Shares of Line Corporation (NYSE:LN) plunged 15% to a 52-week low on Oct. 24 after the Japanese mobile messaging app maker posted its interim report for the first nine months of 2018.

Line's revenue rose 25% year over year to 151.21 billion yen ($1.35 billion) during the nine-month period, compared to 17% growth last year. However, Line's operating profit tumbled 72% to 6.75 billion yen ($60 million), compared to 34% growth a year ago. On the bottom line, the company posted a net loss of 7.69 billion yen ($69 million), compared to a net profit of 12.2 billion yen ($110 million) a year earlier. On a per-share basis, Line reported a net loss of 25.50 yen ($0.23), compared to a net profit of 50.90 yen ($0.45) a year ago.

A Line Friends store in Times Square.

Image source: Line Corporation.

Those bleak numbers indicated that Line was spending a huge amount of money to compete against rival platforms like Facebook (NASDAQ:FB) Messenger, and that its bottom line could remain in the red for the foreseeable future.

What did Line spend all its money on?

Line's total operating expenses surged 44% year over year during the first nine months to 155.7 billion yen ($1.4 billion), which completely outpaced and eclipsed its revenue growth. Here's a breakdown of the company's spending:


% of Operating Expenses

YoY Change

Payment processing and licensing



Sales commissions



Employee compensation






Infrastructure & Communication



Outsourcing & Other Service



Depreciation & Amortization






Source: Line Corporation. YoY = Year over Year.

The huge jump in the company's sales commission expenses can be attributed to the adoption of a new accounting standard (IFRS 15), which changed the way advertising agency revenues are recognized. But even under the original accounting method, those expenses would still have surged over 900%.

The accounting shift didn't significantly affect Line's other expenses, which means that the company was merely spending a huge amount of money on the expansion of its ecosystem.

Two young people checking their smartphones.

Image source: Getty Images.

How fast are Line's core businesses growing?

Line's biggest headwind is a slowdown in user growth. The company finished the third quarter with 165 million monthly active users (MAUs) across its four key countries: Japan, Taiwan, Thailand, and Indonesia. That represents a sequential increase of just one million MAUs from the second quarter, and a decline of three million MAUs from the third quarter of 2017.


Q3 2017 MAUs

Q3 2018 MAUs


71 million

78 million


42 million

44 million


35 million

22 million


20 million

21 million


168 million

165 million

Source: Line Corporation.

Line's loss of users in Indonesia is particularly troubling and is likely due to Facebook's aggressive expansion into the market. The Taiwanese market is also heavily saturated, since the country only has a population of about 23 million. Line still generates 71% of its revenue from Japan, which only consists of 47% of its MAUs: The company is struggling to grow its average revenue per user across its other three core markets.

Line is trying to offset that sluggish user growth by expanding its ecosystem of services, which include a Facebook-like news feed, stickers, games, streaming music, comics, e-commerce, and mobile payments.

Most of these services are growing, but their sales growth can't offset the expenses required to build, run, and market them. Here's how much revenue Line's core business units generated during the first nine months of 2018:


% of Revenues

YoY growth




Communication, Content & Others



Strategic Businesses*



Source: Line Corporation. *Includes Line Friends, Line Pay, and other businesses. YoY = Year over Year.

The weakness of Line's Communication, Content & Others unit suggests that although newer services like comics and streaming music are attracting users, they aren't being monetized effectively.

The strength of the Strategic Business is encouraging, but it's filled with scattershot efforts like its e-commerce platform, smart speakers, Line Friends brick-and-mortar stores, a fintech arm with insurance and investment services, and even its own cryptocurrency. That's problematic, because Line likely operates many of those businesses at a loss in an effort to cling to "hot" tech markets.

Don't catch this falling knife

When Line went public in 2016 it needed to prove that it could keep growing in the shadow of bigger competitors like Facebook Messenger -- which topped 1.3 billion MAUs last year. Unfortunately, Facebook is expanding Messenger into an all-in-one platform for games, payments, and other services -- which could render the Asian underdog obsolete over the long term. It's hard to see how this ends well for Line, so I'd rather stick with Facebook as my main social networking play.