Japanese messaging app Line to mark biggest tech IPO so far this year

Line prices IPO at top of range

Line Corp. is preparing to test the public markets next week, the second significant tech IPO of 2016. The Japanese messaging app company is set to raise as much as $1.12 billion, or 116 billion yen, amid one of the most chaotic times for global markets in years, following the U.K.'s vote to leave the European Union.

Still, a $1 billion valuation would mark the biggest tech listing globally in 2016, topping Twilio's public debut at the end of June. Twilio restored investors' appetite for tech, marking the first U.S. venture-backed tech IPO of the year, where shares closed up almost 92 percent in their first day of trading. Now, Wall Street and Silicon Valley alike will be watching closely to see how other private companies react to Line's success or lack thereof.

Line halted its plans to go public two years ago in hopes of garnering stronger interest from investors, but instead the market for tech IPOs froze, and the delay might end up costing the company. The likes of Facebook, Google and Twitter have rapidly gained market share in the world of instant messaging and pose "direct competition" to Line's business today, the company said in an updated IPO prospectus.

Line's expected valuation ahead of its IPO is much less than the $10 to $20 billion that was set by investors when Line's parent company, South Korean Naver, previously talked of a listing in 2013. At that time, the idea of free chat apps was only beginning to catch on with millennials. Today, Line is the seventh most popular messenger app worldwide, behind Facebook's WhatsApp, Tencent's WeChat and Microsoft's Skype, data from researcher Statista shows.

"Line is in a competitive marketplace with some powerful and well-funded competitors," James Gellert, CEO of research firm Rapid Ratings, said in an interview. "They're also relatively unknown in the U.S., which always makes for a trickier sale."

Gellert cautions investors who might be "setting themselves up" for quarterly assessments of Line against social media giant Facebook. "Sounds rather Twitter-esque," he said. "Its metrics are worrying."

Line will fix its final price range on Monday, July 11, the latest SEC filing said, and shares are scheduled to begin trading on the NYSE, under the ticker symbol LN, on Thursday, July 14, and on the Tokyo Stock Exchange, on Friday, July 15. The latest price range was set between $28.50 and $32.50, or between 2,900 and 3,300 yen.

Slowing user growth raises concern

Line's app launched in 2011, following a catastrophic earthquake and tsunami in Japan, as a mobile platform to be used in place of defective communications. The idea then grew to become a dominant chat app, and Line now focuses efforts on its four largest markets of Japan, Thailand, Indonesia and Taiwan, which account for more than half of the app's users, the company said.

Instead of rapid growth, Line aims to promise investors steadier returns, but many who have watched Line's user growth decelerate in a crowded market are unsure of the app's future potential. Many are also unconvinced that Line's advertising strategy can continue to generate revenue.

"Line grew monthly active users (MAUs) globally from 2015 to 2016," said Phil Haslett, co-founder of private investment marketplace EquityZen. "MAUs outside of Japan, Taiwan, Indonesia and Thailand actually declined in the same period, so the underlying story for Line is: 'Can you monetize your core markets, and can you protect your core markets from competitors?'"

Last year Line's global users increased by a mere 13 million, to 218 million total users, after growing by 46 million users in 2014 and by 84 million users in 2013, the IPO filing showed. Line's attempt to increase ad revenue, which made up 35 percent of sales last quarter, included an acquisition in January of M.T. Burn Inc., a Japanese start-up that develops native advertising software.

Line said that limited operating history makes it "difficult" to forecast future results, but it will try to generate more revenue from services such as advertising and by offering more "localized products." Further, Line said it will use promotional events this year to incentivize users to send more messages, add more friends and interact more on its games.

The majority of Line's revenue today comes from sales of emojis and electronic stickers, another risky bet amid recent attempts by Twitter, Apple and Facebook to incorporate more emojis and stickers into their messaging products. While stickers are an afterthought for the likes of Facebook and Twitter, they're part of Line's core business and represent a vital source of revenue.

"I imagine that many investors would be surprised to hear that 24 percent of Line's $1 billion-a-year revenue comes from digital stickers, and 41 percent from in-app game purchases," Haslett said. Regional competitors WeChat and KakaoTalk should be high concerns for Line, he added.

Line said in March it would be launching new revenue-generating services, including a low-cost mobile carrier and an updated mobile-payment service, in an attempt to boost profits. Line posted losses in both 2013 and 2015, according to financial statements.

What Wall Street hopes to learn

Line plans to offer 22 million new shares in the U.S. and 13 million new shares in Japan, the IPO prospectus said. Underwriters of the offering include Goldman Sachs, JPMorgan, Morgan Stanley and Japanese financial holding company Nomura.