YY Reports Fourth Quarter and Full Year 2018 Unaudited Financial Results

GUANGZHOU, China, March 05, 2019 (GLOBE NEWSWIRE) -- YY Inc. (NASDAQ: YY) (“YY” or the “Company”), a leading live streaming social media platform in China, today announced its unaudited financial results for the fourth quarter and full year of 2018.

Fourth Quarter 2018 Highlights

• Net revenues increased by 28.0% to RMB4,640.9 million (US$675.0 million) from RMB3,626.5 million in the corresponding period of 2017.
• Net income attributable to YY was RMB684.0 million (US$99.5 million), compared to RMB740.4 million in the corresponding period of 2017.
• Non-GAAP net income attributable to YY¹ was RMB836.2 million (US$121.6 million), compared to RMB932.1 million in the corresponding period of 2017.

Full Year 2018 Highlights

• Net revenues increased by 36.0% to RMB15,763.6 million (US$2,292.7 million) from RMB11,594.8 million in 2017.
• Net income attributable to YY was RMB1,642.0 million (US$238.8 million), compared to RMB2,493.2 million in 2017.
• Non-GAAP net income attributable to YY increased by 18.4% to RMB3,196.4 million (US$464.9 million) from RMB2,699.4 million in 2017.

Mr. David Xueling Li, Chairman and acting Chief Executive Officer of YY, stated, “We are delighted to conclude 2018 with solid fourth quarter performances from both YY Live and Huya. Our strong growth momentum was driven by the healthy expansion of our loyal and highly-engaged live streaming community, evidenced by the number of mobile live streaming monthly active users increasing by 18.1% to 90.4 million and the number of live streaming paying users increasing by 36.6% to 8.9 million year-over-year in the fourth quarter of 2018. In addition, our initial foray into the global market has generated encouraging results in 2018. HAGO, a casual-game-oriented social networking platform that is currently available in 33 countries and regions worldwide with 20.9 million monthly active users in the fourth quarter of 2018. In addition, Hago consistently topped the charts as the most popular application on both App Store and Google Play in its primary markets, namely Indonesia and Vietnam in the fourth quarter of 2018. As we continue to enrich and diversify our live streaming content, we have also consistently upgraded our AI algorithms to more accurately match content to our users. Building on the successful growth of our domestic ecosystem, we will continue to execute our globalization strategy as a potential driver for our long-term growth going forward.”

Mr. Bing Jin, Chief Financial Officer of YY, further commented, “We once again recorded solid financial results in the fourth quarter of 2018. Our total net revenues increased by 28.0% year-over-year to RMB4,640.9 million, exceeding the high end of our previous guidance range. The increase in net revenues was driven by the strong growth of our live streaming revenues, which increased by 30.4% year-over-year to RMB4,391.4 million. We continue to invest in content enrichment, technology enhancements, and global expansion. We are confident that our strategies to upgrade our content offerings and AI technologies, buttressed by our increasing global footprint, will continue to yield sustainable growth and increase our market share in the global live streaming industry.”

Fourth Quarter 2018 Financial Results

NET REVENUES
Net revenues increased by 28.0% to RMB4,640.9 million (US$675.0 million) in the fourth quarter of 2018 from RMB3,626.5 million in the corresponding period of 2017, primarily driven by an increase in live streaming revenues. Live streaming revenues increased by 30.4% to RMB4,391.4 million (US$638.7 million) in the fourth quarter of 2018 from RMB3,368.5 million in the corresponding period of 2017.

Other revenues² decreased by 3.3% to RMB249.5 million (US$36.3 million) in the fourth quarter of 2018 from RMB258.0 million in the corresponding period of 2017.

COST OF REVENUES AND GROSS PROFIT
Cost of revenues increased by 37.2% to RMB3,013.1 million (US$438.2 million) in the fourth quarter of 2018 from RMB2,196.6 million in the corresponding period of 2017, primarily attributable to an increase in revenue-sharing fees and content costs to RMB2,556.5 million (US$371.8 million) in the fourth quarter of 2018 from RMB1,828.0 million in the corresponding period of 2017. The increase in revenue-sharing fees and content costs paid to performers, guilds and content providers was in line with the increase in live streaming revenues for both YY Live and Huya segments, respectively. In addition, bandwidth costs increased to RMB246.5 million (US$35.9 million) in the fourth quarter of 2018 from RMB181.2 million in the corresponding period of 2017, primarily reflecting continued user base expansion and live streaming quality improvements.

Gross profit increased by 13.8% to RMB1,627.9 million (US$236.8 million) in the fourth quarter of 2018 from RMB1,429.9 million in the corresponding period of 2017. Gross margin was 35.1% in the fourth quarter of 2018, compared to 39.4% in the corresponding period of 2017, primarily due to the increase in revenue-sharing fees and content costs. The decrease in gross margin was attributable to the impact caused by the relatively low gross margin of the Huya segment as its contribution to net revenues increased significantly year-over-year.

OPERATING INCOME
Operating expenses were RMB931.2 million (US$135.4 million) in the fourth quarter of 2018, compared to RMB652.9 million in the corresponding period of 2017, primarily due to our increased efforts in sales and marketing activities in both China and the overseas market.

Operating income was RMB718.6 million (US$104.5 million) in the fourth quarter of 2018, compared to RMB821.5 million in the corresponding period of 2017. Operating margin was 15.5% in the fourth quarter of 2018, compared to 22.7% in the corresponding period of 2017, primarily due to the increase in sales and marketing expenses and the decrease in gross margin.

Non-GAAP operating income³ was RMB888.5 million (US$129.2 million) in the fourth quarter of 2018, compared to RMB1,034.1 million in the corresponding period of 2017. Non-GAAP operating margin⁴ was 19.1% in the fourth quarter of 2018, compared to 28.5% in the corresponding period of 2017.

NET INCOME
Net income attributable to YY Inc. was RMB684.0 million (US$99.5 million) in the fourth quarter of 2018, compared to RMB740.4 million in the corresponding period of 2017. Net margin was 14.7% in the fourth quarter of 2018, compared to 20.4% in the corresponding period of 2017.

Non-GAAP net income attributable to YY Inc. was RMB836.2 million (US$121.6 million) in the fourth quarter of 2018, compared to RMB932.1 million in the corresponding period of 2017. Non-GAAP net margin⁵ was 18.0% in the fourth quarter of 2018, compared to 25.7% in the corresponding period of 2017.

NET INCOME PER ADS
Diluted net income per ADS⁶ was RMB10.54 (US$1.53) in the fourth quarter of 2018, compared to RMB11.53 in the corresponding period of 2017.

Non-GAAP diluted net income per ADS⁷ was RMB12.86 (US$1.87) in the fourth quarter of 2018, compared to RMB14.51 in the corresponding period of 2017.

BALANCE SHEET AND CASH FLOWS
As of December 31, 2018, the Company had cash and cash equivalents of RMB6,004.2 million (US$873.3 million) and short-term deposits of RMB7,327.0 million (US$1,065.7 million). For the fourth quarter of 2018, net cash from operating activities was RMB2,123.8 million (US$308.9 million).

SHARES OUTSTANDING
As of December 31, 2018, the Company had a total of 1,269.9 million common shares, or the equivalent of 63.5 million ADSs, outstanding.

Full Year 2018 Financial Results

For the full year of 2018, net revenues increased by 36.0% to RMB15,763.6 million (US$2,292.7 million) from RMB11,594.8 million in 2017, primarily driven by a 39.4% year-over-year increase in live streaming revenues.

Net income attributable to YY Inc. for the full year of 2018 was RMB1,642.0 million (US$238.8 million), compared to RMB2,493.2 million in 2017. Net margin for the full year of 2018 was 10.4%, compared to 21.5% in 2017.

Non-GAAP net income attributable to YY Inc. for the full year of 2018 increased by 18.4% to RMB3,196.4 (US$464.9 million) from RMB2,699.4 million in 2017. Non-GAAP net margin for the full year of 2018 was 20.3%, compared to 23.3% in 2017.

Diluted net income per ADS was RMB25.38 (US$3.69) in 2018, compared to RMB41.33 in the corresponding period of 2017. Non-GAAP diluted net income per ADS for the full year of 2018 increased by 9.7% to RMB49.05 (US$7.13) from RMB44.72 in 2017.

For the full year of 2018, net cash from operating activities was RMB4,464.8 million (US$649.4 million).

Business Outlook
For the first quarter of 2019, the Company expects net revenues to be between RMB4.01 billion and RMB4.16 billion, representing a year-over-year growth of 23.4% to 28.0%, without giving effect to the acquisition of Bigo Inc. This forecast reflects the Company’s current and preliminary views on the market and operational conditions, which are subject to change.

Recent Developments
The Company recently entered into a strategic partnership agreement with Shanghai Chuangsi Enterprise development Co., Ltd.(“Shanghai Chuangsi”). Shanghai Chuangsi owns 9377 Games, one of the leading game platforms in China. Under the agreement, the Company will obtain 30% equity interest of Shanghai Chuangsi by injecting its online game business into Shanghai Chuangsi. As a result, the financial results of YY’s online games business, which contributed to less than 3% of YY segment’s total revenues in the fourth quarter of 2018, will no longer be consolidated upon the completion of the transaction. Currently, the transaction is expected to be completed in the first quarter of 2019.

Conference Call Information
The Company will hold a conference call on Monday, March 4, 2019, at 9:00 pm Eastern Time (or Tuesday, March 5, 2019, at 10:00 am Beijing Time) to discuss the financial results. Participants may access the call 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://ir.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 RMB6.8755 to US$1.00, the noon buying rate in effect on December 31, 2018 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 leading live streaming social media platform in China. The Company’s highly engaged users contribute to a vibrant social community by creating, sharing, and enjoying a vast range of entertainment content and activities. YY enables users to interact with each other in real time through online live media and offers users a uniquely engaging and immersive entertainment experience. YY Inc. was listed on the NASDAQ in November 2012.

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 fourth 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 active users, especially paying users; YY’s ability to monetize the user base; fluctuations in general economic and business conditions in China and assumptions underlying or related to any of the foregoing. 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”). YY uses non-GAAP operating income, non-GAAP operating margin, non-GAAP net income attributable to YY Inc., non-GAAP net margin, 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, impairment of goodwill and investments, and gain on deconsolidation and disposal of subsidiary. Non-GAAP operating margin is non-GAAP operating income as a percentage of net revenues. Non-GAAP net income is net income excluding share-based compensation expenses, impairment of goodwill and investments, gain on deconsolidation and disposal of subsidiary, gain on deemed disposal and disposal of investments, gain on fair value change of investments and equity investees’ investments, fair value loss on derivative liabilities, and income tax effects of above non-GAAP reconciling items. Non-GAAP net income attributable to YY Inc. is net income attributable to YY Inc. excluding share-based compensation expenses, impairment of goodwill and investments, gain on deconsolidation and disposal of subsidiary, gain on deemed disposal and disposal of investments, gain on fair value change of investments and equity investees’ investments, fair value loss on derivative liabilities, deemed dividend to subsidiary’s Series A preferred shareholders and income tax effects of above non-GAAP reconciling items and adjustment for non-GAAP reconciling items for the income attributable to non-controlling interests. Non-GAAP net margin is non-GAAP net income attributable to YY Inc. as a percentage of net revenues. Basic and diluted non-GAAP net income per ADS is non-GAAP net income attributable to YY Inc. 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 above reconciling items 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 non-cash effect of (i) share-based compensation expenses, which have been and will continue to be significant recurring expenses in its business, (ii) impairment of goodwill and investments, gain on deconsolidation and disposal of subsidiary, gain on deemed disposal and disposal of investments, gain on fair value change of investments and equity investees’ investments, fair value loss on derivative liabilities, and deemed dividend to subsidiary’s Series A preferred shareholders, which may not be recurring in its business, and (iii) income tax expenses and non-GAAP adjustments for net income (loss) attributable to non-controlling interest shareholders, which are affected by above non-GAAP reconciling items. 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” near the end of this release.

Investor Relations Contact
YY Inc.
Matthew Zhao
Tel: +86 (20) 8212-0000
Email: IR@YY.com

ICR, Inc.
Jack Wang
Tel: +1 (646) 915-1611
Email: IR@YY.com

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¹ Non-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, impairment of goodwill and investment, gain on deconsolidation and disposal of subsidiary, gain on deemed disposal and disposal of investments (deemed disposal refers to dilution of equity interest in equity-method investments), gain on fair value change of investments and equity investees’ investments, fair value loss on derivative liabilities, deemed dividend to subsidiary’s Series A preferred shareholders, income tax effects on non-GAAP adjustment and non-GAAP adjustment for net (loss) income attributable to non-controlling interests shareholders. These adjustments amounted to RMB152.2 million (US22.1 million) and RMB191.7 million in the fourth quarter of 2018 and 2017, respectively. Please refer to the section titled “Reconciliation of GAAP and Non-GAAP Results” for details.

² Starting from the first quarter of 2018, the Company re-classified its revenues from online games, revenues from memberships, and other revenues (which mainly represent revenues from the Company’s online advertising revenues) to the category “other revenues” in order to better reflect the Company’s continued strategic shift towards its live streaming business.

³ Non-GAAP operating income is a non-GAAP financial measure, which is defined as operating income excluding share-based compensation expenses, impairment of goodwill and investments and gain on deconsolidation and disposal of a subsidiary. Please refer to the section titled "Reconciliation of GAAP and Non-GAAP Results" for details.

⁴ Non-GAAP operating margin is a non-GAAP financial measure, which is defined as non-GAAP operating income as a percentage of net revenues. Please refer to the section titled "Reconciliation of GAAP and Non-GAAP Results" for details.

⁵ Non-GAAP net margin is non-GAAP net income attributable to YY Inc. as a percentage of net revenues.

⁶ ADS 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 YY Inc. divided by weighted average number of diluted ADS.

⁷ Non-GAAP diluted net income per ADS is a non-GAAP financial measure, which is defined as non-GAAP net income attributable to YY Inc. divided by weighted average number of ADS used in the calculation of diluted net income per ADS. Please refer to the section titled "Reconciliation of GAAP and Non-GAAP Results" for details.

⁽¹⁾  On January 1, 2018, the Company adopted ASU 2016-1, “Classification and Measurement of Financial Instruments”. After the adoption of this new guidance, the Company measures long-term investments other than equity method investments at fair value through earnings. For those investments without readily determinable fair values, the Company elects to record these investments at cost, less impairment, and plus or minus subsequent adjustments for observable price changes. Changes in the basis of these investments are reported in current earnings. Following the adoption of this guidance, accumulated fair value gain, amounting to RMB87.8 million, was reclassified from accumulated other comprehensive loss to retained earnings as of January 1, 2018.

(1) On January 1, 2018, the Company adopted ASC 606, "Revenue from Contracts with Customers" using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Based on the Company’s assessment, the adoption of ASC 606 did not have any material impact on the Company’s consolidated financial statements.

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

YY INC.
RECONCILIATION OF GAAP AND NON-GAAP RESULTS OF UNAUDITED SEGMENT REPORT
 (All amounts in thousands, except share, ADS and per ADS data)

(1) The elimination mainly consists of revenues and expenses generated from advertising services among YY Live and Huya segments.

(2) 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:

(2) Starting from the three months ended December 31, 2017, the Company reviews the financial performance of the operating segments up to the net income of each segment. Segment information for comparative periods has been revised to be presented on the same basis as the three months ended December 31, 2017