JOYY Inc. (filed as YY Inc.) — FY 2018 Form 20-F
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone 2018 Q4 filing; quarterly financial statements are not provided in the supplied text. Financial statements are audited and prepared under U.S. GAAP. Amounts below are RMB unless otherwise stated.
Business context
YY’s principal businesses were live streaming through YY Live and Huya, monetized mainly by sales of virtual items. The company also operated smaller online games, membership, advertising, education and financing activities. It reported two operating segments, YY Live and Huya. Live streaming represented 94.4% of 2018 net revenue.
For Q4 2018, YY Live and Huya together had 90.4 million mobile average monthly active users, up 18.1% year over year; mobile applications generated 64.0% of live-streaming revenue, versus 53.4% in Q4 2017. Hago reported 20.9 million average monthly active users in Q4. Bigo, not yet consolidated in FY 2018, reported 59.4 million mobile average monthly active users across live streaming and short-form video.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 | Change / context |
|---|---|---|---|
| Net revenue | RMB 15.764 billion | RMB 11.595 billion | +36.0% |
| Live-streaming revenue | RMB 14.878 billion | RMB 10.671 billion | +39.4%; 94.4% of revenue |
| Other revenue | RMB 885.9 million | RMB 923.8 million | -4.1%, principally reflecting lower online-game revenue |
| Gross profit / margin | RMB 5.746 billion / 36.5% | RMB 4.568 billion / 39.4% | Margin contracted 2.9 percentage points |
| Operating income / margin | RMB 2.640 billion / 16.7% | RMB 2.699 billion / 23.3% | Income down 2.2%; margin contracted |
| Net income | RMB 2.116 billion | RMB 2.508 billion | Down 15.7% |
| Net income attributable to common shareholders | RMB 1.642 billion; RMB 25.64 per ADS basic | RMB 2.493 billion; RMB 42.03 per ADS basic | Down 34.2%; each ADS represents 20 common shares |
| Operating cash flow | RMB 4.465 billion | RMB 3.718 billion | Up 20.1% |
| Cash, cash equivalents and restricted cash | RMB 6.004 billion | RMB 3.617 billion | Year-end balance; 2018 had no restricted short-term deposits |
| Additional deposits and short-term investments | RMB 7.327 billion short-term deposits; RMB 1.000 billion long-term deposits; RMB 979.1 million short-term investments | RMB 6.000 billion short-term deposits; none long-term; RMB 124.6 million short-term investments | Separate from cash and cash equivalents |
Cost of revenue rose 42.6% to RMB 10.017 billion, faster than revenue, as revenue-sharing and content costs increased 44.4% to RMB 8.273 billion and bandwidth costs rose 39.0% to RMB 967.4 million. Operating expenses rose 59.6% to RMB 3.225 billion: R&D increased 52.5%, sales and marketing 66.3%, and general and administrative expense 62.2%. Share-based compensation totaled RMB 648.0 million, versus RMB 257.7 million in 2017.
Net cash used in investing activities was RMB 6.295 billion, including placements in deposits and investments and acquisition or strategic-investment spending; net cash from financing activities was RMB 4.167 billion, reflecting Huya financing and IPO proceeds, borrowings and repayments. Capital expenditures were RMB 392.8 million. Year-end total assets were RMB 25.768 billion, current assets RMB 16.490 billion, current liabilities RMB 3.853 billion, and total liabilities RMB 3.972 billion. Year-end convertible bonds were RMB 6.9 million; the remaining notes were repaid April 1, 2019. The company stated cash and expected operating cash flow would cover working-capital and capital-expenditure needs for the next 12 months.
Material changes and unusual items
- Live-streaming paying users increased from 16.6 million to 19.8 million; reported ARPU rose from RMB 643.2 to RMB 751.2. The filing cautions that user and payer counts are accounts, not necessarily unique individuals.
- Common-shareholder earnings included subsidiary preferred-share effects: RMB 489.3 million deemed dividend, RMB 73.2 million accretion to redemption value and RMB 4.6 million cumulative dividend. These reduced income attributable to common shareholders relative to net income attributable to the controlling interest.
- FY 2018 included a RMB 2.285 billion fair-value loss on derivative liabilities associated with Huya preferred shares and a RMB 1.689 billion gain on fair-value changes of investments. The preferred-share derivatives were derecognized when Huya completed its IPO. These items made reported earnings materially sensitive to valuations and financing terms.
- In March 2019, YY acquired the remaining 68.3% of Bigo for US$343.1 million cash and 352,215,075 YY Class A and Class B shares; Bigo became wholly owned after year-end. The 2018 accounts did not consolidate Bigo. YY’s prior Bigo investment contributed to the 2018 fair-value gain.
- Huya completed its IPO in May 2018, with net proceeds of approximately US$190.1 million to Huya. Tencent has a right exercisable from March 2020 to March 2021 to acquire enough additional Huya shares to reach 50.1% of voting power; exercise could cause YY to lose control and cease consolidating Huya.
- Management agreed in March 2019 to contribute YY’s online-game business to a third party in exchange for an equity interest; completion was subject to customary conditions, and the filing expected the game segment would no longer be consolidated after closing.
- The company reported a RMB 20 million provision for the NetEase copyright case; an appeal remained unresolved. It also disclosed aggregate RMB 0.2 million of 2018 warnings and fines for inappropriate platform content.
Outlook, risks and controls
Management expected live streaming to remain the main revenue source and anticipated continued growth in live-streaming revenue, paying users and monetization opportunities. It also expected higher content-sharing costs, bandwidth spending, R&D and marketing expenses, particularly for mobile products and overseas initiatives. No specific revenue, earnings or margin guidance was provided. Management said it was not aware of other trends reasonably likely to materially affect results beyond those disclosed in the filing.
Key risks include dependence on live streaming and virtual-gift monetization; intense competition and talent-retention costs; content, licensing and data-protection regulation; and the PRC variable-interest-entity structure, whose enforceability and future regulatory treatment are uncertain. Substantially all consolidated revenue came from PRC VIEs. Other material exposures include credit risk in the newer lending business, currency and capital-transfer restrictions, preferential-tax qualification, and potential loss of control of Huya. A corporate lessee failed to make a January 2019 payment on a financing receivable of approximately RMB 199 million; YY sued and stated collateral value exceeded the receivable, but recovery remains a matter to monitor. The company said it would not further develop corporate lending to avoid additional risk.
The independent auditor issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective as of December 31, 2018. The filing also warns that the PCAOB could not inspect the company’s China-based auditor at the time.
Most important facts for investors to verify
- Whether revenue and earnings growth can continue as live streaming rises to 94.4% of revenue and gross and operating margins contract.
- How much of FY 2018 earnings depended on investment fair-value gains, preferred-share accounting and other non-operating items; assess common-shareholder earnings separately from net income.
- Collection, collateral and legal status of the approximately RMB 199 million corporate financing exposure, alongside the broader quality and performance of the new loan portfolio.
- Final outcome of the NetEase appeal and status of the proposed online-game business contribution.
- Whether Bigo integration, share issuance and overseas expansion deliver returns, and whether Tencent exercises its Huya voting-control option.
- Whether PRC authorities continue to accept the VIE arrangements and whether licenses, content controls, data practices and cross-border cash transfers remain compliant.
- Reconcile liquidity and debt after year-end: the filing describes a HKD 320 million bank borrowing secured by RMB 300 million, as well as a US$100.25 million loan repaid in April 2019; confirm the status of any other facilities and restrictions.