JOYY Inc (JOYY) 2015 Q3 法說會逐字稿

Good day, everyone, and welcome to YY's third quarter 2015 earnings conference call. At this time, all participants are in a listen-only mode. At this point, I would now like to turn the call to Mr. Charles Eveslage from ICR. Thank you, and please go ahead.

Thank you, operator. Welcome to YY's third quarter 2015 earnings conference call. With me today is Mr. Eric He, CFO. I would also like to mention that due to the pending ongoing private transaction, we will not be hosting the Q&A session at the end of the call.

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 will now turn the call over to the CFO, Mr. Eric He.

Hello, everyone. Welcome to our earnings call. In the third quarter, our overall business continued to expand as net revenue grew by nearly 50% year over year, to almost RMB1.5b, primarily driven by our traditional music and entertainment business and emerging online dating business, but offset by the softness of our online game segment. At the same time, we were able to grow our paying users in tandem with revenues to 2.8m.

What is more impressive is that in our core online music and entertainment segments, our paying users increased over 65% year over year to 1.9m.

On the mobile front, revenue contribution from our online music and entertainment business increased to 35% of total revenue as compared to only 9% in the prior year period.

Additionally, paying users for mobile increased 239% year over year to 1.1m and mobile ARPU continued its strong growth which further accelerated by 69% to RMB252 this quarter from only RMB149 a year ago.

Even though the increased contribution from mobile is lowering our overall ARPU, we firmly believe and are experiencing that this will recover as mobile ARPU continues to grow over the mid and long term.

Moreover, we launched two new businesses in the third quarter. The first is (spoken in Chinese), a highly interactive live broadcasting concert service that connects celebrities, onsite audience, participants, and YY's large community of users virtually. This new innovative service leverages the highly success business model of our online music and entertainment business and encourage the fans of established singers to become YY users.

The other new business that -- new business, (spoken in Chinese) incorporates a new model that enable our users to support their favorite YY singers on our platform as they aim to create original and professional works and attract large fans. In the past few months, it has helped to support many artists to successfully launch hundreds of original works.

Although these new business are still in the early stage, we are confident that they will bring considerable opportunities for YY going forward.

Now, I want to turn to our online dating business. Revenue for our online dating continues to grow impressively with 169% year-over-year increase to RMB173m in the third quarter. This strong growth was driven by solid paying user growth of over 43% year over year.

We expect our online dating business to continue its strong growth in the fourth quarter of 2015, but given the large size of its user base, we expect the growth momentum to start to normalize in 2016.

As for our online game broadcasting business, revenue from Huya Live game broadcasting increased by over 80% year over year to RMB82m in the third quarter 2015 and remains a strategically important business for us. We continue to develop and expand this business with top tier events and talent as we aim to further broaden its user base and content offering.

Our overall growth was offset by a softer than expected performance of our online game segment, due to intensifying competition, widespread softness in the web game market as well as the postponed release of several new games.

We are working hard to revitalize growth for online game by introducing several new games over the next several quarters. However, we do not expect these games to contribute to our revenue until 2016. Thus we anticipate continued softness in online gaming business for the rest of 2015.

As we expected, a shift in our revenue mix and increased competition has led to continued margin pressure. Additionally, there were several one-time occurrences which adversely affect our performance in the third quarters which I would like to discuss briefly.

First, we experienced a one-time loss of RMB37m in foreign currency exchange in the third quarter, due to the depreciation of Chinese yuan when we convert our offshore RMB to US dollars. This was a one-time event as we are now holding all US dollars in our offshore accounts.

Next, our share-based compensation increase which was mainly driven by our one-time payment of value equivalent of RMB28m to the management of one of our online education teams.

Additionally, due to the departure of key individuals in the online education business, we incurred impairment charges of RMB110m as well as adjustment gain of RMB74m for fair value changes of contingent consideration associated with un-obtained earn-out payments.

Despite some of the secular headwinds we faced, and adverse one-time occurrences in the third quarter, we are generally optimistic about the company with our cutting-edge proprietary technology, diverse business model, large user base, and innovative concepts to expand into a new business.

Now, I will turn to our quarterly financial details. Before I get started presenting our financial numbers, I would like to clarify that all the numbers -- all the financial numbers we are presenting today are in RMB amount and percentage changes are year-over-year comparisons unless otherwise noted.

Net revenue for the third quarter of 2015 increased by 49% to RMB1.49b. This increase was primarily driven by increase in revenue from online music and entertainment as well as online dating.

IVAS revenue increased by 50% to RMB1.42b, which mainly reflected the growing number of paying user across all segments except for online games.

Now, let us look at each of our IVAS business lines.

Revenue from online music and entertainment increased by 60% to RMB854m in the third quarter of 2015. This increase was driven by an increase of 65% in the numbers of paying users to 1.9m, but partially offset by a 3% decrease in average revenue per user, ARPU, to RMB439. The year-over-year decrease in ARPU was the result of increased mobile contributions to the total revenue, total music and entertainment revenues.

More importantly, mobile ARPU continues to experience solid growth, having grown 69% to RMB252 in the third quarters of 2015 from RMB149 in the corresponding period of 2014.

Revenue from online games was RMB169m in the third quarter of 2015, compared with RMB235m in the prior year period. This decline was primarily caused by a 31% year-over-year decrease in paying users to 336,000. The number of online games operated by YY as of September 30, 2015 increased to 283 from 183 as of September 30, 2014.

Revenue from online dating increased by 169% to RMB173m. This increase reflected a year-over-year increase of 43% in a number of paying users to 219,000 and an increase -- and a 88% year-over-year increase in ARPU to RMB788 in the third quarter of 215.

Other IVAS revenue increased by 94% to RMB223m in the third quarter of 2015. This mainly includes revenue from Huya broadcasting, which increased by 81% to RMB82m and revenue from membership subscription fees, which increased by 41% to RMB76m.

Other revenues, mainly including revenue from our online education platform, 100 Education, and online advertising revenues from Duowan.com, increased by 37% to RMB72m in the third quarter of 2015.

Cost of revenue increased by 88% to RMB905m, which was primarily attributable to an increase in the revenue-sharing fees and content costs to RMB573m in the third quarter of 2015. The increase in revenue-sharing fees in content cost paid to performers, channel owners, and content providers were mainly due to higher level of user engagement and spending driven by promotional activity, as well as an increasing number of new emerging business lines in different categories.

In addition, bandwidth cost increased to RMB147m in the third quarter of 2015.

Gross profit increased by 13% to RMB584m in the third quarter of 2015.

Gross margin was 39%, compared to 52% in the prior year period. The decrease in gross margin was mainly attributable to change in our business mix to include new business lines involving user-generated contents and higher revenue-sharing fees in music and entertainment, as well as increased investment in Huya, in broadcasting.

Our non-GAAP operating income decreased by 19% to RMB281m in third quarter of 2015, which was mainly due to the growth of operating expenses such as increase in share-based compensation and goodwill impairments as we discussed earlier.

The non-GAAP operating margin fell to 19% from 34% in the prior year period as a result of the decreased non-GAAP operating income.

GAAP net income attributable to YY was RMB156m in the third quarter of 2015, compared to RMB286m in the prior year period.

Net margin in the third quarters of 2015 was 10%, compared to 29% in the corresponding period 2014.

Non-GAAP net income attributable to YY Inc was RMB237m compared to RMB322m in the prior year period.

Non-GAAP net margin decreased to 16% in the third quarter of 2015 from 32% in the prior year period.

Diluted net income per ADS in the third quarter 2015 was RMB2.75, compared to RMB4.77 in the prior year period.

Non-GAAP diluted net income per ADS was RMB4.17 compared to RMB5.37 in the prior year period.

This concludes our prepared remarks. Thank you for joining our call today. I would like to conclude the call now. Thank you.

Operator, we would like to conclude the call now.

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