（3667） | Publish:Thu, Oct 08, 2015 IR「BRIDGE REPORT」

BRIDGE REPORT
（3667）

スタンダード

enish, inc. (3667)

Kouhei Antoku,
President

Company	enish, inc.
Code No.	3667
Exchange	1st Section of Tokyo Stock Exchange
Industry	Information, Communications
President	Kohei Antoku
HQ Address	39th Floor, Roppongi Hills Mori Tower, 6-10-1 Roppongi, Minato-ku, Tokyo
Year-end	December
URL	http://www.enish.com/

Share Price	Shares Outstanding (Excl. Treasury Shares)		Market Cap.	ROE (actual)	Trading Unit
¥1,355	6,941,800 shares		¥9.406 Million	0.8%	100 shares
DPS (Est.)	Dividend Yield (Est.)	EPS (Est.)	PER (Est.)	BPS (actual)	PBR (actual)
-	-	-	-	¥261.63	5.2x

*Stock price as of close on July 31, 2015. Shares outstanding as of end of most recent quarter and exclude treasury shares.

Fiscal Year	Sales	Operating Profit	Current Profit	Net Profit	EPS	Dividend (¥)
December 2011	2,590	526	523	298	147.81	0.00
December 2012	4,430	666	654	373	87.28	28.00
December 2013	6,624	1,109	1,078	653	121.89	22.00
December 2014	6,452	149	151	22	3.19	0.00
December 2015 Est.	5,800	-1,050	-1,050	-1,600	-	-

* Estimates are those of the Company. 20 for 1 and 2 for 1 stock splits were performed in September 2012 and October 2013 respectively.
* EPS has been adjusted to reflect these stock splits.

This Bridge Report provides a review of the first half of fiscal year December 2015 earnings results and other information about enish, inc.

Key Points

Company Overview

enish is a social game development company that boasts of the highly popular restaurant management simulation game "Bokuno Restaurant II", apparel shop management simulation game "Galsho☆", and card battle game "Dragon Tactics." As of March 2014, Kohei Antoku was appointed as the new President. The Company will pursue a strategy of maintaining profitability of browser applications, while creating new hit native applications (or "native apps") and pursuing a strategy of deploying its global content distribution with a focus on Japan and the rest of Asia.

Native apps are those that can be enjoyed by users by downloading them to their smartphones. Browser applications, on the other hand, are not downloaded but can be accessed and enjoyed over various platforms like GREE, mixi, and Mobage. Both forms of applications are provided free of charge, but various items including tools (In the case of "Bokuno Restaurant II," recipes and items to decorate the interior of restaurants can be purchased to make the games more fun to use and more attractive to virtual customers within the game) used in the games to make them more enjoyable are offered for purchase. Responsibility for collection of the fees charged to users for items purchased over browser applications is seconded to the social network services (SNS) platform providers, and a portion of the fees received is paid by enish to the platform providers as usage fees.

First, in order to achieve the mission of "Creating enish Fans throughout the World" based upon the corporate slogan of "Link with Fun," enish's game designers, engineers, and art designers will create high value added services. Second, the Company maintains a fundamental management policy of "striving to be a company that always produces creators and specialists with skills that are recognized by the global market" and it will provide new enjoyable experiences through its social applications to users throughout the world. These two are the core management policies of enish.

enish maintains only a single business segment entitled the social applications business (Games are considered as one type of application category). Based upon the Company's earnings foundation built up in the browser application business, enish is also fortifying its efforts in the newer native apps business. While games are provided free of charge, various items including tools used in the games to make them more enjoyable are offered for purchase. Responsibility for collection of the fees charged to users for items purchased over browser applications is seconded to the social network services (SNS) platform providers, and a fee is paid by enish to the platform providers as usage fees. In addition, enish is cultivating the "Online to Offline (O2O) business where advertisements are posted within the games (Providing companies which seek to use games as opportunities to promote sales).

"Bokuno Restaurant II", "Galsho☆" and other management simulation games are long selling games that are popular with female users. In particular, sales of "Galsho☆"continue to grow despite the passage of four years since its release. The ratio of male to female users of browser based games is 39.1% to 60.9% respectively. enish is promoting a shift from browser games to native games and it has released three native games, namely "1000 Year Kyoshin", "Bahamut Crisis", and "Bokuno Restaurant III" during fiscal year December 2014.

First Half of Fiscal Year December 2015 Earnings Results

Sales Fall 11.5% Year-On-Year, Current Loss of ¥630 Million Incurred

Sales fell by 11.5% year-on-year to ¥2.880 billion. The declining trend was inevitable as browser applications still make up the bulk of overall sales, but it remained basically in line with expectations. Meanwhile, the contributions of native applications were limited, due in part to the fact that sales of the updated "1000 Year Kyoshin" in May 2015 fell shy of initial estimates by about 80%, and also to the delays in release of new titles aimed at quality improvement.

An operating loss of ¥627 million was incurred. The poor performance of native applications caused weaker-than-expected sales, which could not absorb the higher costs for new titles, such as higher outsourcing fees and higher labor expenses due to increased personnel costs. Consequently, a gross loss of ¥2 million was incurred (According to enish's accounting practice, game development expenses, including those for the coming term onwards, shall be booked in the term that they occur). At the same time, reviews of the selling, general and administrative expense structure led to the booking of one-off expenses and to a 5.8% year-on-year increase in SG&A expenses to ¥625 million.

Efforts to improve profitability from the second half onwards including restructuring and reductions of overseas facilities contributed to the booking of an extraordinary loss of ¥159 million. Combined with the influence of tax effect accounting (Deferred tax assets reversals totaling ¥303 million were booked due to the earnings estimates which called for losses during the full year), a net loss amounting to ¥1.050 billion was incurred during the first half.

Declines in the browser applications business are the main contributing factor to the year-on-year and quarter-on-quarter declines in sales. At the same time, higher labor expenses arising from increases in the work force and outsourcing fees for new title development contributed to an increase in cost of sales. Furthermore, higher personnel expenses resulting from increases in the work force and one-off expenses for restructuring and reductions in the overseas business (commission expenses, retirement benefits to employees at overseas subsidiaries) contributed to an increase in selling, general and administrative expenses.

Operating expenses rose by 24.1% year-on-year and 9.9% quarter-on-quarter to ¥1.836 billion. One-off expenses arising from reviews of the cost structure amounting to ¥96 million were booked (Halt of development of the native application "Valiant Soul" led to the payment of guarantees of ¥50 million and employee retirement fees of subsidiaries amounted to ¥46 million).
Cost of sales rose by 26.5% year-on-year and 7.8% quarter-on-quarter to ¥1.495 billion. While fee collection commissions declined due to the lower sales, labor expenses arising from increases in the work force and outsourcing fees for new title development grew.
Selling, general and administrative expenses rose by 14.6% year-on-year and 20.5% quarter-on-quarter to ¥341 million. Advertising expenses for "1000 Year Kyoshin" and commissions arising from the reduction of overseas operations increased. At the same time, refined hiring activities allowed hiring expenses to decline from the previous term and overall personnel expenses to stabilize.

At the end of the first half of the current term, total assets declined by ¥895 million to ¥2.560 billion. On debit side, the factors influencing this decline include declines in deferred tax assets and net assets. On credit side, capital was sourced through the acquisition of ¥300 million in new short-term debt. Current ratio declined from 519.6% at the end of the previous term to 291.1% at the end of the current first half, fixed ratio rose from 25.5% to 32.3%, and equity ratio fell from 82.9% to 70.9% over the same period.

The deterioration in earnings contributed to an expansion in the net outflow in operating cash flow. Restraint in capital investments and other actions allowed the margin of net outflow in investing cash flow to contract by a significant margin, but a net outflow of ¥439 million in free cash flow was recorded. The assumption of ¥300 million in short-term debt allowed the net outflow in financing cash flow recorded during the previous first half to turn to a net inflow during the current first half.

Fiscal Year December 2015 Earnings Estimates

Full-Year Earnings Estimates Revised to Reflect Native Application Development Trends of the First Half

Sales are expected to decline by 10.1% year-on-year to ¥5.8 billion during the full year. Amidst the declining trend in browser applications, the weak response to "1000 Year Kyoshin", halt of development of some titles, and delay in development of new titles are expected to limit the potential contributions from native applications to overall earnings. At the same time, operating expenses are expected to rise by 8.7% year-on-year to ¥6.850 billion due to development expenses for new titles and one-off expenses arising from reductions and withdrawals in the overseas business. Extraordinary losses resulting from restructuring and reductions in overseas facilities and reversal of deferred tax assets are expected to contribute to a net quarterly loss of ¥1.6 billion.
Meanwhile, ¥30 million in advertising expenses for each of the four native application titles scheduled to be released during the second half have been factored into enish's earnings estimates.

Factors behind the Earnings Estimate Revision

With regards to existing titles, the decline in browser applications is expected to be in line with expectations. However, the outlook for sales of the native application "1000 Year Kyoshin" has been revised significantly downwards. At the same time, key performance indicator analysis is currently being conducted and the estimates for the updated version and the Android version of "Bokuno Restaurant 3 DX" released during the first half remain unchanged. And while browser application sales are expected to decline overall, some titles are reportedly showing signs of recovery.

In the meantime, out of the six titles that had been originally scheduled to be released during the current term, two have been frozen and the other four have been postponed. The two titles the development of which has been frozen are "Valiant Soul," which was found difficult to improve its quality, and "Kunio-kun," the development of which has been behind schedule and its outlook unclear. Work on "Kunio-kun", which is a familiar character in Japan, had been promoted along with a Korean manufacturer to localize it for the Korean market. Moreover, the remaining four titles are all in their final stages of completion and efforts are being made to further improve their quality.

Reduction in Managing Director Compensation

To take responsibility for the weaker earnings performance during the current term, the managing directors plan to implement a reduction in their compensation beginning from July for an unspecified period of time as specified below:

Details of Managing Director Compensation Reductions

The President and CEO will take a 50% reduction in monthly pay

Directors (Excluding external directors) will take reductions in pay of between 20% to 50%

Endeavors to Realize Revised Earnings Estimates

In order to grow the top line, measures to improve operational quality and functions, and to strengthen the earnings foundation of the existing browser applications will be implemented. At the same time, efforts will be promoted to increase the development speed of native applications and to strictly adhere to the development plans.

With regards to the supervisory function, an internal committee will lead efforts to promote attainment monitoring and milestone management, and quality levels will be confirmed at an early stage by using prototypes. With regards to costs, various cost reduction efforts will continue to be promoted including optimization of human resources, reduction in director compensation, reductions in overall costs, and strengthening of the supervisory function.

In addition to the above, enish has also begun to restructure its overseas business. enish has begun to reduce its overseas facilities in China, Korea, etc. due to its decision to collaborate with local partners for distribution of contents in overseas markets and halt their own provision of contents. Moreover, the Thai subsidiary has been closed and the CS function has been transferred back to Japan to change some fixed costs to variable costs.

(2) Endeavors to Achieve Growth

Introduction of new native titles, global deployment, and maintenance of a stable earnings foundation are the three main issues in enish's business deployment strategy.

With regards to native title introductions, games will be deployed in various genre regardless of user gender, and strict adherence to development plans will also be implemented. As explained earlier, a decision has been made to collaborate with local partners to lower the risk of global business development. Furthermore, Japanese contents to be introduced into overseas markets will be determined after trends in the Japanese market have been assessed. Maintenance of a stable earnings foundation will be achieved by leveraging marketing capabilities and maintaining profitability of existing browser titles, while at the same time implementing measures to continue to introduce contents and add new functions.

(3) Titles Currently Being Developed

Currently, four titles (Two titles each for male and female users) are being developed and all of them are scheduled to be released within the current term.

Publishing title "Miramira" is a simulation game scheduled to be released in August 2015. The number of pre-launch registrations from July 3 has exceeded 100,000 users.

The original title "12 Odins" is a role playing game (RPG) based upon the concept of the authentically mainstream "Minna de Tsunagaru" game. It offers the ability to fight other participants on a real time basis, a high level of customization of characters, and other features (High fee collection rates). This title is scheduled to be released in September 2015.

"Yurukami!" is a "nationwide deity cultivation RPG" that allows users to search out and cultivate various deities to be found throughout Japan. Originally developed by Square Enix Co., Ltd., along with functionality expanded also by Square Enix, enish will begin distributing this RPG as a means of capturing Square Enix fans. Prelaunch registration began on July 29 and it will be officially released in September 2015.

The original title "Qruton" is a simulation game that portrays the lives of mysterious but very cute characters called "Qrutons" and their gardening activities in a unique microcosm within the small space of a bottle. It is scheduled to be launched in fall 2015.

Conclusions

Establishing accurate estimates for the game business is difficult because of the tendency for only a small handful of all titles to generate earnings. However, the third quarter (July-Sept) will see a concentration of new native applications launches and should be watched closely as an indicator of the earnings potential for not only the current fiscal year, but also for coming years as well. Adherence to development plans and on-schedule release of products is essential of course, but how many users can be gathered at the initial stage must be watched most closely. If enish can achieve a favorable launch for titles during this period and cultivation of users, the earnings potential during the coming term and thereafter could be promising. In addition, a benevolent cycle of success leading to other successes may also be achieved. Furthermore, the trends in existing browser applications, which are part of the efforts to fortify enish's earnings foundation, should also be watched closely.

Disclaimer

This report is intended solely for information purposes, and is not intended as a solicitation to invest in the shares of this company. The information and opinions contained within this report are based on data made publicly available by the Company, and comes from sources that we judge to be reliable. However we cannot guarantee the accuracy or completeness of the data. This report is not a guarantee of the accuracy, completeness or validity of said information and or opinions, nor do we bear any responsibility for the same. All rights pertaining to this report belong to Investment Bridge Co., Ltd., which may change the contents thereof at any time without prior notice. All investment decisions are the responsibility of the individual and should be made only after proper consideration.
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