Tech

Tim Culpan is a technology columnist for Bloomberg Gadfly. He previously covered technology for Bloomberg News.

One of the reasons for Line Corp. to list its shares in both Tokyo and New York was to broaden its international scope. It's not working.

The social-networking company's fourth-quarter operating profit missed analysts' estimates by 70 percent, with many pointing to declines in gaming and digital content revenue. But there's an even deeper reason for the disappointment.

Investors need to look closely at its geographic reach and related revenue base. Monthly active user numbers continue to rise in Japan as well as its key TTI markets -- Taiwan, Thailand and Indonesia -- but its use elsewhere is sliding like a tobogganist down a track. 

Slowing Globally
Line's growth in monthly active users in key markets has been undercut be a continued decline in the rest of the world
Source: Line

It's this international failure that's dragged the figures down, forcing Line to post its first decline in global user numbers in at least two years.

Then there's revenue. Considering the declining-user data, a 3 percent miss at the top line seems almost tolerable, especially after the company missed by twice that amount in the prior quarter. But that in itself is the problem. Investors sometimes forgive when sales fall short, but patience starts to wear thin when it happens twice in a row.

Missing the Mark
Line has missed revenue estimates for two consecutive quarters
Source: Bloomberg

What both management and investors should be concerned about is the continued concentration on Japan. As Line has grown, the revenue spread has barely widened, and home-base contribution still hovers around 70 percent.

Homegrown
Line has failed to expand its revenue base beyond Japan despite a dual listing in Tokyo and New York aimed at making the company more international
Source: Bloomberg
Note: No data available for 1Q 2016

This indicates that not only has global growth stalled, but the overseas users that Line does manage to lure to the platform aren't as lucrative to the top or bottom line. The concern is that Line's management is already stuck in a cycle of concentrating product development on Japan because that's where the money is and is thus failing to capture overseas audiences where users don't bring in as much revenue. Focusing on home markets is a familiar refrain in the current global environment, but it will be detrimental for products unconstrained by border walls.

Completing this cycle is Line's newfound focus on advertising. Whereas ads were once just 30 percent of revenue, that business has grown to become the largest division, accounting for 42 percent of company sales, more than half of which are messenger ads. This category is anchored by official accounts, where corporations and other agencies pay to use the Line messenger app to communicate directly with users. The business model is innovative and potentially lucrative, yet it can succeed only if Line holds onto users.

Advertisers aren't a loyal bunch and will quickly desert any platform that can't deliver attentive eyeballs. Which brings us back to problem No. 1: declining user numbers. As Line reaches peak penetration in key markets, it will need to expand overseas not only to increase its base but to ensure it remains relevant in a world where users communicate globally and its chief competitors already cross borders seamlessly.

While anti-globalization may now be in vogue thanks to U.S. President Donald Trump, Line's lack of international reach could quickly turn it from hot property into a vacant lot.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Tim Culpan in Taipei at tculpan1@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net