Eric He
Thank you, Lili. Good morning, everyone. As Lili mentioned, we continued to see strong growth in a number of businesses. Since she has already discussed music, entertainment and online dating, I will give a brief update on the rest, before we move on to our financial performance. First is the live game broadcasting. As we mentioned on our earnings call last quarter, we restructured the operating team. We have now created a new unit called interactive entertainment which oversees all game-related businesses, i.e. online game, Huya game broadcasting and our media portal Duowan.com. The purpose of this was to build a strong ecosystem around games through better cooperation and utilization of our resources. So far the team has made good progress improving user experience and engagement of Huya game broadcasting which in turn boosts revenue growth. In addition to improving speed for live streaming, the team also launched a number of new product initiatives in the last quarter. Moreover, the team has further enhanced our ecosystem by introducing a mobility system that is similar to the one in music and entertainment. All of these features aim to increase user satisfaction and engagement which we believe is crucial in an increasingly competitive environment. Moving on to online games, we saw revenue grow by nearly 20% year over year, despite against a weak quarter last year. We have made good progress on further expanding our client-based game portfolio by signing four more exclusive new games, including acclaimed [indiscernible] which is scheduled to be launched early next year. However, the continuously worsening marketing - market conditions for web games and slower than expected ramp-up of new client-based games has caused us to reassess and revise our full-year expectation for online games. We now anticipate very limited growth for this business this year. As for 100 Education, in the second quarter we conducted an operational review, following a departure of key personnel in English training business we acquired at the end of last year. Subsequently, we incurred a one-off goodwill impairment write-off - write-down of RMB111 million. Due to this unexpected outflow of teachers, we have reduced our forecast for the business and made an adjustment of RMB110 million to our estimates accordingly on contingent payment for potential earnings related to this specific acquisition. Both items, where reflected in balance sheets, created very little P&L impact. Finally, I would like to talk about our margin situation. Similar to what we saw in the first quarter, gross margin dropped by 11% year over year or 3% quarter over quarter. The main reason was due to increased revenue sharing costs which was primarily driven by the shift in revenue mix. I would like to remind everyone that most of our new business lines, such as education and finance, have a higher revenue sharing arrangement, given their intensive knowledge-based nature. Furthermore, the higher revenue sharing ratio was also caused by a stronger than expected increase in deferred revenue in online music and entertainment which was mainly due to a successful marketing campaign in June. The associated higher revenue sharing costs was paid as occurred, thus recorded on a cash basis which temporarily dampened the gross margin in the second quarter. In addition to these two reasons, higher bandwidth costs and D&A, depreciation and amortization of servers and office equipments, were amongst the most - the main contributors to the lower gross margin. As we will see a continuing shift in our revenue mix away from high-margin businesses, such as online games and membership program, to lower-margin user-generated content business and new business initiatives, we now expect our gross margin to be somewhat under pressure for the rest of the year. However, we plan to mitigate some of this impact by improving operating efficiency which we have already seen in the second quarter. Together with increased economy of scales, we will improve our operating leverage and allow our overall profitability to remain relatively stable for the remainder of the year. One non-recurring item worth mentioning in the second quarter. We received a government grant of RMB22 million, related specifically to the tax year of 2013 and 2014 and a RMB6 million VAT refund. Both were recorded in the other income line item. Now I would like to move on to the quarterly financial details. Before I get started presenting our financial numbers, I would like to clarify that all the financial numbers we're presenting today are in renminbi amounts and the percentage changes are year-over-year comparisons unless otherwise noted. Net revenues for the second quarter 2015 increased by 61% to RMB1.36 billion. This increase is primarily driven by an increase in IVAS revenues. IVAS revenues increased by 62% to RMB1.3 billion. The overall increase primarily reflected an increase in the number of paying users. Let's look at each of our IVAS business lines more specifically. Revenues from online music and entertainment increased by 42% to RMB731 million. This increase primarily reflected a 62% increase in the number of paying users to 1.8 million as well as 13% decrease ARPU to RMB400 during the second quarter 2015. Revenues from online games increased by 20% to RMB199 million. This increase primarily reflected a 2% decrease in the number of paying users to 428,000 and an increase in ARPU of 22% to RMB466. Also, the number of online games increased to 246 as of June 30, 2015 from 150 a year ago. Revenues from online dating increased by 438% to RMB157 million. This increase primarily reflected a 162% increase in the number of paying users to 233,000 and an increase in ARPU of 105% to RMB675. Revenues from other increased by 141% to RMB213 million. This included Huya game broadcasting which increased by 174% to RMB85 million and revenue from the membership program which increased by 49% to RMB73 million. The revenue increase in the membership program primarily reflected a 17% increase in members to 1,073,000 as of June 30, 2015. Other revenues which mainly includes 100 Education and online advertising revenues from Duowan.com, were RMB57 million in the second quarter 2015 compared to RMB40 million in the corresponding period 2014. Cost of revenues increased to RMB833 million. This was primarily attributable to an increase in revenue-sharing fees and content costs which increased to RMB552 million this quarter from RMB256 million last year. The reason for this increase was explained earlier. In addition, bandwidth costs increased to RMB132 million, representing 10% of revenue, due to providing better quality broadcasting streams to our online game broadcasting users and utilizing higher resolution videos. Gross profit increased by 26% to RMB524 million. Gross margin dropped by 11 percentage points year over year to 39%. The decrease in gross margin was mainly attributable to the change in our revenue mix, higher revenue-sharing fees and content costs and increased bandwidth costs related Huya game broadcasting and general business expansion. Our non-GAAP operating income increased 16% to RMB319 million. Non-GAAP operating margin fell by 9 percentage points year over year to 24%, primarily driven by the increase in gross margin for the reasons listed above but compensated by improved operational efficiency. GAAP net income attributable to YY increased 31% to RMB291 million from RMB222 million. GAAP net margin was 21%, representing a 5 percentage points decline year over year. Non-GAAP net income attributable to YY increased by 17% to RMB302 million, while our non-GAAP net margin reduced to 22%. Diluted net income per ADS increased by 37% to RMB5.10 or $0.82 from RMB3.71 in the same quarter last year. Non-GAAP diluted net income per ADS increased by 22% to RMB5.29 or $0.85 from RMB4.32 in the corresponding period of 2014. This concludes our prepared remarks. Thank you for joining us today. We would now like to conclude the conference call. Thank you.
