JOYY Inc. (formerly YY Inc.) — FY2017 Form 20-F
Reporting period: Fiscal year ended December 31, 2017. Although the request refers to 2017 Q4, this filing is an annual report; it does not provide a complete standalone fourth-quarter income statement or cash-flow statement. Financial statements are prepared under U.S. GAAP. Unless noted, amounts below are RMB.
Business context and period highlights
JOYY operated YY Live and Huya, China-focused live-streaming platforms, alongside online games, memberships and smaller education and advertising activities. Its business was increasingly dependent on live streaming, which represented 92.0% of FY2017 revenue. The company reported 76.5 million average monthly mobile active users in Q4, up 36.6% year over year; its mobile applications generated 53.4% of Q4 live-streaming revenue, versus 49.6% a year earlier.
Key financial metrics
Amounts are RMB billions except per-ADS data. U.S. dollar figures are included where reported; translation is at the filing’s convenience rate.
| Metric | FY2017 | FY2016 | Change / context |
|---|---|---|---|
| Net revenue | 11.595 (US$1.782bn) | 8.204 | Up 41.3% |
| Live-streaming revenue | 10.671 | 7.027 | Up 51.9%; 92.0% of total revenue |
| Online-games revenue | 0.544 | 0.634 | Down 14.3%; 4.7% of total revenue |
| Gross profit / margin | 4.568 / 39.4% | 3.101 / 37.8% | Margin improved |
| Operating income / margin | 2.699 / 23.3% | 1.771 / 21.6% | Margin improved |
| Net income attributable to JOYY / margin | 2.493 / 21.5% | 1.524 / 18.6% | Up from prior year |
| Basic / diluted net income per ADS | RMB42.03 / RMB41.33 | RMB27.04 / RMB26.40 | Each ADS represents 20 Class A shares |
| Net cash from operating activities | 3.718 | 2.421 | Cash generation increased |
| Net cash used in investing activities | (4.038) | (1.783) | Primarily higher short-term deposit placements |
| Cash and cash equivalents at year-end | 2.617 | 1.580 | Short-term deposits were a further 6.000 |
At December 31, 2017, current assets were RMB10.129bn and current liabilities RMB3.146bn. In addition to cash and short-term deposits, the balance sheet included RMB1.000bn of restricted short-term deposits and RMB0.125bn of short-term investments. These restricted funds should not be treated as freely available liquidity. Total liabilities were RMB3.221bn; year-end short-term bank loans were RMB0.588bn, and RMB6.5m equivalent of convertible notes remained outstanding. The company had repurchased US$399m principal amount of its US$400m notes in April 2017.
Material changes versus FY2016
- Revenue growth was led by live streaming: paying users increased from approximately 11.0m to 16.6m, while reported live-streaming ARPU increased from RMB637.8 to RMB643.2.
- Revenue mix became more concentrated: live streaming rose from 85.7% to 92.0% of revenue. Online games, memberships and other revenue declined to RMB0.544bn, RMB0.198bn and RMB0.182bn, respectively.
- Cost of revenue rose 37.7% to RMB7.026bn, slower than revenue growth; content and revenue-sharing costs increased 51.1% to RMB5.727bn. Gross margin consequently improved to 39.4% from 37.8%.
- Operating expenses rose 29.3% to RMB2.020bn. Sales and marketing increased 78.5% to RMB0.691bn, primarily from mobile-product promotion; R&D increased 15.8% to RMB0.782bn.
- Operating cash flow increased to RMB3.718bn. Investing outflow grew to RMB4.038bn, mainly reflecting short-term deposit placements. Financing cash flow was positive RMB1.393bn, including proceeds from the August 2017 share offering.
- Year-end total assets increased to RMB14.459bn from RMB9.786bn, and total shareholders’ equity increased to RMB10.713bn from RMB5.053bn.
Outlook, commentary, risks and unusual items
- Management said cash, cash equivalents and expected operating cash flow should cover working-capital and capital-expenditure needs for the next 12 months. No quantified revenue or earnings guidance was provided. The filing says operating expenses may increase in absolute terms; marketing and R&D spending are expected to remain investment areas.
- Management expects the business to remain substantially dependent on live streaming. Risks include intense competition, changes in user demand and monetization, talent and content costs, and the weaker PC-based online-games market. User and paying-user measures count accounts rather than verified unique people and may overstate individuals.
- The company operates key PRC internet businesses through variable-interest-entity contractual arrangements because of foreign-ownership restrictions. Regulatory or legal challenges to these arrangements could impair control over, or consolidation of, major operating entities. PRC content, licensing, data, foreign-exchange and dividend restrictions also pose risks.
- In November 2017, a court ordered payment of RMB20m in a copyright case brought by NetEase concerning live broadcasts of Fantasy Westward Journey. The judgment was under appeal at filing, and JOYY had recorded an estimated RMB20m loss contingency.
- In March 2018, Tencent invested US$461.6m in Huya and received a right to increase its voting interest to 50.1% during a specified period in 2020–2021. If exercised, JOYY could lose control and cease consolidating Huya. This was a post-year-end event, not a FY2017 transaction.
- Other items include a RMB37.989m gain from a 2017 subsidiary disposal, RMB45.861m gain on partial disposal of investments, and RMB43.205m investment impairment. Goodwill impairment was RMB2.527m, versus RMB17.665m in 2016.
- JOYY reported no common-share dividends paid and no present plan to pay dividends in the foreseeable future. Management and the auditor concluded that internal control over financial reporting was effective as of December 31, 2017; the auditor issued an unqualified opinion.
Important facts for investors to verify
- Whether live-streaming user growth, paying-user conversion and ARPU can sustain revenue growth as the company becomes more concentrated in this segment.
- How content-sharing costs and mobile marketing investment affect margins and operating cash flow.
- The availability and maturity of cash and deposits, including the restrictions and collateral attached to the RMB1.000bn restricted deposit balance.
- The final outcome and potential exposure in the NetEase copyright litigation, and any further content-related penalties or claims.
- The enforceability and regulatory status of the VIE arrangements, and the effect of Tencent’s Huya investment and potential voting-control right.
- Whether reported user-account metrics fairly reflect unique users and whether subsequent disclosures provide standalone quarterly results consistent with the annual figures.