OYY Inc. (NASDAQ:YY) Q2 2022 Earnings Conference Call August 29, 2022 9:00 PM ET

Company Participants

Jane Xie - Senior Manager of Investor Relations
David Xueling Li - Chairman & Chief Executive Officer
Alex Liu - General Manager of Finance
Ting Li - Chief Operating Officer

Conference Call Participants

Alex Poon - Morgan Stanley
Thomas Chong - Jefferies
Daniel Chen - JPMorgan
Yiwen Zhang - China Renaissance

Operator

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the JOYY Inc.'s Second Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. After the management's prepared remarks, there will be a question-and-answer session.

I would now like to hand the conference over to your host, Jane Xie, the company's Senior Manager of Investor Relations. Please go ahead, Jane.

Jane Xie

Thank you, operator. Hello, everyone. Welcome to JOYY's Second Quarter 2022 Earnings Conference Call. Joining us today are Mr. David Xueling Li, Chairman and CEO of JOYY; Ms. Ting Li, our COO, and Mr. Alex Liu, the General Manager of Finance.

For today's call, management will first provide a review of the quarter, and then we will conduct a Q&A session. The financial results and webcast of this conference call are available at ir.joyy.com. A replay of this call will also be available on our website in a few hours.

Before we continue, I would like to remind you that we may make forward-looking statements, which are inherently subject to risks and uncertainties that may cause actual results to differ from our current expectations. For detailed discussions of the risks and uncertainties, please refer to our latest annual report on Form 20-F and other documents filed with the SEC.

Finally, please note that unless otherwise stated, all figures mentioned during this conference call are in US dollars.

I will now turn the call over to our Chairman and CEO, Mr. David Xueling Li. Please go ahead, sir.

David Xueling Li

Thank you. Hello, everyone. Welcome to our second quarter 2022 earnings call. Let me start with an overview of our quarterly results. Despite the global macroeconomic uncertainties and the seasonality impact of Ramadan holiday in the Middle East, we achieved $598.1 million in revenues include – including of $502.6 million of revenue from BIGO, approaching the higher end of our previous guidance.

We grow our non-GAAP net profit to $51.5 million at a group level, realizing our non-GAAP net margin of 8.6%. Notably, the BIGO segment expanded its non-GAAP net profit to $86.3 million and improved its non-GAAP net margin to 17.2%.

Our operating cash flow includes – continued to be strong, reaching $61.7 million for the quarter. The steady expansion of our profitability and this current market condition demonstrated the improved efficiency – improved the efficiency and enhanced resilience of our business. We are in an element of increased macro uncertainty within inflation and increase the cost of leading continued to negatively impact consumer spending, the lifting of lockdown and travel restrictions imposed during the pandemic contribute to resurgence in travel demand during the summer season.

Further diverting consumers plan and spending to off-line activities, the aggressive application of the US dollar was also our favorable factor as our price rose in local currency terms. Those various high winds had and will affect the short-term monetization efficiency for a wide variety of global companies include JOYY.

Despite these macroeconomic challenges, a significant proportion of global users is still unreserved for social entertainment services. In time, increase the uncertainties, users are seeking more emotional value from their products, such as a sense of belonging and meaningful connections with others. That's why we respond to this the light micro element first and foremost by turning inward, continuing to integrate our products and cultivate our user community, while making the emotional value our services can provide.

In recent quarters, we launched several major product features updates, including Bigo Live‘s virtual live and community, Likee’s Loop, interest-based community feature and HAGO’s, 3D HAGO space. Those features serve to improve the quality and the efficiency of our users' social experience enabling them to better engage and foster meaningful connections with those who have a similar interest together with our drivers and includes the community culture. We believe those efforts will help our products deliver an important and unique emotional value to our users.

In addition to making this emotional value, we continue to be fully dedicated to creating value for our creators by providing creator-friendly video creation tools and monetization features and cultivating a user community that is built on equity and connections. We have established a creator centric economy ecosystem that enable a large number of creators to showcase their talents in front of global audience and at the same time join from missing economy returns.

Over the past few years, we have invested a cumulative total of our US$1 billion in creator’s reward. With the support of our global operation team and implementation of variety of activities tailored to local users every needs, we empower our creators to gain exposure, both locally and internationally and enables them to realize the new levels of personal and professional success.

Going forward, we remain committed to delivering value to our users and creators. We will continue to cultivate diverse premium content, innovate interactive features and organize tailored local activities. We expect those efforts will further improve the user experience and ultimately facilitate the growth of our user community and global business.

To mitigate risks against the current market, we proactively implemented a series of measures to further improve our efficiency and enhance the resilience of our business. As we continue to execute sustainable growth strategy and emphasize our products organic growth.

We will be more adaptive in the execution of our user acquisition strategy. This means we will dynamically adjust our strategy based on our ROI and closely monitor shifting marketing conditions.

For products that are still loss-making such as, Likee and HAGO, we will focus on the steady improvement of their respective monetization capabilities, stick to disciplined sales and marketing strategy and optimize their cost structure in order to steadily narrow their respectively operation loss. We will also continue to enhance product synergy and optimize our business process to drive further improvement of our operation efficiency at the group level.

As we maintained a healthy growth trajectory in our profit and cash flow since the 2021, we are in a strong financial position that allows us to have greater flexibility and continued investments in core area that build our long-term capabilities.

We expect to emerge from the above recalibration as a more focused and more productive organization, better positioned to capture long-term growth opportunities.

Now, let me dive deeper into the progress we made in each of our product lines. Let us start with Bigo Live. As a result of macroeconomic uncertainties and the seasonality during two Ramadan holiday in the Middle East, Bigo Live's live streaming revenue and the number of paying users declined during the second quarter.

Yet, Bigo Live's user base and engagement level continue to grow. Thanks to our innovative feature updates and localized activities with embraced original tradition -- regional traditions and user needs.

During the second quarter, Bigo Live's MAU increased by 10.6% year-over-year to $32.6 million. Notably, users in Southeast Asia and other emerging markets increased by 18.6% while users in Europe increased by 8.7% year-over-year.

To help our users in the Middle East and certain Southeast Asia countries celebrate their Ramadan holiday, Bigo Live launched a series of live events that tailored to local traditions. This include cooking sessions, quiz shows and singing contests and invited the local celebrities and influencers to demonstrate the unique cultural tradition of their regions.

Our new Community feature, which was launched in the last quarter continue to -- contribute to content diversification and user engagement improvements in the BAR channel. BAR’s average views per user increased by 41% -- 14.1% and the volume of its video content increased by 7.3% sequentially.

Bigo Live also upgraded its Virtual Live feature to enable trendier live streaming experience for its users, driving up both the number of users and cumulative time spent on Virtual Live sessions substantially over the previous quarter.

Next, let's turn to Likee. During the second quarter, for a similar reason to Bigo Live, Likee’s live streaming revenue and the number of paying user decline. As mentioned earlier, given the current micro elements and the fact that short video monetization is still at an early stage of development, Likee continued to excise prudence in its sales and marketing strategy further optimize its cost structure and actively explore new opportunities for monetization. We have made progress in executing those objectives, and we successfully narrowed Likee’s operating loss by 85% year-over-year during the first half of 2022.

In mid-June, Likee launched a new feature called Loop in Europe and US Loop is a community feature that helps users to with similar interest connect with each other, and we have so far received positive feedback from our users. For example, shortly after Loop was launched, the i9 [ph] community shared more than six million episodes of video content and over 50% of the user in the i9 community are following one another. This indicates that Loop has contributed to the fostering of a high level of connection.

We also observed steady improvements in user engagement and stickiness, especially in the region, where Loop was introduced as the average time spent on Likee per user increased sequentially by 10.2% globally and 22.7% in this region.

During the second quarter, in addition to launching a variety of localize campaigns, Likee partnered with our charity organization in Middle East and South Asia to launch a cross-region donation campaign by logging into Likee and participating in the Ramadan Campaign, user collected energy points every day, which could later be converted to a certain donation amount to be made by Likee through local charity organizations. More than 200,000 users participated in this campaign, demonstrating that the user today seeks to make a positive impact on the communities, while being entertained and engaged. We will continue to actively explore other opportunities to further empower our users to make positive difference in their local communities.

Next, we can turn to Hago. During the second quarter, Hago’s live streaming revenue increased by 7.1% year-on-year, and its number of user grows by 12.8% over the same period. As we continue to optimize Hago's content and recommendation, average Hago’s user engagement improved as evidence by increase in its feature channel penetration rates of 1.8% sequentially.

During the quarter, Hago focused on updating its newly launched 3D HAGO Space feature. Hago introduced a more localized to make-up customers and accessories, enabling users to design their 3D avatars, according to their personal and the culture preferences.

Additional interactive item and 3D virtual screens were also introduced both of which were well received by Hago user and demonstrated by the increase of Hago Space next day user retention rates by 16.9% million versus 14.9% sequentially.

In the coming quarter, Hago plan to further update the users,' Hago Space experience by introducing more 3D virtual screens and items that cater to local culture and user needs. We expect to continuously increase the user penetration rates of our Hago's Space feature and further enrich Space users' social experience.

Finally, some updates on capital return. During the second quarter, we bought back additional US$12.1 million of our shares. We will continue to actively utilize our share repurchase program to enhance return to shareholders.

To conclude, we will always strive to establish the stability and find the opportunity and the uncertainty. The current macro element does not change our demonstrated the chat, carrier track record in capturing some of the largest growth opportunity, now our long-term outlook on the industry.

And we view the current market flexion has opportunities to deepen our focus and plan for the future. We remain created to generating value for our users and creators while improving efficiency and enhanced resilience.

As we continue to invest in building our long-term capabilities, we firmly believe that JOYY was a company will emerge from the current uncertainties either more focused and productive organization and be well positioned to capture long-term growth opportunities and generate sustainable shareholders' value.

This concludes my prepared remarks. I will now turn the call to our General Manager of Finance, Alex Liu for our financial updates.

Alex Liu

Thanks, David. Hello, everyone. Now let me go through the details of our financial results. Please note that, the financial information and non-GAAP financial information disclosed in our earnings press release, as presented our continuing operations basis, unless otherwise specifically stated.

As the sale of YY Live was substantially completed on February 8, 2021, with certain customer metrics to be completed in the future. We have ceased consolidation of YY Live business since February 2021. Our total net revenues for the second quarter was US$596.1 million, compared to US$661.7 million in the same period of 2021, primarily due to macroeconomic uncertainties and unfavorable exchange rates, which negatively affects paying user and average.

Cost of revenues for the second quarter decreased by 17.6% year-over-year to US$377.7 million. Revenue sharing fees and content costs was US$247 million in the second quarter compared with US$289.1 million in the same period of 2021, primarily due to optimization of revenue sharing costs, bandwidth costs decreased to US$20 million from US$27.5 million in the same period of 2021, primarily due to the company's improved efficiency in bandwidth usage.

As we continue to execute a sustainable growth strategy and proactively implemented a series of cost optimization measures, which effectively improved our efficiency and enhance the resilience of our business and maintained a healthy growth in our growth and operating profitability.

Gross profit increased to US$218.4 million in the second quarter, with our gross margin improved to 36.6% from 30.7% in the same period of 2021. Our operating expenses for the second quarter decreased by 41.1% to US$185 million from US$314 million in the same period of 2021. Among the operating expenses sales and marketing expenses decreased to US$98.4 million from US$112.2 million due to disciplined and efficient spending on user acquisition.

General and administrative expenses decreased to US$23.7 million for the second quarter of 2022 from US$101.1 million in the corresponding period of 2021. Our general and administrative expenses was higher in the second quarter of 2021, primarily due to a one-off impairment loss arising from certain equity investments.

Our GAAP operating income for the second quarter was US$38.7 million, compared to operating loss of US$101.1 million in the same period of 2021 Operating income margin for the second quarter was 6.5% compared to operating loss margin of 15.3% in the same period of 2021.

Our non-GAAP operating income for the second quarter, which excludes share-based compensation expenses, amortization of intangible assets from business acquisitions as well as impairment of goodwill and investments and gain on disposal of subsidiaries and business, was US$59.9 million in this quarter, compared to non-GAAP operating loss of US$30 million in the same period of 2021.

Our non-GAAP operating income margin for the second quarter was 10% compared to non-GAAP operating loss margin of 2% in the prior year period. GAAP net income from continuing operations attributable to controlling interest of JOYY in the second quarter of 2022 was US$18.7 million, compared to net loss of US$109.3 million in the same period of 2021.

Net income margin was 3.1% in the second quarter of 2022 compared to net loss margin of 16.5% in the corresponding period of 2021. Non-GAAP net income from continuing operations attributable to controlling interest of JOYY in the second quarter was US$51.5 million, compared to non-GAAP net loss of US$0.5 million in the same period of 2021.

The Group's non-GAAP net income margin was 8.6% in the second quarter of 2022, compared to non-GAAP net loss margin of 0.1% in the same period of 2021. Notably, BIGO's non-GAAP net income expanded to $86.3 million in the second quarter, with its non-GAAP net income margin improved to 17.2% from 3.3% in the prior year period.

Together with our improving profitability, we have maintained a strong operating cash flow as well. For the second quarter of 2022, we booked net cash inflows from operating activities of US$61.7 million. We remain a healthy balance sheet with a strong cash position of US$4.29 million as of June 30, 2022. Importantly, we have continued to enhance returns to shareholders through dividend and share repurchase.

In accordance with our previously announced quarterly dividend plans, approved in August and November 2020, we will be distributing a dividend of US$0.51 per ADS for the second quarter of 2022 to shareholders of record as of the close of business on September 2022.

Additionally, we have repurchased US$12.1 million of average shares and our previously announced share repurchase programs. As of June 30, 2022, we had in total repurchased approximately US$327.9 million of our share repurchase program. Given our current cash portion, which will be able to balance between keeping sufficient cash to invest in building up long-term capabilities and enhancing return for our shareholders. We will continue to actively utilize share repurchase to create value for our shareholders and current market conditions.

Going forward, as David just mentioned, we remain committed to delivering value to our users and creators. And we will continue to track all return investment into the cost-base of our content, protect inactive features and localized activities. We will continue to enhance our operational efficiency and effectively execute our long-term growth strategies.

For our business outlook, we expect our net revenues for the third quarter of 2022 to be between USD561.5 million and USD593.5 million without considering supply. We currently have limited visibility surrounding the macroeconomic uncertainties of our business and the market in which we operate. Therefore, this forecast only reflects our current and preliminary views on the market and operational conditions, which are subject to change. That concludes our prepared remarks.

Operator, we would now like to open up the call to questions. Thanks.

Question-and-Answer Session

Operator

Thank you, sir. [Operator Instructions] Our first question comes from the line of Alex Poon from Morgan Stanley. Please go ahead.

Alex Poon

[Foreign Language] Thanks, management for taking my questions. My first question is how should we read our third quarter revenue guidance? And how management sees our growth trajectory in this year second half and next year? And also for user growth trend in second half of next year? Thank you very much.

David Xueling Li

[Foreign Language] This is David. I will firstly talk about the current macro headwinds that we face regarding our revenue growth. The first part mainly comes from lifting of lockdown and travel restrictions. We are seeing a resurgence in travel demand during the quarter. And also, we've seen a lot of our creators and hosts are also having increased activity in offline traveling as well. So that is going to be a negative impact on our revenue.

Secondly, with the rising inflation, we're seeing the cost of living and putting a higher pressure on our users.

And thirdly, the aggressive appreciation of US dollar means that we will need to adjust our price in accordance with the appreciation and that is going to create a negative impact on our revenue growth as well.

[Foreign Language] So our strategy under such environment, we are going to adopt to a ROI-driven sales and marketing strategy, prioritize our efficiency over the scale of our business. It means that we are going to continue to iterate our products and cultivate our services and to rely more on our products and services to achieve organic and effective growth.

[Foreign Language] So for our second question regarding the user growth trend, first of all, for Bigo Live, I think we'd be able to observe that it has been continuously expand its product outreach by further diversifying its content and innovate product features. That's why despite our sales and marketing expenses for Bigo Live declined Q-on-Q. Bigo Live still sustained user growth with its MAU growing by 10.6% year-over-year, and it proves the effective user acquisition strategy of Bigo Live. So as for our second year, we believe that Bigo Live will likely maintain its user growth momentum given its effective user acquisition strategy.

[Foreign Language] Thank you for the question. And we'll now next move to the next question.

Operator

Thank you. Our next question comes from the line of Thomas Chong from Jefferies. Please go ahead.

Thomas Chong

[Foreign Language] Thanks management for taking my questions. My question is about cost efficiency measures. Given that we have seen many Internet companies implementing measures on cost control. Just wanted to get some kind of management about the trend in operating expenses such as sales and marketing, R&D, G&A in the second half? And how we should think about the margin trend going forward? Thank you.

Alex Liu

[Foreign Language] Thank you, Thomas. This is Alex. I will answer your question. So you can see that in the second quarter, thanks to our sustainable growth strategy and continued optimization of cost expenses, we have managed to enhance operating efficiency and achieve better-than-expected profitability.

BIGO segment achieved a non-GAAP net margin of 17.2% while the group achieved a non-GAAP net margin of 8.6%. And if we take a closer look at BIGO segment, our gross margin was improved, both year-over-year and Q-on-Q in the second quarter and that is mainly due to optimization of content cost, improved bandwidth utilization efficiency and also cost savings in the payment channel expenses.

And for our non-GAAP operating expenses, such as sales and marketing, G&A and R&D, we also saw cost savings happening across these expense items as well. And I would like to mention that the fact that we've been able to improve our efficiency despite short-term fluctuation in revenue demonstrate that we have been forward-looking in our strategy planning, while minimizing the potential negative impact from fixed costs.

So for our second half of the year and also full year of 2022, we expect BIGO segment’s gross margin to remain stable. And also given that our localized sales and marketing activity would be more active in the second half of the year.

The amount of sales and marketing expenses should be slightly higher. And also, we expect to continue to achieve certain cost savings across other expense items, given improved efficiency. And we’re still confident to achieve a higher non-GAAP profitability for BIGO segment in the full year 2022 as compared to year 2021. Thank you. Next question

Operator

Thank you. Our next question comes from the line of Daniel Chen from JPMorgan. Please, go ahead.

Daniel Chen

[Foreign Language] I would translate myself. Could management maybe share your view on the live streaming and the short video industry in the overseas market? In each of these segment markets, what are the major competitive landscape and what's the latest change in each of the markets? Thank you.

David Xueling Li

[Foreign Language] This is David. I will answer your question…

This is David. I will answer your question. We can firstly look at the short video sector. We believe that there has been increasing competition in the short video sector, given that we have so many new products coming in the sector, including the larger companies like Google and Facebook as well as TikTok. But if we look at live streaming, especially social live streaming, we don't believe that the competition landscape has changed that much. We believe that for social live streaming this is a product and sector that is hugely reliant on the community and the sticky connection among the users.

If we look back and we look at YY Live, which we used to operate in Mainland, China, even when the domestic or the competitive landscape increased competition in the PRC markets, we see that YY Live's user scale and also revenue scale remain relatively stable. And that is because for such as social live streaming platforms, it usually takes five to 10 years to build up a social connection and the community where everyone is actually deeply connected. So it's much more sticky and therefore, having relatively limited impact from additional competition. So I believe that we have a strong barrier in the global social live streaming sector. Thank you. Next question, please.

Operator

Thank you. Our next question comes from the line of Yiwen Zhang from China Renaissance. Please go ahead.

Yiwen Zhang

Thanks for taking my question. First, regarding to Bigo Live. In prepared remarks, the management documented [indiscernible] can you elaborate on that, including how does it help our user engagement and also the counter ecosystem? And then secondly, can you give us an update on the Likee and Hago business? Thank you.

[Foreign Language]

David Xueling Li

Thank you for your question. This is David. I will answer your questions. So I talk about Bigo Live previously. So now I will mention mostly about Hago and Likee.

Hago launches 3D space, virtual reality, social interaction feature last quarter, and it introduced a variety of virtual 3D themes and virtual costumes during the quarter, significantly improving user experience and engagement.

Hago also completed the setup of the virtual costume stores for users so that they can freely shop and dress their digital advertise. And this should be a meaningful step forward to further improve Hago's monetization efficiency and diversifying its revenue stream.

And for Likee, it's still focusing on the cultivation of creators and facilitating the growth of interest-based communities, so after the new community function, Loop is launched in Europe and US during the quarter. We have observed improved social interactivity on Likee.

We plan to make Loop available in more regions and facilitate the growth of each vertical community through more efficient interest content matching. We will also explore new monetization opportunities under the feature, more community-based social, commerce, for example.

[Foreign Language]

And also some additional updates on Bigo Live. We've mentioned that the recent launch of Bigo Live, virtual live and community features has been launched in the previous quarters, and we have received positive feedback from our users. Both have contributed to increased activity in live streaming sessions and also the content diversity and social activity on our BAR channel. In the second half of the year, we plan to launch some new features such as Match [ph] to further improve our user's social interaction experience. Thank you. So that's at the end of our call, and we look forward to speaking with everyone next quarter.

Operator

Thank you. That does conclude our conference for today. Thank you for your participation. You may now disconnect your lines.