Ladies and gentlemen, thank you for standing by and welcome to YY Inc. Second Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the management’s prepared remarks, we will have a question-and-answer session. Please note, this event is being recorded. I’d now like to hand the conference over to your speaker and host 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 second quarter 2019 earnings conference call. Joining us today are Mr. David Xueling Li, Chairman and CEO of YY; Mr. Bing Jin, CFO of YY; and Ms. Ting Li, COO of YY. For today's call, management will first provide a review of the quarter, and then we will conduct a Q&A session. The second quarter of 2019 financial results and webcast of this conference call are available at ir.yy.com. A replay of this call will also be available on our website in 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 our Chairman and CEO, Mr. David Xueling Li. Please go ahead, sir.

[Foreign Language] Thank you, Matthew. Hello, everyone. Welcome to YY's earnings conference call for the second quarter of 2019. [Foreign Language] Following our successful acquisition of BIGO in March, the second quarter was the first time we had a full quarter consolidation of BIGO's financials. I would like to take this opportunity to share with you the latest business updates as well as the strategy and development focus for the YY group. As you all know, after the acquisition of BIGO, YY has evolved into a world-leading social media platform, offering a comprehensive suite of video-centric products and services, including instant messaging, short-form video, live streaming and et cetera. [Foreign Language] During the second quarter, we have achieved notable progress on three fronts, first, introduce short-form video content into our instant messaging product, IMO, and further enhance its user stickiness, second, drive rapid growth of overseas short-form video users through Likee, and third, further strengthen YY Live and BIGO Live operations and solidify our global leadership in the entertainment live streaming market. Starting from this quarter, we have also revamped our disclosure of operating metrics. We believe that this heightened disclosure transparency will help investors to better understand and follow YY group's business development going forward. [Foreign Language] In the second quarter, our global average mobile MAUs reached 433.5 million. Our global short-form video mobile MAU increased by 431.2% year-over-year to 90.3 million and global live streaming mobile MAUs increased by 39.2% year-over-year to 140.9 million. More importantly, IMO, our instant messaging product, achieved a massive user base of almost 212 million MAUs in the quarter. The increasing diversity of our user base offers great potential for future monetization and the development of synergies across our business units. As a result, in the second quarter, our total revenues increased by…

That concludes David's prepared remarks. Now as YY’s CFO, I will talk about the financial results. We continued to deliver solid financial and operating metrics during the second quarter of 2019. Our total net revenue for the second quarter increased by 66.8% year-over-year to RMB6.3 billion. Specifically, our live streaming revenues for the second quarter increased by 66.4% year-over-year to RMB5.92 billion, accounting for 94.1% of our total net revenues for the quarter. In the second quarter, mobile contributed 71.7% of our live streaming revenues. Cost of revenues for the second quarter increased by 80.4% year-over-year to RMB$4.17 billion. Revenue sharing fees and content costs paid to performers, guilds and content providers increased to RMB3.15 billion in the second quarter, which was in line with the increase in live streaming revenues of the company. In addition, bandwidth cost for the second quarter increased to RMB423.8 million, primarily reflecting continued overseas user base expansion, mainly due to the impact of the consolidation of BIGO. Gross profit for the second quarter increased by 45.4% year-over-year to RMB2.12 billion. Gross margin was 33.7% compared to 38.7% in the prior year period, primarily due to the impact caused by the relatively low gross margin of Huya and BIGO segments as their contribution to net revenues increased substantially year-over-year. The decrease in gross margin was also attributable to the increase in revenue sharing fees and content costs. Operating expenses for the second quarter were RMB2.09 billion compared to RMB779.6 million in the prior year period, primarily due to the increase in sales and marketing expenses of RMB853.4 million and research and development expenses of RMB359.5 million. Sales and marketing expenses for the second quarter were RMB1.1 billion or 17.5% of total revenue compared to RMB246.1 million or 6.5% of total revenue in the prior year…

[Operator Instructions] Your first question comes from the line of Thomas Chong from Jefferies. Please ask your question.

[Foreign Language] My question is about our competition in overseas market. As we see, our users are ramping up very quickly in overseas across different applications in BIGO Live and also IMO, how should we think about the competitive landscape and our spending in sales and marketing expenses in the second half and next year? Thank you.

[Foreign Language] This is David. Let me answer your first part of your question. So firstly, in terms of the competition for the instant messaging platforms globally, so when we monitor the trend, there always be two to three of the different platforms to stay -- to exist in the market simultaneously that makes the market bigger. They will not be -- have the similar situation that what happened in China, which is a winner-take-all situation. So we are still very confident in terms of the futures of IMO's development. Especially in the future, firstly, we'll continue to bring in more technical forces to continue help BIGO to develop the different kind of functionalities. And meanwhile, we also will, as I mentioned in the prepared remarks, we also will bring in the different - brought in the different kind of content as well as the services into IMO to continually improve the user stickiness as well as the user scale. So - and meanwhile, if you look at our - the DNA of the company, we -- in the past decade, we actually has been accumulating a lot of experience in terms of develop instant messaging-related functionalities as well the services. So we -- from that perspective, we're also very confident in terms of future IMO's development. [Foreign Language] And from another perspective, if you look at the instant messaging services, it really looks like the visual ID card for each individual users from the Internet separately. So -- but when we look at the overseas peers' operations, we think that they didn't put that much of the effort in terms of the content operations. But we -- but in terms of the content operation, we were really good about that. For example, as we mentioned in the prepared remarks,…

Okay. Let me address the second question in terms of the sales and marketing strategy. First of all, if you look at the second quarter margin impact, that is mainly due to the consolidated BIGO. And you have seen from the operating margins of BIGO business, the Likee, the shop-form video app has achieved rapid growth. And also, after we acquired IMO, as David has mentioned, we have gradually embedded more content in IMO and promote IMO product on a global basis. So the impact of margin came from the consolidation. That's the first point. Secondly, for sales and marketing, we will be more prudent going forward after the acquisition of BIGO. We will track the ROI for every single product in different markets. And the second point is that if we look at the cost basis, the user acquisition and both user retention costs, those tend to be lower than China in many of those emerging markets. So I think the ROI tend to be better from that perspective. Thirdly, going forward, we will embed more content into IMO and then the marketing campaign focus will be greater shifting to IMO. And to just take example, if we can achieve 50% user conversion from IMO to short-form video, that means for every two users we acquire into IMO, one of them will be converting to short-form video users. Plus, that two users into IMO, they will not only become short-form video users, they could also become a Likee user. They could also become a WeChat kind of group users. So the efficiency of acquiring user into IMO will be much better than the other products. So I think those are the strategies around sales and marketing.

Your next question comes from the line of Daniel Chen from JPMorgan. Please ask your question.

[Foreign Language] I will translate myself. So my question is related to our overseas short video platform, Likee. We have seen a very robust growth in the user base. And we also see that in China, there's another short-form video -- short video platform, Kuaishou, who's doing like very well in terms of monetization. So just wondering, how are we looking at the Likee's monetization outlook maybe in the next one to two years? And then recently, we see that we have just starting to test the live broadcasting function of Likee. So how -- what's the latest update in terms of like the user conversion and also monetization? Thank you.

[Foreign Language] Thank you for your question. This is David. Let me address your question. So firstly, YY or we, as a company, has very rich expertise in terms of the live streaming content operation as well as monetization in the world. So we're still -- so there has no doubt in terms of the Likee's future monetization, we will definitely leverage our capabilities in terms of the live streaming monetization in the future. But currently, if you look at Likee's development stage, we have to agree we're still in the development stage, which is focused on grabbing bigger market share rather than monetization. So currently, if you look at our spendings, we actually had the main focus on the R&D expenses, especially for all of the short-form we do content, one of the competitive edges will definitely be coming from the very advanced AI capabilities. So we also had the same kind of approach, which is spend a lot of effort and resources in terms of the AI development. At current stage, especially the synergies and the connections between Likee and IMO's platform also has been caused our -- a lot of the focus in terms of the technical development strategies. So compared with the monetization at current stage, we're really focused on the -- to increase the market share. But in the future, if we look at the nature of Likee's -- the product seems to be providing the short-form video content streaming. So those kind of format is very suitable for both of the live streaming monetization as well as constant monetizations. So in the long run, we are still very confident in terms of the Likee's monetization from the global market. [Foreign Language] When you look at both Likee and IMO, so in terms of the future monetization model, we actually I think -- since both of the products is focused on the content fees of the services. So in the future, definitely both of the product we'll using both of the live streaming and advertisement to monetize. [Foreign Language] We actually recently started to do a trial version as well as provide live streaming services for some of the Likee users in a very small scale. But it just started, but the performance is very well. So we will definitely continue to trial that. [Foreign Language] Probably after a while, two quarters, we'll have more colors we can share. And we have a more clear view in terms of the future monetization. Thank you.

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

Hi. Good morning. Thanks for taking my question. I have two questions here. First one is regarding BIGO...

[Foreign Language]

[Foreign Language] I will translate myself briefly. So I have mainly two questions. First one is regarding BIGO. Just want to get a sense about the revenue split among the different product lines that's Likee, IMO and BIGO Live and other platforms. Would appreciate if we can get a sense of respective year-on-year growth behind the different business lines as well. And also can you actually help us understand what's the current user geographic overlapping status quo among those three major platforms: Likee, IMO and BIGO Live. Also, what's your focus of areas for user growth in the following six to 12 months for those three products? And second question is related with HAGO. Just wondering, can you help us understand what your -- what's the related revenue contribution from HAGO and also the additional sales and marketing spending related with the global expansion, especially with HAGO this quarter. Also, the margin profile of the HAGO product, is there any difference versus your core live streaming business? Thank you.

Natalie, thanks. Let me address those questions. So the first question regarding BIGO's revenue composition. I would say, super majority is from live streaming. As I mentioned, IMO before acquisition, they have revenue coming from advertisement. And after we acquired IMO, we have tried new ways to further enhance the advertising dollar revenue. But again, as a total, BIGO's differentiated revenue is due from live streaming. That's the first part of the first question. Secondly, regarding the user -- original user composition for different products. IMO's user is mainly focused on South Asia. So the top markets are India, Bangladesh, Pakistan, and then Middle East, and then some of the Southeast Asian market. For the future user acquisition strategy, IMO would definitely focus on its key markets. As I said, those key markets are South Asia and Middle East. So we will continue to attract further users through the friends and friend's friends circle to grow the user base in those markets first. And then once it reaches a critical mass and then once the content, we think IMO reach a critical mass in terms of quality and quantity, IMO definitely will reach out to other markets as well. As you all know, IMO product tends to have a network effect. So for every one user you acquire, you're potentially going to acquire 5 or 6 new users, because those new users are friends and families of the existing user. So that's the -- about IMO. For BIGO Live. Core markets are Southeast Asia markets, roughly 40%, and then roughly 30-something percent coming from Middle East, and then roughly over 20% from developed world, including U.S., Europe, Korea and Japan. In terms of future strategies, BIGO Live will focus on, as we mentioned in the prepared remarks, will focus on…

Your next question comes from the line of Jialong Shi from Nomura. Please ask your question.

[Foreign Language] First of all, thank you very much for the data points shared by management about overseas businesses. And we think this user engagement data about YY's overseas business are quite impressive. I have a few questions about your overseas businesses. And for the four overseas apps, IMO, Likee, BIGO Live and HAGO, so which of the apps may have the biggest financial potential in the long run in the real management? Also, just wondering if management can provide more colors on the competition landscape for the four overseas apps, such as who you guys are competing with in each of the 4 verticals. And finally, if we think the overseas expansion may require multiple years investment. So I just wonder where YY is now in that investment cycle and when will we see a positive earnings contribution from your overseas business based on management best estimates? Thank you.

[Foreign Language] This is David. Let me address your questions. So firstly, if you have to ask me to pick up one of the favorable products in the future, especially in terms of monetization, so the choice definitely will be IMO. Because IMO, if you look at the nature of the platform, it's an instant messaging platform with a very -- with very strong growth potential in terms of the users as well as future monetization. At current stage, since IMO is still in the very early stage, so we actually didn't put very aggressive actions in terms of true money as currency users. But since we already have over 200 million MAUs, which is a massive user base, so in the long run, definitely, we are more confident in terms of future's IMO's monetization. [Foreign Language] When we look at the competitive conditions in terms of the instant messaging product in China, outside of China, which actually is quite different. So in China, in most of the cases, the company will allocate a large scale of the research development teams, which is even over 1,000 people to develop the different functionalities or other services into the IMO product. But by contrast, if you look at the overseas product operation, normally, it's coming from very small teams, like dozens of people, but develop a very focused functionality. But definitely compare the two part of the research and development capabilities, it has a huge gap. So for the Chinese company, we definitely have the expertise in terms of how we can better embed a content as well as develop the different kind of functionality into -- of the instant messaging product to continue to improve the user stickiness. So for that part, we have a very always competitive edge compared with…

There are no further questions at this time. I'll now hand the conference back to the management team for the closing remarks.

Thank you, operator. Thank you for joining our call. We look forward to speaking with everyone next quarter. Thank you.

Thank you.

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