Company Quick10K Filing
Line
20-F 2019-12-31 Filed 2020-03-27
20-F 2019-12-31 Filed 2020-04-14
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-1.1 a51530935ex1_1.htm
EX-1.3 a51530935ex1_3.htm
EX-12.1 a51530935ex12_1.htm
EX-12.2 a51530935ex12_2.htm
EX-13.1 a51530935ex13_1.htm
EX-13.2 a51530935ex13_2.htm

Line Earnings 2017-03-24

Balance SheetIncome StatementCash Flow

20-F 1 a51530935.htm LINE KABUSHIKI KAISHA 20-F


As filed with the Securities and Exchange Commission on March 31, 2017

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, 2016
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
Name of Each Exchange on Which Registered
   
American Depositary Shares, each representing
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, 2016, there were 217,775,500 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  Yes ☐    No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non‑accelerated filer.  See definition of "accelerated filer and large accelerated filer" in Rule 12b‑2 of the Exchange Act.  (Check one):
Large accelerated filer ☐     Accelerated filer ☐    Non‑accelerated filer ☒
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing.
U.S. GAAP ☐     IFRS ☒   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
 
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i

 
92
92
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102
102
104
110
110
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112
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114
114
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114
115
115
115
115
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118
119
119
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120
 

ii


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;
"paid impression" refers to the display of an advertisement to a user while accessing our products and services for which we generate revenues;
"Japanese yen," "yen" or "¥" refers to the legal currency of Japan;
"Korea" refers to the Republic of Korea;
"Korean won," "Won" or "" refers to the legal currency of Korea;
"LINE," "we," "us," "our company," "the Company" or "our" refers to LINE Corporation and its consolidated subsidiaries taken as a whole, as well as the messaging application and other products of LINE Corporation;
"messages" refers to text messages, voice messages, Stickers and photo, video, voice and text files sent and received, as well as free voice and video calls made and received, in each case using the LINE messaging application from either mobile devices or personal computers or using any LINE Game or any other LINE application from mobile devices;
"monthly active users" or "MAUs" in a given month refers to the number of user accounts that (i) accessed the LINE messaging application or any LINE Game through mobile devices; (ii) sent messages through the LINE messaging application from personal computers; or (iii) sent messages through any other LINE application from mobile devices, in each case at least once during that month;
"monthly paying users" or "MPUs" in a given month refers to the number of user accounts that made (i) a payment for Stickers, Themes or LINE Out on the LINE messaging application through mobile devices or personal computers or (ii) a payment relating to any LINE Game through mobile devices, in each case at least once during that month;
"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.
iii


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:
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;
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.
iv

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.
 
v


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
Item 3.A.    Selected Financial Data
The consolidated statement of financial position data as of December 31, 2015 and 2016 and the consolidated statement of profit or loss data for the years ended December 31, 2014, 2015 and 2016 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, 2012 and 2013 and the consolidated statement of profit or loss data for the years ended December 31, 2012 and 2013 have been derived from our audited consolidated financial statements and related notes not included in this annual report. These audited consolidated financial statements and the related notes have been prepared in accordance with IFRS as issued by the IASB.
The information set forth below is not necessarily indicative of the results of future operations.
 
1

Consolidated Statement of Profit or Loss Data
 
 
 
For the year ended December 31,
 
 
 
2012
   
2013
   
2014
   
2015
   
2016
 
   
(in millions of yen, except share and per share data)
 
Revenues and other operating income:
                             
Revenues 
 
¥
6,414
   
¥
39,586
   
¥
86,366
   
¥
120,406
   
¥
140,704
 
Other operating income
   
94
     
69
     
296
     
474
     
5,892
 
Total revenues and other operating income
   
6,508
     
39,655
     
86,662
     
120,880
     
146,596
 
                                         
Operating expenses:
                                       
Payment processing and licensing expenses
   
(1,878
)
   
(9,606
)
   
(20,598
)
   
(28,742
)
   
(29,781
)
Employee compensation expenses
   
(3,929
)
   
(8,490
)
   
(18,289
)
   
(35,572
)
   
(39,445
)
Marketing expenses
   
(599
)
   
(17,202
)
   
(18,069
)
   
(16,596
)
   
(11,833
)
Infrastructure and communication expenses
   
(383
)
   
(2,537
)
   
(4,492
)
   
(7,712
)
   
(7,770
)
Authentication and other service expenses
   
(1,058
)
   
(4,914
)
   
(7,874
)
   
(12,133
)
   
(14,394
)
Depreciation and amortization expenses
   
(805
)
   
(1,330
)
   
(2,370
)
   
(3,733
)
   
(5,100
)
Other operating expenses
   
(1,282
)
   
(3,313
)
   
(8,555
)
   
(14,432
)
   
(18,376
)
Total operating expenses
   
(9,934
)
   
(47,392
)
   
(80,247
)
   
(118,920
)
   
(126,699
)
Profit (loss) from operating activities
   
(3,426
)
   
(7,737
)
   
6,415
     
1,960
     
19,897
 
Finance income 
   
70
     
67
     
86
     
71
     
87
 
Finance costs 
   
(73
)
   
(39
)
   
(137
)
   
(106
)
   
(65
)
Share of loss of associates
   
     
(243
)
   
(167
)
   
(205
)
   
(833
)
Gain (loss) on foreign currency transactions, net
   
234
     
(373
)
   
66
     
(520
)
   
(43
)
Other non-operating income
   
     
7
     
     
157
     
9
 
Other non-operating expenses
   
(37
)
   
     
     
(1,887
)
   
(1,062
)
Profit (loss) before tax from continuing operations
   
(3,232
)
   
(8,318
)
   
6,263
     
(530
)
   
17,990
 
Income tax benefits (expenses)
   
(14
)
   
648
     
(7,151
)
   
146
     
(8,904
)
Profit (loss) for the period from continuing operations
   
(3,246
)
   
(7,670
)
   
(888
)
   
(384
)
   
9,086
 
Profit (loss) from discontinued operations, net of tax
   
2,832
     
1,279
     
2,892
     
(7,588
)
   
(1,982
)
Profit (loss) for the period
 
¥
(414
)
 
¥
(6,391
)
 
¥
2,004
   
¥
(7,972
)
 
¥
7,104
 
                                         
Attributable to:
                                       
The shareholder of the Company
   
(214
)
   
(764
)
   
4,207
     
(7,582
)
   
6,763
 
Non-controlling interests(1)
   
(200
)
   
(5,627
)
   
(2,203
)
   
(390
)
   
341
 
                                         
Earnings per share:
                                       
Basic profit (loss) for the
period attributable to the
shareholder of the Company
 
¥
(1.36
)
 
¥
(4.36
)
 
¥
24.05
   
¥
(43.33
)
 
¥
34.84
 
Diluted profit (loss) for the
period attributable to the
shareholder of the Company
   
(1.36
)
   
(4.36
)
   
22.14
     
(39.12
)
   
31.48
 
Earnings per share from continuing operations
                                       
Basic profit (loss) from
continuing operations
attributable to the
shareholder of the Company
   
(19.33
)
   
(11.67
)
   
7.52
     
0.04
     
45.05
 
Diluted profit (loss) from
continuing operations
attributable to the
shareholder of the Company
   
(19.33
)
   
(11.67
)
   
6.92
     
0.03
     
40.70
 
Earnings per share from discontinued operations
                                       
Basic profit from
discontinued operations
attributable to the
shareholder of the Company
   
17.97
     
7.31
     
16.53
     
(43.37
)
   
(10.21
)
Diluted profit from
discontinued operations
attributable to the
shareholder of the Company
   
17.97
     
7.31
     
15.22
     
(39.15
)
   
(9.22
)
                                         
Basic weighted average shares outstanding
   
157,565,943
     
174,992,000
     
174,992,000
     
174,992,000
     
194,083,995
 
                                         
Diluted weighted average shares outstanding
   
157,565,943
     
174,992,000
     
190,024,846
     
193,797,566
     
214,874,008
 
____________
(1)
For each of the years ended December 31, 2013 and 2014, the non-controlling interests were mainly held by NAVER Corporation, our shareholder.
 
2

Consolidated Statement of Financial Position Data
 
                               
 
 
As of December 31,
 
 
 
2012
   
2013
   
2014
   
2015
   
2016
 
 
 
(in millions of yen)
 
Cash and cash equivalents 
 
¥
7,153
   
¥
13,362
   
¥
20,254
   
¥
33,652
   
¥
134,698
 
Trade and other receivables 
   
7,961
     
11,625
     
24,223
     
27,248
     
28,167
 
Property and equipment 
   
7,504
     
8,102
     
9,656
     
10,501
     
9,029
 
Total assets 
   
33,085
     
46,522
     
85,664
     
122,159
     
256,089
 
Total liabilities 
   
13,148
     
34,206
     
73,153
     
104,626
     
95,066
 
Total shareholder's equity 
   
19,937
     
12,316
     
12,511
     
17,533
     
161,023
 
Equity attributable to the
shareholder of the Company 
   
19,855
     
10,727
     
12,496
     
17,743
     
160,834
 
Equity attributable to non-
controlling interests 
   
82
     
1,589
     
15
     
(210
)
   
189
 

The table below sets forth, for the periods and dates indicated, the noon buying rate in New York City for cable transfers in yen as certified for customs purposes by the Federal Reserve Bank of New York, expressed in yen per US$1.00. We do not intend to imply that the yen or U.S. dollar amounts referred to herein could have been or could be converted into U.S. dollars or yen, as the case may be, at any particular rate, or at all.
 
                         
 
 
Noon Buying Rate
 
Period 
 
Average (1)
   
Period End
   
High
   
Low
 
 
 
(¥ per US$1.00)
 
2012 
   
80.10
     
86.64
     
86.64
     
76.11
 
2013 
   
98.00
     
105.25
     
105.25
     
86.92
 
2014 
   
106.63
     
119.85
     
121.38
     
101.11
 
2015 
   
121.02
     
120.27
     
125.58
     
116.78
 
2016 
   
109.16
     
116.78
     
121.06
     
100.07
 
September 
   
101.78
     
101.21
     
104.18
     
100.34
 
October 
   
103.91
     
105.07
     
105.40
     
101.54
 
November 
   
108.44
     
114.34
     
114.34
     
103.02
 
December 
   
116.00
     
116.78
     
118.32
     
113.50
 
2017  (through March 24)
 
113.75
   
111.03
   
117.68
   
111.03
 
January 
   
114.87
     
112.72
     
117.68
     
112.72
 
February 
   
112.91
     
112.06
     
114.34
     
111.74
 
March (through March 24)
 
113.46
   
111.03
   
115.02
   
111.03
 
____________

(1) Calculated by averaging the exchange rates on the last business day of each month during the respective periods.
 
Item 3.B.     Capitalization and Indebtedness
Not applicable
Item 3.C.     Reasons for the Offer and Use of Proceeds
Not applicable
3

Item 3.D.     Risk Factors
If we fail to retain existing users or add new users, or if our users decrease their level of engagement with LINE, our revenue, financial results and business may be significantly harmed.
The size of our user base and our users' level of engagement are critical to our success. From our inception, we experienced our largest user growth in Japan, Taiwan, Thailand and Indonesia. While we achieved significant user growth in other parts of the world in 2013 and 2014, beginning in early 2015, we have refocused our marketing efforts on key countries in line with our increased emphasis on monetization in markets where we have achieved leading market positions. While this effort has led to a continued increase in our monthly active users ("MAUs") in the four key countries of Japan, Taiwan, Thailand and Indonesia as well as overall MAUs, it has at the same time contributed to a significant decrease in total MAUs outside of the four key countries, and there may be further decreases in the future. Our financial performance has been and will continue to be significantly determined by our success in adding, retaining and engaging active users. The growth rate of our active users has declined over time as the size of our active user base has increased and as we achieved higher penetration rates in our key markets. Our business performance will also become increasingly dependent on our ability to increase levels of user engagement in current and new markets. If people do not perceive our products and services to be useful, reliable or trustworthy, we may not be able to attract or retain users or otherwise maintain or increase the frequency, duration or level of their engagement. A number of other providers of mobile messaging applications and online companies that achieved early popularity have seen the sizes of their user bases or levels of engagement subsequently decline, in some cases precipitously.
Any number of factors could negatively affect user retention, growth or engagement, including if:
we are unable to continue to offer products and services that users find engaging, that work with a variety of mobile operating systems and networks, and that achieve a high level of market acceptance, particularly in markets that we are targeting for expansion;
users increasingly engage with competing products or services, particularly communication tools and mobile games;
we are unable to provide a compelling and intuitive user experience and environment, particularly relating to the quality, volume, design and layout of the content and advertisements delivered on the LINE platform;
we fail to provide adequate customer service to users or advertisers or maintain relationships with key platform partners such as mobile game developers;
there are increased user concerns related to privacy and information sharing, safety or security;
 
there are adverse changes in our products or services that are mandated by legislation, regulatory authorities or legal proceedings;
technical or other problems prevent us from delivering our products and services in a rapid and reliable manner or otherwise negatively affect the user experience; or
we fail to maintain our brand image or our reputation is damaged.
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There is no guarantee that we will not experience erosion of our active user base or decline in engagement levels. A decrease in user retention, growth or engagement could reduce our direct sales to users and render LINE less attractive to our platform partners and advertisers, thereby reducing our revenues from them, which may have a material and adverse impact on our business, financial condition and results of operations.
We may not be successful in our efforts to monetize our products and services.
Our ability to monetize our user base and user engagement is critical to our business and financial performance. We currently generate a substantial portion of our revenues from our advertising products and services, including Official Accounts, Sponsored Stickers, LINE Point Ads, Timeline Ads and LINE NEWS Ads, as well as LINE Games and Stickers. A substantial majority of these revenues come from our operations in Japan. We plan to continue to invest in product development and explore additional monetization opportunities in our largest markets such as Japan, Taiwan, Thailand and Indonesia and in other markets, but there is no guarantee that these efforts will be successful. Furthermore, there is no assurance that new products and services we introduce, such as our services related to daily life, will generate the level of revenues we anticipate. In addition, our monetization efforts could have a negative effect on user engagement if such efforts discourage users from using our existing products and services. If our monetization efforts are not as successful as we anticipate, we may not be able to maintain or grow our revenue and our financial condition and results of operations could be adversely affected.
Users and advertisers in certain markets are not as familiar with new forms of digital advertising, such as our Official Accounts, Sponsored Stickers and LINE Point Ads. In newer markets, we are investing to convince users and advertisers of the benefits of our products and services. However, we expect that monetizing efforts in many of these new markets may require a significant investment of time and resources, which may not result in sufficient, or any, returns to recover such investment.
Our business operates in an industry that is highly competitive, and competition presents an ongoing threat to the success of our business.
We compete against various companies to attract and engage users, some of which have greater financial resources and substantially larger user bases. We face direct competition from mobile messaging service providers such as Facebook's WhatsApp and Messenger, Tencent's WeChat, Snapchat, Telegram Messenger and BlackBerry Messenger, as well as mobile messaging services for specific operating platforms such as Apple's iMessage. We also face significant competition in almost every aspect of our business, including from companies such as Facebook, Google, Snap, Twitter and Yahoo Japan, which offer a variety of social network services and products as well as online advertising services. We also face competition from game companies, mobile telecommunications companies, e-commerce companies, music streaming companies and other internet-related companies that offer products and services that may compete with specific features of the LINE messaging service or other applications that we offer. We also compete with traditional and online media businesses for a share of advertisers' budgets and in the development of the tools and systems for managing and optimizing advertising campaigns. As we introduce new products and our existing products evolve, or as other companies introduce new products and services, we may become subject to additional competition.
 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.
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We may not be successful if we are not able to develop new products and services in a timely and cost-effective manner that address rapidly evolving user preferences, and any new products and services we develop may expose us to new risks.
We compete in a highly competitive industry characterized by rapidly changing products and services, evolving industry standards and continual improvements in performance characteristics and product features. Rapidly evolving user preferences may lead to certain products and services becoming less competitive, or even obsolete. Accordingly, our success depends greatly on our ability to anticipate and respond to emerging user preferences and demands by ensuring continuing and timely development of new, as well as enhancements to existing, products and services. In order to respond to such preferences and demands, we may develop and introduce new products and services, including in areas where we have little or no prior development or operating experience. For example, we offer services related to daily life such as LINE Part-time Job, our mobile service connecting users seeking part-time employment with companies that need part-time employees, that are designed to satisfy our users' daily needs.
We have previously developed and introduced new products and services that have failed to perform as anticipated, and we may do so in the future. For example, in 2013, we launched LINE Mall, an online marketplace, in Japan as a strategic initiative to broaden the spectrum of products and services offered on our platform. LINE Mall allowed our users to shop for goods and services from registered sellers, and we purchased a limited amount of inventory of goods through sourcing agents, engaged third-party delivery services and sold such goods directly to our users. However, we failed to develop a niche market for LINE Mall in the highly competitive mobile e-commerce market, and we closed LINE Mall on May 31, 2016.
Some of our strategic initiatives may not directly or immediately generate revenue, but we expect they will enhance our attractiveness to users, platform partners and advertisers as well as contribute to increasing our active user base. Our new products and services may bring us into contact, directly or indirectly, with entities that are not within our traditional customer base or result in competing with entities that are our existing business partners. Such business activities expose us to new risks, including additional regulatory scrutiny as well as credit-related and other operational risks. For example, we commenced operations as a Mobile Virtual Network Operator ("MVNO") in September 2016 to provide stable and affordably priced plans in Japan. We commenced sales of our SIM cards on Amazon Japan in November 2016 and in select electronics retail stores in Japan in March 2017. However, we cannot be certain that our MVNO service will be profitable or competitive in the long term. As we will utilize the wireless communication networks of a third-party mobile phone operator, the success of our MVNO service will also largely depend on their wireless facilities, wireless network technologies and government authorizations. There can be no assurance that we will succeed in developing products and services that eventually become widely accepted, or that we will be able to timely release products and services that are commercially viable. Our inability to do so would have an adverse impact on our business, financial condition and results of operations.

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 75.8%, 70.4% and 71.7% of our revenues in Japan in 2014, 2015 and 2016, respectively. We expect to continue to derive a substantial portion of our revenues from Japan in the near future. In general, a higher proportion of LINE users in Japan are paying users than LINE users in other countries, and our continuing growth will be dependent, at least in part, on maintaining or increasing revenues from users in Japan. In recent quarters, our active user growth rate in Japan has slowed, and our business performance in Japan will become increasingly dependent on our ability to increase the level of user engagement and our ability to further monetize users' engagement with LINE. Our current business and future growth could be materially and adversely affected if we experience a decline in users or user engagement in Japan.
Due to the importance of the Japanese market to our business, we are also subject to macroeconomic risks specific to Japan. See "— A downturn in macroeconomic conditions may result in reduced demand for our products and services."
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We generate a substantial portion of our revenues from our advertising products. The loss of our advertisers, reduction in spending by our advertisers or failure to achieve market acceptance of new advertising products and services could negatively affect our business.
We generate a substantial portion of our revenues from third parties advertising on LINE through their Official Accounts, Sponsored Stickers, LINE Point Ads, Timeline Ads, as well as from advertising on our livedoor and NAVER Matome ("Matome") portals. In the second half of 2016, we also generated an increasing portion of our advertising revenues from our LINE NEWS Ads. As is common in the industry, our advertisers typically do not have long-term advertising commitments with us. Many of our advertisers spend only a relatively small portion of their overall advertising budget with us. In addition, some of our advertisers may view our products, such as Official Accounts, as experimental or unproven. Advertisers may not continue to do business with us, or they may reduce the prices or spending they are willing to pay to advertise with us, if we do not deliver advertisements and other commercial content in an effective manner, or if they do not believe that their investment in our advertising products and services will generate a competitive return relative to alternative methods of advertising.
In addition, our ability to increase our revenue will depend in large part on our ability to create successful new advertising products as well as products and services on our platform that further enhance the media value for our advertising business. We may introduce new and unproven advertising products and services, using advertising technology with which we have little or no prior development or operating experience. 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;
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.
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The occurrence of any of these or other factors could result in a reduction in demand for advertisements, which may reduce the prices we receive for our advertisements or cause advertisers to stop advertising with us altogether, either of which would negatively affect our business, financial condition and results of operations.
We generate a substantial portion of our revenues from a small number of our mobile games and rely on third-party game developers. We must continue to offer games that attract and retain a significant number of users, or otherwise our business, financial condition and results of operations could be negatively affected.
We offer various games on our LINE platform and they accounted for a significant portion of our revenues in 2014, 2015 and 2016. We rely primarily on third-party game developers for the games offered on the LINE platform. As of December 31, 2016, we offered 47 games, of which 42 games were developed by third-party game developers and five games were developed by us. Accordingly, we believe that maintaining successful partnerships with, and the ability to attract and select from, third-party game developers are critical to our success. Existing and prospective mobile game developers may not be successful in developing games that create and maintain user engagement. Additionally, although our general policy is to enter into new contractual arrangements with third-party game developers to become the exclusive distributor of their games in a particular market, to the extent such arrangements are not yet in place, developers may choose to provide their content on other platforms, including mobile platforms controlled by our competitors, rather than offering them on the LINE platform. Our failure to maintain good relationships with third-party game developers or attract new developers could adversely affect our business, financial condition and results of operations.
Historically, we have depended on a small number of games for a majority of our mobile game revenues, and we expect that this dependence will continue for the foreseeable future. Our growth depends on our ability to consistently launch new games, whether developed internally or by third-party game developers, that achieve significant popularity, as well as to upgrade popular games with new features that our users find attractive. It is difficult to anticipate user preferences or demand, particularly as we procure new games in new genres or new markets, and constant enhancement requires the investment of significant resources. For example, in recent quarters MAUs and monthly paying users ("MPUs") of LINE games have decreased, and there is no guarantee that these metrics will improve over time. 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 substantial portion of our revenues from our sale of Stickers, which is an evolving market, and if the popularity of Stickers declines from its current level in Japan or is not widely replicated in other markets, our business and future growth could be negatively affected.
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We generate a substantial portion of our revenues from the sale of Stickers featuring characters developed by us as well as licensed from third parties, including our users who design and offer Stickers on Creators Market. The sale of Stickers is an evolving market, and the growth of the market for Stickers and the level of demand for, and market acceptance of, our Stickers are subject to a high degree of uncertainty. In particular, a substantial majority of revenues from the sale of our Stickers has been derived from sales in Japan, and there can be no assurance that such products will achieve a similar level of market acceptance elsewhere. Over time, users in Japan may also lose interest in purchasing new Stickers. Accordingly, revenue growth from our sale of Stickers depends to a large extent on our ability to consistently launch new and different types of Stickers that achieve significant popularity and effectively respond to changes in consumer demographics and public tastes and preferences. We also depend on third-party character developers and licensors for content that accounts for a substantial portion of our Sticker sales, and we expect that this dependence will continue for the foreseeable future. A decline in the popularity of our Stickers would negatively affect our business, financial condition and results of operations.
We plan to continue expanding our global operations into markets in which we have limited operating experience and, as a result, may become subject to increased business and economic risks, which could adversely affect our business, financial condition and results of operations.
We believe LINE is the leading mobile messaging application in Japan, Taiwan and Thailand in terms of number of users, and we have obtained substantial numbers of users in other parts of the world, including Indonesia, Iran, Saudi Arabia, the United States, Korea, Vietnam, Malaysia, Egypt, Hong Kong and India. We expect to continue to expand our global operations into new countries and to provide our offerings in additional languages. However, expansion of our operations abroad may be difficult due to the presence of established competitors in such markets. In addition, managing our business and expanding our operations globally require considerable management attention and resources and are subject to the particular challenges of supporting a rapidly growing business in an environment of multiple languages, cultures, customs, legal and regulatory systems and commercial markets. Global expansion has required and will continue to require us to invest significant funds and other resources, and there can be no assurance that we will successfully achieve our growth objectives.
Operating globally subjects us to new risks and may increase risks that we currently face, including risks associated with:
providing an engaging user experience while operating in different languages and cultures, and localizing our products, services, content and features to ensure that they are culturally attuned to the markets where they are offered;
increased competition from mobile applications and internet services that have strong positions in particular markets and may continue to expand their geographic footprint;
different and potentially lower levels of user growth, user engagement and demand for online advertising in new and emerging geographies, resulting in greater difficulty in monetizing our products and services;
recruiting and retaining talented and capable employees in foreign countries and maintaining our company culture across all of our offices;
different levels of telecommunications infrastructure in developing countries that may create challenges in offering our products and services;
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.
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If we are unable to manage the complexity of our global operations successfully, our business, financial condition and results of operations could be adversely affected.
If we are not able to maintain and enhance our LINE brand, or if events occur that damage our reputation and brand, our relationships with our users, platform partners and advertisers may be harmed, which may negatively affect our business, financial condition and results of operations.
Since its introduction in June 2011, LINE has rapidly grown into a global platform for mobile messaging services and content distribution used in approximately 230 countries, and we believe that the LINE brand has significantly contributed to the success of our business. We also believe that maintaining and enhancing our brand is critical to expanding our user base, platform partners and advertisers. Many of our new users are referred by existing users, and therefore we strive to ensure that our users are satisfied with our products and services and otherwise remain favorably inclined toward LINE. Maintaining and enhancing our brand will depend largely on our ability to continue to provide simple, user-friendly, reliable and innovative products and services, which we may not do successfully. We may introduce new products or terms of service that users do not like, which may negatively affect our brand. It may also negatively affect our brand if users do not have a positive experience using our platform partners' applications offered on LINE as well as websites linked with LINE. We have in the past experienced, and we may continue to experience, media, legislative or regulatory scrutiny of our decisions regarding user privacy or other issues, including our measures to protect minors, which may adversely affect our reputation and brand. We may also fail to provide adequate customer service, which could erode confidence in our brand. Our brand may also be negatively affected by attacks from our competitors, by negative publicity about the actions of users that are deemed to be hostile, illegal or inappropriate to other users, by third-party content providers acting inappropriately with respect to the LINE platform, by users acting under false identities, by any regulatory developments designed to address such risks, or due to legal proceedings. Maintaining and enhancing our brand may require us to make substantial investments and these investments may not be successful. If we fail to successfully promote and maintain the LINE brand or if we incur excessive expenses in this effort, our business, financial condition and results of operations may be adversely affected.
We rely primarily on Apple App Store and Google Play as the channels for downloads of LINE and applications offered on the LINE platform as well as processing of payments, and any deterioration in our relationship with either of them may negatively impact our business.
We rely primarily on Apple App Store and Google Play as the channels for downloads of LINE and applications offered on the LINE platform as well as the processing of payments for our products and services. We expect that we will continue to rely on Apple App Store and Google Play for downloads of our applications as well as most of the payment processing for our products and services. Accordingly, we believe that maintaining successful partnerships with Apple and Google is critical to our success.
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The operating policies of Apple or Google have an impact on the accessibility of our products and services. 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 profit for the year of ¥2,004 million in 2014 but recorded loss for the year of ¥7,972 million in 2015. In 2016, we recorded profit for the year of ¥7,104 million. Although our revenues have grown rapidly, increasing from ¥86,366 million in 2014 to ¥120,406 million in 2015 and ¥140,704 million in 2016, our revenue growth rate has slowed recently and may do so in the future due to a variety of factors. We believe that our future revenue growth will depend on, among other factors, our ability to attract new users while retaining current users, increase user engagement and advertisement engagement, increase our brand awareness, compete effectively, maximize our sales efforts, demonstrate a positive return on investment for advertisers, successfully develop and operate new products and services and expand globally. Accordingly, you should not rely on the revenue growth of any prior quarterly or annual period as an indication of our future revenue growth.
We expect our operating expenses to increase in future periods as we continue to expend substantial financial resources on:
sales and marketing;
global expansion;
our technology infrastructure;
attracting and retaining talented employees;
strategic opportunities, including commercial relationships, acquisitions and capital injections;
operation of newly developed or newly acquired businesses; and
general administration, including personnel costs and legal and accounting expenses related to being a public company.
These investments, while increasing our expenses, may not result in an increase in revenues or growth in our business. For example, our marketing expenses have from time to time outpaced the growth of our revenues over the same period, which have materially impacted our results of operations. If we are unable to achieve adequate revenue growth and to manage our expenses, we may incur significant losses in the future.
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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;
convince advertisers of the benefits of our advertising products and services compared to alternative forms of advertising;
develop and deploy new features, products and services in a timely manner and the market acceptance of such offerings;
cost-effectively manage and grow our operations;
attract and maintain platform partners' interest in building on the LINE platform;
attract, retain and motivate talented management and employees, particularly software engineers, designers and product managers;
process, store, protect and use personal data in compliance with governmental regulations, contractual obligations and other obligations related to privacy and security; and
defend ourselves against litigation and regulatory, intellectual property, privacy or other claims.
Failure to adequately address the risks and challenges associated with this market may adversely affect our business, financial condition and results of operations.
Our user growth and engagement on mobile devices, which are required to access and use most of our products and services, depend upon effective operation with mobile operating systems that we do not control.
We are dependent on the interoperability of LINE with popular mobile operating systems, such as Android and iOS, and, to a lesser extent, web browsers, such as those for Windows and Mac OS, that we do not control. Any changes in such operating systems or web browsers that degrade the functionality of our products or services or give preferential treatment to our competitors' products or services could adversely affect usage of our products and services. In addition, if the number of platforms for which we develop our products or services expands, it will result in an increase in our operating expenses.
We may not be successful in developing or maintaining relationships with key participants in the mobile telecommunications industry or in developing products that operate effectively with mobile operating systems, networks or standards. In the event that it becomes more difficult for our users to access and use LINE on their mobile devices, or if our users choose not to access or use LINE on their mobile devices or use mobile devices that do not offer access to LINE, our user growth and user engagement could be harmed, and our business, financial condition and results of operations could be adversely affected.
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If we or our users experience disruptions in mobile telecommunications or internet services or if mobile telecommunications and internet service providers are able to block, degrade or charge for access to our products and services, we could incur additional expenses and the loss of users and advertisers.
We depend on the ability of our users and advertisers to access mobile telecommunications services and the internet. Currently, this access is provided by companies that have significant market power in the mobile, broadband and internet access marketplaces, including incumbent mobile telecommunications companies, telephone companies, cable companies, government-owned service providers, device manufacturers and operating system providers, any of whom could take actions that degrade, disrupt or increase the cost of user access to our products or services, which would, in turn, negatively impact our business. The adoption of any laws or regulations that adversely affect the growth, popularity or use of mobile devices or the internet or disruption of our services in important markets for any political or other non-technical reasons could decrease the demand for, or the usage of, our products and services, increase our cost of doing business and adversely affect our business, financial condition and results of operations. We also rely on other companies to maintain reliable network systems that provide adequate speed, data capacity and security to us and our users. As mobile devices and the internet continue to experience growth in the number of users, frequency of use and amount of data transmitted, the mobile telecommunications and internet infrastructure that we and our users rely on may be unable to support the demands placed upon them. The failure of the operations of mobile telecommunications or internet infrastructure services that we or our users rely on, even for a short period of time, could undermine our operations, and our business, financial condition and results of operations could be adversely affected.
Certain of our user metrics are subject to inherent uncertainties in measurement, and real or perceived inaccuracies in such metrics may harm our reputation and negatively affect our business.
We use our internal data to calculate our MAUs, DAUs and MPUs. See "Conventions Used in This 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.
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.
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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. Any financial or other difficulties these providers face may also adversely affect our business, and we exercise little control over these providers, which increases our vulnerability to problems with the services they provide. In the event of a significant issue with the third-party network infrastructure supporting our network traffic, some of our products and services may become inaccessible or users may experience difficulties accessing our products and services. Any disruption or failure in our infrastructure could hinder our ability to handle existing or increased traffic on our platform, which could significantly harm our business.
As the number of our users increases and as our users generate and transmit increasing volumes of content, including photos, videos and music, we may be required to expand and adapt our technology and infrastructure to continue to reliably store and service such content. It may become increasingly difficult to maintain and improve the performance of our products and services, especially during peak usage times, as our products and services become more complex and our user traffic increases. In addition, we cannot provide assurance that we will be able to expand our data center infrastructure to meet user demand in a timely manner, or on favorable economic terms. If our users are unable to readily access LINE or access is disrupted, users may seek other service providers instead, and may not return to LINE or use LINE as often in the future. This would negatively impact our ability to attract users, platform partners and advertisers and increase engagement of our users. We expect to continue to make significant investments to maintain and improve the capacity, capability and reliability of our infrastructure. To the extent that we do not effectively address capacity constraints, upgrade our systems as needed or continually develop our technology and infrastructure to accommodate actual and anticipated changes in our users' needs, our business, financial condition and results of operations may be harmed.
If our security measures are breached, or if our products and services are subject to attacks that disrupt or deny the ability of users to access our products and services, our products and services may be perceived as not being secure and users and advertisers may curtail or stop using our products and services.
Our products and services involve the storage and transmission of large amounts of users' and advertisers' confidential information, and security breaches expose us to a risk of loss of this information, which may lead to improper use or disclosure of such information, ensuing potential liability and litigation, any of which could harm our reputation and adversely affect our business. From time to time, we experience cyber-attacks of varying degrees. Although there has been no material instance where an unauthorized party was able to obtain access to our data or our users' or advertisers' data, there can be no assurance that we will not be vulnerable to cyber-attacks in the future. Our security measures may also be breached due to employee error, malfeasance or otherwise. Given the rapid development and scope of the services we offer, including those developed in conjunction with third parties, instituting appropriate access controls and safeguards across all our services is challenging. Furthermore, outside parties may attempt to fraudulently induce employees, users or advertisers to disclose sensitive information in order to gain access to our data or our users' or advertisers' data or accounts, or may otherwise obtain access to such data or accounts. In addition, some platform partners may store information provided by our users through applications on the LINE platform or websites linked with LINE. If these third parties or platform partners fail to adopt or adhere to adequate data security practices or fail to comply with our terms and policies, or in the event of a breach of their networks, our users' data may be improperly accessed or disclosed.
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Since our users and advertisers may use their LINE accounts to establish and maintain online identities, unauthorized communications from LINE accounts that have been compromised may damage their reputations and brands as well as ours. Any such breach or unauthorized access could result in significant legal and financial exposure, damage to our reputation and a loss of confidence in the security of our products and services, which could have an adverse effect on our business, financial condition and results of operations. Because the techniques used to obtain unauthorized access, disable or degrade service or sabotage systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived breach of our security occurs or the market perception of the effectiveness of our security measures is harmed, we could lose users and advertisers and we may incur significant legal and financial exposure, including legal claims and regulatory fines and penalties.
Our financial results are likely to continue to fluctuate from quarter to quarter, which makes our period-to-period results volatile and difficult to predict.
We emphasize growth and the increase in engagement of our user base over short-term financial results. Due in part to such focus, our quarterly financial results have fluctuated in the past and are likely to fluctuate in the future. As a result, you should not rely upon our past quarterly financial results as indicators of future performance. You should also take into account the risks and uncertainties frequently encountered by companies in rapidly evolving markets. Our financial results in any given quarter or fiscal period can be influenced by numerous factors occurring in a particular period, many of which we are unable to predict or are outside of our control, including:
the development and introduction of new products or services by us or our competitors, particularly the launching of mobile games and Stickers and their market acceptance;
our ability to attract and retain advertisers;
the growth of revenue sources as well as adjustments in fees charged to users and advertisers;
increases in marketing, sales and other operating expenses that we may incur to grow and expand our operations and to remain competitive;
seasonal fluctuations in spending by our advertisers, especially in Japan where a majority of companies end their fiscal year on March 31 and advertising spending is traditionally stronger in our fourth and first quarters due to year-end effects and companies trying to spend their advertising budgets before the close of their fiscal year;
introduction of new products and/or services, which may lead to higher expenses;
changes in the way online advertising is priced;
non-recurring transactions and related accounting and tax implications therefrom;
unforeseen contingencies, such as adverse litigation judgments, settlements or other litigation-related costs;
fluctuations in currency exchange rates and changes in the proportion of our revenue and expenses denominated in foreign currencies; and
changes in business or macroeconomic conditions.
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We may not be able to effectively manage our growth, which would harm our business and profitability.
We continue to experience rapid growth in our personnel and operations, which will continue to place significant demands on our management and operational and financial infrastructure. We face significant competition for qualified staff, particularly software engineers, designers and product managers, from other internet and high-growth technology companies, and we may not be able to hire new employees quickly enough to meet our needs. As we continue to grow, we are subject to the risks of over-hiring, overcompensating our 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.
Our LINE mobile payment service may subject us to additional regulatory requirements and other risks that could be costly and difficult to comply with or that could harm our business.
As part of our efforts to diversify payment options available to LINE users, we launched LINE Pay, our mobile payment service application, in December 2014. LINE Pay enables our users to register their credit cards and 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 plan to expand the scope of LINE Pay by selectively incorporating it into our applications and exploring local partnership and joint venture opportunities in order to enhance the convenience of our users. For example, we offer "Rabbit LINE Pay" in Thailand through a joint venture with BSS Holdings Group, provider of Rabbit smart cards for mass transit and retail customers. In Japan, we offer LINE Pay Card through our partnership with JCB Co., Ltd., which enables users to use LINE Pay Card for purchases both online and offline anywhere JCB credit cards are accepted using funds deposited to the user's LINE Pay account.
Depending on how our products and services as well as payment processes evolve, we may become subject to a variety of laws and regulations in Japan and elsewhere, including those governing money transmission, payment settlement, e-commerce, electronic funds transfers, anti-money laundering, identification and counter-terrorist financing. In some jurisdictions, the application or interpretation of these laws and regulations is not clear. We are registered as a funds transfer service provider and issuer of prepaid payment instruments for third-party businesses in Japan through LINE Pay Corporation, our subsidiary engaged in mobile payment service, which will generally require us to demonstrate compliance with many domestic laws in these areas. In the event that we are found to be in violation of any such legal or regulatory requirements, we may be subject to monetary fines or other penalties or sanctions such as a cease and desist order, or we may be required to make product changes, any of which could have an adverse effect on our business and financial results.
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In addition, we may be subject to a variety of additional risks as a result of providing mobile payment services, including:
increased operational costs and diversion of management time and effort and other resources to deal with fraudulent or failed transactions or customer disputes;
the impact on our relationships with existing payment processing service providers;
increased capital costs in building out the infrastructure;
potential fraudulent or otherwise illegal activity by users, platform partners, employees or third parties;
leakage of customers' personal information and concerns over the use and security of collected information;
restrictions on the investment of consumer funds used to transact payments; and
additional disclosure and reporting requirements.
We depend on key senior management to operate our business and execute our business strategy, and if we are unable to attract, retain and motivate our senior management and other key personnel, our operations may be negatively affected.
Our ability to execute our strategy efficiently is dependent upon contributions from our key senior management. Our future success will depend on the continued service of our key executive officers and managers who possess significant expertise and knowledge of our industry. A limited number of individuals have primary responsibility for the management of our business, including our relationships with key platform partners. From time to time, there may be changes in our senior management team that may be disruptive to our business, and we may not be able to find replacement key personnel in a timely manner. In addition, acquiring and retaining qualified personnel, such as systems engineers and designers, will be necessary to our achieving sustainable growth. Any loss or interruption of the services of these individuals, whether from retirement, loss to competitors or other causes, or failure to attract and retain other qualified new personnel, could prevent us from effectively executing our business strategy, cause us to lose key platform partner relationships, or otherwise materially affect our operations.
A downturn in macroeconomic conditions may result in reduced demand for our products and services.
Our business is sensitive to global economic conditions and depends on demand from our user base. 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. Although there have been signs of global economic recovery in recent years, this recovery may be fragile and partially attributable to the effects of various government economic stimulus efforts. The sustainability of the global recovery is uncertain, particularly after the effects of these various government stimulus programs subside. The global financial markets continue to experience significant volatility as a result of, among other things, the slowdown of economic growth and financial instability in China and other major emerging market economies. In addition, economic and political instability in various countries in the Middle East and Northern Africa, including Iraq, Syria, Yemen and Egypt, as well as in Ukraine and Russia, as well as increased uncertainty in the wake of a referendum in the United Kingdom in June 2016, in which the majority of voters voted in favor of an exit from the European Union ("Brexit"), have resulted in an increase in volatility in the global financial markets. The outlook for the global economy in 2017 and beyond remains uncertain.
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In recent years, the economic indicators in Japan, our largest market in terms of revenue and user base, have also shown mixed signs, and future growth of the Japanese economy is subject to many factors beyond our control. The current administration of Prime Minister Shinzo Abe, formed in late December 2012, has introduced policies to combat deflation and promote economic growth. In addition, the Bank of Japan introduced a plan for quantitative and qualitative monetary easing in April 2013 and announced a negative interest rate policy in January 2016. However, the long-term impact of these policy initiatives on Japan's economy remains uncertain. 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 both the short and long term, is also uncertain. In addition, the occurrence of large-scale natural disasters, such as the March 2011 Great East Japan Earthquake and the related Fukushima Daiichi nuclear disaster, as well as an increase in the consumption tax rate, which took place in April 2014 with a further increase expected in October 2019, may also adversely impact the Japanese economy, potentially impacting consumer spending and advertising spending by businesses. Any future deterioration of the Japanese or global economy may result in a decline in consumption that would have a negative impact on demand for our products and services and their prices.
Our acquisitions and investments may not be successful in achieving their intended goals and could harm our business, financial condition and results of operations.
Our success will depend, in part, on our ability to expand our products and services, and grow our business in response to changing technologies, user and advertiser demands, and competitive pressures. In some circumstances, we may determine to do so through the acquisition of complementary businesses and technologies rather than through internal development. The identification of suitable acquisition candidates can be difficult, time-consuming and costly, and we may not be able to successfully complete identified acquisitions. We have limited experience acquiring other businesses, and our ability to acquire and integrate other companies and assets, particularly larger or more complex companies, products, or technologies, in a successful manner remains subject to uncertainty. Any completed acquisitions may not achieve their intended goals and could be viewed negatively by users, platform partners, advertisers or investors. For example, we acquired assets of MixRadio, a mobile music streaming service, from Microsoft in March 2015, but after careful assessment of the overall performance of MixRadio, the financial challenges posed by the music streaming market, changing market conditions, an increase in the cost of maintaining the business and a shift in our overall priorities, our board of directors approved the abandonment of our MixRadio business in February 2016, which abandonment became effective on March 21, 2016. As a result, we retrospectively classified the MixRadio operations as a discontinued operation in our consolidated financial statements as of and for the year ended December 31, 2015 and recognized impairment charges of ¥4.6 billion in the fourth quarter of 2015. We also incurred additional restructuring costs of ¥1,165 million related to employee termination benefits and ¥126 million for the termination of office lease contracts, for the year ended December 31, 2016 as a result of the abandonment of the MixRadio operations. For more information, see Note 11 and Note 23 of the notes to our annual consolidated financial statements.
The risks we face in connection with acquisitions also include:
diversion of management time and focus from operating our business to addressing acquisition and integration challenges;
challenges associated with the integration of product development and sales and marketing functions of the acquired company;
challenges associated with the retention of key employees from the acquired company;
cultural and operational challenges associated with integrating employees from the acquired company into our organization;
challenges associated with the integration of the acquired company's accounting, management information, human resources and other administrative systems;
the need to implement or improve controls, procedures, and policies at a business that prior to the acquisition may have lacked effective controls, procedures and policies;
liability for activities of the acquired company before the acquisition, including intellectual property infringement claims;
unanticipated write-offs or charges or impairment of goodwill; and
litigation or other claims in connection with the acquired company, including claims from terminated employees, customers, former shareholders or other third parties.
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Our failure to address these risks or other problems encountered in connection with our past or future acquisitions or investments could cause us to fail to realize the anticipated benefits of these acquisitions or investments, cause us to incur unanticipated liabilities, or could otherwise harm our business generally. Future acquisitions could also result in dilutive issuances of our equity securities or the incurrence of debt, contingent liabilities, amortization expenses or incremental operating expenses.
We may require additional capital to support our operations and the growth of our business, and we cannot be certain that financing will be available on reasonable terms when required, or at all.
From time to time, we may need additional financing to operate or grow our business. 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. Our ability to obtain additional financing, if and when required, will depend on investor and lender demand, our operating performance, the condition of the capital markets and other factors, and we cannot assure you that additional financing will be available to us on favorable terms, or at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support the operation and growth of our business could be significantly impaired and our operating results may be adversely affected.
Our business is subject to complex and evolving Japanese and foreign laws and regulations. These laws, regulations and actions are subject to change and uncertain interpretation, and could result in claims, changes to our business practices, monetary penalties, increased cost of operations or declines in user growth, user engagement or advertising engagement, restricted access to LINE or otherwise harm our business.
We are subject to a variety of laws and regulations in Japan and elsewhere that involve matters central to our business, including privacy, rights of publicity, data protection and protection of personal information, content regulation, intellectual property, competition, protection of minors, consumer protection and taxation. Many of these laws and regulations are still evolving and could be interpreted or applied in ways that could limit our business, particularly in the new and rapidly evolving industry in which we operate. The introduction of new products or services in our existing markets and the expansion of our business to other countries may subject us to additional laws and regulations.
A number of proposals are pending before legislative and regulatory bodies that could significantly affect our business. For example, there have been a number of recent legislative proposals in Japan that would impose new obligations in areas such as privacy and liability for copyright infringement by third parties that could affect liabilities associated with websites that publish user-generated content. An amendment to the Act on the Protection of Personal Information of Japan (the "Act on the Protection of Personal Information") was enacted in September 2015 and is scheduled to be put into full effect on May 30, 2017. This amendment includes establishment of a new regulatory authority and introduction of new regulations on handling of anonymous personal data and transfer of personal information to foreign countries.
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We collect personal information from our users and may expand our collection of personal information in order to comply with new and additional regulatory demands or we may independently decide to do so. Having additional personal information may subject us to additional regulation, and governmental regulators have been applying increased scrutiny to social media companies in this respect. Additionally, if third parties we work with, such as advertisers or platform partners, violate applicable laws or our policies, such violations may also put our users' information at risk and could in turn have an adverse effect on our business. Further, it is difficult to predict how existing laws and regulations will be applied to our business and the new laws and regulations to which we may become subject, and it is possible that they may be interpreted and applied in a manner that is inconsistent with our practices. For example, we believe that our products and services are not subject to regulations under the Act on Regulation on Soliciting Children by Using Opposite Sex Introducing Service on Internet of Japan, but there can be no assurance that we will not be subject to certain processes, administrative sanctions, fines or restrictions under such regulations in the future. Existing and proposed laws and regulations in any jurisdiction can be costly to comply with and can delay or impede the development of new products and services, result in negative publicity, significantly increase our operating costs, require significant time and attention of management and technical personnel and subject us to inquiries or investigations, claims or other remedies, including fines or demands that we modify or cease existing business practices.
The Payment Services Act of Japan (the "Payment Services Act") requires entities that engage in business activities involving advance payments from customers using prepaid payment instruments, such as virtual currencies, to set aside for such customers amounts covering at least 50% of the total amount of the unused amounts or credits represented by such instruments issued as of the end of either the first or third quarter of any year (if such total amount is more than ¥10 million), either by making a deposit or by entering into guarantee or trust agreements, as well as to refund any remaining balance of virtual currencies issued if those entities stop selling such virtual currencies. 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, in China, message transmission service on our LINE messaging application, along with those of certain other non-Chinese service providers, was abruptly blocked on July 1, 2014. As of the date of this annual report, our online services generally remain blocked in China, although we understand that certain users are able to access the service from China. We do not know when our services will be completely restored. If our services are not completely restored, our efforts to expand our user base in the rapidly evolving, highly competitive Chinese market may be significantly harmed. In addition, China's State Internet and Information Office has issued rules requiring users of mobile messaging services who open new "public accounts," which allow the accountholder to post messages to broad groups, to register using their real names and agree to follow certain guidelines regarding how they use their public accounts. While these rules may not directly impact our platform or services, increased focus on mobile messaging services by the Chinese government may result in other restrictions on access to our services. In the event that access to LINE is restricted, in whole or in part, in one or more other countries, our ability to retain or increase our user base and user engagement may be adversely affected, we may not be able to maintain or grow our revenue as anticipated, and our business, financial condition and results of operations could be adversely affected.
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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;
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.
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Our intellectual property rights are valuable, and our inability to protect them could reduce the value of our products, services and brand.
Our trade secrets, trademarks, copyrights, patents and other intellectual property rights are important assets for us. We rely on, and expect to continue to rely on, a combination of confidentiality and license agreements with our employees, consultants and third parties with whom we have relationships, as well as trademark, trade dress, domain name, copyright, trade secret and patent laws, to protect our brand and other intellectual property rights. However, various events outside of our control may pose a threat to our intellectual property rights, as well as to our products, services and technologies. For example, we may fail to obtain effective intellectual property protection, or effective intellectual property protection may not be available in every country in which our products and services are available. In particular, the legal regimes relating to intellectual property rights in many of the countries in which we operate are limited and it is often difficult to effectively protect and enforce such rights in those countries. Also, the efforts we have taken to protect our intellectual property rights may not be sufficient or effective, and any of our intellectual property rights may be challenged, which could result in them being narrowed in scope or declared invalid or unenforceable. There can be no assurance that our intellectual property rights will be sufficient to protect against others offering products or services that are substantially similar to ours and compete with our business.
We also rely on non-patented proprietary information and technology, such as trade secrets, confidential information, know-how and technical information. While in certain cases we have agreements in place with employees and third parties that place restrictions on the use and disclosure of this intellectual property, these agreements may be breached, or this intellectual property may otherwise be disclosed or become known to our competitors, which could cause us to lose competitive advantages resulting from this intellectual property. We are also pursuing registration of trademarks and domain names in Japan and in many jurisdictions outside of Japan. Effective protection of trademarks and domain names is expensive and difficult to maintain, both in terms of application and registration costs as well as the costs of defending and enforcing those rights. We may be required to protect our rights in an increasing number of countries, in a process that is expensive and may not be successful or which we may not pursue in every country in which our products and services are distributed or made available.
We are party to numerous agreements that grant licenses to third parties to use our intellectual property, including our trademarks. For example, some third parties distribute their content through LINE, embed LINE content in their applications, and make use of our trademarks in connection with their services. If the licensees of our trademarks are not using our trademarks properly, it may limit our ability to protect our trademarks and could ultimately result in our trademarks being declared invalid or unenforceable. There can be no assurance that we will be able to protect against the unauthorized use of our brand, trademarks or other assets. There is also a risk that one or more of our trademarks could become generic, which could result in them being declared invalid or unenforceable.
We also seek to obtain patent protection for some of our technology, and we have filed various applications in Japan and abroad for protection of certain aspects of our intellectual property and currently hold a number of issued patents in multiple jurisdictions. We may be unable to obtain patent or trademark protection for our technologies and brands, and our existing patents and trademarks, and any patents or trademarks that may be issued in the future, may not provide us with competitive advantages or distinguish our products and services from those of our competitors. In addition, any patents and trademarks may be contested, circumvented, or found unenforceable or invalid, and we may not be able to prevent third parties from infringing, diluting or otherwise violating them. Effective protection of intellectual property rights is expensive and difficult to maintain, both in 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.
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We may become party to intellectual property rights claims in the future that are expensive and time consuming to defend, and, if resolved adversely, could have a significant impact on our business.
Technology companies own large numbers of patents, copyrights, trademarks and trade secrets, and frequently enter into litigation based on allegations of infringement, misappropriation or other violations of intellectual property or other rights. Many such companies, including many of our competitors, have substantially larger patent and intellectual property portfolios than we do, which could make us a target for litigation as we may not be able to assert counterclaims against parties that sue us for patent or other intellectual property infringement. In addition, various "non-practicing entities" that own patents and other intellectual property rights often attempt to aggressively assert claims in order to extract payments from technology companies. From time to time we have received, and may receive in the future, claims from third parties which allege that we have infringed upon their intellectual property rights. Furthermore, from time to time we may introduce new products and services, including in areas where we currently do not have an offering, which could increase our exposure to patent and other intellectual property claims from competitors and non-practicing entities. Some of our agreements with advertisers, platform partners and data partners require us to indemnify them for certain intellectual property claims against them, which could require us to incur considerable costs in defending such claims, and may require us to pay significant damages in the event of an adverse ruling. Such advertisers, platform partners and data partners may also discontinue use of our products, services and technologies as a result of injunctions or otherwise, which could result in loss of revenue and adversely impact our business.
As we face increasing competition and gain an increasingly high profile, patents and other intellectual property claims against us may grow. There may be intellectual property or other rights held by others, including issued or pending patents, that cover significant aspects of our products and services, and we cannot be sure that we are not infringing or violating, and have not infringed or violated, any third-party intellectual property rights or that we will not be held to have done so or be accused of doing so in the future. Any claim or litigation alleging that we have infringed or otherwise violated intellectual property or other rights of third parties, with or without merit, and whether or not settled out of court or determined in our favor, could be time-consuming and costly to address and resolve, and could divert the time and attention of our management and technical personnel. Some of our competitors have substantially greater resources than we do and are able to sustain the costs of complex intellectual property litigation to a greater degree and for longer periods of time than we could. The outcome of any litigation is inherently uncertain, and there can be no assurance that favorable final outcomes will be obtained. In addition, plaintiffs may seek, and we may become subject to, preliminary or provisional rulings in the course of any such litigation, including potential preliminary injunctions requiring us to cease some or all of our operations. We may decide to settle such lawsuits and disputes on terms that are unfavorable to us. Similarly, if any litigation to which we are a party is resolved adversely, we may be subject to an unfavorable judgment that may not be reversed upon appeal. The terms of such a settlement or judgment may require us to cease some or all of our operations or pay substantial amounts to the other party. In addition, we may have to seek a license to continue practices found to be in violation of a third party's rights. If we are required or choose to enter into royalty or licensing arrangements, such arrangements may not be available on reasonable terms, or at all, and may significantly increase our operating costs and expenses. As a result, we may also be required to develop or procure alternative non-infringing technology or discontinue use of the technology. The development or procurement of alternative non-infringing technology could require significant effort and expense or may not be feasible. An unfavorable resolution of any disputes and litigation could adversely affect our business, financial condition and results of operations.
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Fluctuation of the value of the Japanese yen against certain foreign currencies may have a material adverse effect on the results of our operations.
Some of our foreign operations' functional currencies are not the Japanese yen, and the financial statements of such foreign operations prepared initially using their functional currencies are translated into Japanese yen. Since the currency in which sales are recorded may not be the same as the currency in which expenses are incurred, foreign exchange rate fluctuations may materially affect our results of operations. In 2014, 2015 and 2016, 24.2%, 29.6% and 28.3%, respectively, of our revenues were derived from markets outside of Japan, and we expect that an increasing portion of our revenues and expenses in the future will be denominated in currencies other than the Japanese yen. Accordingly, our consolidated financial results and assets and liabilities may be materially affected by changes in the exchange rates of foreign currencies in which we conduct our business. We strive to naturally offset our foreign exchange risk by matching foreign currency receivables with our foreign currency payables, and our overseas subsidiaries seek to conduct business transactions in the local currency of the respective market in which the transactions occur. When deemed appropriate, we also selectively use derivative contracts, primarily foreign currency forward contracts. However, there can be no assurance that our hedging activities will be successful in protecting us from adverse impacts from currency exchange rate fluctuations, and fluctuation of the Japanese yen against certain foreign currencies may have a material adverse effect on our results of operations. See "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. In addition, the determination of our worldwide provision for income taxes and other tax liabilities requires significant judgment by management, and there are many transactions where the ultimate tax determination is uncertain. Although we believe that our estimates are reasonable, the ultimate tax outcome may differ from the amounts recorded in our financial statements and may materially affect our financial results in the period or periods for which such determination is made.
Due to the global nature of our business, we are subject to trade, economic sanctions and export laws and regulations in various jurisdictions that may govern or restrict our business and we, our directors and officers, may be subject to fines or other penalties for non-compliance with applicable trade, economic sanctions and export laws and regulations.
The U.S. Department of the Treasury's Office of Foreign Assets Control ("OFAC") administers and enforces certain laws and regulations ("OFAC Sanctions") that impose restrictions upon U.S. persons regarding dealings with or related to certain countries and territories, governments, entities and individuals. Even though non-U.S. persons generally are not always directly bound to comply with OFAC Sanctions, in recent years, OFAC has asserted that such non-U.S. persons can be held liable for violations of OFAC Sanctions on various legal grounds, such as with respect to dealings in U.S. goods, services, or technology, or involving U.S. parties, causing violations by U.S. persons, or by engaging in transactions completed in part in the United States. In addition to the OFAC Sanctions, the United States maintains numerous secondary sanction programs that provide authority for the imposition of U.S. sanctions on foreign parties that engage in certain dealings with Iran and other U.S. sanctions targets regardless of whether there is a nexus to the United States. Following the occurrence on January 16, 2016 of "Implementation Day" of the Joint Comprehensive Plan of Action between the "P5+1" countries (including the United States) and Iran, pursuant to which Iran agreed to limits on its nuclear program and the P5+1 countries agreed to provide certain sanctions relief, secondary sanctions targeting Iran have been narrowed but not eliminated. For example, non-U.S. persons can still be sanctioned for engaging in dealings with certain persons on OFAC's Specially Designated Nationals ("SDN") list.
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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 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 approximately 230 countries, including some countries and regions that are the subject of trade embargos and other economic sanctions (such as Iran), and we may have individual users who are the target of sanctions. 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.
In December 2016, we had approximately four million MAUs in Iran. In addition, LINE provides Official Accounts to local Iranian celebrities and engages in promotional activities directed at users in Iran. On May 5, 2016, we launched a website containing media content directed at users in Iran. LINE Pay is available to users in Iran, Cuba, Sudan and Syria. Our business with Iran represented approximately 0.03% of our revenues for the year ended December 31, 2016. In February 2017, we established a local branch through our subsidiary, LINE PLAY Corporation. Our subsidiary, LINE Plus Corporation, has met with officials from the Government of Iran in conjunction with our business expansion efforts in Iran. In January 2017, LINE Plus Corporation entered into a two month research contract with the Iran Telecommunication Research Center (ITRC). The purpose of the research contract was for LINE to explore business opportunities in Iran and gain a better understanding of the Iranian mobile market and relevant regulatory considerations. We will not generate revenue from the contract, and we do not plan to renew the contract.
NAVER Corporation, which owns more than 80% 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, 2016, NAVER Corporation owned approximately 80.4% 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 American Depositary Shares ("ADSs").
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We also engage in a number of 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 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. Mr. Hae Jin Lee, a director and chairman of our company, also serves as a director of NAVER Corporation. In addition, one of our three corporate auditors, Mr. Jin Hee Kim, is currently an executive officer of NAVER Corporation. Such individuals have fiduciary duties to both NAVER Corporation and us under Korean and Japanese law, respectively. As a result, conflicts of interests may arise due to their dual roles, which may adversely impact our business.
The market prices of shares of our common stock and ADSs may continue to be volatile or may decline regardless of our operating or financial performance.
The market prices of shares of our common stock and ADSs may continue to 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;
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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 KLFB and timely disclosure of information required by the Tokyo Stock Exchange in our case and filings with the Korea Exchange in NAVER Corporation's case;
rumors and market speculation involving us or other companies in our industry;
actual or anticipated changes in our results of operations or fluctuations in our results of operations;
actual or anticipated developments in our business, our competitors' businesses or the competitive landscape generally;
litigation involving us, our industry or both, or investigations by regulators into our operations or those of our competitors;
developments or disputes concerning our intellectual property or other proprietary rights;
announced or completed acquisitions of businesses or technologies by us or our competitors;
new laws or regulations or new interpretations of existing laws or regulations applicable to our business;
changes in tax laws and regulations as well as accounting standards, policies, guidelines, interpretations or principles;
any significant change in our management; and
general economic conditions and slow or negative growth of our markets.
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 2016 and do not expect to be a PFIC in subsequent taxable years. PFIC status is a factual determination made annually after the close of each taxable year on the basis of the composition of our income and the value of our active versus passive assets. Because our belief is based in part on the expected market value of our equity, a decrease in the trading price of our common stock and ADSs following this offering may result in our becoming a PFIC. Additionally, the overall level of our passive assets will be significantly affected by changes in the amount of our cash, cash equivalents and securities held for investment, each of which may be classified as passive assets under the PFIC rules.
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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. income tax on gain recognized on the sale or other disposition of shares of our common stock or ADSs and on the receipt of distributions on the shares of our common stock or ADSs to the extent such distribution is treated as an "excess distribution" under the U.S. federal income tax rules. We do not intend to provide holders with the information necessary to make a "QEF election" (as described below under "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."
Substantial future sale of our common stock, or the perception that these sales 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, and the perception that these sales could occur may also depress the market prices of the shares of our common stock and ADSs. As of December 31, 2016, there were 17,321,500 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. In addition, our board of directors will be able to issue and sell additional shares of our common stock within the unissued portion of our authorized share capital, generally without any shareholder vote. Any such sales could cause the prices of the shares of our common stock and ADSs to decline.
If securities or industry analysts do not publish or cease publishing research or other reports about us, our business or our market, or if they adversely change their recommendations regarding an investment in us, the prices of the shares of our common stock and ADSs or their trading volume could decline.
The trading markets for the shares of our common stock and ADSs will be influenced by the research and other reports that securities or industry analysts may publish about us, our business, our market or our competitors. If 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.
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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 U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act"), the U.S. Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"), the Dodd-Frank Act, the listing standards of the New York Stock Exchange as applicable to a foreign private issuer, which are different in some material respects from those required for a U.S. public company, as well as the reporting requirements under the Financial Instruments and Exchange Act of Japan (the "FIEA") and the rules of the Tokyo Stock Exchange. We also 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.
In the past, we had identified material weaknesses in our internal control over financial reporting, which we have since remediated. If we fail to establish and maintain effective internal control over financial reporting in the future, the accuracy and timeliness of our financial reporting may be adversely affected, which could cause investors to lose confidence in our reported financial information and may lead to a decline in the trading price of shares of our common stock and ADSs.
The Sarbanes-Oxley Act requires, among other things, that public companies maintain effective disclosure controls and procedures and internal control over financial reporting. For example, we will be required, pursuant to Section 404 of the Sarbanes-Oxley Act ("Section 404"), to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting in the second annual report we file with the SEC. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting, as well as a statement that our independent registered public accounting firm has issued an opinion on our internal control over financial reporting.
We previously identified material weaknesses in our internal control over financial reporting as of December 31, 2013 and 2014. We have since implemented measures designed to improve our internal control over financial reporting to remediate the control deficiencies that led to our material weaknesses, including requiring a formal review of the contractual terms and conditions and a more stringent board and management approval process for any significant related party transaction and more generally, we set up an internal control team to improve our accounting and finance systems. Based on the measures taken and implemented, we have concluded that the material weaknesses identified have been remediated as of December 31, 2015.
We intend to continue to improve our internal controls over financial reporting to meet the deadline imposed by Section 404 for the filing of our annual report on Form 20-F in respect of fiscal year 2017 and anticipate that we will incur considerable costs and use significant management time and other resources in an effort to comply with Section 404. We cannot be certain, however, that additional material weaknesses will not develop or be identified. Neither our management nor independent registered public accounting firm has ever performed a comprehensive evaluation of our internal control over financial reporting in accordance with the provisions of the Sarbanes-Oxley Act because no such evaluation has been required. Any failure to achieve and maintain adequate internal control over financial reporting or to implement required, new or improved controls, or difficulties encountered in their implementation could cause us to report material weaknesses or other deficiencies in our internal control over financial reporting in the future. If we are unable to successfully remediate any material weaknesses or other deficiencies in our internal control over financial reporting, the accuracy and timing of our financial reporting may be adversely affected and investors may lose confidence in our financial reporting, and the price of shares of our common stock and ADSs may decline as a result. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the New York Stock Exchange.
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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; 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 remuneration 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 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.
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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 of 1933, as amended, but that are not properly registered or distributed pursuant to an applicable exemption from registration. The depositary is not responsible for making a distribution available to any holders of ADSs if any government approval or registration required for such distribution cannot be obtained after reasonable efforts made by the depositary. We have no obligation to take any other action to permit distributions on our common stock to holders of ADSs. This means that holders of ADSs may not receive the distributions we make on shares of our common stock if it is illegal or impractical to make them available to such holders. These restrictions may materially reduce the value of our ADSs.
Holders of ADSs may be subject to limitations on transfer of their ADSs.
ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deems it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.
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We may amend the deposit agreement without consent from holders of ADSs and, if such holders disagree with our amendments, their choices will be limited to selling the ADSs or withdrawing the underlying shares of our common stock.
We may agree with the depositary to amend the deposit agreement without consent from holders of ADSs. If an amendment increases fees to be charged to ADS holders or prejudices a material right of ADS holders, it will not become effective until 30 days after the depositary notifies ADS holders of the amendment. At the time an amendment becomes effective, ADS holders are considered, by continuing to hold their ADSs, to have agreed to the amendment and to be bound by the amended deposit agreement. If holders of ADSs do not agree with an amendment to the deposit agreement, their choices will be limited to selling the ADSs or withdrawing the underlying shares of our common stock. No assurance can be given that a sale of ADSs could be made at a price satisfactory to the holder in such circumstances.
We are incorporated in Japan, and it may be more difficult to enforce judgments obtained in courts outside Japan.
We are incorporated in Japan as a joint stock corporation with limited liability. Most of our directors are non-U.S. residents, and a substantial portion of our assets and the personal assets of our directors and corporate executive officers are located outside the United States. As a result, when compared to a U.S. company, it may be more difficult for investors to effect service of process in the United States upon us or to enforce against us, our directors or executive officers, judgments obtained in U.S. courts predicated upon civil liability provisions of the federal or state securities laws of the U.S. or similar judgments obtained in other courts outside Japan. There is doubt as to the enforceability in Japanese courts, in original actions or in actions for enforcement of judgments of U.S. courts, of civil liabilities predicated solely upon the federal and state securities laws of the United States.
Our shareholders of record on a given record date may not receive the dividend they anticipate.
The customary dividend payout practice of publicly listed companies in Japan may significantly differ from that widely followed or otherwise deemed necessary or fair in foreign markets. We may ultimately determine any dividend payment amount to our shareholders of record as of a record date, including whether we will make any dividend payment to such shareholders at all, only after such record date. For that reason, our shareholders of record on a given record date may not receive the dividends they anticipate.
 
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 sales and marketing services for the LINE platform outside of Japan, in Korea in February 2013.
In February 2013, our board of directors decided to focus our business on the operation and expansion of the LINE platform and to dispose of our Hangame business along with related entities. We disposed of all of our interest in the Hangame business along with related entities 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."
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 +81-3-4316-2000. Our English website address is http://linecorp.com/en/.
 
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.
Overview
We are a leading global platform for mobile messaging and communication services, content distribution and services related to daily life. 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 interactive content and services that satisfy our users' individual needs for access to information and entertainment such as mobile games and music through our "content services," as well as connected solutions that aim to satisfy increasingly sophisticated day-to-day needs of LINE users and further enhance their welfare, such as payment services and job posting, restaurant reservation and taxi booking services, through our "life 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, Taiwan and Thailand in terms of 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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At the heart of our platform is the LINE mobile messaging application, which enables users to communicate with family, friends and other people they care about.
We address people's basic communication needs.  We focus on serving users' everyday communication needs by supplying easy-to-use tools, including chat, voice call and video call, with reliable and secure connectivity wherever they are. 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 both more convenient and more 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, camera 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 the service and content offerings by introducing a range of application settings.
We believe that our user base provides attractive marketing opportunities for our advertisers. We provide a variety of targeted and interactive marketing solutions that enable advertisers to promote their brands and amplify their visibility and reach. We offer a wide variety of "messenger ads" or user-initiated advertising solutions that are offered through the LINE messaging application, such as Official Accounts, Sponsored Stickers and LINE Point Ads, allowing advertisers to direct their efforts and communication in a more targeted manner. In 2016, we also launched a new bid-based advertisement distribution system with data analytics capabilities designed to help advertisers better reach their target audience. We offer impression-based "performance ads" such as Timeline Ads, LINE NEWS Ads and other advertisements that utilize our various communication and content offerings, allowing advertisers to effectively reach a larger number of LINE users. Our performance ads have become our fastest growing advertisement products.
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.
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Communication and Content
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.
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.
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, timely 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 and offer them on Creators Market through LINE Store, our web store accessible from mobile devices and personal computers. After a review process and subject to our approval, users may sell their self-designed Stickers to other LINE users and use them on the LINE messaging application. We do not charge users a fee to offer their Stickers on Creators Market, and the user receives half of the balance of sales proceeds after deducting fees charged by payment processors, as license fees.
Timeline.  Our Timeline service, which users access through the LINE messaging application, enables users to share their day-to-day experiences 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 friends. Each user's Timeline displays that user's posts as well as posts by their friends and other interesting content that the user chooses, with the most recent posts appearing at the top of the Timeline. 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 the friends with whom they share their posts and whose posts they receive on their Timelines.
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 and offer them on Creators Market.
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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 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, 2016, we offered 47 games, of which 42 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 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. 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.
We actively maintain the quality of games introduced on the LINE platform to promote an engaging experience for our users and enhance their overall satisfaction with LINE. To grow our inventory of high-quality games, we continually seek to enhance our in-house game development capability as well as pursue a variety of partnerships, including in the form of equity investments in game developers. In the past, we published most of the games developed by third-party game developers in the markets we serve on a non-exclusive basis. However, our general policy when offering new games on the LINE platform is to enter into new contractual arrangements with third-party game developers to become the exclusive distributor of their games in a particular market. The selection of game titles and pricing of in-game purchase items vary by country subject to local preferences and licensing arrangements for third party-owned intellectual property, and we adjust our portfolio of games from time to time to meet our users' evolving preferences.
LINE PLAY.  LINE PLAY is our virtual community that enables users to design 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 is also integrated into users' Timelines and 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 Timelines 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.
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LINE LIVE and LINE TV.  LINE LIVE is a real-time streaming service offered in 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 our major markets outside of Japan, we also offer 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 book store that enables users to purchase and download from a selection of over 100,000 comic book titles, read comic books on mobile devices and organize purchased titles on a virtual bookshelf. Users can also recommend comic books to their friends and share links to such comic books on their Timelines.
LINE MUSIC.  LINE MUSIC is our on-demand music subscription service that enables users to purchase and stream songs, create playlists of their favorite music, send music or playlists directly to friends on the LINE chat screen or share music with friends by streaming it on their Timelines.
Miscellaneous.  We also offer a wide range of other applications to further enhance user experience, including B612 (a self-portrait enhancement application), LINE Camera (mobile camera application that enables users to edit, enhance and decorate photos), Fortune (daily fortune telling service), LINE Blog (blogging platform designed to foster greater interaction with celebrities) and Weather (weather forecast service).
Others
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 and 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 and Hong Kong. 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-related merchandise.

LINE Part-time Job.  LINE Part-time Job is a part-time job posting service provided through AUBE, Ltd., a joint venture with Intelligence Holdings, Ltd. in which we hold a 49.0% interest. We aim to connect our users who are seeking part-time employment with companies that need part-time employees.
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 our users to register their credit cards and 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.
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We plan to expand the scope of LINE Pay by selectively incorporating it into our applications and exploring local partnership and joint venture opportunities in order to enhance the convenience of our users. For example, we offer "Rabbit LINE Pay" in Thailand through a joint venture with BSS Holdings Group, provider of Rabbit smart cards for mass transit and retail customers. In Japan, we offer LINE Pay Card through our partnership with JCB Co., Ltd., which enables users to use LINE Pay Card for purchases both online and offline anywhere JCB credit cards are accepted using funds deposited to the user's 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 as virtual currency 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 2.0% of amounts spent on LINE Pay Card as well as receive LINE Points from advertisers offered through LINE Point Ads.
LINE Mobile.  We commenced operations as an MVNO in September 2016 to provide affordably priced plans in Japan utilizing the wireless communication networks of a third-party mobile phone operator. We commenced sales of our SIM cards on Amazon Japan in November 2016 and in select electronics retail stores in Japan in March 2017.
Advertising Products and Services
LINE Advertising
LINE offers targeted and interactive marketing products and services that enable advertisers of various sizes to promote their brands, products and services, amplify their visibility, better target their reach and enhance their advertising message by leveraging our user base. Advertisers can choose to subscribe to one product or service or multiple products or services that are bundled as a package. We have a sales force that is dedicated to attracting and retaining advertising customers and providing support to them throughout various stages of their campaigns, and our direct sales activities are supplemented by utilization of third-party advertising agencies. Advertisements and promotional messages can be instantly delivered to our users because they are displayed on our users' smartphone screens through the LINE messaging application on a real-time basis. In 2016, we launched a new bid-based advertisement distribution system with data analytics capabilities designed to help advertisers better reach their target audience.
Our advertising products and services consist primarily of the following:
Messenger Ads
We offer a wide variety of "messenger ads" or user initiated-advertising solutions that are offered through the LINE messaging application, allowing advertisers to direct their efforts and communication in a more targeted manner. Our messenger ads include:
Official Accounts.  Official Accounts are LINE user accounts created for large-scale businesses and celebrities with followers that enable them to send messages directly to LINE users who have added them as a LINE friend. Once added as a LINE friend, such Official Account holder is displayed together with the users' other LINE friends, and the users are instantly alerted of messages through push notifications on their smartphones, as would be the case with any other messages from their LINE friends. 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. Celebrities can also promote themselves and their latest works, such as movies and music albums, by connecting with their fans through their Official Accounts. For initial subscriptions we charge a monthly fee based on the contract period and the numbers of messages to be sent to users and updates to be posted on Timelines. For renewed contracts, we charge monthly fees based on the number of users who have added such Official Accounts as their LINE friends.
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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 typically downloadable during a period of four weeks 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. Advertisers can add special features to their Sponsored Stickers, such as "Must-View Stickers," a feature that allows users who watch certain videos to download a special set of Stickers, and "Direct Stickers," a feature that allows advertisers to invite users to download Stickers through LINE messages. Advertisers may also add an advertisement on our virtual Sticker shop for an additional fee, as well as offer "Sponsored Themes" that customize the look of the LINE messaging application using the advertisers' proprietary characters.
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 Official Accounts as a LINE friend. We charge advertisers a fixed fee per specific action taken by our users. Prior to April 25, 2016, LINE Point Ads was referred to as LINE Free Coins.
LINE@.  Our business users can create their own official accounts using our LINE@ application and send messages to, or post announcements on the Timelines of, other users who have added such LINE@ accounts as LINE friends, as well as respond to inquiries from other users on the LINE@ chat screen. For a monthly fee, users with LINE@ accounts can send more messages per month as well as image-based messages containing links to external websites.
Business Connect.  Business Connect provides our business partners with a set of tools, application programming interfaces and embeddable widgets that they can use to build customized applications that can be offered on the LINE platform, such as sales platforms, marketing tools and customer relationship management solutions.
Performance Ads
We also offer impression-based "performance ads" that leverage user engagement of our communication tools such as Timeline and content offerings such as LINE NEWS. Our performance ads enable advertisers to display their advertisements to a large number of views, leveraging LINE's position as Japan's leading mobile messaging application with the largest user base, and employ our data analytics capabilities to maximize viewer attention. For example, advertisers are able to track how many customers visit their sites as a result of a specific advertisement campaign on the LINE platform, which helps advertisers make modifications to their advertisement campaigns to enhance their results and achieve a higher return on their investment. We believe that our ability to help advertisers 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 performance ads are sold through a bid-based cost per thousand impressions ("CPM") or cost per click ("CPC") pricing model, depending on the type of advertisement, where an advertiser competes against other advertisers in an auction and bids for a given advertisement spot. For example, image performance ads typically generate revenues based on CPC pricing, while video performance ads typically generate revenues based on CPM pricing. Advertisements are ranked for display based on a combination of the maximum bid set by the advertiser and other factors to determine the relevance of the advertisement, including our analysis of users' engagement activities on the LINE platform. We believe that this favors the advertisements that are most relevant to users, improving the experience for both users utilizing our services as well as advertisers looking for interested customers. Our advertisers pay for qualifying impressions or click‑through volume and can also specify the maximum number of impressions to be displayed.
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Our performance ads include:
Timeline Ads.  Our advertisers can post advertisements on our users' Timelines, which appear at select locations as users scroll through various postings on their 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 Timeline and reaches a viewport.
LINE NEWS Ads.  Our advertisers can post advertisements to certain advertisement spots on LINE NEWS to reach our users. Such advertisements may include links to external corporate websites, promotions of application downloads or branding campaigns.
Portal Advertising
In addition to advertising on our LINE platform, we also offer advertising services on both mobile devices and personal computers through the following portals that we operate:
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.
Matome.  We provide a personal web curation platform in Japan called Matome that 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 typically sell advertising space on these portals and their mobile applications through advertising networks such as Google and Yahoo Japan and through other brokers. From time to time, we also sell advertising space directly to advertisers.
Our Investments
From time to time, we selectively invest in other start-up companies and service providers to further develop 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. 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. For example, in October 2016, we acquired a 25.0% interest in Snow Corporation, developer and operator of the selfie app SNOW. We plan to transfer some of our camera-related businesses, including B612 and LINE Camera, to Snow Corporation to pursue further synergies, and our interest in Snow Corporation is expected to increase to 48.6% in May 2017. Additionally, in October 2016, we acquired a 22.0% interest in Yume no Machi Souzou Iinkai Co., Ltd., operator of delivery portal site Demae-Can. For further information on our investments in associates and joint ventures, see Note 32 of the notes to our annual consolidated financial statements.
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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 Google Play for Android-based smartphones and Apple App Store for iOS-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. As part of our efforts to diversify payment options available for LINE users, we launched LINE Pay, our mobile payment service application, in December 2014.
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 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.
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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.
Sales and Marketing
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, often targeting younger generation users. Primarily to increase our brand recognition, we continue to expand the numbers of retail stores and fixed-duration pop-up stores in various markets where shoppers can purchase official LINE merchandise or take photographs with LINE character mascots. We also engage in promotional events and sales of the LINE characters through our LINE Friends stores. Our marketing expenses were ¥18,069 million in 2014, ¥16,596 million in 2015 and ¥11,833 million in 2016, 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 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. Outside of Japan, we engage in global sales and marketing activities through LINE Plus Corporation. LINE Plus Corporation develops marketing strategies for potential advertisers and regularly works with third-party agencies to promote advertising opportunities with LINE.
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 analysis technologies and voice and video call quality solutions.
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Scalable Infrastructure to Support Large-Scale, Real-Time Messaging 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 the 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 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, 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 by delivering messages as well as other content generated from LINE Games and other applications offered on the LINE platform on a real-time basis.
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 simultaneously based on content a user views on our platforms. The key elements of our advertising technology include:
advertising auction system technology that enables advertisers to compete against other advertisers in an auction and bid for a given advertisement spot as well as automatic delivery of relevant, targeted advertising;
contextual advertising technology that considers factors such as optimal ad creatives and quality of landing pages and employs techniques to analyze the content of individual pages and to match advertisements to them; and
systems to 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.
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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.
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.
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, Tencent's WeChat, Snapchat, Telegram Messenger and Blackberry Messenger, as well as mobile messaging services for specific operating platforms, such as Apple's iMessage. We also face significant competition in almost every aspect of our business, including from companies such as Facebook, Google, Twitter, Yahoo Japan and Snap, which offer a variety of social network services and products as well as online advertising services.
We face competition from game companies, mobile telecommunications companies, e-commerce companies, music streaming companies and other internet-related companies that offer products and services that may compete with specific features of the LINE messaging service or other applications that we offer. We also compete with traditional and online media businesses for a share of advertisers' budgets and in the development of 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.
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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.
Personnel.  We experience significant competition for highly skilled personnel, including senior management, engineers, designers and product managers. 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, as well as pending legislative and regulatory proposals, 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. An amendment to this Act was enacted in September 2015 and is scheduled to be put into full effect on May 30, 2017. This amendment includes establishment of a new regulatory authority and introduction of new regulation on handling of anonymous personal data and transfer of personal information to foreign countries.
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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 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 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.
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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 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.
 
Various 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 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. We do not believe that we are a financial institution subject to these laws and regulations. However, it is possible that payments and other transactions on the LINE platform could deem us a financial institution subject to applicable U.S., state or foreign regulations.
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.
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.
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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.
Item 4.C.    Organizational Structure
As of December 31, 2016, we had 11 Japanese subsidiaries and 16 overseas subsidiaries. The following table sets out the jurisdiction of incorporation and our ownership interests of our significant subsidiaries:
Name
Jurisdiction of
Incorporation
 
Percentage of
Ownership
 
LINE Book Distribution Corporation
 
Japan 
   
52.00
%
LINE Business Partners Corporation
 
Japan 
   
100.00
%
LINE Fukuoka Corp.
 
Japan 
   
100.00
%
LINE GAME Global Gateway, L.P.
 
Japan 
   
100.00
%
LINE Life Global Gateway, L.P.
 
Japan 
   
100.00
%
LINE Mobile Corporation
 
Japan 
   
100.00
%
LINE Pay Corporation
 
Japan 
   
100.00
%
LINE Ventures Corporation
 
Japan 
   
100.00
%
M.T. Burn Corporation
 
Japan 
   
50.50
%
WebPay Holdings, Inc.
 
Japan 
   
100.00
%
WebPay, Inc.
 
Japan 
   
100.00
%
LINE Digital Technology (Shanghai)
   Limited.
 
China 
   
100.00
%
LINE Digital Technologies India Private Limited
 
India 
   
100.00
%
PT. LINE PLUS INDONESIA
 
Indonesia 
   
99.80
%
LINE Biz Plus Corporation
 
Korea 
   
100.00
%
LINE C&I Corporation
 
Korea 
   
100.00
%
LINE Friends Corporation
 
Korea 
   
100.00
%
LINE PLAY Corporation
 
Korea 
   
100.00
%
LINE Plus Corporation
 
Korea 
   
100.00
%
LINE BIZ+ PTE. LTD
 
Singapore 
   
100.00
%
Line Biz+ Taiwan Limited
 
Taiwan 
   
100.00
%
LINE Taiwan Limited
 
Taiwan 
   
100.00
%
LINE BIZ Plus Ltd.
 
Thailand 
   
50.00
%
LINE Company (Thailand) Limited
 
Thailand 
   
50.00
%
MixRadio Limited
 
United Kingdom of
Great Britain and
Northern Ireland 
   
100.00
%
LINE Euro-Americas Corp.
 
United States of
America 
   
100.00
%
LINE Vietnam Co., Ltd
 
Vietnam 
   
95.00
%

For further details on our subsidiaries, see Note 30 of the notes to our annual consolidated financial statements.
 
Item 4.D.    Property, Plants and Equipment
As of December 31, 2016, we had ¥9,029 million of property and equipment, which primarily consisted of our servers and networking equipment, and leased office facilities in Japan and other countries, including approximately 118,000 square feet for our corporate headquarters in Tokyo, Japan. We have entered into a lease to move our head offices to a new location in Shinjuku, Tokyo and plan to relocate in April 2017.
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Item 4A.     Unresolved Staff Comments
We do not have any unresolved comments from the Securities and Exchange Commission staff regarding our periodic reports under the Exchange Act of 1934.
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 services related to daily life. 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 interactive content and services that satisfy our users' individual needs for access to information and entertainment such as mobile games and music through our "content services," as well as connected solutions that aim to satisfy increasingly sophisticated day-to-day needs of LINE users and further enhance their welfare, such as payment services and job posting, restaurant reservation and taxi booking services, through our "life 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, Taiwan and Thailand in terms of 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.
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 has been led primarily by LINE Games and Stickers, our revenue growth in 2016 was primarily driven by our advertising products and services, particularly the growth of our "performance ads" such as Timeline Ads and LINE NEWS Ads. We generated revenues of ¥86,366 million in 2014, ¥120,406 million in 2015 and ¥140,704 million in 2016, representing revenue growth of 39.4% from 2014 to 2015 and 16.9% from 2015 to 2016.
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Factors Affecting Our Financial Condition and Results of Operations
Our financial condition and results of operations have been and will continue to be materially affected by a number of factors and developments, some of which are outside of our control, including the following:
user growth;
user engagement;
monetization;
products and services innovation;
marketing and brand promotion;
competition;
investment in talent; and
seasonal fluctuations.
User Growth
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.
2014
 
Jun.
2014
 
Sep.
2014
 
Dec.
2014
 
Mar.
2015
 
Jun.
2015
 
Sep.
2015
 
Dec.
2015
 
Mar.
2016
 
Jun.
2016
 
Sep.
2016
 
Dec.
2016
 
 
(in millions)
     
Total MAUs 
   
159
     
170
     
179
     
190
     
205
     
211
     
212
     
215
     
218
     
220
     
220
     
217
 
Japan 
   
45
     
47
     
49
     
51
     
54
     
55
     
57
     
58
     
61
     
62
     
64
     
66
 
Taiwan, Thailand and Indonesia
   
44
     
49
     
54
     
62
     
70
     
76
     
81
     
87
     
91
     
95
     
98
     
101
 

The growth in MAUs affects our revenues and financial performance by influencing the volume of transactions on LINE, the number of advertisers we are able to attract and the rates we can charge such advertisers, as well as our expenses. In December 2016, we had 217 million MAUs globally, including a total of 167 million MAUs in Japan, Taiwan, Thailand and Indonesia. We intend to pursue MAU growth, particularly in Asia, where we have established significant brand recognition and market positioning through localized services and products. For example, we try to incentivize additional users to exchange messages and add more friends through promotional events, as well as broaden the ways users can interact with their friends on our games and other content applications.
User Engagement
Changes in user engagement also affect our revenues and financial performance. Growth in user engagement enhances our ability to deliver relevant content to users and increase the opportunities for us to generate revenues. Growth in user engagement also generally results in increases in our expenses and capital expenditures required to support user activity. Our average DAUs in December 2016 represented approximately 63% of our MAUs globally and 72% of our MAUs in our four largest markets of Japan, Taiwan, Thailand and Indonesia in December 2016.
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We measure user engagement of communication products and services using various metrics, including daily average number of messages sent and received and daily average number of Stickers sent. While sending and receiving messages is free, when sending messages, our users often include in their messages purchased Stickers, which is our primary revenue source within our communication products offerings. In addition, these metrics affect the attractiveness of our LINE advertising products and services as a medium for advertisers, which in turn impacts our advertising revenue. Such metrics for the months indicated were as follows:
                                                                         
 
 
For the month of
 
 
 
Mar.
2014
   
Jun.
2014
   
Sep.
2014
   
Dec.
2014
   
Mar.
2015
   
Jun.
2015
   
Sep.
2015
   
Dec.
2015
   
Mar.
2016
   
Jun.
2016
   
Sep.
2016
   
Dec.
2016
 
 
 
(in millions)
 
Daily average number of messages sent.
   
2,860
     
3,100
     
3,190
     
3,372
     
3,764
     
4,051
     
3,997
     
4,048
     
4,211
     
4,347
     
4,404
     
4,382
 
Daily average number of messages received
   
6,519
     
8,071
     
9,244
     
11,048
     
12,889
     
15,555
     
15,160
     
15,534
     
16,186
     
17,866
     
19,998
     
20,682
 
Daily average number of Stickers sent
   
346
     
350
     
328
     
335
     
358
     
397
     
379
     
388
     
389
     
397
     
384
     
407
 

We measure user engagement of LINE Games primarily using MAUs of LINE Games. While downloading LINE Games is free, our active users often purchase in-game items to enhance their game experience, which is a key revenue source for us. MAUs of LINE Games may fluctuate depending on the level of popularity of our game titles at any given time. The MAUs of LINE Games for the months indicated were as follows:
                                                                         
 
 
For the month of
 
 
 
Mar.
2014
   
Jun.
2014
   
Sep.
2014
   
Dec.
2014
   
Mar.
2015
   
Jun.
2015
   
Sep.
2015
   
Dec.
2015
   
Mar.
2016
   
Jun.
2016
   
Sep.
2016
   
Dec.
2016
 
 
 
(in millions)
 
MAUs of LINE Games(1)
   
35
     
34
     
33
     
39
     
38
     
36
     
32
     
32
     
31
     
29
     
27
     
27
 
____________
(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, including Official Accounts, Sponsored Stickers, LINE Point Ads, Timeline Ads and LINE NEWS Ads, 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.
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We review MPUs, including MPUs of LINE Games, as a measure to evaluate trends in monetization. MPUs, including MPUs of LINE Games, may fluctuate depending on the level of success of our monetization efforts utilizing the line-up of our products and services. The following table sets forth the number of our MPUs and MPUs of LINE Games for the months indicated:
 
 
 
For the month of
 
 
 
Mar.
2014
   
Jun.
2014
   
Sep.
2014
   
Dec.
2014
   
Mar.
2015
   
Jun.
2015
   
Sep.
2015
   
Dec.
2015
   
Mar.
2016
   
Jun.
2016
   
Sep.
2016
   
Dec.
2016
 
 
 
(in millions)
 
Total MPUs(1)
   
5.4
     
6.7