(TSE:2121)

Monster Strike and the global mobile gaming frenzy

November 17th, 2014

Luis Sanchez
luisvsanchez@gmail.com

Situation Overview

mixi is a Japanese internet company widely known for its mixi social networking
service aka Japans Facebook

mixi was popular with college students in the 2000s but began losing popularity
in 2007/2008 when Facebook and Twitter entered Japan. Today, the social
network has diminished traffic and generates ~15% of its peak ad sales

mixi has made several attempts to reinvigorate its brand by expanding its social
networking platform and expanding into other businesses

In October 2013, mixi launched Monster Strike in Japan. Monster Strike is a

free-to-play mobile game playable on phones and tablets. This was mixis first
mobile game and now accounts for over 90% of mixis revenue

Monster Strike found huge success in Japan, consistently ranking in the top 3
apps by gross sales since its release. Monster Strike has also had a successful
launch in Taiwan and has recently launched in the U.S. with plans to expand to
South Korea, China and other regions globally

Impact of Monster Strike

Share Price Performance

4,000
3,500
3,000

From its prior peak in 2007,

mixis share price fell 95%
due to the decline of its
social networking service

2,500

7,000
6,000
5,000
4,000

2,000

Down 20% since

Q2 14 earnings
US Launch

10 million
Downloads
Taiwan
Launch

1 year Share
Price Return
of 2,108%

3,000

1,500

1,000

2,000

500

1,000

0
Nov-07

Released
Monster
Strike
1 million
Downloads

Monster
Strike
TV Ads

Nov-09

Nov-11

0
Nov-13

Nov-13

Jan-14

Mar-14

May-14

Jul-14

Sep-14

Nov-14

Financial Performance
Base Case Model Estimates
( in Millions)

Monster Strike

Q4 '12

Q1 '13

Q2 '13

Q3 '13

Q4 '13

Q1 '14

Q2 '14

Q3 '14E

Q4 '14E

261

3,113

10,049

19,447

27,700

33,000

2014E
90,196

2015E

2016E

127,506

122,816

Other Sales

2,708

2,143

1,834

2,115

2,684

2,668

2,787

2,900

3,000

11,355

11,626

12,339

Total Sales

2,708

2,143

1,834

2,376

5,797

12,717

22,234

30,600

36,000

101,551

139,132

135,154

Y/Y Growth

0%

114%

493%

1112%

1188%

521%

736%

37%

(39%)

(44%)

(23%)

(3%)

Gross Profit

1,914

1,451

1,132

1,469

4,712

11,165

19,965

27,582

32,502

91,214

125,346

121,802

% Margin

70.7%

67.7%

61.7%

61.8%

81.3%

87.8%

89.8%

90.1%

90.3%

89.8%

90.1%

90.1%

EBIT
% Margin

235

(79)

(310)

(108)

995

4,658

9,701

13,559

16,223

44,141

63,693

59,533

8.7%

(3.7%)

(16.9%)

(4.5%)

17.2%

36.6%

43.6%

44.3%

45.1%

43.5%

45.8%

44.0%

Sources: Capital IQ, Company filings

Investment Thesis
Rationale
mixi operates a low-quality, low-barrier business dependent on
the success of a single fad-driven product

The market has gained wisdom from prior mobile gaming

blow-ups (e.g. Zynga, Gungho Online) and as a result has not
yet driven mixis valuation to ridiculous levels

Current valuation fairly values mixis highly successful

Japanese business and discounts the option value from its
on-going international expansion

At todays valuation, mixi remains a stock to carefully monitor

as it will likely be re-rated in the next 6-12 months depending
on the international success of its gaming app, Monster Strike

It is impossible to predict how successful a mobile game will be

due to random factors (going viral) and changing consumer
tastes; however, reasonable ranges of levels of popularity and
monetization can be forecasted and valued

An opportunity to go short could arise if the gap between

expectations and economic reality significantly increases

The estimated risk/reward ratio of 4.6:1 is compelling, but

timing could be an issue given the volatility in the stock

mixis low-quality business disqualifies it from being a go-long

candidate until it can successfully diversify its revenue streams
(portfolio model vs. single product) and a significant discount
to earnings develops

Bull Thesis
The global mobile gaming market is rapidly growing and is
expected to grow from $20bn today to $30bn by 2017

Games like Candy Crush and Clash of Clans prove the

global market is accessible and can generate as much as
$1.5bn - $2.0bn in annual sales from a single app

Monster Strikes simple Angry Birds-like gameplay and

addictive RPG elements provide universal appeal

Monster Strike will soon reach Puzzle & Dragons level of

success in Japan (150bn+ annual sales or $1.3bn)

mixi has the opportunity to franchise Monster Strike into a

series as well as develop more mobile games

Bear Thesis
Despite the rapid growth of the global mobile gaming

industry, few anomalies are internationally successful

Monster Strikes Japanese style animation and card-battling

features will not be universally appealing

Japans gaming industry is unique in terms of time spent

playing and monetization, Monster Strike will not monetize

internationally in proportion to Japan

Monster Strikes success in Japan is fully priced into the

stock leaving little room for failure or disappointment

mixi is not a mobile gaming company and does not have the
expertise or resources to manage a content platform

If mixi does not find a new engine of growth in the next year,
the stock will garner a lower market multiple

Investment Outcomes
mixis current valuation implies reasonable expectations for growth and

Current Valuation 1
( millions)

2015

2016

Sales

136,700

137,900

Multiple

3.0x

Implied EV
EBIT
Multiple

3.0x

410,100

413,700

63,600

64,200

7.0x

7.0x

Implied EV

445,200

449,400

Avg. Implied EV

427,650

431,550

Net Debt
Equity Value
Avg. Equity Value

(28,549)

(28,549)

456,199

460,099

profitability and multiples in-line with peers

However, mixi is rapidly rolling out its mobile gaming app, Monster Strike,
internationally and in the next 6 12 months the market will likely re-rate
the stock based on its international success and potential

An opportunity to go short could arise if Monster Strike monetizes poorly

outside of Japan and the market builds in unrealistic expectations

458,149

Up/(down) side

2%

Candy Crush 2.0 2

Hit in Asia Only 2

Base Case 2

( millions)

2015

2016

( millions)

2015

2016

( millions)

2015

2016

Sales

175,743

279,733

Sales

143,402

155,986

Sales

139,132

135,154

Multiple
Implied EV
EBIT
Multiple

3.0x

3.0x

Multiple

527,229

839,198

Implied EV

84,733

142,621

EBIT

7.0x

7.0x

3.0x

Multiple

3.0x

430,207

467,957

66,147

71,504

7.0x

7.0x

Multiple
Implied EV
EBIT
Multiple

2.0x

2.0x

278,264

270,309

63,693

59,533

5.0x

5.0x

Implied EV

593,131

998,346

Implied EV

463,030

500,530

Implied EV

318,465

297,664

Avg. Implied EV

560,180

918,772

Avg. Implied EV

446,619

484,244

Avg. Implied EV

298,364

283,987

(28,549)

(28,549)

(28,549)

(28,549)

588,729

947,321

475,168

512,793

Net Debt
Equity Value
Avg. Equity Value
Up/(down) side
Probability

768,025
71%
5%

Net Debt
Equity Value
Avg. Equity Value

493,980

Net Debt
Equity Value
Avg. Equity Value

Up/(down) side

10%

Up/(down) side

Probability

15%

Probability

(28,549)

(28,549)

326,913

312,536

319,725
(29%)
80%

Estimated Risk/Reward
Weighted upside
Weighted downside
Go-short Risk/Return Ratio
1
2

Based on consensus estimates

Modeled based on scenario-specific factors

5%
(23%)
4.6

mixi Company Overview

mixi Company Overview

Overview
Tokyo-based media and tech company, founded in 1997
Started as FindJob!, a Japanese help wanted website
Known for creating Japans Facebook, popular in the
mid 2000s before the real Facebook arrived in Japan

Has introduced updates to its social networking

platform to compete with Facebook, but has not
been able to stem declines in monthly active users

Once robust online advertising sales from the social

network are now 15% of their quarterly peak

In 2013, attempted to diversify its business by acquiring

Confianza, Diverse and mystery shopping

In October 2013, successfully launched the mobile

game, Monster Strike which is now over 90% of sales
CEO Hiroki Morita

Business Units
mixi social networking service (mixi.jp) and mobile
gaming business

mixi Recruitment FindJob! platform for jobseekers, specialized in Internet sector personnel

mixi Research mixi Surveys (smartphone research)

and mystery shopping services

Nohana family photo book service, fostering family

communication through photographs

Diverse online dating platform and youbride/YYC

wedding support businesses

Confianza dating events and Bartown events

Venture Capital I-Mercury Capital and mixi
America
Current mixi apps:

Prior to joining mixi he ran start-up

Naked technology

In 2008, joined mixi

In 2013, was named head of mixis
game business where he served as
executive producer of Monster Strike

June 2014, named CEO of mixi

Hiroki Morita is the third CEO in 2
years

Source: Company filings, Company website

mixis Legacy Businesses Have Been in Decline

mixis social network had peaked in online

Sales by Category (ex-Monster Strike)

Advertising

4,000

Game platform

Other

interest during the mid 2000s

Life Events

Since the social networks peak, mixis

3,500

advertising sales have been in decline

in millions

3,000
2,500

mixi has attempted to diversify its

2,000

business several times, unsuccessfully

1,500
1,000

mixi no longer breaks out game platform

500

or advertising revenues separately

0
Q1
'11

Q2
'11

Q3
'11

Q4
'11

Q1
'12

Q2
'12

Q3
'12

Q4
'12

Q1
'13

Q2
'13

Q3
'13

Q4
'13

Q1
'14

Q2
'14

Google Trends mixi

100

80
60
40
20

0
Nov-04

Nov-06

Nov-08

Source: Company filings, Google Trends

Nov-10

Nov-12

Nov-14

and then Monster Strike

Simple Angry Birds style flick and shoot gameplay:

Monster Strike is a free-to-play game for mobile devices

Players swipe and shoot monster balls across the screen
to knock out enemies

The game has a unique simultaneous multiple player

which can be played with friends on different screens

The game makes money by limiting the amount of time

a player can play for free in a day and by allowing
players to buy upgrades and characters

The game is available in Japan (top 2), Taiwan (top 50),

the U.S. (top 300) and Canada (top 300)

The game will be released in South Korea in November,

Mainland China in early 2015, South East Asia in 2015
and Europe in 2015
Heavy Advertising and Promotion in Japan:

Outdoor Ads

Live Events

Source: Company filings, Company website

TV Commercials

Merchandising
9

Monster Strikes App Store Ranking by Gross Sales

United States

Google Play: 4/5 Stars

Apple App Store: 3.5/5 Stars

Taiwan

Japan

Google Play: 4/5 Stars

Apple App Store: 4.5/5 Stars

Monster Strike has been a consistent top 2 game in

Japan

In Taiwan, the game had a strong start, consistently

ranking in the top 20 or top 10; however, the games
ranking in recent months has slipped

In the U.S. the game has only been released for a month,
but has yet to break into the top 200 and also suffers
from a lower rating in the Apple app store

Raters complain about the U.S. version of the game

crashing frequently
Google Play: 4/5 Stars

Source: AppAnnie

Apple App Store: 4.5/5 Stars

I have played the game on both Android and Apple

ios and have noticed that it crashes every 15 minutes,
causing you to lose your game progress
10

mixi Will Likely be Unable to Successfully Monetize Internationally

The Wrong Product
Monster Strike has a very distinctively Japanese
animation style and features gameplay and
monetization mechanics popular in Japan

Monster Strike requires players to be constantly

connected to the internet to play (even single player)

This works in Japan because Japan has the best

wireless internet connectivity in the world

Likely to significantly limit its audience in countries

with poor 3G internet penetration (rest of Asia)

Monster Strikes showcase feature is its simultaneous

multi-player gameplay mode which requires players to
be near their friends to play together

In Japan, mobile games are mostly played during

transit where it is easy to connect with others

Inadequate Resources
mixi is not a mobile gaming company, Monster Strike
was their first attempt at creating gaming content

Peers such as King and GungHo are mobile gaming

companies and still cannot consistently produce hits

GungHo has produced dozens of titles and only 2

other games have had over 1 million downloads

King has had several domestic hits, but has been

unable to successfully internationalize a game other
than Candy Crush

mixi is understaffed relative to its peers even though

most employees do not work on mobile games

mixi has not ramped up hiring over the last year

It is unclear how mixi will be able to manage the
growth and challenges of an international game

Lack of leadership from a strong CEO

This feature is unlikely to be as popular in other

countries where mobile games are played at home
(like the U.S.)

Employee Headcount
2,034
1,108

1,005

364
Zynga

Source: Company filings, Company websites

King

GungHo

Mixi

11

Projected Financial Results

Projecting Monster Strikes Financial Performance

Monster Strike Projections
Cummulative Downloads

Base Case Operating Model

Average Revenue per User

50
45
40

700

Monster Strike

600

35

500

30

400

25
20

300

15

200

10
5
0

35,000
30,000
25,000

30%

Life Events

2,250

6,190

7,428

8,914

Media

6,307

4,833

3,866

3,093

Other

222

332

332

332

12,154

101,551

139,132

135,154

509

613

613

613

Total Sales
Rental Expenses
Depreciation
Personnel
Content Procurement
Other

168

94

94

94

1,192

1,036

1,036

1,036

143

137

137

137

1,251

8,338

11,787

11,353

131

119

119

119

8,760

91,214

125,346

121,802

Margin

72.1%

Personnel

2,549

2,295

2,295

2,295

Advertising

1,123

11,624

13,624

15,624

Outsourcing

755

952

952

952

Property Rent

549

569

569

569

App Store Payments

2,177

30,023

42,442

40,881

Other

1,123

1,610

1,771

1,948

Operating Profit

484

44,141

63,693

59,533

Margin

20,000

2016E
122,816

Gross Profit

40%

2015E
127,506

50%

2014E
90,196

100

Q/Q Growth

2013
3,375

Outsourcing

Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
'13 '13 '14 '14 '14 '14 '15 '15 '15 '15 '16 '16 '16 '16
Monster Strike Quarterly Sales

( in millions)

4.0%

89.8%

43.5%

90.1%

45.8%

90.1%

44.0%

20%

15,000

10%

10,000

0%

5,000
0

(10%)
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
'13 '13 '14 '14 '14 '14 '15 '15 '15 '15 '16 '16 '16 '16

Source: Company filings

13

Modeling Assumptions

As Monster Strike launches internationally it will have an accelerated rate of new downloads in 2015
(~1.5m per month) with a declining rate of downloads in 2016 and beyond

Because the monetization rate outside of Japan is lower (Japan has the highest monetization rate per
download in the world) the average revenue per user (ARPU) is projected to decline at a rate of ~5% per
month during 2015 and 2% per month during 2016

Monster Strike should reach peak sales in 2015 as Japanese monetization stabilizes and incremental
international sales contribute

Revenue is expected to begin declining in 2016 and accelerate its decline in the following years

App store payments are the only variable expense (fixed commission rates), the remaining costs are
fixed or discretionary; given the low fixed cost base, mixi has high earnings leverage and achieves peak
profitability in 2015

Model assumptions are consistent with actual results seen for Puzzle & Dragons

Despite being independently built, the base-case model is roughly in-line with consensus
estimates implying that research analysis have placed a similar discount on international
monetization rates

14

A Top-down Approach to Projecting Monster Strikes Financials

Given the growing nature of the industry, a bottom up projection model which references historical data
and financial results from peers may not appropriately capture Monster Strikes potential

Mobile gaming industry projections by region from the International Development Group1 and market
share estimates of mobile games at different app store rankings provided by AppAnnie were applied to
assumed app store rankings to be achieved by Monster Strike in different markets

Management has provided guidance on when it will enter certain markets in 2014/2015, beyond that, it
could be reasonably expected that Monster Strike expands to the remaining global markets in order of
size and ease of entrance

Three cases have been developed to sensitize different outcomes: 2

Candy Crush 2.0 (5%) Monster Strike achieves global success similar to Candy Crush, and
achieve top 5 app store rankings in every major region; this case is highly unlikely given Monster
Strikes culturally specific Japanese animation style and mixis lack of resources or expertise to
successfully launch and market the game internationally

Hit in Asia Only (15%) Monster Strike achieves strong regional success in Asia; while Monster
Strike is likely to do relatively well in East Asian markets such as Taiwan and South Korea, South,
Central and South East Asian markets are not culturally homogenous and are difficult to penetrate

Low International Monetization (80%) Monster Strike primarily achieves success in Japan
and some traction in culturally similar markets; there are no precedents of internationally
successful Japanese mobile gaming titles; while some Japanese publishers have achieved mobile
gaming success abroad, the games have generally featured IP familiar to international audiences
1
2

Projections are as of H1 2014 and were cross-checked against projections from NewZoo, an industry data provider
Perceived likelihoods of the sensitized cases are based on extensive industry research and interviews with industry experts

15

Global Mobile Gaming Industry Market Forecasts

Total Market Size

Top Game Sizes

Implied Top Games 2015 Annual Sales

(USD in millions)
Japan
North America
South Korea
China
Australia
SE Asia
Western Europe
Eastern Europe
Latin America
Rest of Asia
Africa + Middle East
Total
Growth

2013

2015

2016

2017

Top 5

Top 10

Top 15

Top 50

$3,000
4,000
1,000
1,000
750
400
2,300
500
500
1,000
250

$3,357
5,429
1,119
1,500
829
484
2,875
750
615
1,210
365

$3,622
6,714
1,207
1,950
906
574
3,306
975
713
1,435
481

$3,853
8,000
1,284
2,350
962
645
3,645
1,175
827
1,613
635

$4,037
9,143
1,346
2,700
1,005
703
3,917
1,350
939
1,758
808

$906
671
121
195
91
57
331
98
71
144
48

$181
336
60
98
45
29
165
49
36
72
24

$36
67
12
20
9
6
33
10
7
14
5

$4
7
1
2
1
1
3
1
1
1
0

$14,700

$18,533

$21,884

$24,989

$27,706

$2,732

$1,094

$219

$22

2013

2014

2015

2016

2017

Japan
North America
South Korea
China
Australia
SE Asia
Western Europe
Eastern Europe
Latin America
Rest of Asia
Africa + Middle East
Total

2014

31.7%

11.9%
35.7%
11.9%
50.0%
10.5%
21.0%
25.0%
50.0%
23.1%
21.0%
46.2%

7.9%
23.7%
7.9%
30.0%
9.3%
18.7%
15.0%
30.0%
15.8%
18.7%
31.6%

6.4%
19.1%
6.4%
20.5%
6.2%
12.4%
10.3%
20.5%
16.0%
12.4%
32.0%

4.8%
14.3%
4.8%
14.9%
4.5%
9.0%
7.4%
14.9%
13.6%
9.0%
27.3%

26.1%

18.1%

14.2%

10.9%

Source: International Development Group, AppAnnie

Top Games Market Share

Top 5

Top 10

Top 15

Top 50

Japan

25.0%

5.0%

1.0%

0.10%

World

10.0%

5.0%

1.0%

0.10%

App store sales are concentrated at the

top; Japan is notably more concentrated
than the rest of the world

16

Projecting Monster Strikes Sales

Candy Crush 2.0
Markets Entered
2015
2016

(USD in Millions)

2014

Japan
North America
South Korea
China
Australia
SE Asia
Western Europe
Eastern Europe
Latin America
Rest of Asia
Africa & ME

$3,357
5,429
1,119

$3,622
6,714
1,207
780
906
574
3,306

9,905

17,110

Total

Asian Hit Only

Japan
North America
South Korea
China
Australia
SE Asia
Western Europe
Eastern Europe
Latin America
Rest of Asia
Africa & ME
(USD in Millions)

top 5
top 15
top 15

top
top
top
top
top
top
top

5
5
5
5
15
15
15

(USD in Millions)

2014

$3,853
8,000
1,284
940
962
645
3,645
1,175
827

$4,037
9,143
1,346
1,080
1,005
703
3,917
1,350
939
1,758
808

Japan
North America
South Korea
China
Australia
SE Asia
Western Europe
Eastern Europe
Latin America
Rest of Asia
Africa & ME

$3,357
5,429
1,119

$3,622
6,714
1,207
780
906
574
3,306

21,332

26,086

Total

9,905

17,110

top
top
top
top
top
top
top
top
top

5
5
5
15
5
5
5
5
5

top
top
top
top
top
top
top
top
top
top
top

10
10
10
50
5
5
5
5
5
5
5

Average Annual Monetization

2014
2015
2016
2017

Japan
North America
South Korea
China
Australia
SE Asia
Western Europe
Eastern Europe
Latin America
Rest of Asia
Africa & ME

$839
54
11

$872
363
66
78
9
6
33

$934
736
125
44
53
35
199
118
83

$583
629
98
5
98
67
378
126
88
176
81

Total (USD)
Ex-Japan

$905
$65

$1,427
$555

$2,325
$1,391

$2,329
$1,747

Total (JPY)
Ex-Japan

Markets Entered
2015
2016

2017

Estimated App Store Ranking

2014
2015
2016
2017

104,048 164,117 267,394 267,867

7,530 63,789 159,933 200,868

Low Intl. Monetization

(USD in Millions)

2014

$3,853
8,000
1,284
940
962
645
3,645
1,175
827

$4,037
9,143
1,346
1,080
1,005
703
3,917
1,350
939
1,758
808

Japan
North America
South Korea
China
Australia
SE Asia
Western Europe
Eastern Europe
Latin America
Rest of Asia
Africa & ME

$3,357
5,429
1,119

$3,622
6,714
1,207
780
906
574
3,306

$3,853
8,000
1,284
940
962
645
3,645
1,175
827

$4,037
9,143
1,346
1,080
1,005
703
3,917
1,350
939
1,758
808

21,332

26,086

Total

9,905

17,110

21,332

26,086

Estimated App Store Ranking

2014
2015
2016
2017
Japan
North America
South Korea
China
Australia
SE Asia
Western Europe
Eastern Europe
Latin America
Rest of Asia
Africa & ME
(USD in Millions)

top 5
top 50
top 10

top
top
top
top
top
top
top

5
15
5
5
15
10
15

Markets Entered
2015
2016

2017

top
top
top
top
top
top
top
top
top

5
50
5
10
50
5
50
15
15

top
top
top
top
top
top
top
top
top
top
top

10
50
10
15
50
5
50
50
50
5
15

Average Annual Monetization

2014
2015
2016
2017

2017

Estimated App Store Ranking

2014
2015
2016
2017
Japan
North America
South Korea
China
Australia
SE Asia
Western Europe
Eastern Europe
Latin America
Rest of Asia
Africa & ME
(USD in Millions)

top 5
top 50
top 10

top
top
top
top
top
top
top

5
15
5
15
15
10
15

top
top
top
top
top
top
top
top
top

5
50
10
50
50
15
50
15
15

top
top
top
top
top
top
top
top
top
top
top

10
50
15
50
50
15
50
50
50
50
15

Average Annual Monetization

2014
2015
2016
2017

Japan
North America
South Korea
China
Australia
SE Asia
Western Europe
Eastern Europe
Latin America
Rest of Asia
Africa & ME

$839
5
56

$872
36
88
78
9
29
33

$934
38
125
63
5
47
18
12
8

$583
9
98
29
1
67
4
7
5
176
8

Japan
North America
South Korea
China
Australia
SE Asia
Western Europe
Eastern Europe
Latin America
Rest of Asia
Africa & ME

$839
5
56

$872
36
88
8
9
29
33

$934
38
92
4
5
18
18
12
8

$583
9
39
1
1
7
4
7
5
2
8

Total (USD)
Ex-Japan

$901
$61

$1,146
$273

$1,249
$315

$985
$403

Total (USD)
Ex-Japan

$901
$61

$1,076
$203

$1,130
$195

$664
$81

Total (JPY)
Ex-Japan

Note: China adjusted for higher commission rates

Source: International Development Group, AppAnnie

103,577 131,776 143,647 113,292

7,059 31,448 36,186 46,294

Total (JPY)
Ex-Japan

103,577 123,703 129,930

7,059 23,375 22,469

76,304
9,305

17

Regional Differences in the Mobile Gaming Industry

Cultural Differences in Consumer Tastes

Eastern vs. Western Gamers
In the 1970s, Japanese arcade game makers such as
Sega, Namco and Nintendo shifted their focus to video
games, creating global leaders in video game technology
and production

In 2002, Japanese video games made up ~50% of the

global market; by 2010, its share shrunk to 10%

The loss of interest in Japanese games can be explained

by cultural differences in consumer preferences

Western gamers prefer realism or human-like

characters; the most popular genres in Western
markets are first person shooters and sports games

Popularity of Card Battle Games

Card battle games are the most popular mobile genre in
Japan

As much as 70% of the top 20 games in Japan at any

given time are card battle style games

Card battle games have not resonated with Western

gamers due to their slow gameplay and complexity

Monster Strike employs card battle elements such as

deck building and character evolving

Dragon Collection, a card battle game:

East Asians gamers prefer fantasy games with

mythical creatures or monsters; the most popular
genres are RPGs and monster battling games
Popular Western video game characters:

Popular Japanese video game characters:

Card Selection Screen

Source: News articles, Kantan Games (Serkan Toto), Conversations with industry experts

Battle Screen
19

Cultural Differences in Business Models and Monetization

Freemium vs. Paying Upfront
Free to Play

Gacha in Japan

Paid Apps

Gacha is a gambling element used in most Japanese

Japan

94%

6%

China

94%

6%

South Korea

89%

11%

United States

79%

21%

Canada

78%

22%

France

78%

22%

Australia

77%

23%

United Kingdom

76%

24%

Russia

76%

24%

Germany

70%
0%

20%

40%

Use in-game money

to play the slots

60%

80%

25%

43%

42%

In-game

player addiction similar to gambling addiction

100%

40%

39%

35%

22%

Gacha has been used outside of Japan, but has not

gained popularity, again, likely due to cultural difference

Asian gamers are big fans of Pay-To-Win; it is socially

47%

47%

42%

41%

43%

44%

16%

17%

17%

17%

17%

17%

2012

2013

2014

2015

2016

2017

acceptable to buy upgrades and rank-up quickly

Western gamers are reluctant to purchase upgrades to

53%

2011

According to conversations with Japanese game

designers, Gacha accounts for as much as 70% of
mobile game monetization in Japan

Ad-supported

36%

Hope to get lucky and

win a rare character

Gacha is extremely popular in Japan and can lead to

30%

U.S. Mobile Gaming Revenues

Download

games where players spend in-game money to gamble

on the prospect of winning a rare character or item

Ad-supported apps are popular in Western countries; however, Asian

gamers dislike in-app ads and game designers have avoided their use

gain advantage as it is widely viewed as a cheap trick

Game designers have expressed frustration at being

unable to design universally appealing commercial
games because Asian gamers want to be able to pay-towin and Western gamers desire an even playing field

Source: Distimo, eMarketer, Kantan Games (Serkan Toto), Conversations with industry experts

20

(Self-conducted) Survey Results Confirm Cultural Differences

How likely are you to spend money on a mobile game for your phone?
English

60%

Japanese

Chinese

50%
40%
30%
20%
10%
0%
Very likely

Likely

Not very likely

Never

How do you prefer to pay for mobile games?

English

60%

Japanese

Chinese

50%
40%
30%

20%
10%
0%
Do not pay for
mobile games

Free to play with option

to purchase content

Buying in
app store

How often do you make in-game purchases for mobile games?

English

100%

Japanese

Chinese

80%
60%

40%
20%
0%
Daily

Weekly

Monthly

Annually

Never

Note: Surveys were conducted online and were translated into representative languages; English n=100, Chinese n=34, Japanese n=21
see appendix for more detail

21

Economic Differences in Monetization

Monetization vs. GDP
Average Revenue/Download

Aside from cultural differences, the

other major driver of monetization
across regions is economic wealth

GDP Per Capita

$6.00

$70

$60

$5.00

The regions with the highest GDP

tend to monetize the best, on
average

$40
$3.00
$30

$2.00

GDP per Capita ($ Thousands)

Average Revenue / Download

$50
$4.00

Although a Japanese game like

Monster Strike could fair well in
culturally similar markets like South
East Asia, the reduced ability to pay
is a large limiting factor

$20

Other limiting factors to Rest of

$1.00

$10

$0.00

$0
Japan Australia Korea Canada Germany U.S.

Source: Distimo, International Monetary Fund (2013)

U.K.

France

Russia

China

World success include: lower smartphone penetration, lower 3G

wireless penetration, fragmentation
of languages, regulations

22

Japanese Games Have Done Well in Korea and the U.S. but not in China
South Korea

United States

China

Japanese games have tended to do well in South Korea;

however, their longevity is much shorter than Japan

Japanese can do well in the U.S. if the IP is familiar to

Western audiences or the animation is culturalized

Japanese games face many challenges in China

Copy cats being more successful than the Japanese
games (Puzzle & Dragons has 13 copy cat versions)

Fragmented distribution, local game platforms

dominate (no Google Play, Apple store is small)

Volume of games released is greater than other

markets due to a plethora of game developers
Source: Kantan Games (Serkan Toto)

23

mixis Opportunity in China is Likely Not Worth Much

Tencent Deal

Top Mobile Games in China

February 2014 mixi announced a partnership with

Tencent to release Monster Strike in China and be the
exclusive distributor

mixi receives ~35% of gross sales (industry standard)

August 2014 announced start of closed beta testing
Will still need to complete open beta testing before a
commercial launch in Q1 2015

China has 500 million mobile phone users, which is

growing rapidly as mobile penetration increases

The Chinese mobile gaming market doubled in 2014

and analysts expect it to grow by 70% next year

Given the hyper concentration of sales, mixi would need

to be in the top 10 to have material China sales

If Monster Strike is #1 and makes RMB300mm per

month, that would add ~20bn to 2015 sales

mixi will rely on Tencent to market the app; however,

given that Tencent releases dozens of mobile games each
quarter, it is unlikely that Monster Strike is a priority

Even Candy Crush couldnt crack the Chinese market

Source: Company filings, Equity research

24

Mobile Gaming Addiction in the Public Eye

The mobile gaming industry has faced criticism in Japan

as well as in the United States

In Japan the use of Gacha has been criticized for being a

masked form of gambling

In 2012, Japans Consumer Agency banned the use

of Complete Gacha

Many Japanese games, including Monster Strike,

have placed limits on how much an underage player
can spend per month

In the U.S., mobile games have been criticized for being

designed to be addictive and for making it too easy for
minors to make mobile in-game purchases

A recent episode of the cartoon South Park titled,

Freemium Isnt Free focused on the topic of mobile
gaming addiction

Given the recent attention, the mobile gaming industry

is at risk of facing legal hurdles which could limit
monetization elements (anti-gambling laws) or lawsuits
against developers for personal harm caused by games
designed to create addiction

Source: News articles

A recent South Park episode

criticized the mobile gaming industry

25

Timing a Short

Timing Will be Critical if Shorting mixi

Despite the high likelihood of Monster Strike disappointing estimates, shorting at the current price
5,410 (11/14/14) has elevated risk because:

Monster Strike is currently being rolled out in several countries (U.S. last month, Korea this month,
China in the coming months) and news of large download numbers or strong sales in new markets
could send the stock significantly higher

mixi has already sold off over 20% in the 6 days since its Q2 14 earnings report (filed 11/7/14)
Random factors such as Monster Strike being featured in a major app store, a strong promotional
campaign in Japan or analyst upgrades could also send the stock higher in the short term

GungHo and its Puzzle & Dragons game is the most relevant case study to mixi and its success with
Monster Strike and should be carefully studied to understand what could happen to mixis stock price

At this stage of growth during the roll out of Puzzle & Dragons, GungHos stock had already
appreciated 3,000% but still had another 4,000% left to go up

Investors and analysts have already learned from the GungHo experience and have more cautiously
valued mixi; however, fundamentals could be tossed if sentiment picks up

Monitoring key leading indicators such as app store rankings and social media activity could assist in
timing a trade

27

Google Trends Data for Relevant Games Shows Their Length and Cycle
Monster Strike
English

100

Candy Crush

Chinese

Japanese

100

80

80

60

60

40

40

20

20

0
Nov-13

Jan-14

Mar-14

May-14

Jul-14

Sep-14

Nov-14

0
Nov-12

Mar-13

Puzzle & Dragons

Jul-13

Nov-13

Mar-14

Jul-14

Nov-14

Clash of Clans

100

80
60
40

20
0
May-12

Nov-12

May-13

Nov-13

May-14

Nov-14

Farmville

Angry Birds

100

100

80

80

60

60

40

40

20

20

0
Jan-09

Jul-09

Source: Google Trends

Jan-10

Jul-10

Jan-11

Jul-11

Jan-12

0
Nov-09

Nov-10

Nov-11

Nov-12

Nov-13

Nov-14

28

At this Point in Puzzle & Dragons Cycle, GungHos Stock had Not Yet Peaked
Monster Strike
Cummulative Downloads

Puzzle & Dragons

Average Revenue per User

50
45
40

700

30

600

25

35

500

30

400

25
20

300

15

200

10
5
0

1,400

1,200

15

30,000

600
400

200

0
Q1
'12

2000%

25,000

800

10

100

2500%

1,000

mixi is here

Q2
'12

Q3
'12

Q4
'12

Q1
'13

Q2
'13

Puzzle & Dragons Sales

Cummulative Stock Returns

35,000

Average Revenue per User

1,600

20

Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
'13 '13 '14 '14 '14 '14 '15 '15 '15 '15 '16 '16 '16 '16
Monster Strike Sales

Cummulative Downloads

Q3
'13

Q4
'13

Q1
'13

Q2
'14

Q3
'14

Cummulative Stock Returns

50,000

8000%

45,000

7000%

40,000
35,000

mixi is here

6000%

1500%

30,000

5000%

20,000

25,000

4000%

15,000

1000%

20,000

3000%

15,000

10,000

500%

5,000

2000%

10,000

1000%

5,000

0%

Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
'13 '13 '14 '14 '14 '14 '15 '15 '15 '15 '16 '16 '16 '16

Source: Company filings, Equity research

0%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
'12 '12 '12 '12 '13 '13 '13 '13 '13 '14 '14

29

GungHos Stock Peaked 6 Months After it Began Launching P&D Globally

mixi Share Price and Trading Multiples
7,000
6,000
5,000
4,000
3,000

Share Price

Monster
Released
Strike
Monster
TV
Ads
Strike
1 million
Downloads

EV / NTM EBIT

15 million
Downloads

Korean Launch
US Launch
40.0x
35.0x

10 million
Downloads

Taiwan
Launch

30.0x

25.0x
20.0x
15.0x

2,000

10.0x

1,000

5.0x

0
Nov-13

0.0x
Jan-14

Mar-14

May-14

Jul-14

Sep-14

Nov-14

GungHo Share Price and Trading Multiples

1,600
1,400
1,200

1,000
800
600

Share Price

10 million
US Launch
Downloads
Korean Launch
Puzzle &
Dragons
TV Ads

EV / NTM EBIT

20 million
Downloads

18.0x
16.0x
14.0x

12.0x
10.0x
8.0x

6.0x

400

4.0x

200

2.0x

0
Nov-12

Sources: Capital IQ, Company filings

Jan-13

Mar-13

May-13

Jul-13

Sep-13

0.0x
Nov-13

30

Sentiment
mixis Analyst Recommendations Over Time

Analysts have been negative on mixi, but sentiment has improved and further improvement can
positively influence shares

GungHos Analyst Recommendations Over Time

Analysts sentiment peaked with the stock price; however, mixi analysts must live with the memory of
GungHos boom and bust
Source: Bloomberg

31

Using Leading Indicators to Monitor Mobile Games

U.S. App Store Ranking
Daily and weekly app store ranking data is publically
available; customer reviews should also be tracked

In the U.S. Monster Strike has not yet risen in the App
Store ranking

The game suffers from poor reviews due to frequent

game crashes

The game is not being marketed strongly in the U.S.,

Twitter Activity
U.S. MS Tweets Last 30 Days: 2,684

industry insiders still had not heard of the game even

after it had been released for over a month

Last 30 days Twitter activity can be monitored for free

from topsy.com; channel activity can also be tracked on
Twitter.com

In the U.S., twitter activity has not gained any

momentum from its launch date

The official Monster Strike U.S. channel has 700

followers and gets low single-digit re-tweets
Japan MS Tweets Last 30 Days: 207,793

In the Japan, twitter activity has been robust and

gaining momentum

The official Monster Strike Japan channel has

600,000 followers and can get over 1,000 retweets

Source: AppAnnie, Topsy, Twitter

32

Using Web Crawlers to Create Leading Indicators

Python Script Which Pulls Live Tweets
Uses tweepy API for Twitter

from tweepy import Stream

from tweepy import OAuthHandler
from tweepy.streaming import StreamListener
import time
import json
from HTMLParser import HTMLParser

Searches for chosen search terms

Pulls live tweets as much as 45 seconds
before they are searchable online

ckey = xxx'
csecret = xxx'
atoken = xxx'
asecret = xxx'

Records tweets in a csv file

class listener(StreamListener):
def on_data(self, data):
try:

newData = json.loads(HTMLParser().unescape(data))
print newData["created_at"].encode('utf-8')
print newData["text"].encode('utf-8')
# Name of Saved File
saveFile = open('monsterstrikes.csv', 'a')
saveFile.write(newData["created_at"].encode('utf-8'))
saveFile.write(newData["text"].encode('utf-8'))
saveFile.write('\n')
saveFile.close()
return True
except BaseException, e:
print 'failed ondata,' , str(e)
time.sleep(5)
def on_error(self, status):
print status

auth = OAuthHandler(ckey, csecret)

auth.set_access_token(atoken, asecret)
twitterStream = Stream(auth, listener())
# Search Term
twitterStream.filter(track=["Monster Strike"])

33

Using Web Crawlers to Create Leading Indicators

Python Script Which Pulls Historical Tweets and Geolocations
import tweepy
import time
import csv
consumer_key = xxx'
consumer_secret = xxx'
access_token = xxx'
access_token_secret = xxx'
try:
auth = tweepy.OAuthHandler(consumer_key, consumer_secret)
auth.set_access_token(access_token, access_token_secret)
api = tweepy.API(auth)
# Open/Create a file to append data
csvFile = open('placeSearch-HASHMonsterStrike-placeID-sinceID-langEN-count100-22.csv', 'a')
#Use csv Writer
csvWriter = csv.writer(csvFile)
#Enter Country to search
places = api.geo_search(query="USA", granularity="country")
place_id = places[0].id
since_id=2014-11-10
#SEARCH TERM IN BETWEEN " "
tweets = api.search(q="#MonsterStrike", place_id=place_id, since_id=since_id, lang="en", count=100)
for tweet in tweets:
print tweet.text.encode('utf-8') + " | " + tweet.place.name.encode('utf-8') if tweet.place else "Undefined place"
if tweet.place:
csvWriter.writerow([tweet.created_at, tweet.text.encode('utf-8'), " | ", tweet.place.name.encode('utf-8')])
else:
csvWriter.writerow([tweet.created_at, tweet.text.encode('utf-8'), " | undefined place"])
except BaseException, e:
print 'failed ondata,' , str(e)
time.sleep(5)
raw_input()
raw_input()

34

Valuation

Comparable Companies
Pure-play Mobile Gaming Peers
(USD Millions)1
Company
King Digital

Enterprise

2015E

Ticker

Marketcap

Value

Sales

Sales Growth
'14-'15

2015E EBIT

EV/2015E

EV/2016E

EV/2015E

EV/2016E

'15-'16

Margin

Sales

Sales

EBIT

EBIT

NYSE:KING

$5,154

$4,178

$2,153

(3.5%)

(6.1%)

34.9%

1.9x

2.1x

5.6x

5.8x

JASDAQ:3765

4,456

3,490

1,295

(13.5%)

(13.2%)

53.0%

2.7x

3.1x

5.1x

6.3x

Mixi

TSE:2121

3,861

3,620

1,173

36.7%

0.9%

46.5%

3.1x

3.1x

6.6x

6.6x

Colopl

TSE:3668

3,185

3,324

666

19.8%

23.1%

43.9%

4.9x

4.0x

11.2x

8.8x

Zynga

NasdaqGS:ZNGA

2,501

1,675

814

18.1%

13.2%

1.1%

2.1x

1.8x

NM

NM

TSE:3656

468

416

215

22.9%

31.5%

19.7%

1.9x

1.5x

9.8x

6.5x

Average

$3,271

$2,784

$1,053

13.4%

8.2%

33.2%

2.8x

2.6x

7.7x

6.8x

Median

$3,523

$3,407

$993

18.9%

7.0%

39.4%

2.4x

2.6x

6.6x

6.5x

GungHo Online

Klab

Broader Gaming Peers

(USD Millions)1
Company

Enterprise

2015E

2015E EBIT

EV/2015E

EV/2016E

EV/2015E

EV/2016E

Ticker

Marketcap

Value

Sales

'14-'15

'15-'16

Margin

Sales

Sales

EBIT

EBIT

NasdaqGS:ATVI

$14,453

$14,947

$4,750

(1.7%)

8.4%

34.3%

3.1x

2.9x

9.2x

8.4x

NasdaqGS:EA

12,895

11,098

4,444

12.6%

1.7%

22.8%

2.5x

2.5x

11.0x

9.7x

TSE:3659

4,301

2,926

1,488

0.5%

4.4%

33.9%

2.0x

1.9x

5.8x

5.6x

NasdaqGS:TTWO

2,220

1,881

1,520

25.5%

18.9%

7.3%

1.2x

1.0x

17.0x

6.6x

ENXTPA:UBI

1,812

1,867

1,979

16.9%

4.1%

13.1%

0.9x

0.9x

7.2x

6.5x

DeNA Co.

TSE:2432

1,751

1,333

1,218

(3.4%)

(6.5%)

12.7%

1.1x

1.2x

8.6x

9.3x

Gree

TSE:3632

1,667

1,181

794

(16.2%)

6.4%

17.8%

1.5x

1.4x

8.3x

5.7x

Koei Tecmo

TSE:3635

1,278

1,192

390

17.2%

4.9%

23.4%

3.1x

2.9x

13.0x

11.9x

Marvelous

TSE:7844

483

415

244

10.8%

3.7%

18.8%

1.7x

1.6x

9.1x

8.2x

Glu Mobile

NasdaqGS:GLUU

410

355

246

7.4%

6.6%

5.2%

1.4x

1.4x

28.0x

13.7x

Average

$4,127

$3,719

$1,707

7.0%

5.3%

18.9%

1.9x

1.8x

11.7x

8.6x

Median

$1,781

$1,600

$1,353

9.1%

4.7%

18.3%

1.6x

1.5x

9.1x

8.3x

Activision Blizzard
Electronic Arts
NEXON Co., Ltd.
Take-Two Interactive
Ubisoft

Sales Growth

Valuation multiples and profitability metrics calculated in local currency values

Source: Capital IQ, Company filings

36

Investment Outcomes
mixis current valuation implies reasonable expectations for growth and

Current Valuation 1
( millions)

2015

2016

Sales

136,700

137,900

Multiple

3.0x

Implied EV
EBIT
Multiple

3.0x

410,100

413,700

63,600

64,200

7.0x

7.0x

Implied EV

445,200

449,400

Avg. Implied EV

427,650

431,550

Net Debt
Equity Value
Avg. Equity Value

(28,549)

(28,549)

456,199

460,099

profitability and multiples in-line with peers

However, mixi is rapidly rolling out its mobile gaming app, Monster Strike,
internationally and in the next 6 12 months the market will likely re-rate
the stock based on its international success and potential

An opportunity to go short could arise if Monster Strike monetizes poorly

outside of Japan and the market builds in unrealistic expectations

458,149

Up/(down) side

2%

Candy Crush 2.0 2

Hit in Asia Only 2

Base Case 2

( millions)

2015

2016

( millions)

2015

2016

( millions)

2015

2016

Sales

175,743

279,733

Sales

143,402

155,986

Sales

139,132

135,154

Multiple
Implied EV
EBIT
Multiple

3.0x

3.0x

Multiple

527,229

839,198

Implied EV

84,733

142,621

EBIT

7.0x

7.0x

3.0x

Multiple

3.0x

430,207

467,957

66,147

71,504

7.0x

7.0x

Multiple
Implied EV
EBIT
Multiple

2.0x

2.0x

278,264

270,309

63,693

59,533

5.0x

5.0x

Implied EV

593,131

998,346

Implied EV

463,030

500,530

Implied EV

318,465

297,664

Avg. Implied EV

560,180

918,772

Avg. Implied EV

446,619

484,244

Avg. Implied EV

298,364

283,987

(28,549)

(28,549)

(28,549)

(28,549)

588,729

947,321

475,168

512,793

Net Debt
Equity Value
Avg. Equity Value
Up/(down) side
Probability

768,025
71%
5%

Net Debt
Equity Value
Avg. Equity Value

493,980

Net Debt
Equity Value
Avg. Equity Value

Up/(down) side

10%

Up/(down) side

Probability

15%

Probability

(28,549)

(28,549)

326,913

312,536

319,725
(29%)
80%

Estimated Risk/Reward
Weighted upside
Weighted downside
Go-short Risk/Return Ratio
1
2

Based on consensus estimates

Modeled based on scenario-specific factors

5%
(23%)
4.6

37

Appendix

The Following People Were Interviewed During the Course of Research:

Daichi Katase Investor Relations at mixi; Tokyo, Japan
Grace Huang & Yuji Nakamura Reporters at Bloomberg News, Tokyo, Japan; authors of Bloomberg
article Google Turns to Monster Strike to Close Apple App Gap, published September 12, 2014

Shuhei Ogata Interactive Designer at btrax; Tokyo, Japan

Bjrn Videkull Vice President of Sales and Business Development at Panda Graphics; Tokyo, Japan
You Na Senior Equity Research Analyst at ICBC; Hong Kong, China
Fawne Jiang Managing Director of Equity Research at Brean Capital; New York, New York
Travlyn Vaughn Senior Game Designer at Wicked Fun; San Francisco, California
Neil Haldar Vice President of Business Development at GREE; San Francisco, California
Ray Salloom Director of User Acquisition and Analytics at Rogue Play; San Francisco, California

Carlos Flores Player Experience Manager at GREE; San Francisco, California

Boyan Alexandrov Mobile Software Developer at CoverMyMeds; Columbus, Ohio

39

Survey Methodology

Surveys were translated into Chinese and Japanese by native speakers

Surveys were conducted online using surveymonkey.com to build the web poll

Surveys were posted on websites including reddit (English surveys), Sina WeiBo (Chinese surveys) and
Yahoo! Japan (Japanese surveys), Twitter (all languages)

English n=100, Chinese n=34, Japanese n=21

Questions Polled:

1.

Are you a male or female?

2.

What is your age category?

3.

What country do you live in?

4.

Do you own a smart phone?

5.

How many games do you have currently downloaded on your phone?

6.

On average, how many hours per week do you spend playing games on
your phone?

7.

How likely are you to spend money on a mobile game for your phone?

8.

How do you prefer to pay for mobile games?

9.

What is the most you have paid to purchase a game in the app store?

10. How often do you make in-game purchases for mobile games?
40

Thank You!