Eric He - CFO.

Analysts:.

Good day, everyone, and welcome to YY’s First Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. With us today is Mr. Eric He, CFO. I would also like to mention that due to the pending ongoing private transaction, we will not be hosting a Q&A session at the end of the call.

Before we begin, I refer you to the Safe Harbor statement in our earnings release, which also applies to our conference call today as we will make forward-looking statements. I would now turn the call over to CFO, Mr. Eric He. Thank you..

Thank you. Hello, everyone. Welcome to our earnings call. In the first quarter of 2016, our topline continued to see solid growth momentum, increasing by 43% year-over-year to RMB1.65 billion, primarily driven by our IVAS business. Meanwhile, we were able to further grow our paying users by 57% year-over-year to 3.9 million in the first quarter.

As we expected, our overall revenue growth was partially offset by the soft performance of online games. It was mainly due to the continued industry wide weakness across China’s web-based game market.

In particular, we saw significant growth in mobile broadcasting business, and we have been able to rapidly capitalize on these opportunities through our newly launched mobile broadcasting app, ME or ME, which we will further develop here.

As we mentioned in the previous quarter, the content on ME app is relevant to users’ daily life and it enabled users to broadcast live and interact with each other anytime and anywhere. Furthermore, we feature popular spots and hold various entertainment events everyday on ME, which enchances its social function and highly diversified content.

We believe there is significant potential to further accelerate its growth, and enhance the ME app popularity among our core and new users. Moving on to Huya, our online games broadcasting business, we are quite excited and proud of the success we have achieved from the recent revamping of the Huya management team.

Huya’s improved user interface and most significantly the improved monetization capabilities we have implemented over the past several quarters, all of which have resulted in significant growth. To exemplify this, during the first quarter, we saw revenue increase impressively by 114% year-over-year to RMB118 million.

The growth was primarily fueled by a significant 132% year-over-year growth in paying users to 899,000. In our online music and entertainment business, we maintained strong revenue growth of 56% year-over-year to RMB919 million and paying users further grew by 68% year-over-year to 2.7 million in the first quarter of 2016.

Meanwhile, mobile YY continued its robust growth with 203% year-over-year increase in revenue and 138% year-over-year increase in paying users. During the first quarter, mobile paying users accounted for 68% of the total paying users in our online music and entertainment business.

Going forward, we will continue to focus on strengthening our content offerings, especially professionally generated entertainment and sports content to further expand our user community and user stickiness on our platform.

One example is our Da Pai Wan Chang Hui, an interactive concert broadcasting service that connects celebrities and participants virtually. It was launched in co-operation with the traditional media outlet Chongqing TV and has been quickly gaining popularity since inception.

These sorts of corporations are aimed at helping to drive continuous user acquisition and stickiness as we strengthen our overall platform.

Now turning to our online dating business, in the first quarter, revenue continued to grow increasing by 60% year-over-year to RMB211 million, mainly driven by the 47% year-over-year growth of paying users to 283,000.

Another growth driver I would like to highlight is our PK show, which is a competitive program for hosts to practice and compete against one another to see who can be more popular.

During the first 12 months since its launch in April 2015, PK show’s growth metrics and monetization rates, including revenue and revenue growth rates have outpaced our online dating business metrics during the same time period.

Such new innovative ideas and the use of YY platform exemplifies the power our technology has, and the capabilities to significantly increase those who thinks outside of traditional entertainment boxes. Moving forward, we will continue to leverage our ecosystem and expand our innovative content and service offerings across our business lines.

This strategy has resulted in successful growth of both our core business as well as many other emerging business ideas and initiatives, and is one of our key differentiators as we strive to meet the evolving demands of our massive user base in dynamic internet markets.

Overall, we remain confident in our market opportunities and aim to continue fortifying our position at the leading real-time internet platform in China. Now, I will turn to our quarterly financial details.

Before I get started, I would like to clarify that all the financial numbers we are presenting today are in Renminbi amounts and percentage changes are year-over-year comparison unless otherwise noted. Net revenues for the first quarter of 2016 increased 43% to 1.65 billion, the increase was primarily driven by the increase in IVAS revenues.

IVAS revenues increased by 45% to 1.61 billion, which was mainly driven by 57% year-over-year growth in number of paying users. Now let’s look at each of the IVAS business lines; revenue from online music and entertainment increased by 56% to 919 million in the first quarter of 2016.

This increase was driven by year-over-year increase of 68% in the number of paying users to 2.7 million. In addition, mobile ARPU continued to grow by 27% year-over-year to RMB243 in the first quarter. Revenue from online games was 171 million in the first quarter of 2016, compared to 232 million in the prior year period.

This decline was mainly caused by a 36% year-over-year decrease in paying users to 306,000, reflecting the continued softness in China’s web game markets, but was partially offset by a 15% year-over-year increase in ARPU of online games. Revenue from online dating increased by 60% to RMB211 million.

This increase reflected a 47% year-over-year jump in paying users to 283,000, and 9% year-over-year increase in ARPU to RMB746 in the first quarter of 2016. Other IVAS revenues increased by 97% to 310 million in the first quarter of 2016.

This mainly includes revenue from Huya broadcasting, which increased by 114% to 118 million and revenue from membership subscription fees which increased by 12% to 69 million.

Other revenues mainly including revenue from our online education platform, Huanqiu Education Online, online advertising revenues from Duowan.com, and e-commerce were 38 million in the first quarter of 2016 compared with 39 million in the corresponding period of 2015.

Cost of revenue increased by 58% to 1.06 billion, which was primarily attributable to an increase in revenue sharing fee and content costs to 708 million in the first quarter of 2016.

The increase in revenue sharing fee and content costs paid to the performers, channel owners, and content providers was in line with the increase in revenue and was primarily due to the higher level of user engagements and spending driven by the promotional activities.

In addition, bandwidth costs increased to 183 million in the first quarter of 2016, primarily reflecting the continued user base expansion and video quality improvement. Gross profit increased by 23% to 589 million in the first quarter of 2016. Gross margin was 36% compared to 42% in the prior year period.

The decrease in gross margin was predominantly attributable to our higher margin online game revenue concentration decreasing year-over-year from 20.1% of total revenue to only 10.4% in the first quarter of 2016. Our non-GAAP operating income increased by 13% to 311 million in the first quarter of 2016.

The non-GAAP operating margin fell to 19% from 24% in the prior year period. GAAP net income attributable to YY was 208 million in the first quarter of 2016, compared to 227 million in the prior year period. Net margin in the first quarter of 2016 was 13% compared to 20% in the corresponding period of 2015. Non-GAAP net income attributable to YY Inc.

increased by 1% to 262 million from 259 million in the prior year period. Non-GAAP net margin decreased to 16% in the first quarter of 2016 from 23% in the prior year period. Diluted net income per ADS in the first quarter of 2016 was RMB3.65, compared to RMB3.83 in the prior year period.

Non-GAAP diluted net income per ADS increased by 5% to RMB4.59 from RMB4.36 in the prior year period. This concludes our prepared remarks. Thank you for joining our conference call. And we would like to conclude our call right now. Thank you..

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating, you may all disconnect..