JOYY Inc. (then YY Inc.) — FY2015 Form 20-F
Reporting period: Fiscal year ended December 31, 2015; filed April 28, 2016. Although the request metadata specifies 2015 Q4, this is an annual filing and the supplied text does not provide a complete standalone fourth-quarter income statement or cash-flow statement. Financial statements are audited and prepared under U.S. GAAP. Amounts below are RMB unless stated otherwise.
Business context
YY operated an interactive social platform in China across PC, web and mobile, with music and entertainment, online games, dating, live game broadcasting and education. Internet value-added services (IVAS) generated 96% of FY2015 revenue. Average monthly active users were 140.7 million in Q4 2015, up 19.8% year over year. The company reported that Mobile YY generated 45.4% of music and entertainment revenue in Q4 2015, versus 14.4% in Q4 2014.
Financial performance and liquidity
| Metric | FY2014 | FY2015 | Change / context |
|---|---|---|---|
| Net revenue | RMB3.678bn | RMB5.897bn (US$910.4m) | +60.3% |
| Gross profit / margin | RMB1.829bn / 49.7% | RMB2.318bn / 39.3% | Margin down 10.4 percentage points |
| Operating income / margin | RMB1.079bn / 29.3% | RMB1.162bn / 19.7% | Income +7.7%; margin down 9.6 points |
| Consolidated net income / margin | RMB1.064bn / 28.9% | RMB998.3m / 16.9% | Down 6.2% |
| Net income attributable to YY Inc. | RMB1.064bn | RMB1.033bn (US$159.5m) | Down 2.9%; differs from consolidated net income due to non-controlling interests |
| Operating cash flow | RMB1.301bn | RMB1.823bn (US$281.5m) | +40.1% |
| Cash and cash equivalents | RMB475.0m | RMB928.9m | At year-end |
| Short-term deposits | RMB4.215bn | RMB1.895bn | Restricted deposits additionally totaled RMB389.2m |
| Total assets / current liabilities | RMB6.863bn / RMB1.091bn | RMB7.328bn / RMB1.384bn | Current assets were RMB3.630bn at year-end 2015 |
Revenue growth was led by online music and entertainment (RMB3.320bn, +57.4%), online dating (RMB651.0m, +235.3%) and other IVAS (RMB918.0m, +120.8%). Online games declined 4.9% to RMB771.9m. Paying users rose to 7.2 million from 4.9 million, while IVAS ARPU increased to RMB783.3 from RMB726.0.
Cost of revenue grew 93.6% to RMB3.580bn, faster than revenue, chiefly reflecting revenue-sharing and content costs of RMB2.343bn (+106.6%). Bandwidth costs rose to RMB570.2m. Sales and marketing expense increased 205.2% to RMB312.9m, partly on mobile promotion; R&D expense rose 27.3% to RMB548.8m.
FY2015 investing cash outflow was RMB1.048bn and financing cash outflow RMB337.1m. Capital expenditures were RMB2.197bn, including RMB1.861bn for land-use rights for future office space in Guangzhou. Financing outflow included repurchases of 3.1 million ADSs for aggregate consideration reported as US$169.5m. Year-end convertible notes had US$400m principal, 2.25% interest and an April 2019 maturity; holders may require repurchase in April 2017. The filing also reports 2015 bank borrowing proceeds and repayments; a short-term borrowing was repaid using deposits.
Material changes, unusual items and outlook
- Gross margin contracted as content and revenue-sharing costs grew faster than sales. Online games’ share of revenue fell to 13.1% from 22.1%; music and entertainment remained the largest source at 56.3%.
- FY2015 included RMB310.1m of goodwill impairment, principally associated with 100 Online and Beifu, whose performance missed expectations amid competition and departures of key personnel. A RMB292.5m favorable fair-value change in contingent consideration partly offset the charge. The two items substantially offset one another in reported operating expenses.
- Management said existing cash and expected operating cash flow should cover working capital and capital expenditure needs for the next 12 months, while noting that acquisitions or changing conditions could require additional funding. It expected continued growth in content-sharing, bandwidth and staffing costs; increased near-term marketing investment, especially for mobile and new initiatives; and further spending to refurbish the future office space. No quantitative revenue or earnings guidance is provided.
- The company proposed no dividend and said it intended to retain earnings. A non-binding July 2015 proposal by the chairman and CEO offered US$68.50 per ADS in a proposed going-private transaction; a special committee was formed, but completion was not assured.
- Material risks include reliance on IVAS and virtual-item monetization; concentration in a small number of popular games (the top five accounted for 41% of online-game revenue); competition and talent/content-provider costs; and China regulatory and VIE-structure uncertainty. The filing also describes RMB100m in damages sought by NetEase in a copyright case concerning Fantasy Westward Journey; management said it could not reliably estimate any potential loss. YY separately brought an antitrust action and filed claims against three game commentators.
- Management reported effective disclosure controls and internal control over financial reporting as of year-end; the independent auditor also issued an effective-controls opinion. The auditor noted that PCAOB inspection access in China was restricted.
Most important facts for investors to verify
- Whether revenue growth can translate into steadier margins as revenue-sharing and content costs rise.
- Current performance, carrying values and contingent-payment consequences for 100 Online, Beifu and the education business after the FY2015 impairments.
- Cash availability and restrictions: distinguish cash, short-term deposits and pledged deposits, and assess the location and remittance limits on PRC-held funds.
- Convertible-note terms, including the 2017 holder put, 2019 maturity and any effect of a fundamental change or going-private transaction.
- Progress and terms of the proposed going-private transaction, and the effects of the dual-class voting structure and controlling shareholders’ influence.
- Developments in the NetEase copyright litigation, other legal claims, and PRC rules affecting the VIE structure, licenses, online content and virtual currency.
- Reconcile reported consolidated net income of RMB998.3m with RMB1.033bn attributable to YY Inc.; confirm the effect of non-controlling interests and the significant impairment and contingent-consideration entries.