JOYY, Inc. Sponsored ADR Class A (JOYY) Q3 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to YY Inc. Third Quarter 2017 Earnings Conference Call. [Operator Instructions]. I must advise you that this conference is being recorded today, Wednesday, 15th of November 2017. I would now like to hand the conference over to your first speaker today, Mr. Matthew Zhao, IR Director of YY. Thank you, sir. Please go ahead.

Thank you, Operator. Good morning, and good evening, everyone. Welcome to YY's Third Quarter 2017 Earnings Conference Call. Joining us today are Mr. David Xueling Li, Chairman, acting CEO of YY; Mr. Rongjie Dong, CEO of Huya Broadcasting; Mr. Bing Jin, CFO of YY; and Ms. Ting Lee [ph], COO of YY. For today's agenda, the management team will provide us with a review of the quarter. Following their prepared remarks, we will conduct a Q&A session. The third quarter 2017 financial results and the webcast of this conference call are available at investors.yy.com. A replay of the call will be available on the website for a few hours. Before we continue, I refer you to our safe harbor statement in our earnings press release, which applies to this call as we will make forward-looking statements. Finally, please note that, unless otherwise stated, all figures mentioned during this conference call are in renminbi. I will now turn the call over to Mr. David Xueling Li, our Chairman and acting CEO. Please go ahead, sir.

Thank you, Matthew. Hello, everyone. Welcome to our third quarter 2017 earnings conference call. This is Bing Jin, the CFO of YY. I will now speak on behalf of our Chairman and acting CEO, David Xueling Li. We're delighted to report another solid quarter with strong financial and operating performance. Our total net revenue for the third quarter increased by 48% year-over-year to RMB3.09 billion. In particular, our live streaming revenues continued its robust growth momentum with a 60.4% year-over-year increase to RMB2.87 billion in the third quarter. Our solid financial performance is a testament to our highly effective strategies of attracting new users and enhancing existing users' engagement and spending on our live streaming social media platform. Now let me provide you with more color on our solid progress in both product innovation and content enrichment. First, in the third quarter, we launched the latest version of YY Live 7.0 to grow out a series of innovative social functionalities and features to further expand our user base, particularly among younger generation of users. One of the new functionality called Accompany Me, is an on-demand live streaming service that allows long-tail hosts to offer more customized services to users, including singing, dancing and chatting. In other words, it is like a live streaming version of taxi filming. We also embedded social games with live streaming features in YY Live 7.0, including Happy Basketball and Clip Doll Online, which further enhance interaction among users. Through our YY Live 7.0, we have progressed from a prevalent showcase-focused model of live streaming, where audiences are passively watching show hosts, to participant-focused live streaming, where audiences experience personalized interactions with their hosts and feel like they're accompanied by their host in an adventure, exploration, sports event, talent show or game. Meanwhile, YY Live 7.0 also enabled us to redefine live streaming, which stimulated nationwide interest in our live streaming content. Our continuous innovations help us to not only reposition YY Live's brand into a more vibrant, innovative and fresh image but also to sustain our user growth. As a result, our mobile live streaming MAUs grew by 36.6% year-over-year to 73 million in the third quarter. Meanwhile, we continue to explore more opportunities in the field of social games. In the third quarter, we upgraded Happy Werewolf Kill, a small-room online social game that we launched in the second quarter from a single social game to a social game collection platform. By infusing other similar types of small-room PK games and board games into this product, we continue to improve the user experience. Happy Werewolf Kill represents our initial leap into the social game space, and we are encouraged to see the breakthrough we have made in this space. Going forward, we strive to develop more social games and optimize their user interface and user experience, thus, ensuring a high retention rate of younger generation and attracting them to make the social connections within the platform. In addition to product innovation, we have further diversified YY Live's content offerings and enhanced the content ecosystem. During the third quarter, our live streaming verticals such as outdoors, sports and animations continue to attract more user eyeballs. More importantly, we continue to enhance our competitive edges of short-form video services, which integrate engaging social and impacted features. We embedded our short-form video services into YY Live APP, which has received great user reception and feedback. As a result, the daily video view count in the YY Live APP doubled from the previous quarter. In addition, we have developed several new short-form video products to tap into market demand for more verticals using short-form video across China. Given our established record in providing live streaming services, we have accumulated a vast amount of original user-generated content, UGC, which we believe will serve a rich library for short-form video services in the future. In summary, as the pioneer of China's live streaming social media industry, YY is ready to bring more innovations into the market and further differentiate itself from its competitors. Looking ahead, we will continue to leverage our deal growth engines, YY Live and Huya, to invent new ways to track users and stimulate user engagement, further build our content ecosystem and explore more monetization opportunities. We believe that we have the right strategy in place to stay ahead of the competition in China's live streaming social media industry. That concludes the remarks of our Chairman and acting CEO, David Xueling Li. Now as the CFO, I would like to discuss our financial results. We once again delivered a robust financial results in the third quarter of 2017. Our total net revenues for the third quarter increased by 48% year-over-year to RMB3.09 billion, which meet the high end of our previous guidance range. Importantly, revenues from live streaming, which constitute 92.9% of our total net revenues, grew by 60.4% year-over-year to RMB2.87 billion. Consistent with our strategic focus on the mobile platform, mobile already contributed 61.1% of our live streaming revenues in the third quarter of 2017. Mobile live streaming MAUs grew by 36.6% year-over-year to 73 million in the third quarter of 2017. Live streaming paying users reached 6.3 million, up 46.5% from 4.3 million in the prior year period. Mobile paying users constitute 75.6% of overall live streaming paying users in the third quarter of 2017. Our cost of revenues for the third quarter increased by 48.2% year-over-year to RMB1.89 billion, which was in line with our top line growth. The increase of cost of revenues was primarily attributable to a 65.9% year-over-year increase in revenue sharing fees and content cost to RMB1.6 billion. In the third quarter of 2017, we increased revenue sharing with entry-level hosts on our platform to develop a more healthy and balanced ecosystem. As a result, our gross margin declined slightly to 38.9% in the third quarter of 2017 from 40.1% in second quarter 2017 but remained relatively stable as compared to 39% in the prior year period. Our operating expenses increased by 49.4% year-over-year to RMB560.3 million during the third quarter of 2017. Sales and marketing expenses increased to RMB249.5 million as we continued launching both online and off-line marketing campaigns to promote our new initiatives and rebuild our branding. However, our R&D and G&A expenses as a percentage of total revenue declined to 5.4% and 4.7%, respectively, in the third quarter as compared to 7.8% and 4.9%, respectively, in the prior year period. Meanwhile, we continue to shrink Huya's operating losses. In the third quarter of 2017, Huya's non-GAAP operating loss was reduced to RMB10.1 million, down from a loss on RMB159.3 million in the prior year period. Our GAAP operating income increased by 39.9% year-over-year to RMB661.4 million in the third quarter of 2017. GAAP operating margin was 21.4% in the third quarter 2017 as compared to 22.6% in the prior year period. Our non-GAAP operating income increased by 30.7% year-over-year to RMB664.5 million in third quarter of 2017. Non-GAAP operating margin was 21.5% in the quarter as compared to 24.3% in the prior year period. Our GAAP net income attributable to YY increased by 59% to RMB636 million in the third quarter 2017. Net margin in the third quarter expanded to 20.6% from 19.1% in the prior year period. Non-GAAP net income attributable to YY increased by 46.7% to RMB639.1 million in the third quarter 2017. Non-GAAP net margin in the third quarter was 20.7% as compared to 20.8% in the prior year period. Diluted net income per ADS in the third quarter 2017 increased by 52.3% to RMB10.51 from RMB6.90 in the prior year period. Non-GAAP diluted net income per ADS increased by 41.2% to RMB10.56 from RMB7.48 in the prior year period. I would like to remind everyone that during the third quarter we completed a very successful secondary offering with approximately USD 442.2 million in net proceeds. This offering further demonstrated investors' confidence in YY and laid a solid capital foundation for YY's future development. We plan to use the proceeds from the offering for general corporate purpose, which may include acquisitions of an investment in complementary businesses and assets, expansion of our overseas business and repayment of our existing bank loans. As of September 30, 2017, we had a total of 63 million ADSs outstanding. Looking forward to the fourth quarter of 2017. We expect our net revenues to be between RMB3.4 billion and RMB3.5 billion, representing a year-over-year growth of 36.5% to 40.6%. This forecast reflects our current and preliminary view on the market and operational conditions, which are subject to change. This concludes our prepared remarks. Operator, we would now like to open the call to questions.

[Operator Instructions]. Your first question comes from the line of Thomas Chong from Crédit Suisse.

My question is about the MAU, the conversion rate and the ARPU trend. Can management give us some color about the rationale that we did such a good set of results? And I know it's because of the new version. But how should we think about going into the next couple of quarters in terms of the operating metrics? And my second question is about the GP margin trend. Can management give us some color about how we should think about this line item going forward?

I'll do it in English. So Thomas, there are two question. One is regarding MAU, commercial rate and ARPU. In general, I think as we mentioned in the third quarter, because the new version and all the new functionalities we built into YY Live, the users see a very healthy growth. We would expect that pattern to continue given we continue to launch new product and new features. In terms of the ARPU, we also see kind of upward trend. Given with these new features such as Happy Contest or Happy Basketball, et cetera, we allow further interaction among the host and audience to incentivize the audience to pay more. So we would also expect similar trend in the ARPU. For the GP margin, as we said just now we made a change to the Blue Diamond policy for the benefit of small- and medium-sized hosts. That's for the long-term healthy growth of the ecosystem. So we will expect the GP margin to be similar in the next few quarters to follow this quarter's pattern.

May I ask a very quick follow-up question about the 2016 outlook regarding our overseas strategy? Because just want to see about what the long-term vision for YY in overseas market.

Let me do the translation. So actually, YY already have initiated its overseas strategy starting from 2015 through the investment to Bigo. And looking forward in the year 2018, we will still, through Bigo, to explore the opportunities for the YY's overseas strategy. Thank you.

[Operator Instructions]. Your next question comes from the line of Eileen Deng from Deutsche Bank.

I have two questions. The first one, can management give us some breakdown on the MAU split between Huya and YY Live and also the paying user split between the two channels? And the second question is regarding the new features we launched during the past few months. We've seen the immediate monetization on Happy Contest and Accompany Me, a very good result. Just wondering how much of the host and audience are adopting Happy Contest in their live program and how much this function contributes to our live streaming business and also for Accompany Me, how much this function contributing to our live streaming revenue. And also regarding the Happy Basketball and Clip Doll Online, what is the DAU and MAU level?

Thanks, Eileen. This is Bing. Let me address those questions. So first question is on the MAU kind of composition between Huya and YY. We don't disclose these numbers, but I think, in general, it's almost similar between these two platforms. As I said, those are two joining engine. So out of the 73 million mobile MAUs, Huya and YY Live are relatively similar on a scale. For the paying users, also we didn't disclose this number, but I will say, in general, YY Live is higher than Huya for paying user. We all understand that the paying ratio is relatively higher in the live show rather than - compared with the game live showroom. So that's the general pattern for the MAU and paying users. Second question is regarding the percentage of the host who have adopted Happy Contest. Again, as we said before, Happy Contest, starting from the introduction in the second quarter, has become a systematic play, but it's quite difficult to really break out the system percentage. I would say more and more hosts are embracing that feature given the fun nature of that Happy Contest. But again, we don't have this number. The third question is on pay war's revenue contribution, Accompany Me's contribution for the revenue. Again, we launched pay war in the third quarter. It's a new feature, so in terms of the absolute dollar amount, it's still not big enough. But it's increasingly becoming a very interesting feature within YY. And also, for the MAU and DAU number for Happy Basketball and Happy Doll Catching, again, that's in the early stage of product development, so we have seen [indiscernible] pattern, but in terms of absolute number of MAU, DAU, it's not that big to be disclosed at this stage.

Your next question comes from the line of Fan Liu from Goldman Sachs.

So my question is that could you please share with us the revenue contribution from your top line top 10 host and also paying users in the quarter? And also, among the revenue share increase you have down during the quarter, how much were attributed to YY Live and Huya, respectively? Have you also increased your revenue share with the top broadcasters as well during the quarter?

Thanks, Fan. I'd like to answer the question as well. For the contribution of the top five host and top five paying users, that hasn't changed much. Again, still highly skewed towards the top paying users and hosts, and we are continuing to launch and introducing new ways of incorporating the features from the bottom kind of host and paying users. That's why we have made changes to the Blue Diamond policy. But in fact, it will take time to show up. So that's the answer to the first question. The second question is the has there been any change to the top five host revenue sharing. I would say, those have relatively remained stable. We increased - purposely increased revenue share with the small- and medium-sized hosts, but the top host, the revenue sharing has been stable. Our focus for the future will still be, as I said, launch new ways, incorporating new features and to allow small- and medium-sized hosts to play an important role in our ecosystem, even though the revenue as of today is still highly skewed towards the top hosts and top paying users. For the third question regarding the revenue sharing from YY and Huya, I think the revenue sharing percentage is relatively stable both for Huya and YY. So the revenue percentage for YY and Huya will relatively tell you the revenue contribution from YY and Huya.

Your next question comes from the line of Natalie Wu from CICC.

I would translate myself. Just wondering how do you view the competitive landscape in both entertainment and gaming live streaming industry. You have heard some competitors recently have saying they're aggressively competing for top hosts with high compensation. I was just wondering what's management's view on this. Also, in the future, is there any kind of new monetization model or business model that should arise on the basis of our current platform? And lastly, is there any potential change regarding the upcoming in Party this year?

Yes. Sorry, let me do the translation firstly. So let's look at the whole competitive landscape for the live broadcasting market. In generally speaking, we don't think the market has a lot of changes, but it still has a lot of opportunities going forward. In terms of YY, like I mentioned in the last conference call, we will anticipate to apply the new initiatives to attract the new users to the new tools as well as to enable more people to join into the live broadcasting platforms. So from the downstreams, we were using more interactive features, trying to play the new roles and to attracting the users. In terms of the interactions between the users it should be continued in-house. The first thing is we will improve the YY interactions like pay war, Accompany Me. And meanwhile, every quarter, we will increase the new AR applications. For example, like the long-distance play roles will continue to implement it with the new AR application with the new features. And the last part, is in terms of the scale of the rooms, we will try to increase multiple hosts to create more content than the single host. So the different scale of the rooms will bring in more chemistries. So from the single one with a lot of audience, followed by the two hosts into the heavy contest and up to eight hosts into one room. So it's not just the simple changes in terms of the host numbers but will have more chemistries within that with more different method to attract the users. Thank you.

Okay, let me do the translation. So in terms of the live game broadcastings, we truly believe the content is the major drivers going forward, especially for the Tier 1 hosts. So we look at there has a lot of opportunities now, for example, like the mobile games as well as the recently emerging of the survival games. So going forward, we truly believe the competition for the top host will be the major key for the live game broadcasting.

Yes. But I think the second point is the real competitive edge for - like game live broadcasting come from the contribution and nurturing system for the mid-level hosts. So having said that, that's also one of the strengths for Huya.

I would like to add one more point. So in terms of the smaller players for the live game broadcastings, so to invest into the top hosts and trying to give more license space for them and trying to attract more users. But at the long run, if we continue doing that, it means their training system has some problems, so there will be serious damage to future communities for those kind of - the smaller game players - live broadcasting game players. So going forward, we think that the platform's training execution capabilities for the new host is also - will be one key point for the competition. Thank you.

Let me do the translation. So in terms of the annual ceremony for this year, the first thing is we will expand the competition into more categories, especially based on the different contents, and we will provide more competitions into the different categories and providing more competitions for the host in the different verticals. The secondly is, as we mentioned before, because we're trying to encourage more long tail of the hosts to join the competition, so this year is also another strength, so we will attract more the long-tail hosts to join us to make the ceremony more interesting and has more dramatic compared to the previous years. The third one is we will continue to strengthen the connection between the users - sorry, between the host and the fans, and we're trying to build out this into a big party between the host and the fans to increase the interaction between the two parts. Thank you.

Your next question comes from the line of Hui Wen Chan [ph] from Citigroup.

So my first question is regarding the new short-form video product. Could management share more on the scale and also the growth strategy going forward, including the sales and marketing plans for this one? And my second question is regarding the game content copyright within game broadcasting. In our case with NetEase, what is our thoughts on this and how this potentially impact the industry going forward, particularly the content costs?

Okay, let me do the translation. The first thing is this case is coming from 2011. It's only related to one single game from NetEase, and the currently judgment is just from the first part, so we will continue appeal to this case. And the second point is we don't believe the game broadcasting equal - the game broadcasting equal to the game [indiscernible]. So the user's action for the game broadcasting is a fair use of the product. So we don't think it should be the infringement for the copyright of the game companies. And one more example is, yesterday, when we heard about the case, actually, we take out several of the NetEase-related games of our services. So after that, actually, we got the cooperation offerings from several of the different departments of the company. So that actually demonstrates this one has very limited impact of our business. So except for the NetEase, actually no other company made a similar request for us and meanwhile at the present, actually, the many game companies have taken game broadcasting as a very important means to promote the new games, and actually, we work together with them to train the host. So going forward, we think it should be out of question for the - our cooperations with those kind of game companies. And lastly, we think this one is actually is a very unfair charges to us, and as a company, we'll appeal and hope the court will give a fair judgment based on the development of the trend of the game broadcasting industry.

I would like to make more points in terms of this question. So both and me and Mr. Dong has been working for that company before, and we actually really respect that. But we noticed in the recently approaches, it's totally different as what we expected before, especially in terms of their attitude to the live game broadcasting industry. So in my views, the live game broadcasting industry has been significantly evolved in the past several years. If we look at back to the three years ago, the live game broadcasting is just a derivative for the game industry, but now it already become a crucial part of the whole game industry trend. So we think the judgment actually is the opposite of the development of the industry. And going forward, we think the industry will continue evolve. So from the single people's behaviors to currency like the e-sport and going forward, it will be more like TV entertainment show. So even more, that means more and more users will participate and view the live game broadcasting content in our platform. So in summary, I truly believe the cooperation between the live game broadcasting as well as the game company, producing company, is the main competitive edge for the live game broadcasting industry. So for this single case, we don't think it will be further impacted the normal operation of our business. Thank you.

I think there's more on the short form video, so maybe

Okay, let me do the translation. So the first thing is we believe the short video is a necessary supplementary to the live broadcastings, so which is can you reach our content in our platform. So as a result, actually, in the third quarter, the video views in YY online ATP has been doubled compared to the previously quarter. So from these initiatives, actually, we can build up a platform to help the small and the mid-tier of the host to continue grow. And in terms of the initiatives for our own short video products, actually, we are still under exploration. So compared with other competitors, actually, we look for the differentiated operation directions. For example, like choose, sell of the short video applications or others, which is focused on the user-generated content. So in summary, actually, we truly believe the entire short video market is still growing, and we will continue looking for the different interactions to us in the future to occupy a place in the short video market. Thank you.

Your next question comes from the line of Hou Tian, T.H. Capital.

So your view of YY's last year's subscriber history as a IPO-listed company, we see up and down. And I'm glad we saw recent takeoff in the business' performance. And the business performance is really based on new innovation. As a technology-driven company, innovation is the key. It aims for continuing growth. So I would like to ask David to share with us what's the new focus for the next year's new engine, new R&D.

Thank you for asking these questions. So innovation is a challenge for a lot of Internet companies, but in terms of the YY strategy for the next year, we will focus on the two parts. The first part will be the new tools. So we'll go through the R&D innovation and trying to create more new method and new tools to attracting the new users. And the second part is new empowerment to the platforms. So for example, we will actually develop more new applications and trying to enable more people, - was not interest about the live broadcasting before and trying to attract those kind of users to start live broadcasting in our platforms. And also, like I mentioned before, so we will also invite the other functional abilities like AR technology and trying to empower - and trying to bring in more empowerment into our company. Thank you.

Your next question comes from the line of Wendy Huang from Macquarie.

I'll translate it. We saw a general trend of tightening entertainment activity during the 19th Congress Meeting. And does it have any impact on the overall live streaming industry or on our company? And do we see any potential policy risk recently or in the next year?

Thank you for this question. The first thing is we didn't hear about the rumors it would tighten the controls to entertainment-related content during the Party's meeting. And secondly is for YY, in terms of the related policies, that actually is quite insistent in the past period. So we don't see there has a significant changes in terms of those kind of control policies from the authorities. And the most important part is YY always be a good example within the industry in terms of the content management capabilities. So going forward, we believe we still have a very strong capability in terms of the risk amendment as well as the UGC content management capabilities. Thank you.

Your next question comes from the line of Karen Chan from Jefferies.

My first question is about whether management can give more color on the overall user acquisition cost. How is it trending with the intensifying competition? And how are we going to look at the operating margin trajectory going forward? And my second question is about, we also note a very rapid increase in Tencent's own game live streaming platform, e-game user base recently. So are we seeing any potential risk from these game developers that own both the live streaming platform and the game IP?

Thanks, Karen. This is Bing Jin. I'll take the first question. I'll let Dong Rong take the second one. The first question is regarding the acquisition cost for live broadcasting industry in China. I think, for our spending, there are 2 major components. One is called channel cost, which is a decent portion, meaning we need to cover all the major app stores to apply users or when users search our product, they can find the relevant product. But second portion is regarding tailor-made or creative marketing. As we said, in the second quarter and third quarter, we have cooperated with China's public TV station called Hunan TV station with the Happy Family program, which is very tailor made to younger generations, so which is very effective. So we will continue to launch an online, off-line creative and tailored campaign to attract younger users when we launch new product. For the operating margin trend, as I said for our gross margins will be relatively stable. And even though sales, marketing, perhaps the dollar will increase, but given our increasing scale, the percentage of revenue were relatively stable. And also, we have increasing operating leverage on G&A and R&D as I said before. So in general, I would say the operating margin will also be stable going forward.

Let me do the translation. So the first thing is in terms of the QQ game broadcasting, actually, it's not the first game production companies to try and to explore their business into the game broadcasting. Actually, NetEase was the first one. So that is why they recently had launched a lawsuit with us back 2, 3 years ago, and they're actually trying to help their live broadcasting platforms you see. That's the first point. The second point is we truly believe nowadays the game industry already evolved into an ecosystem. So each player should have each role in terms of the development, production as well as the other - the relative roles within the game industries. So for all of the players, they should help each other and rather than compete in the very inactive ways. So in the general views, we have welcomed more players to join into the game broadcasting business and trying to make the market share bigger and together to develop the live game broadcasting business. Thank you.

Your final question comes from the line of Shawn Yang from Blue Lotus.

Okay, I will translate. So could management help to elaborate more on the outdoor and animation live stream contents? I mean, what's the percentage of the user and also the revenue contribution to YY Live? And my second question goes with the changes of the top agencies. For the past several quarters, it seems that there's a combination of top agencies. Just want to know what's the management's view towards the changes of these agencies.

Shawn, I'll take the first question. I'll let take Lee, Dong [ph] to take the second one. The first one is regarding outdoor and animation user and revenue contribution. I think we don't have this number because somehow, it's hard to track. Some people come to watch some other verticals as they go to outdoor and animation. And some people actually come to outdoor first, and they go to watch other live streaming content on the platform. So a lot of cross-selling, a lot of traffic direction, so it's hard to separate out the switch in traffic. And for the revenue, it's also hard to track because, as I said, a lot of people watch different content at the same time.

Yes. Let me take the question in terms of the development of the agency or what we call the guild in our platform. The first thing is we think the guild is one crucial part for the whole YY ecosystem. So we look at the trend for the development of the guild in the recent years, and they nowadays become a model, like a very, very normal operational of the companies rather than just a few people's organization - loosened structure of the organizations. So from that perspective, any of the restructuring or the merger acquisitions happened into this ecosystem, we think it's a very natural thing. So from the YY's perspective, actually, we try and build out the group policies and to make us help the guilds grow in the future. So recently, with our new initiatives, it's what we have called the 100 people in 100 city model. That's why, actually, we help more guilds to join into our families and continue to develop in our platform. So going forward, we also will implement it, the growing system for the guilds. By doing this, we truly believe we will provide better environment for the future guilds' growth in our platform. Thank you.

Thank you. I would now like to hand the conference back to the management team for the closing remarks.

Thank you all for joining us today. And if you have any further questions and please feel free to connect to us.

Yes. And this is Bing. Again, I would like to thank everyone for their time. And any further questions, I would - more than happy to either have face-to-face meeting or conference call with you. Again, thank you for your support.

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.