Q1 Earnings Preview: Watch out for guidance update from YY post the Bigo deal

Chinese social media giant YY Inc. (NASDAQ: YY) is scheduled to report its first quarter for the fiscal period 2019 after the bell on May 28. The company’s stock has increased 16% since late December where it touched a 52-week level of $55.55. However, in the last 12 months, YY’s stock price is down 40% hurt by trade wars, slowing Chinese economy and pressure on margins.

YY generated about 95% of revenues from live streaming in 2018. When it comes to live streaming, the company’s money spinners are YY Live and Huya which is into game streaming. It’s worth noting that Huya was churned out as a separate firm last year where YY still has a majority stake.

Q1 Expectations

Last week, Huya reported solid first quarter results where revenues rose 93.4% while profits jumped 102% as the game live streaming and advertising revenues continue to witness strong demand. Average monthly active users (MAU) grew 33.3% aided by streaming of major gaming events to users.

Given the strong performance from Huya, investors would be expecting YY’s Q1 results to be in line with expectations. When it comes to street expectations, sales is anticipated to increase 29% to $603.78 million and adjusted earnings to contract 11% to $1.38 per share. Last quarter, the company guided revenues to grow 23.4% to 28% for the first quarter.

In the fourth quarter, YY’s mobile MAU grew 18.1% to 90.4 million while the paying users rose 36.6% to 8.9 million. Investors would be keeping a close tab on these two metrics as it would lift margins in the near future.

Bigo Acquisition

YY acquired Bigo in March marking its foray beyond China. Bigo is into streaming and short videos app currently has users in South Asia, the Middle East, and Southeast Asia.

The Singapore-based firm is now a subsidiary of YY post the deal. This deal would be helping the firm to reduce its dependency from China and bring in stable revenues with the Bigo deal with a broader base. Bigo had 59.4 million mobile average MAUs in the fourth quarter of 2018.

It’s important to note that YY is facing intense competition in China from the likes of Momo, TikTok, Tencent Music Entertainment, Kuaishou, Douyin, Huoshan, DouyuTV and Live.me.

Investors would be expecting the management to provide outlook for the next quarter and year including Bigo deal.

Bottom Line

YY has steadily seen grow in the top line, but margins are under pressure as the company is currently investing in beefing up its platform to attract more users, adding more content and expanding through acquisitions. Last quarter, operating margins contracted to 15.5% from 22.7% in Q4 of 2017 which the company attributed to an increase in sales and marketing expense and a drop in gross margins.

YY’s peer Momo is scheduled to report its Q1 results. The dating app’s stock has been struggling in the last year due to the ongoing trade war as well as slowing growth from live streaming.

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