Company Quick10K Filing
Line
20-F 2019-12-31 Filed 2020-03-27
20-F 2018-12-31 Filed 2019-03-29
20-F 2017-12-31 Filed 2018-03-30
20-F 2017-03-24 Filed 2017-03-31

LN 20F Annual Report

Part I
Item 1. Identity of Directors, Senior Managers and Advisers
Item 2. Offer Statistics and Expected Timetable
Item 3. Key Information
Item 3.A. Selected Financial Data
Item 3.B. Capitalization and Indebtedness
Item 3.C. Reasons for The Offer and Use of Proceeds
Item 3.D. Risk Factors
Item 4. Information on The Company
Item 4.A. History and Development of The Company
Item 4.B. Business Overview
Item 4.C. Organizational Structure
Item 4.D. Property, Plants and Equipment
Item 4A. Unresolved Staff Comments
Item 5. Operating and Financial Review and Prospects
Item 5.A. Operating Results
Item 5.B. Liquidity and Capital Resources
Item 5.C. Research and Development, Patents and Licenses, Etc.
Item 5.D. Trend Information
Item 5.E. Off-Balance Sheet Arrangements
Item 5.F. Tabular Disclosure of Contractual Obligations
Item 5.G. Safe Harbor
Item 6. Directors, Senior Management and Employees
Item 6.A. Directors and Senior Management
Item 6.B. Compensation
Item 6.C. Board Practices
Item 6.D. Employees
Item 6.E. Share Ownership
Item 7. Major Shareholders and Related Party Transactions
Item 7.A. Major Shareholders
Item 7.B. Related Party Transactions
Item 7.C. Interests of Experts and Counsel
Item 8. Financial Information
Item 8.A. Consolidated Statements and Other Financial Information
Item 8.B. Significant Changes
Item 9. The Offer and Listing
Item 9.A. Offer and Listing Details
Item 9.B. Plan of Distribution
Item 9.C. Markets
Item 9.D. Selling Shareholders
Item 9.E. Dilution
Item 9.F. Expenses of The Issue
Item 10. Additional Information
Item 10.A. Share Capital
Item 10.B. Memorandum and Articles of Association
Item 10.C. Material Contracts
Item 10.D. Exchange Controls
Item 10.E. Taxation
Item 10.F. Dividends and Paying Agents
Item 10.G. Statements By Experts
Item 10.H. Documents on Display
Item 10.I. Subsidiary Information
Item 11. Quantitative and Qualitative Disclosures About Market Risk
Item 12. Description of Securities Other Than Equity Securities
Item 12.A. Debt Securities
Item 12.B. Warrants and Rights
Item 12.C. Other Securities
Item 12.D. American Depositary Shares
Part II
Item 13. Defaults, Dividend Arrearages and Delinquencies
Item 14. Material Modifications To The Rights of Security Holders and Use of Proceeds
Item 15. Controls and Procedures
Item 16. [Reserved]
Item 16A. Audit Committee Financial Expert
Item 16B. Code of Ethics
Item 16C. Principal Accountant Fees and Services
Item 16D. Exemptions From The Listing Standards for Audit Committees
Item 16E. Purchases of Equity Securities By The Issuer and Affiliated Purchasers
Item 16F. Change in Registrant's Certifying Accountant
Item 16G. Corporate Governance
Item 16H. Mine Safety Disclosure
Part III
Item 17. Financial Statements
Item 18. Financial Statements
Item 19. Exhibits
EX-2.2 d773604dex22.htm
EX-4.1 d773604dex41.htm
EX-4.2 d773604dex42.htm
EX-12.1 d773604dex121.htm
EX-12.2 d773604dex122.htm
EX-13.1 d773604dex131.htm
EX-13.2 d773604dex132.htm

Line Earnings 2019-12-31

Balance SheetIncome StatementCash Flow

20-F 1 d773604d20f.htm FORM 20-F FORM 20-F
Table of Contents

As filed with the Securities and Exchange Commission on March 27, 2020

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 20-F

 

 

(Mark One)

 

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2019

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report                     

For the transition period from                     to                     

Commission file number 001-37821

 

 

LINE Kabushiki Kaisha

(Exact name of Registrant as specified in its charter)

 

 

 

LINE Corporation   Japan
(Translation of Registrant’s name into English)   (Jurisdiction of incorporation or organization)

JR Shinjuku Miraina Tower, 23rd Floor

4-1-6 Shinjuku

Shinjuku-ku, Tokyo, 160-0022, Japan

(Address of principal executive offices)

Satoshi Yano

Telephone: +81-3-4316-2050; E-mail: ir@linecorp.com; Facsimile: +81-3-4316-2131

(Name, telephone, e-mail and/or facsimile number and address of company contact person)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Title of Each Class

 

Trading Symbol

 

Name of Each Exchange on Which Registered

American Depositary Shares, each representing   LN   New York Stock Exchange, Inc.
one share of common stock    
Common Stock *     New York Stock Exchange, Inc.*

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None

As of December 31, 2019, there were 241,133,142 shares of common stock outstanding

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☒    No  

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes      No  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files)    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer               Accelerated filer               Non-accelerated filer               Emerging growth company  

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.  ☐

†The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing.

U.S. GAAP               International Financial Reporting Standards as issued by the International Accounting Standards Board  ☒            Other  

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.    Item 17      Item 18  

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

 

*

Not for trading, but only in connection with the registration of the American Depositary Shares.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          Page  

PART I

     5  

ITEM1. IDENTITY OF DIRECTORS, SENIOR MANAGERS AND ADVISERS

     5  

ITEM2. OFFER STATISTICS AND EXPECTED TIMETABLE

     5  

ITEM3. KEY INFORMATION

     5  

Item 3.A.

   Selected Financial Data      8  

Item 3.B.

   Capitalization and Indebtedness      10  

Item 3.C.

   Reasons for the Offer and Use of Proceeds      10  

Item 3.D.

   Risk Factors      10  

ITEM 4. INFORMATION ON THE COMPANY

     44  

Item 4.A.

   History and Development of the Company      44  

Item 4.B.

   Business Overview      45  

Item 4.C.

   Organizational Structure      70  

Item 4.D.

   Property, Plants and Equipment      71  

ITEM 4A. UNRESOLVED STAFF COMMENTS

     71  

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

     71  

Item 5.A.

   Operating Results      71  

Item 5.B.

   Liquidity and Capital Resources      104  

Item 5.C.

   Research and Development, Patents and Licenses, Etc.      113  

Item 5.D.

   Trend Information      114  

Item 5.E.

   Off-Balance Sheet Arrangements      114  

Item 5.F.

   Tabular Disclosure of Contractual Obligations      114  

Item 5.G.

   Safe Harbor      114  

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

     115  

Item 6.A.

   Directors and Senior Management      115  

Item 6.B.

   Compensation      117  

Item 6.C.

   Board Practices      118  

Item 6.D.

   Employees      121  

Item 6.E.

   Share Ownership      121  

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

     123  

Item 7.A.

   Major Shareholders      123  

Item 7.B.

   Related Party Transactions      124  

Item 7.C.

   Interests of Experts and Counsel      125  

ITEM 8. FINANCIAL INFORMATION

     125  

Item 8.A.

   Consolidated Statements and Other Financial Information      125  

Item 8.B.

   Significant Changes      126  

ITEM 9. THE OFFER AND LISTING

     126  

Item 9.A.

   Offer and Listing Details      126  

Item 9.B.

   Plan of Distribution      126  

Item 9.C.

   Markets      127  

Item 9.D.

   Selling Shareholders      127  

Item 9.E.

   Dilution      127  

Item 9.F.

   Expenses of the Issue      127  

ITEM 10. ADDITIONAL INFORMATION

     127  

Item 10.A.

   Share Capital      127  

Item 10.B.

   Memorandum and Articles of Association      127  

Item 10.C.

   Material Contracts      137  

Item 10.D.

   Exchange Controls      139  

Item 10.E.

   Taxation      141  

Item 10.F.

   Dividends and Paying Agents      147  

 

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          Page  

Item 10.G.

   Statements by Experts      147  

Item 10.H.

   Documents on Display      147  

Item 10.I.

   Subsidiary Information      147  

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     147  

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

     150  

Item 12.A.

   Debt Securities      150  

Item 12.B.

   Warrants and Rights      150  

Item 12.C.

   Other Securities      150  

Item 12.D.

   American Depositary Shares      151  
PART II      152  

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

     152  

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

     152  

ITEM 15. CONTROLS AND PROCEDURES

     153  

ITEM 16. [RESERVED]

     154  

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

     154  

ITEM 16B. CODE OF ETHICS

     154  

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

     154  

ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

     155  

ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

     155  

ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

     155  

ITEM 16G. CORPORATE GOVERNANCE

     156  

ITEM 16H. MINE SAFETY DISCLOSURE

     159  

PART III

     160  

ITEM 17. FINANCIAL STATEMENTS

     160  

ITEM 18. FINANCIAL STATEMENTS

     160  

ITEM 19. EXHIBITS

     161  

 

 

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CONVENTIONS USED IN THIS ANNUAL REPORT

Except where the context otherwise requires or unless otherwise specified, and for purposes of this annual report on Form 20-F 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 “W” 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;

 

   

“paid impression” refers to the display of an advertisement to a user while accessing our products and services for which we generate revenues;

 

   

“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.

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

 

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FORWARD-LOOKING STATEMENTS

This annual report contains forward-looking statements with respect to our current plans, estimates, strategies and beliefs. Forward-looking statements include, but are not limited to, those statements using words such as “anticipate,” “believe,” “continues,” “expect,” “estimate,” “intend,” “project,” “aim,” “plan,” “likely to,” “target,” “contemplate,” “predict,” “potential” and similar expressions and future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may,” or similar expressions generally intended to identify forward-looking statements. These forward-looking statements are based on information currently available to us, speak only as of the date hereof and are based on our current plans and expectations and are subject to a number of known and unknown uncertainties and risks, many of which are beyond our control. As a consequence, current plans, anticipated actions and future financial position and results of operations may differ significantly from those expressed in any forward-looking statements in this annual report. You are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented and we do not intend to update any of these forward-looking statements. Risks and uncertainties that might affect us include, but are not limited to:

 

   

whether the Planned Offer (defined below in “Item 3. Key Information—Recent Developments—The Planned Transaction”) will be commenced or will close;

 

   

the timing of the Planned Offer;

 

   

obtaining the requisite consents to the Planned Offer and the Planned Transaction (defined below in “Item 3. Key Information—Recent Developments—The Planned Transaction”), including, without limitation, the risk that a regulatory approval that may be required for the Planned Transaction is delayed, is not obtained, or is obtained subject to conditions that are not anticipated;

 

   

whether the conditions for the Planned Offer and the Planned Transaction will be satisfied or waived;

 

   

the possibility that, prior to the completion of the Planned Transaction, our business and our relationships with employees, collaborators, vendors and other business partners may experience significant disruption due to transaction-related uncertainty;

 

   

shareholder litigation in connection with the Planned Offer or the Planned Transaction potentially resulting in significant costs of defense, indemnification and liability;

 

   

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 the LINE platform and increase the amount that advertisers spend with LINE;

 

   

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

 

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our ability to increase 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;

 

   

the regulatory environment in which we operate;

 

   

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

 

   

changes in business or macroeconomic conditions.

You are urged to read the sections “Item 3.D. Risk Factors,” “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects” of this annual report for a more complete discussion of the factors that could affect our performance and the industry in which we operate.

 

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LIMITATIONS OF USER METRICS

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 “Item 3.D. Risk Factors—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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PART I

 

Item 1.

Identity of Directors, Senior Managers and Advisers

Not applicable

 

Item 2.

Offer Statistics and Expected Timetable

Not applicable

 

Item 3.

Key Information

Recent DevelopmentsThe Planned Transaction

On December 23, 2019, SoftBank Corp., a joint stock company incorporated under the laws of Japan, NAVER Corporation, Z Holdings Corporation, a joint stock company incorporated under the laws of Japan and we entered into a business integration agreement (the “Business Integration Agreement”) concerning the business integration of Z Holdings Corporation and us (the “Planned Transaction”). If consummated, the Planned Transaction will result in making us a privately held company and integrating the business operations of Z Holdings Corporation and us.

The Planned Offer is the first step in a series of transactions with the purpose of consummating the Planned Transaction in a spirit of equal partnership. The Planned Transaction aims to combine the management and operational resources of LINE and Z Holdings Corporation, and to bring together their respective customer bases. It is expected that the combined company will strengthen and pursue synergies in the respective businesses currently operated by LINE and Z Holdings Corporation and make investments to expand into new business areas, such as AI, commerce, fintech, advertising and online-to-offline, with the aim of growing into a leading internet company in Japan and the rest of Asia. While formulation of the business plan for the integrated LINE-Z Holdings Corporation (the “Integrated Company”) will be considered further after the Planned Transaction has been completed currently, LINE expects to realize synergies in the following areas:

(i) Synergies in attracting customers

By connecting LINE’s communication platform, which has a user base of 82 million active users per month in Japan and 104 million active users per month abroad, with the e-commerce service sites of Z Holdings Corporation’s group of companies (including Yahoo Shopping, PayPay Mall, PayPay Flea Market, YAHUOKU!, ZOZOTOWN, Yahoo Travel, Ikyu.com and others), the expectation is that there will be increased customer traffic to all of Z Holdings Corporation’s group services, with the greatest impact being on e-commerce services. LINE has a broad user demographic, including people who rarely or never use e-commerce services, and the expectation is that synergies in this area can be developed at an early stage by applying the know-how for accelerating customer referrals that were obtained through past collaboration between SoftBank Corp. and Ikyu.com. In addition, it is anticipated that the number of users and their retention rates will increase for the Integrated Company because it will be able to reach users of the LINE platform through their official LINE accounts, which provide direct access to those users.

(ii) Synergies with Fintech business

By collaborating on the payments and financial businesses that each of Z Holdings Corporation and LINE are already actively promoting, and making further improvements in terms of increasing the user base and increasing, and making joint use of, the number of retail outlets compatible with Z Holdings Corporation’s and

 

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LINE’s payment and financial services, greater convenience for both users and retail outlets can be expected. In addition, the companies believe it will be possible for Z Holdings Corporation and LINE to strengthen their existing fintech businesses by utilizing their strong customer bases, which already use Z Holdings Corporation’s or LINE’s payments services, as well as from taking advantage of cost reductions from operational efficiencies resulting from shared business activities.

(iii) Marketing business synergies

By utilizing the “multi-big data” of both the Z Holdings Corporation group and the LINE group, the companies believe that all companies engaged in marketing activities in Japan will be able to conduct their own marketing activities more productively, making it possible to improve sales as a result of increased advertising unit prices and cross-selling of the Integrated Company group’s advertising products. In addition, by exploiting Z Holdings Corporation’s and LINE’s complementary product lineups, together with developing the O2O (Online-to-Offline)/OMO (Online Merges with Offline) field as a new area for advertising, LINE expects expanded integrated marketing solutions that will have a synergistic effect on the Integrated Company and its users.

(iv) Synergies in new business / system development

By increasing engineering resources and sharing Z Holdings Corporation’s and LINE’s know-how regarding system development, LINE expects it will be possible for the Integrated Company to create more attractive services for its customers. Although acceleration of development in various fields is expected, Z Holdings Corporation and LINE have been focusing their resources on developing AI infrastructure in particular. LINE intends that the Integrated Company will further strengthen and accelerate AI infrastructure development that will support all of the Integrated Company group’s services. In addition to the above, Z Holdings Corporation and LINE plan to continue to study opportunities for additional areas of collaboration to create more business synergies for the Integrated Company.

The Planned Transaction is expected to be implemented by carrying out the following transactions:

 

  (i)

NAVER Corporation (directly or indirectly through a wholly-owned subsidiary (“NAVER Purchaser”)) and SoftBank Corp., will jointly implement a tender offer (the “Planned Offer”) in Japan and the United States. The Planned Offer, the commencement of which is expected to take place later this year subject to certain conditions precedent (the “Conditions Precedent”), will be for:

 

  (a)

all of our outstanding shares of our common stock and all of our American Depositary Shares (“ADSs”), each representing one share of our common stock, exclusive of shares and ADSs held by NAVER Corporation, for ¥5,380 per share or ADS;

 

  (b)

all of the outstanding stock acquisition rights issued by us for shares of our common stock, for ¥1 per stock acquisition right, and

 

  (c)

all of our zero coupon convertible bonds due 2023 (the “Convertible Bonds due 2023”) and all of our zero coupon convertible bonds due 2025 (the “Convertible Bonds due 2025,” and together with the Convertible Bonds due 2023, the “Convertible Bonds”), issued on September 20, 2018, that may under certain conditions be converted into shares of our common stock, exclusive of Convertible Bonds held by NAVER Corporation, for ¥7,203,820 per ¥10,000,000 principal amount of Convertible Bonds due 2023 and ¥7,155,400 per ¥10,000,000 principal amount of Convertible Bonds due 2025.

 

  (ii)

In the event that the Planned Offer is completed and not all of the common stock and ADSs are acquired in Planned Offer, a squeeze-out will be undertaken to take LINE private and keep

 

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NAVER Corporation and SoftBank Corp. as the only shareholders of LINE (the “LINE Squeeze-out”).

 

  (a)

The LINE Squeeze-out will be implemented through a share consolidation or, if that is not feasible, other squeeze-out procedures to be negotiated by the parties in good faith.

 

  (b)

Assuming that the LINE Squeeze-out is implemented through a share consolidation, we will hold an extraordinary general meeting of shareholders on a date to be separately agreed upon by NAVER Corporation and SoftBank Corp. to propose the approval of the share consolidation pursuant to Article 180(2) of the Companies Act and amendments to our articles of incorporation to enable the share consolidation. NAVER, NAVER Purchaser and SoftBank Corp. will vote in favor of such proposals.

 

  (c)

Subject to the effectuation of the share consolidation, we will, as soon as practicable, sell to NAVER Purchaser and SoftBank Corp. the number of common stock equivalent to the total sum of the fractions of common stock (rounded down to the nearest whole number, the “Total Fractional Shares”) resulting from the share consolidation at a price equal to such total sum of the fractions multiplied by the share consolidation ratio of the share consolidation multiplied by the offer price. We will apply for the permission of the court of voluntary sale in accordance with the procedures stipulated in Article 235 of the Companies Act and other relevant laws and regulations, and immediately after obtaining the court’s permission regarding such sale, NAVER Purchaser and SoftBank Corp. will each purchase half of the Total Fractional Shares.

 

  (d)

We will deliver the proceeds from such sale to the shareholders other than the NAVER Purchaser and SoftBank Corp. in proportion to their respective fractional shares.

 

  (iii)

We will take the necessary steps to delist our common stock and the ADSs from the Tokyo Stock Exchange and the New York Stock Exchange, respectively, apply to the Kanto Local Finance Bureau of the Financial Services Agency of Japan (the “FSA”) for the suspension of its obligations to submit annual securities reports, and to suspend our reporting obligations and to terminate our registration under the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”).

 

  (vii)

SoftBank Corp. and NAVER Corporation will then engage in a series of transactions to transfer the shares of Z Holdings Corporation currently held by SoftBank Corp.’s subsidiary, Shiodome Z Holdings Co., Ltd., to us. This will entail, among other transactions, our issuing new shares of common stock to SoftBank Corp.

 

  (viii)

SoftBank Corp. will transfer a portion of its shares of our common stock to NAVER Corporation and/or one of its subsidiaries such that SoftBank Corp. and NAVER Corporation would each own, directly or indirectly, 50% of the voting rights in us (the “JV Formation”). As a result of the JV Formation, we will become a consolidated subsidiary of SoftBank.

 

  (ix)

We will transfer to a wholly owned subsidiary of ours (the “LINE Successor”), by way of an absorption-type corporate split (the “Corporate Split”), our entire business other than our rights and obligations under contracts that we entered into in connection with shares of Z Holdings Corporation, the Planned Transaction and the Corporate Split.

 

  (x)

After the Corporate Split has taken effect, a share exchange (the “Share Exchange”) will be carried out, as a result of which Z Holdings Corporation will become the 100% parent company of the LINE Successor and the LINE Successor will become the wholly owned subsidiary of Z Holdings Corporation.

 

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Item 3.A.

Selected Financial Data

The consolidated statement of financial position data as of December 31, 2018 and 2019 and the consolidated statement of profit or loss data for the years ended December 31, 2017, 2018 and 2019 have been derived from our audited consolidated financial statements and related notes included in this annual report. The consolidated statement of financial position data as of December 31, 2015, 2016 and 2017 and the consolidated statement of profit or loss data for the years ended December 31, 2015 and 2016 have been derived from our consolidated financial statements and related notes not included in this annual report. These consolidated financial statements and the related notes have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (the “IASB”).

The information set forth below is not necessarily indicative of the results of future operations.

Consolidated Statement of Profit or Loss Data

 

    For the year ended December 31,  
    2015     2016     2017     2018     2019  
    (in millions of yen, except share and per share data)  

Revenues and other operating income:

         

Revenues(1)

  ¥ 120,406     ¥ 140,704     ¥ 167,147     ¥ 207,182     ¥ 227,485  

Other operating income

    474       5,892       12,011       28,099       3,211  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues and other operating income

    120,880       146,596       179,158       235,281       230,696  

Operating expenses:

         

Payment processing and licensing expenses

    (28,742     (29,781     (29,589     (30,823     (35,874

Sales commission expenses(2)

    (288     (615     (899     (15,960     (15,995

Employee compensation expenses

    (35,572     (39,445     (42,469     (57,493     (70,265

Marketing expenses

    (16,596     (11,833     (15,477     (20,311     (33,022

Infrastructure and communication expenses

    (7,712     (7,770     (9,087     (10,483     (10,821

Outsourcing and other service expenses(2)

    (11,845     (13,779     (24,007     (31,825     (41,892

Depreciation and amortization expenses(3)

    (3,733     (5,100     (7,149     (11,135     (22,737

Other operating expenses(3)

    (14,432     (18,376     (25,403     (41,141     (39,087
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    (118,920     (126,699     (154,080     (219,171     (269,693
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit (loss) from operating activities

    1,960       19,897       25,078       16,110       (38,997

Finance income

    71       87       257       413       512  

Finance costs

    (106     (65     (26     (519     (1,980

Share of loss of associates and joint ventures

    (205     (833     (6,321     (11,148     (13,412

Loss on foreign currency transactions, net

    (520     (43     (818     (902     (72

Other non-operating income

    157       9       1,963       869       3,878  

Other non-operating expenses

    (1,887     (1,062     (1,988     (1,469     (1,545
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit (loss) before tax from continuing operations

    (530     17,990       18,145       3,354       (51,616

Income tax benefits (expenses)

    146       (8,904     (9,922     (9,522     (384
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit (loss) for the period from continuing operations

    (384     9,086       8,223       (6,168     (52,000

Profit (loss) from discontinued operations, net of tax

    (7,588     (1,982     (13     376       584  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit (loss) for the period

    (7,972     7,104       8,210       (5,792     (51,416
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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    For the year ended December 31,  
    2015     2016     2017     2018     2019  
    (in millions of yen, except share and per share data)  

Attributable to:

         

The shareholders of the Company

    (7,582     6,763       8,078       (3,718     (46,888

Non-controlling interests

    (390     341       132       (2,074     (4,528

Earnings per share:

         

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

  ¥ (43.33   ¥ 34.84     ¥ 36.56     ¥ (15.62   ¥ (196.07

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

    (39.12     31.48       34.01       (15.62     (196.07

Earnings per share from continuing operations

         

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

    0.04       45.05       36.62       (17.20     (198.51

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

    0.03       40.70       34.06       (17.20     (198.51

Earnings per share from discontinued operations

         

Basic profit (loss) from discontinued operations attributable to the shareholders of the Company

    (43.37     (10.21     (0.06     1.58       2.44  

Diluted profit (loss) from discontinued operations attributable to the shareholders of the Company

    (39.15     (9.22     (0.05     1.58       2.44  

Basic weighted average shares outstanding

    174,992,000       194,083,995       220,945,548       238,074,806       239,142,707  

Diluted weighted average shares outstanding

    193,797,566       214,874,008       237,552,706       238,074,806       239,142,707  

 

(1)

For a discussion of the impact of our adoption of IFRS 15 Revenue from Contracts with Customers (“IFRS 15”) on revenue recognition, see “Item 5.B. Liquidity and Capital Resources—Critical Accounting Judgments, Estimates and Assumptions— Revenue Recognition.”

(2)

Due to our adoption of IFRS 15 starting on January 1, 2018, “sales commission expenses,” which were part of “authentication and other service expenses” prior to January 1, 2018, are now presented separately as a new line item, with the remainder of “authentication and other service expenses” re-categorized as “outsourcing and other service expenses,” starting from the year ended December 31, 2018. Such change in presentation has also been applied retrospectively.

(3)

We have adopted IFRS 16 Leases (“IFRS 16”) from the fiscal year beginning January 1, 2019. Due to this adoption, we recognize right-of-use assets related to properties. Under the previous standard, we recognized rent expenses as other operating expenses; however, after adopting IFRS 16, we instead recognize depreciation expenses relating to right-of-use assets under depreciation and amortization expenses. For a discussion of the impact of our adoption of IFRS 16, see “Item 5.A. Operating Results—Recently Adopted Accounting Standards—The Impact of IFRS16.”

 

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Consolidated Statement of Financial Position Data

 

     As of December 31,  
     2015     2016      2017      2018     2019  
     (in millions of yen)  

Cash and cash equivalents

   ¥ 33,652     ¥ 134,698      ¥ 123,606      ¥ 256,978     ¥ 217,345  

Trade and other receivables

     27,248       28,167        42,892        37,644       42,680  

Property and equipment

     10,501       9,029        15,125        24,726       25,024  

Right-of-use assets(1)

                               54,337  

Total assets

     122,159       256,089        303,439        486,587       541,352  

Corporate bonds

     510 (2)                     142,132 (3)      142,851 (3) 

Lease liabilities(1)

                               56,637  

Total liabilities

     104,626       95,066        113,462        278,073       366,689  

Share capital

     12,596       77,856        92,369        96,064       96,737  

Total shareholders’ equity

     17,533       161,023        189,977        208,514       174,663  

Equity attributable to the shareholders of the Company

     17,743       160,834        185,075        198,916       158,133  

Equity attributable to non-controlling interests

     (210     189        4,902        9,598       16,530  

 

(1)

Consists of the outstanding amounts of the unsecured corporate bonds we issued in August 2013 with an aggregate principal amount of ¥1,500 million, all of which were repaid during the year ended December 31, 2016.

(2)

Consists of the outstanding amounts of the convertible bonds we issued in September 2018. For further details, see “Item 5.B. Liquidity and Capital Resources—Liquidity and Capital Resources—Cash Flows—Net Cash Provided by Financing Activities” and Note 15 of the notes to our annual consolidated financial statements.

(3)

For the year ended December 31, 2019, we recognized right-of-use assets and corresponding lease liabilities as a result of our adoption of IFRS 16. For further details, see Item 5.A. Recently Adopted Accounting Standards—The Impact of IFRS 16 and Note 3 (30) of the notes to our annual consolidated financial statements.

 

Item 3.B.

Capitalization and Indebtedness

Not applicable

 

Item 3.C.

Reasons for the Offer and Use of Proceeds

Not applicable

 

Item 3.D.

Risk Factors

Risks Related to the Planned Offer and Planned Transaction

The conditions of the Planned Offer may not be satisfied at all or in the anticipated timeframe.

Under the Business Integration Agreement, the commencement of the Planned Offer is subject to certain conditions. Satisfaction of certain of the conditions, such as the receipt of required regulatory approvals, the approval of the shareholders of Z Holdings Corporation with respect to the Share Exchange, or the absence of circumstances that would make the Planned Transaction or the achievement of its purposes extremely difficult due to material adverse effects on the parties to the agreement, is not within our control, and difficulties in otherwise satisfying the conditions may prevent, delay, or otherwise materially and adversely affect the commencement of the Planned Offer. We cannot predict with certainty whether and when any of the required conditions will be satisfied. If the Planned Offer does not receive, or timely receive, the required antitrust approvals and clearances, or if another event occurs delaying or preventing the Planned Offer, such delay in commencing or completing, or failure to commence or complete, the Planned Offer may create uncertainty or otherwise have negative consequences that may materially and adversely affect our financial condition and results of operations.

 

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While the Planned Transaction is pending, we are subject to business, legal and regulatory uncertainties and contractual restrictions that could disrupt our business.

The Planned Offer and subsequent steps in the Planned Transaction, and as well as any uncertainties concerning them, may have a variety of adverse effects on our business and operations while they are pending, including the following.

 

   

The Planned Transaction could divert our management’s attention and resources from our ongoing business and operations, which may prevent us from capitalizing on business opportunities or managing risks or challenges that should be addressed.

 

   

Our current and prospective employees and other key personnel may feel uncertain about the effect of the Planned Transaction. This uncertainty may impact our ability to recruit, hire and retain personnel while the Planned Transaction is pending on terms acceptable to us or at all. Conversely, current and prospective personnel may come to have concerns about the likelihood of the consummation of the Planned Transaction, such that delays or other difficulties that are encountered in conducting the Planned Transaction may make it more difficult to recruit, hire and retain such persons on terms acceptable to us or at all.

 

   

Our business partners may view the Planned Transaction negatively. If we are unable to reassure our business partners to continue transacting with us despite the Planned Transaction, such business partners may seek alternative relationships with third parties or seek to alter their business relationship with us. As a result, we may, for example, suffer disruptions in our existing businesses, be unable to seize on opportunities for which we need the cooperation of our business counterparties, or have to reformulate our business or operational strategies in light of the change.

 

   

The Business Integration Agreement requires us to operate our business in compliance with applicable laws and regulations, with the due care of a prudent manager and within the ordinary course of business until the effective date of the Share Exchange. It also restricts us from taking certain actions with respect to certain of our businesses and financial affairs without the prior approval of the other parties to the Business Integration Agreement until the effective date of the Share Exchange. These constraints may reduce our ability to react swiftly to changing circumstances.

 

   

We may be subject to legal or regulatory proceedings in connection with the Planned Transaction. Following the announcement of proposed business combinations, for example, litigation is often brought against a company and its board of directors by security holders seeking various kinds of relief. If such lawsuits are filed against us in relation to the Planned Transaction, they could prevent the Planned Transaction from being completed within the expected timeframe or at all, increase the costs associated with the Planned Transaction, and distract our directors and officers from their normal duties or their execution or oversight of the Planned Transaction.

 

   

Regulatory authorities that are considering the Planned Transaction may impose, as a condition to granting the requisite approvals, conditions that require us to divest as yet unspecified parts of our existing businesses, including property, plant and equipment, inventories and product rights recognized as assets in the consolidated balance sheet at December 31, 2019. The proceeds that we can obtain from the disposal of any such items may not be sufficient to cover the full future value of the divested business to us or the carrying amount of the associated assets. This could also lead to our reporting reduced sales in future periods and to the recognition of additional asset impairments or divestment losses in future periods.

 

   

In addition, whether or not the Planned Transaction is consummated, while it is pending, we will continue to incur costs, fees, expenses, and charges related to the Planned Transaction, which may be material.

 

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Such risks may have a material adverse effect on our business, financial condition, or results of operations. The Planned Transaction may be pending, and thus we may be subject to these risks, for a significant period of time after the date hereof: the Planned Offer is expected to commence no earlier than May 2020, with the actual timing depending on, among other factors, when the conditions precedent for the Planned Offer, including the receipt of certain government approvals, are satisfied.

Our executive officers and directors may have interests that are different from, or in addition to, those of our shareholders generally.

Our executive officers directors may have interests in the Planned Transaction that are different from, or are in addition to, those of our shareholders generally. These interests include direct or indirect ownership of our stock options following the completion of the Planned Transaction. In addition, certain of our directors have current or prior business or personal relationships with NAVER Corporation, SoftBank Corp. and Z Holdings Corporation, and each of their respective representatives. Such interests may influence their decisions concerning the Planned Transaction in ways that are not fully aligned with the interests of our shareholders generally. These interests could also cause our executive officers or directors to have perceived conflicts of interest in recommending approval of the Planned Offer and Planned Transaction.

In the event that the Planned Offer is not consummated, or doubts relating to whether the Planned Transaction will be consummated arise, the trading price of our common stock and our future business and results of operations may be negatively affected.

The conditions to the commencement of the Planned Offer may not be satisfied, as noted above. Furthermore, the Business Integration Agreement may be terminated under certain circumstances, including (i) the agreement to do so by all parties to the agreement, (ii) the Planned Offer not commencing by June 23, 2021, or (iii) a party, prior to the commencement of the Planned Offer, giving written notice to all other parties to the Agreement upon the occurrence of certain events, such as a material breach of the Business Integration Agreement or certain insolvency or similar events. In such an event case, the Planned Offer would likely not be commenced.

 

If the Planned Offer is not consummated, we will have incurred, or would remain liable for, significant transaction costs, and the focus of our management would have been diverted from seeking other potential strategic opportunities, in each case without realizing any benefits of the Planned Transaction.

Furthermore, if we do not consummate the Planned Offer, or if doubts relating to whether the Planned Transaction will be consummated arise, the price of our common stock may decline significantly from the current market price, regardless of the state of our business at the time, as we believe the current market price reflects a market assumption that the Planned Offer will be consummated as currently contemplated.

In addition, a failure of the Planned Offer and the subsequent Planned Transaction, or doubts relating to whether the Planned Transaction will be consummated, may result in negative publicity and a negative impression of us in the investment community, and have a negative impact on our ability to raise additional financing or conduct business combinations in the future.

Finally, any disruptions to our business resulting from the announcement and pendency of the Planned Transaction, including any adverse changes in our relationships with our business partners and current or potential personnel, could continue or accelerate in the event of a failed transaction or heightened uncertainty about the Planned Transaction.

For these and other reasons, not consummating the Planned Transaction could adversely affect our business and results of operations.

 

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If the Planned Offer is consummated, our ADSs will be delisted, and an active public market for our ADSs may cease to exist.

If the Planned Offer is consummated, there will be a substantial reduction in the number of shareholders of the Company and, consequently, there may no longer be an active public market for ADSs. In addition, under the Business Integration Agreement we are required, in connection with the implementation of the LINE Squeeze-out, to take such steps as may be required to delist the Company’s ADSs from the New York Stock Exchange.

To the extent that LINE de-lists the ADSs after the consummation of the Planned Offer, the absence of an active trading market in Japan and the United States would reduce the liquidity of your ADSs and the underlying shares of our common stock.

SoftBank Corp. and NAVER Corporation have announced that if the Planned Offer is completed, they intend to carry out the LINE Squeeze-Out, with the goal of acquiring any shares of our common stock or our ADSs not tendered during the acceptance period of the Planned Offer. In such case, you may be forced, subject to any ability to exercise applicable appraisal rights, to sell your ADSs to SoftBank Corp. and NAVER Corporation at the same amount per ADS as the tender offer price for shares of our common stock in the Planned Offer.

Risks Related to Our Business

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, and our financial performance has been and will continue to be significantly determined by our success in adding, retaining and engaging active users. From our inception, we experienced our largest user growth in Japan, Thailand, Taiwan and Indonesia. For example, our aggregate MAUs in Japan, Thailand and Taiwan were 135 million in December 2017, 144 million in December 2018 and 149 million in December 2019. Despite such growth, the growth rate of our users in such markets has declined over time as we achieved higher penetration rates in those markets. In Indonesia, we have experienced a decrease in the number of our MAUs starting in the second quarter of 2017 primarily due to intensified competition in that market, and our MAUs in Indonesia were 32 million in December 2017, 20 million in December 2018 and 15 million in December 2019. In part due to refocusing of our marketing efforts on these key countries in line with our increased emphasis on monetization in markets where we have achieved leading market positions, we have experienced a significant decrease not only in total MAUs but also in the level of user engagement outside of the four countries, and there may be further decreases in the future.

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;

 

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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 advertisement agencies and mobile game developers;

 

   

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

 

   

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 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 plan to continue to invest in product development and explore additional monetization opportunities, including those related to fintech, artificial intelligence (“AI”) and blockchain, 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. For example, we are currently pursuing a variety of new business initiatives related to fintech, including mobile payment and online financial services, and whether we will be able to successfully monetize these new services remains uncertain. In addition, users and advertisers in certain markets are not as familiar with new forms of digital advertising, such as LINE Official Accounts and Sponsored Stickers, as well as display ads posted on Timeline, LINE NEWS and Smart Channel. In newer markets, we are investing to convince users and advertisers of the benefits of our products and services. However, it remains our expectation 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.

We continue to seek ways to increase our revenue by selectively introducing commissions and other charges with respect to our existing products and services that are currently offered for free, as well as adding new advertising services and developing other new revenue generating products and services. However, there is no guarantee that our efforts to further monetize our products and services will be successful in generating significant new revenues or profits. Furthermore, our monetization efforts could have a negative effect on user engagement and user base growth if such efforts discourage users from using our products and services. In addition, our competitors may introduce new revenue models in the future, and if such new revenue models are perceived as offering a better value proposition to users than the models that we currently use or plan to implement, our customers may switch to our competitors’ products and services. If our monetization efforts are not as successful as we anticipate, we may not be able to maintain or grow our revenues, and our business, financial condition and results of operations could be adversely affected.

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

 

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service providers such as Facebook’s WhatsApp and Messenger and Tencent’s WeChat, 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. We face competition from mobile telecommunications companies, game companies, music and video streaming companies, mobile payment companies, fintech companies, AI companies, e-commerce 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 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.

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 and provide 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 and provide, including those related to fintech, AI and blockchain, may expose us to new risks.

We compete in highly competitive industries 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 and provision 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. For example, in March 2017, we launched our next-generation AI platform called “Cloud Virtual Assistant (or “Clova”),” which enables voice interfaces to process a wide range of real-world inputs and deliver our products and services in a coherent and optimized manner.

In addition, some of our strategic initiatives that we expect will enhance our attractiveness to users and provide us with new sources of revenue may not directly or immediately generate revenue and may even hurt our profitability at least in the short term. Our new products and services may bring us into contact, directly or indirectly, with entities that are not within our traditional customer/partner base or result in competing with entities that are our existing business partners. We may also enter into new business areas that require a number of licensing or registration requirements, as well as subject us to additional regulations applicable to the relevant industry in a number of jurisdictions. For example, in recent years, we have focused our strategy on exploring a variety of new business opportunities related to fintech. Some of our recent fintech-related activities include, among others, expansion of services available to our users through LINE Pay, pursuit of alliances with reputable players in the financial services industry to offer new services related to insurance, online securities brokerage,

 

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consumer loans and internet banking on the LINE platform, as well as the launch of BITFRONT (previously known as BITBOX) and BITMAX, our cryptocurrency exchanges in Singapore and Japan, respectively. We are also pursuing business opportunities related to blockchain, such as LINK, the base digital token for our blockchain ecosystem, which we have been developing since the second quarter of 2018. As many of these strategic initiatives are still in the early stages of operation, there can be no assurance that they will gain market acceptance and be used widely by our existing and potential users.

We expect to continue to expend significant time and resources in developing, launching and marketing these and other strategic initiatives. These ambitions could place significant strain on our management, personnel, operations, systems, financial resources and internal financial control and reporting functions.

Moreover, any of these activities could expose us to new risks, including additional regulatory scrutiny and credit-related and other operational risks, such as inventory risk for our unsold products. We have previously developed and introduced new products and services or entered into new business areas that did not lead to the results we anticipated, which may again occur in the future. There can be no assurance that we will succeed in developing products and services that eventually become widely accepted, that we will be able to timely release products and services that are commercially viable, or that we will establish ourselves as a successful player in a new business area. Our inability to do so would have an adverse impact on 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 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 decide to do so through the acquisition of complementary businesses and technologies or the investment in attractive business opportunities through partnerships with established players in the target industry, rather than through internal development. The identification of suitable acquisition candidates or business partners can be difficult, time-consuming and costly, and we may not be able to successfully consummate the identified acquisition or investment transactions.

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. In addition, 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 liquidation of our MixRadio business that became effective in March 2016. For more information, see Note 23 of the notes to our annual consolidated financial statements. We also make investments by creating joint ventures with third parties, which may subject us to risks that are outside of our control, including changes in our partners’ own businesses and strategies, fraudulent or failed transactions, and the impact on our relationships with existing users, platform partners, employees or third parties.

The risks we face in connection with, acquisitions and investments 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 marketing and sales functions of the acquired / investee company or business;

 

   

challenges associated with the retention of key employees from the acquired / investee company or business;

 

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

 

   

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

 

   

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

 

   

liability for activities of the acquired / investee company or business before the acquisition or investment, respectively, including intellectual property infringement claims;

 

   

unfavorable or restrictive contractual terms that govern our relationship with the acquired / investee company or business;

 

   

unanticipated write-offs or charges or impairment of goodwill;

 

   

recognition of our share of loss of associates and joint ventures that are accounted for under the equity method; and

 

   

litigation or other claims in connection with the acquired / investee company or business, 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 our investments could cause us to fail to realize the anticipated benefits of these acquisitions or investments, cause us to incur unanticipated liabilities, or could otherwise harm our business generally. Future acquisitions or investments could also result in dilutive issuances of our equity securities or the incurrence of debt, contingent liabilities, amortization expenses or incremental operating expenses.

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 72.6%, 71.6% and 73.2% of our revenues in Japan in 2017, 2018 and 2019, 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 continued growth will depend, 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 increasingly depend 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.”

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. In addition, demand for our advertising services is primarily driven by advertising spending levels of our advertising customers in our four key markets, particularly Japan. 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. Global economic conditions have

 

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deteriorated in recent years, with global financial and capital markets experiencing substantial volatility and disruption. Such developments have been caused by, and continue to be exacerbated by, among other things, the slowdown of economic growth in China and other major emerging market economies, adverse economic and political conditions in Europe and Latin America and continuing geopolitical and social instability in North Korea and various parts of the Middle East, as well as a deterioration in economic and trade relations between the United States and its major trading partners, including China. The overall prospects for the global economy and the industries in which we operate in 2020 and beyond remain 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 the strength of the Japanese economy is subject to many factors beyond our control. For example, the impact of Brexit on the Japanese economy and on the value of the Japanese yen against currencies of other countries in which we generate revenue in the long term is uncertain. In addition, an increase in the consumption tax rate that became effective in October 2019 is adversely impacting the Japanese economy, potentially impacting consumer spending and advertising spending by businesses.

In addition, the outbreak of the COVID-19 disease caused by SARS-CoV-2, a new strain of coronavirus, has adversely affected the global economy, including the Japanese economy. While the full macroeconomic effect that COVID-19 or the government responses to it will have on the global economy, or on the economies of our principal geographic markets, will not be known for some time, our operations have been impacted, and may be further impacted, by them. For example, while we are still in the process of assessing their current and potential future impact on our operations generally, we are aware that our LINE Friends business has been adversely affected by the outbreak of the virus in China and Korea and the government measures taken in response to it, due to such factors as the business’s manufacturing operations there having been halted as well as the decrease in the number of customers visiting our offline stores in such countries. To the extent that the outbreak persists, it may have a significant adverse effect on our financial condition and results of operations, both through causing disruption in our supplies and marketing channels as described above, as well as in other ways such as triggering a downturn in consumer spending or corporate expenditures. In addition, if stock prices suffer a sustained decline on account of the COVID-19 outbreak and government measures in response to it, we will likely need to record valuation losses on our equity investments in our listed subsidiaries or our listed equity-method associates; such losses may be significant.

Any further deterioration of the Japanese or global economy may result in further decline in consumption that would have a greater negative impact on demand for our products and services and their prices.

A substantial portion of our revenues is derived 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.

A substantial portion of our revenues is derived from our advertising products and services. 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 LINE 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, as well as improving features of existing products and services on our platform that further enhance the media value for our advertising business. For example, in 2018, we completed a series of enhancements to various functionalities of our display ads platform, which we believe would lead to improved operational capabilities, upgraded targeting technology and enhanced user experience. In 2019, we

 

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launched a new advertisement product called “Smart Channel” which allows advertisements to be posted prominently at the top of our users’ chat lists. Although we expend a significant amount of time and resources on these efforts, such initiatives may not always lead to the anticipated benefits. We may also introduce new and unproven advertising products and services, using advertising technology with which we have little or no prior development or operating experience. 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;

 

   

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;

 

   

failure to maintain partnerships with third-party entities that license key advertising technology necessary to deliver certain advertisements on the LINE platform;

 

   

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 depend on a small number of mobile games offered on the LINE platform for a majority of our mobile game revenues. 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 through Apple App Store and Google Play, and they accounted for a substantial portion of our revenues in 2017, 2018 and 2019. As of December 31, 2019, we offered 30 games, of which 22 games were developed by third-party game developers and 8 games were developed by us. Accordingly, we believe that maintaining successful partnerships with, and the ability to attract

 

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and select from, third-party game developers are important for 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 in this area depends on our ability to consistently launch new games 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. We plan to continue to focus on game development not only through internal development but also through investments in associates by entering into strategic partnerships with experienced players in the game industry. Our success in part will depend on our ability to find and collaborate effectively with such partners. See “—Our acquisitions and investments may not be successful in achieving their intended goals and could harm our business, financial condition and results of operations.”

In recent years, our revenues from LINE Games have declined, with total MAUs steadily decreasing from 39 million in December 2014 to 15 million in December 2019. As a relatively small portion of our players account for a large portion of our revenues from LINE Games, we must constantly seek new ways to convert non-paying players into paying players and attract and retain paying players. However, 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.

We generate a significant portion of our revenues from communication services from our sale of Stickers, the market for which continues to evolve, and if the popularity or profitability of Stickers declines, our business and future growth could be negatively affected.

We generate a significant portion of our revenues from communication services from the sale of Stickers featuring characters developed by us, as well as licensed from third parties, including our users who design Stickers to be sold on LINE Creators Market. The market for the sale of Stickers continues to evolve, and the growth of such market 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. In recent years, our revenues from the sale of Stickers have declined. Revenues from our sale of Stickers depend 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. In addition, we launched a subscription package for Stickers in July 2019, in which we offer users the right to use a large collection of Stickers for a flat monthly fee. Depending on the impact that this has on our users’ spending patterns for Stickers, total revenue from Stickers may decrease, as any revenues from such subscription packages may not offset decreases in revenues from traditional sales of Stickers. A decline in the popularity of our Stickers, or the failure to maintain revenues from our Stickers business, would negatively affect our business, financial condition and results of operations.

 

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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, Thailand and Taiwan in terms of number of users, and we have obtained substantial numbers of users in other parts of the world, including Indonesia, the United States, Korea, Vietnam, Saudi Arabia and Malaysia. We expect to continue to expand our offerings of products and services in our key markets. 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 corporate culture across all of our offices;

 

   

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

 

   

integrating local 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.

 

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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, 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.

The operating policies of Apple or Google have an impact on the accessibility of our products and services. From time to time, we have had to adjust our monthly settlements with our payment processing service providers due to discrepancies in the recognition of user payments. If such discrepancies continue to occur frequently, it may have a material adverse impact on our results of operations and negatively affect our reputation. 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 maintain profitability in the future is uncertain.

We have incurred significant operating losses in the past. We recorded loss for the year of ¥7,972 million in 2015 and, although we recorded profit for the year of ¥7,104 million in 2016 and ¥8,210 million in 2017, we again recorded loss for the year of ¥5,792 million in 2018 and ¥51,416 million in

 

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2019. Even though our revenues have grown over the years, from ¥167,147 million in 2017 to ¥207,182 million in 2018 and ¥227,485 million in 2019, our revenue growth rate has slowed in recent years 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 and successfully develop and operate new products and services. 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:

 

   

marketing and sales;

 

   

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 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;

 

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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;

 

   

identify, evaluate and manage risks involved in collaborating with third parties on new business ventures;

 

   

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 iOS and Android, 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.

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

 

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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 Annual Report” 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, which may negatively affect our business.

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, 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 particular, the operation of some of our new fintech businesses, as well as our LINE Clova AI platform and blockchain-related initiatives implicates complex technological and operational considerations, including technical or systematic issues that may arise in the ordinary course of business. In order to address such technical difficulties, we may need to make fundamental changes to the configurations or specifications of the underlying systems we use or expend a significant amount of time and resources to obtain the technical skills or expertise needed to adequately address such issues. Any such difficulties could have a material impact on our ability to deliver the products and services we intend to offer, reduce our reliability and harm our reputation.

 

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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. For example, in May 2019, LINE Pay Corporation, our subsidiary engaged in mobile payment services, extended the duration of a 30 billion yen giveaway promotional campaign, as certain users were not able to open LINE Pay accounts in order to participate in it, or to complete the requisite identity verification process. These technical difficulties were caused by the large volume of people seeking to participate in a short period of time, overwhelming the infrastructure of certain of our service providers and partner institutions. 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 or misuse 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 unauthorized access to 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, including ones that may involve hackers planting malicious codes into our servers that remain dormant until initiated at some point in the future, making it difficult to measure the potential damage that could result from such attack or to detect such breach altogether. In particular, some of the fintech businesses that we have relatively recently begun to operate, or plan to operate, including insurance, online securities brokerage, consumer loans, internet banking and cryptocurrency exchange, as well as our LINE Clova AI platform and blockchain-related initiatives, among others, are likely to increase the amount and sensitivity of user information that we collect, which in turn would increase the risk of cyber-attacks.

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

 

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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, as well as spam accounts posing as such users and advertisers, may damage our users’ and advertisers’ reputations 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 there are often unknown vulnerabilities that are not recognized until exploited against a target, we may be unable to anticipate these techniques and vulnerabilities, address them promptly or to implement adequate preventative measures. In addition, some cyber-attacks are designed to evade detection, such as attacks designed to extract information from targets at a slow rate, which further complicate efforts to detect and resolve system breaches in a timely manner. 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 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, as well as changes to accounting principles applicable to our business;

 

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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 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 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 incur significant legal, accounting and other expenses that we did not incur as a private company. Managing our growth will continue to 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.

The products and services we offer, including those relating to fintech, AI and blockchain, 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.

The products and services we offer, including those relating to fintech, AI and blockchain, subject us to a variety of laws and regulations in Japan and elsewhere. For example, LINE Pay, our mobile payment service application, enables our users to make payments, regardless of their mobile carrier, on LINE Store and a number of select online and offline partner retail stores. We have also entered into, and have recently established partnership and joint venture opportunities with reputable players in the financial services industry to offer new services related to insurance, online securities brokerage, consumer loans and internet banking, among others, on the LINE platform. See “Item 4.B. Business Overview—Our Products and Services—Strategic Business Segment—Others—Fintech.”

We are 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, identification, counter-terrorist financing and cryptocurrencies. In some jurisdictions, the application or interpretation of these laws and regulations is not clear. For example, we are registered as a funds transfer service provider and issuer of prepaid payment instruments for third-party businesses in Japan and elsewhere through LINE Pay Corporation, which generally requires us to demonstrate compliance with many domestic laws in these areas. In addition, we act as an intermediary in some of our fintech services, such as LINE Insurance and LINE

 

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Smart Invest, which subjects us to a number of registration and other operational laws in Japan. See “Item 4.B. Business Overview—Regulation.”

With respect to our cryptocurrency operations, governments have reacted differently to cryptocurrencies, with certain governments deeming them illegal and others allowing their use and trade. Various foreign jurisdictions may, in the near future, adopt laws, regulations, or directives that could adversely affect BITFRONT or BITMAX, or ownership of LINK, including, but not limited to, restricting the right to acquire, own, hold, sell, use or trade cryptocurrencies or to exchange cryptocurrencies for fiat currency. Governments could also take regulatory action that would increase the cost of, or subject cryptocurrency companies to, additional regulation. In addition, there is significant uncertainty with respect to the tax treatment of an investment in cryptocurrency. Cryptocurrencies may be considered assets in certain jurisdictions, or currencies in others. As such, it is difficult to determine exactly how cryptocurrency will be taxed in any given year which could negatively impact adoption of the cryptocurrency and consequently the results of our operations. Such restrictions or regulatory actions could have a material adverse effect on our ability to pursue business in the cryptocurrency space, which would have a material adverse effect on our business, financial condition and results of operations.

Furthermore, in the event that we are found to be in violation of any of these or other similar legal or regulatory requirements after they come into effect, or if there is a delay in the implementation of internal systems and controls necessary to ensure compliance with such 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, financial condition and results of operations.

In addition, we may be subject to a variety of additional risks as a result of providing products and services relating to fintech, AI and blockchain, including:

 

   

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

 

   

the impact on our relationships with existing service providers;

 

   

increased capital costs in building out the infrastructure;

 

   

heightened risk associated with the adoption of a variety of innovative technologies that may not yet be widely accepted;

 

   

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.

Our cryptocurrency exchange business exposes us to a number of legal and regulatory risks

Growth in our cryptocurrency exchange business will expose us to increasing levels of legal and regulatory risks, including, among others, potential liability from disputes over terms of a cryptocurrency trade or from claims that a system or operational failure caused monetary losses to a customer, as well as potential liability from claims that we that we provided materially false or misleading statements in connection with a

 

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transaction, facilitated unauthorized transactions or did not take adequate steps to prevent such transactions. Dissatisfied customers frequently make claims against their service providers regarding quality of trade execution, improperly settled trades, mismanagement or even fraud.

In addition, flaws or vulnerabilities in the information security of our cryptocurrency exchanges may be exposed by hackers to commit theft, which could cause large financial harm to users of our platforms and also harm the reputation of our cryptocurrency exchanges and call into question the security and reliability of our other services. A number of cryptocurrency exchanges, such as Mt. Gox, Coincheck, Bitfinex, Bitpoint and Upbit, have been targets of hacking resulting in harm to users, including exposed login and other information and significant financial losses. Such attacks have in some cases led to protracted legal disputes and the liquidation of exchanges.

We could also be exposed to substantial liability under laws, regulations and court decisions in the various countries where we operate such as Japan, the United States and Singapore, including rules and regulations promulgated by the FSA, the SEC and the Monetary Authority of Singapore. Such regulators are vested with broad enforcement powers over exchanges in their respective jurisdictions, including powers to censure, fine, issue cease-and-desist orders, prohibit an exchange from engaging in some of its operations or suspend or revoke an exchange’s recognition, license or registration. Any investigation or proceedings carried out by a regulator, whether successful or unsuccessful, could result in substantial costs and diversions of resources and could adversely affect our business, financial condition and operating results. In addition, an adverse resolution of any lawsuit or claim against us may require us to pay substantial damages or impose restrictions on how we conduct our business, either of which could adversely affect our cryptocurrency business, and the reputation of LINE, both in Japan and abroad, which could have a significant negative impact on our business, financial condition and results of operation.

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.

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. If our cash resources are insufficient to satisfy our cash requirements, we may seek to issue additional equity or debt securities or obtain new or expanded credit facilities. For example, in September 2018, we issued zero coupon convertible bonds due 2023 and 2025 in the aggregate principal amount of approximately ¥146.3 billion (the “Convertible Bonds”) through an offering pursuant to Regulation S under the U.S. Securities Act of 1933, as amended (the “Securities Act”), and a private placement to NAVER Corporation, our largest shareholder. 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

 

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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. Many of these laws and regulations are still evolving and could be interpreted or applied in ways that could limit our business or require us to make certain fundamental and potentially detrimental changes to the products and services we offer, particularly in the new and rapidly evolving industries in which we operate, including the fintech, AI and blockchain technology domains. 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, among others resulting from the need to obtain additional licenses and approvals to conduct our businesses as envisioned. In addition, the application or interpretation of these laws and regulations is not clear in some jurisdictions, which could make compliance more costly. Moreover, if third parties we work with, such as platform and other business partners, violate applicable laws or our policies, such violations may result in joint or secondary liability for us.

For example, in December 2019, we launched LINE Healthcare, which allows users to communicate with doctors through our platform. Provision of this service subjects us to the Act on Securing Quality, Efficacy and Safety of Products, Including Pharmaceuticals and Medical Devices. In addition, while the Ministry of Health, Labour and Welfare of Japan has established guidelines for remote healthcare businesses, we believe that we are not subject to such guidelines. Any changes in these guidelines and laws and regulations could have an adverse effect on the business of LINE Healthcare. Moreover, since the remote healthcare industry is relatively young and expected to continue to undergo significant legal and regulatory changes for the foreseeable future, we cannot predict the effect of possible future legislation, regulation and enforcement (including those related to the Medical Practitioners’ Act), which could have an adverse effect on our business, financial condition and operating results.

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, particularly as we enter into new business areas. 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. For example, the EU General Data Protection Regulation, which extends the applicability of stringent data protection laws to all foreign companies processing the data of EU residents, became effective in May 2018. 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’ privacy 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 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

 

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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 to purchase 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, after providing at least 60 days’ prior public notice, if those entities stop selling such virtual currencies. If any of our in-game items for which we have not made a deposit or entered into a guarantee or trust agreement, is deemed a prepaid payment instrument, 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.

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, as of the date of this annual report, our messaging services generally remain blocked in China. 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 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;

 

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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;

 

   

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

 

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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 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

 

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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; it may also result in reputational damage to us. 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.

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 2017, 2018 and 2019, 27.4%, 28.4% and 26.8%, 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

 

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material adverse effect on our results of operations. See “Item 11. Quantitative and Qualitative Disclosures About Market 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. For example, LINE Plus Corporation, our wholly-owned subsidiary in Korea, paid approximately ¥2.2 billion in additional taxes as a result of a tax audit conducted by the National Tax Service in Korea in September 2018. LINE Plus Corporation is currently in the process of appealing the results of the tax audit. 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 are not always directly bound to comply with OFAC Sanctions, 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 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. For example, non-U.S. persons can 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.

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 generally given favorable

 

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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.

LINE can be used in 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. We screen our counterparties, banks, agents, suppliers and other business supporters against OFAC’s SDN list prior to engaging or dealing with them, but 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.

We had approximately 0.4 million MAUs in Iran in December 2019, and our business with Iran represented approximately 0.002% of our revenues in 2019, which consisted primarily of sales of Stickers and in-game items in the ordinary course of business. In February 2017, LINE PLAY Corporation, which is owned by LINE Plus Corporation, our wholly-owned subsidiary in Korea, established a local branch in Iran, which subsequently ceased all operations and remains closed as of December 31, 2019.

NAVER Corporation, which owns more than 70% of the outstanding shares of our common stock, has substantial control over important corporate matters, and its interest may differ from those of our other shareholders.

As of December 31, 2019, NAVER Corporation owned approximately 72.6% of the outstanding shares of our common stock. As a result, NAVER Corporation exercises substantial control over 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 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. In addition, through a private placement in September 2018, NAVER Corporation acquired half of the Convertible Bonds, which may be converted into shares of our common stock. See “Item 5.B. Liquidity and Capital Resources—Liquidity and Capital Resources—Cash Flows—Net Cash Provided by Financing Activities” and Note 15 of the notes to our annual consolidated financial statements.

We also engage in a number of other related party transactions with NAVER Corporation and our affiliates. See “Item 7.B. 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

 

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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.

From time to time, members of our senior management have overlapping duties with NAVER Corporation. For example, Mr. Hae Jin Lee, chairman of our board of directors, also serves as an executive officer of NAVER Corporation. Such individuals, including Mr. Lee, 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.

Risks Related to Shares of our Common Stock and Our ADSs

The market prices of shares of our common stock and ADSs have been and may in the future be volatile, or may decline, regardless of our operating or financial performance.

The market prices of shares of our common stock and ADSs have been and may in the future be volatile. Market prices could be 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. 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 Securities and Exchange Commission (the “SEC”) and the Kanto Local Finance Bureau (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;

 

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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.

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 2019 and currently intend to continue our operations in such a manner that we will not become a PFIC in the future. 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 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 “Item 10.E. Taxation—United States Federal Income Taxation,” that does not make a “mark-to-market” election may incur significantly increased U.S. federal 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 in “Item 10.E. 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 “Item 10.E. Taxation—United States Federal Income Taxation—Passive Foreign Investment Company.”

 

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Substantial future sales of our common stock or the conversion into common stock of the Convertible Bonds, or the perception that these transactions could occur, 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 or the conversion into common stock of the Convertible Bonds, and the perception that these transactions could occur may also depress the market prices of the shares of our common stock and ADSs. As of December 31, 2019, there were 2,376,000 shares of our common stock issuable upon exercise of outstanding stock options, and holders of our stock options 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. As of December 31, 2019, our equity-settled and cash-settled employee stock ownership plans also held 1,524,392 shares of our common stock as treasury shares, have been granted from time to time as shares or cash (after sale of the underlying shares by the trust) as part of our share-based payments to our employees. In 2018, shareholders approved a plan to grant stock options to our directors, and our board of directors approved a plan to grant stock options or other share-based compensation to our executive officers and employees pursuant to our new share-based compensation plan adopted in 2019. See “Item 6.B. Compensation,” “Item 6.D. Employees” and Note 27 and Note 32 of the notes to our annual consolidated financial statements. In addition, we issued the Convertible Bonds in September 2018. See “Item 5.B. Liquidity and Capital Resources—Liquidity and Capital Resources—Cash Flows—Net Cash Provided by Financing Activities” and Note 15 of the notes to our annual consolidated financial statements”. 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.” The conversion of some or all of these Convertible Bonds, or the anticipation of the possibility of such conversion, could also depress the market price of our common stock and ADSs. Moreover, 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 decline.

If securities or industry analysts were to 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 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 are subject to the reporting requirements of the Exchange Act, the U.S. Sarbanes-Oxley Act of 2002, 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

 

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Japan (the “FIEA”) and the rules of the Tokyo Stock Exchange. We also continue to prepare annual financial statements of LINE Corporation on a standalone basis in accordance with generally accepted accounting principles in Japan for Japanese reporting purposes in addition to preparing our consolidated financial statements in accordance with IFRS as issued by the IASB. Complying with these requirements is time-consuming and costly and places significant strain on our personnel, systems and resources. As a result of disclosure of information in filings and submissions required of a public company, our business and financial condition will become more visible, which 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.

As a foreign private issuer, we are permitted to rely on exemptions from certain New York Stock Exchange corporate governance standards applicable to public U.S. companies, as well as from certain disclosure requirements under the Exchange Act. 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 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 “Item 16.G. 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;

 

   

obtain shareholder approval of equity compensation plans, equity offerings that do not qualify as public offerings for cash, and offerings of equity to related parties; 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.

Our parent, NAVER Corporation, controls 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 compensation committee and our nominating and corporate governance committee consist entirely of independent directors.

As a foreign private issuer, we are not subject to all of the disclosure requirements applicable to companies organized within the United States. For example, we are exempt from certain rules under the Exchange Act that regulate disclosure obligations and procedural requirements related to the solicitation of proxies, consents or authorizations applicable to a security registered under the Exchange Act. In addition, our directors and officers are exempt from the reporting and “short-swing” profit recovery provisions of Section 16

 

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of the Exchange Act and related rules with respect to their purchases and sales of our securities. Moreover, we are not required to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. public companies. Accordingly, there may be less publicly available information concerning our company than there is for U.S. public companies.

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 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, 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.

 

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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 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.

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.

 

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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 “Item 10.B. Memorandum and Articles of Association.”

 

Item 4.

Information on the Company

 

Item 4.A.

History and Development of the Company

We were established in Japan in September 2000 as Hangame Japan Corporation, a joint-stock corporation, and subsequently changed our name to NHN Japan Corporation in August 2003. 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 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 marketing and sales 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 in the form of a non-cash dividend to NAVER Corporation in April 2013. In April 2013, we were renamed as LINE Corporation. In September 2013, our board of directors approved a plan to dispose of our online match-making services business for the same reason. The disposition was completed in December 2013 through a sale to an unrelated third party. 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.

 

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In July 2016, we completed our initial public offering and listed our common stock on the First Section of the Tokyo Stock Exchange under the securities identification code 3938 and our ADSs, each representing one share of our common stock, on the New York Stock Exchange under the ticker symbol “LN.”

In December 2019, we entered into a business integration agreement with SoftBank Corp., NAVER Corporation and Z Holdings Corporation concerning the Planned Transaction. If consummated, the Planned Transaction will result in making us a privately held company and integrating the business operations of Z Holdings Corporation and us. See “Item 3. Key Information—Recent Development—The Planned Transaction.” The Planned Transaction is subject to certain conditions, as described in further detail in “Item 10.C—Material Contracts—Business Integration Agreement.”

Our legal and commercial name is LINE Corporation. Our principal executive offices are located at JR Shinjuku Miraina Tower, 23rd Floor, 4-1-6 Shinjuku, Shinjuku-ku, Tokyo, 160-0022, Japan, and our telephone number is +81-3-4316-2050. Our English website address is http://linecorp.com/en/.

The SEC maintains a web site (http://www.sec.gov), which contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.

 

Item 4.B.

Business Overview

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.

 

LOGO

Overview

We are a leading global platform for mobile messaging and communication services, content distribution and life and financial services. Our mobile messaging application, which is the foundation of our “messaging services” and operates on all major mobile operating systems, enables our users to communicate through free instant messaging, Stickers 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 creative content and services that satisfy our users’ individual needs for access to information and entertainment, such as mobile games and music, through our “content services,” as well as connected solutions that aim to satisfy increasingly sophisticated day-to-day needs of LINE users and further enhance their lives and financial welfare, including fintech services such as mobile payments and other financial services offered on the LINE platform, through our “life and financial services.” We believe that the integration on our LINE platform of content and services offers

 

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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 while creating value for advertisers by connecting them with their target audience using the LINE platform.

We believe LINE is the leading mobile messaging application in Japan, Thailand and Taiwan in terms of the number of users, and we have obtained substantial numbers of users in other parts of Asia, including Indonesia. We have achieved this growth through active marketing of LINE as well as customizing our content offerings to suit local preferences and needs. We believe the scale and growth of our user base in many countries provide us with powerful network effects, whereby LINE becomes more valuable with more users and creates additional incentives for existing users to encourage new users to join and to stay connected to their circle of friends. 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.

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 in the following ways:

 

   

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. As a result, our services have already become 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.

 

   

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 more convenient, creative and enriching.

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 services related to daily life, such as games, video, music and news applications, 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 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 allow advertisers to post “display ads” on our various communication and content offerings based on a bid-based advertisement distribution system with data analytics capabilities designed to help advertisers better reach their target audience. We also offer a wide variety of “account ads” through the LINE messaging application, such as LINE Official Accounts and Sponsored Stickers, allowing advertisers to direct their efforts and communication in a more targeted manner.

 

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In recent years, we have focused our strategy on exploring a variety of new business opportunities related to fintech. Some of our recent fintech-related activities include, among others, expansion of services available to our users through LINE Pay, pursuit of alliances with reputable players in the financial services industry to offer new services related to insurance, online securities brokerage, consumer loans and internet banking on the LINE platform. Although most of these ventures are still in the early stages of operation, we believe that they have the potential to contribute to our operating results over the medium- to long-term, and we plan to continue to selectively pursue investment opportunities that we believe would further enhance our capabilities in the financial industry domain. During 2019, we launched various financial related services including LINE Score (which incorporates a credit scoring model), LINE Pocket Money (a personal unsecured loan services), and LINE Securities (an online securities brokerage and investment consultation service). Additionally, BITMAX, a cryptocurrency exchange, launched in September 2019 in Japan following the launch of BITBOX in July 2018. BITBOX is a cryptocurrency exchange for global users excluding Japan which was renamed to BITFRONT as of February 2020.

We are also continuing to focus our research and development efforts on emerging technologies, including AI and blockchain. Since the launch of our next-generation AI platform called LINE Clova in March 2017, we have continued to develop and strengthen our capabilities in AI. Through a series of LINE Clova-integrated smart speakers launched starting in October 2017, our users carry out a natural conversation with LINE Clova in engaging in a wide range of products and services offered by us and other third-party service providers. We are currently also pursuing business opportunities related to blockchain, including the launch of LINK, the base digital token for our blockchain ecosystem. During 2019, we launched LINE BRAIN where we provide AI related technologies, such as chatbot, optical character recognition and voice recognition etc., to external parties.

Prior to and during our fiscal year ended December 31, 2017, we had a single reportable segment. On January 31, 2018, our board of directors approved the establishment of two reportable segments, consisting of our “core business” segment and our “strategic business” segment, in response to the expansion of our business and evolution of our business strategy.

Our reportable segments currently consist of:

 

   

Our “core business” segment that includes:

 

   

“Advertising” consisting of (i) “display advertising” that utilizes our various communication and content offerings, such as Smart Channel, Timeline, LINE NEWS and LINE TODAY, (ii) “account advertising” products and services such as LINE Official Accounts, Sponsored Stickers and LINE Point Ads and (iii) “other advertising” products and services such as LINE Part-Time Job, livedoor and Matome; and

 

   

“Communication, content and others” consisting of (i) “communication” products and services such as Stickers and Themes created by third parties and sold on LINE Creators Market, as well as Stickers and Themes created by us, (ii) “content” products and services such as LINE Games, LINE PLAY, LINE Manga, LINE Music and LINE Fortune, and (iii) “others” consisting of miscellaneous products and services.

 

   

Our “strategic business” segment that includes:

 

   

“LINE Friends” products and services mainly consisting of sales of LINE characters’ merchandise; and

 

   

“Others” primarily consisting of fintech businesses (including LINE Pay and other financial services delivered through the LINE platform), the LINE Clova AI platform, blockchain-related

 

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initiatives and e-commerce. This segment also included LINE Mobile until April 2018, when LINE MOBILE Corporation (“LINE MOBILE”), the provider of mobile virtual network operator (“MVNO”) services, became accounted for as an associate under the equity method rather than as a consolidated subsidiary.

As described in “Item 3. Key Information—Recent Development—The Planned Transaction,” Z Holdings Corporation and we have announced certain strategic initiatives that Z Holdings Corporation and we currently intend to execute as an integrated group after the consummation of the Planned Transaction. However, until Z Holdings Corporation and we receive the required regulatory approvals to conduct the Planned Transaction, Z Holdings Corporation and we intend to act as independent businesses, though subject to certain constraints set forth in the Business Integration Agreement. For a description of such contractual restrictions, see “Item 10.C—Material Contracts—Business Integration Agreement.”

Our Products and Services

We offer a wide range of products and services, and we generate revenues in a variety of ways and from various participants active on the LINE platform.

Core Business Segment

In our core business segment, we plan to continue to promote user engagement on the LINE platform for mobile messaging and communications services in our four key countries of Japan, Taiwan, Thailand and Indonesia. Leveraging on such engagement, we have recorded revenue growth and positive operating margins in recent years by offering a wide range of advertising products and services as well as communication and content products and services on our LINE platform. We anticipate continued steady growth in the proportion of total advertising spending by advertisers in our key markets that are directed to digital advertising. We will continue to invest selectively in initiatives to enhance and broaden the range of communication and content products and services that we offer, which we believe will contribute to our overall growth.

Advertising

LINE offers targeted and interactive marketing products and services that provide advertisers with an attractive advertising platform. We recently completed a series of enhancements to various functionalities of our display ads platform, which we believe would lead to improved operational capabilities, upgraded targeting technology and enhanced user experience. We have also implemented modified pricing models for our account ads, which provide more attractive pricing options for both existing and new advertisers. Through such initiatives, we intend to improve our ability to deliver targeted and creative advertising products and services that are more tailored to our users’ evolving engagement on the LINE platform and enable advertisers to more effectively promote their brands and amplify their visibility and reach.

Our advertising products and services consist primarily of the following:

Display Advertising

We offer “display ads,” which enable advertisers to display their advertisements to a large number of viewers on our various communication and content offerings, leveraging our large user base and data analytics capabilities. Our display ads are sold through a bid-based cost per mille (or cost per thousand) impressions (“CPM”) or cost per click (“CPC”) pricing model, depending on the type of advertisement, and our advertisers pay for qualifying impressions or click-through volume. We believe that our ability to help advertisers better target relevant users will steadily grow over time as we accumulate greater amounts of user data about their engagement activities on the LINE platform. Our display ads include:

 

   

Display Ads on Smart Channel. Advertisements can be posted prominently at the top of our users’ chat lists. Smart Channel utilizes AI to bring personalized information to users, which allows

 

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advertisers to send targeted messages to the right audience at the right time. Further, in January 2020, we announced the launch of video ad product on Smart Channel “Talk Head View.”

 

   

Display Ads on Timeline. Advertisements can be posted on our users’ Timeline, which appear at select locations as users scroll through various postings on their Timeline (for a fuller description of Timeline, see “—Communication, Content and Others—Communication—Timeline”). Such advertisements may include links to external corporate websites, promotions of application downloads or branding campaigns featuring video clips. Video clips play automatically when a user scrolls through a Timeline and reaches a viewport.

 

   

Display Ads on LINE NEWS and LINE TODAY. Advertisements can be posted on certain advertisement spots on LINE NEWS in Japan and LINE TODAY in select countries outside of Japan to reach our users (for fuller descriptions of LINE NEWS and LINE TODAY, see “—Communication, Content and Others—Content—LINE NEWS and LINE TODAY”). Such advertisements may include links to external corporate websites, promotions of application downloads or branding campaigns.

 

   

Display Ads on Other Content Offerings. Advertisements can be posted at certain spots on LINE Manga, LINE BLOG and LINE SHOPPING, respectively, to reach our users in Japan (for fuller descriptions of LINE Manga, LINE BLOG and LINE SHOPPING, see “—Communication, Content and Others—Content—LINE Manga”, “—Communication, Content and Others—Content—Miscellaneous” and “—e-commerce—LINE SHOPPING).

 

   

LINE Ads Platform for Publishers. Advertisements can be posted to partner publishers’ applications and their related services using a new advertising network service based on our ads platform. The LINE Ads Platform for Publishers delivers a variety of advertisements, including performance-based ads and branding ads. Besides ad locations in the LINE messaging application, advertisers can prepare ads in image, video, and other ad formats and distribute them to LINE applications and to over 4,600 external applications.

Account Advertising

We also offer a wide variety of “account ads” that are offered through the LINE messaging application, allowing advertisers to direct their efforts and communication in a more targeted manner. Our account ads include:

 

   

LINE Official Accounts. LINE Official Accounts are LINE accounts created for large-scale businesses and celebrities with followers that enable them to send messages directly to LINE users who have added the Official Account as a LINE friend. Once added as a LINE friend, such Official Account holder is displayed on the users’ friends list on the LINE messaging application, and the users are instantly alerted of incoming messages through push notifications on their smartphones, as would be the case with any other messages they receive from their LINE friends. LINE Official Accounts enable business enterprises to reach LINE users around the world who are interested in their business, products or services by notifying such users of their latest products and services, as well as distributing coupons and promotional information to such users. We also offer Business Connect, a set of tools that allows our business partners to build customized applications, such as sales platforms and marketing tools, and Customer Connect, our customer service solutions offered to business partners using the LINE platform, both of which became integrated into LINE Official Accounts as optional features for our customers in Japan starting in December 2018. In 2019, we integrated our LINE@ accounts and LINE Official Accounts by converting LINE@ accounts, which were similar to LINE Official Accounts but were intended for small and medium-sized enterprises and retailers, into LINE Official Accounts.

 

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We currently charge our LINE Official Accounts customers based on a pay-as-you-go system pursuant to the implementation of a modified pricing model adopted since December 2018.

 

   

Sponsored Stickers. Our advertisers can offer “Sponsored Stickers” to LINE users to promote their brands, products and services. We work with advertisers to design sets of Sponsored Stickers, which often feature the advertisers’ proprietary characters. Sponsored Stickers are available globally and downloadable during a pre-determined period of time for free by users who add the sponsor as their LINE friend. We charge the advertisers fees based on the number of Sponsored Stickers offered by them, as well as a Sticker design fee.

 

   

LINE Point Ads. We offer “LINE Point Ads” to our advertisers which enable our users to receive LINE Points for free upon downloading certain applications, watching certain video commercials created by our advertisers or adding certain LINE Official Accounts as LINE friends. We charge advertisers a fee per specific action taken by our users. Prior to May 2016, LINE Point Ads were referred to as LINE Free Coins.

 

   

LINE Sales Promotion. LINE Sales Promotion provides our business partners with integrated tools through the LINE platform that can be used to promote sales of their products in retail stores, including participation in special marketing events as well as mileage programs.

Other Advertising

Some of the other types of advertising products and services we offer include the following:

 

   

LINE Part-Time Job. LINE Part-Time Job is a part-time job posting service that we operate through a business alliance with MyNavi Inc. LINE Part-Time Job allows potential employers to post part-time job openings on the LINE platform in the form of advertisements. LINE Part Time Job, Ltd. was merged into LINE, effective November 25, 2019, to increase operational efficiencies and further improve the service.

 

   

livedoor. livedoor is a Japanese web portal that brings together information from a wide variety of sources and provides related services such as web search, news, weather and entertainment content and blog hosting. livedoor is one of the largest blogging service providers in Japan. We sell advertising space on livedoor, mainly through advertising networks, such as Google and Yahoo Japan.

 

   

Matome. We provide a personal web curation platform in Japan called Matome, which enables individual users to create web pages that bundle images, links and videos under a specific topic. Such pages help viewers to see information collected from various sources sorted by topic that reflect the curating user’s perspectives and experiences on a specific topic. We also sell advertising space on Matome, mainly through advertising networks.

Communication, Content and Others

Communication

LINE enables our users to enjoy free instant messaging and voice and video calls with each other using their mobile devices (including smartphones and tablets) or personal computers through mobile networks and internet service providers, as well as low-cost voice over internet protocol (“VoIP”) services for domestic and international calls to mobile and fixed-line phone users globally.

 

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Our messaging application and related products and services offered on the LINE platform provide our users with a convenient and fun communication experience and include the following:

 

   

Messaging. LINE provides messaging services for a closed network of users who can select other users with whom they want to connect as “friends.” New friends can be added through inclusion of new contact information in a user’s mobile phone address book, searching for another user’s LINE identification in our database, invitation by email or text messaging, scanning QR codes or, if physically adjacent, shaking users’ smartphones simultaneously. The LINE messaging application can be downloaded for free onto mobile devices using major mobile operating systems as well as personal computers. Our users can send free one-to-one text and voice messages to their friends using data services provided by their mobile network carriers or over the internet. Users can also send images and videos and share their location information using the messaging service. LINE also offers group chat functions as well as livestreaming to participants during group chats.

 

   

Stickers. While using the LINE messaging application, users can add emotional nuance and personalize their text messages by including Stickers, which are colorful icons depicting actions or expressions of our proprietary characters (such as Cony the Rabbit and Brown the Bear), characters from popular animation or manga created by third parties (such as Sanrio’s Hello Kitty and Disney characters), and real life celebrities and athletes. Our selection of Stickers varies by country depending on a number of factors, including local preferences, current events and licensing arrangements for third-party copyrighted characters. We continually look for new and innovative ways to let our users express themselves, including by releasing Stickers with enhanced features such as sound effects as well as animated and pop-up images.

Users can also design their own Stickers to be sold on LINE Creators Market through LINE Store, our web store accessible from mobile devices and personal computers. In June 2017, we also launched the LINE Creators Studio application that enables our users to more easily create Stickers using digital photos stored on their mobile devices, as well as user-generated drawings and writings. After a review process and subject to our approval, user-designed Stickers become available for sale on LINE Creators Market, and once purchased, become available for use on the LINE messaging application. Users receive a portion of the balance of sales proceeds as license fees after deducting fees charged by payment processors. In July 2019, we began offering LINE Stickers Premium, which allows users unlimited access to over 3 million sets of our Stickers for a set monthly fee.

 

   

Timeline. Our Timeline service, which users access through the LINE messaging application, enables users to share their day-to-day experiences with the public or within the closed circle of people whom they choose as their friends. Each user has a profile screen allowing text, Stickers, images and videos and other activity to be posted to express themselves and to share with others. Each user’s Timeline displays that user’s posts, as well as posts by their friends and other interesting content that the user chooses. Our Timeline is designed to be simple and easy to view, and each post displays only the user profile, limited lines of text and any image or video included in the post. Users can choose with whom they share their posts and whose posts they receive on their Timeline.

 

   

Themes. Our users can customize the look of the LINE messaging application on their devices by purchasing and downloading “Themes” that feature LINE and third-party licensed characters. Themes are used to decorate their start up screen, friends list, chat rooms, menu buttons and other displays. Users can also design their own Themes to be sold on LINE Creators Market.

 

   

Free Call and LINE Out (VoIP). Our users can make free domestic or international voice calls and video calls to other LINE users worldwide who are registered as their friends on LINE. We also

 

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offer the LINE Out service, which provides a low-cost VoIP service that enables users to make domestic or international voice calls using the LINE messaging application to mobile and fixed-line phone users globally, regardless of the telecommunications network used by the recipient of the call and regardless of whether the recipient is a LINE user. We do not charge our users any initial setup fee, and users pay in advance for the minutes to be spent making calls by making an in-app purchase of minutes or purchasing minutes on LINE Store.

Content

LINE serves as a content platform for various applications for our users, offering users a wide range of entertainment and other useful and interactive tools. Such applications include:

 

   

LINE Games. We offer various games on the LINE platform. As of December 31, 2019, we offered 30 games, of which 22 games were developed by third-party game developers. We offer games in Japan and our other key markets. Typically, LINE Games are highly social by nature and simple to play. Unlike standalone games not offered on a broader platform, LINE Games enable users to invite their LINE friends to download the LINE Games that they enjoy playing. This, along with a leaderboard that displays scores of the player’s LINE friends, encourages our users to connect with their friends through our games and helps them build and enhance their relationships through increased interaction with one another. All LINE Games are initially downloadable for free, typically with options to buy in-game items, such as extra lives or “boosters” that enhance the user’s performance level, or to upgrade game versions. Our portfolio of games includes puzzle games, adventure games, board games and role-playing games.

 

   

LINE PLAY. LINE PLAY is our virtual community that enables users to decorate their own avatars, or graphic identities selected to represent themselves on screen, write and exchange diaries with other users’ avatars, visit other users’ avatar rooms and chat with other users who share common interests. Community members can also play interactive games with other users. Users may purchase in-app items to dress up their avatars or decorate their avatar rooms. Unlike our LINE messaging service, LINE PLAY is designed as an open social network where users can communicate freely with other LINE users who are not their LINE friends.

 

   

LINE NEWS and LINE TODAY. LINE NEWS is our personalized news-clipping service application 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. LINE NEWS sends updates to users through push notifications, which allows seamless access to interesting and important news throughout the day without the need to leave the LINE messaging application. In addition, users can share interesting articles on their Timeline or with their friends through direct messages allowing for vibrant discussions. LINE NEWS is available to our users in Japan, and we offer similar services called LINE TODAY in our major markets outside of Japan. We introduced a dedicated tab for LINE NEWS and LINE TODAY in the LINE messaging application in 2017, which has contributed to an increase in popularity of such services.

 

   

LINE LIVE and LINE TV. LINE LIVE is a real-time streaming service offered in Japan, as well as markets outside of Japan 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. In Taiwan and Thailand, we also offer an on-demand video service called LINE TV that allows users to select and watch videos from diversified channels that offer an array of localized content.

 

   

LINE Manga. LINE Manga is our online comic bookstore that enables users to purchase and download from a selection of over 300,000 comic books, read them on mobile devices and organize

 

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their purchased comic books on a virtual bookshelf. Users can also recommend comic books to their friends and share links to such comic books on their Timeline.

In July 2018, we entered into an alliance with NAVER WEBTOON Corporation (“NAVER WEBTOON”), Korea’s leading e-comics provider, to establish LINE Digital Frontier Corporation (“LINE Digital Frontier”), in which we hold a 70.0% interest, with NAVER WEBTOON holding the remainder of the interest in LINE Digital Frontier. Through the joint venture, we aim to leverage NAVER WEBTOON’s technical expertise in the development, publishing and distribution of e-comics on LINE Manga.

 

   

LINE MUSIC. LINE MUSIC is our on-demand music subscription service that enables users in Japan to purchase and stream songs, create playlists of their favorite music, send links to music or playlists directly to friends on the LINE chat screen or share music with friends by streaming it on their Timeline. Starting in July 2019, LINE MUSIC became available in Taiwan.

 

   

Miscellaneous. We also offer a wide range of other applications to further enhance user experience, including LINE Fortune (daily fortune telling service) and LINE BLOG (blogging platform designed to foster greater interaction with celebrities).

Others

Our other sources of revenue include, among others, royalty and licensing fees we receive from our business partners for the use of the LINE brand and fees we charge our equity-method associates for the consulting services we provide to them from time to time.

Strategic Business Segment

Our strategic business segment includes LINE Friends products and services and others, primarily consisting of fintech businesses, the LINE Clova AI platform, blockchain-related initiatives and e-commerce. In this segment, we are investing in new ventures that we believe have the potential to contribute to our operating results over the medium- to long-term, particularly through our fintech businesses. We plan to continue to make significant investments in the promotion of our LINE Pay mobile payment services by enhancing our payment infrastructure. We are also pursuing new business opportunities, typically through collaboration with financial industry partners, in areas such as insurance, online securities brokerage, consumer loans, internet banking and cryptocurrency exchange.

LINE Friends

We engage in character marketing using internally-designed LINE characters, such as Cony the Rabbit and Brown the Bear, primarily to promote our brand and appeal, as well as further expand our user base. LINE characters initially gained popularity through Stickers and LINE Games that feature them, and we sell official LINE merchandise, such as plush toys, action figures, stationery goods, clothes, tableware and limited-edition collaboration items, at LINE Friends stores located in Korea, China, Japan, Taiwan, Hong Kong, Thailand and the United States. LINE Friends merchandise is also available through online stores. In addition, we license our proprietary LINE characters to third parties for production and sale of various LINE character-related merchandise.

Others

Fintech

 

   

LINE Pay. As part of our efforts to diversify payment options available to LINE users, we launched LINE Pay, our mobile payment service application, in December 2014. LINE Pay enables

 

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our users to make payments, regardless of their mobile carrier, on LINE Store and a number of select online and offline partner retail stores. Depending on location, our users can also transmit 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 adding money to their LINE Pay accounts at convenience stores or ATMs or through internet banking. We have also expanded the LINE Pay user base and transaction volume by enhancing our payment infrastructure that provides settlement through QR and other barcodes, NFC and physical payment cards (“LINE Pay Cards”). We plan to continue to expand the scope of LINE Pay by selectively incorporating it into our applications and exploring partnership and joint venture opportunities both locally and globally in order to enhance the convenience of our users. For example, in an effort to allow our LINE Pay merchants to capture demands from foreign travelers visiting Japan, in November of 2018, we entered into strategic partnerships with Tencent, the operator of WeChat Pay in China, and NAVER Corporation, the operator of NAVER Pay in Korea, to enable users of such services to make payments at certain LINE Pay outlets in Japan without having to download an application or register for a new service. In January 2019, we partnered with VISA Inc., a world-renowned financial services provider that facilitates electronic funds most commonly through Visa-branded credit cards, to launch a co-branded credit card to be used as a credit card on its own or be linked with a LINE Pay account.

 

   

LINE Points. To further promote the use of LINE Pay, we offer LINE Points, a reward program that enables users to earn points that they can use to add to their LINE Pay balance, use points for purchases at LINE Store and online LINE Friends stores or redeem points for vouchers to be used at retail locations such as coffee shops or convenience stores in Japan. Our users can earn LINE Points equal to a percentage of amounts spent on LINE Pay and LINE SHOPPING (for a fuller description of LINE SHOPPING, see “—e-commerce—LINE SHOPPING), as well as receive LINE Points from advertisers offered through LINE Point Ads.

 

   

LINE Kakeibo. In November 2018, we launched LINE Kakeibo, a free personal financial account and asset management service available on the LINE platform. LINE Kakeibo allows users to manage their income and expenses more efficiently by consolidating a user’s bank accounts, credit cards, reward programs and e-commerce services into a central database and generating a personal account book that tracks a user’s financial activities, such as money transfers, online payments and account balance management.

 

   

LINE Insurance. In October 2018, we launched LINE Insurance, which offers a variety of non-life insurance products such as travel insurance. We operate LINE Insurance through a business alliance between LINE Financial Corporation, our wholly-owned subsidiary focused on investing in fintech businesses (“LINE Financial”), and Sompo Japan Nipponkoa Insurance Inc. (“Sompo Japan”), which was the first insurance provider in Japan to develop a smartphone-optimized insurance service that allows users to review and purchase a wide range of non-life insurance products and receive insurance-related consultation through the use of smartphones. We currently do not take on any insurance underwriting risk by limiting our role to that of an insurance broker.

 

   

LINE Smart Invest. LINE Smart Invest is our investment management-related service accessible through the LINE platform. We provide our users with themed investment opportunities that enable our users to make diversified investments in companies selected by FOLIO Co., Ltd. (“FOLIO”), an online investment management company in which we hold a 41.4% interest, based on specific user-picked themes, such as fashion, travel and technology. See “—Our Investments—Investments by LINE Corporation—FOLIO Co., Ltd.”

 

   

BITFRONT. In July 2018, we launched BITBOX, a cryptocurrency exchange established in Singapore to facilitate the exchange of cryptocurrencies. As of February 2020, we renamed

 

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BITBOX to BITFRONT, with the aim to expand our services and become a full-fledged exchange that includes the fiat-to-crypto markets, and to spur the usage of blockchain by lowering the barriers to cryptocurrency adoption. BITFRONT is a global digital currency exchange based in the U.S. and operated by LVC USA, a subsidiary of LVC Corporation (“LVC”), our wholly-owned subsidiary established in January 2018 that operates LINE’s cryptocurrency-related and blockchain-related businesses. BITFRONT allows for the exchange of approximately 5 cryptocurrencies, including Bitcoin and Ethereum, and supports approximately 15 different languages for global users outside of certain states in the United States and Japan. BITFRONT currently only allows for the exchange of cryptocurrencies and does not accept exchanges between fiat money and cryptocurrencies. For each trade that is executed on its exchange, BITFRONT charges a portion of the transaction value as a commission. As of the date of this annual report, we consider our cryptocurrency balance and transaction volume associated with BITFRONT to be immaterial to our business. We are also exploring opportunities to establish cryptocurrency exchanges in other countries.

 

   

BITMAX. In September 2019, we launched BITMAX, a cryptocurrency exchange for the Japanese market. BITMAX is operated by LVC, and enables users to trade in five cryptocurrencies: Bitcoin, Ethereum, Ripple, Bitcoin Cash and Litecoin. BITMAX links with the LINE Pay service, allowing for fast deposits and withdrawals in yen. Users can also make deposits in yen through either their LINE Pay account or the bank account they have linked to LINE Pay. As of the date of this annual report, we consider our cryptocurrency balance and transaction volume associated with BITMAX to be immaterial to our business. In addition, we and LVC entered into a capital alliance agreement with Nomura Holdings, Inc. (“Nomura”) in September 2019 to work together to build a new financial service using blockchain technology.

 

   

LINE Score. In June 2019, we launched LINE Score, a service that combines big data collected from the LINE platform with user-provided information to create a credit score. Based on the score, the user will be presented with various benefits tailored to the individual user’s score. As we develop this service, we are partnering with a diverse range of companies to offer benefits in various industries, including the sharing economy and financial services.

 

   

LINE Pocket Money. In August 2019, we launched LINE Pocket Money in partnership with Mizuho Bank, Ltd. (“Mizuho”) and Orient Corporation to provide a personal unsecured loan service that determines the terms of a user’s loan based on such user’s credit score generated by LINE Score. The service links to LINE Pay, allowing the user to borrow, use and repay the loan from the LINE app.

 

   

LINE Securities. In May 2018, LINE Corporation and LINE Financial entered into a joint venture agreement with Nomura and established LINE Securities Corporation (“LINE Securities”) to offer online securities brokerage and securities investment consultation services on the LINE platform. LINE Financial holds a 51.0% interest in LINE Securities, with Nomura holding the remainder of the interest in LINE Securities. LINE Securities obtained regulatory approval in June 2019, and began operations in August 2019.

AI

 

   

Clova Smart Speakers. Our smart speakers operate on LINE Clova, our next-generation AI platform designed to enrich our users’ daily lives by integrating a wide array of advanced technologies based on human senses, such as voice recognition, artificial neural network and interactive engine systems. Through a series of smart speakers we launched starting in October 2017, our users carry out a natural conversation with Clova in engaging in a wide range of products and services offered by LINE and other third-party service providers, including access to weather and news, connecting to LINE MUSIC, reading and sending LINE messages and utilizing their smart speaker as an infrared remote controller for TVs or lighting equipment.

 

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Clova Extensions Kit. In July 2018, we released the Clova Extensions Kit, a development kit that allows third-party developers to scale LINE Clova functionalities. Recently, the number of third-party developers incorporating LINE Clova AI technology into their new products using this kit has been increasing, which also contributes to the enhancement of existing functionalities of our LINE Clova smart speakers through collaboration with third-party developers. We believe that leveraging the expertise of third-party developers in such a way not only strengthens our expertise in AI technology but also creates new sources of revenue for our AI business.

 

   

LINE Car Navigation. In September 2019, we launched LINE Car Navigation, a voice-controlled navigation application. Bringing together a hybrid navigation engine provided by Toyota Motor Corporation, which offers navigation guidance and arrival time estimates based on a wealth of driving data, and LINE’s Clova AI platform, LINE Car Navigation enables drivers to use voice commands to search and enter their destination.

 

   

LINE BRAIN. In July 2019, we launched LINE BRAIN, which offers AI technologies developed by LINE to outside companies. Offered technologies include LINE BRAIN CHATBOT technology, which is capable of understanding and responding to natural speech, LINE BRAIN OCR technology, which converts letters and sentences in an image into textual data, and LINE BRAIN SPEECH TO TEXT technology, which converts human speech into text. In January 2020, we began making these AI technologies available as a SaaS (Software as a Service) solution to power the back end of certain services offered by NAVER Business Platform Corp., a subsidiary of NAVER Corporation that provides marketing and advertising services.

Blockchain

 

   

LINK. In August 2018, LINE Tech Plus launched LINK, the base digital token for our blockchain ecosystem. Decentralized applications (“dApps”), offered through our blockchain ecosystem, will reward our users with LINK for participating in our blockchain ecosystem, and users will be able to use LINK to pay for or receive benefits from a variety of contents and services offered through dApps. LINK was listed on BITFRONT in October 2018, so that they can be exchanged for other cryptocurrencies traded on BITFRONT. In January 2020, LVC announced plans to begin trading LINK in Japan from as early as April 2020. As of the date of this annual report, we consider our transaction volume associated with LINK to be immaterial to our business.

 

   

Others. We plan to continue to devote additional resources to developing our blockchain-related technologies and exploring blockchain-related business opportunities. For example, we established LINE Blockchain Lab in April 2018 to foster a dedicated team of engineers and researchers to develop blockchain-related technologies and services that implement such technologies.

e-commerce

 

   

LINE SHOPPING. Accessible within the LINE messaging application, LINE SHOPPING is our comprehensive online shopping gateway that we operate in association with leading online retailers in Japan. Through LINE SHOPPING, users are able to search for products using various filters, compare the products that are available on each participating retailer’s website in a consistent format, and then click through to the applicable retailer’s website for purchases. A wide range of products are offered on LINE SHOPPING, including fashion, sporting goods, home decor, electronics, cosmetics and general goods. Users receive a portion of the purchase price back in LINE Points, which can be used to purchase Stickers and other items offered on our platform. We receive a commission based on the purchase price for sales that originate from LINE SHOPPING.

 

   

LINE Delima. LINE Delima is our food delivery service available in Japan that enables our users to conveniently order from a wide range of gourmet options through the LINE messaging

 

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application. We operate the LINE Delima service in collaboration with Demae-can Co., Ltd., a company in which we hold a 21.7% interest that operates the leading nationwide delivery portal site Demae-Can. See “—Our Investments—Investments by LINE Corporation—Demae-can Co., Ltd.”

 

   

LINE Pockeo. In April 2019, we advance released LINE Pockeo, which enables users to search for restaurants accepting takeout orders, and to order and pay, from their current locations. In June 2019, we formally launched LINE Pockeo, as well as LINE Pockeo for biz, a tablet-based ordering system that enables restaurants to commence takeout services without having to build their own takeout system by registering images, product names and prices of items available for takeout. Users can earn LINE Points when they order with LINE Pockeo, which can be used to purchase Stickers or spent in LINE Pay.

 

   

LINE TRAVEL jp. LINE TRAVEL jp is our one-stop travel metasearch service that allows our users to search for, compare and book domestic and overseas hotels, flights and package tours on the LINE platform. We operate the LINE TRAVEL jp service in collaboration with Venture Republic Inc. (“Venture Republic”), a company in which we hold a 34.0% interest that operates a leading online travel metasearch and media outlet in Japan. See “—Our Investments—Investments by LINE Corporation—Venture Republic Inc.”

 

   

LINE MAN. LINE MAN is our on-demand assistant service that provides a variety of services to our users in Thailand, including food delivery, taxi service and postal and messenger services.

Our Investments

From time to time, we selectively invest in other companies and service providers to further develop existing services on our LINE platform, to launch new services on our LINE platform and to explore possible synergies, especially for services that have gained popularity in markets where we see growth potential for our LINE platform. For further information on our investments in associates and joint ventures, see Note 31 of the notes to our annual consolidated financial statements. We make such investments in a variety of ways, including direct acquisitions of equity interests, creation of joint ventures and investments in third-party venture capital and private equity funds. Notable investments in recent years made by us and LINE Financial include:

Investments by LINE Corporation

 

   

Demae-can Co., Ltd. In October 2016, we acquired a 21.9% interest in Demae-can Co., Ltd., the operator of a leading nationwide delivery portal site “Demae-Can” that collaborates with us on our operation of LINE Delima food delivery service. Due to the exercise of stock acquisition rights during June 2019 by a third party, Demae-can’s total number of outstanding shares increased to 44,390,500 shares (an increase of 100 shares), which caused our interest in Demae-can to decrease to 21.7%. On March 26, 2020, our board of directors approved our entering into a capital alliance and partnership agreement, pursuant to which we will acquire 20,548,000 new shares of Demae-can common stock for 15,000 million yen through a third-party allotment. As a result of the transaction, which is subject to customary closing conditions, our interest in Demae-can is expected to increase, though we expect not to own more than 50% of the voting rights in Demae-can immediately after the transaction.

 

   

Snow Corporation. In October 2016, we acquired a 25.0% interest in Snow Corporation, a subsidiary of NAVER Corporation and developer and operator of the selfie app SNOW. In May 2017, we transferred our camera application business, including B612 and LINE Camera, which was operated by our wholly-owned subsidiary LINE Plus Corporation, to Snow Corporation to pursue further synergies. In exchange for such transfer, LINE Plus Corporation received newly issued shares of common stock of Snow Corporation, after which our interest in Snow Corporation increased to 48.6%. This was followed by an additional capital injection into Snow Corporation by NAVER Corporation and us in August 2017, resulting in a decrease of LINE and its subsidiaries’

 

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ownership from 48.6% to 45.0%. In March and October 2018, Snow Corporation issued new shares to NAVER Corporation through a third-party allotment, which resulted in a decrease in our ownership from 45.0% to 34.0% as of December 31, 2018. In August 2019, Snow Corporation, issued new shares to NAVER Corporation through a third-party allotment, with NAVER Corporation injecting 6,137 million yen of additional capital into Snow Corporation as consideration. As a result, our interest in Snow Corporation decreased from 34.0% to 29.2%.

 

   

LINE MOBILE Corporation. In March 2018, in order to expand our MVNO business provided by LINE MOBILE Corporation, we entered into a partnership agreement with SoftBank Corp., pursuant to which our interest in LINE MOBILE Corporation decreased from 100.0% to 49.0% in April 2018, with SoftBank Corp. holding the remaining interest. This resulted in LINE MOBILE Corporation being accounted for as an associate under the equity method rather than as a consolidated subsidiary. In April 2019, LINE MOBILE Corporation issued new shares to a third party. As a result, our interest decreased from 49.0% to 40.0%.

 

   

FOLIO Co., Ltd. In January 2018, we entered into a capital alliance partnership with FOLIO, pursuant to which we acquired a 41.4% interest in FOLIO on a fully-diluted basis, assuming that all stock options provided by FOLIO to its employees have been vested and exercised. FOLIO provides, starting in October 2018, investment management-related services on LINE Smart Invest, accessible through the LINE platform.

 

   

Venture Republic Inc. In August 2018, we entered into an alliance with Venture Republic, the operator of a leading online travel metasearch and media outlet in Japan, pursuant to which we acquired a 34.0% ownership interest in Venture Republic. We collaborate with Venture Republic to operate LINE TRAVEL jp, our one-stop travel metasearch service.

 

   

LINE Games Corporation. In November 2018, in order to secure funds needed to invest further in game development and platform expansion, we raised W125 billion in a capital increase through a third-party allotment of new shares issued by LINE Games Corporation to Lungo Entertainment Ltd. (“Lungo”), a special-purpose entity established by the global investment firm Anchor Equity Partners (Asia) Limited, subsequent to which our interest in LINE Games Corporation decreased from 73.5% to 49.5%. This resulted in LINE Games Corporation being accounted for as an associate under the equity method rather than as a consolidated subsidiary.

Investments by LINE Financial

 

   

LINE Securities. In May 2018, LINE Corporation and LINE Financial entered into a joint venture agreement with Nomura and established LINE Securities (formerly known as LINE Securities Preparatory Corporation) to offer online securities brokerage and securities investment consultation services on the LINE platform. LINE Financial holds a 51.0% interest in LINE Securities, with Nomura holding the remainder of the interest in LINE Securities. LINE Securities obtained regulatory approval in June 2019, and began operations in August 2019.

 

   

LINE Credit. In order to offer an easily-accessible and reliable source of consumer finance to our users through the LINE platform, we established LINE Credit Corporation (“LINE Credit”) in May 2018. In November 2018, LINE Financial, Mizuho and Orient Corporation agreed to participate in a third-party allotment of new shares issued by LINE Credit, with the resulting shareholding ratio to be 51.0%, 34.0% and 15.0%, respectively.

 

   

LINE Bank. LINE Financial has entered into several alliances with reputable banks to examine various ways to operate optimized partnership-based digital banking platforms in our major markets, outlined below:

 

   

Japan. In November 2018, LINE Financial and Mizuho agreed to establish a bank preparatory company in Japan through a joint venture. It is currently anticipated that joint venture will be

 

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operational in 2020, and that LINE Financial will own 51.0% of the joint venture, with Mizuho holding the remainder of the interest in the joint venture. Through the bank preparatory company, we plan to obtain the regulatory approvals and licenses required to engage in the online banking business in Japan.

 

   

Taiwan. Preparatory Committee of LINE Bank Taiwan Limited (“LINE Bank Prep Office”) applied for an internet-only banking license from Taiwan’s Financial Supervisory Commission, which was granted in July 2019. LINE Bank Prep Office consists of LINE Financial Taiwan Limited (“LINE Financial Taiwan”), a wholly-owned subsidiary of LINE Financial Asia, and six partners, four of which are banks (CTBC Bank Co., Ltd., Standard Chartered Bank (Taiwan) Ltd., Taipei Fubon Commercial Bank and Union Bank of Taiwan) and two of which are telecommunications companies (Far EasTone Telecommunications Co., Ltd. and Taiwan Mobile Co., Ltd.). LINE Bank Prep Office is 49.9% owned by LINE Financial Taiwan, 40.1% owned by the four banks and the remaining 10.0% owned by the two telecommunications companies.

 

   

Thailand. In December 2018, LINE Financial Asia established a joint venture with Kasikorn Vision Company Limited of Thailand, in which LINE Financial Asia holds a 49.99% interest, to launch a mobile banking application that would allow users to transfer funds and apply for personal loans on the LINE platform. The company expects to launch services in Thailand second half of 2020 under the brand “LINE BK.”

 

   

Indonesia. In May 2019, we acquired a 20.0% interest in the outstanding shares of PT. Bank KEB Hana Indonesia (“KEB Hana Indonesia”) through LINE Financial Asia Corporation Limited (“LINE Financial Asia”), a wholly-owned subsidiary of LINE Financial, in order to establish a business partnership in the banking business. Through this alliance, we plan to offer deposit and microcredit products and a variety of other online banking services in Indonesia.

Payment Mechanism for Our Users

Users of LINE and other applications offered on the LINE platform purchase products such as Stickers, in-game items or other in-app items primarily through the payment processing systems established by Apple App Store for iOS-based smartphones and Google Play for Android-based smartphones, for which such payment processing systems charge transaction fees based on a fixed percentage of the price paid by users. In addition, users of iOS- and Android-based smartphones may use LINE Coins as virtual credits for purchase of products and services on the LINE platform. Users may acquire LINE Coins, either by purchasing LINE Coins through their respective payment systems or converting their LINE Points into LINE Coins. We supplement such payment options with LINE Store, our web store accessible from mobile devices and personal computers, where users in select countries have the option to pay with prepaid cards or credit cards or through direct mobile billing that adds the purchase amount to their monthly phone bill.

Building and Maintaining User Trust

We strive to create products and services that are safe, secure and easy to use. We dedicate significant resources to the goal of building user trust through developing and implementing programs designed to protect user privacy, promote a safe online environment and assure the security of user data.

Privacy and Sharing

People come to LINE to communicate and share their experience with friends. Protecting user privacy is a critical consideration in our product and service development process. Our objective is to give users control

 

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over what they share and with whom they share. Our efforts regarding user privacy are fundamental to our business and are focused on assuring control, transparency and accountability as follows:

 

   

Control. We believe that by providing our users with clear and easy-to-use controls, we will continue to promote trust in our products and services. We have introduced various personal information control tools and techniques. For example, a user can choose whether other users can search for his or her account and select the scope of the audience for his or her Timeline postings.

 

   

Transparency. Our privacy policy relates to our data use practices and privacy features. We also offer a number of tools and features that make disclosure to users on how their information is used on the LINE platform. Our application settings feature enables users to view each of the applications they have chosen to use, the information generally needed by each application, and the audience with whom users have chosen to share their experiences. We believe that our transparency efforts enable users to make more informed decisions about their activities on the LINE platform.

 

   

Accountability. We have implemented procedural safeguards as part of our privacy program. These include employing a dedicated team of privacy professionals who are involved in product development from design through launch, conducting ongoing review and monitoring of the way data is handled by existing features and applications and implementing systemic data security practices.

Safety

We generally design our products and services to include safety tools. To communicate directly with other LINE users, each user has the option to register a “LINE ID” to allow other users to find such user through a LINE ID search. Each user may choose whether his or her account is visible to other users’ LINE ID searches. We also cooperate regularly with mobile network providers and educators as well as law enforcement officers to promote proper and legal use of the LINE platform.

Security

We invest in technology, processes and people as part of our commitment to safeguarding our users’ personal information. We use both third-party developed and proprietary technologies to protect our users, including an intrusion detection system to protect the data entrusted to us, and we rely on multiple layers of network segregation using firewalls to protect against attacks or unauthorized access. Our security team actively scans for security vulnerabilities using commercial tools, penetration tests, code security reviews and internal and external audits. Our internal policy is to implement protective measures to safeguard user information, and we have acquired international certifications in both information security and privacy. Upon the occurrence of a cyber-attack or unauthorized access, we take remedial measures to prevent the recurrence of such incidents in the future by collecting and analyzing threat intelligence related to the incident, enhancing authentication mechanisms and access controls on our servers, and developing and deploying additional malware detection and prevention systems.

Marketing and Sales

The LINE user community has grown with users inviting their personal contacts to connect with them, supported by our internal efforts to stimulate user awareness and interest, such as advertising and marketing campaigns on television and the internet. As we seek to increase our global footprint, we engage in active advertising and promotional campaigns to build our brand and further expand our user base.

We utilize television commercials and internet and mobile advertising, as well as product placements in television shows as our primary advertising channels, and we continually assess the effectiveness of such

 

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channels to ensure that we utilize the most suitable channel for each of the various types of products and services we aim to promote. For example, we have focused our advertising efforts in recent years on publicizing our new products and services or major updates to our existing products or services, with a particular focus on our LINE Pay service. Our marketing expenses were ¥15,477 million in 2017, ¥20,311 million in 2018 and ¥33,022 million in 2019, excluding personnel-related costs of our marketing staff. While we believe that our ability to grow through network effects associated with the LINE platform will be fundamental to our growth in global markets, we expect to continue to invest significantly in marketing and promotional activities to further promote such growth.

We also focus on attracting and retaining advertisers. In Japan, we operate a dedicated sales force focused on providing support to advertisers throughout the stages of the advertising campaign cycle, from pre-purchase decision making to post-campaign analytics. Our direct sales activities are supplemented by third-party agencies that primarily assist with attracting large businesses that may be interested in creating LINE Official Accounts, as well as application developers that may be interested in marketing their applications. We also invest in customer support for our users, platform partners and advertisers, and we regularly host conferences and other events to promote our products and services to platform partners and advertisers.

Technology

We have assembled a team of highly skilled engineers and computer scientists whose expertise spans a broad range of technical areas. We have made significant investments in scalable infrastructure to support large-scale, real-time messaging systems, data management and analytics technologies, advertising technology, game development and publishing technologies and voice and video call quality solutions. In recent years, we have invested significant time and resources in developing and strengthening our capabilities in fintech, AI and blockchain technology.

Scalable Infrastructure to Support Large-Scale Systems

Our products and services are built on distributed computing architecture. We use a combination of off-the-shelf and custom software running on clusters of commodity computers to amass substantial computing capability. We intend to continue to develop server infrastructure that is operationally efficient, scalable and reliable, which is designed to do the following:

 

   

adapt to meet the needs from increasing user base growth and activities on our platform through decentralized data networks;

 

   

improve the functionality of servers through automated server management technology, thereby reducing cost and improving operational agility;

 

   

automatically detect and respond to errors in our infrastructure components, including application servers, storage infrastructure and system networks; and

 

   

maintain reliable redundant systems for our infrastructure components in Japan and abroad to reduce the possibility of service interruptions.

Our infrastructure enables the storage and processing of large datasets and deployment of our products and services to our users on a global basis. As our user base grows and the level of engagement and activities on our platform continues to increase in tandem with our introduction of new products and services, we will continue to expand our computing infrastructure to sustain and further improve our operating efficiency and to provide our products and services quickly and reliably to all users around the world. Our core messaging system enables real-time processing of a large amount of user traffic and serves as the basis for our LINE platform operations. Likewise, our scalable server infrastructure allows us to quickly ramp up capacity as we launch new products and services, including those that deploy increasingly sophisticated functionalities, such as our new fintech-related applications.

 

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Data Management and Analytics Technologies

In order to provide each user with a personalized LINE experience, we process and analyze a vast and growing amount of content shared by our users, developers and advertisers. Accordingly, we have invested in developing technologies and analytics in areas including the following:

 

   

a storage infrastructure that enables us to securely store hundreds of petabytes of data generated by our users;

 

   

increased storage capacity for more efficient data distribution;

 

   

a high-volume business intelligence system that enables large scale data analysis; and

 

   

a data warehouse infrastructure that provides tools to enable easy data summarization, ad hoc querying and analysis of large datasets.

Advertising Technology

We offer advertisers a powerful medium through which they can reach our large user base in a targeted manner using our array of advertising products and services. Our advertising technology enables millions of relevant, targeted advertisements to be viewed simultaneously based on content a user views on our platforms. The key elements of our advertising technology include:

 

   

a scalable online training and prediction system that provides well-calibrated click-through rate prediction to our auction system, which allows the most relevant advertisements to be viewed by a large number of targeted users in real time;

 

   

a large-scale data management and analytics system that extracts hidden elements of advertisement performance from large volumes of relevant data;

 

   

contextual advertising technology that employs techniques to analyze the content of individual pages and match advertisements to them, while taking into account factors such as optimal ad creatives and quality of landing pages; and

 

   

an advertiser-friendly system that provides key optimization techniques that better analyze user preferences and content consumption patterns that enable advertisers to provide more personalized advertisements and effectively manage their advertising budgets to generate a higher return on their investment.

Voice and Video Call Quality Solutions

We believe that audio and video quality is critical to the enjoyment of the LINE experience, and we have made significant engineering and development efforts to improve our audio and video quality. Key areas of our investments include the following:

 

   

proprietary audio and video communications technology that can reliably process millions of calls on a daily basis and group calls of up to 200 people at a time; and

 

   

high performance codec and data transmission technologies and routing algorithms to improve overall call quality and user experience.

 

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Game Development and Publishing Technologies

In order to continue to develop and publish successful games, we have invested in developing technologies designed to allow us to monetize games through in-game purchases, while providing players with an exciting experience. Areas of investment include:

 

   

ability to conduct large-scale user data analysis during game play; and

 

   

client/server technology designed to allow simultaneous, secure, fast and stable game play by users around the world.

AI Technology

In March 2017, we launched LINE Clova, a next-generation AI platform designed to enrich our users’ daily lives by integrating a wide array of advanced technologies based on human senses, such as voice recognition, artificial neural network and interactive engine systems. We believe that the creation of a one-stop LINE Clova ecosystem will provide a solid foundation for the delivery of our products and services in the foreseeable future. Accordingly, we plan to continue to expend significant time and resources in strengthening our capabilities in AI. Key areas of our investments include the following:

 

   

expansion of partnerships and alliances with third-party developers, manufacturers and content providers to develop additional services to be offered on the LINE Clova ecosystem;

 

   

improving the functionalities of LINE Clova-integrated smart speakers and other AI-based systems and devices to allow for a more seamless and innovative interaction between us and our users; and

 

   

research and development focused on next-generation AI capabilities, such as the development of a personalization engine that understands our users’ tastes and preferences for various contents based on their activity logs and automatically supplies them with services tailored to their needs.

To that end, in June 2019, we launched LINE BRAIN, which offers a package of technologies, including LINE Clova and our chatbot, text recognition and speech to text technologies, for commercial use. Among others, we are currently working with SKY Perfect JSAT Corporation and ITOCHU Corporation on further developing image recognition and other innovations with an aim to create a next-generation television set that will allow users to interact with the content on the screen, the internet and IoT-enabled devices by using voice commands powered by LINE Clova technology. Applications may include learning more about items displayed on screen in real time and being able to shop for and purchase them quickly and easily, or retrieving a recipe for a dish being made on television, and ordering the ingredients for delivery.

Through our Planned Transaction with Z Holdings Corporation, the resulting Integrated Company group intends to consolidate operating resources, and use AI and Internet technologies to create and provide a richer and more convenient life for the customers of the Integrated Company group, with the ultimate aim of becoming “The AI tech company that leads the world from Japan and Asia.” For further information about our plans for AI as they relate to the Planned Transaction, see “Item 3. Key Information—Recent Development—The Planned Transaction.”

Blockchain Technology

In August 2018, we launched LINK, the base digital token for our blockchain ecosystem. The operation of our blockchain ecosystem, built upon the circulation of LINK as the main currency, is powered by LINK Chain, our own brand of blockchain infrastructure that consists of decentralized, distributed digital ledgers of economic transactions made in cryptocurrencies and maintained on a peer-to-peer network. We believe that

 

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LINK Chain, given its resistance to manipulation of data and other technological benefits, provides a solid foundation for the growth of our blockchain ecosystem, and as such, plan to continue to expend a significant amount of resources in strengthening our capabilities in blockchain-related technologies. Key areas of our investments include the following:

 

   

expansion of partnerships and alliances with other players in the blockchain industry to adopt existing technologies and research new blockchain technologies, including core consensus algorithms, virtual machines and smart contracts;

 

   

improving performance and scalability of LINK Chain through the development of an inter-chain protocol that connects multiple blockchains in order to secure enough capacity for an increasing number of participants in our blockchain ecosystem; and

 

   

enhancements to our development framework, a one-stop development toolkit and a programming interface with a complete set of wallets, dashboards and other administrative tools, which enables service operators in our blockchain ecosystem to seamlessly adopt blockchain technology into their services.

Competition

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 other mobile messaging service providers such as Facebook’s WhatsApp and Messenger and Tencent’s WeChat, 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.

We face competition from mobile telecommunications companies, game companies, music and video streaming companies, mobile payment companies, fintech companies, AI companies, e-commerce 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 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.

The key areas in which we compete include:

 

   

Users and User Engagement. We compete to attract and retain users. We believe that our ability to compete effectively for users depends on many factors, including the utility, ease of use, performance and reliability of our products and services; price; the amount, quality and timeliness of content generated by our users; our ability to establish and maintain relationships with platform partners; and our reputation and the strength of our brand. We also compete to attract and retain developers to build compelling games and other applications offered on the LINE platform, primarily based on size and composition of our user base, and our ability to drive traffic to developers’ applications.

 

   

Advertising. A significant portion of our revenue is generated from the sale of advertising services, and we face significant competition for advertiser spending. We believe that our ability to compete effectively for advertiser spending depends on many factors, including the size and composition of our user base; the effectiveness of our advertising targeting capabilities; the timing and market acceptance of our advertising services; our marketing and selling efforts; and the return our advertisers expect to receive from our advertising services.

 

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Personnel. We experience significant competition for highly skilled personnel, including senior management, engineers, designers, product managers and professionals with expertise in the fintech, AI and blockchain technology domains. Our growth strategy depends in part on our ability to retain our existing personnel and recruit highly skilled employees. Competition for highly skilled personnel is intense, particularly in Japan where our headquarters is located, and we compete for qualified personnel with online and mobile businesses, other companies in the technology industry and traditional media businesses. We believe that our ability to compete effectively for highly skilled personnel depends on many factors, including a work environment that encourages independence, creativity and innovation; opportunities to work on challenging, meaningful and important products; and compensation.

Regulation

We are subject to a number of Japanese and other foreign laws and regulations that affect companies conducting business on the internet, many of which are still evolving and being, or have not yet been, tested in courts, and could be interpreted in ways that could harm our business. These may involve user privacy, rights of publicity, data protection, telecommunications, liability of providers of online services for activities of their users and other third parties, content, intellectual property, distribution, electronic contracts and other communications, competition, protection of minors, consumer protection, taxation and online payment services. Because our services are accessible worldwide in a variety of countries, certain jurisdictions may claim that we are required to comply with their laws, including even jurisdictions where we have no local entity, employees or infrastructure.

Regulations regarding Privacy and Protection of Personal Information and User Data

We are subject to laws and regulations regarding privacy and protection of user data and personal information, which could affect us in many jurisdictions throughout the world. The application and interpretation of these and other similar international laws and regulations concerning data protection and personal information is often uncertain, particularly in the new and rapidly evolving industry in which we operate, and in certain countries where the scope and interpretation of such laws and their application to the internet is in a state of flux. There is a risk that such laws may be interpreted and applied in conflicting ways in different states, countries, or regions, and in a manner that is not consistent with our current data protection practices. There also may be limited precedent in certain jurisdictions with regard to enforcement or interpretation of these laws.

In Japan, the Act on the Protection of Personal Information and its related guidelines impose various requirements on businesses, including us, that use databases containing personal information. Under this Act, we are required to lawfully use personal information we have obtained within the purpose of use we have specified and take appropriate measures to maintain security of such information. We are also restricted from providing personal information to third parties.

Privacy Policies

We post a privacy policy and terms of service with our applications, in which we describe our practices concerning the use, processing and disclosure of user data. Any failure by us to comply with our posted privacy policy or privacy related laws and regulations could result in proceedings against us by governmental authorities or others, which could harm our business. Our compliance with our privacy policy may be subject to regulation by governmental agencies in various jurisdictions. For example, the U.S. Federal Trade Commission may bring enforcement actions against unfair and deceptive trade practices, including the violation of privacy policies, and European authorities may take actions against violations of privacy policies as well.

Regulations of Telecommunications and Portal Businesses

The Telecommunications Business Act of Japan (the “Telecommunications Business Act”) generally requires that those who plan to provide telecommunications services be registered as telecommunications

 

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business operators. However, as long as the scale of the telecommunications circuit facilities to be installed for the telecommunication services and the scope of service area to be covered do not exceed certain thresholds set forth in an ordinance of the Ministry of Internal Affairs and Communications of Japan, or fall within a certain category of radio facilities, submission of a notice to the Minister of Internal Affairs and Communications of Japan, rather than registration, is required. We believe that our facilities and services do not exceed such thresholds, and we are subject to notification requirements. Although it is not expressly clear, we believe that our telecommunications service related to LINE Out is not subject to the Telecommunications Business Act since it is provided by LINE Plus Corporation, an overseas entity.

As a telecommunications business operator, we are prohibited from acquiring, using without permission, or leaking private communications (including, but not limited to, the contents of communications, the dates and places of the communications, the names and addresses, telephone numbers and IP addresses). The Telecommunications Business Act also requires a telecommunications business operator to, among other things, provide its service in a fair manner and, in certain emergency situations such as a natural disaster, prioritize important public communications. If, among other things, the acquisition, use without permission or leakage of private communications occurs or is not appropriately prevented in connection with the operation of the telecommunications business, a telecommunications business operator does not satisfy the foregoing requirements, or its business operation is otherwise inappropriate or unreasonable, such telecommunications business operator may be subjected to administrative or criminal sanctions.

The Provider Liability Limitation Act of Japan regulates a provider of communications services (the “specified communications services provider”) that circulates electronic information publicly through the internet, and our portal services are subject to such regulations. While this act limits the scope of liability of a specified telecommunications services provider that will be incurred when anyone’s rights are infringed upon as a result of the circulation of electronic information in connection with its communications services, it requires a specified communications services provider to disclose certain information related to those who engage in such infringement.

Payment Services Regulations

The Payment Services Act regulates prepaid payment instruments such as the prepaid cards and virtual currencies that we sell in Japan. Because we issue such prepaid instruments, we must comply with certain requirements, including an obligation to deposit or enter into certain guarantee or trust agreements for at least 50% of the total amount of unused amounts or credits represented by the 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; an obligation to refund any remaining amount of money or virtual currencies issued, after providing at least 60 days’ prior public notice, if we stop selling prepaid cards or virtual currencies, and general restrictions on refunds in other situations; and an obligation to secure any private information obtained in connection with our prepaid cards and virtual currencies. We may be subjected to administrative or criminal sanctions if we fail to fulfill such obligations.

We must also register with the director of the competent local finance bureau of the Ministry of Finance if our prepaid payment instruments can be used to purchase goods or services that are offered not only by ourselves or other closely related parties, including our affiliates, but also by third parties. We issue such instruments, and we are registered with the Director of the KLFB. The Director is authorized to issue a business improvement order or business suspension order, or cancel our registration if we fail to comply with such regulations.

The Payment Services Act also regulates funds transfer services. As our service allows our users to remit funds to each other or withdraw or deposit cash at convenience stores, ATMs or through internet banking, in each case up to ¥1 million, by linking their accounts at select banks, we are required to register and have registered with the Director of the KLFB. We must also comply with certain other requirements, including an obligation to deposit or enter into certain credit guarantee or trust agreements for the greater of ¥10 million or the

 

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full amount of our outstanding obligations as service provider payable to transferees in Japan plus the costs associated with exercise of their rights as creditors of our funds transfer service. The Director of the KLFB is authorized to issue a business improvement order, a business suspension order or cancel our registration if we fail to comply with such regulations.

As a result of a recent amendment to the Banking Act of Japan (the “Banking Act”), providers of Electronic Settlement Services (as defined under the Banking Act) are subject to the Banking Act starting on June 1, 2018. Any business operator which, upon entrustment from customers (such as depositors), acquires information from banks concerning deposit accounts and provides such information to customers through an application programming interface (“API”) provided by such banks needs to be registered with the competent local finance bureau of the Ministry of Finance as an Electronic Settlement Agent (as defined under the Banking Act). We are registered as an Electronic Settlement Agent in connection with our LINE Kakeibo service. An Electronic Settlement Agent is also required to enter into contracts with banks in connection with the use of APIs by no later than May 31, 2020. Such contracts must include, among others, provisions relating to the allocation of liability for any loss or damage that may arise in connection with Electronic Settlement Services. Furthermore, an Electronic Settlement Agent is required to provide its customers with certain important information relating to the applicable Electronic Settlement Service, including policies regarding compensation for loss or damage suffered by customers. The FSA has the authority to issue a business improvement order or a business suspension order, or cancel our registration if we fail to comply with such regulations.

Various State and Federal laws and regulations in the United States, such as the Bank Secrecy Act, the Dodd-Frank Act, the USA Patriot Act, and the Credit CARD Act, impose certain anti-money laundering and counter-terrorist financing requirements on companies that are financial institutions or that provide financial products and services. Under these laws and regulations, financial institutions are broadly defined to include money services businesses such as money transmitters, check cashers, and sellers or issuers of stored value. Requirements imposed on financial institutions under these laws include customer identification and verification programs, record retention policies and procedures and transaction reporting. Economic and trade sanctions programs also limit or prohibit transactions to or from certain countries, regions, governments or specified individuals or organizations. The implementation of these laws is the responsibility of several administrative agencies and law enforcement authorities, including the U.S. Department of the Treasury. Two of the main bureaus within the U.S. Department of the Treasury with responsibility for implementing anti-money laundering and sanctions laws are the Financial Crimes Enforcement Network and the Office of Foreign Assets Control, respectively. Penalties for violation of these laws can be severe, particularly in the case of willful violations. Any determination that we have violated the anti-money laundering or sanctions laws could expose us to regulatory enforcement actions, civil and criminal penalties, including substantial fines, limit our ability to provide services, subject us to litigation, damage our reputation, and adversely affect our business, financial condition, results of operations, and cash flows.

Regulations on Advertising

The Premiums and Representations Act of Japan stipulates the restricted methods and means of various advertisements, representations and sales promotions, in a broad sense. When we advertise our products or services, such as games, on the internet, we must provide appropriate information under this Act, so as not to mislead our users.

In addition, regulations promulgated under the Premiums and Representations Act of Japan prohibit the inclusion in our games of certain mechanisms that are considered to excessively promote in-game purchases. These mechanisms typically feature a system in which users may pay for the chance to win an in-game item by random selection from different items, with certain combinations of items won providing users with special premium in-game items.

 

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Regulations to Protect Minors

The Act on Establishment of Enhanced Environment for Youths’ Safe and Secure Internet Use of Japan regulates an administrator of servers publicly accessible through the internet (the “specified server administrator”), aiming to protect youths under the age of eighteen. Under this act, if the specified server administrator learns of any situation where harmful information that materially impairs the sound growth of youths has been provided, or it makes such information available to the public through the internet by the use of its servers, it will be required to make efforts to take measures to prevent youths from accessing such information. The specified server administrator is also required to make efforts to establish a system to receive information or inquiries from the public regarding any harmful information it sends, and to prepare and keep records of any measures that it has taken to prevent underage access to harmful information.

The Act on Regulation on Soliciting Children by Using Opposite Sex Introducing Service on Internet of Japan requires that those who operate an opposite sex introduction service through the internet submit a notification to the Public Safety Commission, and strive to take certain actions to prevent sexual offenses against children conducted through an opposite sex introduction service through the internet. Although we believe that none of our products or services fall within the definition of an “opposite sex introduction service,” it is not expressly clear whether our interpretation is correct. In the event that any regulatory authority or court adopts a different interpretation, we may become subject to the regulations applicable to opposite sex introduction services under this Act, including the administrative or criminal sanctions thereunder.

Regulations on Money Lending Businesses

The Money Lending Business Act of Japan (the “Money Lending Act”) governs the operation of money lending businesses. In accordance with the Money Lending Act, and in preparation for the launch of LINE Pocket Money, our loan service, we have registered as a Money Lender (as defined under the Money Lending Act) with the Governor of Tokyo Metropolis in December 2018, and are currently subject to certain strict regulations that govern money lending operations. We are supervised by the FSA, which has the authority to review our operations and inspect our records in order to monitor our compliance with the relevant regulations. The FSA is authorized to issue a business improvement order or a business suspension order, or cancel our registration if we fail to comply with the Money Lending Act.

The Money Lending Act requires registered Money Lenders to provide borrowers (and any guarantors) with a written notice of, or an electronic communication containing (subject to the borrowers’ prior consent), the following: (a) the terms and conditions of the loan at the time of, or promptly after, the execution of the loan agreement or any guarantee agreement; and (b) repayment amounts received and the application of those amounts to the principal and interest owed, as well as the customer’s remaining balance, at the time of each repayment. In addition, prior to issuing a loan, registered Money Lenders are required to evaluate, using information available from designated third-party information providers, the borrowers’ ability to repay the principal and interest amounts of the loans. Lending by registered Money Lenders is generally prohibited if an individual borrower’s aggregate amount of outstanding loans from all registered Money Lenders after the extension of an additional loan will exceed one-third of such borrower’s annual income.

Regulations on Financial Instruments Intermediary Businesses

The FIEA governs, and the FSA regulates, the financial instruments intermediary business, such as LINE Smart Invest, our investment management-related service that allows our users to engage in investment services offered by FOLIO, an online investment management company. Such business is conducted solely under entrustment by FOLIO, which is licensed as a financial instruments business operator, and our activities are performed on behalf of FOLIO. Our scope of business is limited to intermediary services and does not extend to brokerage or agency services. In addition, with regard to our financial instruments intermediary service, we are prohibited from receiving deposits of money or securities from customers. The KLFB is authorized to require us

 

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to file certain reports, and may issue a business improvement order or business suspension order, or cancel our registration if we fail to comply with the relevant regulations.

Regulations on Solicitation Regarding Insurance Policies

Under the Insurance Business Act of Japan (the “Insurance Act”), non-life insurance solicitors, including sales representatives, must be registered with the director of the relevant local finance bureau of the Ministry of Finance. In order to operate LINE Insurance, our non-life insurance service based on an alliance between LINE Financial and Sompo Japan, LINE Financial has registered with the Director of the KLFB. The Insurance Act prohibits certain solicitation activities or omissions, such as the provision of false notice or non-disclosure of important matters, and we are required to (i) ascertain the customer’s needs and propose insurance products that are in line with such customer’s needs and (ii) provide customers with information on insurance products and other necessary information during the process of insurance solicitation. The Director of the KLFB is authorized to issue a business improvement order or a business suspension order, or cancel our registration if we fail to comply with such regulations.

Regulations on Online Securities Brokerage and Securities Investment Consultation Services

The FIEA regulates most aspects of transactions and businesses that relate to financial instruments in Japan, including public offerings, private placements, and the secondary trading of securities; ongoing disclosure by securities issuers; tender offers for securities; the organization and operation of securities exchanges and self-regulatory associations; and the registration of financial instruments business operators, or FIBOs, such as LINE Securities. The Commissioner of the FSA has the authority to regulate financial instruments businesses. The Securities and Exchange Surveillance Commission of Japan is vested with the authority to conduct day-to-day monitoring of the securities markets, and to investigate irregular activities that hinder the fair trading of securities, including the authority to inspect FIBOs. Furthermore, the Commissioner of the FSA delegates certain authority to the Directors General of Local Finance Bureaus to inspect local FIBOs and branches. A violation of the applicable laws and regulations may result in various administrative sanctions, including the revocation of a registration or authorization, a suspension of business operations, or an order to discharge any director or company auditor who has failed to comply with applicable laws and regulations. LINE Securities is also subject to the rules and regulations of the Japanese stock exchanges and self-regulatory associations, including the Japan Securities Dealers Association and the Financial Futures Association of Japan.

A Type I FIBO, as defined in the FIEA, such as LINE Securities, is required to maintain adjusted capital at specified levels, as compared with the quantified total of its business risks, on a non-consolidated basis. If a Type I FIBO’s capital adequacy ratio falls below 120%, the Commissioner of the FSA may order it to take certain measures to rectify the situation. A Type I FIBO whose ratio falls below 100% may be subject to additional proceedings, including, in certain circumstances, the temporary suspension of its business, or the revocation of its registration as a Type I FIBO.

A shareholder who has acquired 20% (or 15%, if there are certain facts indicative of material influence over the decisions of the company in relation to its financial and operational policies) or more of the voting rights of a Type I FIBO, or a Type I FIBO Principal Shareholder, such as LINE Financial, is required to submit a notification describing, among other things, the ownership of the shares and the purpose of the acquisition, to the Commissioner of the FSA. In addition, the FSA may request the submission of reports or materials from, or may conduct inspections of, any Type I FIBO Principal Shareholder. In limited circumstances, the FSA may also order a Type I FIBO Principal Shareholder to take actions to resign from the position as a Type I FIBO Principal Shareholder, including requiring the disposition of such shares as are held by the Type I FIBO Principal Shareholder. A prompt filing with the FSA is also required when a person or entity ceases to be a Type I FIBO Principal Shareholder.

 

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Regulations on Remote Healthcare Services

Under the Act on Securing Quality, Efficacy and Safety of Products Including Pharmaceuticals and Medical Devices of Japan (the “Pharmaceutical and Medical Device Act”), no person may explicitly or implicitly, advertise, describe or circulate false or exaggerated statements regarding the name, manufacturing process, efficacy and effects or performance of pharmaceuticals, quasi-pharmaceutical products, cosmetics, medical devices or regenerative medicine products. When we handle medical advertisements through LINE Healthcare service, we are subject to the Pharmaceutical and Medical Device Act.

 

Item 4.C.

Organizational Structure

The following table sets out the jurisdictions of incorporation and our ownership interests of our significant subsidiaries as of December 31, 2019:

 

Name

  

Jurisdiction of

incorporation

   Percentage of

ownership

 

LINE Fukuoka Corp.

   Japan      100.0%  

LINE Pay Corporation

   Japan      100.0%  

LINE Financial Corporation

   Japan      100.0%  

LVC Corporation(1)

   Japan      90.0%  

LINE Ventures Global Limited Liability Partnership

   Japan      100.0%  

LINE Ventures Japan Limited Liability Partnership

   Japan      100.0%  

LINE Digital Frontier Corporation

   Japan      70.0%  

LINE Credit Corporation(2)

   Japan      51.0%  

LINE Securities Corporation(3)

   Japan      51.0%  

Gatebox Inc. (4)

   Japan      55.1%  

LINE Plus Corporation

   Korea      100.0%  

LINE Friends Corporation

   Korea      100.0%  

NemusTech Co., Ltd. (5)

   Korea      100.0%  

LINE Taiwan Limited

   Taiwan      100.0%  

LINE Biz+ Taiwan Limited

   Taiwan      70.0%  

LINE Financial Taiwan Limited

   Taiwan      100.0%  

LFG HOLDINGS LIMITED

   Hong Kong (China)      100.0%  

LINE Financial Asia Corporation Limited

   Hong Kong (China)      100.0%  

LINE Company (Thailand) Limited(6)

   Thailand      50.0%  

LINE SOUTHEAST ASIA CORP. PTE. LTD.

   Singapore      100.0%  

LINE MAN Corporation PTE. LTD(7)

   Singapore      100.0%  

LINE Friends (Shanghai) Commercial Trade Co., Ltd

   China      100.0%  

LINE Bank Preparatory Corporation(8)

   Japan      51.0%  

LINE VIETNAM JOINT STOCK COMPANY(9)

   Vietnam      99.1%  

 

(1)

As a result of capital injections by Nomura executed in October 2019, LINE and its subsidiaries’ ownership in LVC Corporation decreased from 100.0% to 90.0%.

(2)

As a result of capital injections by Mizuho, LINE Financial Corporation and Orient Corporation executed in May 2019, LINE and its subsidiaries’ ownership in LINE Credit Corporation decreased from 100.0% to 51.0%.

(3)

As a result of capital injections by LINE Financial Corporation and Nomura executed in January 2019, LINE and its subsidiaries’ ownership in LINE Securities Corporation (renamed from LINE Securities Preparatory Corporation) decreased from 100.0% to 51.0%. As the amount of LINE Securities Corporation’s share capital exceeds LINE’s unconsolidated share capital, LINE Securities Corporation became a specified subsidiary as defined under Article 19, Paragraph (10), Item (iii) of the Japanese Cabinet Office Ordinance on Disclosure of Corporate Affairs, etc.”

(4)

LINE and its subsidiaries acquired additional interests of Gatebox Inc. in June 2019. As a result, the share of LINE and its subsidiaries to Gatebox Inc. increased from 51.0% to 55.1%.

(5)

NemusTech Co., Ltd. became a wholly owned subsidiary of the Company as a result of our additional interests acquisition.

(6)

LINE and its subsidiaries’ ownership in LINE Company (Thailand) Limited is 50.0%, but it holds 90.9% of the voting rights. Accordingly, LINE Company (Thailand) Limited is included in the scope of consolidation for LINE and its subsidiaries’ consolidated financial statements.

 

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(7)

LINE and its subsidiaries established LINE MAN Corporation PTE. LTD, a wholly-owned subsidiary, in September 2019.

(8)

LINE Bank Preparatory Corporation was established in May 2019. LINE Financial Corporation, a subsidiary of the Company, holds a 51.0% ownership interest and Mizuho holds a 49.0% ownership interest in LINE Bank Preparatory Corporation.

(9)

As a result of the third-party allotment executed by LINE VIETNAM JOINT STOCK COMPANY, the ownership of LINE and its subsidiaries increased from 98.8% to 99.1%.

For further details on our significant subsidiaries, see Note 30 of the notes to our annual consolidated financial statements.

 

Item 4.D.

Property, Plants and Equipment

As of December 31, 2019, we had ¥25,024 million of property and equipment and ¥54,337 million of right-of-use assets, which primarily consisted of our servers and networking equipment and leased office facilities in Japan and other countries, including approximately 19,799 square meters for our corporate headquarters in Tokyo, Japan.

 

Item 4A.

Unresolved Staff Comments

We do not have any unresolved comments from the SEC staff regarding our periodic reports under the Exchange Act.

 

Item 5.

Operating and Financial Review and Prospects

 

Item 5.A.

Operating Results

Overview

We are a leading global platform for mobile messaging and communication services, content distribution and life and financial services. Our mobile messaging application, which is the foundation of our “messaging services” and operates on all major mobile operating systems, enables our users to communicate through free instant messaging, Stickers 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 creative content and services that satisfy our users’ individual needs for access to information and entertainment, such as mobile games and music, through our “content services,” as well as connected solutions that aim to satisfy increasingly sophisticated day-to-day needs of LINE users and further enhance their lives and financial welfare, including fintech services such as mobile payments and other financial services offered on the LINE platform, through our “life and financial services.” 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 while creating value for advertisers by connecting them with their target audience using the LINE platform.

We believe LINE is the leading mobile messaging application in Japan, Thailand and Taiwan in terms of the number of users, and we have obtained substantial numbers of users in other parts of Asia, including Indonesia. We have achieved this growth through active marketing of LINE as well as customizing our content offerings to suit local preferences and needs. We believe the scale and growth of our user base in many countries provide us with powerful network effects, whereby LINE becomes more valuable with more users and creates additional incentives for existing users to encourage new users to join and to stay connected to their circle of friends. 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.

 

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We generate revenue in a variety of ways and from various participants active on our global platform. Our revenues are primarily generated from our advertising products and services, LINE Games and Stickers. While our revenue growth prior to 2016 was led primarily by LINE Games and Stickers, our revenue growth in 2017, 2018 and 2019 was primarily driven by our advertising products and services, particularly the growth of our “display ads.” We generated revenues of ¥167,147 million in 2017, ¥207,182 million in 2018 and ¥227,485 million in 2019, representing revenue growth of 24.0% from 2017 to 2018 and 9.8% from 2018 to 2019.

Prior to and during our fiscal year ended December 31, 2017, we had a single reportable segment. On January 31, 2018, our board of directors approved the establishment of two reportable segments, consisting of our “core business” segment and our “strategic business” segment, in response to the expansion of our business and evolution of our business strategy.

Our reportable segments currently consist of:

 

   

Our “core business” segment that includes:

 

   

“Advertising” consisting of (i) “display advertising” that utilizes our various communication and content offerings, such as Smart Channel, Timeline, LINE NEWS and LINE TODAY, (ii) “account advertising” products and services such as LINE Official Accounts, Sponsored Stickers and LINE Point Ads and (iii) “other advertising” products and services such as LINE Part-Time Job, livedoor and Matome; and

 

   

“Communication, content and others” consisting of (i) “communication” products and services such as Stickers and Themes created by third parties and sold on LINE Creators Market as well as Stickers and Themes created by us, (ii) “content” products and services such as LINE Games, LINE PLAY, LINE Manga, LINE MUSIC and LINE Fortune, and (iii) “others” consisting of miscellaneous products and services.

 

   

Our “strategic business” segment that includes:

 

   

“LINE Friends” products and services mainly consisting of sales of LINE characters merchandise; and

 

   

“Others” primarily consisting of fintech businesses (including LINE Pay and other financial services delivered through the LINE platform), the LINE Clova AI platform, blockchain-related initiatives and e-commerce. This segment also included LINE Mobile until April 2018, when LINE MOBILE, the provider of MVNO services, started to be accounted for as an associate under the equity method rather than as a consolidated subsidiary.

As described in “Item 3. Key Information—Recent Development—The Planned Transaction,” Z Holdings Corporation and we have announced certain strategic initiatives that Z Holdings Corporation and we currently intend to execute as an integrated group after the consummation of the Planned Transaction. However, until Z Holdings Corporation and we receive the required regulatory approvals to conduct the Planned Transaction, Z Holdings Corporation and we intend to act as independent businesses, though subject to certain constraints set forth in the Business Integration Agreement. For a description of such contractual restrictions, see “Item 10.C—Material Contracts—Business Integration Agreement.”

We will be adversely affected in 2020 by the outbreak of the COVID-19 disease caused by the SARS-CoV-2 coronavirus and the measures that governments are taking to combat it. For example, the results of operations of our LINE Friends business have been adversely affected by the outbreak of the virus in China and Korea and the government measures taken in response, due to such factors as the manufacturing operations in

 

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those countries having been halted as well as the decrease in the number of customers visiting our offline stores in such countries. In addition, if stock prices suffer a sustained decline on account of the COVID-19 outbreak and government measures in response to it, we will likely need to record valuation losses on our equity investments in our listed subsidiaries or our listed equity-method associates. As the outbreak and the response to it are still unfolding, and we are still in the process of assessing their current and potential future impact, the extent of their impact on our financial condition and results of operations is uncertain. However, depending on such factors as the duration of the outbreak, the impact may be significant.

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 promotion;

 

   

competition;

 

   

investment in talent; and

 

   

seasonal fluctuations.

User Growth

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. MAUs for the months indicated were as follows:

 

     For the month of  
     Mar.
2017
     Jun.
2017
     Sep.
2017
     Dec.
2017
     Mar.
2018
     Jun.
2018
     Sep.
2018
     Dec.
2018
     Mar.
2019
     Jun.
2019
     Sep.
2019
     Dec.
2019
 
     (in millions)  

Japan

     68        70        71        73        75        76        78        79        80        81        82        83  

Thailand

     42        41        42        42        42        43        44        44        44        44        45        45  

Taiwan

     20        20        20        20        21        21        21        21        21        21        21        21  

Indonesia

     41        38        35        32        27        24        22        20        19        18        16        15  

Changes in MAUs affect 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. From our inception, we experienced our largest user growth in Japan, Thailand, Taiwan and Indonesia. For example, our aggregate MAUs in Japan, Thailand and Taiwan were 135 million in December 2017, 144 million in December 2018 and 149 million in December 2019. Despite such growth, the growth rate of our users in such markets has declined over time as we achieved higher penetration

 

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rates in those markets. In Indonesia, we have experienced a decrease in the number of our MAUs starting in the second quarter of 2017 primarily due to intensified competition in that market, and our MAUs in Indonesia were 32 million in December 2017, 20 million in December 2018 and 15 million in December 2019. We strive to retain active users as well as pursue MAU growth in our key markets. 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 represented approximately 79% of our MAUs in our four largest markets of Japan, Taiwan, Thailand and Indonesia in December 2019. Our average DAUs represented approximately 86% of our MAUs in Japan alone, our largest market, in December 2019.

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. These metrics have decreased in recent years due to a general decline in our global MAUs. Such metrics for the months indicated were as follows:

 

    For the month of  
    Mar.
2017
    Jun.
2017
    Sep.
2017
    Dec.
2017
    Mar.
2018
    Jun.
2018
    Sep.
2018
    Dec.
2018
    Mar.
2019
    Jun.
2019
    Sep.
2019
    Dec.
2019
 
    (in millions)  

Daily average number of messages sent.

    4,602       4,609       4,500       4,157       4,214       4,220       4,136       4,004       4,100       4,030       4,036       3,908  

Daily average number of messages received

    22,894       24,597       24,588       23,464       23,163       23,899       23,414       22,624       23,470       23,403       23,773       22,144  

Daily average number of Stickers sent

    441       433       413       381       403       411       389       374       379       378       365       350  

In July 2019, we launched a subscription package for Stickers, in which we offer users the right to use a large collection of Stickers for a flat monthly fee. Depending on the impact that this has on our users’ spending patterns for Stickers, total revenue from Stickers may decrease, as any revenues from such subscription packages may not offset decreases in revenues from traditional sales of Stickers. A decline in the popularity of our Stickers, or the failure to maintain revenues from our Stickers business, would negatively affect our business, financial condition and results of operations.

 

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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, although MAUs of LINE Games have generally declined in recent years in line with a decline in global MAUs. The MAUs of LINE Games for the months indicated were as follows:

 

     For the month of  
     Mar.
2017
     Jun.
2017
     Sep.
2017
     Dec.
2017
     Mar.
2018
     Jun.
2018
     Sep.
2018
     Dec.
2018
     Mar.
2019
     Jun.
2019
     Sep.
2019
     Dec.
2019
 
     (in millions)  

MAUs of LINE Games(1)

     26        23        22        20        19        16        19        18        17        16        15        15  

 

(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 our advertising products and services as well as LINE Games and Stickers. 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.

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.

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 total MPUs and MPUs of LINE Games for the months indicated:

 

     For the month of  
     Mar.
2017
     Jun.
2017
     Sep.
2017
     Dec.
2017
     Mar.
2018
     Jun.
2018
     Sep.
2018
     Dec.
2018
     Mar.
2019
     Jun.
2019
     Sep.
2019
     Dec.
2019
 
     (in millions)  

Total MPUs(1)

     8.5        8.4        8.1        9.5        8.6        7.9        7.8        9.6        8.1        8.0        7.4        8.9  

MPUs of LINE Games(2)

     1.4        1.3        1.2        1.1        1.1        1.0        1.2        1.1        1.1        1.0        0.9        0.9  

 

(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.

 

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We also review various performance indexes, including the number of LINE Official Accounts for account ads, impressions for display ads and page views for our portal ads, to evaluate trends in monetization through our advertising services and products. Impressions are viewings of display ads by users while they access our products and services for which we typically generate revenues. Because our display ads are sold through either a bid-based CPM or CPC pricing model in which the advertiser pays for qualifying impressions or click-through volume, the number of paid impressions displayed is an indicator of our ability to monetize our users’ viewing of advertisements on the LINE platform. The following table sets forth the number of total impressions on the LINE platform for the quarterly periods indicated:

 

     For the three months of  
     Jan.-Mar.
2018
     Apr.-Jun.
2018
     Jul.-Sep.
2018
     Oct.-Dec.
2018
     Jan.-Mar.
2019
     Apr.-Jun.
2019
     Jul.-Sep.
2019
     Oct.-Dec.
2019
 
     (in millions)  

Total impressions

     17,671        21,167        23,265        23,568        26,291        37,653        44,208        54,583  

In recent years, an increasing portion of our revenues has been generated through such monetization. A breakdown of our advertising revenues by major category for the years ended December 31, 2017, 2018 and 2019, with the figures for the years ended December 31, 2017 restated to reflect the bifurcation of our reportable segments (see “—Overview”), is as follows:

 

     For the year ended December 31,  
     2017     2018     2019  
     Amount      %     Amount      %     Amount      %  
     (in millions of yen, except percentages)  

Advertising:

               

LINE advertising

               

Display advertising(1)

   ¥ 26,609        35.0   ¥ 36,221        33.5   ¥ 49,655        39.8

Account advertising(2)

     38,929        51.3       56,714        52.4       62,654        50.2  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Sub-total

     65,538        86.3       92,935        85.9       112,309        90.0  

Other advertising(3)

     10,433        13.7       15,302        14.1       12,533        10.0  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   ¥ 75,971        100.0   ¥ 108,237        100.0   ¥ 124,842        100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

________________

(1)

Primarily consists of revenues from display ads posted on Smart Channel, Timeline, LINE NEWS, LINE TODAY and other content offerings on the LINE platform, including LINE Manga and LINE BLOG.

(2)

Primarily consists of revenues from LINE Official Accounts, Sponsored Stickers and LINE Point Ads.

(3)

Primarily consists of revenues from advertising services offered on LINE Part-Time Job, livedoor and Matome. The operations of LINE Part-time Job were consolidated starting in April 2018.

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 72.6%, 71.6% and 73.2% of our revenues in Japan in 2017, 2018 and 2019, 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 LINE Official Accounts, Sponsored Stickers, LINE Point Ads and display ads posted on Timeline. 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.

For a discussion of the impact of the adoption of IFRS 15 on revenue recognition for our advertising products and services, see “Item 5.B. Liquidity and Capital Resources—Critical Accounting Judgments, Estimates and Assumptions—Revenue Recognition—Revenue Recognition for Stickers, Sponsored Stickers, LINE Point Ads and Advertising Services.”

 

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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.

In 2019, we launched various new products and services to further enhance the LINE platform, in particular in fintech-related businesses. In order to diversify the payment options available to our LINE Pay users, we have continued to make significant investments in promoting our LINE Pay mobile payment services by enhancing our payment infrastructure that provides settlement through QR and other barcodes, NFC and LINE Pay Cards. In June 2019, we launched LINE Score, a service that combines big data collected from the LINE platform with user-provided information to create a credit score. In August 2019, we launched LINE Pocket Money in partnership with Mizuho and Orient Corporation to provide a personal unsecured loan service that determines the terms of a user’s loan based on such user’s credit score generated by LINE Score, as well as LINE Securities in partnership with Nomura to provide a new securities brokerage and securities investment consultation service available on the LINE platform. Furthermore, in January 2020, we announced that starting from April 2020, LINK, the base digital token for our blockchain ecosystem, will be available to users in Japan.

We are also continuing to expend significant time and resources in enhancing our capabilities in AI. For example, in July 2019, we launched LINE BRAIN, which offers AI technologies developed by LINE to other companies, and in September 2019, we launched LINE Car Navigation, a voice-controlled navigation application. See “Item 4.B. Business Overview—Our Products and Services.” We plan to continue to pursue collaboration opportunities with third parties to develop additional content services as well as life and financial services to be offered on the LINE platform that are designed to further enrich our users’ daily lives.

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 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, as well as product placements in television shows as our primary advertising channels, and we continually assess the effectiveness of such channels to ensure that we utilize the most suitable channel for each of the various types of products and services we aim to promote. Additionally, during 2019, we actively promoted our mobile settlement service through LINE Pay by providing LINE Points as a reward, with the amount of LINE Points provided depending on the amounts users paid via LINE Pay. Our marketing expenses, which consist primarily of costs related to advertising on mass media (primarily television advertising), and advertising on mobile applications and promotion costs relating to the LINE Points reward, but excluding personnel-related costs of our marketing staff, were ¥15,477 million, ¥20,311 million and ¥33,022 million in 2017, 2018 and 2019, 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. In 2020, while maintaining discipline by assessing the qualitative and quantitative return on the costs, we expect to continue investing in marketing and promotional efforts for our services. Our quarterly marketing expense has fluctuated in the past and will fluctuate in the future.

 

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Competition

We compete against many companies in different industries and markets to attract and engage users and for advertiser spending. 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.

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 6,998 full-time employees as of December 31, 2019, compared to 5,595 as of December 31, 2018 and 4,344 as of December 31, 2017. We expect to increase our personnel for the foreseeable future as we continue to invest in the growth of our business, in particular fintech-related services and AI 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 as well as equity-settled and cash-settled employee stock ownership plans for our directors and employees. For a discussion of our share-based payments, see Note 27 of the notes to our annual consolidated financial statements and “Item 6.E. Share Ownership.” The stock options vest upon the satisfaction of service conditions. In connection with our share-based payments, we recorded expenses of ¥2,686 million, ¥2,528 million and ¥4,249 million in 2017, 2018 and 2019, 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 between September and March 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 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.

Recently Adopted Accounting Standard — The Impact of IFRS 16

Starting on January 1, 2019, we adopted IFRS 16, a new accounting standard issued by the IASB that governs the accounting for leases and related contractual rights and obligations. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of lease contracts for lessees and lessors. Under IFRS 16, lessees no longer make a distinction between finance and operating leases as required under International Accounting Standard (“IAS”) 17 Leases (“IAS 17”), and apply a single accounting model. At the commencement date of a lease, lessees recognize the right-of-use assets and lease liabilities. The right-of-use assets are measured at cost and shall comprise (i) the amount of the initial measurement of the lease liability, (ii) any lease payments made at or before the commencement date, less any lease incentives received, (iii) any

 

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initial direct cost and (iv) the cost of restoring the underlying asset to the original condition. The lease liabilities are initially measured at discounted present value of the lease payment payable within the lease term. Subsequently, lessees are required to recognize separately the interest expense on the lease liability and the depreciation expense on the right-of-use assets. The right-of-use assets are depreciated on a straight-line basis over the shorter of the estimated useful life of the assets or the lease term. Lessors accounting under IFRS 16 remains substantially unchanged from IAS 17.

We have adopted IFRS 16 by applying the modified retrospective method permitted by IFRS 16 and recognized the cumulative amount of the impact as of January 1, 2019 upon adoption of the standard. Accordingly, the financial information related to periods prior to January 1, 2019 contained in our annual consolidated financial statements have not been restated for the adoption of IFRS 16 and continue to be presented under IAS 17.

Upon the adoption of IFRS 16, we recognized lease liabilities for leases previously classified as operating leases under IAS 17. The lease liabilities were measured at the present value of the remaining lease payments, discounted at the incremental borrowing rate as of January 1, 2019. We elected not to apply IFRS 16 to the agreements that were not identified as containing a lease component applying IAS 17 and IFRIC 4.

Determining whether an Arrangement contains a Lease.

 

     (In millions of yen)  

Commitments for operating lease as of December 31, 2018 as disclosed in the consolidated financial statements of the Company and its subsidiaries.

     58,688  

(Less) Short-term leases recognized as an expense on a straight-line basis

     (545

(Less) Leases of low-value assets recognized as an expense on a straight-line basis

     (29

(Less) Lease contracts commenced on or after January 1, 2019

     (3,092
  

 

 

 

Lease liabilities before discounts

     55,022  

Discounts using the incremental borrowing rate of the Company and its subsidiaries

     (7,009
  

 

 

 

Lease liabilities recognized at January 1, 2019

     48,013  
  

 

 

 

For a discussion of the adoption of IFRS 16 and impact on our annual consolidated financial statements, see Note 3 (30) of the notes to our annual consolidated financial statements.

 

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Major Components of Our Results of Operations

Revenues

A breakdown of our revenues by major category and changes therein for the years ended December 31, 2017, 2018 and 2019, based on the identification of our reportable segments (see “—Overview”), with the figures for the years ended December 31, 2017 and 2018 restated to reflect such bifurcation, is as follows:

 

     For the year ended December 31,  
     2017     2018     2019  
     Amount      %     Amount      %     Amount      %  
     (in millions of yen or percentages)  

Core business segment:

               

Advertising:

               

Display advertising(1)

   ¥ 26,609        15.9   ¥ 36,221        17.5   ¥ 49,655        21.8

Account advertising(2)

     38,929        23.3       56,714        27.4       62,654        27.5  

Other advertising(3)

     10,433        6.2       15,302        7.4       12,533        5.5  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Sub-total

     75,971        45.4       108,237        52.2       124,842        54.9  

Communication, content and others:

               

Communication(4)

   ¥ 30,225        18.1     ¥ 28,527        13.8     ¥ 28,319        12.4  

Content(5)

     40,144        24.0       38,237        18.5       38,344        16.9  

Others

     2,816        1.7       3,397        1.6       5,206        2.3  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Sub-total

     73,185        43.8       70,161        33.9       71,869        31.6  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total core business segment

     149,156        89.2       178,398        86.1       196,711        86.5  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Strategic business segment:

               

LINE Friends(6)

     12,299        7.4       19,579        9.5       19,189        8.4  

Others(7)

     5,692        3.4       9,205        4.4       11,585        5.1  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total strategic business segment

     17,991        10.8       28,784        13.9       30,774        13.5  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   ¥ 167,147        100.0   ¥ 207,182        100.0   ¥ 227,485        100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(1)

Primarily consists of revenues from display ads posted on Timeline, Smart Channel and LINE NEWS.

(2)

Primarily consists of revenues from LINE Official Accounts, Sponsored Stickers and LINE Point Ads.

(3)

Primarily consists of revenues from livedoor, NAVER Matome and LINE Part-Time Job. The operations of LINE Part-Time Job were consolidated starting in April 2018.

(4)

Primarily consists of sales of Stickers and Themes created by third parties and sold on LINE Creators Market as well as Stickers and Themes created by us.

(5)

Primarily consists of sales of virtual items of LINE Games.

(6)

Primarily consists of revenues from sales of LINE characters merchandise.

(7)

Primarily consisting of e-commerce. This segment also included LINE Mobile until April 2018, when LINE MOBILE, the provider of MVNO services, started to be accounted for as an associate under the equity method rather than as a consolidated subsidiary.

For a discussion of how we recognize revenues for different services, see Note 3(22) of the notes to our annual consolidated financial statements.

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, (ii) licensing fees paid to owners of third-party content used in Stickers and other products and

 

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services on a revenue-sharing basis, and (iii) fees paid to third party providers for news articles that are displayed on the LINE platform.

 

   

Sales commission expenses. Sales commission expenses are primarily fees paid to advertising agencies that provide services related to the creation and delivery of advertising products offered on the LINE platform. Prior to our adoption of IFRS 15 starting on January 1, 2018, such expenses were included under “authentication and other service expenses” because such amounts were considered immaterial. In accordance with IFRS 15, however, we now recognize revenue on a gross basis prior to separating out the portion to be paid to advertising agencies, which increased our advertising revenue as well as expenses to be paid to such advertising agencies (see “Item 5.B. Liquidity and Capital Resources—Critical Accounting Judgments, Estimates and Assumptions—Revenue Recognition—Revenue Recognition for Stickers, Sponsored Stickers, LINE Point Ads and Advertising Services”). Given such increase, sales commission expenses are now presented separately, with the remaining “authentication and other services expenses” re-categorized as “outsourcing and other service expenses” (see “—Outsourcing and other service expenses” below).

 

   

Employee compensation expenses. Employee compensation expenses are our personnel-related costs, includin