JOYY 欢聚

Operator

Good morning, and good evening, everyone. Welcome to YY’s Second Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only-mode. With us today is Mr. David Xueling Li, Chairman and acting CEO of YY; Mr. Rong jie Dong, CEO of Huya Broadcasting; Mr. Bing Jin, CFO of YY; and Ms. Ting Lee COO of YY. Following management prepared remarks, we will conduct a Q&A session. Before we begin, I refer you to the safe harbor statement in our earnings release, which also applies to our conference call today as we will make forward-looking statements. I now turn the call over to Mr. David Xueling Li, Chairman, acting CEO of YY. Please go ahead, sir.

Bing Jin

Thank you, operator. Hello, everyone. Welcome to our second quarter 2017 earnings conference call. This is Bing Jin, the CFO of YY. I will now speak on behalf of our Chairman and acting CEO, David Xueling Li. I’m excited to return as the acting CEO of the company, and I’m very delighted to talk to old and new friends here. I’m also pleased to help reinvigorate the vision and execution strategy for YY and believe we still have massive growth potential. After I resumed my role of acting CEO in the second quarter, we have introduced new strategic initiatives to attract more users and enhance user engagement on our live streaming social media platform. We are delighted to see good forward results of these new initiatives and pleased to report strong financial and operating results in the second quarter. Our total net revenue for the second quarter of 2017 reached RMB2.61 billion and exceeded the high end of our previous guidance range. In particular, our live streaming business, including YY Live and Huya, maintained rapid growth. On YY Live, we launched a small-room online social game called Happy Werewolf Kill in April this year. It has quickly become a very popular social game on mobile devices. Also during the second quarter, we introduced short-form video services in YY Live with more diverse content and social features. As a result, we were able to attract a much younger generation to our ecosystem and further enhanced user engagement and stickiness on our platform. In addition to YY Live, Huya continues to deliver impressive results in both revenue generation and user growth. We believe Huya is well positioned to capture even greater market opportunities in the future. Overall, we are very pleased with the result we achieved during the second quarter. We have solidified our leadership position in the live streaming social media industry in China, and our growth outlook remains healthy as underscored by our third quarter revenue outlook. We will maintain our strategic focus on live streaming social media, continue to look for new ways to attract and engage users and strive to generate meaningful shareholder value. That concludes the remarks of our Chairman and acting CEO, David Xueling Li. Now I would like to turn the call to the financial results. First of all, I’m happy to report that David’s return as our acting CEO has greatly energized our entire company. His vision and experience have inspired everyone within our organization. We are continuously rolling out new product features and functionality, which works effectively in attracting new users and increasing user stickiness. Our financial results reflected our strategic reinvigoration. During the second quarter of 2017, our total net revenues increased by 31.7% year-over-year to RMB2.61 billion. Revenues from live streaming, which constitutes 91% of our total net revenues, grew by 42.9% year-over-year to RMB2.37 billion in the quarter. Our key revenue contributor in second quarter 2017 was a new functionality called Happy Contest that we embedded into our live showrooms. It enables live streaming hosts to connect and compete with each other across different showrooms. Consistent with our serious focus on the mobile platform, mobile already contributed 58.4% of our live streaming revenue in second quarter 2017. Our mobile live streaming MAUs grew by 27.1% year-over-year and reached 66.1 million in second quarter 2017. Live streaming paying user reached 5.7 million in second quarter 2017, up 46.1% from second quarter last year. Mobile paying users already constitute 76% of overall live streaming paying users in second quarter of this year. Our cost of revenues increased by 29.4% year-over-year, a slower pace than the increase in our total net revenues. As a result, gross margin expanded to 40.1% in the second quarter this year from 29% in the corresponding period of 2016. In particular, revenue-sharing fees and content costs increased by 40.9% to RMB1.26 billion in second quarter 2017 from RMB893.3 million in the same period last year, a slower pace than the increase in our live streaming revenues. In addition, as a result of the substantial improvement in our asset utilization rate and pricing terms, our broadband cost in the second quarter 2017 only increased by 9.7% to RMB165.3 million in the second quarter this year from RMB150.7 million in the same quarter last year, also a much slower pace than the increase in our total net revenues. Our operating expenses increased to RMB476.3 million during the second quarter this year from RMB351.1 million in the same quarter last year. During the second quarter this year, we launched both online and offline marketing campaigns to promote our new initiatives and enhance our brand awareness. At the same time, we are also closely monitoring our spending. Our R&D and G&A expenses as a percentage of the total net revenues declined to 6.4% and 4%, respectively, in second quarter this year from 8.7% and 4.6%, respectively, in the same quarter last year. Also, as we mentioned on our last quarter’s call, we are actively shrinking Huya’s operating losses. In the second quarter this year, Huya’s non-GAAP operating loss was reduced to RMB11.1 million, down from a loss of RMB146.6 million in the same quarter last year. Consequently, our non-GAAP operating margin expanded to 23.9% during the second quarter this year from 23.3% in the same quarter last year. Our GAAP net income attributable to YY increased by 67.1% to RMB573.7 million in the second quarter of 2017. Net margin in the second quarter increased to 22% from 17.3% in the corresponding quarter last year. Non-GAAP net income attributable to YY increased by 55.2% to RMB597.2 million in the second quarter this year. Non-GAAP net margin in the second quarter this year increased to 22.9% from 19.4% in the same quarter last year. Diluted net income per ADS in the second quarter 2017 increased by 67.2% to RMB9.98 from RMB5.97 in the same quarter last year. Our non-GAAP diluted net income per ADS increased by 56.2% to RMB10.39 from RMB6.65 in the prior year period. Now going into the third quarter of 2017. We expect our net revenues to be between RMB2.75 billion and RMB2.85 billion, representing a year-over-year growth rate of approximately 31.6% to 36.4%. These forecasts reflect our current and preliminary view of the market and operating conditions, which are subject to change. This concludes our prepared remarks. Operator, we would like to open to the Q&A session right now. Thanks.

Operator

Sure sir. Ladies and gentlemen we will now begin the question-and-answer session. [Operator Instructions]. Our first question is coming from the line of Zoe Zhao from Credit Suisse. Please ask your question.

Zoe Zhao

Hi, thanks management for taking my question and congratulations to your return and very strong quarter. I’ve got several questions. First, what is the driver behind an accelerating revenue growth in Q3? And second, could David or [Dong Rong jie] share with us the pipeline for new products and some ideas? And just a quick housekeeping question. What is the MAU and paying user breakdown between YY and Huya? Translating myself. [Foreign Language]

David Xueling Li

[Foreign Language]

Bing Jin

Okay. Let me do the translation. So first of all, I’m very glad to be back to the company. And then as you all witnessed in the past quarter, we have done a lot of new initiatives. I will summarize into, below 2 major ones. One, the first one, we are trying to make sure that we have, we need to make the entertainment grassroot and really touch more audience in the room. So traditionally, our live showroom are dominated by a single host with 10,000 or even more than that, a lot of people watching at the same time. So the participation feeling for a single user is very low. So recently, we have initiated a new strategy, is to introduce Happy Contest feature. As an introduction of that feature, it basically allows the 2 hosts to compete among each other across the show, live showroom. So on first hand, it reduced the pressure for a single host because they have more opportunity to talk to each other and have fun and compete. And secondly, it reduced the entry barrier for a host because the 2 hosts can find more common ground to compete. And then you add a lot of new content in the showroom as well. On the other hand, it also allows the user to participate more. So in the future, we will continue to expand more into the way of engaging more hosts, maybe to -- 3 or 4 to even 8 hosts across different rooms. So as we have more hosts in the room, then the number of participants can actually decrease. So we don’t need to have that many users in that room. So everybody is becoming a very important participant in that showroom. And then we have -- we bring a lot of community sense to our ecosystem. So that’s the first category we’re doing. Second category is we will try new ways to attract new traffic. So that’s the reason why we launched the Happy Werewolf Kill in the second quarter. It is a multi-person, small-room, audio-based social game, usually 6 people to as much -- as many as 10 to 12 people playing that Happy Werewolf Kill game at the same time. So in summary, we are -- on the upstream, we are trying to find new ways to get the user. In the downstream, we are trying to get more user to participate and have more fun feature in the live showroom. And then certainly, also, we have launched the short-form video to bring more happiness and to lower the content-creation barrier for users. So the happy -- the short -- Happy Werewolf Kill game and also short-form video allow us to attract a lot of younger generation to our ecosystem. [Foreign Language]

David Xueling Li

[Foreign Language]

Bing Jin

[Foreign Language]. Shall we go to next question?

Operator

Our next question is coming from the line of Binnie Wong from Merrill Lynch. Please ask your question.

Binnie Wong

Thanks for taking my questions. So first congrats on a solid quarter. We actually saw very nice growth in mobile MAU and your ARPU but then, following up on the first question, is that paying users have seen some sequential decline. What are the reasons for the decline in paying users? And second question is that, if you look at the revenue outlook, it’s actually quite solid, quite upbeat into third quarter. Can you share with us how we should think about it by segment? And what are the key drivers to give management the confidence for such a robust outlook? And lastly is just that we look at Huya’s user traffic as being -- catching up with our close competitor, so -- which is positive to see. But we also see that leading game platform like Tencent is also launching their own game broadcasting. How do you think that will change the competitive landscape of Huya? Thank you. Will you be able to translate into... [Foreign Language]

Bing Jin

Yes. Maybe let me take the question on the paying user and also the revenue driver in the third quarter, and maybe Dong Rong jie can talk about Huya. So for the paying user, in general, YY Live paying user is more or less the same as the first quarter. Huya’s paying user is actually declining a little bit. There is a reason, because the first quarter is the high peak season for Huya due to the Chinese Spring Festival holidays, so a lot of students actually have more time to watch the live show, live game show on Huya platform. So that’s why second quarter the paying user of Huya declined a little bit. In terms of the revenue driver in the third quarter, I wouldn’t go into detail, but I think YY Live, as we continue to launch more new features, attract new user traffic, as Xueling described and also with the [indiscernible], with the Happy Contact feature and also with more and more, I will say, [indiscernible], the annual caller competition event, we do think third quarter for YY Live will continue to grow very strongly from the revenue side. And also, for Huya, Huya’s revenue and also user has been growing very rapidly. I think that pattern will continue in the third quarter as well. So that’s why we give, I will say, pretty confident guidance for the third quarter revenue. [Foreign Language]

Rong jie Dong

[Foreign Language]

Bing Jin

So actually, for Tencent and NetEase, they have been doing this game live broadcasting for quite a long time, over 1 year, so it’s a known fact already. And certainly, it is a highly competitive market. And gaming is only one part of the whole ecosystem. It’s a complement component for the whole ecosystem. So from our perspective, we actually welcome more competitors to this bigger market.

Operator

[Operator Instructions]. Our next question is coming from the line of Yuma Chen [ph] from Citigroup.

Unidentified Analyst

My question is regarding the short-form video that introduced in second quarter. Could you share more about the user metrics, like the operations update, including penetration and [MAU]? And also, could you also touch upon the monetization strategy going forward, please? Thank you.

David Xueling Li

[Foreign Language]

Unidentified Analyst

[Foreign Language]

David Xueling Li

[Foreign Language]

Bing Jin

So we have already incorporated the short-form video features in YY Live. And we aim to provide more service in terms of the user interaction and engagement. We are not going to copy the existing product -- or features in the market. We are going to offer more innovative features.

Operator

Our next question is coming from the line of Eileen Deng from Deutsche Bank.

Eileen Deng

[Foreign Language] Now I will translate this into English. I have a question on Happy Werewolf Kill IPP. Can management share with us some operating metrics on this app as well as the long-term strategy on the monetization? And also, how do you see the synergy between this app and our other new products, which is the existing core products? And also, given the success of this launch, we’ve seen many other similar apps emerging. And how do you see this competitive environment changing now? Thank you.

David Xueling Li

[Foreign Language]

Bing Jin

I will do translation. So hi, everyone. I’m Lee Ting, COO of YY. Very glad to know everyone. For Happy Werewolf Kill, that was the app focused on multi-person, small-room audio social game, and it is our very first app and try in terms of multi-people social and also small-room play method. So it is also a very good way of attracting much younger generation, and actually, we become very successful in doing that. But in terms of the product itself, it is still in the very early stage, and it’s only entry point for us to penetrate into a massive younger generation. So even though Happy Werewolf Kill had already been one of the leading product in the market, but I think it’s still very early stage, so we cannot disclose too much operating metrics at this stage. But I will encourage everybody to pay attention to that product and see how that evolves.

Operator

Our next question is coming from the line of Natalie Wu from CICC.

Natalie Wu

My question is regarding the short video initiative. How do you plan to penetrate into the market apart from adding short video clips into currently existing product mix? And for sharing, you mentioned that you will use an innovative method. Can you elaborate in more details about that? What kind of related budget will you set aside for that, let’s say, for the rest of 2017 and for maybe 2018? [Foreign Language]

David Xueling Li

[Foreign Language]

Bing Jin

Okay. I’ll do the translation. So our short-form video is a content generator in essence. So content play a very important role in short-form video concept. And because of that, there’s no single monopoly player in the market, and I do think it is -- short-form video market is still very early stage. If you look at the U.S., Snapchat and Instagram, they have all shifted towards video-based social kind of model. So that means we still have a lot of opportunities. For us, the most important thing is to find our own characteristics for short-form video, and we’re trying to make sure that the product is designed to the maximum efficiency and user friendliness to really differentiate us from the other market competitor. And so that’s the basic spirit and philosophy behind our short-form video service and short-form video app. In terms of the marketing and -- sales, marketing budget for the whole year for the short-form video, I think that was -- that is still within our current budget.

Operator

Our next question is coming from the line of Chi Tsang from HSBC. Please ask your question.

Qin Wang

Hi, management. This is Qin Wang speaking on behalf of Chi Tsang. So I have several small questions. First question is regarding to our -- to Tantan. So can management elaborate more about any potential cooperation opportunity in the future with Tantan? And secondly is about the vertical content strategy. It seems that in this quarter, the gross margin expanded a little bit Q-o-Q and Y-o-Y. So does that imply that we actually are spending less in the vertical content? So what will be our vertical content strategy going forward in the future? [Foreign Language]

David Xueling Li

[Foreign Language]

Bing Jin

Okay. So for the first question regarding Tantan, we do think Tantan is a very excellent, outstanding company. In terms of the business growth, it’s very healthy. But I think the current focus of Tantan should be on expanding their user base even further. On the other hand, YY does have a lot of monetization experience in terms of live showroom. So we will continue to discuss with Tantan in terms of experience sharing and maybe in the future for cooperation for the live streaming services as well. In terms of the content investment in verticals, the content is still very important for our ecosystem so we’ll continue to expand a lot of content categories. For example, we have launched more UGC content in terms of the outdoor. And that, outdoor itself doesn’t require a lot of investment cost, so that’s why you see we actually achieved cost efficiency for content generation. And by the way, let me also add from my CFO perspective. The reason for gross margin expansion in the second quarter is mostly due to the margin expansion from Huya as Huya’s user growth is very healthy and Huya CDN and broadband cost has operating leverage. So that’s why Huya’s gross margin has been improving quite a lot in the second quarter.

Operator

Our next question is coming from the line of Jialong Shi from Nomura.

Jialong Shi

I have a housekeeping question for, about Huya. And I just wonder, for your Huya business, do you have to pay Tencent or other game operators for the game content streamed on Huya platform? And if you do have to pay for some of the content, just wonder what’s the pricing trend for such paid content. [Foreign Language]

Rong jie Dong

[Foreign Language]

Bing Jin

So for the live show host on Huya to broadcast games, we actually don’t need patent or license fee. Only when we broadcast the official kind of competition or games that we need a copyright or patent fee. But I think the general pattern is it will increase gradually, so it wouldn’t impose a lot of impact on Huya’s financials.

Operator

Our next question is coming from the line of Tian Hou from T.H. Capital. Please ask your question.

Tian Hou

Hi, David and team, congratulation on the good question. [Foreign Language] So I translate. So it’s really about the live broadcasting market landscape. In the last period -- in the last 1.5 years period of time, there are many players doing the live broadcasting in similar way of YY. However, some of them we haven’t really heard them in the last several months. So I wonder how David is foreseeing the future changes of this live broadcasting market. And is YY a market consolidator? If it is, what is YY’s key competitive advantage? So that’s my question. Thank you.

David Xueling Li

[Foreign Language]

Bing Jin

Okay. So I’ll do the translation. So by nature, live show industry is all about social community, which is different from social network and different from stranger-driven community or social network. It is somewhere in the middle. So if we look at history of the evolution of social community, starting from BBS all the way to live show these days, it has several features as follows. The first feature is that every social community needs to have its own unique culture or behavior and also common understanding or a mission among the users within that community. And that’s why a single user cannot change a community so easily. That’s the first feature. Second feature, social community cannot grow so fast because if, all a sudden, there’s a massive traffic into the ecosystem, that will dilute the value and culture of that community and it actually start losing people. So that’s why last year, we see a lot of people, a lot companies, a lot of player putting a lot of money, driving a lot of traffic into this live show social community, but suddenly they collapsed due to the reason I mentioned. So that’s the fact. If we look forward, I think the companies with good amount of traffic and also have the patience to operate a community will finally win the game. And that’s where YY is positioned at. As I mentioned at the very beginning, we are focusing on 2 key tasks: one is to continuously increase the participant behavior from the users into that social community; secondly, trying to get new user traffic across different demographics and really operate the community to the maximum efficiency.

Operator

Our next question is coming from the line of Daniel Chen from JP Morgan.

Daniel Chen

My question is related to Huya. Actually, recently, our competitor, DouYu, has launched a fan festival focusing on the online music host, and they received very good results in the monetization. So I was wondering, what is our strategy on this? And then secondly, on our Huya platform, could management provide the revenue breakdown between the pure gaming host and also the online music kind of host? And what is the monetization profile of each? [Foreign Language]

Rong jie Dong

[Foreign Language]

Bing Jin

So the first question is regarding the offline activities. We will definitely try some method to enter into that offline activities. Secondly, regarding the revenue breakdown, I would say the revenue from game live showroom and music and dance live showroom is similar. And we do think music live showroom is, a part of this, is that Huya can further develop and cultivate.

Operator

Our last question is coming from the line of Shawn Yang from Blue Lotus. Please ask your question.

Shawn Yang

Thank you, management. Thank you for taking my question. I think management mentioned a couple of times about the importance of young generation. I just want to know that -- how do you define young generation? What’s the percentage of young generation in your total user base? And more importantly, what are the key differences between existing user and -- in terms of exposure on the video? And is the current live streaming a very good monetization for young-generation user? [Foreign Language]

David Xueling Li

[Foreign Language]

Unidentified Company Representative

[Foreign Language]

Bing Jin

So the first point is our definition for younger generation is people born after 1995 or even 2000, so really millennial generation. And the characteristics of this younger generation are they are born with Internet so they have higher propensity to try new things and participate. So that’s why we do think even if short-form video might be difficult for older generation but they are a perfect product to cater for the demand of this younger generation. That’s why we are trying a lot of video-based and audio or social-based activities or features to cater for the younger generation. Secondly, in terms of the product nature, product feature and our promotion channels, the difference of this younger generation demographic, we are using different ways of targeting them. For example, within YY Live and also within Happy Werewolf Kill, we might use different channels to touch this younger generation and make sure that our content marketing match their characteristics.

Operator

We are at the end of today’s conference. I would now like to hand the conference back to management for closing remarks.

Bing Jin

[Foreign Language]

David Xueling Li

[Foreign Language]

Bing Jin

So, I don’t have much things to add, I’m translating for David, but I want to reiterate that we, our strategy, as I laid out in the conference call, and I’m very pleased to be back and talk to old and new friends. If you have any questions for live streaming industry or YY, please feel free to reach out to me. I’m more than glad to communicate with you. So I would also like to add, from my CFO perspective, that we had a solid quarter, second quarter, and we are looking forward to even stronger quarter next, for the third quarter. And I look forward to talk to all of you continuously down the road. Thank you so much for your time.

Operator

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