（3667） | Publish:Tue, Dec 22, 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	Roppongi Hills Mori Tower 39F, 6-10-1 Roppongi, Minato-ku, Tokyo
Year-end	December
URL	http://www.enish.com/

Share Price	Shares Outstanding		Market Cap.	ROE (actual)	Trading Unit
¥749	6,992,680 shares		¥5.238 billion	0.8%	100 shares
DPS (Est.)	Dividend Yield (Est.)	EPS (Est.)	PER (Est.)	BPS (actual)	PBR (Est.)
-	-	-	-	¥241.91	3.1x

*Stock price as of close on October 30, 2015. Shares outstanding as of end of most recent quarter and exclude treasury shares.

Fiscal Year	Sales	Operating Profit	Current Profit	Net Profit	EPS	DPS
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	-230.51	TBD

* 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 retroactively adjusted to reflect these stock splits.

We present this Bridge Report reviewing the third quarter of fiscal year December 2015 earnings results and other information about enish, inc.

Key Points

Company Overview

enish is a social game planning, development and operations company that boasts of the highly popular restaurant management simulation game "Bokuno Restaurant II", apparel shop management simulation game "Garsho☆", and card battle game "Dragon Tactics." Effective March 2014, Kohei Antoku was appointed to serve as the new President. The Company will pursue a strategy of maintaining profitability of browser applications, while creating new hit native applications and pursuing a strategy of deploying its contents distribution throughout Asia. The company name "enish" is derived from the Japanese word "en" which refers to the link or bond that connects people to each other.

Native applications are applications 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 such as GREE, mixi, and Mobage. Both forms of applications are provided for free, but 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 networking services (SNS) platform providers, and a portion of the fees received is paid by enish to the platform providers as usage fees.

Based upon the concept of "Link with Fun", enish maintains a goal of "cultivating fans of enish around the world."

enish maintains only a single business segment entitled 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 cultivating its efforts in the newer native applications 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 for browser applications is seconded to the social networking services (SNS) platform providers, and a fee is paid by enish to the platform providers as usage fees. Also, enish is cultivating its efforts in Online to Offline (O2O) business, which develops in-game advertising of alliance partners (alliance partner capitalizes on enish's games as a part of sales promotion).

Social games have features that allow: 1) users to communicate with other users through games, 2) items and tools to be sold to users of games which are provided free of charge, 3) smartphone users to easily play games for free, 4) games without goals to be played, 5) release of new functions as games are updated, and 6) the function to allow for the addition of characters and items in the normal operations of games as a means of differentiating them from packaged games. How the games are "operated" after the launch is the key for the success of games after their "launch".

"Operation" refers to event operations within games, and the three different types of events including acquisition event where items and characters are acquired and collected to develop games, cultivation event where characters are cultivated for growth of both characters and games (Implement distribution of specialized items needed for cultivation), and usage event where cultivation items and characters capability are tested. Furthermore, the usage event draws a great deal of attention from users and contributes to large growth in sales as it allows for users to battle and cooperate with each other in the games and displays user rankings in real time as the game progresses.

According to a research firm, mobile game market size within Japan is estimated to increase from ¥261.0 billion in 2012 to ¥827.0 billion in 2015. The ratio of native games, market drivers, to the total is expected to have risen from 44% in 2012 to 71% in 2015.

Furthermore, native games have the potential for global development. The total value of the world major markets in 2015 is estimated to have risen significantly by 22% year-on-year to over ¥2.1 trillion (¥1.7 trillion in 2014). Especially, the Asian market accounted for the majority of the global markets at an estimate of 65% (¥1.3 trillion).

Introduction of new native titles, global deployment, and maintenance of a stable earnings foundation are the three fundamental policies in enish's business deployment strategy. With regards to native title introductions, games will be deployed in various genres regardless of whether they target male or female users, and strict adherence to development plans will also be implemented. Furthermore, the outcome of launch in the Japanese market will be carefully considered in collaboration with local partners to lower the risk of global business deployment. 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.

"Bokuno Restaurant II", "Garsho☆" and other management simulation games are long selling games that are popular with female users. The ratio of males and females in browser games base is 39.1% and 60.9% respectively. Many of the female users are long-term ongoing users.

Third Quarter of Fiscal Year December 2015 Earnings Results

Native Games Weak, but Browser Games Strong

Sales declined by 3.5% quarter-on-quarter to ¥1.312 billion during the third quarter (July to September). Native games suffered from weak demand but strength in browser games including "Garsho☆","Platinum☆Girl" and "Sakigake! Otokojuku" helped to limit the decline in total sales. With regards to profits, reviews of the cost structure contributed to large declines in cost of sales and sales, general and administrative expenses compared with the second quarter, and allowed the operating loss to decline from ¥476 million during the second quarter to ¥165 million in the third quarter.

"MIRA MIRA" (Publishing Title) Released on August 27

With regards to native games, the simulation game called "MIRA MIRA" (Publishing title) was released on August 27, and a game developed by Square Enix called "Yurukami!" was expanded to make it more attractive to female users was also released on October 9. Meanwhile, the market maintained strong expectations for the role-playing game "12 Odins" (Original title), scheduled to be released during the third quarter, as reflected by the large number of pre-launch member registrations of over 120,000. But the release of competing role-playing games by competitors and the shortfall in key performance indicators (KPI) of "MIRA MIRA" led enish to postpone the launch of "12 Odins" to pursue further improvements in its quality.

Proper Strategy, Consignment to External Partners of Operations for Existing Native Applications

With regards to the weak trend for existing native games, enish is considering the consignment of operations of existing native applications to external partners as part of its strategy to efficiently leveraging human resources, and has completed the transfer of operations of "1000 Year Kyoshin" during the third quarter. Also, enish has decided to switch operations of "Bokuno Restaurant III" to an external partner based upon key performance indicators.

Within cost of sales, both commissions paid and labor expenses declined on the back of the lower sales. enish has chosen not to book development expenses as liabilities on the balance sheet but as expenses during the term that they occur. Consequently, most of the development expenses for new titles for fiscal year December 2015 have been completed along with the booking of labor expenses during the third quarter (Labor expenses to be booked during the fourth quarter are primarily for titles which are being developed for expected launch during fiscal year December 2016.).

With regards to sales, general and administrative expenses, a small increase in advertising expenses for new titles was recorded, but declines in director compensation due to a reduction in pay, general payroll resulting from rationalization of the workforce, hiring expenses arising from restraint in new hires and commissions paid due to rationalization and reductions in overseas facilities were recorded.

Sales Fell by 13.1%, Operating Loss of ¥793 Million Incurred (Compared with Operating Profit of ¥294 Million in Previous 3Q)

Sales declined by 13.1% year-on-year to ¥4.192 billion. This result was basically in line with expectations given the outlook for a continued downtrend in browser games, which still account for a majority of enish's sales. At the same time, weakness in native games was noted along with the release of the updated version of "1000 Year Kyoshin" in May and the release of "MIRA MIRA" in August.

With regards to profits, the lower sales resulting from weakness in the updated version of "1000 Year Kyoshin" and the postponing of a new title release, and increases in new title development, outsourcing, and labor expenses contributed to a deterioration in cost of sales margin. And while sales, general and administrative expenses remained in line with the previous year's levels due to cost structure reviews, an operating loss of ¥793 million was incurred (Compared with an operating profit of ¥294 million in the previous third quarter). Losses resulting from closure of enish Thailand's operations, and reductions in enish China's operations contributed to the booking of an extraordinary loss of ¥158 million, which in turn led to the booking of a net loss of ¥1.221 billion (Compared with a net profit of ¥167 million in the same period of the previous year).

At the end of the third quarter, total assets declined by ¥1.108 billion from the end of the previous fiscal year to ¥2.346 billion. Declines in sales and profits, cash and equivalents, receivables and net assets were recorded. In order to secure funds necessary for application development and marketing activities in the coming term, a third party placement of stock options was conducted. Current ratio declined from 519.6% at the end of the previous fiscal year to 305.6%, noncurrent ratio rose from 25.5% to 33.8%, and equity ratio declined from 82.9% to 72.1% over the same period.

Note Regarding Revision of Exercise Price for 7th Third Party Placement Stock Option Issuance

In order to secure funding necessary for development of native applications and marketing activities, including the acquisition of popular intellectual properties, stock acquisition rights were issued by third party allotment to Daiwa Securities on September 24, 2015. enish plans to make aggressive acquisitions of popular native application intellectual properties and has already entered into negotiations with multiple companies for the acquisition of intellectual properties. Titles based on popular intellectual properties that are widely known to users can easily relate the story lines (therefore higher marketing efficiency) and can contribute to the acquisition of new users and raising of existing user satisfaction levels (High retention rates have been confirmed).
Intellectual property rights include not only those of original authors but also those concerning secondary works that were developed by using the original copyrights. The intellectual properties that enish intends to use include movies, animations, comics and their characters, etc.

Capital Funding Overview

Stock Option Allocation Date:	September 24, 2015
Stock Option Numbers:	8,500
Issuance Price:	¥930 per stock option (Total paid in value ¥7.905 million)
Latent Shares from Stock Options:	850,000 (100 shares per option)
Initial Exercise Price (Revision Possible)	¥1,045
(The exercise price of stock options will be adjusted along with the market value at the time of exercise, with no maximum limit to the exercise price and a minimum exercise price of ¥627)
Capital Sourced (Calculation net taxes)	¥891.155 million

With regards to the total value of capital sourced net taxes of ¥891 million, 1) ¥0.7 billion is expected to be used for development activities for three to four native game applications between September 2015 to December 2016 and 2) ¥191 million for native game application marketing activities between January to December 2016 (In the event that capital in excess of this calculation is raised, the excess amount will be used for labor and other expenses within working capital.). Moreover, 1,400 stock options (For a total of 1.400 million shares) have been exercised as of October 28, 2015, leaving 7,100 stock options (7.100 million shares) outstanding.

Fiscal Year December 2015 Earnings Estimates

4Q: New Title Contribution Expected to Boost Sales, but Conservative Outlook for Profitability Adopted

In addition to the celebrity simulation game "MIRA MIRA" for female users released in August, "Yurukami!" jointly developed with Square Enix was launched in October. Furthermore, the farming simulation game called "Qlton" and the role-playing game called "12 Odins" are expected to be released during the fourth quarter. In addition to the contributions from the above-mentioned native games, a continuation of the favorable trend in browser games is expected to lead to the large quarter-on-quarter increase in sales during the fourth quarter. However, a conservative stance with regards to profitability has been adopted due to the outlook for aggressive advertising spending. Consequently, the operating loss is expected to expand from ¥165 million during the third quarter to ¥255 million during the fourth quarter.

The Company's outstanding full-year estimates remain unchanged and call for sales to decline by 10.1% year-on-year to ¥5.8 billion, and operating and current losses of ¥1.050 billion, and a net loss of ¥1.6 billion are now anticipated.

(2) Endeavors to Achieve Full-Year Earnings Estimates

With the goal of achieving its earnings estimates, enish has been focusing efforts on four issues from the second quarter onwards: 1) expanding sales, 2) strengthening of the progress management structure, 3) rationalization of and reduction in overseas facilities, and 4) implementation of strict cost controls. With regards to the rationalization and reduction in overseas facilities, enish has switched to a strategy of collaborating with local partners distributing its contents in overseas markets and subsequently chosen to rationalize and reduce facilities in China, and moving the customer service (CS) function from Thailand to Japan as a means of switching fixed costs to variable costs (Move has been completed). Moreover, various cost saving measures have been implemented, including optimization of the work force, reduction of director compensation and all the other measures as part of the strategy of strict adherence to cost management (Although the Company plans to continue strengthening its administrative structure and further promoting cost reduction, in an overall view, the Company's efforts have been nearly completed).

On the other hand, the efforts to expand the sales and strengthen the progress management structure are still underway. With regards to the expansion of the sales, measures to strengthen the earnings structure, including addition of functionality and improvement in operations, are being implemented. Endeavors to shorten the development period for new titles and strict adherence to development plans are also being implemented. Furthermore, a task force comprised of an internal committee is taking the lead in strengthening the progress management structure including milestone management, progress monitoring, and prototyping to validate quality levels at an early stage.

Efforts to Expand Sales

Ongoing efforts are being made to improve operational quality and add functionality to browser games, which are a driver of earnings, and the relatively small margin of decline in sales of 3.3% quarter-on-quarter during the third quarter can be attributed to the success of these efforts. With regards to improve operational quality, outsourcing of some management tasks, shifting to in-house manufacturing, and placing of important functions under enish's control have been undertaken. Also quality checks and monthly reviews of companies to which work is outsourced are being made into part of the routinely conducted practices.

As explained earlier in this report, four new native games are expected to be released. "MIRA MIRA" and "Yurukami!" had been already launched, and "Qlton" and "12 Odins" are expected to be released in the middle to the last part of the fourth quarter ("Qlton" and "12 Odins" are currently in the final phase of development.). Also, developing a popular IP is currently being developed as a new title to be released in the fiscal year December 2016.

"MIRA MIRA", released in August 27, is a celebrity simulation game that allows users to have a Cinderella experience, becoming an actor, model or singer. Key performance indicators fell below initial estimates, but a series of upgrades including the fixing of a bug have been completed. Specifically, the upgrade to version 1.2 allows for changes in the level of difficulty, in addition of New NPC motion (Addition of new motion to characters that the game master controls), improvement in notifications and other functions. Furthermore, improvement of events, S Rare (gacha), and tutorial (explanation) are added in version 1.3 which is currently being provided.

"Yurukami!" released in October 9 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., enish distributed this RPG after expanding its functionality as a means of capturing Square Enix fans. Balance improvement was conducted after its launch, and the effectiveness of these improvements are currently being confirmed. The updated version 1.0.5, which is scheduled for release, contains solo event, ranking variable compensation, and other functions.

The original title "Qlton" expected to be released in the fourth quarter (mid November) is a simulation game that portrays the lives of cute characters called "Qltons" and their gardening activities in a unique microcosm within the small space of a bottle. Depending upon the after status of the iPhone version released, a version for Android is expected to be released.

The original title "12 Odins" is a role-playing game (RPG) based upon the concept of the long selling "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 was scheduled to be launched during the third quarter, but the release date was postponed to pursue further quality improvements in response to the launch of competitors' role-playing games. The number of pre-launch registrations has exceeded 120,000 users, and this title has gathered a high amount of attention in the market.

Conclusions

While browser games continue to trend favorably, sales of ¥1.5 to ¥1.6 billion are required on a quarterly basis to be able to absorb the costs of new title development and to secure profitability. Achieving this with browser games alone will be difficult. The operating environment surrounding game companies is severe due to fierce competition and difficulties in producing hit titles, which is not limited to only enish. But the introduction of just one hit title has the ability to change the future of a game company. Consequently, enish seeks to firmly establish native games as a driver of its earnings at an early stage, and both its sales and profits could be largely influenced by trends in native games during fiscal year December 2015. Having said that, since this forecast is rather conservative, the possibility that the loss goes beyond expectations can be said to be small.

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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