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YY's Q4 Earnings Beat Estimates, Revenues Increase Y/Y

Zacks Equity Research

YY Inc. YY delivered fourth-quarter 2018 adjusted earnings of $1.87 per American depositary shares (ADS), which beat the Zacks Consensus Estimate by a penny.

Revenues totaled $674.9 million, which surpassed the Zacks Consensus Estimate of $641.7 million.

In domestic currency, adjusted earnings declined 11.4% to RMB12.86 per share while revenues of RMB 4.64 billion rose 28%.

YY Inc. Price, Consensus and EPS Surprise

YY Inc. Price, Consensus and EPS Surprise | YY Inc. Quote

Top-Line Details

The top-line growth can primarily be attributed to strong live streaming revenues, which increased 30.4% year over year to RMB4.39 billion, accounting for 94.6% of total net revenues in the reported quarter. Notably, Other revenues decreased 3.3% to RMB249.5 million.

The stellar performance of YY Live and HUYA contributed to the impressive top-line growth. Huya and YY Live contributed 67.2% and 32.8%, respectively to total live streaming revenues in the fourth quarter. Further, the year-over-year growth at YY Live and Huya was 10.2% and 108%, respectively.

Additionally, Mobile contributed 64% of YY’s live streaming revenues.

Mobile live streaming Monthly Active Users (MAUs) increased 18.1% year over year to 90.4 million. Live streaming paying users increased 36.6% to 8.9 million. The increase was due to engaged live streaming user base on the back of content delivered to accurately match user interests.

Mobile paying users constituted 75.7% of total live streaming paying users in the reported quarter.

Cost of revenues for YY Live and Huya increased 11.7% and 100% year over year to RMB1.75 billion and RMB1.27 billion, respectively. This was due to rise in revenue sharing fees and content costs. Total cost of revenues increased 37.2% year over year to about $3 billion in the reported quarter.

However, the increase in revenue sharing fees and content costs paid to performers and content providers was in line with the increase in live streaming revenues for both YY Live and Huya segments. Notably, revenue sharing fees and content costs increased to RMB2.56 billion in fourth-quarter 2018 from RMB1.83 billion in fourth-quarter 2017.

Moreover, bandwidth costs in the reported quarter were RMB246.5 million compared with RMB181.2 million in fourth-quarter 2017. The increase was due to growth in user base and quality improvements in the live streaming services.

HAGO, a game-oriented social media platform, which is available in 33 countries globally, has 20.9 million MAUs in the reported quarter. HAGO continues to be the most popular app on both App Store and Google Play in markets like Vietnam and Indonesia. This innovative product is one of the key catalysts of YY’s international expansion strategy.

Notably, YY was successful in retaining its users in the reported quarter. It enriched its content leveraging artificial intelligence (AI) technology and cross-channel promotions. Additionally, the company witnessed strength in user engagement (up 7%) owing to the deployment of visual recognition technology in its content distribution engine. Moreover, YY expects success in the international markets given the strength of its strategy and innovative products in the domestic marketplace.

Operating Details

Gross profit climbed 13.8% from the year-ago quarter to RMB1.63 billion. However, gross margin contracted 440 basis points (bps) to 35.1% in the third quarter, primarily due to higher revenue-sharing fees and content costs.

Operating expenses totaled RMB931.2 million, up 42.6% from the year-ago quarter. This was due to the company’s increased investment in marketing initiatives in domestic and global markets.

Research & development (R&D), sales & marketing (S&M) and general & administrative (G&A) expenses grew 17.6%, 117.6%, and 25.7%, respectively. As a percentage of revenues, R&D and G&A expenses contracted 60 bps and 10 bps respectively year over year. However, S&M expenses increased 290 bps year over year.

Non-GAAP operating income declined 14.1% year over year to RMB888.5 million. Non-GAAP operating margin contracted 940 bps on a year-over-year basis to 19.1%.

Balance Sheet & Cash Flow

As of Dec 31, 2018, YY had cash and cash equivalents of about RMB6 billion compared with RMB4.92 billion in the previous quarter.

Net cash from operating activities amounted to RMB2.12 billion compared with RMB822.4 million in the third quarter.

Recent Updates

In first-quarter 2019, YY acquired the remaining stake in Bigo Inc, a global Internet company that provides live streaming and video services, for about $1.45 billion. Earlier the company had approximately 32% stake in Bigo.

Notably, Bigo’s Bigo LIVE is a popular live streaming platform except in China and its short form video platform, LIKE, is popular globally. Additionally, the company’s user base and time spent on the short form video platform increased significantly in 2018.

The acquisition is expectedly to meaningfully expand YY’s global footprint. Additionally, the company may witness growth in subscriber base and revenues owing to its expanding global reach and the ability to monetize its services.

Moreover, YY entered into a strategic agreement with Shanghai Chuangsi to acquire about 30% equity interest in the latter. YY will obtain stake in the Chinese gaming company in exchange for its online game business, which accounted for less than 3% of YY segment’s total revenues in the reported quarter. Notably, the transaction is likely to be completed in the current quarter.

Q1 Guidance

YY expects net revenues to be between RMB4.01-RMB4.16 billion, representing year-over-year growth of 23.4% to 28%, excluding the acquisition of Bigo Inc.

The company is planning to strengthen its global footprint and add a variety of content to its live streaming platform in 2019.

Zacks Rank & Other Stocks to Consider

Currently, YY sports a Zacks Rank #1 (Strong Buy).

Some other top-ranked stocks in the broader computer and technology sector include CommVault Systems, Inc. CVLT, eGain Corporation EGAN and Fortinet Inc. FTNT, each sporting a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for CommVault, eGain and Fortinet is projected to be 15.8%, 30%, 12% and 16.8%, respectively.

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