JOYY, Inc. Sponsored ADR Class A (JOYY) Q1 2017 Earnings Report, Transcript and Summary

Good morning and good evening, everyone. Welcome to YY’s First Quarter 2017 Earnings Conference Call. At this time, all participants are in listen-only mode. With us today is Mr. Zhou Chen, CEO of YY; Mr. Rongjie Dong, CEO of Huya; Mr. Eric He, Former CFO of YY; and Mr. Bing Jin, CFO of YY. Following management’s prepared remarks, we will conduct a Q&A session. Before we begin, I refer you to the Safe Harbor statement in our earnings release, which also applies to our conference call today as we will make forward-looking statements. I’ll now turn the call over to Mr. Bing Jin, who will read the overview and the strategic highlight section on behalf of Mr. Zhou Chen, CEO of YY. Thank you. Please go ahead, sir.

Thank you, operator. Hello, everyone. This is my first public assignment and in action with all of you. Welcome and thanks for joining us for our first quarter 2017 earnings conference call.

I will now speak on behalf of our CEO, Zhou Chen. As you may have seen, today we announced that we have appointed Bing Jin, as our CFO, effectively immediately. He will succeed Eric, who have decided to retire from the company after six years of service. Bing joins us with years of experience with the U.S. Capital Markets and a deep understanding of China’s technology industry. We look forward to working with him to further grow our business and fortify our leading position in the industry. I would also like to thank Eric for his years of service as former CFO. We are grateful for his contributions and wish him the best of luck in his future endeavors. Now, I would like to turn turn to our results. We are delighted to have delivered another quarter of solid top line growth, and more importantly, strong margin expansion. We continue to see robust growth in our live streaming revenues, which increased by 51.5% year-over-year to RMB2.06 billion in the first quarter of 2017. Additionally, our mobile live streaming MAU increased by 11.8% quarter-over-quarter to 62.6 million, and our total number of live streaming paying users increased by 66% year-over-year to 5.88 million. In the first quarter of 2017, YY Live continue to make significant progress in the execution of this content strategy. We have further developed our outdoor vertical content into a large diverse segment to include a variety of categories, such as travel, food, automobile, parts and others. This strategic move enable us to meet our users interest in various areas and expand our source of content by allowing our users who are non-entertainment performers to become content providers and gain profitable returns. Importantly, our new outdoor vertical content enhances the social aspect of our platform by encouraging our users to socialize with others who share similar interest. We’re very pleased to see enhanced user stickiness to the continued enhancement and enrichment of our outdoor content. In addition, in April of 2017, YY Live launched a small room audio social game called Happy Werewolf Kill, which has been very, very popular since his instruction. With that, I would like to turn the call over to Eric.

Thank you, Bing. Good day, everyone. Before I go into my remarks, I would like to take a moment to thank our CEO, Chen Zhou and the talented YY team. I have tremendous respect for each of our employees, and I’m glad to have had the opportunity to work with you all in the past six years. I believe Bing will be a great addition to the team and he’s highly-qualified to lead the company into its next stage of growth. Moving on to our results. We are pleased to witness sustainable revenue growth in the first quarter of 2017, with total revenue increasing by 37.4% year-over-year to RMB2.27 billion, while greatly expanding our profit margins. Importantly, our non-GAAP net income attributable to YY increased by 115.7% year-over-year to RMB565.7 million, of which Huya segment’s loss shrunk tremendously from RMB140.5 million in the first quarter of 2016 to RMB35.2 million in the first quarter of 2017. Our continued development of new cutting-edge content is foundation of our strong growth and our key differentiator in the live steaming industry. In the past quarter, we are broadcasting further deepened its collaborations with mobile gaming company. These partnerships allow our content providers to host live streaming sessions to share their gaming strategy and personal experiences doing new games promotional period. These partnerships provide Huya and our content providers with additional income allow our content providers to provide timely interesting content and deepened the importance of live gaming broadcasting in the broader in the same ecosystem. Ultimately, mobile game companies will recognize Huya’s promotional capabilities and influence in a new game launches, which will boost Huya’s standing in the industry and open the door for future partnership opportunities. Now, I will turn to our quarterly financial results. Before I get started, I would like to clarify that, all the financial numbers we are presenting today are in Renminbi amounts pretended changes are year-over-year comparison unless otherwise noted. Net revenues for the first quarter of 2017 increased by 37.4% to RMB2.27 billion. This increase was primarily driven by the increase in the live streaming revenue. Live streaming revenue increased by 51.5% to RMB2.06 billion, which was mainly driven by the growth of Huya Broadcasting revenues. Revenues from online games were RMB139.7 million, as compared to RMB171.1 million in the corresponding period of 2016, and primarily reflected the continued softness in China’s web game market. Revenues from membership were RMB45.4 million in the first quarter of 2017, as compared to RMB69.4 million in the corresponding period of 2016. Other revenues, mainly representing revenues from our online advertising revenues, were RMB24.4 million in the first quarter of 2017, as compared to RMB51.2 million in the corresponding period of 2016. Cost of revenues increased by 29.8% to RMB1.38 billion, which was primarily attributable to an increase in revenue-sharing fees and content costs to RMB1.04 billion in the first quarter of 2017. The increase in revenue-sharing fees and content costs paid to performers, channel and content providers was in line with the increase in revenues and was primarily due to the higher level of user engagement and spending driven by promotional activities. In addition, bandwidth costs slightly increased to RMB188.9 million in the first quarter of 2017 primarily reflecting the continued user base expansion and video quality improvements, but largely offset by our improved efficiency and pricing terms. Gross profit increased by 51.2% to RMB890 million in the first quarter of 2017. Gross margin was 39.3% in the first quarter of 2017, as compared to 35.7% in the corresponding period of 2016. Our non-GAAP operating income increased by 105.9% to RMB639.6 million in the first quarter of 2017. Non-GAAP operating margin was 28.2% in the first quarter of 2017, as compared to 18.8% in the corresponding period of 2016. GAAP net income attributable to YY increased by 160.7% to RMB543.2 million in the first quarter of 2017. Net margin in the first quarter of 2017 increased to 24% from 12.6% in the corresponding period, excluding a RMB38 million one-time gain net margin in the first quarter of 2017 was 22.3%. Non-GAAP net income attributable to YY increased by 115.7% to RMB565.7 million from RMB262.3 million in the corresponding period of 2016. Non-GAAP net margin in the first quarter of 2017 increased to 25% from 15.9% in the corresponding period of 2016. Excluding a RMB38 million one-time gain, non-GAAP net income in the first quarter of 2017 was 23.3%. Diluted net income per ADS in the first quarter of 2017 increased by 153.4% to RMB9.25 from RMB3.65 in the prior period – prior-year period. Non-GAAP diluted net income per ADS increased by 109.6% to RMB9.62 from RMB4.59 in the prior-year period. Finally, looking at our business outlook. For the second quarter of 2017, the company expects its net revenue to be between RMB2.45 billion to RMB2.55 billion, representing a year-over-year growth of approximately 24.7% to 28.7%. These forecasts reflect the company’s current and preliminary view on the market and operational conditions, which are subject to change. This conclude our prepared remarks. Let’s start the Q&A.

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. Please note while asking a questions please ask in Chinese first and then translate into English [Operator Instructions]. Your first question comes from the line of Natalie Wu. Please ask your question.

[Foreign Language] I will translate this in English myself. So you’ve done a very good job in terms of expense control.I was just wondering it’s just seasonal thing or it is to be sustainable in the future. Okay, management give us some color on the headcount plan this year as far as the planned marketing activities and related budget? And also in the last conference call, you mentioned that the extra investment should be made in terms of content, which will lead to 1% to 2% of the revenue-sharing comp, which will leave the revenue-sharing cost of goods like 1% to 2% of the – as percentage of the revenue, I’m just wondering if the guidance still hold unchanged? Thank you.

Thank you, Natalie. I’m glad that you remember what I said very clearly. Yes, I did say something what you were referring to. I think first quarter 2017, we have done a great job in terms of expense and cost control, that’s for sure, that’s number one, which has a great contributions to our margin expansion. Secondly, I think, I also mentioned that in 2017, it’s likely to see that we are continuing to grow significantly. With that we are going to narrow down its humongous loss from 2016, and which we delivered as well. You mentioned this specifically a couple of things. One is, headcount; the other thing is, sales and marketing; the third thing is, content investments. I think all those are tactics or strategy are in place. Yes, in 2017, we do have a headcount plan, which we do not expect will increase. If possible, we may actually reduce a little bit. So this plan will continue. However, you mentioned sales and marketing expenses. And the content investments may very well be counterbalanced this good tight control on the cost and expenses. I think that’s likely to happen in the remaining of the years. In Q1 2017, our sales and marketing spending is somewhat muted. So I expect that it could actually speed up once the new features and new products is online. And also our content investments will actually speed up for the rest of the year. So I think, all in all, we are executing, as we expected. The Q1 results – actually, Q1’s margins, actually it’s a reflection of our tight control on the cost and expenses and also the significant growth, the contribution from Huya. And also luckily, our spending on the marketing and content side is somewhat muted. So all of this adding together, you see that margin has expanded greatly. But as I said it before, I said 2017’s margin should be in line with what we had in 2016, if not better. If we can do better, we will do better, so I think that is still on track. Thank you.

Great, thank you, Eric. Best wishes for you future endeavors.

Thank you, thank you, I will try my best.

Thank you. The next question comes from the line Zoe Zhao from Credit Suisse. Please ask your question.

[Foreign Language] I will translate myself. So congratulations to Eric on retirement and being on your new role. I’ve got two questions, mainly on user growth, as well as Huya. First, could management give us some colors on the MAU breakdown between YY and Huya, as well as PC and mobile, specifically with the management’s fee around Huya’s user growth recently? And the second question is about Huya’s turnaround which is apparently much faster than our expectation, so what is Huya’s core operation strategy, as well as the revenue and margin outlook? Thank you.

Thank you, thank you for the greetings. Yes, well, let’s review our MAU a little bit. We did actually had a tremendous MAU growth in the first quarter. I think the first quarter 2017’s number was more than RMB62 million, that number in fact is pretty solid. I remember in the fourth quarter I reviewed that the YY Live MAU was a little bit greater than Huya and this quarter is the other way around, Huya is roughly 30 -- RMB32 million, RMB33 million and YY is about RMB29 million to RMB30 million, so adding together is about RMB62 million. In terms of the breakdown between PC and mobile, I believe this quarter will be – remember as we will start to report MAU only on mobile. So the PC MAU number we are not going to release anymore, because we think it’s less important, because all of the product teasers has been developed for the mobile usage instead of on the PC front. So PC is not important for us anymore, so I actually don’t have that number to share with you. On the second question about Huya, the game broadcasting business, what is the strategy? I actually take advantage of those period, you are doing your English translation as our [Dong] [ph] and what he said is that, in terms of a strategy for Huya, actually it’s going to be continued executions of our strategy in 2016, namely we are going to strengthen our market shares on mobile game broadcasting and this is very crucial and very important and we are doing a great job in terms of penetrating into the mobile gaming area. As I mentioned it in our prepared remarks, because Huya’s influence and standings in the industries, more and more mobile game company are willing to work with us. So, it’s a good sign and we believe we will be able to continue to expand our market shares on the mobile game area. As I indicated in terms of Huya’s development, I think in Q4 we were very boldly confessed that our goal for 2017 is to double again for Huya’s revenue. If I remember correctly, last year Huya’s revenue is a little shy away from RMB8 billion, so if we were to be able to achieve what we said, Huya is going to do somewhere around RMB1.6 billion in revenue. And with that kind of revenue, as I mentioned it before, you know we could make money; but I think whether we will make money is another matter because that will depend on the strategy that we are adopting for the rest of the year. Because as you know if they want to be aggressively expanding their market share, they may spend more on marketing, they may spend more on headcounts. That actually will eat out some of their profits, so it could very well be – turnout to be a load loss. So, again, it’s way too far to forecast how much they will make or how much they will lose for the whole year; but to be conservative, I think I will still try to maintain that Huya may actually generate slight loss for the whole year in 2017. I think that’s our viewpoints in terms of the profitability, in terms of the strategy for the rest of the year for Huya.

Thanks a lot. If I may just follow-up a bit on this, like if we don’t disclose the total MAU anymore, can management give us some color on the paying ratio, especially on mobile and what is the overlap between YY and Huya in terms of mobile users? Thanks a lot.

Our paying ratios are very different in different business line. For example for YY Live, for our music and entertainment line, that paying ratio is somewhere around 4% of the total MAU; but for Huya, it’s only 1% to 2%. The paying ratio is dramatically lower than what we have on the music line. So, it’s very difficult to generalize to give you just one number, so we have to take it one by one. In terms of overlapping between the paying users, the overlapping is surprisingly low. On a quarterly basis, I think the paying ratio overlap is less that 10%. Sometimes a little higher, sometimes a little lower, but 10% is perhaps right around that number, sometimes it’s only single digits. You know I don’t remember that we have many months of double digits of the paying user overlapping. So, roughly it’s close to 10%.

That’s very helpful. Thank you.

Thank you. Your next question comes from the line of Alex Yao from JPMorgan. Please ask your question.

[Foreign Language] So first of all, congratulations to Chen Zhou on your new role and also wish Eric all the best in your retired life. So my first question is, YY is a core positioning and the future direction. We understand that YY starts from in-game chatting and then expanding to PC live broadcasting, and then also a number of other vertical live broadcasting areas over the past few years. Now, the PC gaming market is declining from user perspective, and also live broadcasting behavior is migrating from PC to mobile. What is the core anchor feature for YY? And what value proposition does they offer to the consumers? And where do you want to head YY to over the next one to two years? Secondly, a number of quick number of questions, one is, what is driving the acceleration of a new user growth this quarter? But on the other hand why is ARPU declined on both Q-o-Q and year-over-year basis? And then secondly, why is R&D and G&A declined year-over-year basis? Thank you.

Okay. I would like to actually ask Chen Zhou to answer the first part of the question. I would try to translate for Chen Zhou.

[Foreign Language]

Well, I will try to translate what Chen Zhou just said. I think in terms of our positioning, YY Live has been actually positioned as broad entertainment into active platform. I think this positioning has been true for the last two or three years, despite a fact that we started from just voice software. But in the recent years, this has been our positioning. And as you know that, Huya is a online game broadcasting platform. It actually turns out to be one of the most effective information and user of gamers communities in the new generations of mobile game. So we’re positioning, it’s very clear as well. In the second-half, or in the future months, we’re planning to do a short video or short video clips services. And this is not yet launched, but this is within our plan. I think we will launch something in the short video, short video clip, this type of the services. In terms of the user numbers, for YY Live, we have experienced a user numbers growth, it’s not that surprising. The reason is that the YY has been accumulated tremendous amount of contents and we have lots of performers and has built a very strong coexistence on our platform, not only that YY has a very strong brand names over the last five, six years, so we’re one of the few actually has operated so many years. In 2016, the competition was very intense, and there’s a lot of noises and lot of small companies entered into the market. So the whole market was very crowded. But as we see – we move into 2017, this half competition and all this craze has slowed down a little bit. And because of this slowdown, we will be able to actually retain a little bit more users. We can effectively expand our user base a little bit. So that actually help us in terms of expanding our business. So that gives us opportunities to grow our user base a little bit faster. In terms of game broadcasting business, as we mentioned it before, that mobile game definitely is the most important part of our business and continue to be. And we believe for the foreseeable future, we’re going to focus on mobile games on Huya in game broadcasting business. And we believe that business – that particular business will continue to be very strong. In terms of the number questions, why ARPU is lower on the year-over-year or Q-over-Q basis? Well, this is not surprising. The reason is that one, by nature that game broadcasting users or game broadcasting paying users has much lower ARPU than the music or entertainment users. As our game broadcasting business has grown much faster than the rest of the business, on an average basis, you would see that ARPU is – will be dragged down a little bit, that’s number one reason. Number two reason, and as we grow our mobile user more, our mobile user when they started to pay normally, they would start it from a small number. So those two reasons give us inclinations to start with or to inclination of lower ARPU. So that’s the reason why you see the ARPU numbers. In fact, it’s not going very significantly. But I don’t think we worry too much about those trends. I think moving forward, we would expect ARPU will stabilize and in fact could actually turnaround to grow again. In terms of cost control on R&D and G&A, I think if you look at the absolute numbers for this year compared with last year, it was a little bit of a growth in absolute numbers, but percentagewise, of course it’s nowhere in comparison with our revenue growth, meaning that our expense has been controlled, cost has been controlled very, very tightly. As I mentioned that one of the very important characteristics of our YY business is that we have tremendous amount of very qualified good engineers. So, we decided that we want to use – we want the best use of it, so meaning that we will try to review those good engineers, try to repeat their talents without hiring more headcount. So, put it simply, we actually have a headcount, not freeze, a headcount control type of the mentalities. We want to best utilize our talents. I think that’s the reason why you see R&D expenses has grown very little, as compared to the growth rate of revenue. And same thing for G&A, I think as we entered into 2017, in terms of the headcount, in terms of the scale of all the staff, we want to keep it lean, I mean. We don’t want to grow this structure or institution, organization into a very big institution. So, I think that’s our goal and we will continue to execute what we think is the right way to go. I think we will go to next question please.

Thank you. The next question comes from the line of Benny Wong from Merrill Lynch. Please ask your question.

[Foreign Language] Now, let me translate my two questions into English. So my first question is that, since that your peers are actually using social networking and short video to drive incremental traffic. Can you share with us some of your surety this year to grow our traffic and I remember last quarter Eric was – we were discussing about how social networking saved this year, we probably will be restructuring ME Live to add more social networking element. So how does our strategy differ from our peers and how does the restructuring progressing? My second question is one the split of the paying users of the 5.8 million, how much of that is attributable to Huya and how much is attributable to YY Live. And in terms of our conversion to paying users, how are we going to be differentiating from our peers this year to drive a better conversion ratio. I understand we already – in terms of conversion ratio, we’ve been doing fairly well, but I just wanted to see if there is any update this year we should be focusing, that’s almost all my questions. Thank you management.

[Foreign Language] Okay, for the third part of the question that I think we mentioned briefly as that the YY Live, we actually will continue to strengthen the content investments. We believe that if we have good content, great content, interesting content, attractive content, these are the foundations to attract new users and we will continue to do that and also we believe that the social networks relationship is very important. That will determine how much of the churn rate that’s on our platform. Obviously, the less the churn rate the higher the user base or the quicker the user base will grow and that’s our goal as well. In terms of Huya, the game broadcasting business, as we mentioned it, we will continue to focus on mobile games. We think mobile game has tremendous future. It’s growing very fast. And thirdly, I think we will use short video clip as a tool to help us to gain user base and this product is still remained to be announced and launches for the rest of the year.

[Foreign Language] Yes, we do actually had a plan to launch our social network based products. Namely, at the beginning of the year we – I think I had mentioned to a lot of the analysts and investors that we are going to rebuild ME as a social network product and launch it in this year. I think that plan is still on track; but this plan is somewhat being delayed because we saw there is opportunities which is more pressing than this ME social network product. It’s called Werewolf Kill. I think we mentioned it on our script. This particular product was launched in March and April timeframe which had a, you know a very good, very strong results, help us attract very good amount of the user base for us. So that’s why ME product got a little bit delayed. In terms of the paying users, as Benny you said that yes, this quarter Q1, 2017, we had a tremendous growth. The paying users just YY and Huya altogether was about RMB5.8 million, which was a good – very good growth from RMB5.2 million in the fourth quarter. I would like to point out that for all the platform paying user, it’s somewhere around RMB6.2 million. In terms of numbers RMB5.8 million, 60% belongs to YY Live, 40% belongs to Huya, roughly that is a split for that RMB5.8 million. For the remaining, I believe as RMB60.4 million – RMB6.2 million, I think it’s RMB6.4 million for the whole platform that the paying user for the first quarter. So the rest of the paying user will go to game operation and will go to smaller products. So over there, we’ve got something like 600,000 paying users as well. So altogether, the whole platform is about RMB6.4 million paying users. So I hope that answer your questions.

Oh, yes, totally very clear. [Foreign Language]

So shall we move to the next question?

The next question comes from the line of Alicia Yap from Citibank, so from Citigroup. Please ask your question. Excuse me, Alicia, your line is open. Please go ahead.

Hello. Hi, can you hear me?

Yes.

Thank you for taking my question. Eric, [Foreign Language] I had two questions. Eric, congratulations on your retirement, and thank you for your help and support. And Chen Zhou and also congratulations on your new role and look forward to working with you. My two question is that, when you talk about the short-term video clips, just wonder what type of contents will that be and if management can share about that strategy a little bit more detail? And also what would be the monetization model for the short video? And then on the margins, given the big improvement in the first quarter margins, any targets or any highlight, or colors in terms of the full-year margins for this year? Thank you.

[Foreign Language] For the short video clip products, since it’s still on the – still small, we have not launched announced yet. So I’m going to review very little on this product. But specifically, it’s going to be based on content and also social network. In terms of the timing of this products release, we’re estimating it’s going to be in the second-half of May, or the first-half of June of this year. And to be honest with you, we have not considered how are we going to monetize on that product. Now – right now, it’s building a product and try to launch a product in a most successful manner as possible, so I think that’s what we are focusing right now. In terms of margin, yes, I think as I mentioned it, that Q1 is very good, but I indicated also that Q1 was extremely good is because that some of the sales and marketing expenses has not been spended, so for the remaining years when we start to launch products, our sales and marketing and all the other expenses may actually go up as best practice. So, again I would go back to my previous statement, I think last year, I – when people asked me about the margin of 2017, I continue to say that 2017 margins, in my opinion, is not going to be less than 2016. I think we should expect 2017’s margins to be at least in line with 2016, because you would see some of the positive factors and negative factors. Positive factors, I already mentioned one big one is narrowing loss of Huya, that is the positive factors for our margin. But the negative factor is we are going to launch new product and then we’re going to spend more money on sales and marketing and these will lower our margins. So, because that the spending has not started yet, so you don’t see that, so you see the Q1, the margin is very good. But for the remaining years, I still believe that our margin is going to be relatively good, perhaps it’s not that good as the first quarter, but to go back to my previous point, I think at least we should be in line with 2016, in terms of margin, if it’s not a little better. And also I want to correct my answer on the last questions, the entire paying user of our platform in the first quarter 2017 was 6.6 million, I mistakenly said it’s 6.4 million, it should be 6.6 million instead of 6.4 million; but for Huya and for YY Live, adding together is about 5.8 million, 5.87 million, yes. I hope that I answered your question Alicia.

Yes, very well, thank you. Thanks Eric, congrats again.

Thank you.

Thank you. The next question comes from the line of Eileen Deng from Deutsche Bank. Please ask your question.

[Foreign Language] My first question is regarding the outdoor channel, management gave us some colors on this, especially in the ARPU versus our music and is there any new content planned in the rest of the year? And my second question is regarding the revamped ME app, Happy Werewolf Kill app, is any metrics that management can share with us and especially the monetization probability? Thank you.

[Foreign Language] In terms of the outdoor broadcasting, live broadcasting, you know, in terms of user numbers, I believe last conference call we mentioned it that for the last six or seven months it has, you know a very good growth rate. In terms of content, we are continuing adding new content. But honestly the revenue – ARPU and revenue, it’s lower than the traditional music type of the broadcasting. But we believe the ARPU is a little bit higher than game broadcasting ARPU. So, we still think that outdoor broadcasting is an area that we are going to continue to focus and help us to grow our business in the future.

[Foreign Language] In terms of this new product Happy Werewolf Kill, we just launched about a month ago, which, so we don’t have a meaningful MAU number. I think previously we put out a press release, you know causing that our VAU number has surpassed 1.5 million, but in terms of monetization and revenue, it has not started yet.

[Foreign Language]

Thank you. There are no further questions are this time. I would like to hand the conference back to the speakers for any closing remarks.

Thank you all. Thank you for your fairly [ph] call with me and I hope the best for all of you, thanks.

Thanks. I look forward to working with all of you thanks.

Thank you. That does conclude our conference for today. Thank you all for your participation. You may all disconnect the lines now. Thank you.