JOYY Inc. (then YY Inc.) — FY2014 Form 20-F
Reporting period: Year ended December 31, 2014. The filing is an annual report; it does not provide a clear standalone 2014 Q4 income statement or cash-flow value. Financial statements are prepared under U.S. GAAP. Amounts below are RMB unless stated otherwise.
Business context
YY operated a China-focused interactive social platform across PC, browser and mobile, monetizing mainly through internet value-added services (IVAS), including online music and entertainment, games, dating, live game broadcasting and subscriptions. Online advertising was a smaller revenue source. Average monthly active users reached 117.4 million in Q4 2014; the company reported 861.4 million registered accounts at year-end, noting that accounts may exceed unique individuals.
Financial performance and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net revenue | RMB 3,678.4 million (US$592.8 million) | RMB 1,823.5 million |
| Gross profit / margin | RMB 1,829.2 million / 49.7% | RMB 941.5 million / 51.6% |
| Operating income / margin | RMB 1,078.8 million / 29.3% | RMB 476.0 million / 26.1% |
| Net income attributable to YY Inc. | RMB 1,064.5 million (US$171.6 million) | RMB 477.7 million |
| Operating cash flow | RMB 1,301.4 million | RMB 891.2 million |
| Cash and cash equivalents | RMB 475.0 million | RMB 729.6 million |
| Short-term deposits | RMB 4,214.6 million | RMB 1,432.9 million |
| Total current assets / current liabilities | RMB 5,425.1 million / RMB 1,090.6 million | RMB 2,397.1 million / RMB 701.3 million |
Revenue grew 101.7% and net income more than doubled. Gross margin declined 1.9 percentage points as content and revenue-sharing costs grew rapidly, while operating margin improved as operating expenses grew more slowly than revenue. FY2014 net income included RMB 36.7 million of other non-operating income from transferring the Weihui service to Bigo.
Net cash used in investing activities was RMB 3,954.1 million, driven chiefly by net placements of short-term deposits, acquisitions and investments, and property and equipment spending. Capital expenditures were RMB 744.7 million, including a major office-building purchase commitment/payment. Financing cash flow included RMB 2,402.5 million net proceeds from the convertible notes. Management said cash and expected operating cash flow should cover working capital and capital expenditure needs for the next 12 months.
Debt included US$400 million of 2.25% convertible senior notes due 2019, reported at RMB 2,448.0 million at year-end. Holders may require repurchase on April 1, 2017 or following specified fundamental changes. A separate RMB 183.0 million long-term payable arose from contingent acquisition consideration. The filing reports RMB 100 million of restricted deposits pledged in connection with litigation.
Revenue mix and material changes
| Revenue category | FY2014 | FY2013 | Change |
|---|---|---|---|
| Online music and entertainment | RMB 2,109.5 million; 57.3% of revenue | RMB 852.9 million; 46.8% | +147.3% |
| Online games | RMB 811.7 million; 22.1% | RMB 602.1 million; 33.0% | +34.8% |
| Other IVAS | RMB 609.8 million; 16.6% | RMB 205.2 million; 11.2% | +197.2% |
| Online advertising | RMB 147.3 million; 4.0% | RMB 163.3 million; 9.0% | -9.7% |
IVAS reached 96.0% of total revenue, up from 91.0%. Paying users increased to 4.9 million from 3.2 million, and IVAS average revenue per paying user rose to RMB 726.0 from RMB 525.2. The five largest online games’ share of game revenue fell to 36.1% from 45.2%, though game revenue remained dependent on third-party titles and licensing arrangements.
Cost of revenue increased 109.7% to RMB 1,849.1 million, including revenue-sharing and content costs of RMB 1,134.0 million, up 155.4%. R&D expense rose 61.5% to RMB 431.2 million; sales and marketing expense rose to RMB 102.5 million from RMB 25.0 million, largely due to increased promotion; G&A rose 11.2% to RMB 223.0 million.
Outlook, risks and unusual items
- Outlook: No quantified revenue or earnings guidance was provided. Management expected continued investment in mobile products, technology, marketing and new business lines; it anticipated higher absolute costs, including content-sharing, bandwidth, payroll and R&D costs. It said operating expenses were expected to rise in absolute terms but decline as a share of revenue in the near term.
- Acquisitions: 2014 education acquisitions added RMB 300.4 million of goodwill. Zhengrenqiang and DuBooker included RMB 183.0 million of contingent consideration, dependent on 2015–2017 performance. The company also acquired online game developer Zhuque. Acquired businesses contributed immaterial post-acquisition revenue in 2014, according to the filing.
- Litigation: NetEase sought RMB 100 million over alleged copyright infringement relating to live broadcasting of Fantasy Westward Journey; the company said it could not reliably estimate any loss. YY also pursued an approximately RMB 84 million claim against an advertising agent for unpaid fees and damages, and filed a RMB 20 million copyright/unfair-competition claim against Douyu.
- Structural and regulatory exposure: Substantially all China operations are conducted through VIE contractual arrangements, not direct ownership. The filing highlights uncertainty around PRC foreign-investment rules, a proposed Foreign Investment Law, online-content/game regulation, licenses, virtual currency and the enforceability of VIE contracts.
- Other risks: Dependence on IVAS, performers and game developers; competition in live broadcasting; user-account metrics that may overstate unique individuals; mobile monetization uncertainty; payment-provider and system reliability; RMB exchange controls; and possible dilution from share-based awards. The company reported effective internal controls and an unqualified audit opinion, while noting that its China-based auditor was not then subject to PCAOB inspection.
Most important facts for investors to verify
- Confirm the annual period is FY2014, not a standalone Q4 report, and obtain quarterly data separately if needed.
- Assess whether IVAS concentration and the rapid shift toward music and entertainment revenue are sustainable, and track paying users and ARPU definitions.
- Reconcile liquidity across cash, short-term and restricted deposits, including location, accessibility and restrictions on moving PRC funds offshore.
- Review the convertible notes’ 2017 holder put, 2019 maturity and potential dilution, alongside the acquisition contingent payments.
- Check developments and potential financial exposure in the NetEase case and the company’s other material claims.
- Monitor VIE enforceability, regulatory/licensing developments, acquisition integration and the recoverability of the newly recorded goodwill.