YY Beats On Q1 Earnings & Revenues, Mobile Drives Y/Y Growth

YY Inc. (NASDAQ:YY) delivered first-quarter 2018 earnings of $1.72 per American depositary shares (ADS), which handily beat the Zacks Consensus Estimate of $1.56.

Revenues of $518 million also comfortably surpassed the Zacks Consensus Estimate of $491 million.

In May 2018, YY’s subsidiary HUYA Inc. completed Initial Public Offering (IPO) of 17,250,000 ADS at a price of $12.00 per ADS.

Top-line Details

Net revenues surged 43.3% year over year to RMB3,248.9 million. Strong growth can primarily be attributed to strong live streaming revenues, which jumped 47.4% year over year to RMB3,032 million ($483.4 million). Mobile contributed 57% of YY’s live streaming revenues.

YY has re-classified its revenues from online games, memberships, and other to a new category “other revenues” beginning first-quarter 2018. Other revenues increased 3.5% to RMB216.9 million ($34.6 million).

Mobile live streaming Monthly Active Users (MAU) increased 23.9% year over year to 77.6 million. Total live streaming paying users were up 17.3% from the year-ago quarter to 6.9 million.

Live streaming paying users increased 17.3% to 6.9 million. Mobile paying users constituted 79.1% of the total live streaming paying users in the reported quarter.

YY has rolled out a number of new functionalities and features in the latest version of YY Live which was launched in May. It introduced a new feature called Host Battalion that combines live streaming and casual games with social features.

The company plans to launch more games with Host Battalion features in the second quarter and the rest of the year. This is likely to increase user engagement and interaction as well as the monetization of the company’s social media platform.

Operating Details

Gross profit climbed 38.6% from the year-ago quarter to RMB1,233.1 million ($196.6 million). However, gross margin contracted 130 basis points (bps) to 38.0% in the reported quarter, primarily due to higher revenue-sharing fees and content costs.

Operating expense was RMB649.1 million ($103.5 million) up 96.2% from the year-ago quarter.

Non-GAAP operating income increased 20.6% year over year to RMB727.3 million ($115.9 million). However, non-GAAP operating margin contracted 420 bps on a year-over-year basis to 22.4% primarily due to higher sales & marketing expenses (up 340 bps).

The increase in sales & marketing expenses this quarter was primarily driven by YY’s increased investments in promoting new mobile products and features.

Moreover, non-GAAP net income increased 31.1% year over year to RMB699.9 million ($111.6 million). Non-GAAP earnings were RMB 10.78 per ADS as compared with RMB 9.10 per ADS reported in the year-ago quarter.

Balance Sheet & Cash Flow

As of Mar 31, 2018, YY had cash and cash equivalents of RMB4,086.5 million ($651.5 million) and short-term deposits of RMB8,748.9 million ($1,394.8 million).

Net cash from operating activities was RMB780.3 million ($124.4 million).

Recently, YY announced that it had invested $272 million in the series D preferred shares of Bigo as the lead investor following which the company has become its largest shareholder. Bigo is a fast-growing video-based social media platform.

Additionally, YY had obtained a right, exercisable after the first anniversary of the closing date, to purchase additional Bigo shares at the then fair market price to exceed 50.1% of the voting power in Bigo.

Guidance

For the second quarter of 2018, YY expects net revenues to be between RMB3.6 billion and RMB3.7 billion, representing year-over-year growth of 38.0% to 41.8%.

The company expects to report net loss in the current quarter owing to loss on derivative liabilities worth RMB2.3 billion related to preferred shares of HUYA Inc.

Zacks Rank & Stocks to Consider

Currently, YY has a Zacks Rank #3 (Hold).

Twitter (NYSE:TWTR) , Techtarget (NASDAQ:TTGT) and Xo Group (NYSE:XOXO) are stocks worth considering in the broader Computer and Technology sector. Twitter sports a Zacks Rank #1 (Strong Buy), while both TechTarget and Xo Group carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Twitter, Techtarget and Xo Group is pegged at 23.10%, 20% and 15%, respectively.

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