JOYY Inc. annual report, Q4 FY2012

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JOYY Inc. (then YY Inc.) — FY2012 Form 20-F

Period: Fiscal year ended December 31, 2012. This is an annual report, not a standalone 2012 Q4 report; the filing does not provide a clear set of fourth-quarter-only financial results. Financial statements are prepared under U.S. GAAP. Unless stated otherwise, amounts below are RMB.

Business context

YY operated a China-focused real-time social platform spanning PC software, web portals and mobile applications. It generated revenue mainly from internet value-added services (IVAS)—online games, YY Music and memberships—and online advertising. The company completed its U.S. IPO in November 2012.

Financial and operating performance

  • Revenue: RMB820.0 million (US$131.6 million), up 156.5% from RMB319.7 million in 2011. IVAS was RMB702.4 million, up 202.3%; advertising was RMB117.6 million, up about 35%.
  • Revenue mix: Online games contributed RMB332.3 million (40.5% of revenue); YY Music RMB286.4 million (34.9%); other IVAS RMB83.7 million (10.2%); advertising about 14%.
  • Profit and margins: Gross profit was RMB403.9 million, a 49.3% gross margin, versus RMB137.0 million and 42.8% in 2011. Operating income was RMB102.9 million (12.5% margin), compared with an operating loss of RMB99.5 million in 2011. Net income attributable to YY Inc. was RMB89.2 million (US$14.3 million), versus a net loss of RMB83.2 million; net margin was 10.9%.
  • EPS and preferred-share accounting: Basic earnings were RMB29.91 per ADS and diluted earnings RMB1.80 per ADS. The large gap reflects preferred-share redemption-value accounting and allocation to participating preferred holders: the filing reports RMB1,293.9 million of decretion to redemption value and RMB478.8 million allocated to preferred shareholders. Preferred shares converted to Class B common shares upon the IPO.
  • Cash flow: Operating cash flow was RMB356.9 million, versus RMB99.8 million in 2011. Investing cash flow was negative RMB498.5 million, largely reflecting placement of short-term deposits and capital investment; financing cash flow was positive RMB522.7 million, primarily from the IPO.
  • Liquidity and debt: Year-end cash and cash equivalents were RMB504.7 million and short-term deposits RMB897.7 million, totaling RMB1.402 billion. Current assets were RMB1.578 billion and current liabilities RMB366.4 million. The filing reports no long-term debt; operating lease commitments totaled RMB50.9 million.
  • Balance sheet: Total assets were RMB1.696 billion and shareholders’ equity RMB1.323 billion at year-end, compared with a shareholders’ deficit of RMB1.862 billion in 2011, following the IPO and preferred-share conversion.

Material changes versus 2011

  • Revenue growth and a shift toward IVAS drove the return to operating and net profitability. IVAS rose from 72.7% to 85.7% of revenue, while advertising’s share declined.
  • YY Music revenue increased from RMB52.9 million to RMB286.4 million. Online-game revenue doubled, while advertising grew more slowly.
  • Cost of revenue rose 127.8% to RMB416.1 million, including higher bandwidth costs (RMB145.0 million versus RMB75.1 million) and revenue-sharing fees (RMB109.3 million versus RMB6.8 million). Gross margin nevertheless expanded.
  • Research and development expense rose 65.4% to RMB176.7 million; total operating expenses rose 27.3% to RMB303.5 million. General and administrative expense fell 7.1%, mainly due to lower share-based compensation.
  • Registered accounts reached 457.0 million and monthly active users 69.7 million at year-end; growth rates slowed from 2011. These are account-based metrics and may exceed unique individuals.

Outlook, commentary and risks

  • Outlook: No numerical earnings or revenue guidance is provided. Management expected IVAS, including music and memberships, to remain an increasing share of revenue, while anticipating higher absolute spending on R&D, bandwidth, staffing and public-company compliance. Mobile YY had not yet been monetized.
  • Revenue concentration and execution: Management emphasized reliance on continued user engagement, successful monetization and third-party games, developers, performers and channel owners. A limited number of games and a small set of advertising customers represented significant concentration.
  • China structure and regulation: Substantially all operations depended on contractual arrangements with VIEs because of foreign-ownership restrictions. The filing cautions that authorities could challenge this structure, licenses, online content, virtual currency practices or other regulated activities.
  • Other risks: Competition, content and intellectual-property claims, system outages and payment-provider dependence, privacy and user-account measurement, foreign-exchange controls, and the ability to renew preferential tax treatment could affect results. The company also disclosed dual-class voting, with Class B shares carrying ten votes each, and potential dilution from equity awards.
  • Unusual items and contingencies: The company reported no material pending litigation, no capital commitments at year-end, and no material off-balance-sheet arrangements. It disclosed fines for certain regulatory issues in prior operations and identified no material weaknesses or significant deficiencies in internal control for 2012. The 2012 financial statements received an unqualified audit opinion.

Most important facts for investors to verify

  • Whether rapid IVAS growth, especially YY Music, is durable and supported by paying-user retention and sustainable revenue-sharing economics.
  • How much reported net income and per-ADS earnings reflect preferred-share conversion and allocation mechanics rather than recurring operating performance; compare basic and diluted figures.
  • The sustainability of cash generation after higher bandwidth, revenue-sharing, R&D and staffing costs, and the liquidity, maturity and accessibility of short-term deposits.
  • Revenue concentration in individual games and advertising customers, and the renewal terms and performance of third-party developer and performer arrangements.
  • The enforceability and regulatory status of VIE contracts, required operating licenses, and the ability to transfer cash from PRC entities to the offshore parent.
  • Potential dilution from outstanding awards and the effect of the ten-vote Class B shares on public shareholders’ influence.