COMPANY RESEARCH AND ANALYSIS REPORTKLab Inc.
3656
Tokyo Stock Exchange First Section

16-Jun.-2017
FISCO Ltd. Analyst

Ikuo Shibata

FISCO Ltd.
http://www.fisco.co.jp

COMPANY RESEARCH AND ANALYSIS REPORTFISCO Ltd.
http://www.fisco.co.jp

KLab Inc.
3656 Tokyo Stock Exchange First Section

16-Jun.-2017
http://www.klab.com/jp/english/ir/■ Index■Summary---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- 01
1. Recent results trends...................................................................................................................................

01

2. New titles are expected to be hits.......... ......................................................................................................

01

3. Achieving both business stability and growth through a diversified business portfolio. ...............................

02■Company profile---------------------------------------------------------------------------------------------------------------------------------------------------------- 03
1. Business description. . ..................................................................................................................................

03

2. Corporate characteristics. . ..................... ......................................................................................................

04

3. History................................................... ......................................................................................................

06■Business results---------------------------------------------------------------------------------------------------------------------------------------------------------- 07
1. Past results trend................................... ......................................................................................................

07

2. FY12/16 results............................................................................................................................................

09■Results of activities-------------------------------------------------------------------------------------------------------------------------------------------------- 10
1. Review of the development policy......... ......................................................................................................

10

2. Pipeline conditions. . ............................... ......................................................................................................

11

3. Evolving its management and marketing capabilities...................................................................................

11

4. Promoting the non-game business..............................................................................................................

11■Growth strategy----------------------------------------------------------------------------------------------------------------------------------------------------------- 12
1. Medium-term direction.. ......................... ......................................................................................................

12

2. Policies for activities in the current fiscal year. .............................................................................................

13■Results outlook------------------------------------------------------------------------------------------------------------------------------------------------------------ 14
1. FY12/17 results forecasts...................... ......................................................................................................

14

2. The progress made in FY12/17....................................................................................................................

15■Shareholder returns------------------------------------------------------------------------------------------------------------------------------------------------- 17

We encourage readers to review our complete legal statement on “Disclaimer” page.

COMPANY RESEARCH AND ANALYSIS REPORTFISCO Ltd.
http://www.fisco.co.jp

KLab Inc.
3656 Tokyo Stock Exchange First Section

16-Jun.-2017
http://www.klab.com/jp/english/ir/██Summary
Provider of mobile online games from popular IP like Love Live!
Aiming to accelerate growth by releasing new titles
KLab Inc. <3656> (hereafter, also “the Company”) focuses on the planning and development of mobile games,
mainly for smartphones, toward realizing its vision of “Creating a world of excitement.” It also operates a non-gamebusiness with the aims of expanding sales and reducing volatility. The main titles include Love Live! School Idol
Festival (hereafter, School Festival) and Bleach Brave Souls (hereafter, Bleach). The Company’s strength is in creating
games from popular Japanese manga and animation and then managing these games, and it is also actively
developing its business overseas. Approximately 16% of revenue is from overseas sales, which has tripled in the last
3 years. Also, the majority of the revenue is provided by the top four titles, but it can be said to have a comparatively
balanced lineup within an industry where the reliance on specific hit titles tends to be high. In the last few years, there
has been a sense of stagnation in the smartphone games market as a whole, and in this situation, the Company’s
results have been sluggish due to the poor performance of new titles and the postponement of releases following
a change in policy. However, to a certain extent it has achieved results, as in addition to the ongoing developmentof 11 pipeline titles that include popular IP, it is currently strengthening its management and marketing capabilities.
As the Company is making progress in reducing fixed costs and switching to variable costs, it can be said to haveestablished a system for returning to a growth trajectory.
1. Recent results trends
In the FY12/16 results, revenue decreased 6.3% year on year (YoY) to ¥19,599mn and operating income fell 42.0%
to ¥1,274mn, for declines in revenue and profits and a net loss. Revenue declined due to the poor performance of
titles released in 2015 and the postponement of the release of new titles, following a change in policy. The sluggish
performance of the event business that was launched in 2015 also adversely affected the results. In terms of profits,
while the aim was to lower SG&A expenses, including by reducing personnel costs and closing an overseas center,
operating income declined due to a significant rise in the cost of sales ratio (an extraordinary factor caused by theevent business) and as profits were kept down by the decline in revenue. Moreover, the reasons for the net loss
included the recording of a foreign exchange loss following the appreciation of the yen, an impairment loss due tothe poor performance of the titles, and a loss on the liquidation of a subsidiary.
2. New titles are expected to be hits
From FY12/17, the Company has adopted the presentation of full-year earnings forecasts using a range-based
method, and it is forecasting revenue in the range of ¥17,500mn to ¥22,500mn and operating income of ¥600mn
to ¥2,900mn. Should it reach the upper limits of these ranges, it would achieve new record highs for both revenue
and operating income. A prerequisite of these forecasts is that the new titles (it plans to release from 2 to 5 titles)
contribute to the results. Also, the assumptions when setting the ranges reflect the sales lifecycles of the existing
titles (natural decreases) and the extent to which new titles are hits. At FISCO, we think that it is very possible that
the Company will achieve the upper limits of the ranges for the full fiscal year earnings forecasts. This is because
it made a strong start in Q1 (high rates of progress) and that among the titles scheduled for release, we consider
that is fairly certain that the popular titles of Captain Tsubasa and Uta no Prince-sama

will be released and that

it is also very likely that they will be hits.

We encourage readers to review our complete legal statement on “Disclaimer” page.

01 17

COMPANY RESEARCH AND ANALYSIS REPORTFISCO Ltd.
http://www.fisco.co.jp

KLab Inc.
3656 Tokyo Stock Exchange First Section

16-Jun.-2017
http://www.klab.com/jp/english/ir/

Summary

3. Achieving both business stability and growth through a diversified business portfolio
The Company’s direction for its medium-term growth strategy is to increase the number of game titles throughexternal development and publishing for the Game Business that has so far been focused on in-house development,
and also, by advancing the non-game business, to achieve a state of balance for the three businesses. In the context
of the rapid changes to the environment surrounding smartphone games, its strategy can be said to be accelerating
growth through diversifying its business portfolio and building a flexible profit structure (turning fixed costs into
variable costs), thereby converting to a structure that enables stable profit management.
In a situation in which the future of the smartphones games market feels uncertain, at FISCO we think that theCompany’s growth will be supported by its overseas business development and by it benefiting from the profits
of the remaining players (including by utilizing external resources), and we will be focusing on the developments inthese areas. Also, we think that its strategy of advancing the non-game business toward expanding its businessand stabilizing its profit structure is rational. The key to success is likely to be whether the Company can utilize its
expertise in developing IP in Japan and its independent marketing capabilities to create new value that is unique to it.
Key Points
A mobile online games company specializing in the creation of hit titles from popular IP
Strengths include its unique marketing capabilities and overseas business development capabilities• Revenue and profits declined in FY12/16, mainly due to the postponement of new titles• Is aiming to expand results in FY12/17 by releasing new titles• Its policy is to realize both stability and growth from external development and publishing, and to expand thenon-game business, while maintaining a balance••㻾㼑㼟㼡㼘㼠㼟㻌㼠㼞㼑㼚㼐㼟㻔¥㼙㼚㻕㻾㼑㼢㼑㼚㼡㼑㻌㻔㼘㼑㼒㼠㻕㻻㼜㼑㼞㼍㼠㼕㼚㼓㻌㼕㼚㼏㼛㼙㼑㻌㻔㼞㼕㼓㼔㼠㻕㻞㻡㻘㻜㻜㻜

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Source: Prepared by FISCO from the Company's financial results

We encourage readers to review our complete legal statement on “Disclaimer” page.

02 17

COMPANY RESEARCH AND ANALYSIS REPORTFISCO Ltd.
http://www.fisco.co.jp

KLab Inc.
3656 Tokyo Stock Exchange First Section

16-Jun.-2017
http://www.klab.com/jp/english/ir/██Company profile
A mobile online games company specializing in the creation of hit
titles from popular IP
1. Business description
KLab focuses on the planning and development of mobile games, mainly for smartphones, toward realizing its visionof “Creating a world of excitement.” It also operates a non-game business with the aims of expanding sales andreducing volatility. Its main titles include School Festival, Bleach, Celestial Craft Fleet (hereafter, Celestial Craft), andTales of Asteria (hereafter, Asteria). The Company’s strength is in creating games of popular Japanese manga andanimation and then managing these games, and it is also actively developing its business overseas. The majority of
the revenue is provided by the top four titles, but it can be said to have a comparatively balanced lineup within anindustry where the reliance on specific hit titles tends to be high.
The business segments are classified into the mainstay Game Business and also Other Businesses, which includes
large-scale, high-load compliant infrastructure services that is has provided since its establishment, and the event
business* that was consolidated from FY12/16. However, practically all of the revenue is provided by the GameBusiness and in addition, Other Businesses recorded a segment loss due to the impact of the poor performanceof the event business.
*	It announced in March 2017 that it was withdrawing from this business

The Company has five consolidated subsidiaries (of which, four are overseas subsidiaries), and one equity method
affiliate. The four overseas subsidiaries are KLab Global Pte. Ltd. (Singapore subsidiary), KLab America, Inc. (U.S.
subsidiary)* 1, KLab Cyscorpions, Inc. (Philippines subsidiary)* 2, and KLab China Inc. (Chinese subsidiary). Its
subsidiary in Japan is KLab Entertainment Inc., which manages the event business, and equity method affiliates
are KLab Venture Partners Co., Ltd., which is a joint venture with SBI Investment Co., Ltd. that invests in venturecompanies, and KLab Ventures Inc.
*1	Following changes to its global strategy, as of May 2017, it closed the games development studio function.
*2	Following changes to its global strategy, it liquidated this subsidiary in April 2017.

An overview of the main titles is as follows.
(1) Love Live! School Idol Festival
Love Live! is a media-mix project that sells imaginary female high school students as school idols, and it is a
popular series that is being developed not only for releases of TV anime and music CDs with animation PV (DVD),but also for various other media, including Internet radio, live events, magazines, trading card games. Love Live!
School Idol Festival, which is the game created based on the Love Live! IP, is a rhythm, action, and adventure
game that the Company jointly developed with Bushiroad Inc., and launched in April 2013. It has sold strongly,
including rising to fifth in the top-sales ranking of the App Store within Japan in just one day from its release.
Subsequently also, it has continued to contribute to results as a long-running hit title, and in September 2016, thenumber of players worldwide exceeded 30 million people, and in March 2017, the number of domestic players
surpassed 20 million people.

We encourage readers to review our complete legal statement on “Disclaimer” page.

03 17

COMPANY RESEARCH AND ANALYSIS REPORTFISCO Ltd.
http://www.fisco.co.jp

KLab Inc.
3656 Tokyo Stock Exchange First Section

16-Jun.-2017
http://www.klab.com/jp/english/ir/

Company profile(2) Bleach Brave Souls
This is an exciting 3D action game launched in July 2015. The popular BLEACH is a sword-battle-action comic
serialized in Weekly Shonen Jump, a well-known manga magazine for young people in Japan published by
Shueisha Inc. In addition to a TV anime, a theatrical version has also been released. The game is extremely popular
not just in Japan, but around the world also, and by March 2017 it had been downloaded worldwide more than
20 million times.
(3) Celestial Craft Fleet
This is aerial-fleet action-battle game launched in February 2014. It is an original title that combines 3D action andtraining simulation elements and has simple operations, and it is set in a fantasy world where continents float in thesky. Players conduct exciting aerial battles with their original battleships that are manned by beautiful girl sailors.
(4) Tales of Asteria (delivered by BANDAI NAMCO Entertainment)This is role playing game (RPG) launched in April 2014 from a joint development with BANDAI NAMCOEntertainment Inc. The characters in the “Tales of” series released by BANDAI NAMCO Entertainment all appear
in this RPG created for smartphones.
The main titles; School Festival (left) Bleach (right)

Source: The Company’s website

Improvements in player acquisition and the in-game purchase rates
are the driving forces behind the growth in results
2. Corporate characteristics(1) The growth model
The Company’s main source of revenue is in-game purchases of items by the games’ players. In other words, its
growth model is to acquire players by creating hit titles and then to improve the in-game purchase rates. Also,
the lifecycle of its mobile online game hit titles can be expected to be comparatively long, although this depends
on their management, but it is unavoidable that a (natural) sales decrease occurs year by year. Therefore, themost important issue for the Company is how to cover this natural decrease in hit titles with new titles, and it canbe said that the key to growth is accumulating titles in the development pipeline (the number of releases of new
titles) and improving the hit rate.

We encourage readers to review our complete legal statement on “Disclaimer” page.

04 17

COMPANY RESEARCH AND ANALYSIS REPORTFISCO Ltd.
http://www.fisco.co.jp

KLab Inc.
3656 Tokyo Stock Exchange First Section

16-Jun.-2017
http://www.klab.com/jp/english/ir/

Company profile

Its strengths are its independent marketing capabilities andoverseas business development capabilities(2) The Company’s competitive advantagesa) Its ability to create hit titles from popular IP
The Company’s strength is in creating games from popular Japanese IP, such as manga and animation, andthen managing these games. Starting with its main titles of School Festival and Bleach, it has a track record ofcreating games for a number of popular IP, and it has accumulated expertise in acquiring leading IP, planningand developing games that leverage each IP’s strengths, and then in managing and marketing these games
after they have been released. This supports the Company’s strengths. In particular, Japan’s pop culture (otaku
culture) has been increasing in popularity around the world, including in Asia, Europe, and the United States, andthis has become a major advantage for the Company for its overseas business development. It is also utilizing
its track record and experience of turning popular IP into games, and the network it has acquired from this, todevelop its own IP.
b) Independent marketing capabilities
In addition to developing efficient advertising and promotions activities from accurate KPI analysis and effects
measurements, the Company is conducting effective marketing to capture a core player base (fostering a fan
community) through its implementation of measures that are unique to it, such as for online video distribution*and real events. Moreover, these points-of-contact with grassroots players (networks) provide it with considerable
support in terms of offering hints for the planning and development of new titles and title management after theirreleases, which is an asset that its competitors cannot easily imitate.
*	By KLab Games Station (Japan) domestically and KLab Games Station (Global) for overseasc) Overseas business development capabilities
Another of the Company’s strengths is its overseas business development capabilities. Currently, approximately
16% of revenue is provided by its overseas business, which has tripled in the last 3 years. In particular, the foreign
language versions of Bleach are proving a great success (a French version has been launched) and sales of the
global versions exceed those of the Japanese version (FY12/16 results). Overseas also, in addition to developing
very popular Japanese IP, the Company is developing its business against the backdrop that, starting with
online video distribution for the overseas market, it conducts marketing activities tailored to each local market,
including exhibiting and participating in real events in Europe and the United States. It has also launched in-housemanagement of Web advertising distribution and it is working to accumulate expertise in these fields.

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05 17

COMPANY RESEARCH AND ANALYSIS REPORTFISCO Ltd.
http://www.fisco.co.jp

KLab Inc.
3656 Tokyo Stock Exchange First Section

16-Jun.-2017
http://www.klab.com/jp/english/ir/

Company profile

Since its foundation, it has provided various IT related technologies
in the form of services
Entry into the social game business was the trigger for growth
3. History
The Company’s origins can be traced back to the launch of K Laboratory in January 2000 as the R&D division of
CYBIRD Co., Ltd. In August 2000, K Laboratory Inc. was established as a subsidiary of CYBIRD. It worked on thedevelopment of programs for mobile phones and other projects, and achieved results including releasing the world’s
first Java application to run on a mobile phone. Since its foundation, it has offered various IT related technologies in
the form of services, including large-scale, high-load compliant infrastructure services. In November 2004, when thecompany name was changed to KLab Inc., it became a consolidated subsidiary of USEN CORPORATION <4842>,
and then in February 2007, the Company’s shares were transferred to SBI Holdings, Inc. <8473> and to others.
A turning point for the Company was in 2009 when it decided to focus on social games and released the hit title
Koi-shite Kyaba-jyo. Subsequently in September 2011, it listed on the Tokyo Stock Exchange (TSE) Mothers market,
against the backdrop of the growth of its Game Business.
After that, the Company’s business foundation continued to expand, centered on the Game Business. It also actively
developed an overseas business and established a series of overseas subsidiaries, in Singapore in February 2012,
in the United States and the Philippines in April of the same year, and in China in November of the same year. In
May 2012, its listing was transferred to the TSE First Section.
In November 2013, the Company sold the SI business division and license business division in order to concentrate
its management resources into the Game Business. Meanwhile, in August 2015 it established a subsidiary (KLabEntertainment) to conduct an event business and related operations. Then in October of the same year, it establisheda subsidiary (KLab Venture Partners) to conduct a venture capital business, and in August 2016, it established asubsidiary (KLab Food&Culture Inc.) to develop an overseas business for Japanese food and culture. In such ways,
it has been working to advance non-game businesses for the future.

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06 17

COMPANY RESEARCH AND ANALYSIS REPORTFISCO Ltd.
http://www.fisco.co.jp

KLab Inc.
3656 Tokyo Stock Exchange First Section

16-Jun.-2017
http://www.klab.com/jp/english/ir/██Business results
Achieved record high revenue in FY12/14 from the hit School Festival
1. Past results trend
Looking back on the results in the past 5 years, while the Company achieved record high revenue in FY12/14 as aresult of School Festival becoming a hit, subsequently, revenue trended downward. This is because in addition to thepoor performance of titles released in 2015, in FY12/16 it postponed the releases of new titles following a change
in policy, so it was unable to cover for the natural decrease in existing titles, such as School Festival. On the other
hand, overseas revenue increased greatly from the contributions of School Festival and Bleach.
In terms of profits, the Company recorded an operating loss in FY12/13, which was due to the growth in fixed
costs following its establishment of a series of overseas centers, and also because the number of releases wasless than planned due to development delays, the poor performance of new titles, and the increase in outsourcing
costs in order to recover from the development delays. However, since FY12/14, it has made progress in reducing
costs and SG&A expenses and improving its profit structure (lowering the break-even point) by withdrawing fromlow-profit and unprofitable projects. Alongside this, the Company has reduced personnel numbers through focusing
on development resources, as well as turning fixed costs into variable costs. One of the reasons for the deteriorationin the costs of sales ratio in FY12/16 was the impact of the event business (an extraordinary factor).
Financially, at the end of FY12/14 the equity ratio rose to 70.8% following a capital increase from a third-party
allocation* and subsequently it has trended at above 70%. The current ratio at the end of FY12/16 was also at thehigh level of 263.9% and there are no concerns about the stability of the Company’s financial base.
*	In addition to a capital and business alliance with Qihoo 360 Technology Co. Ltd., which operates a distribution platform
for China’s largest distribution application for smartphones, it involved the issue of new shares and share acquisition rights
to the London branch of the Deutsche Bank by a third party allocation (targeted issue program).

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Source: Prepared by FISCO from the Company's results briefing materials

We encourage readers to review our complete legal statement on “Disclaimer” page.

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COMPANY RESEARCH AND ANALYSIS REPORTFISCO Ltd.
http://www.fisco.co.jp

KLab Inc.

16-Jun.-2017

3656 Tokyo Stock Exchange First Section

http://www.klab.com/jp/english/ir/

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Source: Prepared by FISCO from the Company's financial results㼀㼞㼑㼚㼐㻌㼕㼚㻌㼠㼔㼑㻌㼑㼝㼡㼕㼠㼥㻌㼞㼍㼠㼕㼛
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㼏㼛㼚㼟㼛㼘㼕㼐㼍㼠㼑㼐㻲㼅㻝㻞㻛㻝㻠
㼏㼛㼚㼟㼛㼘㼕㼐㼍㼠㼑㼐㻲㼅㻝㻞㻛㻝㻡
㼏㼛㼚㼟㼛㼘㼕㼐㼍㼠㼑㼐㻲㼅㻝㻞㻛㻝㻢
㼏㼛㼚㼟㼛㼘㼕㼐㼍㼠㼑㼐

Source: Prepared by FISCO from the Company's financial results

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08 17

COMPANY RESEARCH AND ANALYSIS REPORTFISCO Ltd.
http://www.fisco.co.jp

KLab Inc.
3656 Tokyo Stock Exchange First Section

16-Jun.-2017
http://www.klab.com/jp/english/ir/

Business results

Revenue declined in FY12/16 for the second consecutive fiscal
year due to the poor performance of titles released in 2015 and the
postponement of new titles
2. FY12/16 results
In the FY12/16 results, revenue decreased 6.3% YoY to ¥19,599mn, operating income fell 42.0% to ¥1,274mn,
ordinary income declined 56.7% to ¥830mn, and the net loss attributable to owners of parent was ¥814mn (compared to net profit of ¥700mn in the previous fiscal year) for declines in revenue and profits and a final loss.
There has been a sense of stagnation in the smartphone games market as a whole, and in this situation, revenue
fell due to the poor performance of new titles* and the postponement of releases, mainly due to a change in policy.
In addition, the sluggish performance of the event business that was launched in 2015 also adversely affected
the results. The postponement of the releases of new titles was based on the Company reflecting on the poor
performances of the titles released in 2015 and deciding to change its policy and to only release titles after refining
them to an even higher level of completion. Revenue from existing titles has trended steadily, as it has worked tostrengthen its management and marketing capabilities, and this can be viewed as having kept the extent of thedecline in revenue to a minimum.
*	Puzzle Wonderland and Age of Empires: World Domination

In terms of profits also, although the Company worked to keep down SG&A expenses, including by reducing
personnel costs and closing an overseas center, it recorded an operating loss because of the downward pressure
placed on profits by the significant rise in the cost of sales ratio (67.9% → 73.5%) and the decline in revenue. The
cost of sales ratio rose because of the increase in outsourcing costs, including for funding for joint development
projects and costs related to the event business. The impact of costs relating to the event business (an extraordinary
factor) seems to have been particularly great. The Company recorded a foreign exchange loss (¥388mn)*1 within
non-operating expenses following the appreciation of the yen. It also recorded extraordinary losses, of an impairment
loss (¥757mn)*2 from the poor performing titles, a loss on the liquidation of a subsidiary (¥252mn)*3, and a loss on
the valuation of investment securities (¥131mn), and consequentially it recorded a net loss compared to the profit
in the previous fiscal year.
*1	It was generated due to a revaluation of foreign-currency deposits and held for the settlement of foreign-currencytransactions, and not for costs for cash expenditures (to be used unchanged as foreign currency).
*2	The entire amount of the impairment loss was recorded for the Puzzle Wonderland and Age of Empires: World Domination
titles.
*3	From the decision to withdraw from an offshore development center (the Philippines subsidiary).

Financially, total assets declined to ¥12,133mn (down 4.0% on the end of the previous fiscal year) due to the saleof investment securities and the recording of an impairment loss from the poor performing titles (software account),
while shareholders’ equity also declined to ¥9,110mn from the recording of a net loss (down 7.2% on the end of
the previous fiscal year). As a result, the equity ratio fell, although only slightly, to 75.1% (77.7% at the end of theprevious fiscal year).

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09 17

COMPANY RESEARCH AND ANALYSIS REPORTFISCO Ltd.
http://www.fisco.co.jp

KLab Inc.
3656 Tokyo Stock Exchange First Section

16-Jun.-2017
http://www.klab.com/jp/english/ir/

Business results

Business results(¥mn)
FY12/15
Results

FY12/16
Results% of total
20,913

Revenue

Change% of total
19,599Change rate
-1,313-6.3%

20,86899.8%

19,283

98.4%-1,584

-7.6%

44

0.2%

315

1.6%

271

612.8%

Cost of sales

14,19967.9%

14,407

73.5%

208

1.5%

Gross profit

6,713

31.9%

5,192

26.5%

-1,521-22.7%

Game Business

6,702

32.1%

5,437

28.2%

-1,265-18.9%

Other Businesses

11

25.0%

-244

-

-256

-

SG&A expenses

4,515

21.4%

3,917

19.9%

-598

-13.2%

Operating income

2,198

10.4%

1,274

6.5%

-923

-42.0%

Ordinary income

1,919

9.1%

830

4.2%

-1,089-56.7%

700

3.3%

-814

-

-1,514-

Game Business
Other Businesses

Profit attributable to owners of parent
Breakdown of cost of sales

2,781

2,630

-151

-5.4%

813

1,430

617

75.9%

10,567

9,830

-737

-7.0%

31

511

480

-

Salary allowance, etc.

1,181

1,081

-100

-8.5%

PR & promotions costs

1,733

1,344

-389

-22.4%

Other

1,597

1,487

-110

-6.9%

Total assets

12,633

12,133

-499

-4.0%

Shareholders’ equity

9,819

9,110

-709

-7.2%

Equity ratio

77.7%

75.1%

-2.6pt-Labor costs
Outsourcing costs
Royalties / commissions
Other
Breakdown of SG&A expenses

Source: Prepared by FISCO from the Company's financial results██Results of activities
Is making steady progress in the development pipeline toward therelease of new titles
1. Review of the development policy
The Company reviewed its development policy based on factors such as the situation up to the present time andchanges to the external environment. It decided 1) not to adopt poor performing IP from Europe and the UnitedStates and to focus mainly on highly popular Japanese IP even for its overseas market (changed to a system ofdeveloping games utilizing Japanese IP in Japan, and then releasing them overseas), and 2) to shift from in-housedevelopment to promoting external development and publishing. In accordance with this, it decided to withdraw froman overseas development center (the Philippines subsidiary). In addition, it has started to review its system for thedivision of labor internationally and to reorganize its overseas centers, including closing the studio function of its U.S.
subsidiary. Also, by promoting external development and publishing, it plans to change game development-related
costs from fixed costs to variables costs, which it expects to bring about cost reductions, risk hedging, and improved
hit rates in the future.

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10 17

COMPANY RESEARCH AND ANALYSIS REPORTFISCO Ltd.
http://www.fisco.co.jp

KLab Inc.
3656 Tokyo Stock Exchange First Section

16-Jun.-2017
http://www.klab.com/jp/english/ir/

Results of activities

2. Pipeline conditions
As previously explained, the releases of new titles in FY12/16 were postponed, and currently the Company isprogressing the development of a total of 11 titles (development of both actual game titles and pilot titles), andit can be evaluated as steadily accumulating pipeline titles toward their release as new titles. Among them, 5 arebeing developed in-house and 6 by external development and publishing. Also, a total of 6 titles, including Captain
Tsubasa and Uta no Prince-sama are the IP of other companies.
Games Pipeline

Source: The Company’s results briefing materials

3. Evolving its management and marketing capabilities
In the absence of new titles in FY12/16, the Company worked to maintain its existing titles, and as a result, it wasable to refine its management and marketing capabilities. Specifically, it increased the efficiency of player acquisition
from effective advertising, and also improved the in-game purchase rates through utilizing monetization techniques.
It also worked to strengthen other various measures, including to improve the retention rates of players and to foster
fan communities. As a result, titles released two or more years ago still achieved record high sales on a monthly
basis, from which we can see that the Company’s management and marketing capabilities have evolved to a newstage.
4. Promoting the non-game business
The Company also actively worked to strengthen the non-game business. It planned to hold the Classic RockAwards (at the Ryoˉ goku Kokugikan in Tokyo), the rock world’s most authoritive awards, held in Japan for the
first time. In addition, it established a subsidiary (KLab Food&Culture) with the aim of exporting Japanese culture(particularly Japanese food culture) to the world, and it also started development of Ramen Arena, a food themepark, and opened the first store in Shanghai, China, in December 2016. Although the Classic Rock Awards ended
up performing poorly, the Ramen Arena has made a steady start. The Company has also formed an investment fundand started investing in promising startups.
To summarize from the above the financial results and the results of activities in FY12/16, while revenue declined
for the second consecutive fiscal year, the Company constructed a framework for growth in the future (including
accumulating pipeline titles, reviewing the development policy and system, strengthening the profit structure, andenhancing the management and marketing capabilities). On these points, we can evaluate the Company as having
achieved a certain level of success.
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11 17

COMPANY RESEARCH AND ANALYSIS REPORTFISCO Ltd.
http://www.fisco.co.jp

KLab Inc.
3656 Tokyo Stock Exchange First Section

16-Jun.-2017
http://www.klab.com/jp/english/ir/██Growth strategy
Aiming to diversify its business portfolio through external
development and publishing, and promoting the non-game businesstoward realizing both stability and growth
1. Medium-term direction
The Company’s direction for its medium-term growth strategy is to increase the number of game titles throughexternal development and publishing for the Game Business, which so far has been focused on in-house development, based on the review of the development policy in FY12/16. At the same time, it aims to advance thenon-game business to achieve a state of balance for the three businesses. In the context of the rapid changes
to the environment surrounding smartphone games, its strategy can be said to be accelerating growth throughdiversifying its business portfolio and building a flexible profit structure (turning fixed costs into variable costs), while
also converting to a structure that enables stable profit management.
In particular, the following 5 effects can be expected from the promotion of external development and publishing; 1)
a reduction of fixed costs and converting personnel costs to variable costs, 2) the appointment of excellent external
creative staff, 3) the diversification of soaring development costs and risks, 4) an increase in the number of titles
being developed simultaneously and a shortening of the development period, and 5) expanding and contracting thedevelopment pipeline and responding flexibly to the conditions for the acquisition of IP.
The Company is also focusing on supporting its revenue from the non-game business and creating a growth engine
for the future. It is utilizing its development capabilities and IP procurement capabilities for the development andmanagement of non-game smartphone apps and also to develop a media business. In addition, it is looking widely
toward the application of technologies with future potential, like VR, AI, IoT, EdTech, and Fintech.
Medium-Term Business Formation Conception

Source: The Company’s results briefing materials

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12 17

COMPANY RESEARCH AND ANALYSIS REPORTFISCO Ltd.
http://www.fisco.co.jp

KLab Inc.
3656 Tokyo Stock Exchange First Section

16-Jun.-2017
http://www.klab.com/jp/english/ir/

Growth strategy

Its policy is to focus on actively launching new titles and global
business development in order to return to a growth trajectory
2. Policies for activities in the current fiscal year
(1) Actively launch new titles and stably manage existing titles
As previously explained, the Company is currently developing a total of 11 titles, either for the development of thegame itself or the development of a pilot, and it plans to launch between 2 to 5 of these development titles as
new titles in this fiscal year. It is also aiming to launch around the same number of new titles in FY12/18. In otherwords, even as the market has matured and some companies are withdrawing from it, its strategy can be said
to capture profits from the remaining players through aggressively going on the offensive. Conversely, its policy isalso to diversify the costs of development, including through utilizing external development and publishing, andto hedge risks. So it is maintaining a balance between offense and defense.
For existing titles, the Company makes a clear distinction between “future main titles we will continue to support”
and “titles marked for closure.” For the “main titles,” it intends to maintain and improve revenue by further
developing the management and marketing methods that were successful in FY12/16, while for the “closure
titles,” it will either close them, transfer their management, or sell them.
(2) A contents strategy centered on IP
The Company continues to develop its business based on its strength of releasing titles that utilize IP. In particular,
it will not adopt IP from Europe and the United States that are performing poorly, and instead it will aim to acquire
Japanese IP (especially IP with a passionate, highly loyal fan base). It is also working in-house to develop new
player experiences and to open-up new logics for games (however, it intends to improve the hit rates by narrowing
down the number of titles and concentrating development resources by repeatedly conducting reviews at thepilot-development stage). Further, regarding original titles it develops on its own, the Company is not simply
releasing games, it is developing them as its own IP or shared IP through cooperating with various companies inrelated industries, including animation and manga, light novels, and music. In other words, its strategy for its own
IP is to target synergy effects and the diversification (strengthening) of monetization through multifaceted media
development, while continuing to take the lead in the game development.
(3) Further promoting external development and publishing
Having acquired external development partners since 2015, the Company plans to release the titles it is currently
developing sequentially from FY12/17 onward. Due to the soaring costs of development, it has become difficult
for small-scale businesses to release games independently. Seizing this opportunity, the Company is further
strengthening its relationships with external development partners by providing them with technologies, management expertise, and funds.
(4) Global strategy
For the overseas market also, the Company is aiming to expand overseas revenue by developing highly popular
Japanese IP. Moreover, it is developing games especially for China and Asia. Particularly in China, which is ahuge market, while on the one hand Japanese animation and other IP are very popular, on the other hand thelogic of Japanese games tends not to translate very well, and it is difficult for Japanese games to become hits
in this market. Therefore, it plans to jointly develop games using Japanese IP with Chinese companies. It is also
continuing to release versions of titles in various languages and to strengthen marketing that is tailored to eachspecific location.

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13 17

COMPANY RESEARCH AND ANALYSIS REPORTFISCO Ltd.
http://www.fisco.co.jp

KLab Inc.
3656 Tokyo Stock Exchange First Section

16-Jun.-2017
http://www.klab.com/jp/english/ir/

Growth strategy(5) Converting the structure from fixed costs to variable costs
The number of (full-time) employees planned for the current fiscal year is 450 people in Japan (up 3 people on theend of the previous fiscal year) and 40 people overseas (down 145 people) for a total of 490 employees (down142 people). So a major decrease in employee numbers is expected, which will be mainly from its closure ofan overseas development center. Its policy is also to keep down the increase in employee numbers by utilizing
outsourcing for titles that are being developed in-house (however, it will consider increasing employees for new
titles that are performing well).

██Results outlook
Aiming for business expansion through releasing new titles
1. FY12/17 results forecasts
From FY12/17, the Company has adopted the presentation of full-year earnings forecasts using the range-based
method, and it is forecasting revenue in the range of ¥17,500mn (down 10.7% YoY) to ¥22,500mn (up 14.8%),
operating income of ¥600mn (down 52.9%) to ¥2,900mn (up 127.5%), ordinary income of ¥450mn (down 45.8%)
to ¥2,750mn (up 231.1%), and profit attributable to owners of parent of ¥160mn to ¥1,750mn (compared to a lossof ¥814mn in the previous fiscal year). Should it reach the upper limits of these ranges, it would achieve new record
highs for both revenue and operating income.
The reason why the Company changed to the presentation of full-year earnings forecasts using the range-based
method include that its results fluctuate significantly from the extent to which a new title is a hit, and also that it
felt that the presentation of earnings forecasts for the next quarter, which it adopted in FY12/16, did not provide
investors with sufficient information to judge its corporate value from a long-term perspective.
A prerequisite of the revenue forecasts is that the new titles (it plans to release from 2 to 5 titles) contribute to
the results. Also, the assumptions when setting the ranges reflect the sales lifecycles of the existing titles (natural
decreases) and the extents to which new titles are hits. In other words, the ranges’ upper limits assume the newtitles will be hits and will sell well, while their lower limits assume they will not be hits and will sell poorly.
In terms of costs, game development-related outsourcing costs, and also depreciation costs from the increase in
the number of new titles scheduled for release, are both expected to rise.

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14 17

COMPANY RESEARCH AND ANALYSIS REPORTFISCO Ltd.
http://www.fisco.co.jp

KLab Inc.

16-Jun.-2017

3656 Tokyo Stock Exchange First Section

http://www.klab.com/jp/english/ir/

Results outlook

FY12/17 results forecasts (range format)(¥mn)
FY12/16
Results

FY12/17
Forecast% of total

Change% of total

Change rate

Revenue
Upper limit

19,599Lower limit

22,500

2,901

14.8%

17,500-2,099-10.7%

Operating income
Upper limit
Lower limit

1,274

6.5%

830

4.2%

-814

-

2,900

12.9%

1,625

127.5%

600

3.4%

-674

-52.9%

2,750

12.2%

1,919

231.1%

450

2.6%

-380

-45.8%

1,750

7.8%

2,564

-

160

0.9%

974

-

Ordinary income
Upper limit
Lower limit
Profit attributable to owners of parent
Upper limit
Lower limit

Source: Prepared by FISCO from the Company's financial results

FY12/17 made a smooth start in Q1
2. The progress made in FY12/17
In the FY12/17 Q1 results, the Company made a steady start to the fiscal year. Revenue was ¥5,249mn (rate ofprogress toward achieving the full-year forecast’s upper limit, 23.3%), operating income was ¥935mn (rate ofprogress, 32.3%), ordinary income was ¥1,055mn (rate of progress, 38.4%), and net profit was ¥689mn (rate ofprogress, 39.4%).
While there were no releases of new titles, among the existing titles, sales grew from the Japanese version of School
Festival and the global version of Bleach, and as a result, revenue trended strongly, up 8.9% on the same quarter inthe previous fiscal year and up 4.8% on the previous quarter. It is considered that this is from the greater precisionof the Company’s management and marketing capabilities since the previous fiscal year.
In costs, the cost of sales ratio greatly improved to 66.0% (76.0% in the same period in the previous fiscal year
and 76.4% in the previous quarter.) In particular, the improvement from the previous quarter was mainly due to theelimination of costs relating to the event business. The SG&A expenses ratio also improved to 16.1% (25.5% in thesame period in the previous fiscal year and 18.8% in the previous quarter), while operating income to revenue rose
considerably to 17.8% (an operating loss of ¥70mn in the same period in the previous fiscal year and 4.9% in theprevious quarter). The major improvement in the SG&A expenses ratio from the same quarter in the previous fiscal
year was due to the significant reduction in PR and promotions costs, and also from the contribution of the lower
personnel costs (including due to the closure of the KLab America studio).

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15 17

COMPANY RESEARCH AND ANALYSIS REPORTFISCO Ltd.
http://www.fisco.co.jp

KLab Inc.
3656 Tokyo Stock Exchange First Section

16-Jun.-2017
http://www.klab.com/jp/english/ir/

Results outlook

Summary of the FY12/17 Q1 results(¥mn)
FY12/16 Q1Results

FY12/16 Q4% of total

Results

FY12/17 Q1% of total

5,008

Results

vs FY12/16
Q4

YoY% of total

Revenue

4,820

Cost of sales

3,663

76.0%

3,821

76.4%

5,249
3,465

66.0%

8.9%

4.8%

-5.4%

-9.3%

Gross profit

1,156

24.0%

1,187

23.7%

1,783

34.0%

54.2%

50.2%

SG&A expenses

1,227

25.5%

943

18.8%

847

16.1%

-30.9%-10.1%

Operating income

-70

-

243

4.9%

935

17.8%

-

284.0%

Ordinary profit

-435

-

706

14.1%

1,055

20.1%

-

49.4%

Profit attributable to owners of parent

-413

-

-12

-

689

13.1%

-

-

Breakdown of costs of sales
Labor costs

694

639

638

-8.1%

-0.1%

Outsourcing costs

251

604

380

51.4%

-37.1%

2,443

2,515

2,636

7.9%

4.8%

274

62

-188

-

-

Salary allowance, etc.

304

249

213

-29.9%-14.3%

PR & promotions costs

496

290

257

-48.2%-11.2%

Other

426

403

376

-11.7%-6.8%

Royalties / commissions
Other
Breakdown of SG&A expenses

Source: Prepared by FISCO from the Company's financial results

At FISCO, we think it is highly possible that the Company will achieve the upper limits of the full-year earnings
forecasts. This is because it made a strong start (high rates of progress) in Q1, despite not releasing any new titles,
and also that among the titles scheduled for release in the near future, at least two of them, the popular Captain
Tsubasa and Uta no Prince-sama , can be expected to become hits to a certain extent. Rather, we consider the
points that should be focused on are how many new titles it can release, and to what extent can these new titles
contribute to the results.
Also, in the medium to long term and in the context of the sense of uncertainty about the future of the smartphonegames market, we think the Company’s growth will be supported by its overseas business development and it
benefiting from the profits of the remaining players (including by utilizing external resources), and we will be paying
attention to developments in these areas. We also consider its strategy of promoting its non-game business toward
expanding its business and stabilizing its profit structure to be rational. The key to success is likely to be to what
extent the Company can utilize its expertise in developing IP in Japan and its independent marketing capabilities
to create new value that is unique to it.

We encourage readers to review our complete legal statement on “Disclaimer” page.

16 17

COMPANY RESEARCH AND ANALYSIS REPORTFISCO Ltd.
http://www.fisco.co.jp

KLab Inc.
3656 Tokyo Stock Exchange First Section

16-Jun.-2017
http://www.klab.com/jp/english/ir/██Shareholder returns
It has a track record of actively acquiring treasury shares andrelated measures. If it achieves profits, it may return them toshareholders, including as dividends
The Company does not pay a dividend at the current time, as it is working to build up internal reserves to develop
its business for the future and to further strengthen its corporate structure. This is considered to be because in its
extremely competitive industry environment, it is still presently in a phase of actively investing in the development
pipeline and it is prioritizing the allocation of funds to strengthening its management and marketing capabilities.
On the other hand, the Company acquired its treasury shares on four occasions in 2012 and 2015. Even after itreached the upper limit for the distributable amount as stipulated by the Companies Act and was no longer able toacquire treasury shares, it has implemented “treasury stock price reservation transactions,” which can be expected
to have similar effects as the acquisition of treasury shares. An urgent task is stabilizing the profits structure throughreforming its business structure (diversifying its business portfolio). Based on its approach in the past on returning
profits to shareholders, it is thought the Company may start returning profits to shareholders, including by paying
dividends, should revenue in its mainstay Game Business trend favorably, and if the prospect of revenue rising in
the future also increases.

We encourage readers to review our complete legal statement on “Disclaimer” page.

17 17

Disclaimer
FISCO Ltd. (the terms “FISCO”, “we”, mean FISCO Ltd.) has legal agreements with theTokyo Stock Exchange, the Osaka Exchange,and Nikkei Inc. as to the usage of stock priceand index information. The trademark and value of the “JASDAQ INDEX” are the intellectual
properties of the Tokyo Stock Exchange, and therefore all rights to them belong to the Tokyo
Stock Exchange.
This report is based on information that we believe to be reliable, but we do not confirm or
guarantee its accuracy, timeliness,or completeness, or the value of the securities issued bycompanies cited in this report. Regardless of purpose,investors should decide how to use
this report and take full responsibility for such use. We shall not be liable for any result of its
use. We provide this report solely for the purpose of information, not to induce investment or
any other action.
This report was prepared at the request of its subject company using information provided
by the company in interviews, but the entire content of the report, including suppositions andconclusions, is the result of our analysis. The content of this report is based on informationthat was current at the time the report was produced, but this information and the content of
this report are subject to change without prior notice.
All intellectual property rights to this report, including copyrights to its text and data, areheld exclusively by FISCO. Any alteration or processing of the report or duplications of thereport, without the express written consent of FISCO, is strictly prohibited. Any transmission,
reproduction, distribution or transfer of the report or its duplications is also strictly prohibited.
The final selection of investments and determination of appropriate prices for investment
transactions are decisions for the recipients of this report.
FISCO Ltd.