Thinking Points

  • Mixi (TSE: 2121) is a social media giant that fizzled and transitioned into a mobile game giant with the release of Monster Strike, the highest grossing mobile game worldwide in 2016.
  • With its Monster Strike IP in maturity and a recent scandal relating to a subsidiary, Mixi is at a crossroads, with no promising future businesses up and running yet.
  • Kouki Kimura, the lead developer behind Monster Strike, assumed the CEO position in June 2018 as a result of the scandal. The company plans to invest 100 billion yen ($893 million USD) over the next 3 to 5 years on new business and M&A activities.
  • At 2,474 yen per share, Mixi trades at an adjusted 0.8x EV/EBIT and 124% NCAV with a market cap of 187,244 million yen ($1,672 million USD).
  • The quality of Mixi’s revenues is difficult to gauge. Together with the company’s current situation in mind, we will reserve valuation on Mixi. Only those highly familiar with mobile game development and IP management should consider investing in the company.

Introduction

Mixi (TSE: 2121) is primarily a mobile game development company best known for Monster Strike, a megahit mobile game which came in #1 in worldwide gross revenues for mobile games in 2016. The company operates through two segments: Entertainment and Media Platform.

Source: Company filings


Prior to its release of Monster Strike, the company mainly operated a popular social media platform which lost traction after western social media platforms like Facebook (NASDAQ: FB) and Twitter (NYSE: TWTR) entered the Japanese market.

The business & environment

Mixi was founded in 1997 by Kenji Kasahara, a student of Tokyo University who aimed to become a government official. At the time, however, corruption-related scandals plagued the Japanese government, and Kenji lost interest in joining.

Soon thereafter, Kenji’s attention was redirected to technology ventures. He learned programming on his own and started a job site called “Find Job!”. In 1996 he setup E-Mercury, the company that later becomes Mixi.

In 2004, the company launched its first social media platform, mixi. The platform spread like wildfire, gaining over 10 million users within a year and a half of its release. The company went public in 2006 and in 2007, the platform reached 100 million users, becoming one of Japan’s three largest homegrown platforms alongside DeNA’s (TSE: 2432) Mobage and Gree (TSE: 3632).

Twitter and Facebook both entered the Japanese market in 2008. Although mixi maintained a stronghold in Japan, the company started taking steps to mirror Twitter and Facebook in some ways (Japanese), upsetting heavy users. By 2012, Facebook and Twitter both had twice the number of visitors compared to mixi.

Things quickly changed in late 2013 (fiscal 2014), however, as Mixi released Monster Strike, a social network game that quickly gained popularity in Japan. Monster Strike grew rapidly and by the end of 2016, it became the highest grossing mobile game of the year worldwide.

Source: Company filings


Today, Mixi aims to build a Disney (NYSE: DIS) like business model, leveraging its Monster Strike intellectual property to develop a variety of revenues streams.

Source: 2018 company presentation, translation by Kenkyo Investing


Outside of Monster Strike, which is more than mature in a short lifecycle mobile game industry, Mixi does not have any promising new businesses lined up. In fact, its most promising business, Ticket Camp (event ticket reselling), was shut down in 2018 after having several major trademark violations along with ticket scalping pointed out.

The company had purchased Hunza, the operator of Ticket Camp, for 11,500 million yen ($103 million USD) in 2015. In Q3 2018, the company announced a one-time consolidated loss of 7,729 million yen ($69 million USD) after the violations were pointed out. Hunza’s CEO and Mixi’s CEO at the time were both arrested in June of 2018.

Kouki Kimura, the lead developer behind Monster Strike, assumed the CEO position in June 2018 after the scandal. In an August 2018 interview with Business Insider Japan (Japanese), Kouki talked about organizational reform, with a particular emphasis on corporate governance. He attributed the Ticket Camp scandal to a difference in corporate culture between Mixi and Hunza, and Mixi’s inability to govern Hunza post-acquisition.

In other words, Mixi is at a crossroads. The company just got through a major scandal and is still in the middle of figuring out how to extend the life cycle of its existing IP while building new IP. Between new business and M&A, the company is prepared to spend 100 billion yen ($893 million USD) over the next 3 to 5 years (2018-2023).

For fiscal 2019 (ending March 31st, 2019), Mixi guided 155,000 million yen ($1,384 million USD, -18% YoY) in revenues and 42,000 million yen ($375 million USD, -42.2% YoY) in operating income. Three quarters in, the company reported business performance roughly in line with guidance, with revenues of 105,983 million yen ($946 million USD, -21.7% vs cumulative Q3 last year) and operating income of 26,899 million yen ($240 million USD, -43.8% vs cumulative Q3 last year).

Shareholders

As of Q3 2019 (ending December 31st, 2018), Mixi had 78,230,850 shares issued and 2,881,300 shares in treasury, putting outstanding shares at 75,349,550 shares.

Here are the major shareholders:

Source: Company filings & Nikkei


Kenji Kasahara remains the single largest shareholder by a wide margin. As of Q3 2019, there are 348,400 shares worth of unexercised options, equivalent to less than 1% of outstanding shares.

Over the last three years, the company has consistently repurchased shares and paid out dividends. Going forward, the company plans to maintain either a dividend on equity ratio of 5% or dividend payout ratio of 20%.

Financials & Valuation

  • Mixi is a social media giant that fizzled and transitioned into a mobile game giant with the release of Monster Strike, the highest grossing mobile game worldwide in 2016.
  • With its Monster Strike IP in maturity and recent scandals relating to a subsidiary, Mixi is at a crossroads, with no promising future businesses up and running yet.
  • Kouki Kimura, the lead developer behind Monster Strike, assumed the CEO position in June 2018. The company plans to invest 100 billion yen ($893 million USD) over the next 3 to 5 years on new business and M&A activities.
  • At 2,474 yen per share, Mixi trades at an adjusted 0.8x EV/EBIT and 124% NCAV with a market cap of 187,244 million yen ($1,672 million USD).
  • The quality of Mixi’s revenues is difficult to gauge. Together with the company’s current situation in mind, we will reserve valuation on Mixi. Only those highly familiar with mobile game development and IP management should consider investing in the company.

Mixi originally started as a job search site, then quickly expanded business when its social media platform caught fire in the mid-2000s. With the entrance of foreign social media platforms like Twitter and Facebook, however, the company lost traction and its platform became obsolete. In a surprise comeback, Mixi’s mobile game Monster Strike became a megahit, growing into the highest grossing mobile game worldwide in 2016.

Since then, the company has largely relied on Monster Strike for its revenues. In an attempt to diversify its business portfolio, the company made several acquisitions while also building new businesses internally. In late 2017, one of its acquired businesses was involved in a scandal that resulted in the arrest of the subsidiary CEO as well as Mixi’s then CEO, and the company posted a one-time consolidated loss of 7,729 million yen ($69 million USD).

Kouki Kimura, the lead developer behind Monster Strike, came on as CEO after the scandal, promising improved governance. With its core business in maturity and no promising new businesses lined up, the company is at a crossroads, and its stock price performance reflects that:

Source: Google


Mixi’s quality of revenues is difficult to gauge. A successful extension of its IP life cycle could make Mixi into a mini-Disney. Failure to extend the life cycle, on the other hand, would be costly. Operating leverage, much like leverage in general, is a double-edged sword. With 85% gross margins and fixed annual operating expenses of 95,000 million yen ($848 million USD), Mixi’s break-even revenue is roughly 112,000 million yen ($1,000 million USD).

Source: Company filings


As mentioned earlier, the company is guiding for 155,000 million yen ($1,384 million USD) in revenues for fiscal 2019, inching closer toward the breakeven point. With the absence of another megahit title, a resurgence in Monster Strike IP, or significant cost cutting, there is a good chance that Mixi will post operating losses in the next few years. Looking at the balance sheet, the company maintains an equity to asset ratio of 0.91, with 76% of its assets in cash.

With this in mind, we will reserve valuation for Mixi. Only investors highly familiar with mobile game development and IP management should consider investing in the company at this time.

The bottom line

Mixi is a once great social media company turned into a mobile game development company. More recently, the company is struggling to develop new businesses while its core Monster Strike IP matures. Mixi’s revenue quality is difficult to gauge, making it equally difficult to assign a valuation. Only those highly familiar with mobile game development and IP management should consider investing in the company at this time.


Kenkyo Investing
Kenkyo Investing

Kenkyo Investing applies a value investing approach to Japanese equities, providing insights that are often unavailable to non-Japanese speakers.