YY, Inc. :YY-US: Earnings Analysis: Q3, 2016 By the Numbers : November 23, 2016

YY, Inc. reports financial results for the quarter ended September 30, 2016.

We analyze the earnings along side the following peers of YY, Inc. – Sohu.com, Inc., Yahoo! Inc., Baidu, Inc. Sponsored ADR Class A, Changyou.com Ltd. Sponsored ADR Class A and SINA Corp. (SOHU-US, YHOO-US, BIDU-US, CYOU-US and SINA-US) that have also reported for this period.

Highlights

  • Summary numbers: Revenues of USD 313.43 million, Net Earnings of USD 60.00 million.
  • Gross margins narrowed from 39.23% to 38.99% compared to the same period last year, operating (EBITDA) margins now 21.05% from 13.43%.
  • Earnings growth from operating margin improvements as well as one-time items.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2016-09-30 2016-06-30 2016-03-31 2015-12-31 2015-09-30
Relevant Numbers (Quarterly)
Revenues (mil) 313.43 301.47 252.54 296.74 236
Revenue Growth (%YOY) 32.81 37.74 37 55.99 45.14
Earnings (mil) 60 52.25 31.9 56.11 24.77
Earnings Growth (%YOY) 142.24 11.45 -12.3 -7.38 -46.76
Net Margin (%) 19.14 17.33 12.63 18.91 10.5
EPS 1.02 0.85 0.55 N/A 0.45
Return on Equity (%) 36.77 35.67 24.04 47.01 22.86
Return on Assets (%) 18.86 17.52 11.15 19.13 8.74

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Market Share Versus Profits

Revenues History
Earnings History

YY-US‘s change in revenue this period compared to the same period last year of 32.81% is almost the same as its change in earnings, and is about average among the announced results thus far in its peer group, suggesting that YY-US is holding onto its market share. Also, for comparison purposes, revenues changed by 3.97% and earnings by 14.83% compared to the immediate last period.

Revenues Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Leader, Earnings Focus, Laggard, Revenues Focus

Earnings Growth Analysis

The company’s gross margins showed no year-on-year improvement. In spite of this, the company’s earnings rose, influenced primarily by the improvement in operating margins (EBITDA margins) from 13.43% to 21.05%. For comparison, gross margins were 39.00% and EBITDA margins were 21.27% in the last period.

Gross Margin Versus EBITDA Margin

Quadrant label definitions. Hover to know more

Differentiated; Low Cost, Commodity; Low Cost, Commodity; High Cost, Differentiated; High Cost

Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

Gross Margin History
Working Capital Days History

YY-US‘s decline in gross margins were offset by some improvements on the balance sheet. The management of working capital, for example, shows progress. The company’s working capital days have fallen to 78.28 days from 170.39 days for the same period last year. This leads Capital Cube to conclude that the gross margin decline is not altogether bad.

Gross Margin Versus Working Capital Days

Quadrant label definitions. Hover to know more

Customer Financed, Cash Starved, Supplier Financed, Cash Rich

Margins

The company’s earnings growth has also been influenced by the following factors: (1) Improvements in operating (EBIT) margins from 13.43% to 21.05% and (2) one-time items. The company’s pretax margins are now 22.47% compared to 11.33% for the same period last year.

EBIT Margin Versus PreTax Margin

Quadrant label definitions. Hover to know more

Operation driven Earnings, One-time Favorables, Low Earnings Base, One-time Unfavorables
EBIT Margin History
PreTax Margin History

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Company Profile

YY, Inc. engages in managing a communication social platform, which enables users to join real-time online group activities through voice, text, and video. Its services include music and entertainment, online games, online dating, live game broadcasting, online education, and advertising. The company was founded by Xueling Li and Jun Lei in April 2005 and is headquartered in Guangzhou, China.

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