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GungHo rides cash cow 'Dragons' game to record first-half profit

TOKYO -- GungHo Online Entertainment's group net profit climbed 14% on the year to 32 billion yen ($311 million) in the six months through June, a first-half record, as the Japanese online video game developer continued reaping rewards from its "Puzzle & Dragons" smartphone game.

     "It looks like we will be able to keep a majority share in the smartphone game market this fiscal year as well," President Kazuki Morishita said at the company's earnings conference Tuesday.

     "Puzzle & Dragons" has players solve puzzles and level up monsters they collect. It is free to download but charges 100 yen for each in-game item. First-time players downloaded the game about 6 million times between January and June, lifting the total number of downloads above 28 million.

     Boosted by the growth in users, revenue from in-game fees increased. Sales jumped 26% to 94.3 billion yen, with "Puzzle & Dragons" accounting for more than 90% of the figure. Operating profit shot up 19% to an all-time high of 53.7 billion yen.

     The game remains popular about two and a half years since its launch, with its user base continuing to expand. Should growth continue at the pace seen in the first half, GungHo may log a record net profit for the full year through December.

     But the company's shares have failed to keep up with earnings. They have instead hovered in the lower 600 yen range, about half their value a year ago. Investors are wary that smartphone games may prove a flash in the pan and seem increasingly skeptical of the prospects for future explosive profit growth.

     Winning back investors' confidence will require GungHo to again raise its potential for higher profits. With the domestic "Puzzle & Dragons" market approaching saturation, the company must figure out how to accelerate growth overseas. Even with aggregate downloads in North America, Europe, and Asia outside Japan reaching around 7 million at the end of June, growth abroad is relatively slow compared with the pace at home. The company is preparing for a launch in China but is still working out how to replicate the success of the Japanese freemium model there.

     GungHo launched an updated version of "Puzzle & Dragons" with a new gameplay mode Tuesday in Japan. Capturing new categories of users, including women, will also be key to increasing fee revenue.

     Some see the company entering a period of stable earnings. If further profit growth cannot be expected, discussion may turn to boosting the stock price through such measures as raising the dividend payout ratio.




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