JOYY(YYINZ) - 2019 Q4 - Annual Report

PART I Key Information This section outlines JOYY Inc.'s financial performance, capital structure, and risk profile, emphasizing live streaming revenue growth and key business, regulatory, and structural challenges Selected Financial Data The company's net revenues significantly grew to RMB 25.6 billion in 2019, driven by live streaming, with net income reaching RMB 3.4 billion and total assets expanding to RMB 52.2 billion due to the Bigo acquisition Selected Consolidated Statements of Operations Data (2017-2019) | | 2017 | 2018 | 2019 | | :--- | :--- | :--- | :--- | | | (RMB thousands) | (RMB thousands) | (RMB thousands) | | Total net revenues | 11,594,792 | 15,763,557 | 25,576,204 | | Live streaming | 10,670,954 | 14,877,667 | 24,028,299 | | Others | 923,838 | 885,890 | 1,547,905 | | Gross profit | 4,568,390 | 5,746,423 | 8,427,854 | | Operating income | 2,699,231 | 2,639,690 | 1,067,955 | | Net income attributable to common shareholders | 2,493,235 | 1,641,958 | 3,379,330 | Selected Consolidated Balance Sheet Data (As of Dec 31, 2018 & 2019) | | 2018 | 2019 | | :--- | :--- | :--- | | | (RMB thousands) | (RMB thousands) | | Total assets | 25,768,045 | 52,209,483 | | Cash and cash equivalents | 6,004,231 | 3,893,538 | | Short-term deposits | 7,326,996 | 16,770,885 | | Goodwill | 11,763 | 12,947,192 | | Total liabilities | 3,972,241 | 13,325,646 | | Total shareholders' equity | 21,377,131 | 38,417,766 | - Share-based compensation expenses totaled RMB 948.1 million in 2019, a significant increase from previous years, with the largest allocations to Research and Development (RMB 505.7 million) and General and Administrative (RMB 348.5 million) expenses[22] Risk Factors The company faces numerous risks, including heavy reliance on live streaming revenue, intense competition, PRC regulatory scrutiny of its VIE structure, data privacy laws, and PFIC classification for U.S. tax purposes - The business is heavily dependent on live streaming, which constituted 93.9% of total net revenue in 2019. Any decline in this segment could materially affect results[39][44] - The company faces significant competition from other social media and live streaming platforms in China (Kuaishou, Douyin, Tencent Music, Momo, Douyu) and overseas (TikTok)[71] - The company's VIE structure, essential for its PRC operations, faces risks from PRC regulations. If the government finds this structure non-compliant, it could face severe penalties, including the shutdown of its platforms[149][151][152] - The company believes it was a Passive Foreign Investment Company (PFIC) for the 2019 tax year, which could result in significant adverse U.S. federal income tax consequences for U.S. holders of its ADSs[255][257] - The company's dual-class share structure gives holders of Class B shares ten votes per share, compared to one for Class A shares. As of March 31, 2020, Mr. David Xueling Li and his affiliates held 75.8% of the total voting power, giving them substantial control over corporate matters[261][262] Information on the Company This section details JOYY's corporate history, business operations, organizational structure, and properties, highlighting the Bigo acquisition, name change, global platform portfolio, AI strategy, and VIE structure History and Development of the Company JOYY Inc., founded in 2005 and public since 2012, underwent strategic changes including the 2019 Bigo acquisition and corporate name change, with Huya's controlling stake transferred to Tencent in April 2020 - In March 2019, the company completed the acquisition of the remaining 68.3% of Bigo for US$343.1 million in cash and the issuance of common shares, making Bigo a wholly-owned subsidiary[300] - Effective December 20, 2019, the company changed its corporate name from "YY Inc." to "JOYY Inc."[302] - On April 3, 2020, the company transferred a controlling stake in Huya to a Tencent subsidiary for approximately US$262.6 million. Consequently, JOYY will no longer consolidate Huya's operating results[297] Business Overview JOYY operates a global social media matrix focused on video content, monetizing primarily through virtual item sales on platforms like YY Live and Bigo Live, leveraging AI, and navigating extensive content and data privacy regulations Key Product Mobile Monthly Active Users (MAU) - Q4 2019 | Platform | Mobile MAU (Q4 2019) | YoY Growth | | :--- | :--- | :--- | | imo | 211.0 million | N/A | | Likee | 115.3 million | 208.3% | | Huya | 61.6 million | 21.5% | | YY Live | 41.2 million | 3.8% | | Hago | 33.0 million | 57.9% | | Bigo Live | 23.1 million | 18.6% | - The company's business model focuses on integrating traffic generation, user engagement, and monetization, primarily through the sale of virtual items in live streaming[313] - Artificial intelligence (AI) is integral to all critical aspects of the business, from content recommendation and distribution to automated product testing and corporate decision-making[312][334] - The company is subject to extensive PRC regulations covering telecommunications, internet content, online games, virtual currency, and data security, as well as international regulations like GDPR in the EU and the CCPA in California[352][469][470][472] Organizational Structure JOYY Inc. operates in China via Variable Interest Entities (VIEs) like Guangzhou Huaduo, essential for complying with PRC foreign ownership restrictions, providing effective control and financial consolidation - The company uses a Variable Interest Entity (VIE) structure to conduct its operations in China due to PRC restrictions on foreign ownership in the internet sector[790] - Key VIEs include Guangzhou Huaduo, Beijing Tuda, Bilin Online, Guangzhou Huya, and Guangzhou BaiGuoYuan. These entities are controlled through a series of contractual agreements rather than direct equity ownership[482][790] - As of April 3, 2020, JOYY owned 43.0% of the voting power in HUYA Inc. and no longer consolidates its financial results[483] Property, Equipment and Land Use Right The company's headquarters are in Guangzhou, China, with additional owned and leased office spaces globally, including Zhuhai and Singapore, while physical servers are hosted in third-party data centers - The company's corporate headquarters is in Guangzhou, China, comprising 37,548 square meters. It also owns a 27,206 square meter building in Zhuhai[484] - Bigo's headquarters is in Singapore, and it leases 39,793 square meters of office space globally. Huya leases 30,402 square meters, primarily in Guangzhou[485][486] Operating and Financial Review and Prospects This section analyzes JOYY's financial condition and results, noting a 62.2% revenue surge in 2019 driven by Bigo consolidation, alongside sharp increases in costs and operating expenses due to global expansion Operating Results In 2019, net revenues increased 62.2% to RMB 25.6 billion, primarily from live streaming and Bigo consolidation, while costs and operating expenses rose significantly due to revenue sharing, bandwidth, and sales and marketing Year-over-Year Financial Performance (2018 vs. 2019) | Metric | 2018 (RMB millions) | 2019 (RMB millions) | Change (%) | | :--- | :--- | :--- | :--- | | Net Revenues | 15,763.6 | 25,576.2 | +62.2% | | Live Streaming Revenues | 14,877.7 | 24,028.3 | +61.5% | | Cost of Revenues | 10,017.1 | 17,148.4 | +71.2% | | Revenue Sharing & Content | 8,272.7 | 12,861.4 | +55.5% | | Bandwidth Costs | 967.4 | 1,723.0 | +78.1% | | Operating Expenses | 3,224.6 | 7,764.7 | +140.8% | | R&D Expenses | 1,192.1 | 2,535.5 | +112.7% | | Sales & Marketing Expenses | 1,149.3 | 3,739.7 | +225.4% | | Net Income Attributable to Shareholders | 1,642.0 | 3,379.3 | +105.8% | - The significant increase in net income for 2019 was heavily influenced by a non-cash gain of RMB 2.7 billion on the fair value change of the company's pre-existing investment in Bigo upon its acquisition[634][1267] - The company's three main segments in 2019 were YY, Huya, and Bigo. Bigo, consolidated from March 2019, contributed RMB 5.0 billion in revenue for the period[648][652] Liquidity and Capital Resources The company financed operations through cash flow and a US$1 billion convertible notes offering in 2019, with cash, cash equivalents, and restricted cash totaling RMB 4.55 billion by year-end Summary of Cash Flows (2019) | Cash Flow Item | Amount (in millions RMB) | | :--- | :--- | | Net cash provided by operating activities | 4,581.7 | | Net cash used in investing activities | (15,609.9) | | Net cash provided by financing activities | 9,469.9 | | Net decrease in cash and equivalents | (1,558.3) | - In June 2019, the company issued US$1 billion in convertible senior notes (US$500 million due 2025 and US$500 million due 2026), receiving net proceeds of US$982.4 million[690] - As of December 31, 2019, the company held RMB 4.55 billion in cash, cash equivalents, and restricted cash, down from RMB 6.00 billion at the end of 2018[691] - Capital expenditures were RMB 1.22 billion (US$175.9 million) in 2019, a significant increase from RMB 392.8 million in 2018, primarily for purchasing office space, servers, and other assets[707] Tabular Disclosure of Contractual Obligations As of December 31, 2019, JOYY's primary contractual obligations included operating lease commitments, capital commitments, and convertible senior notes, representing significant future payments Contractual Obligations as of December 31, 2019 | Obligation Type | Total | Less than 1 year | 1-2 years | 3-5 years | More than 5 years | | :--- | :--- | :--- | :--- | :--- | :--- | | | (RMB thousands) | (RMB thousands) | (RMB thousands) | (RMB thousands) | (RMB thousands) | | Operating lease commitments (RMB) | 359,971 | 159,920 | 106,987 | 93,064 | — | | Capital commitment (RMB) | 915,780 | 506,924 | 197,749 | 211,107 | — | | Convertible senior notes (US$) | 1,065,313 | 10,625 | 10,625 | 31,875 | 1,012,188 | Directors, Senior Management and Employees This section covers JOYY's leadership, compensation, board structure, and workforce, highlighting key executives, share incentive plans, board committees, and a dual-class share structure concentrating voting power Directors and Senior Management JOYY is led by co-founder David Xueling Li as Chairman and CEO, supported by a senior management team including the CFO, COO, and CTO, with a board comprising five directors, including four independent members - Mr. David Xueling Li is the co-founder, Chairman of the Board, and Chief Executive Officer[719] - The senior executive team includes Bing Jin (CFO), Ting Li (COO), and Pengjun Lu (CTO)[719] Compensation of Directors and Executive Officers In 2019, directors and executive officers received RMB 28.8 million in cash compensation, with equity-based incentives from three share incentive plans aligning management interests with shareholder value - For the fiscal year ended December 31, 2019, the aggregate cash compensation (salaries and bonuses) paid to directors and executive officers was RMB 28.8 million (US$4.1 million)[728] - The company has three share incentive plans: the 2009 Scheme (expired Dec 2019), the 2011 Plan, and the 2019 Arrangement (for Bigo employees)[732][734][744][753] - As of March 31, 2020, there were outstanding options to purchase 10.3 million common shares, 37.1 million restricted shares, and 42.7 million restricted share units under the various plans[733] Board Practices The board of directors, consisting of five members, has four key committees, with the Audit Committee comprising independent directors and the Compensation Committee chaired by the CEO under foreign private issuer exemptions - The board has four committees: Audit, Compensation, Corporate Governance and Nominating, and Investment[765] - The Audit Committee consists of three independent directors: Peter Andrew Schloss (Chairman), David Tang, and Richard Weidong Ji. Mr. Schloss qualifies as an "audit committee financial expert"[766] - The Compensation Committee is chaired by CEO David Xueling Li, who is not an independent director, a practice permitted under foreign private issuer exemptions[767] Employees As of December 31, 2019, JOYY's workforce more than doubled to 9,273 employees, with a strong focus on research and development and customer services, and participation in all required PRC social security plans Employee Breakdown by Function (as of Dec 31, 2019) | Function | Number of Employees | Percentage | | :--- | :--- | :--- | | Customer services and operations | 4,210 | 45% | | Research and development | 3,946 | 43% | | Sales and marketing | 446 | 5% | | General and administration | 671 | 7% | | Total | 9,273 | 100% | - The total number of employees more than doubled from 4,325 at the end of 2018 to 9,273 at the end of 2019[775] Share Ownership The company's dual-class share structure, with Class B shares holding ten votes per share, grants co-founder David Xueling Li substantial control, owning 75.8% of the total voting power as of March 31, 2020 - As of March 31, 2020, David Xueling Li, Chairman and CEO, beneficially owned shares representing 75.8% of the total voting power[784] - The company has a dual-class share structure where Class A common shares have one vote per share and Class B common shares have ten votes per share[788] Major Shareholders and Related Party Transactions This section details JOYY's concentrated ownership structure and related party transactions, particularly the critical contractual arrangements with its Variable Interest Entities (VIEs) for PRC operations Related Party Transactions JOYY conducts China operations via VIE contractual arrangements to comply with foreign ownership restrictions, receiving significant service fees from entities like Guangzhou Huaduo and Guangzhou Huya, and engaging in affiliate transactions - The company relies on a VIE structure to operate in China. This involves a series of contractual arrangements with entities like Guangzhou Huaduo and Guangzhou Huya to transfer economic benefits and maintain control[790] - In 2019, the company received service fees of RMB 476.5 million from Guangzhou Huaduo and RMB 941.0 million from Guangzhou Huya under these VIE arrangements[798][806] - The company paid RMB 116.0 million (US$16.7 million) for bandwidth services in 2019 to Guangzhou Sunhongs, a company in which principal shareholder Mr. Jun Lei holds a 19.5% interest[832] Financial Information This section includes consolidated financial statements, discusses a notable lawsuit with NetEase resulting in a RMB 20.0 million compensation order, and confirms the company's policy of not paying dividends - The company was ordered by the Guangzhou Intellectual Property Court to compensate NetEase RMB 20.0 million for copyright infringement related to the game Fantasy Westward Journey. The judgment was upheld on appeal in December 2019[840] - The company has never paid dividends and does not have a current plan to do so, preferring to retain earnings for operational and expansion purposes[844] Additional Information This section details JOYY's corporate governance and legal framework as a Cayman Islands company, highlighting its dual-class share structure, differences in shareholder rights, and its classification as a PFIC for U.S. tax purposes - The company's common stock is divided into Class A (1 vote per share) and Class B (10 votes per share). Class B shares are convertible to Class A, but not vice-versa, concentrating voting power with Class B holders[856][864] - The company believes it was a Passive Foreign Investment Company (PFIC) for U.S. federal income tax purposes for the taxable year ended December 31, 2019[949] - As a Cayman Islands company, shareholder rights differ from those in the U.S. For example, shareholders have no general right to inspect corporate records or lists of shareholders, and derivative lawsuits are more difficult to bring[903][912][936] Quantitative and Qualitative Disclosures about Market Risk The company's primary market risks are foreign exchange risk, impacting USD-denominated assets, and interest rate risk on deposits, with a hypothetical 10% USD depreciation decreasing asset value by RMB 1.39 billion - The company is exposed to foreign exchange risk as most revenues are in RMB while some assets are in USD. As of Dec 31, 2019, a 10% depreciation of the USD against the RMB would result in a decrease of RMB 1.39 billion in the value of its USD-denominated cash, deposits, and investments[968][971] - The company is exposed to interest rate risk on its interest-earning bank deposits. A hypothetical 1% decrease in interest rates would have reduced interest income by US$23.6 million for the year ended December 31, 2019[972] Controls and Procedures Management concluded that JOYY's disclosure controls and internal control over financial reporting were effective as of December 31, 2019, with the independent auditor also issuing an unqualified opinion - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2019[986] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2019, based on the COSO framework (2013)[988] - In 2019, the company completed the integration of the internal control over financial reporting of its acquisition, Bigo[990] Principal Accountant Fees and Services This section details fees paid to PricewaterhouseCoopers Zhong Tian LLP, totaling RMB 26.9 million in 2019, with audit fees comprising the largest portion, all pre-approved by the audit committee Accountant Fees (2018-2019) | Fee Type | 2018 (RMB thousands) | 2019 (RMB thousands) | | :--- | :--- | :--- | | Audit fees | 20,101 | 23,186 | | Audit-related fees | — | 688 | | Tax fees | 763 | 2,521 | | Others | 680 | 534 | Purchases of Equity Securities by the Issuer and Affiliated Purchasers In August 2019, the board approved a US$300 million share repurchase plan, under which the company repurchased approximately 0.4 million ADSs for US$23.7 million by year-end - On August 13, 2019, the board approved a 12-month share repurchase plan for up to US$300 million[1001] Share Repurchases in 2019 | Period | Total ADSs Purchased | Average Price Paid Per ADS (US$) | Approx. Dollar Value of ADSs Purchased (US$ thousands) | Value Remaining Under Plan (US$ thousands) | | :--- | :--- | :--- | :--- | :--- | | Aug 14 - Aug 31, 2019 | 434,145 | 54.62 | 23,713 | 276,287 | PART III Financial Statements This section presents JOYY's audited consolidated financial statements, with the auditor identifying critical audit matters related to Bigo acquisition intangible asset valuation, goodwill impairment, and revenue recognition - The independent auditor, PricewaterhouseCoopers Zhong Tian LLP, identified three Critical Audit Matters for the 2019 audit: 1) Valuation of trademark and user base intangible assets from the Bigo acquisition, 2) Goodwill impairment assessment for the Bigo reporting unit, and 3) Revenue recognition for contracts with multiple performance obligations[1040][1041][1045][1048] - The acquisition of Bigo in March 2019 was a transformative event, with net consideration of RMB 16.0 billion, resulting in the recognition of RMB 12.4 billion in goodwill and RMB 3.5 billion in identifiable intangible assets (trademark, user base, etc.)[1041][1265][1269] - On April 3, 2020, the company sold a controlling stake in Huya to Tencent for US$262.6 million. As a result, Huya ceased to be a subsidiary and its results will be accounted for using the equity method going forward[1445] Exhibits This section lists all exhibits filed with the annual report, including articles of association, share incentive plans, material contracts like VIE agreements, convertible notes indentures, and required CEO/CFO certifications - The exhibits include the detailed contractual arrangements that form the basis of the company's VIE structure for its key PRC operating entities, such as Guangzhou Huaduo, Beijing Tuda, and the entities related to Huya and Bigo[1013][1014][1015] - Filed exhibits include the indentures for the US$500 million 0.75% Convertible Senior Notes due 2025 and the US$500 million 1.375% Convertible Senior Notes due 2026[1021] - The list includes the 2009, 2011, and 2019 Share Incentive Plans, which govern the company's equity compensation for employees[1013][1021]