JOYY Inc (YY) 2013 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the YY Inc. Third Quarter 2013 Earnings Conference Call. (Operator Instructions).

At this point, I would like to hand the call over to Ms. Anna Yu, YY's Investor Relations Manager. Thank you. Please, go ahead.

Welcome to YY's third quarter 2013 earnings conference call. With us today are Mr. David Xueling Li, CEO of YY, and Mr. Eric He, CFO. 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.

At this time, I would like to turn the conference call over to our CEO, Mr. David Li.

Good morning, and good evening, everyone. We are pleased to report another strong quarter that saw robust performance both operationally and financially, as well as strong progress in key strategic areas, which will also cause future growth.

In the third quarter, we saw aggregate monthly active user increase by 4% quarter over quarter to 87.2 million. We began to use this metric last quarter and believe this metric provides a fuller picture of our overall platform engagement, interaction, and reach.

With the expansion of our platform and the success of several recent initiatives, we have been able to greatly increase our revenues by over 113% year over year and the net income by over 267%.

Allow me to further outline the key area of focus for today's call. First, the strong growth of our music platform, which reflects both the advantage of our business model and the success of our recent collaboration with Hunan TV's "Happy Boy Show." Second, YY mobile climbed, as well as (inaudible) was closed and initiatives going forward. Third, our CFO, Eric, will update you on the continued development of our gaming platform. And, lastly, Eric will go through our third quarter financial results in detail.

Getting started, our collaboration with Hunan TV's "Happy Boy Show" was a great success and helped to continue to the overall outperformance of our YY music platform.

Initially, we had expected this event to be a good experiment for YY and help broaden our user base appeal. We aimed to learn the necessary content and production skill to host a similar event in the future, as well as improve the interactive capability amongst users and the channel host, which will help to improve revenue generation capabilities.

Not only did we learn a lot, but we also were able to attract a significant number of new paying and nonpaying users to our platform. In fact, we increased our music paying user by over 117% year over year to over 770,000. The heavy growth on the music side supported overall YY (inaudible) paying user growth, which reached 1.3 million, growing at a rate of 48% year over year.

Additionally, this collaboration has paid some intangible dividends. It has given the YY interactive experience and the user culture, as well as elevated our brand recognition in China.

On the mobile YY front, we saw monthly active users of our mobile platform increase 19% quarter over quarter and 94% year over year to over 17 million. Average monthly installation for the portal increased 78% year over year to 4.6 million per month. This performance allowed us to begin monetization on this (inaudible) in multiple ways during the quarter.

In addition, we launched our mobile gaming platform and are actively building up our gaming portfolio. In this beginning stage, we remain more focused on the development of the platform and the expansion of its user base. As we head into 2014, we will continue to focus heavily on strengthening our monetization efforts on the mobile front.

On the education front, we have also continued to explore opportunities and develop capabilities for this vertical. We continued to see strong growth in the number of teachers on the platform, which increased by 29% quarter over quarter, [reaching] 125,000. We are confident both in the long-term growth prospects associated with the online education sector in China, as well as our internal capabilities to successful expand deeper into this vertical. Consequently, we are committed to exploring opportunities -- exploring options and making strategic investments at the right time and upon the right opportunity.

Lastly, as you have read earlier, we have announced the resignation of our CTO, Tony Zhao. Even though Tony will no longer be our CTO, we are excited to partner with him in a strategic partnership that will be based in Silicon Valley and will be focused on leveraging YY's strong, real-time, interactive platform to help us expand into promising new verticals internationally. We look forward to working with Tony in this new capacity, as well as his continued input on the Company's board of directors and as chairman of YY's technology committee.

Going forward, our continuing strengths across all platforms, coupled with our recent initiatives to diversify into new verticals and enhance the user experience, will allow us greater opportunities to monetize our offering and achieve robust financial growth in the quarters and years to come.

At this point, let me hand over the call to our CFO, Eric.

Good morning, everyone.

To begin with, I would like to discuss the development of our gaming platform and growth initiatives in greater detail.

For third quarter, we saw gaming revenues grow by over 84% year over year to over RMB154 million.

Chief among our game initiative is our recently announced licensing agreement with S2 Games and subsequent partnership with Asiasoft, a leading provider of online gaming services in southeast Asia. The partnership marks our entry into international gaming markets. Under this partnership we have licensed the online game "Strife" from S2 Games for Asia, excluding Japan and South Korea. In addition, we will jointly market, distribute, and operate the global version of "Strife" on an integrated platform with Asiasoft in Thailand, Vietnam, Indonesia, Singapore, Philippines, and Malaysia. This global version, which can be played in multiple languages, is slated to begin beta testing this quarter and is scheduled for commercial release in early 2014.

For our IVAS revenue, one particular aspect that I would like to highlight was the strong contribution from our emerging area of live game broadcasting. This growing business increased significantly to almost RMB17 million in the third quarter from only RMB434,000 just a year ago. This impressive growth represents the strength and the success of our powerful, real-time, interactive platform capabilities that can be leveraged for any similar real-time event, as well as our large base of engaged YY users.

Now, moving to our quarterly financial highlights, before I get started, I'd like to clarify that all the financial numbers we are presenting today are in RMB, or renminbi, amounts, unless otherwise noted.

Net revenues for the third quarter 2013 increased by 113% year over year to RMB487 million. This increase was primarily driven by increase in IVAS revenues and, to a lesser extent, increase in our Company's online advertising revenues. IVAS revenues increased by 126% year over year to RMB442 million. The overall increase primarily reflected an increase in the number of paying users and increase in ARPU.

Let's look at each -- our IVAS business lines more specifically.

Revenue from YY music increased by 161% year over year to RMB229 million. This increase primarily has reflected a 117% increase in the number of paying users to 771,000 with an ARPU of RMB297 during the third quarter 2013.

Revenue from online games increased by 84% year over year to RMB155 million. This increase primarily reflected an increase in ARPU of 17% to RMB347 and a 57% increase in number of paying users to 443,000. Also, the number of online games increased to 111 as of September 30, 2013 from 68 at the same time last year.

Revenue from others increased by 445% (sic - see press release, "145%") to RMB58 million. Revenue from membership program increased by 77% to RMB37 million. This increase primarily reflected a 75% increase in the number of members to 705,000 members as of September 30, 2013 from 404,000 a year ago. Revenues from live broadcasting of online games increased significantly to RMB17 million in the third quarter of 2013 from RMB434,000 in the corresponding period of 2012.

Online advertising revenue increased by 36% year over year to RMB45 million in the third quarter 2013. This increase reflected a 42% increase year over year in average revenue per advertiser to approximately RMB731,000 from 62 advertisers.

Cost of revenues increased RMB249 million. This was primarily attributable to an increase in revenue-sharing fees and content costs, which increased to RMB134 million this quarter from RMB32 million last year. This increase included revenue-sharing fees and content costs to performers, channel owners, and content providers, including one-time costs related to the "Happy Boy" collaborations, as well as higher level of user engagement and spending. Revenue-sharing fees and content costs consist of music-related, game-related, open-platform-related sharing costs, as well as other content production and procurement costs with music-related sharing costs as predominant component of it.

Bandwidth costs increased by 43% year over year to RMB55 million, or 11% of the revenue, down from 17% of revenue in the same period last year, as we continue to manage our bandwidth costs through better allocation of bandwidth resources and infrastructure improvement.

Gross profit increased by 106% to RMB239 million. Gross margin was 49% in the third quarter 2013, compared with 51% in the corresponding period of 2012. The decrease in gross margin was mainly attributable to one-time costs related to the "Happy Boy Show," partially offset by improved cost efficiency associated with the Company's increased scale.

Our non-GAAP operating income increased 193% year over year to RMB176 million. Non-GAAP operating margin increased to 36% from 26% in the same quarter last year. The increase in operating margin was primarily due to increased operating leverage associated with our Company's expansion.

GAAP net interest income attributable to YY increased 267% year over year to RMB129 million from RMB35 million in the same quarter last year. GAAP net margin increased to 27% from 15% in the same quarter last year.

Non-GAAP net income attributable to YY increased by 207% to RMB171 million, while our non-GAAP net margin expanded to 35% from 24% in the same quarter last year.

Diluted net income per ADS increased to RMB2.17, or $0.35, from RMB0.72 in the same quarter last year. Diluted non-GAAP net income per ADS increased to RMB2.87, or $0.47, from RMB1.14 in the corresponding period 2012.

For the fourth quarter 2013, we currently expect our net revenue to be between RMB510 million to RMB520 million, representing year-over-year growth of approximately 91% to 95%.

This conclude our prepared remarks for today. Operator, we are now ready to take some questions.

(Operator Instructions). Timothy Chan, Morgan Stanley.

Congratulations on a very strong quarter, as well as the solid guidance.

My question is actually related to your mobile monetization. Maybe could you talk about the (inaudible) trend here as far as some of the user metrics, such as conversion rates or spending level, comparing to PC? And are you seeing any impacts to the PC spending as a result of more users are now migrating to mobile? Thank you very much.

Yes. As we announced that the third quarter -- last quarter was the first quarter that we start the mobile monetization. But, at this point of time, the mobile monetization remain very small. So we do not have any metrics to announce. We will continue to watch this performance. I think, at the early stage, the mobile monetization was good.

And, in terms of conversion, in terms of PC spending, we do not see that there is any collaboration at this -- I'm sorry. We do not see any cannibalization at this point of time. So PC monetization in music and in games and membership are still growing very strong on YY platform.

Thank you very much.

Alex Yao, JPMorgan.

My question is on the mobile game publishing side. You guys mentioned you have recently done some mobile game portal. Can you talk about your strategy on the mobile gaming side? Obviously, we have seen very strong synergy between your (inaudible) game publishing and the core YY business. How do you leverage the user base on the mobile side? How do you create the synergy between these two activities? Thank you.

I think mobile games is an area that we think is very important for us, as you all know that. In YY platform, there are a lot of gaming users, so we actually have a very good foundation in base to leverage on our user base. Now we are actually in a process of establishing of our mobile game team.

I think, at this stage, we will be aiming at two directions. One is we will -- actually not giving up development of mobile games by ourselves because we believe that this is still at early stage of the mobile game development. So there is some opportunities over there. And we do see there's a chance that the gigantic or blockbuster mobile game is on the way into the future.

Secondly is to leverage on our YY resources, traffic. We think that we will also build our distribution channel as well.

I think, on this particular point, I would like to direct this question to our CEO, David. David would like to answer this question as well. Maybe he will answer in Chinese first. Then we will translate into English for you.

(spoken in Chinese).

(interpreted) I think that, for mobile games, we would like to actually capitalize on our platform -- the power of our YY platform. As you all know that, mobile YY at this moment has actually growing very nicely in this quarter, and we believe it will continue to grow.

And, also, don't forget we have very large resources called Duowan.com, which is our game portal. It actually has a very strong traffic on the PC front. And, now, we are actually consolidating a lot of apps on Duowan.com into, actually, the mobile apps. And we believe all those traffics created by the different apps from Duowan.com will actually contribute to a large, large portion of our future mobile game platform, which is under development right now.

We mentioned it before that we will focus on two areas, both. One is mobile game development and, also, the platform construction. I think we are in the process of building our mobile game teams in the quarters and years to come.

[Gregory Chow], Citigroup.

Congratulations on the strong quarter. And I have three questions.

First, my question about the cooperation with Asiasoft in the (inaudible) area S2's games. Shall we expect we will launch further cooperation with Asiasoft to promote our current voice communication software and the video service in that area?

And I have (inaudible) two questions.

I would like to direct this question to our CEO, David, please.

Sorry. We just translated the question again for the CEO. Please, David.

(Spoken in Chinese).

(interpreted) We are working, again, with Asiasoft in south Asia, and we are about to -- we were planning to promote our YY business in southeast Asia. But we still have not reached any agreement with Asiasoft yet.

The cooperation with Hunan TV -- I think we got a very successful cooperation in the past quarter. And so it was mentioned (inaudible) upon the user engagement in the coming quarter and Q4 and, after we end the cooperation with Hunan TV. And any expectation around the churn rates? And shall we expect that the new joiners from the cooperation with "Happy Boy" will stay on our platform and convert to our paying users? And shall we expect the Q-on-Q sequential paying user increase? Thanks.

Yes. As you all know that, in third quarter, our music performance was fantastic. Part of the reason is because that we have the collaboration with Hunan TV. However, I would like to remind you that, in second quarter, our music activity or our music business was very good as well. At that time, we did not have Hunan TV -- Satellite TV's collaborations. So the point I want to make is that we think the power of our YY platform is really the key.

So, in third quarter, in fact, all the spaces, all the marketing efforts, resources have been put onto Hunan's collaboration on "Happy Boy Shows." So the point is that, if -- even that we don't have that content, we have other content, which, as we did in the second quarter of this year, we will have very similar type of business level or growth momentum.

So, moving forward into the fourth quarter, obviously, we do not have any collaboration with Hunan TV on any content, but we think that the music business will continue to grow very strongly into the quarters and the years to come.

So, in this quarter, the ARPU increase is also contributed by YY's own platform. Right?

I don't quite understand your question, Greg.

I mean the paying users' ARPU (inaudible). We saw a year-on-year and a Q-on-Q increase. I mean the increase is also mainly contributed by the current (inaudible) users rather than from the close collaboration with Hunan TV. Right?

As I told you, in third quarter, we have a very good collaboration with Hunan TV. So it will be impossible for us to distinguish between --

Got it.

-- the revenue is from Hunan collaboration or from our own music. So there is no way for us to distinguish that.

But I just pointed out, in the second quarter, we did not have any collaboration with Hunan TV, where we actually had a very strong business as well. So, moving forward, we will not be dependent upon any contents from any parties. So I think that's a point which should be very clear now.

I understood.

My last question about the recent progress on education. Can management share some color around the education, the monetization? Thanks.

Why don't I just take this question first, and I will let our CEO, David, to answer the question as well.

This question for the education, as you know that, we have putting into a lot of efforts and resources trying to develop a model which is suitable for our platform. As you know that, we already have roughly 3 million monthly active users who comes to YY for the education purpose. I think we continue to improve as we (inaudible) that the teachers on YY platform have grown very, very nicely, by roughly 28% on a sequential basis. So I think our education efforts are on the very right tracks.

But, in terms of monetization, I think our plan at this moment is to wait until next year.

(Spoken in Chinese).

(interpreted) I think, for our education endeavor, the most important thing is we would like to facilitate the teachers and also schools, helping them to do business, to make a living, on YY platform, to make them as online business.

Right now, our team actually is developing our products and sharpen our technology. We are actually still at this stage.

So, eventually, we would like to see that we can help teachers and school to convert their offline business model to online business model. We would like to see they can make a lot of money. So we would like to see they can be very successful on YY platform.

As to our own monetization, I think it's not a big consideration at this juncture for our Company at this moment.

Thanks, David. Thanks, Eric. Very helpful and insightful.

Gene Munster, Piper Jaffray.

My congratulations.

Just a follow-up on the education side, Eric. Do you envision that being a separate brand and kind of a separate piece and consumer brand around education, or would that just be under the general YY platform?

And then I have a follow-up question.

(Spoken in Chinese).

(interpreted) Gene, I think for your questions regarding the brand name of our YY applications, at this moment the final decision has not been made yet. As you know that, YY the brand name has been built over years. In fact, lots of Chinese consumers recognize YY as a great brand name.

But we do understand that YY education and YY brand may actually have very different meanings to the investors because YY represents games, music, and entertainment. So we are also considering maybe we will use another brand to do our YY education.

So I think the final decision has not been made yet. But this is an important decision, and I think we will make that decision as we go along into the future.

And my follow-up question, just in terms of timing of education revenue, revenue that's a little bit more measurable that we can be kind of calling out. Is that late 2014, 2015? Any sort of big-picture context of when we should expect that? Thank you.

Well, as indicated by our CEO earlier, the paramount task at this moment is to build and to develop a product or technology that can help the schools and teachers. If we can be successful in that, then we will have lots of education users. I think, at this stage, that's the most important things that we need to focus on.

As to the monetization, as to the revenues, it will come into secondary. It could be -- I think it could come in the second half of 2014, or it may be later. So I would say, at this moment, monetization on education is not of the most important things for us to think about.

Got it. Thank you.

Yu-Heng Fan, China Renaissance.

Congrats on strong results.

My first question is regarding your margin outlook. You have pretty substantial margin improvement in this quarter. And I wonder if management can comment on the margin outlook for the fourth quarter, both in terms of gross margin and operating margin.

Thank you. And I have a follow-up.

Sure. As I mentioned before to all the investors, I am very confident on our margin picture this year. The reason that I'm very confident is because, as I mentioned, we have actually achieved a lot of operating leverage. As we indicated in our earnings release that our bandwidth costs as a percentage of revenue actually has dropped over years by a couple of percentage points, that's very, very apparent evidence that we are actually generating very powerful operating leverage.

So, moving forward, we think this operating leverage will continue to work. So, in the fourth quarter, we believe our margins should continue to improve on top of the Q3 level. So the Company is optimistic on our margins' improvement in the quarters to come.

Thank you. That's helpful.

My second question is regarding your game broadcasting business. How should we think about the potential of this business? You mentioned that this type of business can be extended to any type of live events. Is there any areas you want to get into for the live broadcasting? Thank you.

Okay. We just translated the questions to David.

(Spoken in Chinese).

(interpreted) We think that the YY is a platform of real-time interaction business or activities. Not just we can make music business flourish; we can also, again, make game broadcasting as a big business. As you all can see that, game broadcasting in this year has been growing very, very fast, very, very strongly.

In the past, all the broadcasting business is a business of video Websites. The business model video Websites mainly depends on advertising. However, we can -- the power of the YY platform is we can actually convert that advertising-dependent business model into a user participate model. I think that's the power of YY platform. We believe this capability will enable YY to go into other verticals which will disrupt a lot of different verticals in the future.

Thank you. That's very helpful.

Alicia Yap, Barclays.

Congrats again for a good quarter.

My question is on your new mobile games platform. So, in addition to developing some of your mobile games, what is your plan to attract game developers to work with you? And are you looking more for some exclusive license contracts?

And then I also wanted to get management view is that -- how should we think about your mobile game platform differentiated with other existing, third-party app store? Or there are some third-party game platforms as well.

And, also, one of the peers that just reported a couple weeks ago said they plan to launch and market aggressively on the 17173 platform on some of these mobile apps. I just wanted to get your sense. How are we going to spend -- ? Are we going to spend aggressively, as well, on the sales and marketing to drive some of this adoption of the mobile apps download? And how should we see the competitive environment on this area? Thank you.

I think we would answer the questions in two parts. I will answer the first part. David will answer the second part. I think I will focus more on the mobile game side.

As you know that, we are entering into this mobile era, but we do actually believe that we are still at very early stage. So that's why we said that we will use three strategies to enter into the market concurrently.

One is we will not give up mobile game development. And, as to how are we going to do that, I think we will open up for all of the alternatives and options. For example, we will build games by our own teams, and we will actually invest into others' mobile game development teams once we receive that they have the capability to develop good games.

On the other hand, as you just mentioned now that we may actually go out there to license some of the mobile games out there to build our distribution platforms, as we recognize that moving to future in mobile landscapes, there might be many different type of business models.

So we think that, at this moment, it's not very clear what models it's going to work the best. So we will try, actually, different options, all different routes. So that's pretty much what we believe on this mobile game development moving into the future.

I will let -- I would ask David to answer the second part of the questions.

(Spoken in Chinese).

(interpreted) I think I want to sort of bring up a couple of important points.

The first point is that we all know that YY has lots of PC users. And this user base is very, very large. And all those YY PC users -- they actually would use mobiles. We actually have not leveraged that power to migrate our YY PC users onto mobile yet. And, if we start to do that, that will become a very important source of users on our mobile applications or mobile YY at this moment.

Secondly, as we emphasized a couple of times that music, education, game broadcasting -- those are the businesses that we have -- we are still experiencing large growth. We believe all those businesses are bringing a lot of new users for us. When the new users come in to experience our products in those verticals, it's likely, if we have corresponded applications on mobile, it's going to help us to drive all those users to use our mobile applications more easily. So that is going to be another source of our mobile users into the future.

Thirdly, I think we want to emphasize the power of our game portal, Duowan.com, which we did not actually emphasize too much in the past. Currently, we have more than 20 million daily, unique visitors on Duowan.com. All those users come to Duowan, actually, for one or other applications. For example, it could be on the blogs. It could be just looking for some information or game-related tools or utilities. All those traffics, all those specific usage, can be converted into mobile applications. And we are actually constructing that as well.

So we think that, once all those applications being constructed into the mobile apps, that is going to generate lots of usage on our mobile applications into the future.

So, in third quarter, as you all know that, we started our monetization on mobile fronts. We think, although that we have not disclosed any metrics -- but we think that the endeavor was very encouraging because the business model that we have on the mobile, obviously, is going to be virtual item based. And the virtual item based model actually is being hampered by the size of the screen. So we are confident that, as we move along, our mobile revenue should continue to grow and ramp up in the quarters and years to come.

Okay. Great. Thank you so much.

Vivian Hao, Deutsche Bank.

Congratulations on a great quarter.

We realize -- it looks like our operating expense not only declined as a percentage of revenue. And, also, in absolute terms, it seems to be lower quarter over quarter. Is there any specific reason behind this? Or how we should read into the fourth quarter on operating expense?

And, also, in terms of the revenue -- sorry -- the content-sharing cost, stripping out that RMB30 million that should fall into this quarter, it seems like it is still about 47%, 46% of the music revenue. So what is the sustainable music sharing percentage we should think of for the coming years?

Yes. Those two questions first. Thank you.

For the first question, it's regarding that our operating expenses is actually declining in terms of a percentage of the revenue, and also on the Q-over-Q sequential basis, it's actually decreased. Yes. We actually achieved this by two ways. One is because our operating leverage. As I mentioned that, as we grow bigger, the percentage of this operation expense to this revenue will get smaller.

Secondly, on the sequential decline, is because that, when we actually have all this expense, we will incorporate a lot of accounting estimations. So, in the third quarter, we have some changes in accounting estimations, which resulted in smaller numbers of operating expenses.

For your second question, is our sharing cost and content cost -- revenue-sharing costs and content costs. I think the way that you calculate the sharing costs for our music revenue is incorrect.

The reason it's incorrect is because, if you look very carefully, this line item is called revenue-sharing costs and content costs. Yes, you took out the content costs for the collaboration of Hunan Satellite TV, but, if you compare this cost with last year, remember, last year, in this line item, it was only music-sharing costs versus music revenue. But, in this year, as I just said it, that the sharing cost includes not only the music-sharing costs; it also includes open platform games and others. So that portion -- if you incorporate that, that portion actually make the sharing costs a little bit higher. That's number-one reason.

Number-two reason is the deferred revenue. As I mentioned, that part of the music revenue is being deferred into the future periods because of the US GAAP requirements.

So, because of two reasons, if you use this percentage to calculate sharing costs, it could create incorrect percentage.

I can assure you at this moment that our sharing costs for musicians at this moment on a cash basis is still unchanged, roughly around 35% to 40%, at this moment.

Okay. Great.

One last housekeeping question, just on the P&L. There's other income of RMB16.8 million for this quarter. Is that all from government grants, or any other components there?

Yes. That is one-time government grants in the third quarter. Correct.

Okay. Great. Thank you very much.

[Evan Cho], Credit Suisse.

My question is a quick follow-up on the user acquisition strategy that David just mentioned briefly. It seems to me that most of our mobile traffic right now are -- mainly comes from these resources that David just mentioned, pretty natural, organic traffic sources. So wondering -- I just want to pick you guys' thoughts on how do you see our mobile user acquisition spend or kind of strategy going forward down the road, maybe in the next one or two years, because I think some of the peers are spending pretty heavily in domestic and also international markets to increase their user base. So I'm wondering. How do we mainly see the market going? And how do we plan for the -- in the long term to acquire more -- increase our user base? Thanks.

We're translating the question to David. Just hold on a second.

(Spoken in Chinese).

(interpreted) Since eight years ago, when the Company -- we established the Company, we still use the original model is that we want to solve the problems of the users. If we solve the users' problems, word of mouth will actually market or distribute our products. So we believe this model very much. So we would continue to use this as our growing strategy moving into future.

Thank you. (Inaudible).

I would now like to hand the conference back to Mr. Eric He. Please, continue.

Thank you very much. Now I would like to conclude today's conference call. Thank you very much.

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

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.