Friday, November 8, 2013

GungHo sales and profit drop, prompting stock price fall. What's going on?

Dr. Serkan Toto is a gaming expert and independent consultant based in Tokyo. You can follow him and . This article is with his permission.

GungHo (3765.OS), the company behind Japan's biggest smartphone game Puzzle and Dragons, has published its financial report for Q3 (July-September 2013) yesterday. Things are not looking .

GungHo's sales in Q3 reached $424 million (down five percent quarter-on-quarter), while operating profit dropped to $238 million (down 12 percent).

This is the first time GungHo saw these numbers drop late last year.

this graphic of how sales and profit developed for GungHo since 2010:

As a consequence, GungHo's stock dropped like a rock and was down around 19 percent at one point, limit-down.

The company has a $9.3 billion market cap, but that number was much higher just a few days ago. That's how brutal Japan's mobile gaming market can be: it's strange though, as the dip in sales and profit shouldn't have come as a big surprise to anybody in the industry over here. It was known that , not only in terms of user growth.

GungHo expects sales in October to reach $132 million: the company has so far disclosed monthly sales in the past for January, April, July and October 2013.


Social Game Info used that information to visualize the correlation between downloads for GungHo's flagship title Puzzle and Dragons and monthly sales:

And here's how daily downloads for Puzzle and Dragons in Japan have been dropping since the game hit 12 million users in April this year:


The data shows that it's about time for GungHo to become more active. Here are two ways to do so:User growth for Puzzle and Dragons inside Japan is slowing down, even though the situation will likely get better around the holiday season (when gadget sales go up).

International expansion has been super-slow (Puzzle and Dragons is still not available in Chinese, Spanish, or German, for instance), but that will probably be one of the nuts Supercell will have to crack for its Japanese buyer going forward.

But not all is looking bad. Here are two ways things are looking up:Divine Gate, the unofficial follow-up to Puzzle and Dragons, just hit one million registered users in Japan, GungHo said today. The game is only available in Japan (an international version has been announced), has been lightly marketed so far but is monetizing nicely already.

Puzzle and Dragons Z, a 3DS variation of the original game that looked very promising when I tried it at Tokyo Game Show last month. The company officially predicts one million units sold in Japan, but I would expect many, many more. The game just looks like a big hit to me and has the right release date: December 12, just in time for the holiday season (not to mention the fact that the 3DS has been sold over 13 million times in Japan - a large potential user base).

The 3DS game is a perfect vehicle to monetize an entirely different target group: Japanese school kids and young adults who may not have access to an iOS or Android device with in-app purchases enabled - but can certainly ask their parents to get them a $40 packaged game for Christmas.

GungHo says it is trying to turn Puzzle and Dragons into a brand with long-term value - which is why the original game will continue to be updated with events like the with , both in Japan and globally. Inside Japan, a special Baskin and Robbins-branded dungeon was added for 24 hours today - and yes, the monsters were eating ice cream.

Japanese mobile gaming companies are masters when it comes to planning and executing in-game events, and GungHo is particularly strong in this respect. Remember ?

Another big deal is , which was praised by many mobile gaming industry experts to make a lot of sense for GungHo. History shows it usually comes with risk when a big Japanese corporation buys a foreign gaming startup. Other such deals , and I expect this to be the case with Supercell-GungHo as well.

(Charts by )

(Editing by Steven Millward)

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