JOYY(YYINZ) - 2018 Q4 - Annual Report

Part I Key Information This section presents selected consolidated financial data for the past five years and details significant investment risks, categorized by business, corporate structure, China operations, and ADS-related factors Selected Financial Data The company presents selected consolidated financial data for fiscal years 2014-2018, showing consistent net revenue growth to RMB 15.76 billion in 2018, though net income decreased to RMB 1.64 billion due to fair value losses, while total assets significantly increased to RMB 25.77 billion Selected Consolidated Statements of Operations Data (2016-2018) | Indicator | 2016 (RMB, thousands) | 2017 (RMB, thousands) | 2018 (RMB, thousands) | | :--- | :--- | :--- | :--- | | Total net revenues | 8,204,050 | 11,594,792 | 15,763,557 | | - Live streaming | 7,027,227 | 10,670,954 | 14,877,667 | | - Others | 1,176,823 | 923,838 | 885,890 | | Gross profit | 3,100,620 | 4,568,390 | 5,746,423 | | Operating income | 1,771,484 | 2,699,231 | 2,639,690 | | Net income attributable to common shareholders | 1,523,918 | 2,493,235 | 1,641,958 | | Diluted Net income per ADS (RMB) | 26.40 | 41.33 | 25.38 | Selected Consolidated Balance Sheet Data (As of Year-End 2017-2018) | Indicator | 2017 (RMB, thousands) | 2018 (RMB, thousands) | | :--- | :--- | :--- | | Cash and cash equivalents | 2,617,432 | 6,004,231 | | Short-term deposits | 6,000,104 | 7,326,996 | | Total assets | 14,458,719 | 25,768,045 | | Total current liabilities | 3,145,799 | 3,853,026 | | Total shareholders' equity | 10,712,859 | 21,377,131 | - Share-based compensation expenses totaled RMB 648.0 million in 2018, a significant increase from RMB 257.7 million in 2017, impacting overall profitability[23] Risk Factors This section details numerous risks, including heavy dependence on live streaming revenue, intense competition, challenges in managing growth, risks associated with the VIE structure, evolving PRC and international regulations, and ADS-related price volatility and share structure dilution - The company's business is heavily dependent on live streaming services, which constituted 94.4% of total net revenue in 2018, and any decline in this segment could materially harm results[41][44] - The company faces significant competition from other live streaming platforms like Momo, Tencent Music, Kuaishou, and Douyin in China, and TikTok and Live.me overseas[70][71] - The use of a Variable Interest Entity (VIE) structure to comply with PRC foreign ownership restrictions is a key risk, as non-compliance could lead to severe penalties, including platform shutdown[141][143][144] - The dual-class share structure gives holders of Class B shares ten votes per share, while Class A shares get one vote, resulting in Mr. David Xueling Li and his affiliates holding 75.4% of the total voting power as of April 15, 2019, granting them substantial control over corporate matters[245][247] - The company may be classified as a Passive Foreign Investment Company (PFIC) for U.S. federal income tax purposes, which could result in adverse tax consequences for U.S. holders of its ADSs or common shares[242][243][244] Information on the Company This section provides a comprehensive overview of the company's history, business operations, organizational structure, and properties, detailing its evolution, key platforms, revenue model, technology, and the competitive and regulatory landscape, including its use of VIEs History and Development of the Company Founded in 2005 and listed on Nasdaq in 2012, the company expanded through organic growth and strategic acquisitions, including the spin-off and IPO of HUYA Inc. and the significant global expansion achieved through the acquisition of Bigo Inc. in March 2019 - The company commenced operations in April 2005 with the establishment of Guangzhou Huaduo[264] - The company's ADSs were listed on The Nasdaq Stock Market under the symbol "YY" on November 21, 2012[287] - In March 2019, the company completed the acquisition of the remaining 68.3% equity interest in Bigo Inc., making it a wholly-owned subsidiary and significantly expanding its international presence[285] - Its majority-controlled subsidiary, HUYA Inc., completed its initial public offering in May 2018, and Tencent holds a right to purchase shares to reach 50.1% of HUYA's voting power between March 2020 and March 2021[282] Business Overview The company operates as a global social media platform focused on live streaming through YY Live, Huya, and Bigo, generating revenue primarily from virtual item sales, while expanding its user base to 90.4 million mobile MAUs for YY Live and Huya, and 59.4 million for Bigo in Q4 2018, with a focus on AI-driven innovation and global expansion - The company's main platforms are YY Live (comprehensive live streaming), Huya (game-focused live streaming), and Bigo (global live streaming and short-form video)[300][302][303][304] - In Q4 2018, YY Live and Huya combined had 90.4 million mobile average monthly active users (MAUs), an 18.1% increase YoY, while Bigo had 59.4 million mobile MAUs for its services in the same period[291][300] - The primary revenue model is the sale of virtual gifts and items on its live streaming platforms, with additional revenue from online games, memberships, and advertising[297][298] - The company is expanding globally with Hago, a casual-game social platform with 20.9 million MAUs in Q4 2018, and Bigo, which has a strong presence in Southeast Asia, South Asia, the Middle East, and America[292][294] - The business is subject to extensive PRC regulations covering telecommunications, internet content, online games, data privacy, and foreign ownership, as well as international regulations like GDPR in the EU[341][343][461] Organizational Structure The company, a Cayman Islands holding entity, operates through a complex structure of subsidiaries and Variable Interest Entities (VIEs) to comply with PRC foreign ownership restrictions, with key VIEs like Guangzhou Huaduo and Guangzhou Huya holding necessary operating licenses - The company is a Cayman Islands holding company[469] - It controls its PRC operating entities, such as Guangzhou Huaduo and Guangzhou Huya, through a series of contractual arrangements (VIE structure) rather than direct ownership to comply with Chinese law[469] - HUYA Inc. is a majority-controlled, publicly-listed subsidiary whose financial results are consolidated with the company[469] Property, Plant, and Equipment The company's principal executive offices are in an owned property in Guangzhou, with additional owned and leased facilities in China, and it acquired land use rights in Guangzhou for future development, while servers are hosted in leased third-party data centers - Principal executive offices are located in a 37,548 square meter owned property in Panyu District, Guangzhou[471] - The company acquired land use rights for a parcel in Pazhou, Guangzhou, designated as a new e-commerce center, to support future development[472] - Servers are hosted in leased internet data centers owned by major domestic providers throughout China[473] Operating and Financial Review and Prospects This section provides management's discussion and analysis of the company's financial condition and operating results, detailing revenue streams, cost structures, and expenses, highlighting live streaming growth, and covering liquidity, capital resources, expenditures, and contractual obligations Operating Results In 2018, total net revenues grew 36.0% to RMB 15.76 billion, driven by a 39.4% increase in live streaming revenue, though net income attributable to common shareholders decreased to RMB 1.64 billion from RMB 2.49 billion in 2017, primarily due to a RMB 2.29 billion fair value loss on derivative liabilities Revenue Breakdown (2016-2018) | Revenue Stream | 2016 (RMB, thousands) | 2017 (RMB, thousands) | 2018 (RMB, thousands) | | :--- | :--- | :--- | :--- | | Live streaming | 7,027,227 | 10,670,954 | 14,877,667 | | Others | 1,176,823 | 923,838 | 885,890 | | Total net revenues | 8,204,050 | 11,594,792 | 15,763,557 | - 2018 vs. 2017 Performance: - Net Revenues: Increased 36.0% to RMB 15,763.6 million[615] - Live Streaming Revenues: Increased 39.4% to RMB 14,877.7 million, driven by growth in paying users (16.6M to 19.8M) and ARPU (RMB 643.2 to RMB 751.2)[616] - Cost of Revenues: Increased 42.6% to RMB 10,017.1 million, mainly due to a 44.4% rise in revenue sharing fees and content costs[618] - Operating Expenses: Increased 59.6% to RMB 3,224.6 million, driven by higher R&D and Sales & Marketing expenses[619] - Net Income: Decreased to RMB 1,642.0 million from RMB 2,493.2 million, primarily due to a RMB 2.29 billion fair value loss on derivative liabilities[619] - 2017 vs. 2016 Performance: - Net Revenues: Increased 41.3% to RMB 11,594.8 million[628] - Live Streaming Revenues: Increased 51.9% to RMB 10,671.0 million, driven by a significant increase in paying users from 11.0 million to 16.6 million[629] - Cost of Revenues: Increased 37.7%, primarily due to a 51.1% rise in revenue sharing fees and content costs[632] - Net Income: Increased to RMB 2,493.2 million from RMB 1,523.9 million[639] Liquidity and Capital Resources The company's operations are financed by cash from operations, IPOs, and offerings, holding RMB 6.0 billion in cash and equivalents as of December 31, 2018, with strong net cash from operating activities at RMB 4.46 billion in 2018, and believes its current liquidity is sufficient for the next 12 months Summary of Cash Flows (2016-2018) | Cash Flow Activity | 2016 (RMB, thousands) | 2017 (RMB, thousands) | 2018 (RMB, thousands) | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | 2,421,135 | 3,718,452 | 4,464,814 | | Net cash used in investing activities | (2,172,359) | (3,037,516) | (6,295,386) | | Net cash provided by financing activities | 10,651 | 1,392,525 | 4,167,270 | - As of December 31, 2018, the company had RMB 6.00 billion in cash and cash equivalents, up from RMB 3.62 billion at year-end 2017[652] - Significant financing events in 2018 included receiving US$461.6 million from Tencent for Huya's Series B-2 shares and net proceeds of US$190.1 million from Huya's IPO[649][650] - Capital expenditures were RMB 392.8 million (US$57.1 million) in 2018, primarily for purchasing servers, office space, and other assets[668] Contractual Obligations As of December 31, 2018, total contractual obligations amounted to RMB 415.3 million, comprising RMB 221.9 million in operating lease commitments and RMB 193.4 million in capital commitments, with most obligations due within one to five years Contractual Obligations as of December 31, 2018 (in RMB thousands) | Obligation Type | Total | Less than 1 year | 1-2 years | 3-5 years | More than 5 years | | :--- | :--- | :--- | :--- | :--- | :--- | | Operating lease commitments | 221,895 | 84,689 | 53,609 | 83,597 | - | | Capital commitment | 193,412 | 154,427 | 27,383 | 11,599 | 3 | | Convertible senior notes (in US$) | 1,006 | 1,006 | - | - | - | Directors, Senior Management and Employees This section details the company's leadership, board practices, and employee base, including directors and executive officers, 2018 compensation of RMB 19.6 million, board committee structures, 4,325 employees as of December 31, 2018, and the significant voting control held by the chairman due to the dual-class share system Directors and Senior Management The company is led by co-founder, Chairman, and CEO David Xueling Li, with a senior management team including CFO Bing Jin, COO Ting Li, and CTO Pengjun Lu, and a five-member board of directors including three independent directors - Mr. David Xueling Li is the co-founder, Chairman of the Board, and Chief Executive Officer[679] - Other key executives include Bing Jin (CFO), Ting Li (COO), and Pengjun Lu (CTO)[685][686][688] Compensation In fiscal year 2018, the company paid RMB 19.6 million in cash compensation to directors and executive officers, in addition to awarding 367,870 HUYA Inc. ordinary shares, utilizing multiple share incentive plans to attract and retain talent - Aggregate cash compensation (salaries and bonuses) for directors and executive officers in FY2018 was RMB 19.6 million (US$2.8 million)[689] - The company utilizes multiple share incentive plans (2009 Scheme, 2011 Plan, HUYA 2017 Plan) to grant equity awards, with a significant number of options, restricted shares, and restricted share units outstanding as of April 15, 2019[692] Board Practices The five-member board of directors has established Audit, Compensation, and Corporate Governance & Nominating Committees, with the Audit Committee comprising independent directors, and the company utilizing foreign private issuer exemptions allowing a non-independent director to chair the Compensation Committee - The board has three committees: Audit, Compensation, and Corporate Governance and Nominating[734] - The Audit Committee consists of three independent directors: Peter Andrew Schloss (Chairman), David Tang, and Richard Weidong Ji, with Mr. Schloss qualifying as the 'audit committee financial expert'[735] - The company relies on foreign private issuer exemptions, allowing Chairman David Xueling Li, a non-independent director, to chair the Compensation Committee[736][931] Employees As of December 31, 2018, the company had 4,325 employees, with the largest segment being Research and Development at 2,197 employees, underscoring its focus on technology and innovation Employee Breakdown by Function (as of Dec 31, 2018) | Function | Number of Employees | | :--- | :--- | | Research and development | 2,197 | | Customer services and operations | 1,303 | | General and administration | 404 | | Sales and marketing | 231 | | Engineering and maintenance | 175 | | Management | 15 | | Total | 4,325 | Share Ownership The company operates with a dual-class share structure, where Chairman David Xueling Li beneficially owned 21.9% of common shares but controlled 75.4% of total voting power as of April 15, 2019, granting him substantial influence over corporate matters - The company has a dual-class share structure: Class A common shares (1 vote per share) and Class B common shares (10 votes per share)[753] Beneficial Ownership of Key Shareholders (as of April 15, 2019) | Shareholder | Total Common Shares Beneficially Owned (%) | Total Voting Power (%) | | :--- | :--- | :--- | | David Xueling Li | 21.9% | 75.4% | | All directors and executive officers as a group | 22.1% | 75.4% | - Mr. David Xueling Li's voting power includes shares held by entities he controls and voting rights over shares held by Mr. Jun Lei, which were delegated to him in August 2016[751] Major Shareholders and Related Party Transactions This section details major shareholders and related party transactions, emphasizing critical contractual arrangements with Variable Interest Entities (VIEs) like Guangzhou Huaduo and Guangzhou Huya, which ensure compliance with PRC regulations and transfer economic benefits and control to the company - The company conducts its operations in China through a series of contractual arrangements with its VIEs (e.g., Guangzhou Huaduo, Guangzhou Huya) and their shareholders to comply with PRC restrictions on foreign ownership[755] - These VIE agreements include Exclusive Business Cooperation, Exclusive Option, Equity Pledge, and Powers of Attorney, which collectively transfer economic benefits and provide effective control to YY Inc[757][759][761][762] - In 2018, the company received service fees of RMB 313.1 million from Guangzhou Huaduo and RMB 420.2 million from Guangzhou Huya under these arrangements[763][771] - Prior to its full acquisition in March 2019, Bigo Inc. was a significant related party, and as of Dec 31, 2018, the amount due from Bigo was RMB 191.8 million for operating expenses paid and loans provided by the company[793] Financial Information This section includes the company's consolidated financial statements, discloses ongoing legal proceedings including a copyright infringement lawsuit with Guangzhou NetEase involving RMB 20.0 million in damages under appeal, and states the company's policy of retaining earnings for business expansion without current dividend plans - The company is involved in a lawsuit with Guangzhou NetEase Computer System Co., Ltd. over alleged copyright infringement, where a court ordered the company to pay RMB 20.0 million, but this judgment is not final and is under appeal[799] - The company has no current dividend policy and does not plan to pay dividends in the foreseeable future, retaining earnings for business operations and expansion[802] - The ability to pay dividends is also restricted by PRC regulations on the distribution of profits from PRC subsidiaries to the offshore holding company[803] The Offer and Listing This section details the trading of the company's securities, noting that its American Depositary Shares (ADSs) are listed on the Nasdaq Global Select Market under the symbol "YY", with each ADS representing twenty Class A common shares - The company's ADSs are listed on the Nasdaq Global Select Market under the symbol "YY"[808] - Each ADS represents twenty Class A common shares[808] Additional Information This section provides additional details on the company's corporate governance and legal framework, summarizing key provisions of its Memorandum and Articles of Association, covering material contracts, exchange controls, and comprehensive taxation considerations for the Cayman Islands, PRC, and U.S., including the risk of PFIC classification - The company is incorporated in the Cayman Islands and its affairs are governed by its Memorandum and Articles of Association and Cayman Islands law[812] - Voting Rights: Class A common shares have one vote per share, while Class B common shares have ten votes per share, and Class B shares are convertible into Class A shares on a one-for-one basis, but not vice-versa[814][823][827] - PRC Taxation: Dividends from PRC subsidiaries to the overseas parent are generally subject to a 10% withholding tax, and the company could be classified as a PRC "resident enterprise," which would subject its worldwide income to a 25% PRC tax rate[863][864] - U.S. Taxation: There is a risk that the company could be classified as a Passive Foreign Investment Company (PFIC), which would lead to adverse U.S. federal income tax consequences for U.S. holders of its ADSs or shares[870][880] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are foreign exchange risk from RMB-USD fluctuations and interest rate risk on cash deposits, where a hypothetical 1% decrease would have reduced 2018 interest income by US$12.8 million, with no current hedging instruments in place - The company is exposed to foreign exchange risk as its revenues are primarily in RMB, while its ADSs are traded in USD, and the RMB is not freely convertible and its value fluctuates[894][897] - Interest rate risk primarily affects interest income from cash and deposits, where a hypothetical 1 percentage point decrease in interest rates would have lowered 2018 interest income by US$12.8 million[899] - The company has not entered into any hedging transactions to mitigate these risks[895] [Description of Securities Other than Equity Securities](index=153&type=section&id=ITEM%2012.%20DESCRIPTION%20OF%20SECURITIES%20OTHER%20THAN%20EQUITY%20SECU RITIES) This section details fees and charges for American Depositary Shares (ADSs) holders, including issuance, cancellation, and distribution fees, noting that the depositary reimbursed the company US$0.36 million in 2018 for ADS program expenses ADS Holder Service Fees | Service | Fee | | :--- | :--- | | Issuance of ADSs | Up to US$5.00 per 100 ADSs | | Cancellation of ADSs | Up to US$5.00 per 100 ADSs | | Distribution of cash dividends | Up to US$5.00 per 100 ADSs | | Distribution of ADSs (stock dividends, etc.) | Up to US$5.00 per 100 ADSs | | ADS Services Fee | Up to US$5.00 per 100 ADSs held on record date | - In 2018, the company received US$0.36 million from the depositary as reimbursement for expenses related to the ADS program[909] Part II Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2018, a conclusion affirmed by PricewaterhouseCoopers Zhong Tian LLP's unqualified opinion - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2018[914] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2018, based on the COSO framework[917] - The independent auditor, PricewaterhouseCoopers Zhong Tian LLP, issued an unqualified audit report on the effectiveness of the company's internal control over financial reporting as of December 31, 2018[918] Principal Accountant Fees and Services This section discloses fees paid to PricewaterhouseCoopers Zhong Tian LLP, totaling RMB 21.5 million in fiscal year 2018, primarily for audit services, all of which were pre-approved by the audit committee Accountant Fees (in RMB thousands) | Fee Type | 2017 | 2018 | | :--- | :--- | :--- | | Audit fees | 10,317 | 20,101 | | Audit-related fees | 4,029 | - | | Tax fees | - | 763 | | Others | - | 680 | - Audit fees for 2018 include services for the annual audit, internal controls audit, and services related to Huya's initial public offering[923] Corporate Governance As a foreign private issuer, the company adheres to Cayman Islands corporate governance practices, relying on exemptions from certain Nasdaq requirements, notably allowing a non-independent director to chair its compensation committee and for certain securities issuances without shareholder approval - The company follows home country (Cayman Islands) practices for certain governance matters, as permitted for foreign private issuers[930] - The company relies on an exemption allowing its compensation committee to be chaired by a non-independent director, Mr. David Xueling Li[931] Part III Financial Statements This section presents the company's audited consolidated financial statements for fiscal years 2016-2018, prepared under U.S. GAAP, including the Independent Auditor's Report, Balance Sheets, Statements of Comprehensive Income, Statements of Changes in Shareholders' Equity, Statements of Cash Flows, and detailed notes Report of Independent Registered Public Accounting Firm PricewaterhouseCoopers Zhong Tian LLP issued an unqualified opinion on the company's consolidated financial statements for the three years ended December 31, 2018, and also on the effectiveness of its internal control over financial reporting as of December 31, 2018 - The auditor's opinion states that the consolidated financial statements present fairly, in all material respects, the financial position of YY Inc. in conformity with U.S. GAAP[949] - The auditor also opined that the company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018[949]