Line, a messaging app popular in Asia, passed an important landmark on June 9—they filed a F1 with the US Securities and Exchange Commission, ahead of a July public offering.
Link’s IPO is a big moment for the tech industry at large, because finally investors will place a public valuation on a messaging company. More than two years after Facebook purchased WhatsApp for $18 billion and began to promote Messenger, no chat app has submitted its financials to public scrutiny.
In Line’s case, it might have been better to keep things private. The complete prospectus reveals a company that has no easy path to growth. In fact, the time to go public might have been two years ago, before WhatsApp and and Facebook’s Messenger approached billions of users, and a cutesy Japanese app offering free SMS seemed like a it could become a global player.
The company’s top line revenue remains impressive enough. Line generated $1.12 billion in sales by the end of 2015, marking a 38% increase from the year prior. It has yet become profitable, but most investors overlook such matters when it comes to internet stocks.
While its revenue growth remains strong, some engines that should drive upward climb in the future are slowing down.
For one thing, Line’s user growth has ground to a halt. Its global count of monthly active users grew less than 1% in the past year.
This is likely due to fierce competition from Facebook and WhatsApp. With market dominance in just four countries—Japan, Taiwan, Thailand, and Indonesia—Line is a minor competitor in the worldwide messaging wars.
If Line can’t grow its revenues by reaching more users, it has to grow them by extracting more money from its existing ones. That will be difficult.
At present, Line makes most of its money through games, advertisements and a whopping $268 million, about a quarter of its overall revenue, from sticker sales. It also earns a small but growing amount of money by licensing its own clan of characters, which are as beloved as Hello Kitty to some in Asia.
But these major revenue streams look set to stagnate. The number of people that spend money on Line’s games has been declining, while growth in the number of people buying stickers is slowing.
Line itself has acknowledged that its healthy sticker business could ultimately be a passing fad.
Meanwhile, Line is dominant in markets where the digital advertising industry remains undeveloped.
Advertisers in Japan, where Line earns over 67% of its revenues, spent $40 billion on digital ads in 2015, according to data from IDC cited by Line in its prospectus (pg. 6). But in Taiwan, advertisers spent just $500 million on digital in 2015. Advertisers in Indonesia spent the same amount, while Thailand was even lower—just $300 million.
It will take a lot of time before these markets can catch up to Japan in digital ad spending. When they do, advertisers in those countries will be forced to choose between Line and other social media platforms like Facebook—which has a much wider reach globally.