JOYY Inc (YY) 2017 Q1 法說會逐字稿

Good morning, and good evening, everyone.

Welcome to YY's First Quarter 2017 Earnings Conference Call.

(Operator Instructions) With us today is Mr. Zhou Chen, CEO of YY; Mr. Rong jie Dong, CEO of Huya; Mr. Eric He, former CFO of YY; and Mr. Bing Jin, CFO of YY.

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.

I will now turn the call over to Mr. Bing Jin, who will read the overview and the strategic highlight section on behalf of Mr. Zhou Chen, CEO of YY.

Thank you.

Please go ahead, sir.

Thank you, operator.

Hello, everyone.

This is my first public assignment and introduction with all of you.

Welcome, and thanks for joining us for our first quarter 2017 earnings conference call.

I will now speak on behalf of our CEO, Zhou Chen.

As you may have seen, today, we announced that we have appointed Bing Jin as our CFO, effectively immediately.

He will succeed Eric, who has decided to retire from the company after 6 years of service.

Bing joins us with years of experience with the U.S. capital markets and a deep understanding of China's technology industry.

We look forward to working with him to further grow our business and fortify our leading position in the industry.

I would also like to thank Eric for his years of service as YY CFO.

We are grateful for his contributions and wish him the best of luck in his future endeavors.

Now I would like to turn to our results.

We are delighted to have delivered another quarter of solid top line growth, and more importantly, strong margin expansion.

We continue to see robust growth in our live streaming revenues, which increased by 51.5% year-over-year to RMB 2.06 billion in the first quarter 2017.

Additionally, our mobile live streaming MAU increased by 11.8% quarter-over-quarter to 62.6 million.

And our total number of live streaming paying users increased by 66% year-over-year to 5.88 million.

In the first quarter of 2017, YY Live continued to make significant progress in the execution of its content strategy.

We have further developed our outdoor vertical content into a large, diverse segment to include a variety of categories, such as travel, food, automobile, pets and others.

This strategic move enable us to meet our users' interest in various areas and expand our source of content by allowing our users, who are nonentertainment performers to become content providers and gain profitable returns.

Importantly, our new outdoor vertical content enhances the social aspect of our platform by encouraging our users to socialize with others who share similar interests.

We're very pleased to see enhanced user stickiness through the continued enhancement and enrichment of our outdoor content.

In addition, in April of 2017, YY Live launched a small room audio social game called, [Happy Werewolf Kill], which has been very, very popular since its introduction.

With that, I would like to turn the call over to Eric.

Thank you, Bing.

Good day, everyone.

Before I go into my remarks, I would like to take a moment to thank our CEO, Chen Zhou, and the talented YY team.

I have tremendous respects for each of our employees, and I am glad to have had the opportunity to work with you all in the past 6 years.

I believe Bing will be a great addition to the team and is highly qualified to lead the company into its next stage of growth.

Moving on to our results, we are pleased to witness sustainable revenue growth in the first quarter of 2017 with total revenue increasing by 37.4% year-over-year to RMB 2.27 billion, while greatly expanding our profit margins.

Importantly, our non-GAAP net income attributable to YY increased by 115.7% year-over-year to 565.7 million, of which Huya segment's loss shrunk tremendously from 140.5 million in the first quarter of 2016 to 35.2 million in the first quarter of 2017.

Our continuous development of new cutting-edge content is foundation of our strong growth and our key differentiator in the live streaming industry.

In the past quarter, Huya broadcasting further deepened its collaborations with mobile gaming company.

These partnerships allow our content providers to host live streaming sessions to share their gaming strategy and personal experiences during new games promotional period.

These partnerships provide Huya and our content providers with additional income, allow our content providers to provide timely interesting content and deepen the importance of live gaming broadcasting in the broader entertainment ecosystem.

Ultimately, mobile gaming companies will recognize Huya's promotional capabilities and influence in the new game launches, which will boost Huya's standing in the industry and open the door for future partnership opportunities.

Now, I will turn to our quarterly financial results.

Before I get started, I would like to clarify that all financial numbers we are presenting today are in renminbi amount.

Percentage changes are year-over-year comparisons, unless otherwise noted.

Net revenues for the first quarter of 2017 increased by 37.4% to 2.27 billion.

This increase was primarily driven by the increase in the live streaming revenue.

Live streaming revenue increased by 51.5% to 2.06 billion, which was mainly driven by the growth of Huya broadcasting revenues.

Revenues from online games were 139.7 million, as compared to 171.1 million in the corresponding period of 2016 and primarily reflected the continued softness in China web game market.

Revenue from membership were 45.4 million in the first quarter of 2017 as compared to 69.4 million in the corresponding period of 2016.

Other revenues, mainly representing revenue from our online advertising revenue, were 24.4 million in the first quarter of 2017 as compared to 51.2 million in the corresponding period of 2016.

Cost of revenues increased by 29.8% to 1.38 billion, which was primarily attributable to an increase in revenue-sharing fee and content cost to 1.04 billion in the first quarter of 2017.

The increase in revenue sharing fee and content cost paid to performers, channel owners and content providers was in line with the increase in revenue and was primarily due to the higher level of user engagement and spending driven by promotional activity.

In addition, bandwidth costs slightly increased to 188.9 million in the first quarter of 2017, primarily reflecting the continued user base expansion and video quality improvement, but largely offset by our improved efficiency and pricing terms.

Gross profit increased by 51.2% to 890 million in the first quarter of 2017.

Gross margin was 39.3% in the first quarter of 2017 as compared to 35.7% in the corresponding period of 2016.

Our non-GAAP operating income increased by 105.9% to 639.6 million in the first quarter of 2017.

Non-GAAP operating margin was 28.8 -- 28.2% in the first quarter of 2017 as compared to 18.8% in the corresponding period of 2016.

GAAP net income attributable to YY increased by 160.7% to 543.2 million in the first quarter of 2017.

Net margin in the first quarter of 2017 increased to 24% from 12.6% in the corresponding period.

Excluding a 38 million onetime gain, net margin in the first quarter of 2017 was 22.3%.

Non-GAAP net income attributable to YY increased by 115.7% to 565.7 million from 262.3 million in the corresponding period of 2016.

Non-GAAP net margin in the first quarter of 2017 increased to 25% from 15.9% in the corresponding period of 2016.

Excluding a 38 million onetime gain, non-GAAP net income in the first quarter of 2017 was 23.3%.

Diluted net income per ADS in the first quarter of 2017 increased by 153.4% to RMB 9.25 from RMB 3.65 in the prior year period.

Non-GAAP diluted net income per ADS increased by 109.6% to RMB 9.62 from RMB 4.59 in the prior year period.

Finally, looking at our business outlook.

For the second quarter of 2017, the company expects its net revenue to be between RMB 2.45 billion and RMB 2.55 billion, representing a year-over-year growth of approximately 24.7% (sic) [23.7%] to 28.7%.

These forecasts reflect the company's current and preliminary view on the market and operational conditions, which are subject to change.

This concludes our prepared remarks.

Let's start the Q&A.

(Operator Instructions) Your first question comes from the line of Natalie Wu.

(foreign language) I will translate this in English myself.

So just that you've done a very good job in terms of expense control.

So just wondering if this is just a seasonal thing or it is to be sustainable in the future.

So can management give us some color on the headcount plan this year as well as the planned marketing activities and related budget?

And also in last conference call, you mentioned that the extra investment to be made in terms of content, which will lead to 1% to 2% of the revenue-sharing costs, which will lead the revenue-sharing costs to grow, like 1% of 2% as a percentage of the revenue.

So just wondering if the guidance still holds as unchanged?

Natalie, I am glad that you remembered what I said very clearly.

Yes, I did say something what you were referring to.

I think first quarter 2017, we have done a great job in terms of expense and cost control, that's for sure.

That's number one, which has a great contributions to our margin expansion.

Secondly, I think I also mentioned that in 2017, it's likely to see that we are continuing to grow significantly with that.

We are going to narrow down its humongous loss from 2016 and which we delivered as well.

You mentioned specifically a couple of things: One is headcount; the other thing is sales and marketing; the third thing is content investments.

I think all those tactics or strategies are in place.

Yes, in 2017, we do have a headcount plan, which we do not expect will increase.

If possible, we may actually reduce a little bit.

So this plan will continue.

However, you mentioned sales and marketing expenses and the content investments may very well be a counterbalance this good tight control on the cost and expenses.

I think that's likely to happen in the remaining of the years.

In Q1 2017, our sales and marketing spending is somewhat muted.

So I expect that it could actually speed up once the new features and new products is online.

And also, our content investments will actually speed up for the rest of the year.

So I think, all in all, we are executing as we expected.

The Q1 results actually -- Q1's margins actually is a reflection of our tight control on the cost and the expenses and also the significant growth, the contribution from Huya, and also luckily, our spending on the marketing and in content side is somewhat muted.

So all of these adding together, you see the margin has expanded greatly.

But as I said it before, I said 2017's margin should be in line with what we had in 2016, if not better.

If we can do better, we would do better.

So I think that is still on track.

Best wishes for your future endeavors.

Thank you, thank you.

I will try my best.

The next question comes from the line of Zoe Zhao from Credit Suisse.

(foreign language) I'll translate myself.

So congratulations to Eric on retirement and being on your new role.

I've got 2 questions, mainly on user growth as well as Huya.

First, could management give us some colors on the MAU breakdown between YY and Huya, as well as PC and mobile, specifically what the management see around Huya's user growth recently?

And the second question is about Huya's turnaround, which is apparently much faster than our expectation.

So what is our Huya's core operation strategy as well as the revenue and margin outlook?

Thank you.

Thank you for the greetings.

Yes, well, let's review our MAU a little bit.

We did actually had a tremendous MAU growth in the first quarter.

I think the first quarter 2017's number was more than 62 million.

That number, in fact, it’s pretty solid.

I remember in the fourth quarter, I revealed that the YY Live MAU was a little bit greater than Huya.

And this quarter, it's the other way around.

Huya is roughly 32, 33 million.

And YY is about 29, 30 million.

So adding together, it's about 62 million.

In terms of the breakdown between PC and mobile, I believe this quarter will be remembered as we will start to report MAU only on mobile.

So the PC MAU number, we are not going to release anymore because we think it's less important, because all the product features had been developed for the mobile usage instead of on the PC front.

So PC is not important for us anymore.

So I actually don't have that number to share with you.

On the second questions about Huya, the game broadcasting business, what is the strategy?

I actually take advantage of this period that you are doing your English translation to ask our (foreign language).

And what he said is that in terms of a strategy for Huya, it actually is going to be continued executions of our strategy in 2016.

Namely, we are going to strengthen our market shares on mobile game broadcasting.

And this is very crucial and very important.

And we are doing a great job in terms of penetrating into the gaming -- mobile gaming area.

As I mentioned it in our prepared remarks, because of Huya's influence and the standings in the industries, more and more mobile game company are willing to work with us.

So it's a good sign.

And we believe we will be able to continue to expand our market shares on the mobile gaming area.

As I indicated, in terms of Huya's development, I think in Q4, we were very boldly -- confess that our goal for 2017 is to double again for Huya's revenue.

If I remember correctly, last year Huya's revenue is a little shy away from RMB 8 billion.

So if we were to be able to achieve what we said, Huya is going to do somewhere around RMB 1.6 billion in revenue.

And with that kind of revenue, as I mentioned it before, we could make money.

But I think whether we will make money is another matter because that will depend on the strategy that we are adopting for the rest of the year.

Because as you know, if they want to be aggressively expanding their market share, they may spend more on marketing, they may spend more on headcounts.

That actually will eat out some of their profits.

So it could very well be, turn out to be a little loss.

So again, it's way too far to forecast how much they will make or how much they will lose for the whole year.

But to be conservative, I think I would still try to maintain that Huya may actually may generate slight loss for the whole year in 2017.

I think that's our viewpoint in terms of its profitability, in terms of the strategy for the rest of the year for Huya.

If I may just follow up a bit on this, like if we don't disclose the total MAU anymore, could management give us some color on the paying ratio, especially on mobile?

And what is the overlap between YY and Huya in terms of mobile users?

Our paying ratios are very different in different business line.

For example, for YY Live, for our music entertainment line, that paying ratio is somewhere around 4% of the total MAU.

But for Huya, it's only 1% to 2%.

The paying ratio is dramatically lower than what we have on the music line.

So it's very difficult to generalize, to give you just 1 number, so we have to take it one by one.

In terms of overlapping between the paying users, the overlapping is surprisingly low.

On a quarterly basis, I think the paying ratio overlap is less than 10%, sometimes a little higher, sometimes a little lower, but 10% is perhaps right around that number.

Sometimes it's only single digits.

I don't remember that we have many months of double digits of the paying user overlapping.

So roughly, it's close to 10%.

Your next question comes from the line of Alex Yao from JPMorgan.

(foreign language) So first of all, congratulations to [Chen Zhou] (sic) [Bing Jin] on your new role and also wish Eric all the best in your retired life.

So my first question is -- YY's core positioning and the future direction, we understand that YY starts from in-game chatting and then expanding to PC live broadcasting and then also a number of other vertical live broadcasting areas over the past few years.

Now the PC gaming market is declining from user perspective and also live broadcasting behavior is migrating from PC to mobile, what is the core anchor feature for YY?

And what value proposition does it offer to the consumers?

And where do you want to head YY to over the next 1 to 2 years?

Secondly, a number of quick number questions.

One is, what is driving the acceleration of new user growth this quarter?

But on the other hand, why is the ARPU declined on both Q-on-Q and year-over-year basis?

And then, secondly, why is the R&D and G&A declined on a year-over-year basis?

Okay.

I would like to actually ask Chen Zhou to answer the first part of the questions.

I would try to translate for Chen Zhou.

(foreign language)

Well, I would try to translate what Chen Zhou just said.

I think in terms of our positioning, YY Live has been actually positioned as a broad entertainment interactive platform.

I think this positioning has been true for last 2 or 3 years.

Despite the fact that we started from just a voice software.

But in the recent years, this has been our positioning.

And as you know that Huya is an online game broadcasting platform, it actually turns out to be one of the most effective information and user of gamers' communities in the new generations of mobile games.

So Huya's positioning is very clear as well.

In the second half or in future months, we are planning to do a short video or short video clips services.

And this is not yet launched, but this is within our plan.

I think we will launch something in the short video, short video clip, this type of the services.

In terms of the user numbers, for YY Live, we have experienced user numbers' growth.

It's not that surprising.

The reason is that the YY has been -- accumulates tremendous amount of the content.

And we have lots of performers and has built a very strong ecosystems on our platform.

Not only that, YY has a very strong brand names over the last 5, 6 years.

So we are one of the few actually has operated so many years.

In 2016, the competition was very intense.

And there's a lot of noises and a lot of small companies entering to the market.

So the whole market was very crowded.

But as we see, we move into 2017, this hot competition and all this craze has slowed down a little bit.

And because of the slowdown, we will be able to actually retain a little bit more users.

We can, effectively expand our user base a little bit.

So that actually help us in terms of expanding our business.

So that gives us the opportunities to grow our user base a little bit faster.

In terms of a game broadcasting business, as we mentioned it before, that mobile game definitely, it's the most important part of our business.

It continue to be.

And we believe, for the foreseeable futures, we are going to focus on mobile games on Huya and game broadcasting business.

And we believe that, that particular business will continue to be very strong.

In terms of the number questions, why ARPU is lower on a year-over-year or Q-over-Q basis, well this is not surprising.

The reason is that: one, by nature, the game broadcasting users or game broadcasting paying users has much lower ARPU than the music or entertainment users.

As our game broadcasting business has grown much faster than the rest of the business, on an average basis, you will see that ARPU is -- will be dragged down a little bit.

That's the number one reason.

Number two reasons -- and as we grow our mobile user more, our mobile user, when they started to pay, normally, they will start from a small number.

So those 2 reason has give us inclinations to start with -- inclination of lower ARPU.

So that's the reason why you see the ARPU numbers.

In fact, it's not growing very significantly.

But I don't think we worry too much about this trend.

I think moving forward, we will expect ARPU will stabilize, and in fact, could actually turn around to grow again.

In terms of cost control on R&D and G&A, I think if you look at the absolute numbers for this year compared with last year, it was a little bit of growth in absolute numbers.

But percentage wise, of course, it's nowhere in comparison with our revenue growth, meaning that our expense has been controlled.

Cost has been controlled very, very tightly.

As I mentioned that one of the very important characteristics of YY business is that we have tremendous amount of very qualified, good engineers.

So we decided that we want to use -- we want the best use of it.

So meaning that we will try to reveal those good engineers, try to repeat their talents without hiring more headcounts.

So put it simply, we actually have a headcount, not freeze, a headcount control type of mentalities.

We want to best utilize our talents.

I think that's the reason why you see R&D expenses has grown very little as compared to the growth rate of revenue.

And same thing for G&A.

I think as we enter into 2017, in terms of the headcount, in terms of the scale of all the staff, we want to keep it lean and mean.

We don't want to grow this structure or institution, organization into a very big institution.

So I think that's our goal, and we will continue to execute what we think is the right way to go.

The next question comes from the line of Binnie Wong from Merrill Lynch.

(foreign language) Let me translate my 2 questions into English.

So my first question is that, it seems that your peers are actually using social networking and short video to drive incremental traffic.

Can you share with us some of your strategy this year to grow our traffic?

And I remember last quarter, Eric was -- were discussing about how social networking say -- this year, we probably will be restructuring ME live to add more social networking element -- so how does our strategy differ from our peers?

And how does the restructuring progressing?

My second question is on the split of the playing users of the 5.8 million.

How much of that is attributable to Huya?

And how much is attributable to YY Live?

And in terms of our conversion to paying users, how are we going to be differentiating from our peers this year to drive a better conversion ratio?

Understand we already -- in terms of conversion ratio, we've been doing very well.

But I just want to see is there any update this year we should be focusing?

That's almost all of my questions.

Thank you, management.

(foreign language)

Okay, for the first part of the question that I think we mentioned briefly as that YY Live, we actually will continue to strengthen the content investments.

We believe that if we have good content, great content, interesting content, attractive content, these are the foundations to attract new users.

And we will continue to do that.

And also we believe that the social networks relationship is very important.

That will determine how much of the churn rate that on our platform.

Obviously, the lesser churn rate, the higher the user base or the quicker the user base will grow.

And that's our goal as well.

In terms of Huya, the game broadcasting business, as we mentioned it, we will continue to focus on mobile game.

We think mobile game has tremendous future.

It's growing very fast.

And then thirdly, I think we will use short video clip as a tool to help us to gain user base.

And this product is still -- remain to be announced and launches for the rest of the year.

(foreign language)

Yes.

We do actually had a plan to launch our social network-based products.

Namely at the beginning of the year, we -- I think I had mentioned to a lot of the analysts and investors that we are going to rebuild ME as a social network product and launch it in this year.

I think that plan is still on track.

But this plan is somewhat being delayed because we saw there's opportunities, which is more pressing than this ME social network product.

It's called [Werewolf Kill].

I think we mentioned it on our script.

This particular product was launched in March and April time frame, which had a very good, very strong results, helped us attract very good amount of the user base for us.

So that's why our ME product got a little bit delayed.

In terms of the paying users, Binnie, you said that, yes, this quarter Q1 2017, we had a tremendous growth.

The paying user, just YY and Huya, altogether was about 5.8 million, which was a very good growth from 5.2 in the fourth quarter.

I would like to point out that for all the platform-paying user, it's somewhere around 6.2 million.

In terms of -- among this 5.8 million, 60% belongs to YY Live, 40% belongs to Huya.

Roughly that is the split for that 5.8 million.

For the remaining, I believe I said 60.4 -- so 6.2, I think it's 6.4 million for the whole platform, the paying user for the first quarter.

So the rest of the paying user will go through game operation, will go to smaller products.

So over there, we got something like 600,000 paying users as well.

So altogether, the whole platform is about 6.4 million paying users.

So I hope I answered your question.

The next question comes from the line of Alicia Yap from Citibank -- from Citigroup.

(foreign language) I have 2 questions.

Eric, congratulations on your retirement, and thank you for your help and support.

And Bing Jin and also congratulations on your new role and look forward to working with you.

My 2 questions is that, when you talk about the short video clip, just wonder what type of contents would that be and if management can share about that strategy a little bit more detail?

And also, what would be the monetization model for the short video?

And then on the margins, given the big improvement in the first quarter margins, any targets or any color in terms of the full year margins for this year?

(foreign language)

For the for short video clip products, since it's still on the stealth mode, we have not launched and announced yet, so I am going to reveal very little on this product.

But specifically, it's going to be based on content and also social network.

In terms of the timing of this product's release, we are estimating it's going to be in the second half of May or the first half of June of this year.

And to be honest with you, we have not consider how are we going to monetize on their products.

Right now, it's building a product and try to launch a product in the most successful manner as possible.

So I think that's what we are focusing right now.

In terms of margin, yes, I think as I mentioned it, that Q1 is very good.

But I indicated also that Q1 was extremely good, it's because that some of the sales and marketing expenses has not been spended.

So for the remaining years, when we start to launch products, our sales and marketing and all the other expenses may actually go out faster.

So again, I would go back to my previous statement.

I think last year, when people asked me about the margin of 2017, I continue to say that the 2017 margins, in my opinion, is not going to be less than 2016.

I think we should expect 2017's margin to be at least in line with 2016 because you would see some of the positive factors and the negative factors.

Positive factors, I already mentioned one big one is the narrowing loss of Huya.

That is the positive factors for our margin.

But then the negative factor is we are going to launch new products.

And then we're going to spend more money on sales and marketing.

And these will lower our margins.

So because the spending has not started yet, so you don't see that, so you see the Q1 margin is very good.

But for the remaining years, I still believe that our margin is going to be relatively good, perhaps it's not that good as the first quarter.

But go back to my previous point, I think at least, we should be in line with 2016 in terms of margin, if it's not a little better.

And also, I want to correct my answer on the last questions.

The entire paying user of our platform in the first quarter 2017 was 6.6 million.

I mistakenly said it's 6.4 million.

It should be 6.6 million instead of 6.4 million.

But for Huya and for YY Live, adding together, it's about 5.8 -- 5.87 actually.

I hope I answered your question, Alicia.

Yes, very well.

Thank you.

Thanks, Eric.

Congrats again.

The next question comes from the line of Eileen Deng from Deutsche Bank.

(foreign language) My first question is regarding the outdoor channel.

Can management give us some colors on this, especially in the ARPU versus our music?

And is there any new content planned in the rest of the year?

And my second question is regarding the revamped ME app, [Happy Werewolf Kill] app.

Is any metrics that management can share with us and especially the monetization capability?

(foreign language)

In terms of the outdoor broadcasting, live broadcasting, in terms of user numbers, I believe last conference call we mentioned it, that for the last 6 to 7 months, it has very good growth rate.

In terms of content, we are continuing adding new content.

But honestly, the revenue, ARPU and revenue, it's lower than the traditional music type of the broadcasting.

But we believe the ARPU is a little bit higher than game broadcasting ARPU, so we still think that outdoor broadcasting is an area that we are going to continue to focus and help us grow our business into the future.

(foreign language)

In terms of this new product, [Happy Werewolf Kill], we just launched it about a month ago, which -- so we don't have a meaningful MAU number.

I think previously, we put out a press release touting that our BAU number has surpassed 1.5 million.

But in terms of monetization and revenue, it has not started yet.

There are no further questions at this time.

I would like to hand the conference back to the speakers for any closing remarks.

Thank you all.

Thank you for your [fairway] call with me, and I hope the best for all of you.

Thanks.

Thanks.

I look forward to working with all of you.

Thanks.

Thank you.

That does conclude our conference for today.

Thank you all for your participation.

You may all disconnect the lines now.

Thank you.