JOYY(YYINZ) - 2023 Q4 - Annual Report

PART I ITEM 3. KEY INFORMATION This section details JOYY Inc.'s corporate structure, regulatory environment, and key risks, including its VIE arrangements, required Chinese approvals, cash flows, and comprehensive risk factors Holding Company Structure and VIE Arrangements JOYY Inc., a Cayman Islands holding company, operates in mainland China through VIEs controlled by contractual arrangements, a structure with inherent enforceability risks VIE Revenue Contribution | Fiscal Year | Revenue Contribution from VIEs | | :--- | :--- | | 2021 | 17.1% | | 2022 | 19.8% | | 2023 | 13.3% | - The company relies on contractual arrangements (e.g., voting rights proxy, exclusive service agreements) to control its VIEs in mainland China, as direct ownership is restricted in the internet and telecommunications sectors[24][25] - There are substantial uncertainties regarding the interpretation and application of Chinese laws concerning VIE structures. If the government finds the structure non-compliant, the company could face severe penalties, including being forced to relinquish its interests in its China operations[26] Required Permissions and Approvals in Mainland China The company's mainland China operations are subject to complex and evolving regulations, including new CSRC and CAC rules, which may require future approvals and pose compliance risks - The company's subsidiaries and VIEs in mainland China have obtained material licenses required for current operations, including the Internet Culture Operation License and ICP License[29] - New regulations, such as the CSRC's Overseas Listing Trial Measures (effective March 2023) and the CAC's Measures for Cybersecurity Review, may require the company to complete filing procedures or obtain approvals for future offerings and data processing activities, creating regulatory uncertainty[29][30] - As of the report date, the company has not been subject to any cybersecurity review by the CAC but acknowledges that failure to comply with future requirements could lead to significant penalties, including fines, license revocation, or business suspension[31][33] Cash and Asset Flows JOYY Inc. relies on cash flows from subsidiaries and VIEs, which are subject to mainland China's transfer restrictions, including statutory reserves and withholding taxes, with the holding company funding its own dividends via financing activities Inter-company Cash Flows (US$ in millions) | Flow Type | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | | Capital contributions to PRC subsidiaries | 7.8 | 8.7 | 20.0 | | VIE payments to subsidiaries (technical/software fees) | 114.6 | 109.7 | 86.1 | | Subsidiary payments to VIEs (revenues) | 129.4 | 9.7 | 14.5 | - Subsidiaries in mainland China must set aside at least 10% of after-tax profits for a statutory reserve fund until it reaches 50% of registered capital. As of December 31, 2023, these reserves amounted to US$37.7 million and are not distributable as cash dividends[42] - For the years 2021-2023, no subsidiaries paid dividends to the holding company, JOYY Inc. The holding company's cash dividends to its shareholders were funded through its own financing activities[40][43] Financial Information Related to VIEs This section provides detailed condensed consolidating financial schedules for JOYY Inc., its equity subsidiaries, the primary beneficiaries of the VIEs, and the VIEs themselves, including statements of operations, balance sheets, and cash flows for 2021-2023 VIEs and Subsidiaries - Selected Financial Data (FY 2023, US$ in thousands) | Metric | Amount | | :--- | :--- | | Total Revenue | 355,685 | | Net Income from Continuing Operations | 22,968 | | Total Assets (as of Dec 31, 2023) | 2,411,553 | | Total Liabilities (as of Dec 31, 2023) | 507,179 | VIEs and Subsidiaries - Selected Cash Flow Data (FY 2023, US$ in thousands) | Flow Type | Amount | | :--- | :--- | | Net Cash from Continuing Operating Activities | 27,077 | | Net Cash used in Continuing Investing Activities | (211,471) | | Net Cash used in Continuing Financing Activities | (2,314) | Risk Factors This section outlines significant risks to JOYY's ADSs, categorized into business, jurisdictional, corporate structure, and ADS-specific factors, including the terminated YY Live sale, live streaming revenue reliance, global regulatory complexities, VIE structure risks, and ADS price volatility - Business Risks: The company faces substantial uncertainty regarding the terminated sale of its YY Live business to Baidu, including whether the business will be returned and the status of the purchase price. A majority of revenue (87.3% in 2023) comes from live streaming, making the company vulnerable to declines in this segment[71][75][79] - Jurisdictional Risks: Operating globally exposes the company to complex and evolving laws regarding cybersecurity, data privacy (e.g., GDPR, China's PIPL), and content regulation. Failure to comply could result in significant penalties. The company also faces risks from geopolitical tensions and potential government actions, such as the blocking of its apps in India in 2020[99][96][183] - Corporate Structure Risks: The VIE structure used for China operations is subject to interpretation by PRC authorities. If deemed non-compliant, the company could face severe penalties, including being forced to relinquish its interests in these operations. The contractual arrangements may not be as effective as direct ownership[230][237] - ADS Risks: The company believes it was a Passive Foreign Investment Company (PFIC) for U.S. tax purposes in 2023, which could have adverse tax consequences for U.S. holders. The dual-class share structure gives co-founder David Xueling Li significant voting control (83.0% as of March 31, 2024), limiting the influence of other shareholders[262][265] ITEM 4. INFORMATION ON THE COMPANY This section provides a comprehensive overview of JOYY Inc.'s history, business strategy, products, and regulatory landscape, emphasizing its global expansion, AI investment, and complex multi-jurisdictional compliance requirements History and Development of the Company JOYY Inc., founded in 2005, has evolved into a global technology company through acquisitions like BIGO and Shopline, facing significant uncertainty regarding the terminated sale of its YY Live business to Baidu - The company expanded its global operations by acquiring BIGO in March 2019 and consolidating the smart commerce platform Shopline in September 2022[298][303] - On January 1, 2024, Baidu issued a notice to terminate the share purchase agreement for the YY Live business. The company is currently in discussions with Baidu and seeking legal advice, with the final outcome, including the status of the US$3.6 billion purchase price, remaining uncertain[302][74] Business Overview JOYY is a global social entertainment and smart commerce company, leveraging AI and a "globalization through localization" strategy, with monetization primarily from live streaming virtual item sales and growing contributions from advertising and e-commerce Key Financial Metrics (US$ in billions) | Year | Total Revenue | Net Income/(Loss) from Continuing Operations | | :--- | :--- | :--- | | 2021 | 2.6 | (0.125) | | 2022 | 2.4 | 0.120 | | 2023 | 2.3 | 0.347 | - The company's global monthly active users on its social platforms reached 274.9 million in Q4 2023, a 2.6% year-over-year increase[307] - The core business strategy is "globalization through localization," supported by over 30 regional offices and a focus on tailoring products and content to local cultures[315] - Artificial intelligence (AI) is integrated into all critical aspects of the business, including content recommendation, user engagement features, content moderation, and operational decision-making[316] Organizational Structure This section illustrates JOYY Inc.'s corporate structure, showing the Cayman Islands holding company, key global subsidiaries like Bigo Technology, and mainland China VIEs controlled via contractual arrangements - The corporate structure is headed by JOYY Inc., a Cayman Islands holding company[555] - Key operating subsidiaries for the global business include Bigo Technology Pte. Ltd[299][555] - Operations in mainland China are conducted through Variable Interest Entities (VIEs) like Guangzhou Huaduo and Guangzhou BaiGuoYuan, which are controlled via contractual arrangements rather than direct equity ownership[299][555] Property, Plant, and Equipment JOYY Inc.'s corporate headquarters is in Singapore, with leased global office space and owned land use rights and buildings in mainland China, including a major completed project in Guangzhou and ongoing construction commitments - The company's corporate headquarters is located in Singapore, and it leases 48,708 square meters of office space globally[556] - A significant property in Pazhou, Guangzhou, with approximately 142,000 square meters of floor area, was completed in 2023[558] - As of December 31, 2023, the company had capital commitments of US$170.5 million related to building construction, primarily for a project in Foshan scheduled for completion in 2026[558] ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS This section analyzes JOYY's financial condition and results for 2021-2023, highlighting a revenue decrease offset by significant net income growth due to non-recurring impairment and improved margins, with liquidity supported by operations and financing activities Operating Results In 2023, JOYY's net revenues decreased to US$2.3 billion due to lower live streaming revenue, but net income from continuing operations significantly increased to US$347.4 million, primarily due to the non-recurrence of a 2022 impairment loss Consolidated Results of Operations (US$ in millions) | Metric | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | | Total Net Revenues | 2,619.1 | 2,411.5 | 2,267.9 | | Live Streaming | 2,476.8 | 2,225.5 | 1,979.4 | | Others | 142.3 | 186.0 | 288.5 | | Gross Profit | 837.9 | 852.1 | 813.0 | | Operating (Loss) Income | (106.7) | 50.7 | 28.8 | | Net (Loss) Income from Continuing Operations | (129.6) | 101.6 | 272.4 | - The decrease in 2023 live streaming revenue was primarily due to proactive adjustments to non-core audio products and a decrease in ARPU from US$452 in 2022 to US$403 in 2023, caused by macroeconomic uncertainties[605] - The significant increase in net income from continuing operations in 2023 was largely due to the non-recurrence of a US$417.2 million impairment loss from an equity method investment that was recognized in 2022[612][613] Liquidity and Capital Resources The company's liquidity is supported by cash from operations and financing, with US$1.44 billion in cash as of December 31, 2023, but faces material cash requirements from convertible notes and capital commitments, including a US$406.0 million repurchase option in June 2024 Summary of Cash Flows (US$ in millions) | Cash Flow Activity | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | | Net Cash from Continuing Operations | 146.1 | 316.5 | 295.6 | | Net Cash (used in)/from Continuing Investing | (846.9) | (510.3) | 420.4 | | Net Cash used in Continuing Financing | (723.5) | (321.9) | (841.7) | - As of December 31, 2023, the company had US$1.44 billion in cash, cash equivalents, and restricted deposits[648] - Major cash outflows in 2023 included US$432.2 million for extinguishment of convertible bonds and US$273.9 million for share repurchases[661] - The company faces a significant potential cash requirement in June 2024, as holders of the US$406.0 million outstanding 2026 Notes have the right to require the company to repurchase them[668] Critical Accounting Estimates This section details critical accounting estimates, including complex revenue recognition for live streaming and annual goodwill impairment tests for BIGO and Shopline, where fair values exceeded carrying values by small margins, indicating sensitivity to assumptions - Revenue recognition for live streaming requires significant judgment in identifying distinct performance obligations within contracts (e.g., noble member programs) and allocating the transaction price based on estimated standalone selling prices[683] - Goodwill impairment assessment is a critical estimate. The fair value of the BIGO reporting unit, determined by a discounted cash flow model, exceeded its carrying value by approximately 3% as of December 31, 2023[999][696] - The fair value of the Shopline reporting unit, determined by a market approach, exceeded its carrying value by approximately 1% as of December 31, 2023, highlighting the sensitivity of the goodwill balance to market conditions and performance[696][1003] ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES This section covers the company's leadership, compensation, board structure, and employee base, noting the dual-class share structure giving co-founder David Xueling Li significant voting control and the employee distribution by function - As of March 31, 2024, co-founder, Chairman, and CEO David Xueling Li, along with his affiliates, controlled 83.0% of the company's total voting power due to the dual-class share structure[749][265] Employee Breakdown by Function (as of Dec 31, 2023) | Function | Number of Employees | Percentage | | :--- | :--- | :--- | | Customer services and operations | 2,623 | 42% | | Research and development | 2,565 | 41% | | General and administration | 594 | 9% | | Sales and marketing | 510 | 8% | | Total | 6,292 | 100% | - For the fiscal year 2023, the aggregate cash compensation (salaries and bonuses) paid to directors and executive officers was US$2.3 million[707] - As of March 31, 2024, there were 8,574,220 options, 5,968,858 restricted shares, and 43,061,343 restricted share units outstanding under the company's share incentive plans[711] ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS This section details the company's major shareholders and the contractual arrangements forming its Variable Interest Entity (VIE) structure for mainland China operations, designed to provide effective control and economic benefits despite foreign ownership restrictions - The company conducts its restricted business in mainland China through a VIE structure, relying on a series of contractual arrangements to control entities like Guangzhou BaiGuoYuan and Guangzhou Ruicheng[754] - Key contractual agreements that enable control over the VIEs include: Exclusive Service Agreements, Voting Rights Proxy Agreements, Exclusive Option Agreements, and Equity Interest Pledge Agreements[758][763] - The VIE structure is designed to ensure stability and governance, with VIEs typically held by limited partnerships whose partners are selected individuals from the company's management team[755] ITEM 8. FINANCIAL INFORMATION This section covers legal proceedings, noting the resolution of a securities class action lawsuit, and the company's expired dividend policies, with future dividends at board discretion and subject to mainland China cash transfer restrictions - A securities class action lawsuit filed against the company in November 2020 was dismissed with prejudice, and the dismissal was affirmed on appeal in May 2023, resolving the matter[777] - The company had two three-year quarterly dividend policies, which have both expired. A total of US$454.8 million was paid to shareholders under these policies. Future dividend distributions are not guaranteed and are at the discretion of the board[779] ITEM 9. THE OFFER AND LISTING This section details the listing of JOYY Inc.'s American Depositary Shares (ADSs) on the Nasdaq Global Select Market under the ticker symbol "YY", with each ADS representing twenty Class A common shares - JOYY Inc.'s American Depositary Shares (ADSs) are listed on the Nasdaq Global Select Market under the ticker symbol "YY"[785] - Each ADS represents twenty Class A common shares[785] ITEM 10. ADDITIONAL INFORMATION This section provides detailed information on the company's corporate governance, including its dual-class share structure and Cayman Islands corporate law differences, and its tax status, notably its belief of being a Passive Foreign Investment Company (PFIC) for 2023 - 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. Class B shares are convertible to Class A, but not vice-versa[800][804] - 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, 2023, which could subject U.S. holders of its ADSs or shares to significant adverse tax consequences[262][905] - Dividends from the company's PRC subsidiaries to offshore entities are subject to a 10% withholding tax, which may be reduced by tax treaties[922] ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section details the company's exposure to market risks, primarily foreign exchange risk from non-USD revenues/expenses and interest rate risk on cash holdings, where a 1% rate decrease would reduce net interest income by US$27.7 million - The company is exposed to foreign exchange risk as some revenues and expenses are in currencies other than the U.S. dollar. A 10% depreciation of the RMB against the USD would result in a US$54.2 million decrease in the value of its RMB-denominated cash and investments as of December 31, 2023[931][932] - The company is exposed to interest rate risk on its interest-earning cash and deposits. A hypothetical 1% decrease in interest rates would have resulted in a US$27.7 million decrease in total net interest income based on its holdings as of December 31, 2023[933] ITEM 15. CONTROLS AND PROCEDURES This section confirms the effectiveness of the company's disclosure controls and internal control over financial reporting as of December 31, 2023, as evaluated by management and attested by PricewaterhouseCoopers LLP - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2023[946] - Based on the COSO framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2023. This assessment was audited and confirmed by PricewaterhouseCoopers LLP[948][949] ITEM 16. Other Information This section covers governance and compliance, including the audit committee financial expert, code of ethics, principal accountant fees, ongoing share repurchase program, foreign private issuer exemptions, and cybersecurity risk management strategy Principal Accountant Fees (US$ in thousands) | Year | Audit Fees | | :--- | :--- | | 2022 | 4,053 | | 2023 | 3,108 | - The company's share repurchase program was renewed in November 2023, authorizing the continued use of the unutilized quota of approximately US$530 million for another 12-month period. In 2023, the company repurchased 9,128,846 ADSs for a total of US$273.5 million[957][960][1296] - The company utilizes exemptions available to foreign private issuers, following home country governance practices regarding board and committee independence instead of certain Nasdaq requirements[963] - The company has a cybersecurity risk management framework where the board of directors provides oversight, and key officers, including the CEO and a dedicated cybersecurity officer, are responsible for managing threats and reporting to the board[971][972] PART III ITEM 18. FINANCIAL STATEMENTS This section contains JOYY Inc.'s audited consolidated financial statements for 2021-2023, prepared under U.S. GAAP, including reports from independent auditors and detailed financial statements with accompanying notes ITEM 19. EXHIBITS This section lists all exhibits filed with the annual report, including corporate documents, securities descriptions, share incentive plans, material contracts like VIE agreements, and various certifications and consents