YY Q3 Earnings And Revenues Beat Estimates, Increase Y/Y

Shares of YY Inc. (NASDAQ:YY) plunged 1.16% on Nov 13, following the announcement of third-quarter 2018 results. Notably, the stock has lost 46.6% against the industry’s decline of 30.4% on a year-to-date basis.

YY Inc. (YY) delivered third-quarter 2018 earnings of $1.76 per American depositary shares (ADS), which beat the Zacks Consensus Estimate by 3 cents.

Revenues totaled $597 million, which surpassed the Zacks Consensus Estimate of $590 million.

In domestic currency, earnings increased 11.1% to RMB 12.07 per share on revenues of RMB 4.10 billion, which jumped 32.6%.

Top-Line Details

The top-line growth can primarily be attributed to strong live streaming revenues, which jumped 35.6% year over year to RMB 3.89 billion, accounting for 95% of total net revenues in the reported quarter. Notably, Other revenues decreased 6.7% to RMB 205.9 million.

The stellar performance of YY Live and HUYA contributed to the impressive top-line growth. Huya and YY Live contributed 68.8% and 31.2%, respectively to total live streaming revenues in the third quarter. Further, the year-over-year growth at Huya and YY Live was t 15.5% and 120.3%, respectively.

Additionally, Mobile contributed 62.4% of YY’s live streaming revenues.

Mobile live streaming Monthly Active Users (MAU) increased 20.7% year over year to 88.1 million, as the company added new features. Live streaming paying users increased 26.3% to 8 million. Mobile paying users constituted 73.9% the total live streaming paying users in the reported quarter.

Cost of revenues for both Huya and YY Live increased 112.2% and 15.4%, respectively, year over year. 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.

Furthermore, management announced a cooperation agreement with Xiaomi, which will enable the company to operate certain entertainment live streaming services on Xiaomi Live. Additionally, the company is also developing products for its audio live streaming segment, to target mobile users in China.

Notably, YY was successful in retaining its users in the reported quarter, with content enrichment and cross-channel promotions. The company expects to expand its presence in the overseas market on the back of early-stage innovative products and rapid user growth.

YY Inc. Price, Consensus and EPS Surprise

Operating Details

Gross profit climbed 18.5% from the year-ago quarter to RMB 1.43 billion. However, gross margin contracted 410 basis points (bps) to 34.8% in the third quarter, primarily due to higher revenue-sharing fees and content costs.

Operating expenses totaled RMB 864.7 million, up 54.3% from the year-ago quarter. This was due to the company’s increased investment in talent recruitment to further enhance research and development capabilities.

Research & development (R&D), sales & marketing (S&M) and general & administrative (G&A) expenses grew 89.1%, 37.8%, and 42.9%, respectively.As a percentage of revenues, R&D, S&M and G&A expenses surged 230 bps,30 bps and 40 bps respectively, year over year.

Non-GAAP operating income increased 12.9% year over year to RMB 774.2 million. Non-GAAP operating margin contracted 330 bps on a year-over-year basis to 18.9%. Non-GAAP net income increased 28.9% year over year to RMB 848.6 million.

Balance Sheet & Cash Flow

As of Sep 30, 2018, YY had cash and cash equivalents of RMB 4.92 billion compared with RMB 3.56 billion in the previous quarter.

Net cash from operating activities amounted to RMB 822.4 million compared with RMB 738.3 million in the second quarter.

Guidance

For the fourth quarter of 2018, YY expects net revenues to be between RMB 4.39 billion and RMB 4.54 billion, representing year-over-year growth of 21.1% to 25.2%.

Zacks Rank & Stocks to Consider

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

Some better-ranked stocks in the broader computer and technology sector include SS&C Technologies Holdings, Inc. (NASDAQ:SSNC) , Twitter, Inc. (NYSE:TWTR) and NetApp, Inc. (NASDAQ:NTAP) . All the three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks Rank #1 stocks here.

Long-term earnings growth rate for SS&C Technologies, Twitter and NetApp is projected to be 13.5%, 22.1% and 14.1%, respectively.

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