YY Reports First Quarter 2016 Unaudited Financial Results

GUANGZHOU, China, May 31, 2016 (GLOBE NEWSWIRE) -- YY Inc. (NASDAQ:YY) ("YY" or the "Company"), a revolutionary real-time interactive social platform, today announced its unaudited financial results for the first quarter of 2016.

First Quarter 2016 Highlights 

• Net revenues increased by 43.4% to RMB1,649.3 million (US$255.8 million) from RMB1,150.3 million in the corresponding period of 2015.

Mr. David Xueling Li, Chief Executive Officer of YY, stated, “We continued to see solid growth momentum in our top line in the first quarter of 2016, primarily driven by our IVAS business. In particular, we saw significant growth in the mobile broadcasting business and have been able to rapidly capitalize on these opportunities through our newly launched mobile broadcasting app ME, which we will further develop this year. By featuring popular stars and hosting various entertainment events, we believe that there is significant potential to further accelerate its growth and enhance its popularity. Additionally, in the online music and entertainment business, our newly-launched Da Pai Wan Chang Hui is an interactive concert broadcasting service that connects celebrities and participants virtually. This new service clearly demonstrates our strategy to continue strengthening our professionally-generated content offerings and expand our user community. Overall, we remain confident in our market opportunities and aim to continue fortifying our position as the leading real time internet platform in China.”

Mr. Eric He, Chief Financial Officer of YY, commented, “In the first quarter of 2016, our total revenue increased by 43.4% year over year to RMB1.6 billion, reflecting the strength of our core business. Meanwhile, we were able to significantly grow the number of our paying users by 57.1% year over year to 3.89 million. Our online game broadcasting business Huya grew significantly, with an increase in revenue by 114.0% year over year and an increase in number of paying users by 131.7% year over year to 899,000.  For our online music and entertainment business, our on-going efforts to introduce diverse content resulted in a revenue increase of 55.8% year over year. Additionally, our mobile music and entertainment business continued its robust growth with a 202.8% year-over-year increase in revenue and 137.5% year-over-year increase in number of paying users. Because of the execution of our planned transition to an increasing amount of UGC content revenues across the YY platform, we have continued to experience compression to gross and operating margins.  This expected decline in margins results from the decreased concentration of our high-margin gaming revenues year over year, from 20.1% of total revenue to 10.4% in the first quarter of 2016, as revenue growth for our other offerings continues to outpace our gaming revenue. Going forward, we will continue to leverage our ecosystem and expand our innovative content and service offerings in order to meet the evolving demands of our massive user base.”

First Quarter 2016 Financial Results

NET REVENUES
Net revenues increased by 43.4% to RMB1,649.3 million (US$255.8 million) in the first quarter of 2016 from RMB1,150.3 million in the corresponding period of 2015, primarily driven by the increase in IVAS revenues. IVAS revenues, which mainly consisted of revenues from online music and entertainment, online dating, online games, Huya broadcasting and YY's membership program, increased by 45.1% to RMB1,611.8 million (US$250.0 million) in the first quarter of 2016 from RMB1,110.8 million in the corresponding period of 2015. The increase in IVAS revenues was primarily driven by a 57.1% year-over-year increase in the number of paying users.

Revenues from online music and entertainment increased by 55.8% to RMB919.1 million (US$142.5 million) in the first quarter of 2016 from RMB590.1 million in the corresponding period of 2015. This increase was driven by a year-over-year increase of 68.2% in the number of paying users to 2,666,000. Moreover, mobile ARPU continues to grow 27.2% to RMB243 in the first quarter of 2016 from RMB191 in the corresponding period of 2015.

Revenues from online games were RMB171.1 million (US$26.5 million) in the first quarter of 2016, as compared to RMB231.7 million in the corresponding period of 2015. This decline was primarily caused by a 35.8% year-over-year decrease in the number of paying users to 306,000, which reflects the continued softness in China’s web game market, but was partially offset by a 15.0% year-over-year increase in ARPU of online games.  

Revenues from online dating increased by 60.2% to RMB211.2 million (US$32.8 million) in the first quarter of 2016 from RMB131.8 million in the corresponding period of 2015. This increase primarily resulted from a 47.4% year-over-year increase in the number of paying users to 283,000 and 8.6% year-over-year increase in ARPU to RMB746 in the first quarter of 2016.

Other IVAS revenues, mainly including Huya broadcasting and membership subscription fees, increased by 97.5% to RMB310.4 million (US$48.1 million) in the first quarter of 2016 from RMB157.2 million in the corresponding period of 2015. Revenues from Huya broadcasting increased by 114.0% to RMB117.7 million (US$18.3 million) in the first quarter of 2016 from RMB55.0 million in the corresponding period of 2015. Revenues from membership subscription fees increased by 12.5% to RMB69.4 million (US$10.8 million) in the first quarter of 2016 from RMB61.7 million in the corresponding period of 2015, which reflected a 2.1% increase in the number of members to 1,084,000 as of March 31, 2016 from 1,062,000 as of March 31, 2015.

Other revenues, mainly including revenues from the Company's online education platform, Huanqiu Education Online, online advertising revenues from Duowan.com, and e-commerce, were RMB37.5 million (US$5.8 million) in the first quarter of 2016, compared with RMB39.4 million in the corresponding period of 2015.

COST OF REVENUES AND GROSS PROFIT
Cost of revenues increased by 57.6% to RMB1,060.5 million (US$164.5 million) in the first quarter of 2016 from RMB672.7 million in the corresponding period of 2015, primarily attributable to an increase in revenue-sharing fees and content costs to RMB707.7 million (US$109.8 million) in the first quarter of 2016 from RMB411.8 million in the corresponding period of 2015. The increase in revenue-sharing fees and content costs paid to performers, channel owners and content providers was in line with the increase in revenues and was primarily due to the higher level of user engagement and spending driven by promotional activities, as well as the Company’s investments in expanding the amount of new and innovative content it provides to users. In addition, bandwidth costs increased to RMB182.9 million (US$28.4 million) in the first quarter of 2016 from RMB129.6 million in the corresponding period of 2015, primarily reflecting the continued user base expansion and the video quality improvements.

Gross profit increased by 23.3% to RMB588.8 million (US$91.3 million) in the first quarter of 2016 from RMB477.5 million in the corresponding period of 2015. Gross margin was 35.7% in the first quarter of 2016 compared with 41.5% in the corresponding period of 2015. The year-over-year decrease in gross margin was primarily attributable to the change in the Company's business mix to include new business lines involving user-generated content, and higher revenue-sharing fees and content costs.

OPERATING INCOME
Operating expenses for the first quarter of 2016 increased by 45.7% to RMB341.0 million (US$52.9 million) from RMB234.1 million in the corresponding period of 2015. This increase was primarily attributable to an increase in research and development expenses, driven by the Company’s overall business expansion, as well as sales and marketing expenses, particularly those associated with mobile product promotion.

Operating income in the first quarter of 2016 increased by 5.1% to RMB256.7 million (US$39.8 million), as compared to RMB244.2 million in the corresponding period of 2015. Operating margin in the first quarter of 2016 was 15.6%, as compared to 21.2% in the corresponding period of 2015.

Non-GAAP operating income¹ increased by 12.5% to RMB310.6 million (US$48.2 million) in the first quarter of 2016 from RMB276.1 million in the corresponding period of 2015. Non-GAAP operating margin² decreased to 18.8% in the first quarter of 2016 from 24.0% in the corresponding period of 2015.

NET INCOME
Net income attributable to YY Inc. was RMB208.3 million (US$32.3 million) in the first quarter of 2016, as compared to RMB227.0 million in the corresponding period of 2015. Net margin in the first quarter of 2016 was 12.6%, as compared to 19.7% in the corresponding period of 2015. Non-GAAP net income attributable to YY Inc.³ increased by 1.3% to RMB262.3 million (US$40.7 million), as compared to RMB258.8 million in the corresponding period of 2015. Non-GAAP net margin⁴ was 15.9% in the first quarter of 2016, as compared to 22.5% in the corresponding period of 2015. 

NET INCOME PER ADS
Diluted net income per ADS⁵ was RMB3.65 (US$0.57) in the first quarter of 2016, compared to RMB3.83 in the corresponding period of 2015.

Non-GAAP diluted net income per ADS⁶ increased by 5.3% to RMB4.59 (US$0.71) in the first quarter of 2016 from RMB4.36 in the corresponding period of 2015.

BALANCE SHEET AND CASH FLOWS
As of March 31, 2016, the Company had cash and cash equivalents of RMB593.0 million (US$92.0 million) and short-term deposits of RMB2,716.8 million (US$421.3 million). For the first quarter of 2016, net cash from operating activities was RMB198.4 million (US$30.8 million).

SHARES OUTSTANDING
As of March 31, 2016, the Company had a total of 1,098.9 million common shares outstanding, or the equivalent of 54.9 million ADSs outstanding.

Conference Call Information
The Company will hold a conference call on Tuesday, May 31, 2016 at 8:00 am Eastern Time or 8:00 pm Beijing Time to discuss the financial results. Participants may access the call by dialing the following numbers:

The replay will be accessible through June 7, 2016 by dialing the following numbers:

A live and archived webcast of the conference call will also be available at the Company's investor relations website at http://investors.yy.com/.

Exchange Rate
This press release contains translations of certain Renminbi amounts into U.S. dollars at specified rates solely for the convenience of readers. Unless otherwise noted, all translations from Renminbi to U.S. dollars, in this press release, were made at a rate of RMB6.448 to US$1.00, the noon buying rate in effect on March 31, 2016 in the City of New York for cable transfers in Renminbi per U.S. dollar as certified for customs purposes by the Federal Reserve Bank of New York.

About YY Inc.
YY Inc. (“YY” or the “Company”) is a revolutionary real-time interactive social platform that engages users in real-time online group activities through voice, text and video. Launched in July 2008, YY Client, the Company’s core product, empowers users to create and organize groups of varying sizes to discover and participate in a wide range of online activities, including online music and entertainment, online games, online dating, live game broadcasting and education. YY Inc. was listed on NASDAQ in November 2012 and generated revenues of US$910 million in the fiscal year 2015.

Safe Harbor Statement
This announcement contains forward-looking statements. These statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as “will,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates” and similar statements. Among other things, the business outlook and quotations from management in this announcement, as well as YY's strategic and operational plans, contain forward-looking statements. YY may also make written or oral forward-looking statements in its periodic reports to the U.S. Securities and Exchange Commission (“SEC”), in its annual report to shareholders, in press releases and other written materials and in oral statements made by its officers, directors or employees to third parties. Statements that are not historical facts, including statements about YY’s beliefs and expectations, are forward-looking statements. Forward-looking statements involve inherent risks and uncertainties. A number of factors could cause actual results to differ materially from those contained in any forward-looking statement, including but not limited to the following: YY’s goals and strategies; YY's future business development, results of operations and financial condition; the expected growth of the online communication social platform market in China; the expectation regarding the rate at which to gain registered user accounts, active users, especially paying users; YY’s ability to monetize the user base; YY’s ability to continue attracting advertisers and offering popular online games; fluctuations in general economic and business conditions in China and assumptions underlying or related to any of the foregoing, as well as uncertainties relating to the proposed “going-private” transaction. Further information regarding these and other risks is included in YY’s filings with the SEC. All information provided in this press release and in the attachments is as of the date of this press release, and YY does not undertake any obligation to update any forward-looking statement, except as required under applicable law.

Use of Non-GAAP Financial Measures
The unaudited condensed consolidated financial information is prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”), except that the consolidated statement of changes in shareholders’ equity, consolidated statements of cash flows, and the detailed notes have not been presented. YY uses non-GAAP operating income, non-GAAP operating margin, non-GAAP net income attributable to YY Inc., non-GAAP net margin, non-GAAP net income attributable to common shareholders, and basic and diluted non-GAAP net income per ADS, which are non-GAAP financial measures. Non-GAAP operating income is operating income excluding share-based compensation expenses. Non-GAAP operating margin is non-GAAP operating income as a percentage of net revenues. Non-GAAP net income attributable to YY Inc. is net income attributable to YY Inc. excluding share-based compensation expenses. Non-GAAP net margin is non-GAAP net income attributable to YY Inc. as a percentage of net revenues. Non-GAAP net income attributable to common shareholders is net income attributable to common shareholders excluding share-based compensation expenses. Basic and diluted non-GAAP net income per ADS is non-GAAP net income attributable to common shareholders divided by weighted average number of ADS used in the calculation of basic and diluted net income per ADS. The Company believes that separate analysis and exclusion of the non-cash impact of share-based compensation adds clarity to the constituent parts of its performance. The Company reviews these non-GAAP financial measures together with GAAP financial measures to obtain a better understanding of its operating performance. It uses the non-GAAP financial measure for planning, forecasting and measuring results against the forecast. The Company believes that non-GAAP financial measure is useful supplemental information for investors and analysts to assess its operating performance without the effect of non-cash share-based compensation expenses, which have been and will continue to be significant recurring expenses in its business. However, the use of non-GAAP financial measures has material limitations as an analytical tool. One of the limitations of using non-GAAP financial measures is that they do not include all items that impact the Company’s net income for the period. In addition, because non-GAAP financial measures are not measured in the same manner by all companies, they may not be comparable to other similar titled measures used by other companies. In light of the foregoing limitations, you should not consider non-GAAP financial measure in isolation from or as an alternative to the financial measure prepared in accordance with U.S. GAAP.

The presentation of these non-GAAP financial measures is not intended to be considered in isolation from, or as a substitute for, the financial information prepared and presented in accordance with U.S. GAAP. For more information on these non-GAAP financial measures, please see the table captioned “YY Inc. Reconciliations of GAAP and Non-GAAP Results” at the end of this release.

¹Non-GAAP operating income is a non-GAAP financial measure, which is defined as operating income excluding share-based compensation expenses. 

²Non-GAAP operating margin is a non-GAAP financial measure, which is defined as non-GAAP operating income as a percentage of net revenues. 

³Non-GAAP net income attributable to YY Inc. is a non-GAAP financial measure, which is defined as net income attributable to YY Inc. excluding share-based compensation expenses.

⁴Non-GAAP net margin is a non-GAAP financial measure, which is defined as non-GAAP net income attributable to YY Inc. as a percentage of net revenues.

⁵ADS is American Depositary Share. Each ADS represents twenty Class A common shares of the Company. Diluted net income per ADS is net income attributable to common shareholders divided by weighted average number of diluted ADS.

⁶Non-GAAP diluted net income per ADS is a non-GAAP financial measure, which is defined as non-GAAP net income attributable to common shareholders divided by weighted average number of ADS used in the calculation of diluted net income per ADS.

_____________________________________

* Effectively January 2016, ASU 2015-3 issued by FASB requires entities to present the issuance costs of bonds in the balance sheet as a direct deduction from the related bonds rather than assets. Accordingly, the Company retrospectively reclassified RMB25.3 million of issuance cost of bonds from other non-current assets into convertible bonds as of December 31, 2015.

(1)     Share-based compensation was allocated in cost of revenues and operating expenses as follows:

(1) Share-based compensation was allocated in cost of revenues and operating expenses as follows:

(1) Share-based compensation was allocated in cost of revenues and operating expenses as follows:

(1) Share-based compensation was allocated in cost of revenues and operating expenses as follows: