JOYY Inc.
Q2 2018 Earnings Call Transcript

Published: 14 Aug 2018

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to YY Incorporated Second Quarter 2018 Earnings Call. [Operator Instructions]. I must advise you that this conference is being recorded today, Tuesday, the 14th of August, 2018. I'd now like to hand the conference over to your speaker host today, Mr. Matthew Zhao, IR Director of YY. Thank you. Please go ahead.

[Matthew Zhao:]

Thank you, Operator. Good morning, and good evening, everyone. Welcome to YY's Second Quarter 2018 Earnings Conference Call. Joining us today are Mr. David Xueling Li, Chairman and acting CEO; Mr. Bing Jin, CFO; and Ms. Ting Li, COO 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 second 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 statement in our earnings press release, which applies to this call as we will make forward-looking statements. Finally, please know that, unless otherwise stated, all figures mentioned during this conference call are in renminbi. I will now turn to the call over to Mr. David Xueling Li, our Chairman and acting CEO. Please go ahead, sir.

[Bing Jin:]

Thank you, Matthew. Hello, everyone. Welcome to our second quarter 2018 earnings conference call. This is Bing Jin, CFO of YY. I will now speak on behalf of our Chairman and acting CEO, Mr. David Xueling Li. We once again sustained our strong growth structurally and delivered a robust quarter. Our total revenues increased by 44.6% year-over-year to RMB3.77 billion, which exceeded the high end of our previous guidance. Revenues from our live streaming business grew by 50% year-over-year to RMB3.56 billion and remained the primary driving force of our growth in the second quarter. Our continued growth momentum in YY Live demonstrates our achievements in three areas

[Operator:]

[Operator Instructions]. And our first question comes from the line of Thomas Chong from Crédit Suisse.

[Thomas Chong:]

I have two questions. My first question is about the user trend for YY Live in second half and 2019. Is there any KPI in terms of the user level? And my second question is about Bingo, given the facts that -- I think, we have talked a lot on Bingo in last earnings conference call. Just want to see, if there is any update about the Q2 and also the second half outlook for Bingo?

[Matthew Zhao:]

Let me do the translation. Firstly, in terms of YY Live's future users' growth, this is not our major KPI. Actually, they will be continue to be one our key focus for the management teams in the long-run goal. In terms of the future initiatives, how we can grow our users that will be the following parts

[Operator:]

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

[Eileen Deng:]

My first question is regarding the third quarter guidance. How much is the impact from the workup actually have you seen? And how strong have you seen the recovery post the event? My second question is regarding the promotion of top host in other social media and the short-form video player platform? Management, quantify how big the user base and paying user growth, based on the example of Modern Brother? And do we have any target, the progress of such strategy, in the following quarter?

[Bing Jin:]

Thanks, Eileen. Let me address the first question and Ting Li can address the second one. So for the third quarter revenue guidance, I think, there are two main factors. One is the world cup, because the world cup broadcasting time is highly overlapping with our peak timing, which is 8

[Matthew Zhao:]

Let me do the translation. So in terms of your question for the promotion of our top host in the -- outside of traffics, firstly, for the Modern Brother, actually in the past two months, their follower number in the wireless platform has been doubled and their rallies actually has been 10x compared to the promotion before. So actually from the Modern Brothers' case, actually, it's very successful case. We can further replicate to other, our top host, going forward. And in terms -- except for the online promotions, so we actually also using other ways to promote Modern Brother. Firstly, it's a good brand recognition promotion, provides brand as well, and meanwhile, we are also trying to using our off-line events, such as music, concert, or other ways to promote the popularity of Modern Brother going forward. So all those kind of practice will continue to replicate to other top host. And secondly, in terms of our plan to doing of the outside promotions, so all of our top 100 of the host will be into the list and will continue to -- based on the data internally, we will continue track those data and to dynamically to monitor and manage of this list. So once the host enter of the top 100, definitely they got the chance to using the platform's traffic, and we will help them to using the outside traffic to promote their content as well as increase their popularity. So that's the answer of your question. Thank you.

[Operator:]

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

[Natalie Wu:]

I would translate myself. Sir, I have two questions here. Firstly, excluding Huya, sales and marketing expanding in the second quarter actually went down compared with the first quarter. So just wanted -- can you help us understand what your sales and marketing plan in the future? And you just touched the plan to -- how to check actual users in the future. So just wondering what kind of the assets will you need to resume the growth in terms of paying user number for YY Live in the future? And secondly, you have accumulated abundant cash in your balance sheet. Just wondering how is management plan in terms of the use of the cash? Will you consider repurchase or dividend payout or potential M&A?

[Bing Jin:]

Thanks, Natalie. Let me address those questions. So first question regarding the sales and marketing expense, you are right that excluding Huya, our second quarter sales and marketing, as a percentage of revenue, is roughly 7% compared with first quarter is roughly 8% to 9%. The decrease of the percent of revenue for sales and marketing, I think, mainly because in the second quarter, we don't promote them any new products. In the first quarter, we promote Happy Go as a leisure game collection platform. In the second quarter, we do not promote that many product. However, having said that, in the third quarter and fourth quarter, we have other new product in our pipeline, both in China and offshore, mainly focused on new traffic acquisition. So it could be leisure game, it could be short-form video, it could be other formats. So when time matures, we will make sure that we spend decent amount of sales and marketing. So in general, you expect percentage of revenue for sales and marketing in the third quarter and fourth quarter, and the rest of the year, it will be higher than the second quarter. That's the answer to your first question. For the -- how we grow the paying user, I think, again, we will focus on introducing more games into Host Battalion because we see increasing activities in Host Battalion. We will explore and innovate other similar features, such as Host Battalion 2, enable more host to compete among themselves and enable more host to compete against the fans, as a way of increasing the paying behavior and ARPU -- paying region ARPU. For the third question, we do have lot of cash on hand. We have over RMB6 billion onshore. We have roughly USD 20 million offshore. I think we would make sure that we use those money to the place that we think makes sense. So we will continue to -- and we are actively looking at different kinds of M&A targets. As I've said before, focusing on new traffic acquisition, enhancing the user engagement and also enhancing our AI and technology capabilities, both through organic product and through external M&As. So we are looking actively for onshore and offshore M&A targets.

[Natalie Wu:]

Any plans to -- in terms of the share buyback or dividend payout?

[Bing Jin:]

No immediate term. We do think there is many interesting opportunity we can capture. So we'll focus on organic product, sales and marketing and M&A acquisition.

[Operator:]

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

[Jerry Liu:]

My question is on the product competitive landscape with guys like, Duowan and Weibo, specifically, for example, Duowan is more a competition model, since we would like to use some -- as a content distribution platform, but at the same time, they will be interested to do live streaming products themselves. And then the second question is around any direct monetization for content exporting? We obviously benefit from additional fans and tipping on the YY Live platform, but could we see any new revenue streams?

[Matthew Zhao:]

Let me do the translation. So address your question in terms of the competition between YY and Duowan and all other short-form video platform, firstly, we truly believe the short-form video content, we have the live streaming content, is coming from the different [indiscernible]. So the short-form video platform is more flattish, it's more diversified content platform compared with the live streaming platform. And we truly believe it attracts different talent for the different kind of platforms. For the live streaming platform, we have a lot of true, what we call, the UTC producers, which is our host, and they can produce very valuable of live streaming content comparably the short form videos. And for those kind of people, actually, it's very -- for them, actually the short-form video platform is very ideal destination for amplified of their influence and meanwhile also to more distribute their content to more targeted of the users. But comparably, the people who can do the short-form videos may not have the possibility to do the live streaming content. So my point is, this -- both are -- the different kind of platform actually has been attracted different kind of talents. And definitely compared with the people doing the short form videos, actually the talent, which is doing the live streaming definitely will be -- have a better position going forward. And meanwhile, with respect to the Modern Brother's case, as I mentioned before, so firstly, in terms of their -- as I mentioned before, so after they have become a phenomena in the Duowan's platform. Actually their site number as well as the interaction or the revenues generated from the YY platform also has been significant growth. And meanwhile, we also consider seriously of their -- other agency business growing. So in the past two months, instead of the live streaming content, actually we got a lot of invitation in terms of different layers of the business events from other kind of arcade agency contract. But during this period, actually, we are more serious considering and more carefully to pick up of those kind of arcade agency events because we want to -- trying to maximize our top host valuation in both of our platform as well as for themselves. So all-in-all, actually, we truly believe we are totally different compared with Duowan. So we'll continue to find out more ways to distribute our content as well as promote our host in their platform. Thank you.

[Operator:]

And our next question comes from the line of Pinny Wang from HSBC.

[Pinny Wang:]

In terms of the increase in the revenue sharing piece and also the content cost, it's actually good to see that it was in line with the increase in the live streaming revenues and most of the paying ratio has also remained quite stable. But we understand that there is a quite intensively competition environment, right, for top guilds and hosts. Do you think that is more just because of our strong leadership position and that we'll maintain such ratio? Or you think that because we want to step up our market share and then down the road that we might see some changes in terms of, like, the sharing ratio, the guild, just in terms of our strategy, how you will -- in face of the increasing intensive competition? And then second is just in terms of the competition of the top hosts' revenue concentration, because we previously have been talking, say, the top 10 or top 100 hosts concentration in terms of our revenue contribution. With our new strategy, how has that been diversified down the road?

[Bing Jin:]

Thanks, Pinny. Let me address those questions. I think first question regarding the revenue sharing, it has been stable in the past and will continue to be stable in the future because we have already formed a very healthy ecosystem with our host and the guilds and also our fans. So given our massive revenue scale, a lot of the guilds are willing to cooperate with us on a continuing basis. But if you see the Modern Brother example, it just demonstrates how well we can promote our content and promote our host through different platforms. So I think that revenue sharing percentage will continue to be stable going forward. For the second question regarding the concentration of our top host, we actually track the data for the top 1% of the host, top 3% of the host, top 10% of the host, how much revenue they contribute, and that number has continuously decreasing on a quarter-by-quarter basis. So I think that indicate that we have achieved more decentralization with regard to the guild -- to the host as well as guilds as well. Yes.

[Operator:]

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

[Karen Chan:]

I'll translate myself. For the first question, management mentioned that YY Live streaming is showing recovery trend after the world cup. I was just wondering how should we think about the full year YY Live revenue growth and into the next couple of years? And secondly, can management share some of the user feedback or operating metrics on Host Battalion? And lastly on -- across different tier cities, especially Tier 3 and 4, what's the current user penetration?

[Bing Jin:]

Karen, thanks. Let me address those questions. For YY Live live streaming revenue, as I mentioned that we are seeing recovering trend from the world cup. I think for the rest of the year as well as next year, the key focus will continue to be on user growth. Our revenue user times the paying ratio times ARPU, even though we still think ARPU and paying ratio has room for improvement, but I think the primary driver will be on the user growth. So we would need to see how we systematically roll out our product, and how systematically we can sustain the user engagement and then monetize them. So I think, in general, that's the pattern. For the Host Battalion, we have introduced more games into the Host Battalion and is getting more popularity compared with the Happy Contest last year. Host Battalion hasn't reached a systematic scale yet, but we are seeing encouraging pattern. So what we will do is, we will continue to embed more interesting leisure games into Host Battalion, and hopefully, they can be used more and more by different levels of hosts. For the user demographic distribution across first tier, second tier and third tier, I think, that is stable. Over half of our users, 50% of users, are on third tier cities or below. And as Ting Li mentioned in the call just now, one of our focus in the future will also continue to find out more new users in third tier and 4-tier cities in China, which -- among which they have lot of idle time, and they have needs to pursue better quality entertainment, including live streaming. So I think, going forward, we will find more ways to attract those users.

[Operator:]

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

[Alex Yao:]

So I have three questions. The first one is regarding the third quarter revenue guidance and the potential fourth quarter revenue outlook. So the implied growth rate for the core YY Live is only at low teens based on the current revenue guidance. You guys have talked about the impact of the world cup and then the operation metrics recovers in the following weeks. Based on the current visibility, would you be able to give us a little bit preliminary color in terms of how you think about 4Q revenue growth outlook for core YY Live as well as the entire group? And then secondly, you guys discussed the initiative, such as Modern Brother to drive traffic generation from external sources. Would the additional traffic generated from these initiatives ceasing to the use case of our immersive company experience on the YY Live live broadcasting platform? And more importantly, would these guys potentially become -- converted to the heavy core users who spend lot of money and a lot of time on the platform? And third question is regarding the R&D. So if we take out the Huya part of the financial, R&D increased to almost RMB40 million on sequential basis in second quarter 2018. How shall we think about this line item in second half?

[Bing Jin:]

Alex, thanks. Let me address question 1 and 3 and then Ting can address question 2. So for the first question, I think some colleague have asked that question before. We do see recovering trend from the world cup. The third quarter guidance currently reflect our current assessment. But again, we need more visibility down the road in the rest of the third quarter as well as the fourth quarter, given we will launch the end of gala event, et cetera, to see how the growth of YY Live, the core live streaming business, will grow. So that's the first question answer. The third question regarding R&D, actually the second quarter, the percentage of R&D expense as a revenue is around 6.4% that compare with the 6% in the first quarter. So I don't see a big increase as a percentage of revenue per say. But a pattern that I can share with you is after our CTO joined, as our Dr. John Leh joined, we continued to recruit more high-quality R&D and AI expert. So that will incur some of the R&D expense as well, but again, that's manageable. I think for the rest of the year, the percentage of R&D as per revenue will be relatively stable compared with the second quarter.

[Matthew Zhao:]

Let me answer your question in terms of the monetization value for the Modern Brother's fans in YY's platform. Actually, I already answered the question. So as mentioned before, so Modern Brother's fans number is up -- it just grow like twice compare before. But actually the revenues for or the income for the Modern Brother actually has been increased almost 10x. So that actually demonstrates the strong monetization capability coming from their fans' base.

[Operator:]

And our next question comes from the line of Eddie Leung from Merrill Lynch.

[Eddie Leung:]

So my question is more about artificial intelligence. From the management's remark, it seems like at the moment the company has been using artificial intelligence mainly to drive the efficiency as well monetization of the platform. Just wondering whether there is any opportunity for us to use AIs to do a better job in terms of marketing and user acquisition?

[Bing Jin:]

Eddie, thanks. Let me address the question. I think at the end of the day, we are technology-enabled company, and we focus on voice and video content. So we need to make sure that we are the world leader in that aspect. AI is the second, I would say, layer of our technology capability, meaning, we will find more ways to mine the data and analyze the data and push the revenue content to the right audience. That includes the enhancement of our current content, push the relevant content to right audience and also attracting the new traffic, who would like to see a certain categories of content. So in general, to make our video and audio content to be more interactive and high quality and cater for different audience. So you're absolutely right that AI can be applied to the existing content, to the new content, to the existing user and new traffic.

[Operator:]

And our next question comes from the line of Hillman Chan from Citigroup.

[Hillman Chan:]

So my first question is about the upcoming new games of Host Battalion to be rolled out in second half. Can management share more on the trend and also the direction of the development outlook? And the second one is on the Blockchain adoption that Xueling has been talking publicly about? Is application in the messaging and communication, could management share more on these development and also the synergy with consistent YY products? And lastly, on Bigo, could management share more on the investment and also the profitability outlook of this business?

[Bing Jin:]

Thanks, Hillman. Let me address question 1 and 3 and Xueling Li can address question two. Question 1 is regarding Host Battalion, we have introduced Happy Chinese Checker and Happy Sheep. We will continue to add more interesting, I would say, games into Host Battalion. As I said, we have seen increase in the enhancement of the user stickiness, even though it hasn't become systematic compared with host Happy Contest that we introduced last year. So I think there is still room for improvement. So definitely, we'll continue to launch new games to attract and retain users. For the Bigo investment, Bigo's the live streaming business is highly profitable in many Southeast Asia markets as well as Middle East market. Bigo also has a record growing short form video app called, Like, that is still in the initial investment stage. So we will continue to invest for quality content and for sales and marketing, for branding, et cetera. So that's the general pattern for Bigo. I'll have Xueling Li answer the second question.

[Matthew Zhao:]

Let me address your question in terms of Blockchain. So firstly, we noticed in the market, most of the currency -- the start up of the Blockchain, they all focus on the visual cash applications. But for us, we truly believe the future for the Blockchain will be more focused from the technical perspective. So especially in the long run -- so we truly believe the [indiscernible] Blockchain for the Internet service is all coming from -- as well as some of the two basic demand from the users. Firstly, it will be the ID, the identification of the users, and secondly, is Internet transition. So who will tend to provide the better service to fulfill those two of the basic demand from users, definitely will be the leader for the Blockchain going forward. So from our coverage perspective, definitely, we'll continue to develop more applications as well as doing more innovation in terms of Blockchain going forward. Thank you.

[Operator:]

I'll now like to hand the conference back to the management team for your closing remarks.

[Matthew Zhao:]

Thank you, Operator. Thank you all for joining us today. We look forward to speaking with you in the coming quarters. Thank you.

[Operator:]

And that does conclude your conference for today. Thank you for participating. You may all disconnect.