 billion in 2015 to $55.6 billion in 2020 with the Japanese mobile advertising market projected to increase from $2.8 billion in 2015 to $5.3 billion in 2020, according to data released by IDC in April 2016.

 

LOGO

 

Source: IDC

 



 

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Content Market Opportunity

We believe that people are increasingly using mobile content to enrich their interpersonal relationships and social experiences. Consumer spending on paid content on mobile devices globally is projected to increase from $75.6 billion in 2015 to $256.0 billion in 2020, according to data released by IDC in April 2016.

Our business benefits from the size and growth of the content market in our four key countries of Japan, Taiwan, Thailand and Indonesia. According to App Annie, Japan was the world’s largest market in terms of the amount of revenue on iOS App Store and Google Play in 2015, combined. According to IDC, from 2015 to 2020, consumer spending on paid content on mobile devices is expected to grow at a compound annual growth rate (“CAGR”) of 3.3%, 16.4% and 29.9%, from $5.2 billion to $6.1 billion, from $2.6 billion to $5.5 billion and from $2.7 billion to $10.0 billion in Taiwan, Thailand and Indonesia, respectively.

Our Strategies

Continue to Grow Our User Base and Enhance User Engagement

We aim to continue to grow our user base with a strategic focus on Asia and markets where we believe we are uniquely positioned to attract new smartphone users and build a leading position. We aim to penetrate targeted markets by introducing localized services and products that appeal to the cultural tastes and differentiated demands of each region. In our largest market of Japan, we plan to commence operations as a Mobile Virtual Network Operator (“MVNO”) in order to promote the use of smartphones in Japan and further increase our potential user base.

We strive to offer services and products that users find useful, reliable and entertaining, in order to enrich the user experience and encourage engagement. We believe that the social and interactive features of our services and products are integral to achieving high levels of user engagement, and continue to develop services and products designed to allow users a broad range of expression and opportunities for interaction. We also continue to introduce a wide range of localized content and services that further encourage users to integrate LINE into their daily lives. For example, LINE Live, a real-time video streaming service, and LINE TV, an on-demand video service, provide information and entertainment catered to each region, and LINE Pay and LINE Points, our mobile payment service and rewards programs, enable users to further converge their online and offline activities using our platform.

Expand and Improve Our Platform for Users and Content Providers

Our LINE platform integrates mobile messaging services with a wide range of social and interactive content. We intend to build upon our strength in mobile messaging services to develop and broaden our spectrum of content offerings on our LINE platform as well as integrate offline services in order to further enrich the user experience. For example, we offer a variety of LINE Games, which are popular among casual game players, and plan to expand our game portfolio to include more immersive role-playing games in order to broaden our appeal to diverse user groups. We are also enabling more cross-application interactions, such as posting LINE Music tracks to a user’s Timeline and sending in-game items from LINE Games to other users. In addition to serving as a portal to other content, our LINE messaging application encourages closer, intimate relationships through free instant messaging combined with the use of fun, expressive Stickers.

Offer a Differentiated Marketing Platform for Advertisers

We continue to enhance and broaden the range of our advertising services and products in order to enhance the appeal of LINE as an advertising platform and ultimately attract more advertisers. We intend to

 



 

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strengthen our ability to utilize data analytics and other technologies in order to provide more targeted and interactive advertising solutions that enable advertisers to best promote their brands and products and amplify their visibility and reach. For example, we recently introduced Timeline Ads to allow advertisers to reach a larger number of LINE users by posting advertisements on users’ Timelines, and implemented a new advertisement distribution system based on Hike, a smartphone native advertising platform that utilizes demographic and interest based targeting and real-time bidding to optimize online advertising inventory. We intend to attract additional business partners by introducing new and more comprehensive business solutions, such as Business Connect and LINE@, that help business partners integrate their online and offline advertising to better reach and communicate with customers. For larger businesses, we plan to launch our Official Web App designed to seamlessly incorporate their existing web services with LINE and to allow them to connect with our users with greater ease through automatic login and personalized push notifications. For SMEs, which may have limited or no web service capability, we plan to launch our SME Partnership Program, which is designed to help SMEs achieve better results by engaging with LINE users through aggregation services they already use.

Further Monetize Our User Base and User Traffic

We constantly explore and pursue new opportunities to monetize our user base. We focus our monetization and underlying marketing efforts on markets and regions where we have achieved a leading position. We intend to enhance and develop our content offerings and marketing solutions designed to capture increased monetization opportunities across our platforms.

Pursue Strategic Investments and Alliances

To develop and expand an ecosystem around our LINE platform, we intend to pursue strategic investments, acquisitions and alliances, in order to grow our user base and engagement and to introduce complementary services and products outside of our current content offerings. We also plan to selectively partner with leading content providers and service providers where such partnership would enable us to deliver a range of high-quality services through our LINE platform, leveraging our brand recognition and strong positioning as the leading messaging application in our key markets. For example, we have established a joint venture with transcosmos inc., an outsourcing service provider in Japan, to offer our business accounts customer support solutions utilizing one-to-one LINE chats.

Summary Risk Factors

Our business is subject to numerous risks described in the section entitled “Risk Factors” and elsewhere in this prospectus. You should carefully consider these risks before making an investment. Some of these risks include:

 

    If we fail to retain existing users or add new users, or if our users decrease their level of engagement with LINE, our revenue, financial results and business may be significantly harmed;

 

    We may not be successful in our efforts to monetize our products and services;

 

    Our business operates in an industry that is highly competitive, and competition presents an ongoing threat to the success of our business;

 

    We may not be successful if we are not able to develop new products and services in a timely and cost-effective manner that address rapidly evolving user preferences, and any new products and services we develop may expose us to new risks;

 



 

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    Japan is our largest market in terms of revenue, and our current business and future growth could be materially and adversely affected if we experience a decline in users or user engagement in Japan;

 

    We generate a substantial portion of our revenues from our advertising products. The loss of our advertisers, reduction in spending by our advertisers or failure to achieve market acceptance of new advertising products and services could negatively affect our business;

 

    We generate a substantial portion of our revenues from a small number of our mobile games and rely on third-party game developers. We must continue to offer games that attract and retain a significant number of users, or otherwise our business, financial condition and results of operations could be negatively affected;

 

    We generate a substantial portion of our revenues from our sale of Stickers, which is an evolving market, and if the popularity of Stickers declines from its current level in Japan or is not widely replicated in other markets, our business and future growth could be negatively affected;

 

    We plan to continue expanding our global operations into markets in which we have limited operating experience and, as a result, may become subject to increased business and economic risks, which could adversely affect our business, financial condition and results of operations;

 

    Our acquisitions and investments may not be successful in achieving their intended goals and could harm our business, financial condition and results of operations;

 

    Our parent, NAVER Corporation, offers a variety of products and services to internet users and advertisers, and the absence of contractually delineated spheres of operations means that competition and conflicts of interest between us and NAVER Corporation could arise in the future;

 

    Overlapping management and business relationships with NAVER Corporation, our parent, may adversely impact our business;

 

    There will be a gap of three business days between pricing and trading of our ADSs and a gap of four business days between pricing and trading of shares of our common stock, which means you will not be able to sell or otherwise trade shares of our common stock or ADSs during those periods; and

 

    In the past, we had identified material weaknesses in our internal control over financial reporting, which we have since remediated. If we fail to establish and maintain effective internal control over financial reporting in the future, the accuracy and timeliness of our financial reporting may be adversely affected, which could cause investors to lose confidence in our reported financial information and may lead to a decline in the trading price of shares of our common stock and ADSs.

Our History and Corporate Information

We were incorporated as a joint-stock corporation in Japan in September 2000. We began as an online game company and engaged in the development and distribution of online games under the Hangame brand. We subsequently expanded our business to portal services and acquired livedoor Co., Ltd., a Japanese internet portal company, in May 2010.

In June 2011, we launched the LINE messaging application to the public in Japan, followed by launches in other Asian countries. We initially focused on building our user base in Japan, but shortly afterwards began to

 



 

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actively conduct marketing efforts in other parts of Asia, where we believed there was significant market potential based on the relatively low level of smartphone penetration in a relatively large and growing population size. In order to more effectively pursue global expansion outside of Japan, we incorporated LINE Plus Corporation, which provides sales and marketing services for the LINE platform outside of Japan, in Korea in February 2013.

In February 2013, our board of directors decided to focus our business on the operation and expansion of the LINE platform and to dispose of our Hangame business along with related entities. We disposed of all of our interest in the Hangame business along with related entities (through the newly created NHN Japan Corporation) in the form of a non-cash dividend to NAVER Corporation in April 2013. In September 2014, as a part of our continued focus on the expansion of the LINE platform, our board of directors decided to dispose of our data management business, which consisted of DataHotel Co., Ltd., a wholly-owned subsidiary, and the data management business was subsequently sold to a subsidiary of NHN Entertainment Corporation, a Korean online game portal company that was spun off from NAVER Corporation in August 2013.

NAVER Corporation currently owns 100% of the outstanding shares of our capital stock. NAVER Corporation is a leading internet company in Korea and listed on the KOSPI Market of the Korea Exchange. See “Principal Shareholder.”

Our principal executive offices are located at Shibuya Hikarie, 27th Floor, 21-1 Shibuya 2-chome, Shibuya-ku, Tokyo 150-8510, Japan, and our telephone number is +81-3-5155-1008. Our English website address is http://linecorp.com/en/. The information on, or that can be accessed through, our website is not part of this prospectus.

 



 

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The Global Offering

 

Global offering

35,000,000 shares of our common stock (including shares represented by ADSs).

 

International offering

             shares of our common stock, deliverable in the form of shares or ADSs, to be offered in the United States and elsewhere outside Japan.

 

Japanese offering

             shares of our common stock.

 

Total shares of common stock to be outstanding after the global offering

209,992,000 shares of our common stock (including shares represented by ADSs).

 

Over-allotment options

We have granted to Morgan Stanley & Co. LLC, as representative of the international underwriters, and to Nomura Securities Co., Ltd., as representative of the Japanese underwriters, the options, in the aggregate, to purchase up to an additional 5,250,000 shares of our common stock, in each case solely to cover over-allotments. Such options may be exercised independently of each other. An affiliate of Morgan Stanley & Co. LLC as representative of the international underwriters, and Nomura Securities Co., Ltd., as representative of the Japanese underwriters, will enter into stock borrowing agreements with NAVER Corporation solely to facilitate settlement by the underwriters of over-allotments, if any. The affiliate of Morgan Stanley & Co. LLC and Nomura Securities Co., Ltd. are obligated to return all borrowed shares to NAVER Corporation concurrently with the expiration of the over-allotment options. See “Underwriting.”

 

Use of proceeds

The primary purposes of the global offering are financing our business expansion, which may include investment, acquisition or strategic cooperation to expand our user base or procure additional content for the LINE platform, as well as marketing new products and services and repaying outstanding debt.

 

Sales to designated purchaser

The LINE Employee Shareholding Association will purchase              shares of our common stock in the Japanese offering as a designated purchaser.

 

Lock-up agreements

We, NAVER Corporation, certain of our and our subsidiaries’ directors and officers, the LINE Employee Shareholding Association and Mr. Joon Ho Lee, our former director, have agreed with the joint global coordinators (and, in the case of the LINE Employee Shareholding Association, the joint global coordinators and the Japanese joint lead managers named in the Japanese underwriting agreement) to restrictions on any sale of shares of our common stock or ADSs during the period beginning on the date of this prospectus and ending on the date that is 180 days from and including the date of delivery of the shares in the global offering, subject to the limited exceptions described in “Underwriting.”

 



 

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Timing of global offering

The following is the anticipated timetable of various events in the global offering (Tokyo time, unless otherwise indicated):

 

Pricing of global offering

   July 11, 2016

Japanese subscription period commences

   July 12, 2016

Japanese subscription period closes

   July 13, 2016

Trading of ADSs commences on the New York Stock Exchange

  

July 14, 2016 (New York time)

Delivery of shares through JASDEC

   July 15, 2016

Trading of shares of our common stock commences on the Tokyo Stock Exchange

   July 15, 2016

Delivery of ADSs through the facilities of The Depository Trust Company

   July 15, 2016 (New York time)

 

  Trading of ADSs on the New York Stock Exchange will not commence until three business days from the date of pricing of the global offering. Trading of shares of our common stock on the Tokyo Stock Exchange will then commence the business day following commencement of trading of ADSs on the New York Stock Exchange.

In addition, delivery of shares of our common stock and ADSs is expected to occur later than three business days after the date of pricing of the global offering. Because of the longer settlement period, purchasers who wish to trade shares of our common stock or ADSs on or soon after pricing may need to specify alternative settlement arrangements to prevent a failed settlement.

The closing for the sale of shares or ADSs in the international offering is conditioned upon the closing of the Japanese offering and vice versa.

 

The ADSs

Each ADS represents one share of our common stock. The ADSs will be evidenced by American depositary receipts (“ADRs”).

 

  The depositary will be the holder of the shares of our common stock underlying the ADSs and you will have the rights of an ADS holder as provided in the deposit agreement among us, the depositary and holders and beneficial owners of ADSs from time to time.

 

  You may surrender your ADSs to the depositary to withdraw the shares of our common stock underlying your ADSs. The depositary will charge you a fee for such an exchange.

 



 

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  We may amend or terminate the deposit agreement for any reason without your consent. Any amendment that imposes or increases fees or charges or that materially prejudices any substantial existing right you have as an ADS holder will not become effective as to outstanding ADSs until 30 days after notice of the amendment is given to ADS holders. If an amendment becomes effective, you will be bound by the deposit agreement, as amended, if you continue to hold your ADSs.

 

  To better understand the terms of the ADSs, you should carefully read the section in this prospectus entitled “Description of American Depositary Shares.” We also encourage you to read the deposit agreement, which is an exhibit to the registration statement that includes this prospectus.

 

Listings

We will apply for listing of the ADSs on the New York Stock Exchange under the symbol “LN.” We have received approval to list and trade shares of our common stock on the Tokyo Stock Exchange under the securities identification code of “3938.”

 

Depositary for the ADSs

JPMorgan Chase Bank, N.A.

 

Controlled company

NAVER Corporation, our parent currently holding 100% of the outstanding shares of our capital stock and which after our initial public offering will control approximately 83.3% (before exercise of any over-allotment options) of the voting power of our outstanding capital stock, will have the ability to control the outcome of matters submitted to our shareholders for approval, including the election of our directors and significant corporate transactions such as a merger. Because NAVER Corporation controls a majority of the voting power of our outstanding capital stock, we will be a “controlled company” within the meaning of the New York Stock Exchange corporate governance rules. As a controlled company, we are eligible to and, in the event we no longer qualify as a foreign private issuer, we intend to elect not to comply with certain of the New York Stock Exchange corporate governance standards.

 



 

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Summary Financial and Operating Data

You should read the summary financial and operating data below in conjunction with “Unaudited Pro Forma Financial Information,” “Selected Historical Financial and Operating Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical consolidated financial statements and related notes included in this prospectus.

The consolidated statement of financial position data as of December 31, 2014 and 2015 and the consolidated statement of profit or loss data for the years ended December 31, 2013, 2014 and 2015 have been derived from our audited consolidated financial statements and related notes included in this prospectus. These audited consolidated financial statements and related notes have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (the “IASB”). The interim condensed consolidated statement of financial position data as of March 31, 2016 and the interim condensed consolidated statement of profit or loss data for the three months ended March 31, 2015 and 2016 have been derived from our unaudited consolidated financial statements and related notes included in this prospectus. The unaudited interim condensed consolidated financial statements and related notes have been prepared on the same basis as the audited consolidated financial statements and related notes and reflect, in the opinion of management, all adjustments of a normal recurring nature that are necessary for a fair statement of unaudited interim condensed consolidated financial statements.

The information set forth below is not necessarily indicative of the results of future operations, and the results in the first three months of the year ending December 31, 2016 are not necessarily indicative of results to be expected for the full year or any other period.

 



 

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Consolidated Statement of Profit or Loss Data

 

    For the year ended December 31,     For the three months ended March 31,  
    2013     2014     2015     2015(1)     2015     2016     2016(1)  
    (in millions of yen and millions of U.S. dollars, except share and per share data)  

Revenues and other operating income:

             

Revenues

  ¥ 39,586      ¥  86,366      ¥  120,406      $ 1,071      ¥ 28,104      ¥ 33,456      $ 298   

Other operating income

    69        296        474        4        117        660        5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues and other operating income

    39,655        86,662        120,880        1,075        28,221        34,116        303   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

             

Payment processing and licensing expenses

    (9,606     (20,598     (28,742     (256     (6,225     (7,750     (69

Employee compensation expenses

    (8,490     (18,289     (35,572     (316     (7,574     (9,393     (84

Marketing expenses

    (17,202     (18,069     (16,596     (148     (4,780     (2,307     (21

Infrastructure and communication expenses

    (2,537     (4,492     (7,712     (69     (1,663     (1,782     (16

Authentication and other service expenses

    (4,914     (7,874     (12,133     (108     (2,398     (2,897     (26

Depreciation and amortization expenses

    (1,330     (2,370     (3,733     (33     (764     (968     (9

Other operating expenses

    (3,313     (8,555     (14,432     (128     (3,393     (3,681     (31
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    (47,392     (80,247     (118,920     (1,058     (26,797     (28,778     (256
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit (loss) from operating activities

    (7,737     6,415        1,960        17        1,424        5,338        47   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Finance income

    67        86        71        1        23        27        0   

Finance costs

    (39     (137     (106     (1     (24     (24     (0

Share of loss of associates

    (243     (167     (205     (2     (23     (63     (1

Gain (loss) on foreign currency transactions, net

    (373     66        (520     (5     (64     (569     (5

Other non-operating income

    7               157        1        14        21        0   

Other non-operating expenses

                  (1,887     (16     (165     (587     (4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit (loss) before tax from continuing operations

    (8,318     6,263        (530     (5     1,185        4,143        37   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax benefits (expenses)

    648        (7,151     146        1        (2,942     (2,737     (24
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit (loss) for the period from continuing operations

    (7,670     (888     (384     (4     (1,757     1,406        13   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit (loss) from discontinued operations, net of tax

    1,279        2,892        (7,588     (67     (148     (1,640     (15
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit (loss) for the period

  ¥ (6,391   ¥ 2,004      ¥ (7,972   $ (71   ¥ (1,905   ¥ (234   $ (2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Attributable to:

             

The shareholder of the Company

    (764     4,207        (7,582     (68     (1,888     (122     (1

Non-controlling interests(2)

    (5,627     (2,203     (390     (3     (17     (112     (1

Earnings per share:

             

Basic profit (loss) for the period attributable to the shareholder of the Company

  ¥ (4.36   ¥ 24.05      ¥ (43.33   $ (0.39   ¥ (10.79   ¥ (0.70   $ (0.01

Diluted profit (loss) for the period attributable to the shareholder of the Company

    (4.36     22.14        (39.12     (0.35     (10.79     (0.63     (0.01

Earnings per share from continuing operations

             

Basic profit (loss) from continuing operations attributable to the shareholder of the Company

    (11.67     7.52        0.04        0.00        (9.95     8.67        0.08   

Diluted profit (loss) from continuing operations attributable to the shareholder of the Company

    (11.67     6.92        0.03        0.00        (9.95     7.79        0.07   

Earnings per share from discontinued operations

             

Basic profit from discontinued operations attributable to the shareholder of the Company

    7.31        16.53        (43.37     (0.39     (0.84     (9.37     (0.09

Diluted profit from discontinued operations attributable to the shareholder of the Company

    7.31        15.22        (39.15     (0.35     (0.84     (8.42     (0.08

Basic weighted average shares outstanding

    174,992,000        174,992,000        174,992,000        174,992,000        174,992,000        174,992,000        174,992,000   

Diluted weighted average shares outstanding

    174,992,000        190,024,846        193,797,566        193,797,566        174,992,000        194,745,768        194,745,768   

 

(1) For convenience, the Japanese yen amounts are expressed in U.S. dollars at the rate of ¥112.42 per US$1.00, the noon buying rate of the Federal Reserve Bank of New York for Japanese yen in effect on March 31, 2016.

 

(2) For each of the years ended December 31, 2013 and 2014, the non-controlling interests were mainly held by NAVER Corporation, our shareholder.

 



 

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Consolidated Statement of Financial Position Data

 

     As of December 31,     As of March 31,  
     2014      2015     2015     2016     2016  
     (in millions of yen and millions of U.S. dollars)  

Cash and cash equivalents

   ¥     20,254       ¥     33,652      $     299      ¥     35,082      $     312   

Trade and other receivables

     24,223         27,248        242        23,632        210   

Property and equipment

     9,656         10,501        93        9,974        89   

Total assets

     85,664         122,159        1,087        118,621        1,055   

Total liabilities

     73,153         104,626        931        99,397        884   

Total shareholder’s equity

     12,511         17,533        156        19,224        171   

Equity attributable to the shareholder of the Company

     12,496         17,743        158        19,616        174   

Equity attributable to non-controlling interests

     15         (210     (2     (392     (3

Supplemental Financial Information

 

     For the year ended December 31,      For the three months ended March 31,  
     2013      2014      2015      2015      2015      2016      2016  
     (in millions of yen and millions of U.S. dollars)  

Adjusted EBITDA(1)

   ¥     (5,603)       ¥     11,760       ¥     16,906       $     150       ¥     4,475       ¥     8,800       $     78   

Adjusted profit (loss) for the period(1)

     (6,911)         1,975         10,266         91         411         3,790         34   

 

(1) See “— Non-IFRS Measures” below.

Non-IFRS Measures

We use non-IFRS financial measures such as adjusted EBITDA and adjusted profit (loss) for the period in evaluating our financial and operating results and for financial and operational decision making purposes.

We believe that adjusted EBITDA and adjusted profit (loss) for the period help identify underlying trends in our business that could otherwise be distorted by the effect of the income or expenses that we exclude in calculating adjusted EBITDA and adjusted profit (loss) for the period. We believe that adjusted EBITDA and adjusted profit (loss) for the period provide useful information about our financial and operating results, enhance the overall understanding of our past performance and future prospects and allow for greater visibility with respect to key metrics used by our management in its financial and operational decision making.

Adjusted EBITDA and adjusted profit (loss) for the period should not be considered in isolation or construed as an alternative to profit (loss) from operating activities, profit (loss) for the period, cash flows or any other measure of performance or as an indicator of our financial or operating performance. Adjusted EBITDA and adjusted profit (loss) for the period presented here may not be comparable to similarly titled measures presented by other companies. Other companies may calculate similarly titled measures differently, limiting their usefulness as comparative measures to our data.

Adjusted EBITDA represents profit (loss) from operating activities (which does not include finance income, finance costs, share of profit or loss of associates, gain (loss) on foreign currency transactions, net, other non-operating income and expenses, income tax benefits or expenses and profit (loss) from discontinued operations, net of tax) before certain non-cash expenses, consisting of share-based compensation expenses and depreciation and amortization expenses.

Adjusted profit (loss) for the period represents profit (loss) for the period before share-based compensation expenses, tax impact of share-based compensation expenses and profit (loss) from discontinued operations, net of tax.

 



 

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The table below sets forth a reconciliation of our profit (loss) from operating activities to adjusted EBITDA for the periods indicated:

 

    For the year ended December 31,     For the three months ended
March 31,
 
    2013     2014     2015     2015     2015     2016     2016  
    (in millions of yen and millions of U.S. dollars)  

Profit (loss) from operating activities

  ¥ (7,737   ¥ 6,415      ¥ 1,960      $ 17      ¥ 1,424      ¥ 5,338      $ 47   

Add: Share-based compensation expenses

    804        2,975        11,213        100        2,287        2,494        22   

Add: Depreciation and amortization expenses

          1,330              2,370              3,733                  33              764              968                  9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  ¥ (5,603   ¥ 11,760      ¥ 16,906      $ 150      ¥ 4,475      ¥ 8,800      $ 78   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table sets forth a reconciliation of our profit (loss) for the period to adjusted profit (loss) for the periods indicated:

 

    For the year ended December 31,     For the three months ended
March 31,
 
    2013     2014     2015     2015     2015     2016     2016  
    (in millions of yen and millions of U.S. dollars)  

Profit (loss) for the period

  ¥ (6,391   ¥ 2,004      ¥ (7,972   $ (71   ¥ (1,905   ¥ (234   $ (2

Add: Share-based compensation expenses

             804              2,975        11,213        100              2,287        2,494        22   

Subtract: Tax impact of share-based compensation expenses

    (45     (112     (563     (5     (119     (110     (1

Subtract: Profit (loss) from discontinued operations, net of tax

    (1,279     (2,892           7,588                  67        148              1,640                  15   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted profit (loss) for the period

  ¥ (6,911   ¥ 1,975      ¥ 10,266      $ 91      ¥ 411      ¥ 3,790      $ 34   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Summary Operating Data

 

     For the month of  
     Mar.
2013
     Jun. 
2013
     Sep.
2013
     Dec.
2013
     Mar. 
2014
     Jun.
2014
     Sep.
2014
     Dec.
2014
     Mar.
2015
     Jun.
2015
     Sep.
2015
     Dec.
2015
     Mar.
2016
 
     (in millions)         

Total MAUs(1)

     75         94         125         137         159         170         179         190         205         211         212         215         218   

Japan

     31         35         39         41         45         47         49         51         54         55         57         58         61   

Taiwan, Thailand and Indonesia

     22         28         34         38         44         49         54         62         70         76         81         87         91   

Total MPUs(2)

     2.6         3.7         3.7         4.1         5.4         6.7         7.0         8.2         7.5         7.9         8.2         8.8         8.4   

 

(1) Represents the number of user accounts that (i) accessed the LINE messaging application or any LINE Game through mobile devices; (ii) sent messages through the LINE messaging application from personal computers; or (iii) sent messages through any other LINE application from mobile devices, in each case at least once during the month indicated.
(2) Represents the number of user accounts that made (i) a payment for Stickers, Themes or LINE Out on the LINE messaging application through mobile devices or personal computers or (ii) a payment relating to any LINE Game through mobile devices, in each case at least once during the month indicated.

 



 

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Conventions Used in This Prospectus

Except where the context otherwise requires or unless otherwise specified, and for purposes of this prospectus only:

 

    “daily active users” or “DAUs” refers to the number of user accounts that (i) accessed the LINE messaging application or any LINE Game through mobile devices; (ii) sent messages through the LINE messaging application from personal computers; or (iii) sent messages through any other LINE application from mobile devices, in each case at least once during a given day;

 

    “Japanese yen,” “yen” or “¥” refers to the legal currency of Japan;

 

    “Korea” refers to the Republic of Korea;

 

    “Korean won,” “Won” or “₩” refers to the legal currency of Korea;

 

    “LINE,” “we,” “us,” “our company,” “the Company” or “our” refers to LINE Corporation and its consolidated subsidiaries taken as a whole, as well as the messaging application and other products of LINE Corporation;

 

    “messages” refers to text messages, voice messages, Stickers and photo, video, voice and text files sent and received, as well as free voice and video calls made and received, in each case using the LINE messaging application from either mobile devices or personal computers or using any LINE Game or any other LINE application from mobile devices;

 

    “monthly active users” or “MAUs” in a given month refers to the number of user accounts that (i) accessed the LINE messaging application or any LINE Game through mobile devices; (ii) sent messages through the LINE messaging application from personal computers; or (iii) sent messages through any other LINE application from mobile devices, in each case at least once during that month;

 

    “monthly paying users” or “MPUs” in a given month refers to the number of user accounts that made (i) a payment for Stickers, Themes or LINE Out on the LINE messaging application through mobile devices or personal computers or (ii) a payment relating to any LINE Game through mobile devices, in each case at least once during that month, and average MPUs for a particular period is the average of the MPUs at each month-end during that period;

 

    “platform partners” refers to application developers and other providers of content offered on the LINE platform;

 

    “stickers” refers to larger, cartoon-like emoticons that depict emotions and actions of characters, which are exchanged as part of chat messages on mobile messaging applications; and

 

    “U.S. dollar,” “US$” or “$” refers to the legal currency of the United States.

Unless we indicate otherwise, all information in this prospectus assumes no exercise by Morgan Stanley & Co. LLC, as representative of the international underwriters, and by Nomura Securities Co., Ltd., as representative of the Japanese underwriters, of their options to purchase up to 5,250,000 additional shares of our common stock, in the aggregate.

For your convenience, this prospectus contains translations of certain Japanese yen amounts into U.S. dollars at the noon buying rate of the Federal Reserve Bank of New York for Japanese yen in effect on March 31, 2016, which was ¥112.42 per US$1.00. On June 3, 2016, the noon buying rate was ¥106.88 per US$1.00. See “Exchange Rates.”

Any discrepancies in any table between the totals and the sums of the amounts listed are due to rounding.

 

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RISK FACTORS

Investing in shares of our common stock or ADSs involves a high level of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this prospectus, including the financial statements and the related notes, before deciding whether to invest in shares of our common stock or ADSs. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. These risk factors are not presented in the order of importance or probability of occurrence. If any of the following risks actually occurs, our business, financial condition and results of operations could be materially and adversely affected. In that event, the market prices of shares of our common stock and ADSs could decline, and you could lose part or all of your investment.

Risks Related to Our Business and Industry

If we fail to retain existing users or add new users, or if our users decrease their level of engagement with LINE, our revenue, financial results and business may be significantly harmed.

The size of our user base and our users’ level of engagement are critical to our success. From our inception, we experienced our largest user growth in Japan, Taiwan, Thailand and Indonesia. While we achieved significant user growth in other parts of the world in 2013 and 2014, beginning in early 2015, we have refocused our marketing efforts on key countries in line with our increased emphasis on monetization in markets where we have achieved leading market positions. While this effort has led to a continued increase in our MAUs in the four key countries of Japan, Taiwan, Thailand and Indonesia as well as overall MAUs, it has at the same time contributed to a significant decrease in total MAUs outside of the four key countries, and there may be further decreases in the future. Our financial performance has been and will continue to be significantly determined by our success in adding, retaining and engaging active users. The growth rate of our active users has declined over time as the size of our active user base has increased and as we achieved higher penetration rates in our key markets. Our business performance will also become increasingly dependent on our ability to increase levels of user engagement in current and new markets. If people do not perceive our products and services to be useful, reliable or trustworthy, we may not be able to attract or retain users or otherwise maintain or increase the frequency, duration or level of their engagement. A number of other providers of mobile messaging applications and online companies that achieved early popularity have seen the sizes of their user bases or levels of engagement subsequently decline, in some cases precipitously.

Any number of factors could negatively affect user retention, growth or engagement, including if:

 

    we are unable to continue to offer products and services that users find engaging, that work with a variety of mobile operating systems and networks, and that achieve a high level of market acceptance, particularly in markets that we are targeting for expansion;

 

    users increasingly engage with competing products or services, particularly communication tools and mobile games;

 

    we are unable to provide a compelling and intuitive user experience and environment, particularly relating to the quality, volume, design and layout of the content and advertisements delivered on the LINE platform;

 

    we fail to provide adequate customer service to users or advertisers or maintain relationships with key platform partners such as mobile game developers;

 

    there are increased user concerns related to privacy and information sharing, safety or security;

 

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    there are adverse changes in our products or services that are mandated by legislation, regulatory authorities or legal proceedings;

 

    technical or other problems prevent us from delivering our products and services in a rapid and reliable manner or otherwise negatively affect the user experience; or

 

    we fail to maintain our brand image or our reputation is damaged.

There is no guarantee that we will not experience erosion of our active user base or decline in engagement levels. A decrease in user retention, growth or engagement could reduce our direct sales to users and render LINE less attractive to our platform partners and advertisers, thereby reducing our revenues from them, which may have a material and adverse impact on our business, financial condition and results of operations.

We may not be successful in our efforts to monetize our products and services.

Our ability to monetize our user base and user engagement is critical to our business and financial performance. We currently generate a substantial portion of our revenues from LINE Games, Stickers and our advertising products and services, including Official Accounts, Sponsored Stickers and LINE Point Ads. A substantial majority of these revenues come from our operations in Japan. We plan to continue to invest in product development and explore additional monetization opportunities in our largest markets such as Japan, Taiwan, Thailand and Indonesia and in other markets, but there is no guarantee that these efforts will be successful. Furthermore, there is no assurance that new products and services we introduce will generate the level of revenues we anticipate. We may have little or no success implementing our new advertisement distribution platform based on Hike, a native mobile advertising platform in Japan operated by our consolidated subsidiary, M.T. Burn Inc., (“M.T. Burn”) or monetizing our new services, including LINE Mobile, Business Platform and LINE Pay Card, either initially or at all. In addition, our monetization efforts could have a negative effect on user engagement if such efforts discourage users from using our existing products and services. If our monetization efforts are not as successful as we anticipate, we may not be able to maintain or grow our revenue and our financial condition and results of operations could be adversely affected.

Users and advertisers in certain markets are not as familiar with new forms of digital advertising, such as our Official Accounts and Sponsored Stickers services. In newer markets, we are investing to convince users and advertisers of the benefits of our products and services. However, we expect that monetizing efforts in many of these new markets may require a significant investment of time and resources, which may not result in sufficient, or any, returns to recover such investment.

Our business operates in an industry that is highly competitive, and competition presents an ongoing threat to the success of our business.

We compete against various companies to attract and engage users, some of which have greater financial resources and substantially larger user bases. We face direct competition from mobile messaging service providers such as Facebook’s WhatsApp and Messenger, Tencent’s WeChat, Telegram Messenger and BlackBerry Messenger, as well as mobile messaging services for specific operating platforms such as Apple’s iMessage. We also face significant competition in almost every aspect of our business, including from companies such as Facebook, Google, Twitter and Yahoo Japan, which offer a variety of social network services and products as well as online advertising services. We also face competition from game companies, mobile telecommunications companies, e-commerce companies, music streaming companies and other internet-related companies that offer products and services that may compete with specific features of the LINE messaging service or other applications that we offer. We also compete with traditional and online media businesses for a share of advertisers’ budgets and in the development of the tools and systems for managing and optimizing advertising campaigns. As we introduce new products and our existing products evolve, or as other companies introduce new products and services, we may become subject to additional competition.

 

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Scale benefits and other advantages may allow our competitors to respond more effectively than us to a rapidly evolving environment in the mobile internet industry, including industry consolidation that may result in increased competition. Our competitors may develop products, features or services that are similar to ours or that achieve greater market acceptance, may undertake more far-reaching and successful product development efforts or marketing campaigns, or may adopt more aggressive pricing policies. In addition, platform partners may use information shared by our users through the LINE platform in order to develop products or features that compete with us. Certain competitors, including Facebook and Google, could use strong positions in one or more markets to gain competitive advantages against us in areas where we operate including: by integrating competing messaging applications or features into products they control such as social networking platforms, search engines, web browsers or mobile device operating systems; by making strategic acquisitions; or by making access to LINE more difficult. As a result, our competitors may acquire and engage users at the expense of our user base or our users’ engagement with our products and services, which may negatively affect our business, financial condition and results of operations.

We may not be successful if we are not able to develop new products and services in a timely and cost-effective manner that address rapidly evolving user preferences, and any new products and services we develop may expose us to new risks.

We compete in a highly competitive industry characterized by rapidly changing products and services, evolving industry standards and continual improvements in performance characteristics and product features. Rapidly evolving user preferences may lead to certain products and services becoming less competitive, or even obsolete. Accordingly, our success depends greatly on our ability to anticipate and respond to emerging user preferences and demands by ensuring continuing and timely development of new, as well as enhancements to existing, products and services. In order to respond to such preferences and demands, we may develop and introduce new products and services, including in areas where we have little or no prior development or operating experience.

We have previously developed and introduced new products and services that have failed to perform as anticipated, and we may do so in the future. For example, in 2013, we launched LINE Mall, an online marketplace, in Japan as a strategic initiative to broaden the spectrum of products and services offered on our platform. LINE Mall allowed our users to shop for goods and services from registered sellers, and we purchased a limited amount of inventory of goods through sourcing agents, engaged third-party delivery services and sold such goods directly to our users. Largely due to our lack of experience in online marketplace operations, however, we failed to develop a niche market for LINE Mall in the highly competitive mobile e-commerce market. LINE Mall was closed on May 31, 2016.

Some of our strategic initiatives may not directly or immediately generate revenue, but we expect they will enhance our attractiveness to users, platform partners and advertisers as well as contribute to increasing our active user base. Our new products and services may bring us into contact, directly or indirectly, with entities that are not within our traditional customer base or result in competing with entities that are our existing business partners. Such business activities expose us to new risks, including additional regulatory scrutiny as well as credit-related and other operational risks. For example, we plan to enter into a partnership with a company in the NTT group in order to commence operations as an MVNO and provide stable and affordably priced plans in Japan by using the infrastructure and communication system of NTT Docomo Inc. (“NTT Docomo”), a leading Japanese mobile phone service provider. We expect to launch the LINE Mobile MVNO service in the second half of 2016. However, we cannot be certain that our MVNO service will be profitable or competitive in the long term. As we will utilize the wireless communication networks of a third-party mobile phone operator, the success of our MVNO service will also largely depend on their wireless facilities, wireless network technologies and government authorizations. There can be no assurance that we will succeed in developing products and services that eventually become widely accepted, or that we will be able to timely release products and services that are commercially viable. Our inability to do so would have an adverse impact on our business, financial condition and results of operations.

 

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Japan is our largest market in terms of revenue, and our current business and future growth could be materially and adversely affected if we experience a decline in users or user engagement in Japan.

We are incorporated in Japan, and Japan is our largest market in terms of revenue. We also have the broadest product and service offerings in Japan, and we generated 86.9%, 75.8%, 70.4% and 71.1% of our revenues in Japan in 2013, 2014, 2015 and the first three months of 2016, respectively. We expect to continue to derive a substantial portion of our revenues from Japan in the near future. In general, a higher proportion of LINE users in Japan are paying users than LINE users in other countries, and our continuing growth will be dependent, at least in part, on maintaining or increasing revenues from users in Japan. In recent quarters, our active user growth rate in Japan has slowed, and our business performance in Japan will become increasingly dependent on our ability to increase the level of user engagement and our ability to further monetize users’ engagement with LINE. Our current business and future growth could be materially and adversely affected if we experience a decline in users or user engagement in Japan.

Due to the importance of the Japanese market to our business, we are also subject to macroeconomic risks specific to Japan. See “— A downturn in macroeconomic conditions may result in reduced demand for our products and services.”

We generate a substantial portion of our revenues from our advertising products. The loss of our advertisers, reduction in spending by our advertisers or failure to achieve market acceptance of new advertising products and services could negatively affect our business.

We generate a substantial portion of our revenues from third parties advertising on LINE, through their Official Accounts, Sponsored Stickers or LINE Point Ads, as well as from advertising on our livedoor and NAVER Matome (“Matome”) portals. In recent months, we have also generated an increasing portion of our advertising revenues from our Timeline Ads. As is common in the industry, our advertisers typically do not have long-term advertising commitments with us. Many of our advertisers spend only a relatively small portion of their overall advertising budget with us. In addition, some of our advertisers may view our products, such as Official Accounts, as experimental or unproven. Advertisers may not continue to do business with us, or they may reduce the prices or spending they are willing to pay to advertise with us, if we do not deliver advertisements and other commercial content in an effective manner, or if they do not believe that their investment in our advertising products and services will generate a competitive return relative to alternative methods of advertising.

In addition, our ability to increase our revenue will depend in large part on our ability to create successful new advertising products. We may introduce new and unproven advertising products and services, using advertising technology with which we have little or no prior development or operating experience. For example, we recently introduced advertisements on Timeline, LINE News and LINE Live, and a new advertisement distribution system based on Hike. If new advertising products and services fail to engage advertisers, we may fail to generate sufficient revenue to justify investment and our business may be adversely affected.

Our advertising revenue could also be adversely affected by a number of other factors, including:

 

    decreases in the number of active users and their engagement;

 

    our inability to improve our analytics and measurement solutions that demonstrate the value of advertising on LINE or our portals;

 

    our inability to create new products or services that sustain or increase the value of advertising on LINE or our portals;

 

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    product changes we may make that reduce the frequency or relative prominence of advertisements and other commercial content delivered through the LINE platform or our portals;

 

    our inability to increase the relevance of targeted ads shown to users;

 

    our inability to increase advertisers’ demand and inventory;

 

    loss of advertising market share to our competitors;

 

    adverse legal developments relating to advertising;

 

    adverse changes in the way online advertising on personal computers or mobile devices is priced;

 

    the degree to which users opt out of certain types of targeted ads;

 

    the impact of new technologies that could block or obscure the display of some types of advertisements and other commercial content; and

 

    the impact of macroeconomic conditions and conditions in the advertising industry in general.

The occurrence of any of these or other factors could result in a reduction in demand for advertisements, which may reduce the prices we receive for our advertisements, or cause advertisers to stop advertising with us altogether, either of which would negatively affect our business, financial condition and results of operations.

We generate a substantial portion of our revenues from a small number of our mobile games and rely on third-party game developers. We must continue to offer games that attract and retain a significant number of users, or otherwise our business, financial condition and results of operations could be negatively affected.

We offer various games on our LINE platform and they accounted for a significant portion of our revenues in 2013, 2014, 2015 and the first three months of 2016. We rely primarily on third-party game developers for the games offered on the LINE platform. As of March 31, 2016, we offered 56 games, of which 50 games were developed by third-party game developers and 6 games were developed by us. Accordingly, we believe that maintaining successful partnerships with, and the ability to attract and select from, third-party game developers are critical to our success. Existing and prospective mobile game developers may not be successful in developing games that create and maintain user engagement. Additionally, although our general policy is to enter into new contractual arrangements with third-party game developers to become the exclusive distributor of their games in a particular market, to the extent such arrangements are not yet in place, developers may choose to provide their content on other platforms, including mobile platforms controlled by our competitors, rather than offering them on the LINE platform. Our failure to maintain good relationships with third-party game developers or attract new developers could adversely affect our business, financial condition and results of operations.

Historically, we have depended on a small number of games for a majority of our mobile game revenues, and we expect that this dependence will continue for the foreseeable future. Our growth depends on our ability to consistently launch new games, whether developed internally or by third-party game developers, that achieve significant popularity, as well as to upgrade popular games with new features that our users find attractive. It is difficult to anticipate user preferences or demand, particularly as we procure new games in new genres or new markets, and constant enhancement requires the investment of significant resources. For example, in recent quarters MAUs of LINE games have decreased and while we have been able to maintain consistent MPUs of LINE games, there is no guarantee that we will be able to continue to do so. The success and performance of new and existing games is volatile and difficult to predict. If we fail to offer attractive in-game items, make unpopular changes to existing in-game items or offer games that do not encourage purchases of in-game items or upgrades of game versions, or if we fail to successfully launch new games that attract and retain a significant number of users or if upgrades and launches of new titles are delayed, revenues from our games will decrease and our business, financial condition and results of operations could be materially harmed.

 

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We generate a substantial portion of our revenues from our sale of Stickers, which is an evolving market, and if the popularity of Stickers declines from its current level in Japan or is not widely replicated in other markets, our business and future growth could be negatively affected.

We generate a substantial portion of our revenues from the sale of Stickers featuring characters developed by us as well as licensed from third parties, including our users who design and offer Stickers on Creators Market. The sale of Stickers is a rapidly evolving market, and the growth of the market for Stickers and the level of demand for, and market acceptance of, our Stickers are subject to a high degree of uncertainty. In particular, a substantial majority of revenues from the sale of our Stickers has been derived from sales in Japan, and there can be no assurance that such products will achieve a similar level of market acceptance elsewhere. Over time, users in Japan may also lose interest in purchasing new Stickers. Accordingly, revenue growth from our sale of Stickers depends to a large extent on our ability to consistently launch new and different types of Stickers that achieve significant popularity and effectively respond to changes in consumer demographics and public tastes and preferences. We also depend on third-party character developers and licensors for content that accounts for a substantial portion of our Sticker sales, and we expect that this dependence will continue for the foreseeable future. A decline in the popularity of our Stickers would negatively affect our business, financial condition and results of operations.

We plan to continue expanding our global operations into markets in which we have limited operating experience and, as a result, may become subject to increased business and economic risks, which could adversely affect our business, financial condition and results of operations.

We believe LINE is the leading mobile messaging application in Japan, Taiwan and Thailand in terms of number of users, and we have obtained substantial numbers of users in other parts of the world, including Indonesia, Hong Kong, Singapore, Malaysia and Myanmar in Asia, Egypt, Iran and Saudi Arabia in the Middle East, and the United States. We expect to continue to expand our global operations into new countries and to provide our offerings in additional languages. However, expansion of our operations abroad may be difficult due to the presence of established competitors in such markets. In addition, managing our business and expanding our operations globally require considerable management attention and resources and are subject to the particular challenges of supporting a rapidly growing business in an environment of multiple languages, cultures, customs, legal and regulatory systems and commercial markets. Global expansion has required and will continue to require us to invest significant funds and other resources, and there can be no assurance that we will successfully achieve our growth objectives.

Operating globally subjects us to new risks and may increase risks that we currently face, including risks associated with:

 

    providing an engaging user experience while operating in different languages and cultures, and localizing our products, services, content and features to ensure that they are culturally attuned to the markets where they are offered;

 

    increased competition from mobile applications and internet services that have strong positions in particular markets and may continue to expand their geographic footprint;

 

    different and potentially lower levels of user growth, user engagement and demand for online advertising in new and emerging geographies, resulting in greater difficulty in monetizing our products and services;

 

    recruiting and retaining talented and capable employees in foreign countries and maintaining our company culture across all of our offices;

 

    different levels of telecommunications infrastructure in developing countries that may create challenges in offering our products and services;

 

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    payment processing systems;

 

    compliance with applicable foreign laws and regulations, including laws and regulations with respect to economic sanctions and export controls, anti-corruption, anti-bribery and anti-kickback, privacy and consumer protection that may conflict with local customs and practices in some jurisdictions in which we operate and sell our products, and the risk of penalties if our practices are deemed not to be in compliance;

 

    political, social and economic instability in some countries;

 

    double taxation of our global earnings and potentially adverse tax consequences due to changes in the tax laws of Japan or other jurisdictions in which we operate; and

 

    higher costs of conducting business globally, including increased accounting, travel, infrastructure and legal compliance costs.

If we are unable to manage the complexity of our global operations successfully, our business, financial condition and results of operations could be adversely affected.

If we are not able to maintain and enhance our LINE brand, or if events occur that damage our reputation and brand, our relationships with our users, platform partners and advertisers may be harmed, which may negatively affect our business, financial condition and results of operations.

Since its introduction in June 2011, LINE has rapidly grown into a global platform for mobile messaging services and content distribution used in more than 230 countries, and we believe that the LINE brand has significantly contributed to the success of our business. We also believe that maintaining and enhancing our brand is critical to expanding our user base, platform partners and advertisers. Many of our new users are referred by existing users, and therefore we strive to ensure that our users are satisfied with our products and services and otherwise remain favorably inclined toward LINE. Maintaining and enhancing our brand will depend largely on our ability to continue to provide simple, user-friendly, reliable and innovative products and services, which we may not do successfully. We may introduce new products or terms of service that users do not like, which may negatively affect our brand. It may also negatively affect our brand if users do not have a positive experience using our platform partners’ applications offered on LINE as well as websites linked with LINE. We have in the past experienced, and we may continue to experience, media, legislative or regulatory scrutiny of our decisions regarding user privacy or other issues, including our measures to protect minors, which may adversely affect our reputation and brand. We may also fail to provide adequate customer service, which could erode confidence in our brand. Our brand may also be negatively affected by attacks from our competitors, by negative publicity about the actions of users that are deemed to be hostile, illegal or inappropriate to other users, by third-party content providers acting inappropriately with respect to the LINE platform, by users acting under false identities, by any regulatory developments designed to address such risks, or due to legal proceedings. Maintaining and enhancing our brand may require us to make substantial investments and these investments may not be successful. If we fail to successfully promote and maintain the LINE brand or if we incur excessive expenses in this effort, our business, financial condition and results of operations may be adversely affected.

We rely primarily on Apple App Store and Google Play as the channels for downloads of LINE and applications offered on the LINE platform as well as processing of payments, and any deterioration in our relationship with either of them may negatively impact our business.

We rely primarily on Apple App Store and Google Play as the channels for downloads of LINE and applications offered on the LINE platform as well as the processing of payments for our products and services. We expect that we will continue to rely on Apple App Store and Google Play for downloads of our applications as well as most of the payment processing for our products and services. Accordingly, we believe that maintaining successful partnerships with Apple and Google is critical to our success.

 

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The operating policies of Apple or Google have an impact on the accessibility of our products and services. In addition, our pricing strategy is impacted by changes in the payment processing fees charged by Apple or Google. Our inability to pass along increases in the payment processing fees charged by Apple or Google to our users on a timely basis or a decrease in paying user engagement due to a price increase may negatively impact our net revenue or profit margin. If we fail to maintain good relationships with Apple or Google, it may adversely impact our ability to continue to offer our products and services or effect payment processing, which in turn could have a material adverse impact on our business.

We have incurred significant operating losses in the past, and our ability to achieve profitability is uncertain.

We have incurred significant operating losses in the past. We recorded loss for the year of ¥6,391 million in 2013. We recorded profit for the year of ¥2,004 million in 2014 but recorded loss for the year of ¥7,972 million in 2015 and loss for the period of ¥234 million in the first three months of 2016, and we had an accumulated deficit of ¥19,301 million as of March 31, 2016. Although our revenues have grown rapidly, increasing from ¥39,586 million in 2013 to ¥86,366 million in 2014, ¥120,406 million in 2015 and ¥33,456 million in the first three months of 2016, our revenue growth rate has slowed recently and may do so in the future due to a variety of factors. We believe that our future revenue growth will depend on, among other factors, our ability to attract new users while retaining current users, increase user engagement and advertisement engagement, increase our brand awareness, compete effectively, maximize our sales efforts, demonstrate a positive return on investment for advertisers, successfully develop and operate new products and services and expand globally. Accordingly, you should not rely on the revenue growth of any prior quarterly or annual period as an indication of our future revenue growth.

We expect our operating expenses to increase in future periods as we continue to expend substantial financial resources on:

 

    sales and marketing;

 

    global expansion;

 

    our technology infrastructure;

 

    attracting and retaining talented employees;

 

    strategic opportunities, including commercial relationships, acquisitions and capital injections;

 

    operation of newly developed or newly acquired businesses; and

 

    general administration, including personnel costs and legal and accounting expenses related to being a public company.

These investments, while increasing our expenses, may not result in an increase in revenues or growth in our business. For example, our marketing expenses have from time to time outpaced the growth of our revenues over the same period, which have materially impacted our results of operations. If we are unable to achieve adequate revenue growth and to manage our expenses, we may incur significant losses in the future.

We have a limited operating history in the developing and rapidly evolving market for our products and services, which makes it difficult to evaluate our future prospects and may increase the risk that we will not be successful.

We launched our LINE messaging application in June 2011 and other LINE products and services more recently, and our limited operating history makes it difficult to effectively assess our future prospects or forecast

 

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our future results. You should consider our business and prospects in light of the risks and challenges we encounter or may encounter in this developing and rapidly evolving market environment. These risks and challenges include our ability to, among other things:

 

    increase our number of users and user engagement and monetize our products and services;

 

    successfully compete with other companies, some of which have substantially greater resources and market power than us, that are currently in, or may in the future enter, our markets, or duplicate the features of our products and services;

 

    successfully expand our business and enhance the LINE brand globally;

 

    continue to develop a reliable, scalable, secure, high-performance technology infrastructure that can efficiently handle increased usage globally;

 

    convince advertisers of the benefits of our advertising products and services compared to alternative forms of advertising;

 

    develop and deploy new features, products and services in a timely manner and the market acceptance of such offerings;

 

    cost-effectively manage and grow our operations;

 

    attract and maintain platform partners’ interest in building on the LINE platform;

 

    attract, retain and motivate talented management and employees, particularly software engineers, designers and product managers;

 

    process, store, protect and use personal data in compliance with governmental regulations, contractual obligations and other obligations related to privacy and security; and

 

    defend ourselves against litigation and regulatory, intellectual property, privacy or other claims.

Failure to adequately address the risks and challenges associated with this market may adversely affect our business, financial condition and results of operations.

Our user growth and engagement on mobile devices, which are required to access and use most of our products and services, depend upon effective operation with mobile operating systems that we do not control.

We are dependent on the interoperability of LINE with popular mobile operating systems, such as Android and iOS, and, to a lesser extent, web browsers, such as those for Windows and Mac OS, that we do not control. Any changes in such operating systems or web browsers that degrade the functionality of our products or services or give preferential treatment to our competitors’ products or services could adversely affect usage of our products and services. In addition, if the number of platforms for which we develop our products or services expands, it will result in an increase in our operating expenses.

We may not be successful in developing or maintaining relationships with key participants in the mobile telecommunications industry or in developing products that operate effectively with mobile operating systems, networks or standards. In the event that it becomes more difficult for our users to access and use LINE on their mobile devices, or if our users choose not to access or use LINE on their mobile devices or use mobile devices that do not offer access to LINE, our user growth and user engagement could be harmed, and our business, financial condition and results of operations could be adversely affected.

 

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If we or our users experience disruptions in mobile telecommunications or internet services or if mobile telecommunications and internet service providers are able to block, degrade or charge for access to our products and services, we could incur additional expenses and the loss of users and advertisers.

We depend on the ability of our users and advertisers to access mobile telecommunications services and the internet. Currently, this access is provided by companies that have significant market power in the mobile, broadband and internet access marketplaces, including incumbent mobile telecommunications companies, telephone companies, cable companies, government-owned service providers, device manufacturers and operating system providers, any of whom could take actions that degrade, disrupt or increase the cost of user access to our products or services, which would, in turn, negatively impact our business. The adoption of any laws or regulations that adversely affect the growth, popularity or use of mobile devices or the internet or disruption of our services in important markets for any political or other non-technical reasons could decrease the demand for, or the usage of, our products and services, increase our cost of doing business and adversely affect our business, financial condition and results of operations. We also rely on other companies to maintain reliable network systems that provide adequate speed, data capacity and security to us and our users. As mobile devices and the internet continue to experience growth in the number of users, frequency of use and amount of data transmitted, the mobile telecommunications and internet infrastructure that we and our users rely on may be unable to support the demands placed upon them. The failure of the operations of mobile telecommunications or internet infrastructure services that we or our users rely on, even for a short period of time, could undermine our operations, and our business, financial condition and results of operations could be adversely affected.

Certain of our user metrics are subject to inherent uncertainties in measurement, and real or perceived inaccuracies in such metrics may harm our reputation and negatively affect our business.

We use our internal data to calculate our MAUs, DAUs and MPUs. See “Conventions Used in This Prospectus” for definitions of such user metrics. While these numbers are based on what we believe to be reasonable estimates of our active user and paying user base for the applicable period of measurement, there are inherent challenges in measuring usage of our products and services across large online and mobile populations around the world. For example, each LINE account is linked to a mobile phone number and there may be multiple LINE accounts held by the same person if the person carries multiple smartphones and has chosen to download a LINE application on each smartphone.

We regularly review and may adjust our processes for calculating our internal metrics to improve their accuracy. Our measures of user growth and user engagement may differ from estimates published by third parties or from similarly-titled metrics of our competitors due to differences in methodology. If advertisers, platform partners or prospective investors do not perceive our user metrics to be accurate representations of our user base or user engagement, or if we discover material inaccuracies in our user metrics, our reputation may be harmed and platform partners and advertisers may be less willing to allocate their budgets or resources to our products and services.

Our business and operating results may be harmed by a disruption in our service due to failures in or changes to our systems, or by our failure to timely and effectively expand and adapt our technology and infrastructure.

Our reputation and ability to attract, retain, and serve our users is dependent in large part upon the reliable performance of LINE and our underlying technical infrastructure. Our systems may not be adequately designed with the necessary reliability and redundancy to avoid performance delays or outages that could be harmful to our business. We have experienced, and may in the future experience, service disruptions, outages and other performance problems due to a variety of factors, including infrastructure changes, human or software errors, hardware failure, capacity constraints due to an overwhelming number of people accessing our products and services simultaneously, computer viruses, denial of service or fraud or security attacks. Our technical infrastructure is also vulnerable to the risk of damage from natural disasters, such as earthquakes and typhoons,

 

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as well as from acts of terrorism or other criminal acts. Our services and products also incorporate software that is highly technical and complex. Our software has contained, and may now or in the future contain, undetected errors, bugs or vulnerabilities. Some errors in our software code may only be discovered after the code has been released.

In addition, a substantial portion of our network infrastructure is provided by third parties. Any disruption or failure in the services we receive from these providers could harm our ability to handle existing or increased traffic and could significantly harm our business. Any financial or other difficulties these providers face may also adversely affect our business, and we exercise little control over these providers, which increases our vulnerability to problems with the services they provide. In the event of a significant issue with the third-party network infrastructure supporting our network traffic, some of our products and services may become inaccessible or users may experience difficulties accessing our products and services. Any disruption or failure in our infrastructure could hinder our ability to handle existing or increased traffic on our platform, which could significantly harm our business.

As the number of our users increases and as our users generate and transmit increasing volumes of content, including photos, videos and music, we may be required to expand and adapt our technology and infrastructure to continue to reliably store and service such content. It may become increasingly difficult to maintain and improve the performance of our products and services, especially during peak usage times, as our products and services become more complex and our user traffic increases. In addition, we cannot provide assurance that we will be able to expand our data center infrastructure to meet user demand in a timely manner, or on favorable economic terms. If our users are unable to readily access LINE or access is disrupted, users may seek other service providers instead, and may not return to LINE or use LINE as often in the future. This would negatively impact our ability to attract users, platform partners and advertisers and increase engagement of our users. We expect to continue to make significant investments to maintain and improve the capacity, capability and reliability of our infrastructure. To the extent that we do not effectively address capacity constraints, upgrade our systems as needed or continually develop our technology and infrastructure to accommodate actual and anticipated changes in our users’ needs, our business, financial condition and results of operations may be harmed.

If our security measures are breached, or if our products and services are subject to attacks that disrupt or deny the ability of users to access our products and services, our products and services may be perceived as not being secure and users and advertisers may curtail or stop using our products and services.

Our products and services involve the storage and transmission of large amounts of users’ and advertisers’ confidential information, and security breaches expose us to a risk of loss of this information, which may lead to improper use or disclosure of such information, ensuing potential liability and litigation, any of which could harm our reputation and adversely affect our business. From time to time, we experience cyber-attacks of varying degrees. Although there has been no material instance where an unauthorized party was able to obtain access to our data or our users’ or advertisers’ data, there can be no assurance that we will not be vulnerable to cyber-attacks in the future. Our security measures may also be breached due to employee error, malfeasance or otherwise. Given the rapid development and scope of the services we offer, including those developed in conjunction with third parties, instituting appropriate access controls and safeguards across all our services is challenging. Furthermore, outside parties may attempt to fraudulently induce employees, users or advertisers to disclose sensitive information in order to gain access to our data or our users’ or advertisers’ data or accounts, or may otherwise obtain access to such data or accounts. In addition, some platform partners may store information provided by our users through applications on the LINE platform or websites linked with LINE. If these third parties or platform partners fail to adopt or adhere to adequate data security practices or fail to comply with our terms and policies, or in the event of a breach of their networks, our users’ data may be improperly accessed or disclosed.

Since our users and advertisers may use their LINE accounts to establish and maintain online identities, unauthorized communications from LINE accounts that have been compromised may damage their reputations

 

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and brands as well as ours. Any such breach or unauthorized access could result in significant legal and financial exposure, damage to our reputation and a loss of confidence in the security of our products and services, which could have an adverse effect on our business, financial condition and results of operations. Because the techniques used to obtain unauthorized access, disable or degrade service or sabotage systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived breach of our security occurs or the market perception of the effectiveness of our security measures is harmed, we could lose users and advertisers and we may incur significant legal and financial exposure, including legal claims and regulatory fines and penalties.

Our financial results are likely to continue to fluctuate from quarter to quarter, which makes our period-to-period results volatile and difficult to predict.

We emphasize growth and the increase in engagement of our user base over short-term financial results. Due in part to such focus, our quarterly financial results have fluctuated in the past and are likely to fluctuate in the future. As a result, you should not rely upon our past quarterly financial results as indicators of future performance. You should also take into account the risks and uncertainties frequently encountered by companies in rapidly evolving markets. Our financial results in any given quarter or fiscal period can be influenced by numerous factors occurring in a particular period, many of which we are unable to predict or are outside of our control, including:

 

    the development and introduction of new products or services by us or our competitors, particularly the launching of mobile games and Stickers and their market acceptance;

 

    our ability to attract and retain advertisers;

 

    the growth of revenue sources as well as adjustments in fees charged to users and advertisers;

 

    increases in marketing, sales and other operating expenses that we may incur to grow and expand our operations and to remain competitive;

 

    seasonal fluctuations in spending by our advertisers, especially in Japan where a majority of companies end their fiscal year on March 31 and advertising spending is traditionally stronger in our fourth and first quarters due to year-end effects and companies trying to spend their advertising budgets before the close of their fiscal year;

 

    introduction of new products and/or services, which may lead to higher expenses;

 

    changes in the way online advertising is priced;

 

    non-recurring transactions and related accounting and tax implications therefrom;

 

    unforeseen contingencies, such as adverse litigation judgments, settlements or other litigation-related costs;

 

    fluctuations in currency exchange rates and changes in the proportion of our revenue and expenses denominated in foreign currencies; and

 

    changes in business or macroeconomic conditions.

We may not be able to effectively manage our growth, which would harm our business and profitability.

We continue to experience rapid growth in our personnel and operations, which will continue to place significant demands on our management and operational and financial infrastructure. We face significant competition for qualified staff, particularly software engineers, designers and product managers, from other internet and high-growth technology companies, and we may not be able to hire new employees quickly enough to meet our needs. As we continue to grow, we are subject to the risks of over-hiring, overcompensating our

 

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employees and over-expanding our operating infrastructure, and to the challenges of integrating, developing and motivating a rapidly growing employee base in various countries around the world. As our organization continues to grow and we are required to implement more complex organizational management structures, we may find it increasingly difficult to maintain the strengths of our corporate culture, including our ability to quickly develop and launch new products and services. If we fail to effectively manage our hiring needs and successfully integrate our new hires, our employee morale, productivity and retention could suffer.

We also expect to continue to invest in our infrastructure in order to enable us to provide our products and services rapidly and reliably to users around the world, including in countries where we do not expect significant near-term monetization. Continued growth could strain our ability to maintain reliable service levels for our users and advertisers, develop and improve our operational, financial, legal and management controls, and enhance our reporting systems and procedures. As a public company we will incur significant legal, accounting and other expenses that we did not incur as a private company. Managing our growth will require significant expenditures and allocation of valuable management resources. If we fail to achieve the necessary level of efficiency in our organization as it grows, our business, financial condition and results of operations would be harmed.

Our LINE mobile payment service may subject us to additional regulatory requirements and other risks that could be costly and difficult to comply with or that could harm our business.

As part of our efforts to diversify the payment options available for LINE users, in December 2014 we launched LINE Pay, our mobile payment service application, on iOS and Android operating systems. LINE Pay allows our users to register their credit cards and make mobile payments, regardless of their mobile carrier. LINE Pay is in its initial stage and such credit card payments can only be made on LINE Store and a number of select online partner retail stores. This credit card payment component is generally available in any country where our users are able to make purchases on their credit cards. Our users in Japan, Thailand and Taiwan can remit funds to each other or withdraw cash from certain banks within their respective countries through LINE Pay by linking their accounts at select banks in their respective countries or, in the case of users in Japan and Taiwan, by adding money to their LINE Pay accounts from convenience stores or ATMs or through internet banking. In addition to making online payments, users in Thailand can use LINE Pay to make purchases at over 140 offline retailers. We plan to expand the scope of LINE Pay by selectively incorporating it into our applications and exploring local partnership and joint venture opportunities in order to increase the convenience of our users. Through our partnership with JCB Co., Ltd., a leading Japanese credit card company, we also launched LINE Pay Card, a JCB-branded prepaid debit card that allows both online and offline purchases at any place where JCB cards are accepted, in March 2016.

Depending on how our products and services as well as payment processes evolve, we may become subject to a variety of laws and regulations in Japan and elsewhere, including those governing money transmission, payment settlement, e-commerce, electronic funds transfers, anti-money laundering and counter-terrorist financing. In some jurisdictions, the application or interpretation of these laws and regulations is not clear. We are registered as a funds transfer service provider and issuer of prepaid payment instruments for third-party businesses in Japan through LINE Pay Corporation, our subsidiary engaged in mobile payment service, which will generally require us to demonstrate compliance with many domestic laws in these areas. In the event that we are found to be in violation of any such legal or regulatory requirements, we may be subject to monetary fines or other penalties or sanctions such as a cease and desist order, or we may be required to make product changes, any of which could have an adverse effect on our business and financial results.

In addition, we may be subject to a variety of additional risks as a result of providing mobile payment services, including:

 

    increased operational costs and diversion of management time and effort and other resources to deal with fraudulent or failed transactions or customer disputes;

 

    the impact on our relationships with existing payment processing service providers;

 

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    increased capital costs in building out the infrastructure;

 

    potential fraudulent or otherwise illegal activity by users, platform partners, employees or third parties;

 

    leakage of customers’ personal information and concerns over the use and security of collected information;

 

    restrictions on the investment of consumer funds used to transact payments; and

 

    additional disclosure and reporting requirements.

We depend on key senior management to operate our business and execute our business strategy, and if we are unable to attract, retain and motivate our senior management and other key personnel, our operations may be negatively affected.

Our ability to execute our strategy efficiently is dependent upon contributions from our key senior management. Our future success will depend on the continued service of our key executive officers and managers who possess significant expertise and knowledge of our industry. A limited number of individuals have primary responsibility for the management of our business, including our relationships with key platform partners. From time to time, there may be changes in our senior management team that may be disruptive to our business, and we may not be able to find replacement key personnel in a timely manner. In addition, acquiring and retaining qualified personnel, such as systems engineers and designers, will be necessary to our achieving sustainable growth. Any loss or interruption of the services of these individuals, whether from retirement, loss to competitors or other causes, or failure to attract and retain other qualified new personnel, could prevent us from effectively executing our business strategy, cause us to lose key platform partner relationships, or otherwise materially affect our operations.

A downturn in macroeconomic conditions may result in reduced demand for our products and services.

Our business is sensitive to global economic conditions and depends on demand from our user base. There are many macroeconomic factors that influence consumer confidence and spending behavior, including the level of inflation and unemployment, fluctuations in energy prices and conditions in the real estate markets. Although there have been signs of global economic recovery in recent years, this recovery may be fragile and partially attributable to the effects of various government economic stimulus efforts. The sustainability of the global recovery is uncertain, particularly after the effects of these various government stimulus programs subside. The global financial markets continue to experience significant volatility as a result of, among other things, the slowdown of economic growth and financial instability in China and other major emerging market economies. In addition, economic and political instability in various countries in the Middle East and Northern Africa, including Iraq, Syria and Egypt, as well as in Ukraine and Russia, have resulted in an increase in volatility in the global financial markets. The outlook for the global economy in 2016 and beyond remains uncertain.

In recent years, the economic indicators in Japan, our largest market in terms of revenue and user base, have also shown mixed signs, and future growth of the Japanese economy is subject to many factors beyond our control. The current administration of Prime Minister Shinzo Abe, formed in late December 2012, has introduced policies to combat deflation and promote economic growth. In addition, the Bank of Japan introduced a plan for quantitative and qualitative monetary easing in April 2013 and announced a negative interest rate policy in January 2016. However, the long-term impact of these policy initiatives on Japan’s economy remains uncertain. In addition, the occurrence of large-scale natural disasters, such as the March 2011 Great East Japan Earthquake and the related Fukushima Daiichi nuclear disaster, as well as an increase in the consumption tax rate, which took place in April 2014 with a further increase expected in October 2019, may also adversely impact the Japanese economy, potentially impacting consumer spending and advertising spending by businesses. Any future deterioration of the Japanese or global economy may result in a decline in consumption that would have a negative impact on demand for our products and services and their prices.

 

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Our acquisitions and investments may not be successful in achieving their intended goals and could harm our business, financial condition and results of operations.

Our success will depend, in part, on our ability to expand our products and services, and grow our business in response to changing technologies, user and advertiser demands, and competitive pressures. In some circumstances, we may determine to do so through the acquisition of complementary businesses and technologies rather than through internal development. The identification of suitable acquisition candidates can be difficult, time-consuming and costly, and we may not be able to successfully complete identified acquisitions. We have limited experience acquiring other businesses, and our ability to acquire and integrate other companies and assets, particularly larger or more complex companies, products, or technologies, in a successful manner remains subject to uncertainty. Any completed acquisitions may not achieve their intended goals and could be viewed negatively by users, platform partners, advertisers or investors. For example, we acquired assets of MixRadio, a mobile music streaming service, from Microsoft in March 2015, but after careful assessment of the overall performance of MixRadio, the financial challenges posed by the music streaming market, changing market conditions, an increase in the cost of maintaining the business and a shift in our overall priorities, our board of directors approved the abandonment of our MixRadio business in February 2016, which abandonment became effective on March 21, 2016. As a result, we have retrospectively classified the MixRadio operations as a discontinued operation in our consolidated financial statements as of and for the year ended December 31, 2015 and recognized impairment charges of ¥4.6 billion in the three months ended December 31, 2015. We also incurred additional restructuring costs of ¥1,183 million related to employee termination benefits and ¥127 million for the termination of office lease contracts, in the first three months of 2016 as a result of the abandonment of the MixRadio operations. For more information, see Note 24 and Note 35 of the notes to our annual consolidated financial statements and Note 9 of the notes to our interim condensed consolidated financial statements appearing elsewhere in this prospectus.

The risks we face in connection with acquisitions also include:

 

    diversion of management time and focus from operating our business to addressing acquisition and integration challenges;

 

    challenges associated with the integration of product development and sales and marketing functions of the acquired company;

 

    challenges associated with the retention of key employees from the acquired company;

 

    cultural and operational challenges associated with integrating employees from the acquired company into our organization;

 

    challenges associated with the integration of the acquired company’s accounting, management information, human resources and other administrative systems;

 

    the need to implement or improve controls, procedures, and policies at a business that prior to the acquisition may have lacked effective controls, procedures and policies;

 

    liability for activities of the acquired company before the acquisition, including intellectual property infringement claims;

 

    unanticipated write-offs or charges or impairment of goodwill; and

 

    litigation or other claims in connection with the acquired company, including claims from terminated employees, customers, former shareholders or other third parties.

Our failure to address these risks or other problems encountered in connection with our past or future acquisitions or investments could cause us to fail to realize the anticipated benefits of these acquisitions or

 

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investments, cause us to incur unanticipated liabilities, or could otherwise harm our business generally. Future acquisitions could also result in dilutive issuances of our equity securities or the incurrence of debt, contingent liabilities, amortization expenses or incremental operating expenses.

We may require additional capital to support our operations and the growth of our business, and we cannot be certain that financing will be available on reasonable terms when required, or at all.

From time to time, we may need additional financing to operate or grow our business. In the past, we have relied not only on debt financing but also on proceeds from issuances of shares of our capital stock to NAVER Corporation, our parent, as well as equity investment by NAVER Corporation into our subsidiary, LINE Plus Corporation, which has since become our wholly-owned subsidiary. Our ability to obtain additional financing, if and when required, will depend on investor and lender demand, our operating performance, the condition of the capital markets and other factors, and we cannot assure you that additional financing will be available to us on favorable terms, or at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support the operation and growth of our business could be significantly impaired and our operating results may be adversely affected.

Our business is subject to complex and evolving Japanese and foreign laws and regulations. These laws, regulations and actions are subject to change and uncertain interpretation, and could result in claims, changes to our business practices, monetary penalties, increased cost of operations or declines in user growth, user engagement or advertising engagement, restricted access to LINE or otherwise harm our business.

We are subject to a variety of laws and regulations in Japan and elsewhere that involve matters central to our business, including privacy, rights of publicity, data protection and protection of personal information, content regulation, intellectual property, competition, protection of minors, consumer protection and taxation. See “Regulation” for a discussion of various laws and regulations applicable to us. Many of these laws and regulations are still evolving and could be interpreted or applied in ways that could limit our business, particularly in the new and rapidly evolving industry in which we operate. The introduction of new products or services in our existing markets and the expansion of our business to other countries may subject us to additional laws and regulations.

A number of proposals are pending before legislative and regulatory bodies that could significantly affect our business. For example, there have been a number of recent legislative proposals in Japan that would impose new obligations in areas such as privacy and liability for copyright infringement by third parties that could affect liabilities associated with websites that publish user-generated content. An amendment to the Act on the Protection of Personal Information of Japan (the “Act on the Protection of Personal Information”) was enacted in September 2015 and is expected to be fully enforced within two years from the date of the enactment. This amendment includes establishment of a new regulatory authority and introduction of new regulations on handling of anonymous personal data and transfer of personal information to foreign countries.

We collect personal information from our users and may expand our collection of personal information in order to comply with new and additional regulatory demands or we may independently decide to do so. Having additional personal information may subject us to additional regulation, and governmental regulators have been applying increased scrutiny to social media companies in this respect. Additionally, if third parties we work with, such as advertisers or platform partners, violate applicable laws or our policies, such violations may also put our users’ information at risk and could in turn have an adverse effect on our business. Further, it is difficult to predict how existing laws and regulations will be applied to our business and the new laws and regulations to which we may become subject, and it is possible that they may be interpreted and applied in a manner that is inconsistent with our practices. For example, we believe that our products and services are not subject to regulations under the Act on Regulation on Soliciting Children by Using Opposite Sex Introducing Service on Internet of Japan, but there can be no assurance that we will not be subject to certain processes, administrative sanctions, fines or restrictions under such regulations in the future. Existing and proposed laws

 

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and regulations in any jurisdiction can be costly to comply with and can delay or impede the development of new products and services, result in negative publicity, significantly increase our operating costs, require significant time and attention of management and technical personnel and subject us to inquiries or investigations, claims or other remedies, including fines or demands that we modify or cease existing business practices.

The Payment Services Act of Japan (the “Payment Services Act”) requires entities that engage in business activities involving advance payments from customers using prepaid payment instruments, such as virtual currencies, to set aside for such customers amounts covering at least 50% of the total amount of the unused amounts or credits represented by such instruments issued as of the end of either the first or third quarter of any year (if such total amount is more than ¥10 million), either by making a deposit or by entering into guarantee or trust agreements, as well as to refund any remaining balance of virtual currencies issued if those entities stop selling such virtual currencies. We are registered with the Director of the Kanto Local Finance Bureau (“KLFB”) as an issuer of prepaid payment instruments. During the first half of 2016, the KLFB conducted an inspection of our business as an issuer of prepaid payment instruments and issued a notice of inspection results on May 16, 2016. Following the determination that one of our in-game items, for which we had not made a deposit or entered into a guarantee or trust agreement, would be deemed a prepaid payment instrument, on May 24, 2016 we entered into an additional guarantee agreement for ¥12.6 billion with an annual guarantee fee rate of 0.1% to comply with the Payment Services Act requirement, which resulted in an additional annual guarantee expense of ¥12.6 million. We are in the process of reviewing all of our in-game items that may potentially be deemed prepaid payment instruments, and accordingly, it may become necessary to enter into additional arrangements to comply with the Payment Services Act requirement in connection with any such in-game items. While we intend to enter into additional guarantee agreements to meet any additional deposit requirements, entering into additional guarantee agreements will require us to pay guarantee fees equal to the contractual amount times a guarantee fee rate, and there is no assurance that we will be able to enter into additional guarantee agreements on favorable terms when required, or at all. Any failure to enter into contractual arrangements on terms satisfactory to us when required may adversely affect our business, financial condition, results of operations and/or reputation. See “Regulation — Payment Services Regulations.”

It is also possible that governments or relevant regulators of one or more countries may seek to censor content offered on the LINE platform in their country, restrict access to LINE from their country entirely, or impose other restrictions that may affect the accessibility of LINE in their country for an extended period of time or indefinitely. For example, in China, message transmission service on our LINE messaging application, along with those of certain other non-Chinese service providers, was abruptly blocked on July 1, 2014. As of the date of this prospectus, our online services generally remain blocked in China, although we understand that certain users are able to access the service from China. We do not know when our services will be completely restored. If our services are not completely restored, our efforts to expand our user base in the rapidly evolving, highly competitive Chinese market may be significantly harmed. In addition, China’s State Internet and Information Office has issued rules requiring users of mobile messaging services who open new “public accounts,” which allow the accountholder to post messages to broad groups, to register using their real names and agree to follow certain guidelines regarding how they use their public accounts. While these rules may not directly impact our platform or services, increased focus on mobile messaging services by the Chinese government may result in other restrictions on access to our services. In the event that access to LINE is restricted, in whole or in part, in one or more other countries, our ability to retain or increase our user base and user engagement may be adversely affected, we may not be able to maintain or grow our revenue as anticipated, and our business, financial condition and results of operations could be adversely affected.

We are regulated as a telecommunications company under Japanese law. If our business were deemed to be a regulated telecommunications business in multiple jurisdictions, it would significantly increase our expenses and may require us to change our products and other aspects of our business in potentially detrimental ways.

We are regulated as a telecommunications company pursuant to Japanese law, and we have submitted required notifications to the Ministry of Internal Affairs and Communication of Japan. We are subject to the risk

 

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that, due to changes in telecommunications, e-commerce and other similar laws and regulations or in the application, interpretation or enforcement of both existing and future such laws and regulations, we may be required to comply with additional laws and regulations in Japan and in other jurisdictions. In addition, we are continually seeking ways to improve our products and services, which may involve from time to time upgrades or changes in the technological infrastructure on which our products and services are based and which could result in subjecting our activities to greater regulation in multiple jurisdictions. If we are required to comply with telecommunications, e-commerce and other similar laws and regulations in multiple jurisdictions, we would need to meet a number of obligations, which could vary from jurisdiction to jurisdiction, including new or enhanced compliance in the following areas:

 

    licensing and notification requirements;

 

    emergency calling requirements, including enhanced emergency calling through multi-line telephone systems;

 

    universal service fund contribution requirements;

 

    lawful interception or wiretapping requirements;

 

    privacy and data retention and disclosure requirements;

 

    limitations on our ability to use encryption technology;

 

    disability access requirements;

 

    consumer protection requirements and local dispute resolution requirements;

 

    requirements related to customer support;

 

    quality of service requirements;

 

    provision of numbering directories;

 

    numbering rules, including portability requirements;

 

    directory and operator services; and

 

    access and interconnection obligations.

If we are required to comply with telecommunications, e-commerce and other similar laws and regulations in multiple jurisdictions, it could affect our business in many ways and areas, including the following:

 

    the cost and general impact of compliance would be substantial, may require significant investments and organizational changes and may erode or eliminate our pricing advantage over competing forms of communication and, potentially, our ability to compete effectively;

 

    compliance may require us to make certain fundamental and potentially detrimental changes to the products and services we offer and the way we conduct business in certain countries, including withdrawing from markets;

 

    compliance may be technically difficult or impossible;

 

    we may need to change our distribution, marketing and sales activities;

 

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    we may need to terminate or restructure partnerships and other commercial agreements; and

 

    we may need to establish a local presence in any given jurisdiction, sell our products through a local entity and be required to pay new or increased taxes in that jurisdiction.

Our intellectual property rights are valuable, and our inability to protect them could reduce the value of our products, services and brand.

Our trade secrets, trademarks, copyrights, patents and other intellectual property rights are important assets for us. We rely on, and expect to continue to rely on, a combination of confidentiality and license agreements with our employees, consultants and third parties with whom we have relationships, as well as trademark, trade dress, domain name, copyright, trade secret and patent laws, to protect our brand and other intellectual property rights. However, various events outside of our control may pose a threat to our intellectual property rights, as well as to our products, services and technologies. For example, we may fail to obtain effective intellectual property protection, or effective intellectual property protection may not be available in every country in which our products and services are available. In particular, the legal regimes relating to intellectual property rights in many of the countries in which we operate are limited and it is often difficult to effectively protect and enforce such rights in those countries. Also, the efforts we have taken to protect our intellectual property rights may not be sufficient or effective, and any of our intellectual property rights may be challenged, which could result in them being narrowed in scope or declared invalid or unenforceable. There can be no assurance that our intellectual property rights will be sufficient to protect against others offering products or services that are substantially similar to ours and compete with our business.

We also rely on non-patented proprietary information and technology, such as trade secrets, confidential information, know-how and technical information. While in certain cases we have agreements in place with employees and third parties that place restrictions on the use and disclosure of this intellectual property, these agreements may be breached, or this intellectual property may otherwise be disclosed or become known to our competitors, which could cause us to lose competitive advantages resulting from this intellectual property. We are also pursuing registration of trademarks and domain names in Japan and in many jurisdictions outside of Japan. Effective protection of trademarks and domain names is expensive and difficult to maintain, both in terms of application and registration costs as well as the costs of defending and enforcing those rights. We may be required to protect our rights in an increasing number of countries, in a process that is expensive and may not be successful or which we may not pursue in every country in which our products and services are distributed or made available.

We are party to numerous agreements that grant licenses to third parties to use our intellectual property, including our trademarks. For example, some third parties distribute their content through LINE, embed LINE content in their applications, and make use of our trademarks in connection with their services. If the licensees of our trademarks are not using our trademarks properly, it may limit our ability to protect our trademarks and could ultimately result in our trademarks being declared invalid or unenforceable. There can be no assurance that we will be able to protect against the unauthorized use of our brand, trademarks or other assets. There is also a risk that one or more of our trademarks could become generic, which could result in them being declared invalid or unenforceable.

We also seek to obtain patent protection for some of our technology, and we have filed various applications in Japan and abroad for protection of certain aspects of our intellectual property and currently hold a number of issued patents in multiple jurisdictions. We may be unable to obtain patent or trademark protection for our technologies and brands, and our existing patents and trademarks, and any patents or trademarks that may be issued in the future, may not provide us with competitive advantages or distinguish our products and services from those of our competitors. In addition, any patents and trademarks may be contested, circumvented, or found unenforceable or invalid, and we may not be able to prevent third parties from infringing, diluting or otherwise violating them. Effective protection of intellectual property rights is expensive and difficult to maintain, both in

 

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terms of application and maintenance costs, as well as the costs of defending and enforcing those rights. Significant impairments of our intellectual property rights, and limitations on our ability to assert our intellectual property rights against others, could harm our business and our ability to compete.

We may become party to intellectual property rights claims in the future that are expensive and time consuming to defend, and, if resolved adversely, could have a significant impact on our business.

Technology companies own large numbers of patents, copyrights, trademarks and trade secrets, and frequently enter into litigation based on allegations of infringement, misappropriation or other violations of intellectual property or other rights. Many such companies, including many of our competitors, have substantially larger patent and intellectual property portfolios than we do, which could make us a target for litigation as we may not be able to assert counterclaims against parties that sue us for patent or other intellectual property infringement. In addition, various “non-practicing entities” that own patents and other intellectual property rights often attempt to aggressively assert claims in order to extract payments from technology companies. From time to time we have received, and may receive in the future, claims from third parties which allege that we have infringed upon their intellectual property rights. Furthermore, from time to time we may introduce new products and services, including in areas where we currently do not have an offering, which could increase our exposure to patent and other intellectual property claims from competitors and non-practicing entities. Some of our agreements with advertisers, platform partners and data partners require us to indemnify them for certain intellectual property claims against them, which could require us to incur considerable costs in defending such claims, and may require us to pay significant damages in the event of an adverse ruling. Such advertisers, platform partners and data partners may also discontinue use of our products, services and technologies as a result of injunctions or otherwise, which could result in loss of revenue and adversely impact our business.

As we face increasing competition and gain an increasingly high profile, patents and other intellectual property claims against us may grow. There may be intellectual property or other rights held by others, including issued or pending patents, that cover significant aspects of our products and services, and we cannot be sure that we are not infringing or violating, and have not infringed or violated, any third-party intellectual property rights or that we will not be held to have done so or be accused of doing so in the future. Any claim or litigation alleging that we have infringed or otherwise violated intellectual property or other rights of third parties, with or without merit, and whether or not settled out of court or determined in our favor, could be time-consuming and costly to address and resolve, and could divert the time and attention of our management and technical personnel. Some of our competitors have substantially greater resources than we do and are able to sustain the costs of complex intellectual property litigation to a greater degree and for longer periods of time than we could. The outcome of any litigation is inherently uncertain, and there can be no assurance that favorable final outcomes will be obtained. In addition, plaintiffs may seek, and we may become subject to, preliminary or provisional rulings in the course of any such litigation, including potential preliminary injunctions requiring us to cease some or all of our operations. We may decide to settle such lawsuits and disputes on terms that are unfavorable to us. Similarly, if any litigation to which we are a party is resolved adversely, we may be subject to an unfavorable judgment that may not be reversed upon appeal. The terms of such a settlement or judgment may require us to cease some or all of our operations or pay substantial amounts to the other party. In addition, we may have to seek a license to continue practices found to be in violation of a third party’s rights. If we are required or choose to enter into royalty or licensing arrangements, such arrangements may not be available on reasonable terms, or at all, and may significantly increase our operating costs and expenses. As a result, we may also be required to develop or procure alternative non-infringing technology or discontinue use of the technology. The development or procurement of alternative non-infringing technology could require significant effort and expense or may not be feasible. An unfavorable resolution of any disputes and litigation could adversely affect our business, financial condition and results of operations.

 

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Fluctuation of the value of the Japanese yen against certain foreign currencies may have a material adverse effect on the results of our operations.

Some of our foreign operations’ functional currencies are not the Japanese yen, and the financial statements of such foreign operations prepared initially using their functional currencies are translated into Japanese yen. Since the currency in which sales are recorded may not be the same as the currency in which expenses are incurred, foreign exchange rate fluctuations may materially affect our results of operations. In 2013, 2014, 2015 and the first three months of 2016, 13.1%, 24.2%, 29.6% and 28.9%, respectively, of our revenues were derived from markets outside of Japan, and we expect that an increasing portion of our revenues and expenses in the future will be denominated in currencies other than the Japanese yen. Accordingly, our consolidated financial results and assets and liabilities may be materially affected by changes in the exchange rates of foreign currencies in which we conduct our business. We strive to naturally offset our foreign exchange risk by matching foreign currency receivables with our foreign currency payables, and our overseas subsidiaries seek to conduct business transactions in the local currency of the respective market in which the transactions occur. When deemed appropriate, we also selectively use derivative contracts, primarily foreign currency forward contracts. However, there can be no assurance that our hedging activities will be successful in protecting us from adverse impacts from currency exchange rate fluctuations, and fluctuation of the Japanese yen against certain foreign currencies may have a material adverse effect on our results of operations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Market Risk — Exchange Rate Risk” for a discussion of our foreign currency exposure and sensitivity analysis.

We may have exposure to greater than anticipated tax liabilities.

Our income tax obligations are based on our corporate operating structure and intercompany arrangements, including the manner in which we develop, value, and use our intellectual property and the valuations of our intercompany transactions. The tax laws applicable to our business activities, including the laws of Japan and other jurisdictions, are subject to interpretation. The taxing authorities of the jurisdictions in which we operate may challenge our methodologies for valuing developed technology or intercompany arrangements, which could increase our worldwide effective tax rate and harm our financial position and results of operations. In addition, our future income taxes could be adversely affected by earnings being lower than anticipated in jurisdictions that have lower statutory tax rates and higher than anticipated in jurisdictions that have higher statutory tax rates, by changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws, regulations or accounting principles. We are subject to regular review and audit by tax authorities of various jurisdictions in which we operate. Any adverse outcome of such a review or audit could have a negative effect on our financial position and results of operations. In addition, the determination of our worldwide provision for income taxes and other tax liabilities requires significant judgment by management, and there are many transactions where the ultimate tax determination is uncertain. Although we believe that our estimates are reasonable, the ultimate tax outcome may differ from the amounts recorded in our financial statements and may materially affect our financial results in the period or periods for which such determination is made.

Due to the global nature of our business, we are subject to trade, economic sanctions and export laws and regulations in various jurisdictions that may govern or restrict our business and we, our directors and officers, may be subject to fines or other penalties for non-compliance with applicable trade, economic sanctions and export laws and regulations.

The U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) administers and enforces certain laws and regulations (“OFAC Sanctions”) that impose restrictions upon U.S. persons regarding dealings with or related to certain countries and territories, governments, entities and individuals. Even though non-U.S. persons generally are not always directly bound to comply with OFAC Sanctions, in recent years, OFAC has asserted that such non-U.S. persons can be held liable for violations of OFAC Sanctions on various legal grounds, such as with respect to dealings in U.S. goods, services, or technology, or involving U.S. parties, causing violations by U.S. persons, or by engaging in transactions completed in part in the United States. In addition to the OFAC Sanctions, the United States maintains numerous secondary sanction programs that provide

 

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authority for the imposition of U.S. sanctions on foreign parties that engage in certain dealings with Iran and other U.S. sanctions targets regardless of whether there is a nexus to the United States. Following the occurrence on January 16, 2016 of “Implementation Day” of the Joint Comprehensive Plan of Action between the “P5+1” countries (including the United States) and Iran, pursuant to which Iran agreed to limits on its nuclear program and the P5+1 countries agreed to provide certain sanctions relief, secondary sanctions targeting Iran have been narrowed but not eliminated. For example, non-U.S. persons can still be sanctioned for engaging in dealings with certain persons on OFAC’s Specially Designated Nationals (“SDN”) list.

The European Union also enforces certain laws and regulations (“EU Sanctions”) that impose restrictions upon nationals and entities of, and business conducted in, European Union member states with respect to activities or transactions with certain countries, governments, entities and individuals that are the subject of EU Sanctions. The United Nations Security Council and other governmental entities also impose similar sanctions.

LINE can be used in 230 countries, including some countries and regions that are the subject of trade embargos and other economic sanctions (such as Iran), and we may have individual users who are the target of sanctions. In March 2016, we had approximately 9 million MAUs in Iran. In addition, LINE provides Official Accounts to local Iranian celebrities and engages in promotional activities directed at users in Iran. On May 5, 2016, we launched a website containing media content directed at users in Iran. Our business with Iran represented approximately 0.01% and 0.03% of our revenues for the year ended December 31, 2015 and the first three months of 2016, respectively. In addition, LINE Pay is available to users in Iran, Cuba, Sudan and Syria. We do not have a system in place to screen users of our services against OFAC’s SDN list and, accordingly, cannot guarantee that our services are not and will not be provided to SDNs.

The global nature of our business subjects us to the laws and regulations of various jurisdictions. Our significant international operations also expose us to economic sanctions risk and our continued expansion may increase the risk of violation of applicable economic sanctions laws and regulations. We intend our operations to comply with all applicable economic sanctions. Personal communications services are given favorable treatment under a number of economic sanctions regimes. However, given the global nature of our business, the fact that our business extends beyond personal communications services and the complexity and lack of certainty regarding the scope of some countries’ laws, there can be no assurance that our efforts to comply with all applicable economic sanctions and embargo laws and regulations will be completely effective to detect and prevent violations. There can also be no assurance that we will be in compliance with all applicable economic sanctions laws and regulations in the future. Such a violation could result in reputational damage, civil or criminal penalties or the imposition of sanctions against us or our affiliates, all of which could have a material adverse effect on our business, financial condition and reputation.

Risks Related to Our Initial Public Offering

Upon completion of this global offering, NAVER Corporation will own 83.3% of the outstanding shares of our common stock and continue to have substantial control over us, which will limit your ability to influence the outcome of important corporate decisions, including transactions involving a change in control.

Upon completion of this global offering, NAVER Corporation will own 83.3% (before exercise of any over-allotment options) of the outstanding shares of our common stock assuming no change in our capital stock or our ownership held by NAVER Corporation following this global offering. As a result, NAVER Corporation will continue to be able to influence or control matters requiring approval by our shareholders, including the election of directors and the approval of mergers, acquisitions or other extraordinary transactions. NAVER Corporation may also have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests. This concentration of ownership may also have the effect of delaying, preventing or deterring a change in control of our company, could deprive our shareholders of an opportunity to

 

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receive a premium for their shares of our common stock as part of a sale of our company and might ultimately affect the market prices of shares of our common stock and ADSs.

We also engage in a number of related party transactions with NAVER Corporation and our affiliates. See “Certain Relationships and Related Party Transactions” for a discussion of our transactions with such entities. In the event NAVER Corporation, a publicly traded company, undergoes a change of control or experiences financial and other difficulties, it may materially and adversely affect our business, financial condition and results of operations.

Our parent, NAVER Corporation, offers a variety of products and services to internet users and advertisers, and the absence of contractually delineated spheres of operations means that competition and conflicts of interest between us and NAVER Corporation could arise in the future.

NAVER Corporation is publicly listed in Korea and also provides a variety of products and services to internet users, mobile application users and advertisers. NAVER Corporation operates the largest search portal site in Korea and is actively seeking to develop products and services to enhance the experience of mobile internet users. There is no contractual agreement between us and NAVER Corporation delineating our respective spheres of operation, and each company’s development team is actively introducing new services independently of one another. Current or future products and services offered by NAVER Corporation could compete with our own. NAVER Corporation’s business operations and the lack of contractual non-competition arrangements between NAVER Corporation and us could give rise to direct competition between us and conflicts regarding allocation of business opportunities and management and investment resources.

Overlapping management and business relationships with NAVER Corporation, our parent, may adversely impact our business.

Some of our senior management have overlapping duties with NAVER Corporation. Mr. Hae Jin Lee, our chairman, also serves as chairman of the board of directors of NAVER Corporation, and Mr. In Joon Hwang, our chief financial officer, serves as director of NAVER Corporation. In addition, one of our three corporate auditors, Mr. Jin Hee Kim, is an executive officer of NAVER Corporation. These individuals have fiduciary duties to both NAVER Corporation and us under Korean and Japanese law, respectively. As a result, conflicts of interests may arise due to their dual roles, which may adversely impact our business.

An active public trading market for shares of our common stock or ADSs may not develop, and they may trade below the initial public offering price.

Prior to this initial public offering, there has been no public market for shares of our common stock or ADSs. We have received approval to list and trade shares of our common stock on the Tokyo Stock Exchange and will apply to have our ADSs listed on the New York Stock Exchange. If active trading markets for shares of our common stock or ADSs do not develop after this global offering, the market prices and liquidity of shares of our common stock or ADSs may be materially and adversely affected. The initial public offering prices of shares of our common stock and ADSs were determined through negotiation between us and the underwriters, and these prices do not necessarily reflect the price at which investors in the market will be willing to buy and sell shares of our common stock or ADSs following this global offering. Investors in this global offering may experience a significant decrease in the market value of their investments regardless of our operating performance or prospects.

The market prices of shares of our common stock and ADSs may be volatile or may decline regardless of our operating or financial performance.

The market prices of shares of our common stock and ADSs following this global offering may fluctuate substantially and may be higher or lower than the initial public offering price. Market prices could be

 

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subject to wide fluctuations in response to various factors, many of which are beyond our control and may not be related to our operating or financial performance. These fluctuations could cause you to lose all or part of your investment since you might be unable to sell your shares of our common stock or ADSs at or above the price you paid in this global offering.

Factors that could cause fluctuations in the market prices of shares of our common stock and ADSs include the following:

 

    price and volume fluctuations in the global stock markets from time to time;

 

    changes in operating performance and stock market valuations of other technology sector companies generally, or those in our industry in particular;

 

    sales of shares of our common stock by us or our parent company;

 

    failure of securities analysts and credit rating agencies to maintain coverage of us, changes in financial estimates by securities analysts and credit rating agencies who follow our company, or our failure to meet these estimates or the expectations of investors;

 

    the financial projections we may provide to the public (in the event we decide to provide any such projections), any changes in those projections or our failure to meet those projections;

 

    announcements by us or our competitors of new products and services;

 

    the public’s reaction to our and NAVER Corporation’s press releases, other public announcements as well as filings with the SEC and the KLFB and timely disclosure of information required by the Tokyo Stock Exchange in our case and filings with the Korea Exchange in NAVER Corporation’s case;

 

    rumors and market speculation involving us or other companies in our industry;

 

    actual or anticipated changes in our results of operations or fluctuations in our results of operations;

 

    actual or anticipated developments in our business, our competitors’ businesses or the competitive landscape generally;

 

    litigation involving us, our industry or both, or investigations by regulators into our operations or those of our competitors;

 

    developments or disputes concerning our intellectual property or other proprietary rights;

 

    announced or completed acquisitions of businesses or technologies by us or our competitors;

 

    new laws or regulations or new interpretations of existing laws or regulations applicable to our business;

 

    changes in tax laws and regulations as well as accounting standards, policies, guidelines, interpretations or principles;

 

    any significant change in our management; and

 

    general economic conditions and slow or negative growth of our markets.

 

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In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. This type of litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

We may be classified as a passive foreign investment company for U.S. federal income tax purposes, which could subject U.S. investors in shares of our common stock or ADSs to adverse tax consequences, which may be significant.

We will be classified as a passive foreign investment company (a “PFIC”) in any taxable year in which, after taking into account our income and gross assets (and the income and assets of our subsidiaries pursuant to applicable “look-through rules”) either (i) 75% or more of our gross income consists of certain types of “passive income” or (ii) 50% or more of the average quarterly value of our assets is attributable to “passive assets” (assets that produce or are held for the production of passive income). We believe that we were not a PFIC for U.S. federal income tax purposes in 2015 and do not expect to be a PFIC in subsequent taxable years. PFIC status is a factual determination made annually after the close of each taxable year on the basis of the composition of our income and the value of our active versus passive assets. Because our belief is based in part on the expected market value of our equity, a decrease in the trading price of our common stock and ADSs following this offering may result in our becoming a PFIC. Additionally, the overall level of our passive assets will be significantly affected by changes in the amount of our cash, cash equivalents and securities held for investment, each of which may be classified as passive assets under the PFIC rules.

If we were to be or become classified as a PFIC, a U.S. Holder, as defined in “Taxation — United States Federal Income Taxation,” that does not make a “mark to market” election may incur significantly increased U.S. income tax on gain recognized on the sale or other disposition of shares of our common stock or ADSs and on the receipt of distributions on the shares of our common stock or ADSs to the extent such distribution is treated as an “excess distribution” under the U.S. federal income tax rules. We do not intend to provide holders with the information necessary to make a “QEF election” (as described below under “Taxation — United States Federal Income Taxation — Passive Foreign Investment Company”). Thus, a U.S. Holder seeking to mitigate the potential adverse effects of the PFIC rules should consider making a mark to market election. Additionally, if we were to be or become classified as a PFIC, a U.S. Holder of shares of our common stock or ADSs will be subject to additional U.S. tax form filing requirements, and the statute of limitations for collections may be suspended if the U.S. Holder does not file the appropriate form. See “Taxation — United States Federal Income Taxation — Passive Foreign Investment Company.”

There will be a gap of three business days between pricing and trading of our ADSs and a gap of four business days between pricing and trading of shares of our common stock, which means you will not be able to sell or otherwise trade shares of our common stock or ADSs during those periods.

The initial price to the public of shares of our common stock and ADSs sold in the global offering was determined on the date of this prospectus. In order to permit completion of the subscription period in Japan, however, ADSs offered in the global offering will not commence trading on the New York Stock Exchange until three business days from the date of pricing. Trading of shares of our common stock on the Tokyo Stock Exchange will commence the business day immediately following the commencement of trading on the New York Stock Exchange. Accordingly, you will not be able to sell or otherwise trade shares of our common stock or ADSs prior to the commencement of trading on such markets. In addition, you will not be able to withdraw shares of our common stock represented by your ADSs in exchange for the surrender of your ADSs prior to the commencement of trading of shares of our common stock on the Tokyo Stock Exchange.

 

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After this global offering, shares of our common stock held by NAVER Corporation and our employee shareholding association, as well as shares issuable upon exercise by certain optionholders, will be restricted from immediate resale, but may be sold on a stock exchange in the near future. The large number of shares of our common stock eligible for future sale of our common stock could depress the market prices of the shares of our common stock and ADSs.

The market prices of the shares of our common stock and ADSs could decline as a result of sales of a large number of shares of our common stock or ADSs in the market after this initial public offering, and the perception that these sales could occur may also depress the market prices of the shares of our common stock and ADSs. We, our controlling shareholder, certain of our and our subsidiaries’ directors and officers, the LINE Employee Shareholding Association and Mr. Joon Ho Lee, our former director, have agreed with the joint global coordinators (and, in the case of the LINE Employee Shareholding Association, the joint global coordinators and the Japanese joint lead managers named in the Japanese underwriting agreement) to restrictions on sales and other dispositions of shares of our common stock or ADSs during the period beginning on the date of this prospectus and ending on the date that is 180 days from and including the date of delivery of the shares in the global offering. After the expiration of such restrictions, such directors, corporate auditors or other officers may choose to exercise their options and sell all or a portion of their shares of our common stock on the Tokyo Stock Exchange or otherwise in Japan or abroad. In addition, our board of directors will be able to issue and sell additional shares of our common stock within the unissued portion of our authorized share capital, generally without any shareholder vote. Any such sales could cause the prices of the shares of our common stock and ADSs to fall and may make it more difficult for you to sell your shares of our common stock or ADSs purchased in this global offering.

In making your investment decision, you should not rely on information in public media that is published by third parties. You should rely only on statements made in this prospectus in determining whether to purchase our shares.

You should carefully evaluate all of the information in this prospectus. We have in the past received, and may continue to receive, a high degree of media coverage, including coverage that is not directly attributable to statements made by our officers or employees, that incorrectly reports on statements made by our officers or employees, or that is misleading as a result of omitting information provided by us, our officers, or employees. You should rely only on the information contained in this prospectus (or in a related free writing prospectus) in determining whether to purchase the shares of our common stock or ADSs.

We have broad discretion in the use of the net proceeds from our initial public offering and may not use them effectively.

We cannot specify with any certainty the particular uses of the net proceeds that we will receive from our initial public offering. The primary purposes of the global offering are financing our business expansion, which may include investment, acquisition or strategic cooperation to expand our user base or procure additional content for the LINE platform, as well as marketing new products and services and repaying outstanding debt. Currently, however, we have no agreements or commitments for particular uses of the net proceeds from this global offering, and our management may exercise discretion over the terms and timing of any future transaction in light of the changing needs of our business. The failure by our management to apply these funds effectively could harm our business and financial condition. We may invest the net proceeds from our initial public offering in a manner that does not produce income or that loses value.

If securities or industry analysts do not publish or cease publishing research or other reports about us, our business or our market, or if they adversely change their recommendations regarding an investment in us, the prices of the shares of our common stock and ADSs or their trading volume could decline.

The trading markets for the shares of our common stock and ADSs will be influenced by the research and other reports that securities or industry analysts may publish about us, our business, our market or our competitors. If

 

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any of the analysts who may cover us adversely change their recommendation regarding an investment in us, or provide more favorable relative recommendations about our competitors, the prices of the shares of our common stock and ADSs would likely decline. If any analyst who may cover us were to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the prices of the shares of our common stock and ADSs or their trading volume to decline.

We do not intend to pay dividends for the foreseeable future.

We have never declared or paid cash dividends on our capital stock. We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to declare or pay any dividends in the foreseeable future. As a result, you may only receive a return on your investment if the market price of the shares of our common stock or ADSs increases.

The requirements of being a public company may strain our resources and divert management’s attention.

As a public company, we will be subject to the reporting requirements of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), the U.S. Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), the Dodd-Frank Act, the listing standards of the New York Stock Exchange as applicable to a foreign private issuer, which are different in some material respects from those required for a U.S. public company, as well as the reporting requirements under the Financial Instruments and Exchange Act of Japan (the “FIEA”) and the rules of the Tokyo Stock Exchange. We also plan to continue to prepare annual financial statements of LINE Corporation on a standalone basis in accordance with generally accepted accounting principles in Japan (“Japanese GAAP”) for Japanese reporting purposes in addition to preparing our consolidated financial statements in accordance with IFRS as issued by the IASB. We expect that the requirements of these rules and regulations will increase our legal, accounting and financial compliance costs, make some activities more difficult, time consuming and costly, and place significant strain on our personnel, systems and resources. As a result of disclosure of information in this prospectus and in filings required of a public company, our business and financial condition will become more visible, which we believe may result in threatened or actual litigation, including by competitors, shareholders or third parties. If such claims are successful, our business and operating results could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and harm our business and operating results.

In the past, we had identified material weaknesses in our internal control over financial reporting, which we have since remediated. If we fail to establish and maintain effective internal control over financial reporting in the future, the accuracy and timeliness of our financial reporting may be adversely affected, which could cause investors to lose confidence in our reported financial information and may lead to a decline in the trading price of shares of our common stock and ADSs.

The Sarbanes-Oxley Act requires, among other things, that public companies maintain effective disclosure controls and procedures and internal control over financial reporting. For example, we will be required, pursuant to Section 404 of the Sarbanes-Oxley Act (“Section 404”), to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting in the second annual report we file with the SEC. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting, as well as a statement that our independent registered public accounting firm has issued an opinion on our internal control over financial reporting. We are still in the costly and challenging process of compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404.

We previously identified material weaknesses in our internal control over financial reporting as of December 31, 2013 and 2014. We have since implemented measures designed to improve our internal control over financial reporting to remediate the control deficiencies that led to our material weaknesses, including requiring a formal review of the contractual terms and conditions and a more stringent board and management approval process for any significant related party transaction and more generally, we set up an internal control

 

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team to improve our accounting and finance systems. Based on the measures taken and implemented, we have concluded that the material weaknesses identified have been remediated as of December 31, 2015.

We cannot be certain that additional material weaknesses will not develop or be identified. Neither our management nor independent registered public accounting firm has ever performed a comprehensive evaluation of our internal control over financial reporting in accordance with the provisions of the Sarbanes-Oxley Act because no such evaluation has been required. Any failure to achieve and maintain adequate internal control over financial reporting or to implement required, new or improved controls, or difficulties encountered in their implementation could cause us to report material weaknesses or other deficiencies in our internal control over financial reporting in the future. If we are unable to successfully remediate any material weaknesses or other deficiencies in our internal control over financial reporting, the accuracy and timing of our financial reporting may be adversely affected and investors may lose confidence in our financial reporting, and the price of shares of our common stock and ADSs may decline as a result. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the New York Stock Exchange.

As a foreign private issuer, we are permitted to, and we intend to, rely on exemptions from certain SEC and New York Stock Exchange corporate governance standards applicable to public U.S. companies. This may afford less protection to holders of shares of our common stock or ADSs.

We are exempted from certain corporate governance requirements of the SEC and New York Stock Exchange by virtue of being a foreign private issuer. We are required to provide a brief description of the significant differences between our corporate governance practices and the corporate governance practices required to be followed by U.S. companies listed on the New York Stock Exchange. See “Management — Corporate Governance.” The standards applicable to us are considerably different from the standards applied to public U.S. companies. For instance, we are not required to:

 

    have a majority of our board of directors be independent;

 

    have a compensation committee or a nominating or corporate governance committee consisting entirely of independent directors; or

 

    have regularly scheduled executive sessions with only independent directors.

We have relied on and intend to continue to rely on all of these exemptions for so long as we maintain our status as a foreign private issuer. In addition, we have a board of corporate auditors in lieu of an audit committee in accordance with applicable Japanese laws, which is permitted under Rule 10A-3(c)(3) of the Exchange Act for foreign private issuers, subject to certain requirements. As a result, you may not be provided with the benefits of certain corporate governance standards applicable to public U.S. companies.

Upon completion of this global offering, our parent, NAVER Corporation, will control a majority of the voting power of the outstanding shares of our capital stock, making us a “controlled company” within the meaning of the New York Stock Exchange corporate governance rules. As a controlled company, we are eligible to, and, in the event we no longer qualify as a foreign private issuer, we intend to, elect not to comply with certain of the New York Stock Exchange corporate governance standards, including the requirement that a majority of directors on our board of directors are independent directors and the requirement that our remuneration committee and our nominating and corporate governance committee consist entirely of independent directors.

If you purchase shares of our common stock or ADSs in our initial public offering, you will experience substantial and immediate dilution.

If you purchase shares of our common stock or ADSs in our initial public offering, you will experience substantial and immediate dilution in the pro forma net tangible book value per share of ¥2,265 per share as of March 31, 2016 (assuming no exercise by Morgan Stanley & Co. LLC, as representative of the international

 

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underwriters, and by Nomura Securities Co., Ltd., as representative of the Japanese underwriters, of the over-allotment options to acquire additional shares of our common stock), based on an assumed initial public offering price of shares of our common stock of ¥2,800 per share (equivalent to dilution of $21.27 per ADS based on an assumed initial public offering price of $26.30 per ADS), the initial reference price we have included in our Japanese registration statement in accordance with Japanese regulations and the approximate midpoint of the price range on the cover page of this prospectus, because the price that you pay will be substantially greater than the pro forma net tangible book value per share or ADS of the shares of common stock or ADSs that you acquire. For more information, see “Dilution.” This dilution is due in large part to the fact that our earlier investor, NAVER Corporation, paid substantially less than the initial public offering price when it purchased shares of our capital stock. You will experience additional dilution upon exercise of stock options to purchase shares of our common stock or if we otherwise issue additional shares of our common stock or ADSs. For more information, see “Dilution.”

Rights of shareholders under Japanese law may be different from rights of shareholders in other jurisdictions.

Our articles of incorporation and the Companies Act of Japan (the “Companies Act”) govern our corporate affairs. Legal principles relating to matters such as the validity of corporate procedures, directors’ and executive officers’ fiduciary duties and obligations and shareholders’ rights under Japanese law may be different from, or less clearly defined than, those that would apply to a company incorporated in any other jurisdiction. Shareholders’ rights under Japanese law may not be as extensive as shareholders’ rights under the law of other countries. For example, under the Companies Act, only holders of 3% or more of our total voting rights or our outstanding shares are entitled to examine our accounting books and records. Furthermore, there is a degree of uncertainty as to what duties the directors of a Japanese joint stock corporation may have in response to an unsolicited takeover bid, and such uncertainty may be more pronounced than that in other jurisdictions.

Holders of ADSs have fewer rights than shareholders under Japanese law, and their voting rights are limited by the terms of the deposit agreement.

The rights of shareholders under Japanese law to take actions, including voting their shares, receiving dividends and distributions, bringing derivative actions, examining our accounting books and records, and exercising appraisal rights, are available only to shareholders of record. Because the depositary, through its custodian agents, is the record holder of the shares of our common stock underlying the ADSs, only the depositary can exercise those rights in connection with the deposited shares. ADS holders will not be able to bring a derivative action, examine our accounting books and records, or exercise appraisal rights through the depositary.

Holders of ADSs may exercise their voting rights only in accordance with the provisions of the deposit agreement. Upon receipt of voting instructions from them in the manner set forth in the deposit agreement, the depositary will make efforts to vote the shares underlying the ADSs in accordance with the instructions of ADS holders. The depositary and its agents may not be able to send voting instructions to holders of ADSs or carry out their voting instructions in a timely manner. Furthermore, the depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote. As a result, holders of ADSs may not be able to exercise their right to vote.

Holders of ADSs may not receive distributions on shares of our common stock or any value for them if it is illegal or impractical to make them available to such holders.

The depositary of our ADSs has agreed to pay holders of ADSs the cash dividends or other distributions it or the custodian for our ADSs receives on shares of common stock or other deposited securities after deducting its fees and expenses. Holders of ADSs will receive these distributions in proportion to the number of shares of our common stock that such ADSs represent. However, the depositary is not responsible for making such

 

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payments or distributions if it is unlawful or impractical to make a distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities that require registration under the Securities Act of 1933, as amended (the “Securities Act”), but that are not properly registered or distributed pursuant to an applicable exemption from registration. The depositary is not responsible for making a distribution available to any holders of ADSs if any government approval or registration required for such distribution cannot be obtained after reasonable efforts made by the depositary. We have no obligation to take any other action to permit distributions on our common stock to holders of ADSs. This means that holders of ADSs may not receive the distributions we make on shares of our common stock if it is illegal or impractical to make them available to such holders. These restrictions may materially reduce the value of our ADSs.

Holders of ADSs may be subject to limitations on transfer of their ADSs.

ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deems it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.

We may amend the deposit agreement without consent from holders of ADSs and, if such holders disagree with our amendments, their choices will be limited to selling the ADSs or withdrawing the underlying shares of our common stock.

We may agree with the depositary to amend the deposit agreement without consent from holders of ADSs. If an amendment increases fees to be charged to ADS holders or prejudices a material right of ADS holders, it will not become effective until 30 days after the depositary notifies ADS holders of the amendment. At the time an amendment becomes effective, ADS holders are considered, by continuing to hold their ADSs, to have agreed to the amendment and to be bound by the amended deposit agreement. If holders of ADSs do not agree with an amendment to the deposit agreement, their choices will be limited to selling the ADSs or withdrawing the underlying shares of our common stock. No assurance can be given that a sale of ADSs could be made at a price satisfactory to the holder in such circumstances.

We are incorporated in Japan, and it may be more difficult to enforce judgments obtained in courts outside Japan.

We are incorporated in Japan as a joint stock corporation with limited liability. Most of our directors are non-U.S. residents, and a substantial portion of our assets and the personal assets of our directors and corporate executive officers are located outside the United States. As a result, when compared to a U.S. company, it may be more difficult for investors to effect service of process in the United States upon us or to enforce against us, our directors or executive officers, judgments obtained in U.S. courts predicated upon civil liability provisions of the federal or state securities laws of the U.S. or similar judgments obtained in other courts outside Japan. There is doubt as to the enforceability in Japanese courts, in original actions or in actions for enforcement of judgments of U.S. courts, of civil liabilities predicated solely upon the federal and state securities laws of the United States.

Our shareholders of record on a given record date may not receive the dividend they anticipate.

The customary dividend payout practice of publicly listed companies in Japan may significantly differ from that widely followed or otherwise deemed necessary or fair in foreign markets. We may ultimately determine any dividend payment amount to our shareholders of record as of a record date, including whether we will make any dividend payment to such shareholders at all, only after such record date. For that reason, our shareholders of record on a given record date may not receive the dividends they anticipate.

 

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Dividend payments and the amount you may realize upon a sale of shares of our common stock or ADSs that you hold will be affected by fluctuations in the exchange rate between the U.S. dollar and the Japanese yen.

Cash dividends, if any, in respect of the shares of our common stock represented by our ADSs will be paid to the depositary in Japanese yen and then converted by the depositary into U.S. dollars, subject to certain conditions. Accordingly, fluctuations in the exchange rate between the Japanese yen and the U.S. dollar will affect, among other things, the amounts a holder of ADSs will receive from the depositary in respect of dividends, the U.S. dollar value of the proceeds that a holder of ADSs would receive upon sale in Japan of the shares of our common stock obtained upon surrender of ADSs and the secondary market price of ADSs. Such fluctuations will also affect the U.S. dollar value of dividends and sales proceeds received by holders of shares of our common stock.

Daily price range limitations imposed by the Tokyo Stock Exchange may prevent you from selling shares of our common stock at a particular price on a particular trading day, or at all.

Share prices on the Tokyo Stock Exchange are determined on a real-time basis by the balance between bids and offers. The Tokyo Stock Exchange is an order-driven market without specialists or market makers to guide price formation. To prevent excessive volatility, the Tokyo Stock Exchange sets daily upward and downward price range limitations for each listed stock based on the previous day’s closing price or any “special quote,” a price indicated by the Tokyo Stock Exchange to notify investors that there are orders beyond such price that may result in a large price fluctuation. Although transactions may continue at the upward or downward limit price if the limit is reached on a particular trading day, no transactions may take place outside these limits. Consequently, an investor wishing to sell shares of our common stock at a price above or below the relevant daily limit may not be able to effect a sale at such price on a particular trading day, or at all.

Investors holding less than a full “unit” of shares will have limited rights as shareholders.

Our articles of incorporation provide that 100 shares of our common stock constitute one “unit.” As a result of the unit share system, ADS holders will only be permitted to surrender ADSs and withdraw underlying shares of our common stock constituting whole units. The Companies Act imposes significant restrictions and limitations on holders of shares of our common stock that do not constitute a whole unit. In general, holders of shares of our common stock constituting less than one unit do not have the right to vote with respect to those shares. For further discussion of the unit share system and its effect on the rights of our shareholders, see “Description of Capital Stock — Unit Share System.”

 

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FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements within the meaning of the U.S. federal securities laws, which statements involve risks and uncertainties. All statements other than statements of historical facts are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements.

You can identify these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “likely to,” “should,” “could,” “target,” “project,” “contemplate,” “predict,” “potential,” “continue” or the negative of these words or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include:

 

    our ability to attract and retain users and increase the level of engagement of our users;

 

    our ability to improve user monetization;

 

    our ability to successfully enter new markets and manage our business expansion;

 

    our ability to compete in the global social network services market;

 

    our ability to develop or acquire new products and services, improve our existing products and services and increase the value of our products and services in a timely and cost-effective manner;

 

    our ability to maintain good relationships with platform partners and attract new platform partners;

 

    our ability to attract advertisers to our platform and increase the amount that advertisers spend with us;

 

    our expectations regarding our user growth rate and the usage of our mobile applications;

 

    our ability to increase our revenues and our revenue growth rate;

 

    our ability to timely and effectively scale and adapt our existing technology and network infrastructure;

 

    our ability to successfully acquire and integrate companies and assets;

 

    our future business development, results of operations and financial condition; and

 

    the regulatory environment in which we operate.

You should read thoroughly this prospectus with the understanding that our actual future results may be materially different from and worse than what we currently expect. We qualify all of our forward-looking statements by these cautionary statements. The forward-looking statements made in this prospectus are subject to a number of risks, uncertainties and assumptions, including those described in the “Risk Factors” section. Other sections of this prospectus include additional factors which could adversely impact our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 

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This prospectus contains data related to the mobile internet industry. These market data, including data from App Annie, IDC, MM Research Institute, Nielsen and Ovum Ltd. (“Ovum”), include projections that are based on a number of assumptions. The mobile internet industry may not grow at the rates projected by the market data, or at all. The failure of the market to grow at the projected rates may materially and adversely affect our business and the market price of our common shares and ADSs. In addition, the rapidly changing nature of the mobile internet industry subjects any projections or estimates relating to the growth prospects or future condition of our market to significant uncertainties. If any one or more of the assumptions underlying the market data proves to be incorrect, actual results may differ from the projections based on these assumptions. You should not place undue reliance on these forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. The forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. We undertake no obligation to update or revise any forward-looking statements made in this prospectus to reflect events or circumstances after the date of this prospectus or to reflect new information, future events or otherwise.

 

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INDUSTRY DATA AND USER METRICS

This prospectus contains estimates and information concerning our industry, including market size and growth rates of the markets in which we participate, that are based on third-party industry publications and reports. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to these estimates. We have not independently verified the accuracy or completeness of the data contained in these third-party industry publications and reports. The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the section titled “Risk Factors.” These and other factors could cause results to differ materially from those expressed in these publications and reports.

We review a number of metrics, including MAUs, DAUs and MPUs, to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions. Our MAUs, DAUs and MPUs are calculated using our internal data. While these numbers are based on what we believe to be reasonable estimates of our user base for the applicable period of measurement, there are inherent challenges in measuring usage of our products and services across large online and mobile populations around the world. For example, each LINE account is linked to a mobile phone number, and there may be multiple LINE accounts held by the same person if the person carries multiple smartphones and has chosen to download the LINE messaging application on each smartphone. In addition, our data regarding user geographic location for purposes of reporting the geographic location of our MAUs, DAUs and MPUs is based on the mobile phone number associated with the account when a user initially registered the account on LINE. The phone number may not always accurately reflect a user’s actual location at the time of user engagement on our platform. See “Risk Factors — Risks Related to Our Business and Industry — Certain of our user metrics are subject to inherent uncertainties in measurement, and real or perceived inaccuracies in such metrics may harm our reputation and negatively affect our business.”

We regularly review and may adjust our processes for calculating our internal metrics to improve their accuracy. Our measures of user growth and user engagement may differ from estimates published by third parties or from similarly-titled metrics of our competitors due to differences in methodology.

 

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USE OF PROCEEDS

We estimate that we will receive proceeds from the sale of shares of our common stock (including shares represented by ADSs) in the global offering of approximately ¥98,000,000,000 before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. This estimate is based upon an assumed initial offering price of ¥2,800 per share in the global offering, which is the initial reference price we have included in our Japanese registration statement in accordance with Japanese regulations and the approximate midpoint of the estimated offering price range shown on the front cover page of this prospectus. The international underwriters will purchase shares from us in Japanese yen, including for the portion of shares that will be represented by ADSs. If Morgan Stanley & Co. LLC, as representative of the international underwriters, and Nomura Securities Co., Ltd., as representative of the Japanese underwriters, exercise in full their options, in the aggregate, to purchase up to an additional 5,250,000 shares, we estimate that we will receive proceeds of approximately ¥112,700,000,000 before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

A ¥100 increase (decrease) in the assumed initial public offering price of ¥2,800 per share would increase (decrease) the proceeds of this offering to us by ¥3,500,000,000, assuming that the number of shares offered by us, as set forth on the front cover page of this prospectus, remains the same and before deducting the estimated underwriting discounts and commissions and the estimated offering expenses payable by us.

The primary purposes of the global offering are financing our business expansion, which may include investment, acquisition or strategic cooperation to expand our user base or procure additional content for the LINE platform, marketing new products and services and for other general corporate purposes. In addition, we intend to use a portion of the proceeds from this offering to repay ¥42,000 million in loans, all due in June 2016, and which we plan to extend to September 2016, with interest rates between 0.11% and 0.22%, including ¥5,000 million in short-term borrowings we obtained in August 2015 primarily for income tax payments.

We have no agreements or commitments for particular uses of the net proceeds from this global offering, and our management may exercise discretion over the terms and timing of any future transaction in light of the changing needs of our business. In the meantime, we intend to hold any net proceeds in cash or invest them in short-term, investment-grade, interest-bearing instruments.

 

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DIVIDEND POLICY

Since our inception, we have not declared or paid cash dividends on shares of our common stock. Any decision to pay dividends in the future will be subject to a number of factors, including our financial condition, results of operations, the level of our retained earnings, capital demands, general business conditions and other factors our board of directors may deem relevant. We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future. Consequently, we cannot give any assurance that any dividends may be declared and paid in the future.

If declared, holders of outstanding shares of our capital stock on a dividend record date will be entitled to the full dividend declared without regard to the date of issuance of the shares or any subsequent transfer of the shares. Payment of declared annual dividends in respect of a particular year, if any, will be made in the following year after approval by our shareholders at the annual general meeting of shareholders, subject to certain provisions of our articles of incorporation and the Companies Act. See “Description of Capital Stock — Restriction on Distribution of Surplus.”

Subject to the terms of the deposit agreement for the ADSs, you will be entitled to receive dividends on shares of our common stock represented by ADSs to the same extent as the holders of shares of our common stock, less the fees and expenses payable under the deposit agreement in respect of, and any Japanese tax applicable to, such dividends. See “Taxation — Japanese Taxation” and “Description of American Depositary Shares.” The depositary will generally convert the Japanese yen it receives into U.S. dollars and distribute the U.S. dollar amounts to holders of ADSs. Cash dividends on shares of our common stock, if any, will be paid in Japanese yen.

 

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CAPITALIZATION

The following table sets forth our short-term borrowings and capitalization as of March 31, 2016:

 

    on an actual basis; and

 

    on an as adjusted basis to give effect to (i) the sale of shares of our common stock in the global offering (assuming no exercise of the over-allotment options) at an assumed initial public offering price of ¥2,800 per share (equivalent to US$26.30 per ADS), the initial reference price we have included in our Japanese registration statement in accordance with Japanese regulations and the approximate midpoint of the estimated offering price ranges shown on the front cover page of this prospectus, before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, and (ii) our repayment of ¥42,000 million in loans.

You should read this table together with our consolidated financial statements and the related notes included elsewhere in this prospectus and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     As of March 31, 2016  
     Actual     As adjusted     Actual(1)     As adjusted(1)  
     (in millions of yen and millions of U.S. dollars)  

Short-term borrowings

   ¥ 42,058      ¥ 58      $ 374      $ 1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Corporate bonds

     263        263        2        2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Shareholder’s equity:

        

Common stock, no par value; 690,000,000 shares authorized; 174,992,000 shares issued and outstanding, actual; and 209,992,000 shares issued and outstanding, as adjusted to give effect to the global offering(2)

     12,596        61,596        112        548   

Share premium

     21,451        70,344        191        626   

Accumulated deficit

     (19,301     (19,301     (172     (172

Accumulated other comprehensive income

     4,870        4,870        43        43   
  

 

 

   

 

 

   

 

 

   

 

 

 

Equity attributable to the shareholder of the Company

     19,616        117,509        174        1,045   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-controlling interest

     (392     (392     (3     (3
  

 

 

   

 

 

   

 

 

   

 

 

 

Total shareholder’s equity

     19,224        117,117        171        1,042   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total capitalization(3)

   ¥ 19,487      ¥ 117,380      $ 173      $ 1,044   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) For convenience, the Japanese yen amounts are expressed in U.S. dollars at the rate of ¥112.42 to US$1.00, the noon buying rate in effect on March 31, 2016 as quoted by the Federal Reserve Bank of New York. The reference price per share was converted to U.S. dollars at the rate of ¥106.47 to US$1.00, the midpoint fixing rate quoted on Reuters at 4:00 pm, June 9, 2016 London time.

 

(2) Assumes no exercise by Morgan Stanley & Co. LLC, as representative of the international underwriters, and by Nomura Securities Co., Ltd., as representative of the Japanese underwriters, of the overallotment options, and excludes 25,569,000 shares of our common stock issuable upon the exercise of outstanding stock options.

 

(3) A ¥100 increase (decrease) in the assumed initial public offering price of ¥2,800 per share of our common stock would increase (decrease) as adjusted total capitalization by approximately ¥3,500,000,000, before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

If the options of Morgan Stanley & Co. LLC, as representative of the international underwriters, and of Nomura Securities Co., Ltd., as representative of the Japanese underwriters, to purchase, in the aggregate, 5,250,000 additional shares of our common stock from us were exercised in full, as adjusted total shareholder’s equity and total number of shares of our common stock outstanding as of March 31, 2016 would be ¥131,817 million and 215,242,000, respectively.

 

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DILUTION

If you invest in shares of our common stock or ADSs, your interest will be diluted to the extent of the difference between the amount per share paid by purchasers of shares of our common stock or ADSs in this global offering and the net tangible book value per share or ADS immediately after the completion of this global offering. Dilution results from the fact that the initial public offering price per share is substantially in excess of the book value per share attributable to the existing shareholders for our presently outstanding shares. Our net tangible book value as of March 31, 2016 was approximately ¥82 per share of common stock. Net tangible book value per share represents the amount of total assets excluding goodwill and other intangible assets minus the amount of total liabilities, divided by the total number of shares of our common stock outstanding. Dilution is determined by subtracting net tangible book value per share, after giving effect to the additional proceeds we will receive from this global offering, from the assumed initial public offering price per share, which is the initial reference price we have included in our Japanese registration statement in accordance with Japanese regulations and the approximate midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus and before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Without taking into account any other changes in such net tangible book value after March 31, 2016, other than to give effect to our sale of shares of our common stock in the global offering at the assumed initial public offering price of ¥2,800 per share after deduction of estimated underwriting discounts and commissions and estimated offering expenses payable by us, our adjusted net tangible book value as of March 31, 2016 would have been ¥535 per outstanding share. This represents an immediate increase in net tangible book value of ¥453 per share to existing shareholders and an immediate dilution in net tangible book value of ¥2,265 per share (equivalent to $21.27 per ADS) to purchasers of shares of our common stock or ADSs in the global offering.

The following table illustrates such dilution on a per share of common stock basis:

 

Assumed initial public offering price per share of our common stock

     ¥   2,800   

Net tangible book value per share of our common stock as of March 31, 2016

     ¥ 82   

Increase in net tangible book value per share of our common stock attributable to the sale of shares of our common stock in this global offering

     ¥ 453   
  

 

 

 

As adjusted net tangible book value per share of our common stock immediately after this global offering

     ¥ 535   
  

 

 

 

Dilution in net tangible book value per share of our common stock to new investors

     ¥ 2,265   
  

 

 

 

A ¥100 increase (decrease) in the assumed initial public offering price of ¥2,800 per share would increase (decrease) our as adjusted net tangible book value per share after giving effect to the global offering by ¥17 per share and the dilution in net tangible book value per share to new investors in the global offering by ¥83 per share (equivalent to $0.78 per ADS), assuming no change to the number of shares of our common stock offered by us as set forth on the cover page of this prospectus, and before deducting underwriting discounts and commissions and other offering expenses.

If the options of Morgan Stanley & Co. LLC and Nomura Securities Co., Ltd. to purchase, in the aggregate, 5,250,000 additional shares of our common stock are exercised in full, the as adjusted net tangible book value per share, as adjusted to give effect to the global offering, would be ¥591 per share, and the dilution in net tangible book value per share to new investors in the global offering would be ¥2,209 per share (equivalent to $20.75 per ADS).

 

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The following table summarizes, as of March 31, 2016, the differences between our existing shareholder and the new investors purchasing shares of our common stock in the global offering, with respect to the respective number of shares purchased, total consideration paid, and average price per share paid, assuming an initial public offering price of ¥2,800 per share, which is the initial reference price we have included in our Japanese registration statement in accordance with Japanese regulations and the approximate midpoint of the estimated offering price range set forth on the front cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

    Shares of
stock purchased
    Total consideration     Average price
per share 
 
    Number     Percent     Amount     Percent        

Existing shareholder

    174,992,000        83.3   ¥ 12,596,197,697 (1)      11.4   ¥         71.98   

New investors

    35,000,000        16.7            98,000,000,000        88.6              2,800        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    209,992,000        100.0   ¥ 110,596,197,697        100.0   ¥ 526.67   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) There were no non-cash payments made by NAVER Corporation.

A ¥100 increase (decrease) in the assumed public offering price of ¥2,800 per share of our common stock would increase (decrease) total consideration paid by new investors and average price per share paid by all shareholders by ¥3,500,000,000 and ¥16.67 per share, respectively, assuming a sale of 35,000,000 shares at ¥2,800, the initial reference price we have included in our Japanese registration statement in accordance with Japanese regulations and the approximate midpoint of the range set forth on the cover page of this prospectus, and before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

If the options of Morgan Stanley & Co. LLC and Nomura Securities Co., Ltd. to purchase, in the aggregate, 5,250,000 additional shares of our common stock are exercised in full, our existing shareholder would own 81.3% and our new investors would own 18.7% of the total number of our shares outstanding upon the completion of this global offering. The primary purposes of the global offering are financing our business expansion, which may include investment, acquisition or strategic cooperation to expand our user base or procure additional content for the LINE platform, marketing new products and services and other general corporate purposes and repaying outstanding debt.

The discussion and tables above also assume no exercise of any outstanding stock options. As of May 31, 2016, there were 25,526,500 shares of our common stock issuable upon exercise of outstanding stock options. See “Management — Stock Options.” To the extent that any of these options are exercised, there will be further dilution to new investors.

 

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EXCHANGE RATES

The table below sets forth, for the periods and dates indicated, the noon buying rate in New York City for cable transfers in yen as certified for customs purposes by the Federal Reserve Bank of New York, expressed in yen per US$1.00. Unless otherwise stated, the translations of yen into U.S. dollars in this prospectus have been made at the noon buying rate of the Federal Reserve Bank of New York in effect on March 31, 2016, which was ¥112.42 to US$1.00. We do not intend to imply that the yen or U.S. dollar amounts referred to herein could have been or could be converted into U.S. dollars or yen, as the case may be, at any particular rate, or at all.

 

     Noon Buying Rate  

Period

   Average (1)      Period End      High      Low  
     (¥ per US$1.00)  

2012

     80.10         86.64         86.64         76.11   

2013

     98.00         105.25         105.25         86.92   

2014

     106.63         119.85         121.38         101.11   

2015

     121.02         120.27         125.58         116.78   

December

                     123.52         120.27   

2016 (through June 3, 2016)

                     121.06         106.34   

January

                     121.05         116.38   

February

                     121.06         111.36   

March

                     113.94         111.30   

April

                     112.06         106.90   

May

                     110.75         106.34   

June (through June 3)

                     109.55         106.88   

 

(1) Calculated by averaging the exchange rates on the last business day of each month during the respective periods.

 

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UNAUDITED PRO FORMA FINANCIAL INFORMATION

We have prepared the following unaudited pro forma consolidated financial information to give effect to the deconsolidation of LINE BIZ Plus Ltd. (“BIZTH”), which offers payment services in Thailand.

Our former subsidiary BIZTH was deconsolidated as a result of the issuance of shares on April 25, 2016. BSS Holdings Co., Ltd. (“BSS Holdings”), a third party entity, acquired the newly issued shares and the transaction resulted in a decrease of our ownership of BIZTH from 100.0% to 50.0%. As a result of this transaction, we account for BIZTH as a joint venture under the equity method because we have joint control of the entity. To acquire the new shares, BSS Holdings contributed 750 million Baht, or ¥2,384 million in cash (exchange rate as of the transaction date, April 25, 2016). In conjunction with this transaction, we cancelled a trade receivable from BIZTH of 90 million Baht, or ¥284 million.

The unaudited pro forma condensed consolidated statement of profit or loss for the year ended December 31, 2015 gives effect to the deconsolidation of BIZTH as if it had occurred on January 1, 2015. The unaudited pro forma condensed consolidated statement of profit or loss for the three months ended March 31, 2016 gives effect to the deconsolidation of BIZTH as if it had occurred on January 1, 2015. The unaudited pro forma condensed consolidated balance sheet as of March 31, 2016 gives effect to the deconsolidation of BIZTH as if it had occurred on March 31, 2016.

The pro forma consolidated financial information has not been audited and has been furnished for informational purposes only. We therefore caution you not to place undue reliance on the unaudited pro forma consolidated financial information.

Unless otherwise indicated, the following exchange rates of yen per 1.00 Baht have been applied in the preparation of the pro forma financial information:

 

Average exchange rate for the year ended December 31, 2015 (pro forma statement of profit or loss for the year ended December 31, 2015):

  

 

¥3.52472 / 1.00 Baht

  

Average exchange rate for the three months ended March 31, 2016 (pro forma statement of profit or loss for the three months ended March 31, 2016):

     ¥3.23543 / 1.00 Baht   

Period-end exchange rate as of March 31, 2016 (pro forma balance sheet):

     ¥3.19000 / 1.00 Baht   

 

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Unaudited Pro Forma Condensed Consolidated Statement of Profit or Loss

For the year ended December 31, 2015

 

     (In thousands of yen, except per share data)  
     As Reported     Pro Forma
Adjustments 
     Pro Forma  

Revenues and other operating income:

       

Revenues

     120,405,531        111,775 (1)       120,517,306   

Other operating income

     474,363        (1,023 )(1)       473,340   
  

 

 

   

 

 

    

 

 

 

Total revenues and other operating income

     120,879,894        110,752         120,990,646   

Operating expenses:

       

Payment processing and licensing expenses

     (28,742,254     12,776 (2)       (28,729,478

Employee compensation expenses

     (35,571,775     41,494 (2)       (35,530,281

Marketing expenses

     (16,596,242     10,191 (2)       (16,586,051

Infrastructure and communication expenses

     (7,712,095     44 (2)       (7,712,051

Authentication and other service expenses

     (12,133,232     10,519 (2)       (12,122,713

Depreciation and amortization expenses

     (3,732,775     3,168 (2)       (3,729,607

Other operating expenses

     (14,431,395     34,062 (2)       (14,397,333
  

 

 

   

 

 

    

 

 

 

Total operating expenses

     (118,919,768     112,254         (118,807,514
  

 

 

   

 

 

    

 

 

 

Profit from operating activities

     1,960,126        223,006         2,183,132   
  

 

 

   

 

 

    

 

 

 

Net finance income/(cost)

     (35,081     29 (3)       (35,052

Share of loss of associates

     (204,903     (125,156 )(4)       (330,059

Loss on foreign currency transactions, net

     (519,846     14,941 (5)       (504,905

Other non-operating income

     157,023        —           157,023   

Other non-operating expenses

     (1,887,437     12,337 (3)       (1,875,100
  

 

 

   

 

 

    

 

 

 

Loss before tax from continuing operations

     (530,118     125,157         (404,961
  

 

 

   

 

 

    

 

 

 

Income tax benefits

     146,004        —   (6)       146,004   
  

 

 

   

 

 

    

 

 

 

Loss for the year from continuing operations

     (384,114     125,157         (258,957
  

 

 

   

 

 

    

 

 

 

Attributable to:

       

The shareholder of the Company

     6,196        68,880         75,076   

Non-controlling interests

     (390,310     56,277         (334,033

Earnings per share

       

Basic profit from continuing operations attributable to the shareholder of the Company (7)

     0.04           0.44   

Diluted profit from continuing operations attributable to the shareholder of the Company (7)

     0.03           0.38   

 

Notes to Unaudited Pro Forma Condensed Consolidated Financial Information

Pro forma adjustments:

 

(1) Reflects revenues and other operating income relating to the provision of IT services to BIZTH of ¥122 million, which were previously eliminated as part of the consolidation process but which are now presented as our revenue from BIZTH. This revenue amount reflects a revised service agreement, which is effective from the joint venture transaction date. The adjustment also includes ¥10 million of revenue generated directly by BIZTH from third party customers, which has been eliminated as this revenue was not generated by us. All of the transactions between BIZTH and us relate to the rendering of services and there was nothing recorded in the balance sheet related to these transactions. Therefore, the recognition is not dependent upon a transaction with a third party.
(2) Reflects the elimination of operating expenses directly attributable to BIZTH.
(3) Reflects the elimination of non-operating income and expenses directly attributable to BIZTH.
(4) Reflects our 50% share of loss incurred by BIZTH for the year ended December 31, 2015.
(5) Reflects the elimination of gains from foreign currency transactions directly attributable to BIZTH.
(6) BIZTH recorded a net loss during the year ended December 31, 2015 and therefore no pro forma adjustment was made to income tax benefit. No deferred tax assets on its unused tax losses were recognized by BIZTH as of December 31, 2015.
(7) Pro forma weighted average number of total common and class A shares for basic earnings per share and diluted earnings per share adjusted for the effect of dilution were 174,992,000 and 193,797,566, respectively.

 

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Unaudited Pro Forma Condensed Consolidated Statement of Profit or Loss

For the three months ended March 31, 2016

 

     (In thousands of yen, except per share data)  
     As Reported     Pro Forma
Adjustments 
    Pro Forma  

Revenues and other operating income:

      

Revenues

     33,455,853        28,765 (8)      33,484,618   

Other operating income

     660,302        —          660,302   
  

 

 

   

 

 

   

 

 

 

Total revenues and other operating income

     34,116,155        28,765        34,144,920   

Operating expenses:

      

Payment processing and licensing expenses

     (7,750,301     5,488 (9)      (7,744,813

Employee compensation expenses

     (9,393,213     16,991 (9)      (9,376,222

Marketing expenses

     (2,306,594     32,564 (9)      (2,274,030

Infrastructure and communication expenses

     (1,781,655     —   (9)      (1,781,655

Authentication and other service expenses

     (2,896,673     5,486 (9)      (2,891,187

Depreciation and amortization expenses

     (967,975     1,519 (9)      (966,456

Other operating expenses

     (3,681,759     7,809 (9)      (3,673,950
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     (28,778,170     69,857        (28,708,313
  

 

 

   

 

 

   

 

 

 

Profit from operating activities

     5,337,985        98,622        5,436,607   
  

 

 

   

 

 

   

 

 

 

Net finance income

     3,202        —          3,202   

Share of loss of associates

     (62,845     (29,989 )(10)      (92,834

Loss on foreign currency transactions, net

     (568,698     (6,927 )(11)      (575,625

Other non-operating income

     21,252        —          21,252   

Other non-operating expenses

     (587,886     —          (587,886
  

 

 

   

 

 

   

 

 

 

Profit before tax from continuing operations

     4,143,010        61,706        4,204,716   
  

 

 

   

 

 

   

 

 

 

Income tax expenses

     (2,736,740     —   (12)      (2,736,740
  

 

 

   

 

 

   

 

 

 

Profit for the period from continuing operations

     1,406,270        61,706        1,467,976   
  

 

 

   

 

 

   

 

 

 

Attributable to:

      

The shareholder of the Company

     1,517,890        34,571        1,552,461   

Non-controlling interests

     (111,620     27,135        (84,485

Earnings per share

      

Basic profit from continuing operations attributable to the shareholder of the Company(13)

     8.67          8.87   

Diluted profit from continuing operations attributable to the shareholder of the Company(13)

     7.79          7.97   

 

Notes to Unaudited Pro Forma Condensed Consolidated Financial Information

Pro forma adjustments:

 

(8) Reflects revenues and other operating income relating to the provision of IT services to BIZTH of ¥34 million, which were previously eliminated as part of the consolidation process but which are now presented as our revenue from BIZTH. This revenue amount reflects a revised service agreement, which is effective from the joint venture transaction date. The adjustment also includes ¥5 million of revenue generated directly by BIZTH from third party customers, which has been eliminated as this revenue was not generated by us. All of the transactions between BIZTH and us relate to the rendering of services and there was nothing recorded in the balance sheet related to these transactions. Therefore, the recognition is not dependent upon a transaction with a third party.
(9) Reflects the elimination of operating expenses directly attributable to BIZTH.
(10) Reflects our 50% share of loss incurred by BIZTH for the three months ended March 31, 2016.
(11) Reflects the elimination of gains from foreign currency transactions directly attributable to BIZTH.
(12) BIZTH recorded a net loss during the three months ended March 31, 2016 and therefore no pro forma adjustment was made to income tax benefit. No deferred tax assets on its unused tax losses were recognized by BIZTH as of March 31, 2016.
(13) Pro forma weighted average number of total common shares for basic earnings per share and diluted earnings per share adjusted for the effect of dilution were 174,992,000 and 194,745,768, respectively.

 

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Unaudited Pro Forma Condensed Consolidated Balance Sheet

As of March 31, 2016

 

     (In thousands of yen)  
     As Reported     Pro Forma
Adjustments 
    Pro Forma  

Assets

      

Current assets

      

Cash and cash equivalents

     35,081,614        (479,932 )(14)      34,601,682   

Trade and other receivables

     23,631,977        (3,017 )(15)      23,628,960   

Current assets – other

     4,022,254        (27,046 )(16)      3,995,208   
  

 

 

   

 

 

   

 

 

 

Total current assets

     62,735,845        (509,995     62,225,850   
  

 

 

   

 

 

   

 

 

 

Non-current assets

      

Investments in associates and joint venture

     1,622,326        2,383,847 (17)      4,006,173   

Other financial assets, non-current

     22,878,331        (2,798 )(16)      22,875,533   

Deferred tax assets

     16,444,552        —     (12)      16,444,552   

Non-current assets – other

     14,940,397        (156,204 )(18)      14,784,193   
  

 

 

   

 

 

   

 

 

 

Total non-current assets

     55,885,606        2,224,845        58,110,451   
  

 

 

   

 

 

   

 

 

 

Total assets

     118,621,451        1,714,850        120,336,301   
  

 

 

   

 

 

   

 

 

 

Liabilities

      

Current liabilities

      

Trade and other payables

     21,870,091        (31,591 )(16)      21,838,500   

Other financial liabilities, current

     43,080,840        (31,087 )(16)      43,049,753   

Other current liabilities

     25,908,322        (5,132 )(16)      25,903,190   
  

 

 

   

 

 

   

 

 

 

Total current liabilities

     90,859,253        (67,810     90,791,443   
  

 

 

   

 

 

   

 

 

 

Non-current liabilities

     8,537,906        (4,234 )(16)      8,533,672   
  

 

 

   

 

 

   

 

 

 

Total Liabilities

     99,397,159        (72,044     99,325,115   
  

 

 

   

 

 

   

 

 

 

Shareholder’s equity

      

Share capital

     12,596,198        —          12,596,198   

Share premium

     21,451,394        —          21,451,394   

Accumulated deficit

     (19,301,340     1,175,372 (19)      (18,125,968

Accumulated other comprehensive income

     4,870,329        66,118 (20)      4,936,447   
  

 

 

   

 

 

   

 

 

 

Equity attributable to the shareholder of the Company

     19,616,581        1,241,490        20,858,071   
  

 

 

   

 

 

   

 

 

 

Non-controlling interests

     (392,289     545,404 (21)      153,115   
  

 

 

   

 

 

   

 

 

 

Total shareholder’s equity

     19,224,292        1,786,894        21,011,186   
  

 

 

   

 

 

   

 

 

 

Total liabilities and shareholder’s equity

     118,621,451        1,714,850        120,336,301   
  

 

 

   

 

 

   

 

 

 

 

Notes to Unaudited Pro Forma Condensed Consolidated Financial Information

Pro forma adjustments:

 

(14) Reflects the elimination of cash and cash equivalents directly attributable to BIZTH.
(15) Reflects trade and other receivables directly attributable to BIZTH of ¥8 million, which excluded an intercompany trade receivable of ¥5 million, which was previously eliminated as part of the consolidation process but which is now due to us from BIZTH as a result of the transaction. The trade receivable of ¥284 million from BIZTH described in the introductory paragraph does not impact this adjustment because the receivable position is cancelled as a result of the transaction. Refer to note (19) below for more information on the impact of the receivable cancellation on accumulated deficit.
(16) Reflects the elimination of assets and liabilities directly attributable to BIZTH.

 

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(17) Reflects the change in the ownership of BIZTH from a subsidiary to a 50% owned joint venture as follows:

 

     (In thousands of yen)  

Net assets of BIZTH as reported in our consolidated financial statements as of March 31, 2016

     753,855   

Fair value adjustment(a)

     1,629,993   
  

 

 

 

Investment in associates and joint venture(a)

     2,383,848   
  

 

 

 

 

  (a) This adjustment reflects the re-measurement to fair value of our 50% ownership interest in BIZTH. The fair value is based on the issuance of new shares for 750 million Baht (or ¥2,384 million using the exchange rate as of the transaction date, April 25, 2016) cash paid by BSS Holdings to acquire 50% of BIZTH.

 

(18) Reflects the elimination of other non-current assets directly attributable to BIZTH including ¥131 million of goodwill recognized by us as part of the original acquisition of BIZTH in February 2015.
(19) Mainly reflects a gain on the fair value adjustment attributable to us of ¥1,630 million (see table in note (17) above), partly offset by ¥407 million attributable to a 25% non-controlling interest held by a third party unrelated to BSS Holdings that remains in our post-transaction 50% ownership of BIZTH. The remaining balance was also offset by ¥71 million in connection with the write-off of the trade receivable mentioned in the introductory paragraph. Since the trade receivable cancellation took place while BIZTH was consolidated (i.e., the transaction date), our write-off loss was netted off by a gain in the same amount recorded by BIZTH as its payable to us was cancelled. However, as of transaction date BIZTH was still subject to a 25% non-controlling interest held by a third party unrelated to BSS Holdings. ¥71 million represents 25% of BIZTH’s ¥284 million gain on its payable cancellation. This non-controlling interest reduced BIZTH’s net assets.
(20) Reflects the reversal of the cumulative foreign currency translation adjustment directly attributable to BIZTH.
(21) This adjustment to non-controlling interest includes mainly ¥407 million for the fair value adjustment described in note (19) above. The adjustment also reflects the elimination of the portion of the accumulated loss of BIZTH attributable to a 25% non-controlling interest of ¥130 million. The post-transaction non-controlling interest of 25% described in note (19) was included with the profit that resulted directly from the transaction as of March 31, 2016 and therefore used 25% of our new ownership of 50%. The elimination of the accumulated loss of BIZTH of ¥130 million includes ¥16 million due to foreign currency translation.

 

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SELECTED HISTORICAL FINANCIAL AND OPERATING DATA

You should read the selected historical financial and operating data below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical consolidated financial statements and related notes included in this prospectus.

The consolidated statement of financial position data as of December 31, 2014 and 2015 and the consolidated statement of profit or loss data for the years ended December 31, 2013, 2014 and 2015 have been derived from our audited consolidated financial statements and related notes included in this prospectus. The consolidated statement of financial position data as of December 31, 2012 and 2013 and the consolidated statement of profit or loss data for the year ended December 31, 2012 have been derived from our audited consolidated financial statements and related notes not included in this prospectus. These audited consolidated financial statements and the related notes have been prepared in accordance with IFRS as issued by the IASB. The interim condensed consolidated statement of financial position data as of March 31, 2016 and the interim condensed consolidated statement of profit or loss data for the three months ended March 31, 2015 and 2016 have been derived from our unaudited consolidated financial statements and related notes included in this prospectus. The unaudited interim condensed consolidated financial statements and related notes have been prepared on the same basis as the audited consolidated financial statements and related notes and reflect, in the opinion of management, all adjustments of a normal recurring nature that are necessary for a fair statement of unaudited interim condensed consolidated financial statements.

Our audited consolidated financial statements as of and for the year ended December 31, 2013, together with comparative audited consolidated financial statements as of and for the year ended December 31, 2012, are the first consolidated financial statements prepared in accordance with IFRS. For periods up to and including the year ended December 31, 2012, we prepared our consolidated financial statements in accordance with Japanese GAAP. Japanese GAAP differs in material respects from IFRS. For this reason, our financial information presented in accordance with Japanese GAAP, which we publish in Japan, is not directly comparable to our financial information prepared in accordance with IFRS included in this prospectus, and we have not included such information below.

The information set forth below is not necessarily indicative of the results of future operations, and the results of the three months ended March 31, 2016 are not necessarily indicative of results to be expected for the full year or any other period.

 

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Consolidated Statement of Profit or Loss Data

 

    For the year ended December 31,     For the three months ended March 31,  
    2012     2013     2014     2015     2015(1)     2015     2016     2016(1)  
          (in millions of yen and millions of U.S. dollars, except share and per share data)  

Revenues and other operating income:

               

Revenues

  ¥ 6,414      ¥ 39,586      ¥ 86,366      ¥ 120,406      $ 1,071      ¥ 28,104      ¥ 33,456      $ 298   

Other operating income

    94        69        296        474        4        117        660        5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues and other operating income

    6,508        39,655        86,662        120,880        1,075        28,221        34,116        303   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

               

Payment processing and licensing expenses

    (1,878     (9,606     (20,598     (28,742     (256     (6,225     (7,750     (69

Employee compensation expenses

    (3,929     (8,490     (18,289     (35,572     (316     (7,574     (9,393     (84

Marketing expenses

    (599     (17,202     (18,069     (16,596     (148     (4,780     (2,307     (21

Infrastructure and communication expenses

    (383     (2,537     (4,492     (7,712     (69     (1,663     (1,782     (16

Authentication and other service expenses

    (1,058     (4,914     (7,874     (12,133     (108     (2,398     (2,897     (26

Depreciation and amortization expenses

    (805     (1,330     (2,370     (3,733     (33     (764     (968     (9

Other operating expenses

    (1,282     (3,313     (8,555     (14,432     (128     (3,393     (3,681     (31
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    (9,934     (47,392     (80,247     (118,920     (1,058     (26,797     (28,778     (256
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit (loss) from operating activities

    (3,426     (7,737     6,415        1,960        17        1,424        5,338        47   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Finance income

    70        67        86        71        1        23        27        0   

Finance costs

    (73     (39     (137     (106     (1     (24     (24     (0

Share of loss of associates

           (243     (167     (205     (2     (23     (63     (1

Gain (loss) on foreign currency transactions, net

    234        (373     66        (520     (5     (64     (569     (5

Other non-operating income

           7               157        1        14        21        0   

Other non-operating expenses

    (37                   (1,887     (16     (165     (587     (4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit (loss) before tax from continuing operations

    (3,232     (8,318     6,263        (530     (5     1,185        4,143        37   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax benefits (expenses)

    (14     648        (7,151     146        1        (2,942     (2,737     (24
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit (loss) for the period from continuing operations

    (3,246     (7,670     (888     (384     (4     (1,757     1,406        13   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit (loss) from discontinued operations, net of tax

    2,832        1,279        2,892        (7,588     (67     (148     (1,640     (15
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit (loss) for the period

  ¥ (414   ¥ (6,391   ¥ 2,004      ¥ (7,972   $ (71   ¥ (1,905   ¥ (234   $ (2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Attributable to:

               

The shareholder of the Company

    (214     (764     4,207        (7,582     (68     (1,888     (122     (1

Non-controlling interests(2)

    (200     (5,627     (2,203     (390     (3     (17     (112     (1

Earnings per share:

               

Basic profit (loss) for the period attributable to the shareholder of the Company

  ¥ (1.36   ¥ (4.36   ¥ 24.05      ¥ (43.33   $ (0.39   ¥ (10.79   ¥ (0.70   $ (0.01

Diluted profit (loss) for the period attributable to the shareholder of the Company

    (1.36     (4.36     22.14        (39.12     (0.35     (10.79     (0.63     (0.01

Earnings per share from continuing operations

               

Basic profit (loss) from continuing operations attributable to the shareholder of the Company

    (19.33     (11.67     7.52        0.04        0.00        (9.95     8.67        0.08   

Diluted profit (loss) from continuing operations attributable to the shareholder of the Company

    (19.33     (11.67     6.92        0.03        0.00        (9.95     7.79        0.07   

Earnings per share from discontinued operations

               

Basic profit from discontinued operations attributable to the shareholder of the Company

    17.97        7.31        16.53        (43.37     (0.39     (0.84     (9.37     (0.09

Diluted profit from discontinued operations attributable to the shareholder of the Company

    17.97        7.31        15.22        (39.15     (0.35     (0.84     (8.42     (0.08

Basic weighted average shares outstanding

    157,565,943        174,992,000        174,992,000        174,992,000        174,992,000        174,992,000        174,992,000        174,992,000   

Diluted weighted average shares outstanding

    157,565,943        174,992,000        190,024,846        193,797,566        193,797,566        174,992,000        194,745,768        194,745,768   

 

(1) For convenience, the Japanese yen amounts are expressed in U.S. dollars at the rate of ¥112.42 per US$1.00, the noon buying rate of the Federal Reserve Bank of New York for Japanese yen in effect on March 31, 2016.

 

(2) For each of the years ended December 31, 2013 and 2014, the non-controlling interests were mainly held by NAVER Corporation, our shareholder.

 

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Consolidated Statement of Financial Position Data

 

     As of December 31,     As of March 31,  
     2012      2013      2014      2015     2015     2016     2016  
    

(in millions of yen and millions of U.S. dollars)

 

Cash and cash equivalents

   ¥     7,153       ¥     13,362       ¥     20,254       ¥     33,652      $     299      ¥     35,082      $     312   

Trade and other receivables

     7,961         11,625         24,223         27,248        242        23,632        210   

Property and equipment

     7,504         8,102         9,656         10,501        93        9,974        89   

Total assets

     33,085         46,522         85,664         122,159        1,087        118,621        1,055   

Total liabilities

     13,148         34,206         73,153         104,626        931        99,397        884   

Total shareholder’s equity

     19,937         12,316         12,511         17,533        156        19,224        171   

Equity attributable to the shareholder of the Company

     19,855         10,727         12,496         17,743        158        19,616        174   

Equity attributable to non-controlling interests

     82         1,589         15         (210     (2     (392     (3

Supplemental Financial Information

 

    For the year ended December 31,     For the three months ended March 31,  
    2013     2014     2015     2015     2015     2016     2016  
    (in millions of yen and millions of U.S. dollars)  

Adjusted EBITDA(1)..

  ¥     (5,603)      ¥     11,760      ¥     16,906      $     150      ¥     4,475      ¥     8,800      $     78   

Adjusted profit (loss) for the period(1).

    (6,911)        1,975        10,266        91        411        3,790        34   

 

(1) See “— Non-IFRS Measures” below.

Non-IFRS Measures

We use non-IFRS financial measures such as adjusted EBITDA and adjusted profit (loss) for the period in evaluating our financial and operating results and for financial and operational decision making purposes.

We believe that adjusted EBITDA and adjusted profit (loss) for the period help identify underlying trends in our business that could otherwise be distorted by the effect of the income or expenses that we exclude in calculating adjusted EBITDA and adjusted profit (loss) for the period. We believe that adjusted EBITDA and adjusted profit (loss) for the period provide useful information about our financial and operating results, enhance the overall understanding of our past performance and future prospects and allow for greater visibility with respect to key metrics used by our management in its financial and operational decision making.

Adjusted EBITDA and adjusted profit (loss) for the period should not be considered in isolation or construed as an alternative to profit (loss) from operating activities, profit (loss) for the period, cash flows or any other measure of performance or as an indicator of our financial or operating performance. Adjusted EBITDA and adjusted profit (loss) for the period presented here may not be comparable to similarly titled measures presented by other companies. Other companies may calculate similarly titled measures differently, limiting their usefulness as comparative measures to our data.

Adjusted EBITDA represents profit (loss) from operating activities (which does not include finance income, finance costs, share of profit or loss of associates, gain (loss) on foreign currency transactions, net, other non-operating income and expenses, income tax benefits or expenses and profit (loss) from discontinued operations, net of tax) before certain non-cash expenses, consisting of share-based compensation expenses and depreciation and amortization expenses.

Adjusted profit (loss) for the period represents profit (loss) for the period before share-based compensation expenses, tax impact of share-based compensation expenses and profit (loss) from discontinued operations, net of tax.

 

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The table below sets forth a reconciliation of our profit (loss) from operating activities to adjusted EBITDA for the periods indicated:

 

    For the year ended December 31,     For the three months ended March 31,  
    2013     2014     2015     2015     2015     2016     2016  
    (in millions of yen and millions of U.S. dollars)  

Profit (loss) from operating activities

  ¥ (7,737   ¥ 6,415      ¥ 1,960      $ 17      ¥ 1,424      ¥ 5,338      $ 47   

Add: Share-based compensation expenses

    804        2,975            11,213            100        2,287        2,494            22   

Add: Depreciation and amortization expenses

        1,330            2,370        3,733        33              764              968        9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  ¥ (5,603   ¥ 11,760      ¥ 16,906      $ 150      ¥ 4,475      ¥ 8,800      $ 78   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table sets forth a reconciliation of our profit (loss) to adjusted profit (loss) for the periods indicated:

 

    For the year ended December 31,     For the three months ended March 31,  
    2013     2014     2015     2015         2015                 2016             2016  
    (in millions of yen and millions of U.S. dollars)  

Profit (loss) for the period

  ¥ (6,391   ¥     2,004      ¥ (7,972   $ (71   ¥ (1,905   ¥ (234   $ (2

Add: Share-based compensation expenses

          804        2,975        11,213        100        2,287        2,494        22   

Subtract: Tax impact of share-based compensation expenses

    (45     (112     (563     (5     (119     (110     (1

Subtract: Profit (loss) from discontinued operations, net of tax

    (1,279     (2,892         7,588            67              148            1,640            15   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted profit (loss) for the period

  ¥ (6,911   ¥ 1,975      ¥ 10,266      $ 91      ¥ 411      ¥ 3,790      $ 34   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Selected Operating Data

The following tables present our selected operating data as of the dates or for the periods indicated:

 

     For the month of  
     Mar.
2013
     Jun.
2013
     Sep.
2013
     Dec.
2013
     Mar.
2014
     Jun.
2014
     Sep.
2014
     Dec.
2014
     Mar.
2015
     Jun.
2015
     Sep.
2015
     Dec.
2015
     Mar.
2016
 
     (in millions)  

Total MAUs(1)

     75         94         125         137         159         170         179         190         205         211         212         215         218   

Japan

     31         35         39         41         45         47         49         51         54         55         57         58         61   

Taiwan, Thailand and Indonesia

     22         28         34         38         44         49         54         62         70         76         81         87        
91
  

Total MPUs(2)

     2.6         3.7         3.7         4.1         5.4         6.7         7.0         8.2         7.5         7.9         8.2         8.8         8.4   

MAUs of LINE Games(3)

     18         19         21         22         35         34         33         39         38         36         32         32         31   

MPUs of LINE Games(4)

     0.6         0.8         1.1         1.1         1.5         1.4         1.4         1.8         1.5         1.4         1.4         1.6         1.6   

 

(1) Represents the number of user accounts that (i) accessed the LINE messaging application or any LINE Game through mobile devices; (ii) sent messages through the LINE messaging application from personal computers; or (iii) sent messages through any other LINE application from mobile devices, in each case at least once during the month indicated.

 

(2) Represents the number of user accounts that made (i) a payment for Stickers, Themes or LINE Out on the LINE messaging application through mobile devices or personal computers or (ii) a payment relating to any LINE Game through mobile devices, in each case at least once during the month indicated.

 

(3) Represents the number of user accounts that accessed any LINE Game through mobile devices at least once during the month indicated.

 

(4) Represents the number of user accounts that made a payment relating to any LINE Game through mobile devices at least once during the month indicated.

 

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    As of  
    Mar. 31,
2013
    Jun. 30,
2013
    Sep. 30,
2013
    Dec. 31,
2013
    Mar. 31,
2014
    Jun. 30,
2014
    Sep. 30,
2014
    Dec. 31,
2014
    Mar. 31,
2015
    Jun. 30,
2015
    Sep. 30,
2015
    Dec. 31,
2015
    Mar. 31
2016
 
    (in millions)  

Cumulative downloads of applications offered on the LINE platform

                         

Downloads of the LINE messaging application(1)

    134        183        260        325        400        476        554        637        722        804        883        953        1,025   

Downloads of LINE Games

    93        146        191        235        312        367        428        485        527        563        597        628        654   

Downloads of other LINE applications

    58        80        101        125        145        169        191        223        270        327        391        441        500   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    285        409        552        685        857        1,012        1,173        1,345        1,519        1,694        1,871        2,022        2,179   

 

(1) As of March 31, 2016, the number of registered user accounts of the LINE messaging application, after adjusting for subsequent deregistrations, was 675 million.

 

    For the three months ended  
    Mar. 31
2013
    Jun. 30
2013
    Sep. 30
2013
    Dec. 31
2013
    Mar. 31
2014
    Jun. 30
2014
    Sep. 30
2014
    Dec. 31
2014
    Mar. 31
2015
    Jun. 30
2015
    Sep. 30
2015
    Dec. 31
2015
    Mar. 31
2016
 
    (in millions)  

Actual downloads of applications offered on the LINE platform per period

                         

Downloads of the LINE messaging application

    29        49        77        65        74        76        79        82        85        82        79        70        71   

Downloads of LINE Games

    29        53        45        44        77        55        62        57        42        36        33        31        26   

Downloads of other LINE applications

    17        22        21        24        21        24        22        32        47        57        64        50        58   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    74        123        143        133        173        155        163        171        174        174        177        151        155   

We periodically review the cumulative downloads of the LINE messaging application as an indicator of our performance in acquiring new LINE platform users and the cumulative downloads of LINE Games and other applications as an indicator of the popularity and user acceptance of the games and other content we distribute through the LINE platform.

 

    For the month of  
    Mar.
2013
    Jun. 
2013
    Sep. 
2013
    Dec. 
2013
    Mar. 
2014
    Jun. 
2014
    Sep. 
2014
    Dec. 
2014
    Mar.
2015
    Jun. 
2015
    Sep.
2015
    Dec.
2015
    Mar.
2016
 
    (in millions, except Sticker sets available)  

Messages(1)

                         

Daily average number of messages sent

    1,403        1,801        2,050        2,197        2,860        3,100        3,190        3,372        3,764        4,051        3,997        4,048        4,211   

Daily average number of messages received

    3,105        3,917        4,257        4,715        6,519        8,071        9,244        11,048        12,889        15,555        15,160        15,534        16,186   

Stickers(2)

                         

Daily average number of Stickers sent

    155        204        231        267        346        350        328        335        358        397        379        388        389   

Total number of Sticker sets available on the LINE platform

    163        225        289        351        428        3,881        18,671        41,596        75,392        147,987        185,114        225,895        259,499   

 

(1) Includes text messages, voice messages, Stickers and photo, video, voice and text files sent and received, as well as free voice and video calls made and received, in each case using the LINE messaging application from either mobile devices or personal computers or using any LINE Game or any other LINE application from mobile devices.

 

(2) Includes Stickers offered on Creators Market, which was launched in April 2014, and Sponsored Stickers.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the section titled “Selected Historical Financial and Operating Data” and the consolidated financial statements and related notes thereto included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” included elsewhere in this prospectus.

Overview

We are a leading global platform for mobile messaging and communication services, content distribution and advertising. Our mobile messaging application, which is the foundation of our LINE platform and operates on all major mobile operating systems, enables our users to communicate through free instant messaging and voice and video calls and serves as a smart portal to our other applications and services. We provide users with access to a wide range of social and interactive content and services that satisfy our users’ individual needs for access to information and entertainment such as mobile games and music through our “content platform,” as well as O2O services such as payment services and job posting, restaurant reservation and taxi booking services through our “life platform.” We believe that the integration on our LINE platform of content and services offers our users a convenient way to connect and have fun with their family and friends, explore and share their interests and satisfy their daily needs with greater ease, which we believe enriches the user experience and ultimately contributes to higher user loyalty. For game developers and other content providers, we serve as a publishing and distribution platform for the direct sale of their products. Supported by our large user base and high level of user engagement, LINE has become an attractive advertising platform providing targeted and interactive marketing solutions that enable advertisers to promote their brands and amplify their visibility and reach.

Our focus has been on growing our user base and developing our LINE platform into one that is capable of supporting rapid and sustainable growth in a highly evolving, fast-changing industry. We have experienced our largest user growth in Japan, Taiwan, Thailand and Indonesia. In March 2016, we had 218 million MAUs globally, with 152 million MAUs located in Japan, Taiwan, Thailand and Indonesia combined. We strive to localize our services to take into account cultural differences and user needs, and we currently provide our services in 19 languages. According to App Annie, LINE was the fourth largest application publisher globally for the two years ended March 31, 2016, based on the number of downloads from the Social Networking category on iOS App Store and Social and Communication categories on Google Play, combined. At the same time, we have been focusing on increasing revenues generated from various participants active on the LINE platform. While our revenues have been derived primarily from games, Stickers and advertising services, we plan to continue to invest in product development and explore additional monetization opportunities in both our largest existing markets as well as in markets that we have entered more recently.

With an increasing amount of activity on the internet being conducted through mobile applications from a smartphone, we believe that LINE provides a fast, versatile and user-friendly platform for the discovery of content and services in the mobile era. Our approach in each market is to build a large user base through our LINE messaging application, promote user engagement and introduce and enhance entertainment and other content and services, all of which lead to greater monetization opportunities and enhanced media value for our advertising business.

Our Global Footprint and Expansion

We have experienced rapid growth in our business since the introduction of the LINE mobile messaging application in June 2011. We first launched the LINE messaging application to the public in Japan, followed by

 

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launches in other Asian countries. We initially focused on building our user base in Japan and shortly afterwards expanded our focus to other parts of Asia, where we believed there was significant market potential based on the relatively low level of smartphone penetration in a relatively large and growing population size. Today, we believe LINE is the leading mobile messaging application in Japan, Taiwan and Thailand in terms of number of users, and we have obtained substantial numbers of users in other parts of Asia, including Indonesia, Hong Kong, Singapore, Malaysia and Myanmar.

We have achieved this growth through active marketing of LINE as well as customizing our content offerings to suit local preferences and needs. We continue to see opportunities for growth in our leading markets of Japan, Taiwan, Thailand and Indonesia as we enhance and expand our offering of products and services, while we also continue to strive to enhance our position in additional markets by localizing our products and engaging in targeted marketing.

The growth rate of our active users has slowed recently as the size of our active user base has increased and we have achieved higher market penetration rates, particularly in our leading markets of Japan, Taiwan, Thailand and Indonesia. From our inception, we experienced our largest user growth in Japan, Taiwan, Thailand and Indonesia. While we achieved significant user growth in other parts of the world in 2013 and 2014, beginning in early 2015, we have refocused our marketing efforts on key countries in line with our increased emphasis on monetization in markets where we have achieved leading market positions. While this effort has led to a continued increase in our MAUs in the four key countries of Japan, Taiwan, Thailand and Indonesia as well as overall MAUs, it has at the same time contributed to a significant decrease in total MAUs outside the four key countries. We continue to strive to attract and retain new users in new markets by investing in various product offerings available on the LINE platform as well as marketing initiatives.

We believe that the scale and growth of our user base provide us with powerful network effects, whereby LINE becomes more valuable with more users driving further user growth and engagement as well as attracting more advertisers and platform partners. We benefit from such network effects where more activity on LINE leads to the creation and distribution of more content, which in turn attracts more users, platform partners and advertisers. We will continue to invest in new products and services and enhancements to our existing products and services, with the goal of further expanding our user base and increasing user engagement.

We generate revenues in a variety of ways and from various participants active on the LINE platform. Our revenues are primarily generated from games, Stickers and advertising services on the LINE platform as well as from advertising on our web portals. We generated revenues of ¥39,586 million in 2013, ¥86,366 million in 2014, ¥120,406 million in 2015 and ¥33,456 million in the first three months of 2016. For the two years ended March 31, 2016, according to App Annie, LINE ranked as the world’s largest mobile publisher based on non-game gross revenue from iOS App Store and Google Play, combined.

 

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Key Milestones

The following is a summary of our key product and service launches since June 2011:

LOGO

 

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Key Metrics

MAUs are a measure of the size of our active user base. We define MAUs in a given month as the number of user accounts that (i) accessed the LINE messaging application or any LINE Game through mobile devices; (ii) sent messages through the LINE messaging application from personal computers; or (iii) sent messages through any other LINE application from mobile devices, in each case at least once during that month. Growth in our MAUs has been as follows:

 

LOGO

 

LOGO   LOGO

MPUs are a measure of the number of our paying users, which we review to measure our ability to monetize our user base. We define MPUs in a given month as the number of user accounts that made (i) a payment for Stickers, Themes or LINE Out on the LINE messaging application through mobile devices or personal computers or (ii) a payment relating to any LINE Game through mobile devices, in each case at least once during that month. Growth in our MPUs has been as follows:

 

LOGO

 

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Factors Affecting Our Financial Condition and Results of Operations

Our financial condition and results of operations have been and will continue to be materially affected by a number of factors and developments, some of which are outside of our control, including the following:

 

    user growth;

 

    user engagement;

 

    monetization;

 

    products and services innovation;

 

    marketing and brand promotion;

 

    competition;

 

    investment in talent; and

 

    seasonal fluctuations.

User Growth

The growth in MAUs affects our revenues and financial performance by influencing the volume of transactions on LINE, the number of advertisers we are able to attract and the rates we can charge such advertisers, as well as our expenses. In March 2016, we had 218 million MAUs globally, including a total of 152 million MAUs in Japan, Taiwan, Thailand and Indonesia. We intend to pursue MAU growth, particularly in Asia, where we have established significant brand recognition and market positioning through localized services and products. For example, we try to incentivize additional users to exchange messages and add more friends through promotional events, as well as broaden the ways users can interact with their friends on our games and other content applications.

User Engagement

Changes in user engagement also affect our revenues and financial performance. Growth in user engagement enhances our ability to deliver relevant content to users and increase the opportunities for us to generate revenues. Growth in user engagement also generally results in increases in our expenses and capital expenditures required to support user activity. Our average DAUs in March 2016 represented approximately 61.4% of our MAUs globally and 73.0% of our MAUs in our four largest markets of Japan, Taiwan, Thailand and Indonesia in March 2016.

We measure user engagement of communication products and services using various metrics, including daily average number of messages sent and received and daily average number of Stickers sent. While sending and receiving messages is free, when sending messages, our users often include in their messages purchased Stickers, which is our primary revenue source within our communication products offerings. In addition, these metrics affect the attractiveness of our LINE advertising products and services as a medium for advertisers, which in turn impacts our advertising revenue. Such metrics for the months indicated were as follows:

 

    For the month of  
    Mar. 
2013
    Jun. 
2013
    Sep. 
2013
    Dec. 
2013
    Mar. 
2014
    Jun. 
2014
    Sep.
2014
    Dec.
2014
    Mar.
2015
    Jun.
2015
    Sep.
2015
    Dec.
2015
    Mar.
2016
 
    (in millions)        

Daily average number of messages sent.

    1,403        1,801        2,050        2,197        2,860        3,100        3,190        3,372        3,764        4,051        3,997        4,048        4,211   

Daily average number of messages received

    3,105        3,917        4,257        4,715        6,519        8,071        9,244        11,048        12,889        15,555        15,160        15,534        16,186   

Daily average number of Stickers sent

    155        204        231        267        346        350        328        335        358        397        379        388        389   

 

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We measure user engagement of LINE Games primarily using MAUs of LINE Games. While downloading LINE Games is free, our active users often purchase in-game items to enhance their game experience, which is a key revenue source for us. MAUs of LINE Games may fluctuate depending on the level of popularity of our game titles at any given time. The MAUs of LINE Games for the months indicated were as follows:

 

     For the month of  
     Mar.
2013
     Jun.
2013
     Sep.
2013
     Dec.
2013
     Mar.
2014
     Jun.
2014
     Sep.
2014
     Dec.
2014
     Mar.
2015
     Jun.
2015
     Sep.
2015
     Dec.
2015
     Mar.
2016
 
     (in millions)         

MAUs of LINE Games(1)

     18         19         21         22         35         34         33         39         38         36         32         32         31   

 

(1) Represents the number of user accounts that accessed any LINE Game through mobile devices at least once during the month indicated.

Monetization

Our ability to monetize the increase in our user base and our users’ engagement with LINE is critical to our financial performance. We currently generate a substantial portion of our revenues from LINE Games, Stickers and our advertising products and services, including Official Accounts, Sponsored Stickers and LINE Point Ads. In recent months, we have also generated an increasing portion of our advertising revenues from our Timeline Ads. Our approach in each market is to build a large user base through our LINE messaging application, promote user engagement and introduce and enhance entertainment and other content and services, all of which lead to greater monetization opportunities and enhanced media value for our advertising business. We plan to continue to invest in product development, including localization of existing products and services for new markets, and explore ways to pursue additional monetization opportunities. For a discussion of our latest innovations, see “— Products and Services Innovation.”

We review MPUs, including MPUs of LINE Games, as a measure to evaluate trends in monetization. MPUs, including MPUs of LINE Games, may fluctuate depending on the level of success of our monetization efforts utilizing the line-up of our products and services. The following table sets forth the number of our MPUs and MPUs of LINE Games for the months indicated:

 

     For the month of  
     Mar.
2013
     Jun.
2013
     Sep.
2013
     Dec.
2013
     Mar.
2014
     Jun.
2014
     Sep.
2014
     Dec.
2014
     Mar.
2015
     Jun.
2015
     Sep.
2015
     Dec.
2015
     Mar.
2016
 
     (in millions)         

Total MPUs(1)

     2.6         3.7         3.7         4.1         5.4         6.7         7.0         8.2         7.5         7.9         8.2         8.8         8.4   

MPUs of LINE Games(2)

     0.6         0.8         1.1         1.1         1.5         1.4         1.4         1.8         1.5         1.4         1.4         1.6         1.6   

 

(1) Represents the number of user accounts that made (i) a payment for Stickers, Themes or LINE Out on the LINE messaging application through mobile devices or personal computers or (ii) a payment relating to any LINE Game through mobile devices, in each case at least once during the month indicated.

 

(2) Represents the number of user accounts that made a payment relating to any LINE Game through mobile devices at least once during the month indicated.

We intend to invest in our global operations in order to increase monetization outside of Japan, especially in our three other key countries of Taiwan, Thailand and Indonesia. We generated 84.6%, 73.1%, 67.8% and 68.7% of our LINE business revenues (i.e., our total revenues excluding revenues from portal advertising) from Japan in 2013, 2014, 2015 and the first three months of 2016, respectively, and we expect to continue to derive a significant portion of our revenues from Japan in the near future. Certain global markets are not as familiar with new forms of digital advertising, such as our Official Accounts, Sponsored Stickers and LINE Point Ads. In such markets, we are investing in marketing efforts to help our users and advertisers understand and take advantage of the benefits of products and services offered on the LINE platform.

 

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Products and Services Innovation

Our ability to increase the size of our user base and engagement of our users, attract platform partners and advertisers and generate revenues will depend in part on our ability to create successful new products and services, both independently and in conjunction with third parties. We plan to continue to make significant investments in product development and, from time to time, we may acquire companies to further enhance our products, services and technical capabilities.

As part of our efforts to provide innovative products and services, we launched Business Connect and LINE@ that help business partners integrate their online and offline advertising to better reach and communicate with customers, and recently introduced performance ads such as Timeline Ads and other advertisements that utilize our various communication and content offerings, to allow advertisers to effectively reach a larger number of LINE users. To increase the availability of high-quality content on the LINE platform, in December 2015 we expanded LINE News, our personalized news-clipping service that provides users with relevant real-time news stories based on the topics that users are most interested in, such as entertainment, sports, politics, economy, gourmet and fashion, and launched LINE Live, a real-time streaming service that allows users to access live streaming personal videos or commercial events, such as concerts and sporting events, provided by artists, celebrities and corporate sponsors. Both LINE News and LINE Live send updates to users through push notifications that users can check easily without having to leave the LINE messaging application. In March 2016, we announced the launch of LINE Mobile planned for the second half of 2016.

Our operating results have been, and will continue to be, affected by our ability to stimulate customer demand for new and upgraded products and to anticipate and respond to emerging customer preferences and demands by ensuring continuing and timely development of new products and services, as well as enhancements to existing products and services. New services will incur additional operating expenses with uncertainty on timing and level of monetization.

Marketing and Brand Promotion

As we continue to increase our footprint, we engage in active marketing campaigns to promote new products and services, build our brand and expand our user base. We utilize television commercials and internet and mobile advertising, often targeting younger generation users. Our marketing expenses, which consist primarily of costs related to advertising on mass media (primarily television advertising) and advertising on mobile applications (particularly mobile games), but excluding personnel-related costs of our marketing staff, were ¥17,202 million, ¥18,069 million, ¥16,596 million and ¥2,307 million in 2013, 2014, 2015 and the first three months of 2016, respectively. While we believe that our ability to grow through network effects will be fundamental to our growth, we expect to continue to invest significantly in marketing activities, including activities to further promote the growth we have experienced to date as we enter new markets and seek to expand our presence in existing markets. Our quarterly marketing expense has fluctuated in the past and will fluctuate in the future.

Competition

We compete against many companies in different industries and markets to attract and engage users and for advertiser spending. See “Business — Competition.” We must compete effectively for users and advertisers in order to grow our business and increase our revenues. Scale benefits and other advantages may allow our competitors to respond more quickly and effectively than us to a rapidly evolving environment in the mobile internet industry, including industry consolidation that may result in increased competition. We will continue to invest in our products and services for users and advertisers and to grow our active user base in order to address the competitive challenges in our industry. As part of our strategy to improve our products and services, we may acquire other companies to add talent or complementary products and technologies.

 

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Investment in Talent

We intend to continue to invest in hiring and retaining talented employees to grow our business and increase our revenues. We had 2,537 full-time employees as of March 31, 2016, compared to 2,454 as of December 31, 2015, 1,783 as of December 31, 2014 and 1,060 as of December 31, 2013. We expect to increase our personnel for the foreseeable future as we continue to invest in the growth of our business. We have also made and intend to continue to make acquisitions that increase the number of our engineers, designers, product managers and other personnel with specific technology expertise. In addition, we must retain our high-performing personnel in order to continue to develop, sell and market our products and services and manage our business.

We offer stock options for our directors and employees. For a discussion of our stock options, see Note 28 of the notes to our annual consolidated financial statements and Note 12 of the notes to our interim condensed consolidated financial statements appearing elsewhere in this prospectus and “— Critical Accounting Judgments, Estimates and Assumptions — Share-based Payments and Valuation of Our Share Capital.” The stock options vest upon the satisfaction of service conditions. In connection with our stock option awards, we recorded expenses of ¥804 million, ¥2,975 million, ¥11,213 million and ¥2,494 million in 2013, 2014, 2015 and the first three months of 2016, respectively.

Seasonal Fluctuations

Our quarterly operating results may fluctuate significantly from period to period based on the seasonality of user spending for products and services offered on our LINE platform, such as Stickers for which various promotions may be offered either by us or by our advertisers in the year-end holiday season. In Japan, where a majority of companies end their fiscal year on March 31, advertising spending is traditionally stronger in our fourth and first quarters due to the year-end effects and companies in Japan trying to spend their advertising budgets before the close of their fiscal year. This seasonality in advertising has affected our quarterly results, with higher sequential advertising revenue growth from the third quarter to the fourth and then first quarter compared to slower growth or a decline in revenues and profits between the first quarter and the second quarter. For example, our LINE advertising revenues increased 14.5% from the three months ended September 30, 2015 to the three months ended December 31, 2015 and 13.0% from the three months ended December 31, 2015 to the three months ended March 31, 2016, while our LINE advertising revenues decreased 2.2% from the three months ended March 31, 2015 to the three months ended June 30, 2015. For these reasons, a sequential quarter-to-quarter or year-to-year comparison is not necessarily a good indication of our performance or of how our business will perform in the future. As the percentage of our advertising revenues increases, such seasonal impact may become more pronounced in the future.

Major Components of Results of Operations

We generate revenues from our LINE business and portal business. Revenues from our LINE business primarily consist of revenues from communication products and services on LINE, content on LINE and advertising on LINE, while revenues from our portal business consist of revenues from advertising on our livedoor and Matome portal sites.

 

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Revenues

The following sets forth the components of our revenues, and their percentages of total revenues, for the periods indicated:

 

    For the year ended December 31,     For the three months ended
March 31,
 
    2013     2014     2015     2015     2016  
    (in millions of yen or percentages)  

Communication and content:

                   

Communication

  ¥ 9,893        25.0   ¥ 20,690        24.0   ¥ 28,725        23.9   ¥ 6,680        23.8   ¥ 7,686        23.0

Content

    17,662        44.6         40,449        46.8        49,284        40.9        12,064        42.9        11,865        35.5   

Others(1)

    664        1.7        1,783        2.1        5,985        5.0        1,023        3.6        2,032        6.0   
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Sub-total

    28,219        71.3        62,922        72.9        83,994        69.8        19,767        70.3        21,583        64.5   

Advertising:

                   

LINE advertising

    5,322        13.4        14,603        16.9        26,487        22.0        5,591        19.9        9,302        27.8   

Portal advertising

    6,045        15.3        8,841        10.2        9,925        8.2        2,746        9.8        2,571        7.7   
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Sub-total

    11,367        28.7        23,444        27.1        36,412        30.2        8,337        29.7        11,873        35.5   
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Total

  ¥ 39,586        100.0   ¥ 86,366        100.0   ¥ 120,406        100.0   ¥ 28,104        100.0   ¥ 33,456        100.0
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

 

(1) Others include revenues from character marketing, such as sales of LINE character merchandise at our retail stores and licensing of LINE characters’ copyrights, and revenues from e-commerce.

Communication and Content

 

    Communication.  Revenues from communication primarily consist of sales of Stickers. We recognize Sticker revenues at the time of purchase and over an estimated usage period which reflects end user usage patterns.

In the case of purchases of our virtual credits, revenues are not recognized when our users purchase virtual credits but rather when they use such virtual credits. When virtual credits are redeemed for the purchase of Stickers (or in-game items for games internally developed by us as described below), the credits redeemed are recognized as revenues over the estimated usage periods of Stickers (or in-game/in-app virtual items in the case of games/applications internally developed by us as described below).

 

    Content.  Revenues from content primarily consist of revenues from LINE Games.

For games developed by third-party game developers, revenues are recognized at the time of purchase of in-game items and over the contract periods during which such games are accessible on the LINE platform, depending on the types of services provided to third-party game developers. We recognize the net proceeds we receive as our revenue, which are equivalent to the total consideration paid by users less processing fees paid to payment processing service providers and the amounts paid to third-party game developers.

For games/applications internally developed by us, revenues are recognized at the time our users purchase in-game/in-app items or over the estimated periods over which the benefits of such items are enjoyed by our users, depending on the durability of the items. We recognize the amounts of total consideration paid by users as our revenues. Processing fees paid to payment processing service providers are recognized as part of our operating expenses as described below.

 

    Others.  Revenues from others primarily consist of sales of official LINE merchandise, royalty revenues related to LINE characters’ copyrights and revenues from our e-commerce services.

 

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Advertising

 

    LINE advertising.  Revenues from LINE advertising primarily consist of fees from Official Accounts, Sponsored Stickers and LINE Point Ads. For Official Accounts, we recognize monthly fees in the month services are rendered and, in certain jurisdictions where we also charge a one-time registration fee, such fee over the period of the advertising contract. For Sponsored Stickers, we provide marketing and design services and recognize revenues from such services over the advertising contract period. Through LINE Point Ads, we provide users with LINE Points for free as a reward for downloading certain applications, watching certain video commercials created by our advertisers or adding certain Official Accounts as a LINE friend. We charge advertisers a fixed fee per such action taken by our users and recognize such revenue in the period in which it is taken. For Timeline Ads, a new advertising product launched in December 2015 that allows advertisers to post advertisements on users’ Timelines, we charged advertisers a fixed fee per Timeline Ad until May 2016. Beginning in June 2016, we transitioned to charging advertisers a fixed fee per impression for Timeline Ads as well as for other targeted native mobile advertisements across our content products.

 

    Portal advertising.  Revenues from portal advertising primarily consist of advertising fees and subscription fees from our livedoor and Matome portal sites on both personal computers and mobile devices. We recognize advertising revenues over the advertising contract period. See “Business — LINE Platform — Advertising Products and Services — Portal Advertising” for a discussion of our livedoor and Matome portals.

For a discussion of details on how we recognize revenues for different services, see Note 3(21) of the notes to our annual consolidated financial statements appearing elsewhere in this prospectus.

Operating Expenses

The following are the principal components of our operating expenses:

 

    Payment processing and licensing expenses.  Payment processing and licensing expenses consist primarily of (i) processing fees paid to Apple and Google, our payment processing service providers, incurred from the sale of virtual items for internally-developed games and Stickers, and (ii) licensing fees paid to owners of third-party content used in Stickers and other products and services on a revenue-sharing basis.

 

    Employee compensation expenses.  Employee compensation expenses are our personnel-related costs, including salaries, benefits and share-based compensation.

 

    Marketing expenses.  Our marketing expenses consist primarily of costs related to (i) advertising on mass media, primarily television advertising and (ii) advertising on mobile applications. To a lesser extent, we also incur marketing expenses related to brand promotional events. Our marketing expenses do not include compensation expenses of our marketing personnel, which are included in employee compensation expenses.

 

    Infrastructure and communication expenses.  Infrastructure and communication expenses consist primarily of co-location charges incurred by us that are required for operation of the LINE platform and data centers, including fees for data transmission, data center infrastructure fees for maintenance of a suitable operating environment, server rental fees and server connection fees.

 

    Authentication and other service expenses.  Authentication and other service expenses primarily relate to (i) fees paid for mobile phone number authentication services, (ii) fees paid for server maintenance activities and (iii) fees paid to customer service center operators as well as outsourcing service providers, in each case for services outsourced to third parties on a fixed-fee basis.

 

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    Depreciation and amortization expenses.  Depreciation and amortization expenses primarily relate to depreciation of property and equipment, which is computed using the straight-line method based on the depreciable amount of the assets over their respective useful lives.

We plan to continue to expand our business globally. We plan to continue increasing the capacity and enhancing the capability and reliability of our infrastructure to support user growth and increased activity on our LINE platform. We also plan to continue to invest in marketing activities to increase brand awareness, promote launching of new services and expand our user base and advertiser base. Some of our operating expenses, such as employee compensation expenses, are relatively fixed, and other expenses, such as marketing expenses, may not directly correspond to revenues in the same period. We expect that our operating expenses will increase for the foreseeable future and may vary in the near term from period to period as a percentage of revenues.

Finance Income and Finance Costs

Our finance income consists of interest income, and our finance costs consist of interest expense.

Income Tax Benefits (Expenses)

Our income tax benefits (expenses) mainly consist of current income taxes in Japan and Korea, and deferred income taxes and changes in the related assessment of the recoverability of deferred tax assets reflecting the net tax effects of temporary differences between the carrying amounts of assets and liabilities in each of these jurisdictions for financial reporting purposes and the amounts used for income tax purposes. Under Japanese tax regulations that took effect on April 1, 2014, the statutory tax rate applicable to corporations was reduced from 38.0% to 35.6% for taxable years beginning on or after April 1, 2014. Under current Korean tax regulations, the statutory tax rate is approximately 22.0%. Deferred tax assets and liabilities are measured using the tax rates that are expected to apply to the period when the assets are realized or the liabilities are settled.

Profit (Loss) from Discontinued Operations, Net of Tax

Prior to April 1, 2013, we were engaged in the development and distribution of online games through our Hangame business along with its related entities, including NHN Search Technology Corporation, NHNST Japan Corporation, Sync Corporation, Mediator Corporation and our 49.95% interest in Smartphone Contents Investment Limited Partnership. On February 13, 2013, we publicly announced our decision to dispose of our Hangame business and related entities, and they were classified as discontinued operations. The Hangame business and related entities were transferred to a new entity, NHN Japan Corporation, which specializes in internet and gaming services. We disposed of all of our ownership interest in NHN Japan Corporation by transferring all of the related shares in the form of a non-cash dividend to NAVER Corporation at book value, which was completed on April 1, 2013. The book value of NHN Japan Corporation was ¥8,652 million at the time of distribution, and no disposal gain or loss was recorded for financial accounting purposes although the transaction did entail a gain for income tax purposes.

On September 30, 2013, we publicly announced our decision to dispose of our online match-making service business, which was also classified as discontinued operations. We completed the disposition on December 2, 2013 by selling all related assets and liabilities of the business to an unrelated third party and recognized a gain of ¥739 million (prior to income taxes on disposal).

On September 19, 2014, our board of directors approved a plan to dispose of our data management business which consisted of data storage and server hosting services. The operations of the data management services business were classified as discontinued operations on September 19, 2014, and the disposition was completed on September 30, 2014 through a sale to a subsidiary of NHN Entertainment Corporation, an online game portal company that was spun off from NAVER Corporation in August 2013.

On February 12, 2016, after careful assessment of the overall performance of MixRadio, the financial challenges posed by the music streaming market, changing market conditions, an increase in the cost of

 

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maintaining the business and a shift in our overall priorities, our board of directors approved the abandonment of our MixRadio operations, which abandonment became effective on March 21, 2016. As a result, we have retrospectively classified the MixRadio business as a discontinued operation in our consolidated financial statements as of and for the year ended December 31, 2015 and recognized impairment charges of ¥4.6 billion in the fourth quarter of 2015. We also incurred additional restructuring costs of ¥1,183 million for employee termination benefits and ¥127 million for the termination of office lease contracts, in the first three months of 2016 as a result of the abandonment of the MixRadio operations. For more information, see Note 24 and Note 35 of the notes to our annual consolidated financial statements and Note 9 of the notes to our interim condensed consolidated financial statements appearing elsewhere in this prospectus.

The results of the above discontinued operations for 2013, 2014 and 2015 were as follows:

 

    For the year ended
December 31,
    Changes     For the year ended
December 31,
    Changes     For the three
months ended
March 31,
    Changes  
    2013     2014           Amount           %     2014     2015           Amount           %     2015     2016           Amount           %  
    (in millions of yen)     (in percentage)    

(in millions of yen)

    (in percentage)     (in millions of yen)     (in percentage)  

Revenues

  ¥ 11,275      ¥ 3,477      ¥ (7,798     (69.2 )%    ¥ 3,477      ¥ 264      ¥ (3,213     (92.4 )%    ¥  10      ¥  443      ¥ 433        4,330.0

Other income

    61        1        (59     (99.0     1        —          (1     (100.0     103        —          (103     (100.0

Expenses

    (9,631     (3,087     6,544        (67.9     (3,087     (11,767     (8,681     281.2        (261     (2,940     (2,679     (1026.4

Gain (loss) on the disposal of discontinued operations

    739 (1)      2,456 (2)      1,716        232.1        2,456 (2)      —          (2,456     (100.0     —          —          —          —     

Profit (loss) before tax from discontinued operations

    2,444        2,847        403        16.5        2,847        (11,503     (14,350     N/A (3)      (148     (2,497     (2,349     (1587.2

Income tax expenses on ordinary activities

    (708     (216     492