Earnings Call: Q2 2019

Aug 14, 2019

Earnings release

Welcome to YY Inc. 2nd Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen only mode. After the management's prepared remarks, we will have a question and answer session. Please note this event is being recorded. I'd now like to hand the conference over to your speaker host today, Mr. Matthew Zhao, IR Director of YY Inc. Thank you, sir. Please go ahead. Thank you, operator. Good morning and good evening, everyone. Welcome to YY's Q2 2019 earnings conference call. Joining us today are Mr. David Qutting Li, Chairman and CEO of FlyWise Mr. Bing Jin, CFO of FlyWise and Mr. Ting Li, COO of FlyWise. For today's call, management will first provide a review of the quarter and then we will conduct a Q and A session. The Q2 of 2019 financial results and webcast of this conference call are available at ir. Yy.com. A replay of this call will also be available on our website in a few hours. Before we continue, I refer you to our Safe Harbor statement in our earnings press release, which applies to this call as we will make forward looking statements. Finally, please note that unless otherwise stated, all figures mentioned during this conference call are in renminbi. I will now turn the call over to our Chairman and CEO, Mr. David Xueling Li. Please go ahead, sir. Thank you, Matthew. Hello, everyone. Welcome to YY's earnings conference call for the Q2 2019. Following our successful acquisition of Bigo in March, the second quarter was the first time we had a full quarter consolidation of Bigo's financials. I would like to take this opportunity to share with you the latest business updates as well as the strategy and development focus for the YY Group. As you all know, after the acquisition of Bigo, YY has evolved into a world leading social media platform, offering a comprehensive suite of video centric products and services, including instant messaging, short form video, live streaming and etcetera. During the Q2, we have achieved notable progress on 3 fronts. 1st, introduce short form video content into our instant messaging product, IMO, and further enhance its user stickiness 2nd, drive rapid growth of overseas short form video users through LIKI. And third, further strengthen YY Live and VIVO Live operations and solidify our global leadership in the entertainment live streaming market. Starting from this quarter, we have also revamped our disclosure of operating metrics. We believe that this heightened disclosure transparency will help investors to better understand and follow YY Group's business development going forward. In the Q2, our global average mobile MAUs reached 433,500,000. Year over year to 90,300,000 and global live streaming mobile MAUs increased by 39.2% year over year, 900,000. More importantly, IMO, our instant messaging product achieved a massive user base of almost 212,000,000 MAUs in the quarter. The increasing diversity of our user base offers great potential for future monetization and the development of synergies across our business units. As a result, in the second quarter, our total revenues increased by 66.8 percent year over year to RMB6.3 billion exceeding the high end of our previous guidance range. Revenue from our live streaming business grew by 66.4% year over year to RMB5.92 billion, of which RMB906 1,000,000 came from overseas market. Next, I will introduce the latest update for our key three areas of business, IMO, short form video and live streaming. IMO's goal is to become an instant messaging platform catered for young generation. As we embed a variety of content offerings into IMO, we continue to enhance IMO's product stickiness. Meanwhile, the content offerings can also increase user engagement, which in turn drives the scale and quantity and quality of our UGC product production. In the Q2, we started to gradually invest short form videos from LIKI into IMO. As a pilot program, for example, we made LIKI's short form video content services available to more than 17,500,000 MAUs in over 40 countries and regions across South Asia, Central Asia, and Europe on the IMO platform. We were very pleased to see that over 50% of IMO's users were converted into short form video users. Going forward, in addition to the short form videos already embedded into IMO, we also plan to introduce moments, group chats, official accounts, mini games, live streaming and other categories of content and services within IMO to bolster social interactions among content feeds and the content feeds within IMO will provide much bigger monetization potential for the advertising in the future. In the second quarter, LIKI continues strong momentum for its users across the world. In Indonesia, for example, LIKI's MAUs grew by 114% sequentially in June 2019, while constantly ranked at the top of Google Play's free apps list in Indonesia during the same month. LaiQI has continuously expanded content offerings in the form of high quality user generated short form video. In May 2019, laiQI introduced a We media support program to attract more content creators to cultivate an increasingly diverse, engaging and entertaining content library. In the Q2, LaiQi's daily active video uploaders remained above 10% of its total DAUs, outperforming the majority of other short form video apps and platforms in the world. Moreover, in June 2019, LaiQi co organized an award ceremony for key influencers in digital world with local music radio stations, celebrity agencies and digital media in India. A large number of local artists, idols as well as key opinion leaders in fashion, beauty, travel, food and bodybuilding participated in the event. This event increased LIKI's influence among young generation and contributed to the rapid expansion of LIKI's user base in India. In addition to supercharging our growth engine through instant messaging and short form videos, we continue to fortify our global leadership in live streaming through Bigo Live. To ensure operation efficiency and culture sensitivity in different markets and regions, we focused on developing Bigo Life's localization capabilities. We also continue to enhance our footprint in developed world and Bigo Life's revenue generated in developed markets during the quarter continue to increase as a result. Revenues from North American and European countries in particular accounted for 16% of Bigo Live's total revenues compared to 14% in the previous quarter. For emerging markets, the light version of Bigo Live app lowered the entry barrier for users and drove Bigo Live user growth in these markets simultaneously. Meanwhile, Hago, our casual game oriented social media platform, rapidly grew its user base and revenues during the Q2 of 2019, forming a closed loop monetization ecosystem. As we continue to add new game titles and diversifying game types on the platform, we also embedded additional social features into HAGO, such as live streaming chat rooms and car loyalty, which further increased the platform's user stickiness. As a result, the average user time spent on a daily basis for Hago exceeded 60 minutes in the Q2 of 2019. Returning to the domestic market, we continue to optimize YY Live's content creation model during the quarter. In order to provide more innovative live streaming content, we focused on facilitating collaborations between different hosts and third party content creators to encourage the joint production of creative content on our platform. For example, we partnered with YouHua Entertainment to launch an exclusive online broadcast of YouHua Family's concert in June. Since the concert featured performances and interactions from all the top celebrities under Youhua's management, We were able to leverage the exclusivity of our broadcast to attract a substantial number of fans and encourage them to interact and support their favorite celebrities through tipping on our platform. Following this success, we will continue to explore the possibility of partnering with more artists and set up celebrities to attract and maintain different cohorts of celebrity fans through live streaming content on our platform. Moreover, as many of you have noticed, YY stock price has currently reached its lowest level during the past 52 weeks. However, as management, we remain fully confident about the company's future growth prospects. With the approval from the Board, today we announced a share repurchase program under which the company may repurchase up to US300 million dollars of shares over the next 12 months. In summary, our global video based social media platform has taken good shape during the Q2 of 2019 and is zooming along its next phase of growth trajectory. We are only at the very initial stage of reaping benefits from our globalization strategy and we are very excited about the unlimited potentials. Today, overseas users accounts for 78% of our global user base but contribute less than 20% of our total revenue, leaving substantial headroom for financial growth. The capital inclusion from our recent convertible bond offerings has supercharged our engine of innovation, creativity and growth. As we continue to enhance our AI technology capabilities and invent new monetization venues, we are very confident that we will achieve our vision to connect people and to reach their lives through video. That concludes David's prepared remarks. Now as Huobi's CFO, I will talk about the financial results. We continue to deliver solid financial and operating metrics during the Q2 of 2019. Our total net revenue for the 2nd quarter increased by 66.8 percent year over year to RMB6.3 billion. Specifically, our live streaming revenues for the 2nd quarter increased by 66.4 percent year over year to RMB5.92 billion, accounting for 94.1% of our total net revenues for the quarter. In the 2nd quarter, mobile contributed 71.7% of our live streaming revenues. Cost of revenues for the 2nd quarter increased by 80.4% year over year to RMB4.17 billion. Revenue sharing fees and content costs paid to performers, guilds and content providers increased to RMB3.15 billion in the 2nd quarter, which was in line with the increase in live streaming revenues of the company. In addition, bandwidth costs for the Q2 increased to RMB423.8 million primarily reflecting continued overseas user base expansion, mainly due to the impact of the consolidation of Bigo. Gross profit for the 2nd quarter increased by 45.4% year over year to RMB2.12 billion. Gross margin was 33.7% compared to 38.7% in the prior year period, primarily due to the impact caused by the relatively low gross margin of Huya and Bigo segments as their contribution to net revenues increased substantially year over year. The decrease in gross margin was also attributable to the increase in revenue sharing fees and content costs. Operating expenses for the Q2 were RMB2.09 billion compared to RMB779.6 million in the prior year period, primarily due to the increase in sales and marketing expenses of RMB855.4 million and research and development expenses of RMB359.5 million. Sales and marketing expenses for the Q2 were RMB1.1 billion or 17.5 percent of total revenue compared to RMB246.1 million or 6.5 percent of total revenue in the prior year period. The increase in sales and marketing expenses were primarily attributable to the company's increased efforts in sales and marketing activities in overseas markets and the impact of depreciation and amortization related to the consolidation of Bigo. Our R and D expenses for the Q2 were RMB655.4 million or 10.4 percent of total revenues compared to RMB295.9 million or 7.8 percent of total revenues in the prior period, mainly due to the increase in staff related expenses related to R and D. G and A expenses were RMB336 1,000,000 or 5.3 percent of total revenues in the Q2 compared to RMB237.5 million or 6.3 percent of total revenues in the prior year period. Our GAAP operating income for the Q2 was RMB71.9 million compared to RMB713.8 million in the prior year period. Operating margin for the 2nd quarter was 1.1% compared to 18.9% in the prior year period, primarily due to the decrease in gross margin, the consolidation of Bigo and other overseas expansion initiatives. Our non GAAP operating income for the Q2, which excludes share based compensation expenses, impairment of goodwill and investments, amortization of intangible assets from business acquisitions as well as gain on deconsolidation and disposal of subsidiaries was RMB524.9 million compared to RMB933.1 million in the prior year period. Our non GAAP operating margin for the 2nd quarter was 8.3% compared to 24.7% in the prior year period. GAAP net income attributable to controlling interest of YY for the Q2 2019 was RMB42.1 million compared to net loss attributable to controlling interest of YY of RMB99.9 million in the prior year period. Non GAAP net income attributable to controlling interest of YY was RMB424.2 million compared to RMB910.2 million in the prior year period. Non GAAP net margin in the Q2 of 2019 was 6.7% compared to 24.1% in the prior year period. Diluted net income per ADS in the Q2 of 2019 was RMB0.27 compared to diluted net loss per ADS of RMB2.14 in the prior period. Non GAAP diluted net income per ADS was RMB5.14 compared to RMB13.75 in the prior period. Looking forward to the Q3 of 2019, we expect our net revenues to be between RMB6.57 billion and RMB6.77 billion, representing a year over year increase of 60.2% to 65.1%. 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 up the call to questions. Ladies and gentlemen, we will now begin the question and answer session. Please ask in Chinese first and immediately repeat your question in English. To give more people the opportunity to ask question, Your first question comes from the line of Thomas Chong from Jefferies. Please ask your question. Thanks management for taking my questions. My question is about competition in overseas market. As we see our users are ramping up very quickly in overseas across different applications in Bigo Life, Bigo Like and also emo. How should we think about the competitive landscape and our spending in sales and marketing expenses in second half and next year? Thank you. This is Liu. Let me answer your first part of your questions. So, firstly, in terms of the competition for the instant messaging platforms globally, so what we monitor the trend is there always be 2 to 3 of the different platforms to stay to exist in the market simultaneously that makes the market bigger. They will not be have the similar situation that what happened in China which is a winner take all situation. So, we are still very confident in terms of the futures of IMOs development. Especially in the future, firstly, we will continue to bring in more technical forces to continue help Bigo to develop the different kind of functionalities. And meanwhile, we also will, as I mentioned in the prepared remarks, we also will brought in the different kind of content as well as the services into IMO to continue to improve the user stickiness as well as the user scale. So, and meanwhile, if you look at our DNA of the company, we in the past decade, we actually have been accumulated a lot of experience in terms of the best instant messaging related functionalities as well as the services. So, we from that perspective, we're also very confident in terms of futures and most development. And from another perspective, if you look at the instant messaging services, it really looks like the visual ID card for each individual users from the Internet server base. But when we look at the overseas peers operations, it seems like they didn't put that much of effort in terms of the content operations. But in terms of the content operation, we were really good at that. For example, as we mentioned in the prepared remarks, the IMOs currently the users conversion rate from the instant messaging to the short form video services has reached to over 50%. So, in the future, since we continue to brought in more different kind of content there, definitely we can continue to improve the ID card functionalities as well as the people's participation into the instant messaging platform. We are very optimistic in terms of the synergies between of LaiKey and IMO's platform in the future. For LaiKey's platform, the users the short form video producers' participation rate is much higher than other peers. And for IMO, since they have the video communication users, so they also have more motivation to consume more short form video content in IMO's platform. So, the 2 part of the platform will continue interactive and bring more synergies in the future as long as the light produced the short form video content and IMOs users will consume as well as produce short form video content at the same time. So, in the future, as mentioned, we definitely will see more synergies happen between the 2 platforms. In the future, we also will brought in more different functionalities and services into IMO such as live streaming, mini games as well as the media account, etcetera. So through those kind of additional services definitely we will continue to see the user time spent as well as the user stickiness for IMO will continue to grow. We truly believe the business model which is we bring more synergies between the content production platform as well as the instant messaging platform is a very unique competitive act for our company. So, we will feel very confident in terms of future ammo development. Okay. Let me address the second question in terms of the sales and marketing strategy. First of all, if you look at the Q2 margin impact, that is mainly due to the consolidation of Bigo. And you have seen from the operating metrics of Bigo business, the Aliki, the short form video app has achieved rapid growth. And also after we acquired IMO, as David has mentioned, we have gradually embedded more content into IMO and promote IMO product on a global basis. So, the impact of margin came from the consolidation. That's the first point. Secondly, for sales and marketing, we will be more prudent going forward after the acquisition of Bigo. We will track the ROI for every single product in different markets. And the second point is that if we look at the cost basis, the new user acquisition and old user retention costs, those tend to be lower than China in many of those emerging markets. So I think the ROI tend to be better from that perspective. Thirdly, going forward, we will embed more content into IMO and then the marketing campaign focus will be gradually shifting to IMO. And just take example, if we can achieve 50% user conversion from IMO to short form video, that means for every 2 users we acquire into IMO, one of them will be converting to short form video users. Plus, that 2 users into IMO, they will not only become a short form video user, they could also become a live streaming user, they could also become WeChat kind of group users. So, the efficiency of acquiring user into IMO will be much better than the other product. So, I think those are the strategies around sales and marketing. Your next question comes from the line of Daniel Chen from JPMorgan. Please ask your question. I will translate myself. So my question is related to our overseas short video platform, LIKIP. We have seen a very robust growth in the user base. And we also see that in China, there's another short video platform, Kuaishou, who's doing very well in terms of monetization. So just wondering how are we looking at the LaiQi's monetization outlook maybe in the next 1 to 2 years? And recently, we see that we have just starting to test the live broadcasting function of LIKI. So how what's the latest update in terms of like user conversion and also monetization? Thank you. Thank you for your question. This is David. Let me address your question. So, firstly, YY, we are a company, has very rich expertise in terms of the live streaming content operation as well as monetization in the world. So we will still so there has no doubt in terms of the Leki's future monetization, we will definitely leverage our capabilities in terms of the live streaming monetization in the future. But currently, if you look at the legacy development group stage, we have to agree we are still in the development stage, which is focused on grabbing bigger market share rather than monetization. So currently, if you look at our spending, we actually have the main focus on the R and D expenses, especially for all of the short form video content. One of the competitive ad will definitely coming from the very advanced AI capabilities. So, we also have the same kind of approach, which has spent a lot of effort and resources in terms of the AI development. At current stage, especially the synergies and the connections between Lucky and IMOs platform also has been caused our a lot of the focus in terms of the technical development strategies. So, compared with the monetization, at current stage, we really focus on to increase the market share. But in the future, if we look at the nature of like the products since they are providing the short form video content streaming. So those kind of format is very suitable for both of the live streaming monetization as well as advertisement monetization. So, in the long run, we are still very confident in terms of the legacy monetization from the global market. Thank you. When you look at the both of Nike and IMO, so in terms of the future monetization model, we actually quite seen since both of the products is focused on the content fees of the services. So, in the future, definitely both of the products will be using both of the live streaming and advertisement to monetize. We actually recently started to do a a trial version as well as provide live streaming services for some of the lucky users in a very small scale. But it just started, but the performance is very well. So, we will definitely continue to trial that. Probably after 1 or 2 quarters, we will have more colors so we can share and we have more clear views in terms of the future monetization. Thank you. Your next I have 2 questions here. First one is regarding FIGO. I will translate myself briefly. So I have mainly two questions. First one is regarding Bigo. Just want to get a sense about the revenue split among different product lines, like EIMO in Bigo Life and other platforms, would appreciate if we can get a sense respective year on year growth behind the different business lines as well. And also, can management help us understand what's the current user geographic overlapping status quo among those 3 major platforms like EIMO and Bigo Life? Also, what's your focus of areas for user growth in the following 6 to 12 months for those 3 products? And second question is related with HAGO. Just wondering, can you help us understand what's your what's the related revenue contribution from HAGO and also the additional sales and marketing spending related with the global expansion, especially with Hago this quarter, also the margin profile of the Hago product. Is there any difference versus your core live streaming business? Thank you. Natalie, thanks. Let me address those questions. So, the first question regarding Bigo's revenue composition, I would say super majority is from live streaming. As I mentioned, IMO, before acquisition, they have revenue coming from advertisement. And after we acquired IMO, we have tried new ways to further enhance the advertising dollar revenue. But again, as a total, Bigo's majority revenue is due from live streaming. That's the first part of the first question. Secondly, regarding the user original user composition for different products, IMO's user mainly focus on South Asia. So, the top markets are India, Bangladesh, Pakistan and then Middle East and then some of the Southeast Asia markets. For the future user acquisition strategy, IMO will definitely focus on its key markets. As I said, those key markets are South Asia and Middle East. So, we will continue to attract further users through the friends and friends, friends circle to grow the user base in those markets first. And then once it reaches a critical mass and then once the content within IMO reach a critical mass in terms of quality and quantity, IMO definitely will reach out to other markets as well. As you all know, I'm product tend to have a network effect. So, for every one user you acquire, you potentially can acquire 5 or 6 new users because those new users are friends and families of the existing users. So, that's about IMO. For Bigo Lite, core markets are Southeast Asia markets, roughly 40% and then roughly 30 something percent coming from Middle East and then roughly over 20% from developed world including U. S, Europe, Korea and Japan. In terms of future strategies, Bigo Like will focus on, as we mentioned in the prepared remarks, we'll focus on developed world because we see that developed world users tend to have more social features and then high ARPU and monetization potential. So, the U. S, European and Japan and Korean market will go faster than the existing emerging markets. So, that's about Bigo Life. For the next product, LaiQi. LaiQi's key markets are in India, Indonesia, Russia, U. S. And some of the Latin American countries. In terms of strategy, it will be more balanced like Key because it's very easy for users to access and create short form videos. So, we will go parallel both in terms of penetrating into emerging markets and developed world. As we mentioned that we have organized, LaiQi has organized some of the offline events in India and also in July, we organized a very popular event in Russia, attracts thousands of users, young generations to play LaiQi in offline setting and make friends and do social interaction. So, we do see a lot of potential for LaiQI to acquire both developed world and emerging markets traffic. That's the long answer to your first question. Secondly, for Hago business, Hago's revenue is growing very rapidly. It's actually one of the main driver for YY's revenue growth. But again, in terms of percentage, it's still less than 10% of the total YY business. But as I said, we see very encouraging growth pattern. For the sales and marketing, we have spent, I would say, decent amount of spending in the second quarter. But again, right now, it's still not breaking even yet on a business stand alone perspective, but we do see margin will improve and see breakeven point coming in foreseeable future. So, that's the question to the Hago, the answer to Hago question. Your next question comes from the line of Jialong Shi from Nomura. Please ask your question. First of all, and thanks very much for the data points shared by management about overseas businesses. And we think these user engagement user engagement data about YY's overseas business are quite impressive. I have a few questions about your overseas businesses. And for the 4 overseas apps, IMO, LIKI, Bigo Live and HAGO, So which of the apps may have the biggest financial potential in the long run-in the view of management? Also just wondering if management can provide more colors on the competition landscape for the 4 overseas apps, such as who you guys are competing with in each of the 4 verticals? And finally, if we think the overseas expansion may require multiple years investments. So I just wonder where YY is now in that investment cycle? And when will we see a positive earnings contribution from your overseas business based on management based estimates? Thank you. This is David. Let me address your question. So, firstly, if you have to ask me to pick up one of the favorable product in the future especially in terms of monetization. So, the choice definitely will be IMO, because IMO, if you look at the nature of the platform, it's an instant messaging platform with very strong growth potential in terms of the users as well as future monetization. And at current stage, since IMO is still in the very early stage, so we actually didn't put very aggressive actions in terms of monetize currently users. But since we already had over 200,000,000 MAUs, which is a massive user base. So, in the long run, definitely, we are more confident in terms of future MOS manufacturing. We will look at the competitive conditions in terms of the instant messaging products in China, outside of China, which is actually quite different. So, in China, in most of the cases, the company will allocate a large scale of the research development teams which is even over 1,000 people to develop the different functionalities or the services into the I'm product. But by contrast, if you look at the overseas I'm product operation, normally it's coming from a very small teams like couple dozens of people, but develop a very functionality. But definitely compared the 2 part of the research and developing capabilities, it has a huge gap. So for the Chinese company, we definitely have the expertise in terms of how we can better evaluate content as well as develop the different kind of functionalities into of the instant messaging product to continue to improve the user stickiness. So, for that part, we have very always competitive edge compared with the overseas peers. So, in the first part, definitely we see a lot of opportunities in the instant messaging area. But meanwhile, if you look at other products, especially I want to highlight Bigo Live, which is our major entertainment live streaming platform outside of China. So Bigo Live actually has been profitable in the past 1 to 2 years already. And actually, their profitability used to be good enough to support of Leki's development. But why recently we have more aggressive campaign in terms of the legacy investment since we actually see the better ROI from the user acquisition part for the short form video platform. So, that is why we have the relatively more aggressive spending. And meanwhile, it doesn't mean we spend money blindly. We actually look at close monitor a lot of different kind of features and operation metrics. So, when we look at the better and the positive ROI coming from those part of the investment, so definitely that bring us more confident to continue spend and invest into of the Lakis development in the future. But as I mentioned before, so we actually can see the overall Bigo business could be profitable at any time if we cut off the spending from the lucky part. So, that means we have very flexible of the control for this power business. So, we can dynamically take control of the financial budget and close monitor that on a quarterly basis. Our short form video users have been growing several times on a year over year basis into 90,000,000 in the second quarter. So, it's very so if we look at the massive user base, definitely there has a lot of potential. And meanwhile, going forward, since we have more synergies happened between IMO and the Leki, so definitely you will see the Xiaofeng video users converted from IMO, which is instant messaging products will rapidly grow. So, since we in the foreseeable future, once we build out the closed loop for the and the ecosystem for the short form video product, definitely we will see better financial leverage from this part as well. And for the products such as HAGO, HAGO. So, since HAGO will continue will become more mature for the product and it's focused on the monetization progress, So, definitely, we also will be start breakeven and generate positive cash in the foreseeable future. In terms of the profitability roadmap for the overall Bigo business, we actually still stick on the original plan, which just means until the end of next year, hopefully, we can achieve the single month breakeven for the overall Bigo business and we will continue to work on that goal. Thank you. There are no further questions at this time. I'll now hand the conference back to the management team for the closing remarks. Thank you, operator. Thank you for joining our call. We look forward to speaking with everyone next quarter. Thank you. Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now all disconnect.