JOYY Inc. (then YY Inc.) — FY2016 Form 20-F
Period note: This is an annual report for the fiscal year ended December 31, 2016, not a standalone Q4 filing. It provides certain fourth-quarter operating metrics, but does not give a clear standalone Q4 income statement or cash flow. Financial amounts below are in RMB unless stated otherwise; U.S. dollar equivalents use the filing’s year-end rate.
Business context and reporting period
YY operated live-streaming platforms YY Live and Huya, alongside online games, memberships, education and advertising. It reported under U.S. GAAP. The filing changed the revenue presentation to live streaming, online games, membership and others, with prior years recast; this did not change total revenue.
At Q4 2016, average monthly active accounts were 96.1 million on PC clients and 56.0 million on mobile clients. Mobile applications generated 49.6% of live-streaming revenue in the quarter, up from 33.4% a year earlier. These account-based measures may exceed unique individuals.
Financial and operating performance
| Metric | FY2015 | FY2016 | Change / context |
|---|---|---|---|
| Total net revenue | RMB5,897.2m | RMB8,204.1m (US$1,181.6m) | Up 39.1% |
| Live-streaming revenue | RMB4,539.9m | RMB7,027.2m | Up 54.8%; 85.7% of total revenue |
| Online-games revenue | RMB771.9m | RMB634.3m | Down 17.8% |
| Membership revenue | RMB291.3m | RMB284.9m | Down 2.2% |
| Gross profit / margin | RMB2,317.5m / 39.3% | RMB3,100.6m / 37.8% | Margin declined as content and revenue-sharing costs rose |
| Operating income / margin | RMB1,162.0m / 19.7% | RMB1,771.5m / 21.6% | Up 52.5% |
| Net income | RMB998.3m | RMB1,511.6m | Net income attributable to YY Inc. was RMB1,523.9m |
| Basic / diluted net income per ADS | RMB18.37 / RMB17.96 | RMB27.04 / RMB26.40 | One ADS represents 20 Class A shares |
Live-streaming paying accounts rose to approximately 11.0 million from 5.8 million, while live-streaming ARPU fell to RMB637.8 from RMB780.5. Online-games paying accounts were approximately 1.189 million, and that business faced continued weakness in China’s web-game market. The five most popular games supplied 37.2% of online-games revenue, down from 41.0%.
Revenue-sharing fees and content costs increased 61.8% to RMB3,790.6m. Total cost of revenue rose 42.6% to RMB5,103.4m. R&D expense rose 23.0% to RMB675.2m; sales and marketing rose 23.8% to RMB387.3m; and general and administrative expense rose 34.6% to RMB482.4m. The filing cites content investment, user engagement, mobile promotion and business expansion as key drivers.
Cash flow, debt and liquidity
- Operating cash flow was RMB2,421.1m, versus RMB1,823.4m in 2015. Investing cash flow was negative RMB1,783.1m, mainly reflecting short-term deposit placements, acquisitions and investments; financing cash flow was positive RMB10.7m.
- Year-end cash and cash equivalents were RMB1,579.7m and short-term deposits RMB3,751.5m. Current assets were RMB5,970.4m against current liabilities of RMB4,690.4m.
- The US$400m, 2.25% convertible notes were classified as current at year-end because holders could put them in April 2017. On April 1, 2017, the company repurchased US$399m principal; US$1m remained outstanding. Interest expense for 2016 was RMB81.1m.
- After year-end, the company drew US$30m and US$60m in bank loans, due in 2018, and pledged RMB500m of deposits as collateral for each loan. Management said existing cash and expected operating cash flow should cover working capital and capital expenditure for the next 12 months.
- Capital expenditures were RMB237.8m in 2016, compared with RMB2,197.0m in 2015, when land and office-related spending was significant. The company reported no share repurchases in 2016.
Material changes, outlook and risks
- Portfolio and reported earnings: The company sold control of Shanghai Beifu and Beijing Xingxue, retaining minority stakes. These disposals generated a combined reported gain on deconsolidation and disposal of RMB104.0m; the Xingxue disposal itself generated a RMB127.4m gain, while Beifu’s disposal generated a RMB23.5m loss. Goodwill impairment was RMB17.7m, compared with RMB310.1m in 2015; impairment of investments was RMB80.1m. Such items affect comparability.
- Management outlook: No numerical revenue or earnings guidance was provided. Management expected operating expenses to rise in absolute terms, while declining as a share of revenue, and anticipated continued increases in content, bandwidth, staffing and mobile-promotion spending.
- Business concentration: Live streaming’s 85.7% revenue share makes results sensitive to user demand, paying conversion, ARPU, talent retention, competition and content costs. Mobile live-streaming ARPU was below the overall live-streaming ARPU in Q4.
- China structure and regulation: Most operations depend on contractual VIE arrangements rather than direct ownership of key operating entities. The filing warns that regulatory action, changing rules or unenforceable contracts could disrupt operations or prevent consolidation. Content, live-streaming, gaming and licensing compliance are material risks.
- Litigation and unusual contingencies: NetEase sought RMB100m in a pending copyright case concerning streamed gameplay of Fantasy Westward Journey; the company said the outcome could not be reliably estimated. The filing also reports prior small fines for inappropriate content and a prior fine relating to game lucky-draw features.
- Other exposures: The company reported foreign-exchange risk, limits on moving funds from China, and restrictions on PRC subsidiaries’ distributions. It paid no dividends and had no foreseeable dividend plan. Management and the auditor concluded internal control over financial reporting was effective at year-end 2016.
Important facts for investors to verify
- Confirm the annual rather than quarterly scope, and distinguish annual results from the limited Q4 operating metrics.
- Track whether live-streaming growth and paying-user expansion persist while ARPU declines and content-sharing costs rise.
- Reconcile the disposal gains, investment impairments, goodwill charges and differences between consolidated net income and income attributable to YY Inc.
- Verify the post-year-end repayment of the convertible notes, the terms and collateral of the US$90m bank loans, and the location and accessibility of cash and deposits.
- Monitor the RMB100m NetEase claim, VIE enforceability and regulatory developments affecting online content, live streaming, games and licenses.
- Interpret user and paying-account figures cautiously: the filing states that multiple accounts may represent a single individual.