JOYY Inc.
Q3 2020 Earnings Call Transcript

Published: 17 Nov 2020

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the JOYY Inc.’s Third Quarter 2020 Earnings 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, Ms. Jane Xie, the company’s Senior Investor Relations Manager. Please go ahead, ma’am.

[Jane Xie:]

Thank you, operator. Good morning and good evening, everyone. Welcome to JOYY’s third quarter 2020 earnings conference call. Joining us today are Mr. David Xueling Li, Chairman and CEO of JOYY; CFO, Mr. Bing Jin; and COO, Ms. Ting Li.

[David Xueling Li:]

Hello everyone. Welcome to our third quarter of 2020 earnings call today. Before updating everyone on our business progress for this quarter, I would like to take a moment to elaborate on the recent development in our domestic business. As disclosed in the press release, we issued earlier on November 16, we have entered into a definitive binding agreement with Baidu, pursuant to which Baidu will acquire JOYY’s video-based entertainment live streaming business in China, YY Live. The closing of this transaction is subject to certain conditions and is currently expected to occur in the first half of 2021. As pioneered in China’s live streaming industry, JOYY has been deeply engaged in the live streaming industry for many years. As a result of our years of hard work and experiences, we have built YY Live into what is now a leading video-based entertainment live streaming platform in China. Today, YY Live possesses not only a comprehensive system of operational procedures, but also domain expertise related to the development of live streaming ecosystem and innovation of live streaming technologies, content operations, monetization features as well as host incubation and host development systems. As a leading integrated information and knowledge-focused internet service provider in China, Baidu has built an extensive mobile internet ecosystem covering over one billion monthly active users, including over 200 million daily active mobile users on its Baidu app alone. As a result of this transaction, YY Live will be able to access Baidu’s massive user traffic, boost its business growth, and enhance its ecosystem’s monetization capabilities to unleash greater value in Baidu’s massive business ecosystem. As a true win-win arrangement this deal will also bolster our own growth prospects. Going forward, we plan to leverage the resources of paying through this transaction to further accelerate our global dual-engine growth strategy, establish a foothold in the industrial AI internet sector, and explore new business opportunities in e-commerce as well as other areas. Beyond investing into our operations, we will also actively focus on exploring other ways to return value to our shareholders and delivering maximum shareholder value, including, but not limited to the potential additional disbursement of dividends for example.

[Bing Jin:]

That concludes David’s prepared remarks. Now, as JOYY’s CFO, I will talk about the financial results. Please be noted that the financial information and non-GAAP financial information disclosed in our third quarter earnings press release is presented on a continuing operational basis unless otherwise specifically stated. After the deconsolidation of Huya, the company accounts for our investment in Huya as an equity method investment and applied the equity method of accounting one quarter in the arrears to enable us to provide financial disclosures independent of the reporting schedule of Huya. During the third quarter of 2020, we maintain our strong momentum and deliver robust financial and operating results. Our total net revenues for the third quarter increased by 36.1% year-over-year to RMB6.29 billion exceeding both the high end of our previous guidance range and Street consensus. In particular, our live streaming revenues for the third quarter increased by 40.1% year-over-year to RMB6.05 billion, driven by live steaming revenues growth from Bigo segment. Other revenues in the third quarter decreased by 20.8% to RMB237.3 million, primarily due to the decrease in other revenues in YY segment. Cost of revenues for the third quarter increased by 38.8% year-over-year to RMB3.96 billion. Revenue sharing fees and content costs increased to RMB2.84 billion in the third quarter from RMB1.95 billion in the same period of 2019, which was in line with the increase in live streaming revenues. Bandwidth costs decreased to RMB236.9 million from RMB286.3 million in the same period of 2019, primarily related to the termination of service and assessed to users in India after government’s measures took to block certain Chinese own apps in late June. Gross profit for the third quarter increased by 31.9% year-over-year to RMB2.32 billion. Gross margin in the third quarter of 2020 decreased to 37% from 38.2% in the same period of 2019.

[Operator:]

Thank you. The first question comes from the line of Jialong Shi of Nomura. Please ask your question.

[Jialong Shi:]

Congratulations. Good morning, management. congratulations on a very solid quarter. Yes. I have two questions. So, first question is just about Bigo and just wonder, what is the latest market split by revenue for Bigo Live business in the third quarter? And we saw Bigo achieved very strong revenue growth, and also trend profitable in Q3, and just wonder how we should look at the trend for Bigo’s revenue, and a margin in Q4 as well as next year. And the second question is about the investment and I think management mentioned in the earlier remarks, JOYY will continue to explore opportunities in China’s internet industries such as the AI related industry and after the sale of the YY Live business. So, just wondering if management can elaborate a little bit, what are the areas JOYY will likely look to enter or invest in China in the future? Thank you.

[Bing Jin:]

Thank you, Jialong. I’ll answer the first question and David Xueling can ask the second one. For the Bigo Live’s gross trajectory, things we cannot provide specific numbers, I’ll just give you some colors. In the third quarter, you can see on a year-on-year basis and also sequential basis, Bigo Live continue to give a very strong result, the main regional composition are developed markets Middle East, and Southeast Asia. If you look at the composition from developed markets, it’s already well over 40%. Under the key components in developed markets are North America, European countries and also Japan, Korea, New Zealand, Australia. So, these three sub regions on the developed markets continue to drive a lot of the growth for Bigo Live. Middle East is still around a one third of the total revenue for Bigo Live. And again, that is a very established market with our clear leading position. So, we expect we will continue to drive additional revenue from Middle East. Southeast Asia and other parts of the world accounts for roughly, I would say 25% to 30% of the total revenue for Bigo Live. We still think that we will continue to establish our leading position in Southeast Asia and also explore other emerging markets as well. So, I think in general, for the third quarter – for the fourth quarter of 2020, and also going forward to 2021, the main driver for Bigo Live will come from the developed markets with higher paying amounts and also higher ARPU – paying region higher ARPU. So, I would say that’s the – that’s the answer to your question.

[David Xueling Li:]

Thank you for the question. First of all, this transaction does not mean that JOYY will abandon our domestic business. Actually, we will continue to explore new businesses in China and continue to execute or implement our long-term strategy, which is to continue to bring those areas that Chinese companies have competitive advantages and to replicate these experiences and competitive advantages across the globe. So, we have seen that on Chinese companies have technology resources over overseas companies, and we have witnessed the successful replication of business models in overseas markets. And also, you will also notice that China has a lot of industrial chain advantages, especially in the manufacturing side. Historically speaking, Chinese companies have advantages as a manufacturing company on taking the OEM mode, which is without our brand or our own channel, simply taking orders to manufacture other brands products. In the future, we believe that more Chinese companies will be able to establish their own brand, establish their own channel, and so build up a new innovative business model. And this is the future trend and opportunity that JOYY foresee. So, actually since last year, JOYY has actually begun to explore starting new businesses in terms of oversees e-commerce. Going forward, we’ll continue to be focused in our long-term strategy, that’s continuously bringing the successful experiences, technology advantages and business models in China, replicate these experiences to generate more growth across the globe.

[Bing Jin:]

Jialong, I think you also asked about the margin trends. Let me also give you some color.

[Jialong Shi:]

Yes. Thanks.

[Bing Jin:]

If you look at margin profile for Bigo in the third quarter on the non-GAAP operating margin level is already breakeven, is already positive that is – thanks to the – it has helped the gross margin for us with the saving of the bandwidth costs and also with the leverage of economy, we have also reduced the percentage I was spending on the sales marketing as potential revenue. So, that results in a positive non-GAAP operating margin. I think that trend will continue in the fourth quarter and also next year, even though if you ask me about the balance between user growth and margin, if you want to continue to invest in our business to attract more users around the world, because we do think that global wise, the short-form video and live streaming have massive potential. but again, as we have demonstrated our capability to generate positive margin, I think that will give a lot of confidence for investors as well.

[Jialong Shi:]

[Operator:]

Your next question comes from the line of Alex Poon of Morgan Stanley. Please ask your question.

[Alex Poon:]

My question is related to Likee, could management please help to share with us some of the monetization progress and monetization user growth and investments target for next year and in terms of monetization, for example, for live streaming, how is it compared with the engagement metrics with Bigo Live and short videos in China and apart from live streaming, are we seeing any progress on advertising, maybe even e-commerce? thank you very much.

[Bing Jin:]

I think, Alex, let me address that question. For the monetization of the Likee business, as I cannot disclose this numbers in general, it’s going very well. As I explained in the first half of this year, it’s still in a relatively, I would say early stage, but we have freed up the monetization ever from the third quarter and continues with the fourth quarter. So, we are confident to achieve the level of production monetization for Likee as we communicate with invested before. I think overseas, as I mentioned, users tend to have more social interactions and as I explained in the prepared remarks, we have incubated more functionalities to allow more users to create content and upload to Likee’s ecosystem, and to share and comment on each other’s content. So, the engagement and interaction between users within Likee is very healthy. Even though we have encountered the Indian government’s ban of Chinese app that resolved in quarter-by-quarter MAU decline, but if you axe India, you can see likee’s user base on year-on-year basis and on a year-on-year and on a sequential basis or achieve very high user growth. So, we are confident that the addition to users from other parts of the world will provide the additional traffic funnel to monetization. in terms of the different formats of monetization, I think overseas marketing has still revenue early compared with China. So – but everything happening in China will be replicated global as well, it just met up time. So, in the initial days, as I said this year and next year, we will be focusing on converting user traffic funnel to live streaming, because live streaming is a perfect twin brother with a short-form video, because they all share similar characteristics and we utilize Bigo Live’s backend operation expertise to monetize the user in short-form video Likee ecosystem. So that the paying ratio – will gradually turn up to the similar level of Bigo Live, which would take some time. after we realized the handsome portion of the user conversion to live streaming, then we will continue to explore advertising the e-commerce. As I explained to investors before, advertising is a very natural monetization for short-form video as well, because we kind of explore native ads as a way for user engagement, as well as monetization for Likee. For e-commerce, David has claimed that we have established development e-commerce capabilities for cross-border transactions. So, we also utilized likee’s massive user base to feed into this ecosystem. We utilized Chinese supply chain and then to maximize the user value. But I think advertising and e-commerce at the meaningful revenue contribution will come at a later stage than live streaming. Thanks.

[Alex Poon:]

Thank you very much.

[Operator:]

Your next question comes from the line of Yiwen Zhang of Citi. Please ask your question.

[Yiwen Zhang:]

Thanks for taking my question. I asked your view on live streaming model in the future. So, while I pioneered with a future showroom, a decade ago, and it then evolved into mobile showroom and then incubated at again, live streaming, and then it also has exposure industrial video sidebar market in overseas, so what’s your view of the live streaming model in the future? So, apart from this model I mentioned, what are the opportunities if you see, and why do I play in the future? Thank you.

[Bing Jin:]

Thank you. Let me address that question. I think interestingly, live streaming is not – was a business model per se. It can be integrated with many different business model that’s the beauty of live streaming. For example, our social networking platform can use live streaming for monetization. I’m using app, I use live streaming as a monetization, and that’s the reason why we have so our domestic video-based entertainment live streaming business to Baidu, because Baidu does have a lot of traffic from these different apps, and those traffic can feed into live streaming and have Baidu to build a big ecosystem with better monetization, also help while I’d like to expand its capability of monetization in that big ecosystem. So, I think in China, live streaming will continue to grow. They will further expand to the different categories of industry and different business formats. global live is the same thing, but we think global live, there’ll be more opportunity for live streaming, is not only as a way for monetization with the combination of short-form video, but also the live streaming, as I explained before, has two very unique features overseas. One is that in general, the entry barrier for live streaming is low overseas. That’s why the participation rate from a host in overseas much higher than in China. Secondly, the social interaction between users, among users, among host also more prevalent in overseas market resolving the higher engagement and also high paying amount per users. So in short, that I would say, live streaming has massive potential both in China and overseas and we will make sure that we can really invest in our overseas operation and create more opportunities down the road.

[Yiwen Zhang:]

Thank you.

[Operator:]

Your next question comes from the line of Daniel Chen of JPMorgan. Please ask your question.

[Daniel Chen:]

I’ll translate myself. My question – the first question is YY Live China business. this quarter, we see there’s a substantial improvement in the margin. What’s the driver behind? the second line is on Bigo, own market segment, which market do we think has the biggest potential in both user and monetization in the next three to four years. Thank you.

[Bing Jin:]

Thank you, Daniel. Let me address the question. If you look at the YY Live segment, it has two components; one is YY Live streaming in China domestic, and also the other is HAGO, and other business. in terms of YY Live domestic live stream business, we have achieved better and better operation margin as you can see from the past few quarters. One is on the gross margin side, we tend to do some of the campaigns in the quarter regarding the low, I would say, revenue sharing ratio in the third quarter. in terms of the sales marketing, we have also paid more attention to the YY. So, we have achieved better, I would say, sales and marketing leverage as a percentage of revenue. We have also paid close attention to the R&D and generally personnel spending. So, that’s the reason why we have maintained a healthy and healthier margin profile for YY domestic live streaming business. For other parts under YY Live segment, including HAGO, as I explained in the prepared remarks probably is on the wild track to be the coming breakeven in some of the key regions. So, the better margin profile for HAGO will also help with the enhancement of the or YY Live segment margin expansion. Second question is regarding the biggest potential area for overseas market. I think in general, it would fall under developed markets, as I said, is well over 40% of the revenue contribution for Bigo now. Within developed markets, we think that North America, particularly, the U.S. market will be one of the big markets and also secondly, is the Japan, Korea, New Zealand and Australia, which I called pan-Pacific region or Eastern Pacific regions. Third one is the more on the Western Europe regions. Those regions share several key common characteristics. One is a bigger population base. Second is a high disposable income. Third is very high propensity for social engagement and social interaction resulting in a high paying APU within live streaming scenarios. Thanks.

[Daniel Chen:]

Thank you.

[Operator:]

Thank you. Your next question comes from the line of Lei Zhang of BofA. Please ask your question.

[Lei Zhang:]

Thanks management for taking my question and congrats on adherence to your results. My first question is regarding the computation in short video in overseas market, especially after the potential geopolitical change after the U.S. election and second delay about the YY Live deal or curiously, we have some synergy in terms of data and R&D with YY Live domestic business. So, do I continue to share those data or those staffs, while any change we can see after the deal? Thank you.

[David Xueling Li:]

This is David. Let me answer your question. As far as the short-form video competitions Live’s scale overseas, I think our long-term strategy will be consistent. Number one is that we’ll continue to wait for the right time. Secondly, we will make sure that our business stay on a healthy and balanced tracks, and that is what distinguishes us from other competitors as for our data storage and operations ever since the establishment of Bigo in 2014, Bigo’s operation has been fully separated from YY Live, all of our data of overseas and PRC operations separating these stored and operated. Thank you.

[Lei Zhang:]

Thank you.

[Operator:]

Our final question is from Tian Hou of TH Capital. please ask your question.

[Tian Hou:]

Thank you, management, congratulations for the great quarter. So after you sell YY to Baidu, so, I guess the focus is going to be on your overseas business, like the Bigo and the HAGO and other...

[David Xueling Li:]

[Tian Hou:]

So after sale of YY domestic to Baidu, I guess the company’s focus is going to be your overseas business, including Likee, Bigo, IMO and HAGO. So, I wonder in terms of live streaming, the business operation isn’t going to be the similar to YY domestically, which is a union driven, so that’s number one, also among different apt, so what is the – you must stretch the plan for each of them, which one is the traffic generator, which one is a revenue or profit generator? So what’s your plan? So that’s the first question. The second question is domestic. As the management said that you guys going to get into the new business. Last quarter, I remember Xueling mentioned that you guys going to enter into community fresh produce purchasing program. It is a very high, how to say, momentum area. So, I wonder what company’s new business are going to be and some of the new business you already started, what is the current status? That’s all my question. Thank you.

[David Xueling Li:]

As for our growth in the overseas sector, for Bigo, we’ve been – we’re seeing obvious growth both in our revenue and user base. So, Bigo’s business model has been relatively healthy. as for Likee, at the current stage, mainly – our current focus is mainly on the growth of user base. We have kicked off to start to kick off the monetization of Likee since on the mid-2020, and we foresee and expect to see a more improvement in 2021. As for our domestic business, in terms of community short-form video project business, we did invested in a company focused in this area on – in this trend – but that is an – our investment in the e-commerce sector does not mean that we intend to enter into this sector by ourselves, but it shows our interest in this area. Our long-term focus is to continuously replicate or bring the advantages of Chinese firms in terms of product technology and business model and try to replicate these advantages overseas. Thank you.

[Tian Hou:]

Okay. Thank you, David.

[Operator:]

Thank you. At this time, I would now like to hand the call back to the management for short closing remarks.

[Bing Jin:]

I think that’s the end of the call. We thank everybody for joining the call. We look forward to speaking with everyone next quarter. Thank you.

[David Xueling Li:]

Thank you very much.

[Operator:]

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