JOYY Inc (YY) 2018 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to YY Inc.

Third Quarter 2018 Earnings Call.

(Operator Instructions) I must advise you that this conference is being recorded today, Tuesday, the 13th of November 2018.

I'd now like to hand the conference over to your speaker 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 2018 Earnings Conference Call.

Joining us today are Mr. Bing Jin, Chief Financial Officer of YY; and Ms. Ting Li, Chief Operating Officer 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 2018 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 statements 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 Ms. Bing Jin -- Mr. Bing Jin, CFO of YY, to provide you a business update on behalf of our Chairman and acting CEO, David Xueling Li.

Then he will also go over the details of our financial results of the quarter.

Please go ahead, sir.

Thank you, Matthew.

Hello, everyone.

Welcome to our third quarter 2018 earnings conference call.

Our total revenues increased by 32.6% year-over-year to RMB 4.1 billion during the third quarter, exceeding the high end of our previous guidance range.

Revenue from our live streaming business grew by 35.6% year-over-year to RMB 3.89 billion.

Revenue from Huya, our game live streaming subsidiary, grew by 118.8% year-over-year to RMB 1.28 billion.

Today, we are very pleased to announce that we have entered into a strategic cooperation agreement with Xiaomi in late October.

Under this arrangement, YY has the exclusive right to operate certain entertainment live streaming services on Xiaomi's primary live streaming platform, Xiaomi Live.

This agreement will enable us to integrate both our high-quality live streaming content and extensive experience in live streaming operations into Xiaomi's ecosystem.

We are confident that the cooperation will provide Xiaomi's users with a better experience in entertainment live streaming services and enable YY and Xiaomi to explore additional monetization opportunities together.

Going forward, we will maintain our open approach to the development of multiplatform cooperation.

By leveraging the user traffics of our partners, we will introduce more innovative live streaming services to the market, thus creating multiple benefits to all the parties involved.

During the third quarter, we continue to execute our growth strategies on 3 key areas: content enrichment and upgrades; product enhancement and overseas market exploration; and AI-backed technology enhancement.

Improvements in these 3 areas translate into enhancement in both user growth and stickiness which, in turn, will create more potential monetization opportunities.

Firstly, we continue to acquire and retain users through content enrichment and cross-channel promotions.

During the third quarter, while we continued to reinforce the popularity of Modern Brothers and expanded their fan base, we also tried to replicate their success formula with other hosts.

We have systematically incubated, groomed, packaged, promoted and transformed a series of grassroots musicians into bona fide music stars.

In addition, we recently upgraded our YY musician program by teaming up with one of the leading music platforms in China to better promote artists who have displayed original production skills across both our homegrown channels and our partner channels.

Not only are we successful in promoting our hosts online, but we are also creative in cementing their fame offline.

In September 2018, we hosted the YY fan carnival in Shenyang, bringing together over 300 top-tier live streaming hosts to produce a super variety show, integrating music, dance, gaming and many other entertainment programs into a single event that lasted 3 days.

Over 250,000 fans participated in this event in person, while more than 11 million viewers tuned into the online broadcast.

At the peak show time, the concurrent online viewer counted -- the concurrent online viewer count exceeded 1.6 million.

These successful events demonstrate that YY has been recognized as one of the most influential, sticky and mature online cultural communities in China.

Secondly, during the third quarter, we also focused on continuous product enhancement.

As the leader of the live streaming industry in China, we continue to expand our product matrix and redefine the boundaries of live streaming services from video-based live streaming content to more diversified categories, including interactive audio-based live streaming services.

As a result, we have developed several products focused on audio live streaming.

By infusing more social features into audio live streaming products, we will continuously explore the best model to provide audio live streaming services to the next generation of mobile users in China.

In addition, we are very confident of the significant growth potential in overseas markets.

We have already initiated the overseas operations for several of our early-stage innovative products.

Going forward, we expect to increase spending on our overseas expansion in order to achieve more rapid user growth and explore more monetization opportunities for these products.

Thirdly, we leverage our proprietary algorithms to further increase our user stickiness which, in turn, translates into longer user time spent and better monetization.

Utilizing our deep neural network technology to quantify the level of interaction between hosts and fans, we successfully motivated our hosts to constantly produce new and engaging content to boost or sustain their popularity ranking.

Meanwhile, through our AI-infused visual recognition technology, we automatically capture the most enthralling scenes from live streaming shows and use them as our front-page or recommendation page thumbnails to increase user click-through rates.

As a result, our average user time spent on YY Live has increased during this quarter compared to last quarter.

Overall, as the macroeconomic environment remains uncertain for the rest of the year, we will continue to focus on enriching our content, enhancing our user engagement and improving our monetization capabilities.

We're very confident that with our strong competitive edge, loyal user base and innovative spirit, we are well positioned to weather through any market conditions.

That concludes the remarks of our Chairman and acting CEO, David Xueling Li.

Now as the CFO of the company, I would like to discuss our financial results in more details.

During the third quarter of 2018, we continued to deliver strong financial and operating metrics.

Our total net revenues for the third quarter increased by 32.6% year-over-year to RMB 4.1 billion.

Specifically, our live streaming revenues increased by 35.6% year-over-year to RMB 3.89 billion, accounting for 95% of our total net revenues this quarter.

Our ongoing efforts and investment into our mobile platform and related technologies have also continued to yield impressive results.

In the third quarter, mobile contributed 62.4% of our live streaming revenues, while mobile live streaming MAUs increased by 20.7% to 88.1 million in the third quarter 2018.

Live streaming paying users increased by 26.3% to 8 million in the third quarter of 2018, while mobile paying users constituted 73.9% of overall live streaming paying users.

Cost of revenues for the third quarter increased by 41.6% year-over-year to RMB 2.65 billion.

The increase in revenue-sharing fees and content costs paid to performers, guilds and content providers was in line with the increase in live streaming revenues for both YY Live and Huya segments, respectively.

In addition, bandwidth cost for the third quarter increased to RMB 249.5 million, primarily reflecting continued user base expansion and live streaming quality improvements.

Gross profit for the third quarter increased by 18.5% year-over-year to RMB 1.43 billion.

Gross margin was 34.8% compared to 38.9% in the prior year period, primarily due to the increase in revenue-sharing fees and content costs.

In addition, Huya's relatively low gross margin negatively impacted our overall gross margin as Huya's contribution to our net revenue increased significantly year-over-year.

Our operating expenses were RMB 864.7 million during the third quarter of 2018 compared to RMB 560.3 million in the prior year period primarily due to our increased investments in talent recruitment as we further enhanced our research and development capabilities.

Sales and marketing expenses for the third quarter were RMB 343.8 million or 8.4% of total revenue compared to RMB 249.5 million or 8.1% of total revenue in the prior year period.

Our R&D expenses for the third quarter were RMB 314.1 million or 7.7% of total revenues compared to RMB 166.1 million or 5.4% of total revenues in the prior year period.

G&A expenses were RMB 206.7 million or 5% of total revenues in the third quarter compared to RMB 144.7 million or 4.7% of total revenues in the prior year period.

Our GAAP operating income for the third quarter 2018 was RMB 610.9 million compared to RMB 661.4 million in the prior year period.

Our non-GAAP operating income, which excludes share-based compensation expenses, impairment of goodwill and investments and gain on deconsolidation and disposal of a subsidiary, increased by 12.9% year-over-year to RMB 774.2 million in the third quarter of 2018.

GAAP net income attributable to YY increased by 2.3% to RMB 650.7 million in the third quarter of 2018.

Our non-GAAP net income attributable to YY increased by 19.7% year-over-year to RMB 787 million in the third quarter of 2018.

Non-GAAP net margin in the third quarter of 2018 was 19.2% compared to 21.3% in the prior year period.

Diluted net income per ADS in the third quarter of 2018 was RMB 10.01 compared to RMB 10.51 in the prior year period.

Non-GAAP diluted net income per ADS increased by 11.1% to RMB 12.07 from RMB 10.86 in the prior year period.

Looking forward to the fourth quarter of 2018, we expect our net revenues to be between RMB 4.39 billion and RMB 4.54 billion, representing a year-over-year increase of 21.1% to 25.2%.

This forecast reflects our current and preliminary views on the market and operational conditions, which are subject to change.

That concludes our prepared remarks.

Operator, we would now like to open the call to questions.

(Operator Instructions) And our first question comes from the line of Thomas Chong from Credit Suisse.

(foreign language) I have 2 questions.

My first question is about our 2019 outlook as well as our overseas expansion strategy for next year.

And my second question is about Bigo.

Given that I think we have talked about the revenue, the user and the geographical coverage sometime ago, can management give us some color about the latest business trends?

(foreign language)

Okay.

In terms of the outlook for the year of 2019, firstly, if we look at the domestic market in terms of both the user growth as well as revenue growth, we are still quite optimistic on that.

And secondly, for YY as a whole, we actually continue to develop more opportunities in the overseas market, and we have launched several new initiative market -- new initiative product in the international market.

And what we're trying to do is have more synergies with Bigo's business together and trying to continue to improve the user as well as tapping into the new markets.

And Thomas, I will take your second question.

So with regards to the updates of Bigo, in the third quarter, Bigo's revenue continued to grow very strongly.

While they are further consolidating Southeast Asia market, they're also exploring more rapidly into other developed areas such as U.S., Australia, Japan, et cetera, because these market has huge potential as well.

Secondly, Bigo has a business unit called Live, which is short-form video app.

We're glad to see that the user base for Live continue to grow very healthily in the third quarter, particularly after we have input -- integrated a lot of the AI-driven algorithm to drive the user retention rate.

The general user number and revenue, as we discussed before, hasn't changed in terms of forecast.

(Operator Instructions) And our next question comes from the line of Eileen Deng from Deutsche Bank.

(foreign language) My first question is regarding the paying users.

We saw some sequential growth with YY's paying user on third quarter.

What drives this recovery?

And how should we expect the trajectory going forward under the macroeconomic conditions and also our efforts on the cooperation?

What other tactics can help us to achieve those further growth?

And the second question is, could management elaborate more on the cooperation with Xiaomi?

What is each parties' role?

And when should we expect the clear revenue contribution from it?

What other potential new partnership should we expect?

Is it from the smaller live streaming platform or other kind of platform?

Any color would be helpful.

Thanks, Eileen.

I'll take the first question, and Ting Li will take the second one.

In terms of the paying user growth, we do see a healthy growth in the third quarter primarily due to several reasons.

One is we continue to add new features, and also we have integrated some of the operational activities to drive the paying user behavior.

Clearly, we have also, as I said, integrated a lot of the AI-driven mechanism in terms of matching the best quality content, the best clear content to provide to audience so that whenever they view the content, they feel more comfortable.

And whenever they pay, they feel more comfortable.

In the future, we will continue to add new features, and also we will continue to integrate more and more AI machine learning capabilities, hopefully, to continue to drive the paying ratio.

As I said to many investors and analysts before, in terms of paying ratio, we still have massive room for growth compared with game paying ratio in general.

(foreign language)

And let me give you more details in terms of YY's cooperation with Xiaomi.

Firstly, Xiaomi actually is one of all sorts of channels for our continuous user growth going forward.

So in terms of our cooperation philosophy with Xiaomi, first, certainly, we look at YY's very strong optimization efficiency as well as monetization capabilities.

So through the Xiaomi's cooperation, we actually can export YY's very efficiently, optimized additional capabilities to other platform.

And secondly, we also look at the traffic synergies between YY and other platforms.

So working with our partners together, we actually can continue to expand the overall market pie as well as to improve the conversion rate from our partners' platforms.

And meanwhile, because the Xiaomi's cooperation will be officially launched in December, so we are still in the very early stage, so we probably will provide more colors going forward.

And our next question comes from the line of Karen Chan from Jefferies.

(foreign language) My first question is actually regarding, can management share the revenue contribution approximately from our top-paying users currently in YY Live?

And also, how -- what are we doing differently for annual gala this year compared to last?

And finally, should we think about market trajectory for 2019 and beyond?

Thank you, Karen.

Let me take those questions.

So first one is regarding the concentration of the top donors (foreign language).

The general pattern hasn't changed much.

As we explained many times, that's a typical denominator in all the live streaming platform in China, but we're seeing gradually improvement in terms of the deconcentration for the top donor, even though the percentage change isn't that much.

Now with regard to the annual gala, we will continue to launch annual gala event this year.

However, the focus will be shifted from encouraging the big guilds to donate into encouraging long-tail guilds to participate and encouraging long-tail hosts to flourish.

We do think that it's more healthy for our acquisition in the long run because for the guilds, they also have their own P&L pressure, so we don't want to have them to spend all the money they earned throughout the year.

So that's regarding annual gala.

For the margin, for overseas expansion, we will spend some of the, I would say, sales marketing at the right time to promote overseas product.

But again, as our overseas business continue to grow, we'll see more and more economies of scale.

So I would encourage you to use the most recent quarter kind of margin as the basis.

Of course, our overseas business has many other dimensions and variables, so we cannot comment too much at this stage.

And our next question comes from the line of Jialong Shi from Nomura.

It's Jialong Shi from Nomura.

(foreign language) So my question, I have a follow-up question on the Xiaomi partnership.

In particular, I just wonder how many Xiaomi phones will this cooperation cover?

And also what is the economics for such cooperation?

Will YY need to pay a preinstallation fee to Xiaomi?

Or is it a revenue-sharing model?

And also I just wonder if YY will be the exclusive provider for entertainment live broadcasting contents on those Xiaomi phones?

And yes, that's my question.

(foreign language)

In terms of -- let me provide you more colors in terms of our cooperation with Xiaomi.

Firstly, for Xiaomi's MIUI systems, they actually have over 200 million of MAUs.

So the potential user base can be much bigger.

And it's a part which we cooperated, which is called the Xiaomi Zhibo or the Xiaomi Live, it's one of the most important of the live streaming platforms, into Xiaomi's platforms.

And we actually have the exclusive cooperation with Xiaomi Zhibo together so far, especially in terms of the entertainment live streaming content.

And then for the economies of scale going forward, we actually will be using the revenue-sharing model rather than pay the upfront fee in terms of the user acquisition.

So I think the 2 parts of the demand is going to be aligned.

So we're trying to make the potential market size bigger then we will be sharing revenue as well as the profit for those -- for this cooperation.

And last, I mean, in terms of Xiaomi's penetration, YY -- Xiaomi Zhibo's penetration to the whole Xiaomi ecosystem is still relatively small.

So going forward, followed by our cooperation to show more fruit to the Xiaomi ecosystem, definitely we expect that our traffic, which is we acquired from the Xiaomi's ecosystem, will continue to increase.

And our next question comes from the line of Natalie Wu from CICC.

(foreign language) First question is regarding, can management give us some color on what kind of initiative are we preparing for next year (foreign language) for YY Live MAU paying user (foreign language).

And second question is, how is the margin outlook given the revenue-sharing agreement with Xiaomi?

(foreign language)

Let me talk about the coverage strategies looking into the 2019.

Firstly, since we already see very healthy user number of growth from our -- the overseas initiatives products, so looking into 2019, we'll continue to invest into the overseas user acquisition as well as the product enhancement.

And then secondly, followed by the Xiaomi's cooperation, we will continue looking for other large traffic of potential partners in the domestic market to continue to expand our cooperations with other potential domestic partners going forward to expand our channels as well as bring more monetization opportunities going forward.

Thirdly, except for the YY's core apps, we actually also develop another (foreign language) which just means a simplified version of YY.

So comparably, it has a smaller size package.

It's more suitable for the lower end of the phone's consumption.

So that product actually is more suitable for the lower-tiered city or the lower end user's consumption.

And looking into 2019, we also will continue to promote our simplified version into a more wider range of the potential market in domestic China.

And then fourthly, since previously, we all -- for YY, we always focused on the video live streaming of the business, but in 2019 -- 2018, we actually also developed several opportunities in terms of the audio live streaming services in China, and we're trying to combine those kind of products into a united platform.

And we are also looking for more monetization opportunities for the audio live streaming services.

So looking into 2019, we'll continue to develop other more diversified content offerings as well as the services through the audio live streaming services.

And let me address the second question regarding the gross margin trend resulting from Xiaomi cooperation.

I think, in general, it's still too early to say how the margin trend will be going regarding from Xiaomi cooperation because we just started the cooperation, and the accounting treatment need to be finalized at a later stage.

Again, the key strategy value of this cooperation is to set up a perfect example in China how we can export our core competency in live streaming and partner with a big traffic platform.

Now hopefully, we can continue to replicate this kind of model to other platforms as well.

So I think let's wait and see.

It's still early in terms of the margin trend.

And our next question comes from the line of Jerry Liu from UBS.

Yes, I just have 2 quick follow-ups.

The first one is on Xiaomi and similar smartphone cooperations.

If we look at this just in aggregate, could we see some revenue contribution in 2019?

And then the second, I just wanted to go back to a topic we spoke about on the recent earnings calls, which is exploring our content to other platforms, for example, like Modern Brothers.

And could we just get an update on how -- if we're seeing good traction and how that is attracting new users or returning users to online, any update or statistics there?

I'll translate.

(foreign language)

Jerry, thanks.

I'll take the first question, and Ting will take the second one.

In terms of the cooperation with Xiaomi and other partners and their revenue contribution in 2019, again, it's still too early to say, but I think, definitely, there will be contribution in terms of revenue for 2019.

How big the scale is depending on the progress with Xiaomi and how soon we can replicate to other platforms.

(foreign language)

Yes, let me talk about it more in terms of our strategies to promote our top host.

So as Bing described in the conference call and, meanwhile, in the third quarter, we actually continue to export a series of our host into other platforms.

Firstly, we continue to upgrade YY's musician program into more platforms.

So what we did is we're trying to help our top host to publish the popular singles into the other platform.

We were doing the -- publish those kind of single sales with other music platforms in China together.

So what we're trying to do is, through our effort with the host together, we continue to improve their influence in both internal platform as well as external platform, then continue to explore more monetization opportunities for those kind of top hosts or the top musicians in our platform.

Then secondly, in the third quarter, except for the Modern Brothers, we also -- as I mentioned before, we're also trying to promote a series of other artists, for example, like (foreign language), those kind of -- the new names you probably never heard of before.

But through our export of those kind of UGC-oriented content or the good music products, we -- and through our mature marketing activities, actually we continue to promote those kind of hosts into the -- into other platforms.

So generally speaking, we will continue to do more efforts, and what we're trying to do is just bring systematic experience, and then we'll continue to apply that into more potential hosts in our platform going forward.

Thank you.

(Operator Instructions) And our next question comes from the line of Hillman Chan from Citigroup.

(foreign language) So my first question is also a follow-up on the Xiaomi cooperation.

When you have to, would YY have to bear with the extra cost on brand advertising or these acquisition costs for Xiaomi Live?

Or would those be borne by Xiaomi team?

And my other question will be also on outside of live streaming, do we have any other initiatives that you can update us on regarding, for example, short video, meaning also game anything else?

Thanks, Hillman.

I'll take the first one, and Ting Li will take the second.

With regard to our cooperation with Xiaomi, again, Xiaomi will be responsible for their user acquisition cost.

Remember, all the front-end will be within Xiaomi.

We will just take up the back-end and export our core competency in terms of managing the guilds, managing the content, managing the live streaming business for them, but the front-end will be managed by Xiaomi.

That means including the app itself, including how they attract users.

So we wouldn't bear the additional cost with regard to that.

(foreign language)

Let me discuss more in terms of the new products initiatives.

Except for the social games platform as well as short-form video platforms, we actually also more actively develop the various different functionality base of the products in overseas market.

But our focus is not only on the user growth.

What we're trying to do is also exploring, if it makes sense, a mature monetization model for those kind of new products.

So definitely, when we think the time is ready, when we feel comfortable for both the user gross number as well as the monetization philosophy, so we will disclose more numbers for you.

Thank you.

And our next question comes from the line of [Lee Hang] from Merrill Lynch.

(foreign language) I will translate now.

My first question is I just want to follow up on the overseas market.

Do you see any major competition in this market?

And do you see the content of spending for the host is increasing in the overseas market?

And then my second question is a follow up on Xiaomi external strategy.

Do you expect -- or maybe you can -- any updates on the content allocation about your own platform on the Xiaomi platforms?

Is there any dilution of your content given the host have limited streaming time?

(foreign language)

Yes, let me answer your first question in terms of our overseas strategies, firstly.

Yes.

So I think in terms of the year 2018, it's probably the 0 year for all the Chinese Internet companies trying to develop their overseas business and put more efforts after that.

So in terms of the user growth as well as the user costs for the Southeast Asia market, we actually did monitor of the continued cost growth on a year-over-year basis.

But meanwhile, we also noticed, for most of the southeastern users, mobile users, they only use the mainstream apps, for example, like Facebook or YouTube, which means they still have a lot of time as well as demand which has not been fulfilled by the mobile apps.

But they also have a very strong demand in terms of online and offline entertainment demandings.

And it has to be fulfilled by the new products or some of the new initiatives which is suitable for their consumption habit as well as cultures.

So based on those kind of adjustments, we will continue to develop more tailor-made functionalities of the products which is suitable for the Southeast Asian users and continued growth in user number in Southeast Asia market.

And certainly in terms of the materiality of the host market in Southeastern Asia market, you are right because we, compared with Chinese domestic market, definitely is much immature compared with the domestic market.

Although we noticed there has a lot of mad rest of those online celebrities in those kind of different regions and countries.

But for most of them, it's still in the very early stage.

They are not mature.

They have no idea how they monetize their influence or how they monetize their traffic.

So what they more need is a more mature (inaudible) systems for the host for those kind of (inaudible) of online celebrities.

And video is the stress from YY's past 7 years of the execution capability.

So for YY, we actually have a very mature host culture as well as the training system.

We actually can export those kind of experience or the system into the Southeast Asia market and trying to develop more solid relationship with those kind of (inaudible) potential host then continue to develop their influence as well as the monetization opportunities for them.

Thank you.

(foreign language)

The second question in terms of Xiaomi's impact, of Xiaomi Live's cooperation cannibalization towards main platform.

Based on our thinkings, we don't think we will have -- we'd see a serious cannibalization or impact from the Xiaomi's cooperation.

The major reason because if you look at the detail of the cooperation, we, as partners, will provide a tailor-made content as well as the host into the Xiaomi's platform based on the Xiaomi's user base profile ecosystems.

So what we do is based on the new -- exactly new and a different user profile and continue to develop more entertainment live streaming services in Xiaomi's platform.

So from that perspective, definitely, we will not see impact for YY's own platform going forward.

Thank you.

And our next question comes from the line of Alex DouYu from China Renaissance.

(foreign language) So for international ventures, we have multiple products in pipelines.

Just wondering is there anything that's more related to social or more kind of entertainment aspects in development?

And also, for the -- whether the management can help us understand more on the investment strategy as of today.

(foreign language)

The first -- let me answer your first question.

So the answer actually is quite affirmative.

So in terms of our overseas product pipeline, we definitely have some of the new product which is focused on social feature, the social connections or social network.

But our -- as the current stage, our key focus still will be the traffic acquisition.

Then based on the users number, we actually can develop more different ways to continue to improve the user stickiness as well as monetization.

Thank you.

Second question regarding the cash usage.

We do now have a lot of cash on hand even though majority, super majority are sitting onshore with some offshore.

We will continue to use cash on several fronts.

First is develop new products to drive new traffic, both in China and globally.

Second one is sales and marketing.

Whenever we have a good product, we need to find the right channel to have more audience pay attention to that new product.

Thirdly, as we discussed before, we'll continue to look for good M&A targets in China and globally for traffic content and good technologies.

I would now like to hand the conference back to the management team for the closing remarks.

I think that's the end for our call.

We look forward to our continued discussion with everyone.

Thank you for your time.

Thank you.

And that does conclude the conference for today.

Thank you for participating.

You may all disconnect.