Ladies and gentlemen, thank you for standing by and welcome to YY Inc. Third Quarter 2019 Earnings 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 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 third 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 third 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 our earnings call today. Our third quarter 2019 results are characterized with continued success in our group's mobilization and AI technology-driven strategies. Our total revenues increased by 67.8% year-over-year to RMB6.88 billion, demonstrating our solid progress in three key areas: First, globalization efforts resulting in significant growth in both users and revenues; second, technology advancement, leading to increase in our user loyalty and operation efficiency; third, content innovation, revitalizing domestic business. [Foreign Language] On the globalization front, we achieved significant progress in expanding the market reach of all four key products, which are Likee, IMO, BIGO LIVE and HAGO. Notably, Likee, our leading short-form video platform with global footprint, hit a milestone of 100 million monthly active users in the third quarter of 2019, representing a year-over-year growth rate of 413.4%. Such rapid growth in user base is a result of our relentless drive for content globalization, innovative features and AI technology enhancement. [Foreign Language] First, let me share more details on Likee. Short-form video has become the mainstream content format of choice for Generation-Z users around the world, increasing their social values and lifestyles. As the second largest short-form video platform globally outside of China, Likee is well positioned to capitalize on a growing market demand. To extend Likee's global footprint, during the third quarter, we continued to explore the best values to localize short-form video content for diverse cultures, background and values. For example, in Russia, Likee hosted an offline event called Likee Party Moscow in August. This event marked Likee's second anniversary as an international short-form video brand. The onstage performance doubles more than 10,000 audience in the capital city of Russia. Our success in organizing such local events in Russia demonstrates Likee's unique capability in establishing cultural…

Now as YY's CFO, I will talk about the financial results. We continue to deliver robust financial and operating results during the third quarter of 2019. Total net revenues for the third quarter increased by 67.8% year-over-year to RMB6.88 billion, exceeding the high end of our previous guidance range and exceed expectations. Specifically, live streaming revenues for the third quarter increased by 66.2% year-over-year to RMB6.47 billion, mainly driven by the continued growth in live streaming revenues from the YY and Huya segment, as well as the consolidation of Bigo, which contributed RMB1.42 billion in the quarter. Other revenues in the third quarter increased by 98.3% to RMB408.3 million driven by higher advertising revenues from both Huya and Bigo. Cost of revenues for the third quarter increased by 76.2% year-over-year to RMB4.71 billion. Revenue sharing fees and content costs increased to RMB3.46 billion in the third quarter from RMB2.21 billion in the same period of last year, as a result of increase in live streaming revenues of the company. Bandwidth costs increased to RMB496.8 million from RMB249.5 million in the same period last year, mainly reflecting the continuous expansion of our global user base and time spent following the Bigo consolidation. Gross profit for the third quarter increased by 52.1% year-over-year to RMB2.17 billion. Gross margin was 31.5% compared to 34.8% in the prior year period. The decrease in gross margin was caused by increases in both revenue sharing fees and content costs. In addition, both Huya and Bigo have lower gross margins, but contributed a significantly greater portion of the net revenue in the third quarter of 2019 compared to the prior year period, which also contributed to the gross margin contraction. Operating expenses for the third quarter were RMB2.16 billion compared to RMB864.7 million in the prior year…

Certainly. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Thomas Chong from Jefferies.

[Foreign Language] Thanks management for taking my question. And congratulations on a solid set of results. I have two questions. The first question is about Bigo. Given that Bigo demonstrates very strong user growth as well as geopolitical coverage. Can management talks about the KPI in terms of user and revenue supports our different product offerings, BIGO LIVE, IMO and HAGO in 2020. And my second question is about our AI capabilities. Given that our AI capabilities is getting so strong right now in getting the user traction, retention and providing where we personalize content, can management share about what other areas or how we can further strengthen our AI capabilities in 2020 to track more user growth and retention in domestic and overseas market? Thank you.

[Foreign Language] Thank you for the question. This is David. Firstly, in terms of our international strategy, we actually have been implemented our current international strategy about two years already. So if you look at our global product map, we actually had three major product, which is Likee, IMO and BIGO LIVE. So if you look at the third quarter results, which has already demonstrated the very strong synergies between the three different platforms. So looking into next year, we were quite confident, firstly, in terms of the IMO's strong support in terms of the short-form video content from Likee distribution, we think of the IMO's platform. And meanwhile, the social relationships within IMO also will significantly help our further content distributions within the different platforms. And meanwhile, on the other side, the experienced – monetization experience coming from BIGO LIVE also will continue to help both IMO and Likee to further explore of the monetization opportunities. So in summary, we truly believe the synergies between – among all those three platforms as well as we further exploring of the user's social relationship within of the three platforms, definitely, will continue to help us to grow our international business with the very prospectus future. Thank you. [Foreign Language] I think the second question, in terms of the AI development. So the major reason, why the companies are really focused on to develop the short-form video content, because if you look at the nature of the short-form video platform, it actually has been embedded all different types of the AI-related technologies here. It could be divided by the three parts. The first one is relatively traditional, what we call the recommendation systems. So we use a – continue to develop our personalized recommendation capability to further – to recommend the more…

Thank you.

Our next question comes from the line of Daniel Chen from JPMorgan. Please go ahead.

[Foreign Language] I will translate myself. So my question is related to BIGO LIVE revenue, which grows very strongly this quarter, up by 35% quarter-over-quarter. And how much of that actually come from BIGO LIVE? And how much comes from other products like Likee and IMO? What's the drivers behind? Is it more from developed country or developing country? And how should we think about the revenue growth trajectory of the Bigo in the future quarters? Thank you.

Thank you, Daniel. This is Bing. Let me address those questions. So for BIGO LIVE and IMO and Likee's monetization, the majority of revenues is coming from BIGO LIVE. IMO, as they mentioned some revenue from advertisement, which increased by 25% quarter-by-quarter. But on an absolute dollar term, it's still much smaller than BIGO LIVE's live streaming revenue. Likee is in very early stage of monetization. So Likee will continue to explore monetization, both from advertisement and live streaming. But in terms of advert dollar, it's very small. So to give you a picture, that majority of revenue from Bigo certainly is from live streaming of BIGO LIVE. That's the first question. Second question, in terms of the country breakdown, we are seeing, obviously, more rapid growth from developed world. As we mentioned in the call, that 26% of revenue is coming from developed world, including U.S., Europe, Korea and Japan, et cetera, compared with 21% last quarter. So obviously developed, we will contribute more and more a portion of the revenue. Meanwhile, Middle East and Southeast Asia market are still the mainstream monetization regions currently. And then for the future forecast, I think that is consistent with what we discussed on analyst and investor report. So I wouldn't go into detail, but we are confident that Bigo will continue to maintain that revenue growth. And obviously, additional revenue will be coming from further synergies into IMO and Likee.

Thank you.

Our next question comes from the line of Natalie Wu from CICC. Please go ahead.

[Foreign Language] I will just say myself. So I have two questions here. First one is about Likee. Firstly, congratulations on the Likee of the -- of exceeding 100 million mobile MAU. Just wondering what's the highest penetration rate in your top five cities for Likee on top of the mobile Internet user population? And what do you see as a tipping point for the explosive growth in the same region for Likee? And second question is for David. So David, just wondering what will be the resource or time allocation for you next year? Thank you.

Thank you, Natalie. I'll address the first question and then Xueling David will address the second one. So in terms of the Likee MAU, you're right, we achieved over 100 million MAUs. In the top five countries, those as we said before are India, Indonesia, Russia and some of the other developed and emerging markets. You asked about the penetration rate. What I can tell you, if we look at the industry landscape or the short-form video market in global markets, except China are very I would say, relatively low penetrated. My take would be less than 10% penetration in terms of mobile Internet users. So from that perspective, we are seeing massive opportunities and potential across all those emerging market developed world. As David mentioned in the last question that we truly believe short-form video is just starting to take off globally. So we're very excited in terms of the penetration of future market potential. A – David Xueling Li: [Foreign Language] This is David. Let me address your second question. So, we truly believe in the next year or even the longer period, our key focus as well as major energy allocation will be into the short-form video arena. Because based on our understandings, definitely the short-form videos will be further improve our comprehensive capabilities for the whole companies. That's also the major reason why we took the short-form video as one of the key strategies for the corporation. If we look at the international development in terms of short-form video content, which we believe it will be, in the future, it will be similar as China, which means every person will be use of the short-form video apps. So our ultimate penetration rate for the short-form videos will very similar as the social media, even social network…

Our next question comes from Lei Zhang from Bank of America. Please go ahead.

[Foreign Language] Thanks management for taking my question. Congrats on the strong results. The first question is on the overseas competition, maybe with TikTok, our launch year management's updated view on the competitive dynamic and your recent user channel in lieu of the acquisition and last year short-form videos spending overseas? And second question about Likee's or short videos record lower rates. You can see there what has happened, though, with TikTok. Thank you.

[Foreign Language] This is David. Let me address your question. So in terms of the short-form video competition, we have to agree, year 2019 is most of the difficult year for us. The major reason behind that is, firstly, if you look at our short-form video platforms history, we're actually much shorter than other of the major peers within this sector. We only give up likely about two years compared with other peers already existing in the market last five years. And meanwhile, in terms of the recommendation capability behind of the short-form video platform, our peers even had the experience, which is more than eight years. And meanwhile, in terms of the sales and marketing spend on the full year of 2018, our major peers also has more or less 5 times of the sales and marketing expenses compared with Likee in the last year. So put all those factors together, 2019 is most of the -- I would say, the most of the difficult year for our short-form video platform development. But, meanwhile, we're facing those kind of difficulties, but our -- the Likee's market share continue to increase. In the third quarter of this year, as we mentioned before, our overall short-form video MAUs has been reached 250 million outside of China, which is already amazing scale for the short-form video user base already. And so, we truly believe, especially followed by our -- the AI as well as other technology capability continue to improve, definitely looking into 2020; the competition pressure for us will be significantly eased. And except for that, I also want to mention IMO, our IM products. So for the IM product, currently, we only allow the users to watch of the short-form vidoes, but in the future, once we start to allow and encourage the users to produce and upload to more short-form video content within IMO, we definitely can leverage IMO's very strong social relationships to further boom of the activities as well as viewership of the short-form videos within of the IM products. So, all-in-all, this year, we actually focus on to continuously solidify our fundamental capabilities, especially AI capabilities. So, next year, once we see more users growth, definitely, we will see those kind of capability will continue to help us to grow the short-form video platform. Thank you.

The second question related to the directory risk in overseas. The difference in terms of our short-form video platform compared with other peers is likely starting from day one, we were a global company. We really focus on to understand of the demand of the global users compared with most of our peers is there, short-form video business-oriented from the China business. So, it's very different. And since we're actually starting from a global company, so starting from day 1, we really focus on the topline as well as a deep understanding about the local regulatory as well as the local government requirements. So, that is behind that. So, that can help likely to build up more mature of the policies and the technical actions in terms to better protect the user privacy as well as the data -- the overall data protection. So, all in all, we believe we -- in terms of the regulatory risk globally, we are better than most of our peers. Thank you. [Foreign Language]

Thank you. Our next question comes from Alex Liu from China Renaissance. Please go ahead.

[Foreign Language] I'll translate myself. So, first of all, Xueling, we see some sort of easing side on the sales and marketing expense for people this quarter. Just wondering how should we think about this cost item shifting into the trend of the cost side into 2020 in the fourth quarter of 2019? And then also, given the fact we have multiple different products within Bigo umbrella, namely IMO, Likee and also BIGO LIVE, would the management share a bit of color on the user acquisition cost across different products at the moment?

Hi. Thank you. Let me address those questions. So the first question regarding sales margin expense for BIGO. We did see that the third quarter, the sales margin expense is relatively lower compared with second quarter, because we're seeing very healthy pattern for our user retention. And as David mentioned, that we start with small base. We are seeing more rapid progress in more converging markets and developed world. So we're continuing to monitor our user retention as well as the balance of the growth for the user base and the marketing spending. In 2020, David did mention that our pressure will be less. But that doesn't necessarily mean that we're going to spend less money for sales marketing. It just means that we are seeing more opportunities. And once we see the pattern, meaning user retention pattern continued to be healthy, we are confident to spend more dollar value to attract more users to build a bigger ecosystem. And meanwhile, we also focused on monetization on the Likee. As I mentioned, we monetize through live streaming and advertisement to releverage synergies among different products. So, that's, I would say, the trend that I can foresee for Bigo sales marketing. For the user acquisition cost, it is different across different product. But for IMO, our key focus right now is to focus on enhancing the quality of the content into IMO rather than expand sales marketing to attract more users. So I think the near term we’ll focus on content quality enhancement for IMO. For Likee, as I said, it differs from country-to-country. It differs according to different stage of development. So we cannot share a single number for Likee's user acquisition cost. For BIGO LIVE, we've been doing BIGO LIVE for quite a long time, so I think it's a relatively stable business. We'll continue to do sales marketing for BIGO LIVE user, but it's not on a big scale compared with Likee. So that's, I think the color I can share.

Appreciate it. Thank you.

Our final question will come from the line of Jialong Shi from Nomura. Please go ahead.

[Foreign Language] I have two questions. And first question is about YY Live, the live broadcasting business in any colors as to the potential growth rate YY Live could achieve next year? And also, I was just wondering if there -- the management see any changes in the competition landscape in China's live broadcasting business that is caused by new entrants, such as DouYu and Kuaishou. My second question is about the relationship -- YY's relationship with, again, live broadcasting subsidiary, Huya. As we are approaching the two-year anniversary, upon which Tencent will likely become a majority shareholder of Huya. So I just wonder if we should expect to see any changes in YY's relationship with Huya before and post the divestment as Huya is also talking about expanding into a broad category of non-gaming entertainment content, which could potentially make it a competitor to YY in China and overseas market as well. So I just wonder if YY currently has or will sign a non-competition agreement with Huya post the divestment? Thank you.

[Foreign Language] This is COO, Ting. Let me address your question. So firstly, in terms of the competitive landscape with short-form videos in China, we all agree the short-form video products is a very comprehensive product, which can have an impact with the different parts of the services or products at the same time. That was the major reason why you have the overseas short-form videos. But for the China part, we already noted the trend, for example, in terms of the new music distributions, the short-form videos, such as already become the mainstream platform, which is already impact of the traditional of the music distribution channels. Another good example is, since the short-form video has occupy a lot of users time as well as interactive features, that is why it also has some of the impact for the stranger social network. But by comparison, since the live streaming business, our live streaming platform has a very stickiness of the user feature as well as the immersive user experience. So that is why if you look at this year's YY Live environment, although we're facing the competition from the short-form videos, but we actually keep the very stable outlook growth for the overall YY Live's revenue. And we expected next year also have the similar situation. And in meanwhile, a worse to mention is for this year is paying user number for YY Live also has been significantly improved, demonstrates a very healthy trend for the whole platforms. So all-in-all, in the future, in terms of our live streaming business in China, especially since we continue focus on the -- to create more diversified content as well as to create the different types of the interactive features, definitely we are still very confident in terms of future YY Live's development. Thank you.

And John, I'll address the second question regards our relationship with Huya. First of all, we're still very favorable look upon Huya's potential as China's leading game platform and also the enormous e-sports market opportunities. So we will continue to support Huya and consolidate with Huya on to the point where Tencent can excite the option, which is coming from March next year to March 2021. If they exit the auction, we can obviously consider sell portion of Huya's shares to Tencent. Regarding your second question for the competition of Huya's non-game license, meaning business with YY, I don't think that's a big issue. As I explained before, both in China and overseas, entertainment live streaming is never a zero-sum game market. The market opportunity is enormous, both from the supply side and demand side. On the supply side, we have seen more and more ordinary people becoming popular online live streaming stars. So the supply will continue to drive more and more hosts coming into different and stimulating platform. On the demand side, even in China, with this huge competition, as you have asked the question, YY Live will continue to grow. And overseas, it's a very early stage for entertainment live streaming. So I don't think competition would be -- entertainment live streaming is a big issue, hopefully.

Thanks. As a quick follow-up, so how are you going to use the cash proceeds to be received from the sale of Huya shares?

That -- we can have a range of options. Depending on the ROI of different alternatives. So I think our strategy right now is to remain flexible. Obviously, we also patent the shareholder value. Meanwhile, we're also trying to find new ways of generating high ROI project for ourselves.

Thank you for the color. This is it. Thanks all.

Appreciate. Thank you.

Thank you. I'd now like to hand the conference back to management for 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, this concludes today's conference call. Thank you so much for your attendance. You may now disconnect.