YY's (YY) CEO Zhou Chen on Q3 2016 Results - Earnings Call Transcript

| About: YY Inc. (YY)

YY Inc. (NASDAQ:YY)

Q3 2016 Earnings Conference Call

November 21, 2016 08:00 ET

Executives

Zhou Chen - Chief Executive Officer

Eric He - Chief Financial Officer

Analysts

Zoe Zhao - Credit Suisse

Jialong Shi - Nomura

Natalie Wu - CICC

Alex Yao - JPMorgan

Thomas Chong - Bank of China International

Benny Wong - Merrill Lynch

Alicia Yap - Citigroup

Wayne Wang - HSBC

Ronnie Ho - CCB International

Operator

Good day, everyone and welcome to YY’s Third Quarter 2016 Earnings Conference Call. [Operator Instructions] With us today is Mr. Zhou Chen, CEO of YY and Mr. Eric He, CFO of YY. Following management’s prepared remarks, we will conduct the Q&A session. 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 will now turn the call over to the CEO, Mr. Zhou Chen.

Zhou Chen

Thank you, operator. Hello, everyone. Welcome and thanks for joining us for our third quarter 2016 earnings call. As I said last quarter, my goal as the CEO of YY is to enhance our platforms through accelerating the innovation in our content and the service offerings and fully executing of our expansion strategy in order to stay ahead of our competitors. I am pleased to report that in the third quarter, we have achieved solid results and made significant progress in enhancing the content offerings across our platform. That’s extremely important as we believe that high-quality content not only increase significantly for existing users, but it attracts new members to our platforms and further growth of YY community.

We finished the third quarter with solid top and bottom line growth across the quarter. Importantly, our revenues increased by 40% compared to the same period last year to RMB2.1 billion, which was primarily driven by the robust 55% year-over-year revenue growth in our live streaming business. In addition, our total mobile monthly active users on YY Live and Huya, has reached RMB53.4 million in the third quarter of 2016. In particular, mobile contributed to 53% of YY Live revenue as compared with 45% in the second quarter of 2016. On the Huya side, mobile contributed to 39% of its revenue, which is also big step up from 25% in the second quarter. This is our testament of succeed of our business and confident strategy as well as the progress we have further made in mobilization.

In the third quarter, we have made significant strides in the expansion of our content offerings for both YY Live and Huya Broadcasting. On YY Live, we continued to focus on the development of PUGC or the Professionally-curated User Generated Content and the PGC content. With that, we launched a new program that featured influential speakers to this tough and wide range of relationship issue grappling the modern day couple in an interactive way. In addition, we are pleased to have been reached our both offerings through the partnership with Chinese Basketball Association, or CBA. Through broadcasting all of this season’s basketball games live on the Huya side, we saw dramatic growth in Huya’s revenue, which increased by 139% year-over-year and 38% quarter-over-quarter consistent with the platform’s hot streams, we continued to introduce more mobile game live broadcasting content in the third quarter. Importantly, we have massive user base, user techniques and monetization capabilities are way ahead of the competitors and demonstrate the strength of our platform.

Overall, we are pleased with the result we are seeing so far. We believe that by enabling our creative user space to continue and develop new offerings on our text platform as well as continuing to diversify our market segment and enhance the quality of our content, we will be able to build a comprehensive content existence that provides innovative content offerings and superior user experience through our existing and new users. We are confident that we have the right strategy and people in place to stay ahead of our competitors and solidify our leading positions in the interactive live streaming industry.

With that, I would like to turn the call over to our CFO, Eric.

Eric He

Thank you, Chen Zhou. Good day and good evening everyone. Before I discuss our operational and financial results, I would like to first talk about the changes YY is making in our revenue breakdown. As you can see in our earnings release, instead of Internet value-added services, or IVAS, which was composed of four categories: online music and entertainment, online games, online dating and others. We now breakdown our revenues in four new categories: live streaming, online games, memberships and the others. The primary reasons that we are making these changes beginning this quarter is that we believe the new method is more transparent and better captures the way YY generates revenue. As the company moves towards a leading and active live broadcasting platform, we believe that segmenting our revenues by how they are generated is more reliable method than breaking them down by business lines.

Now, I would like to turn our results for the quarter. I would like to turn to our results for the quarters. As Chen Zhou mentioned, our revenue grew 40% year-over-year primarily driven by the strong 55% year-over-year increase in live streaming revenues. The record revenue growth was a result of our strong paying user growth, which increased by 63% compared to the same period last year to 4.6 million. We are extremely pleased with the solid progress we are seeing in paying users as we will ensure continued healthy revenue generation going forward. Specifically, Huya’s rapid revenue growth in the third quarter was driven by its remarkable 134% year-over-year growth in paying users. We are confident that we will achieve probability ahead of our competitors in live game broadcasting and believe that Huya will contribute more to the company’s profit going forward.

In the third quarters, our gross margin remained stable at 39% as compared with the same period last year. Looking ahead, we will continue to invest in content that is suitable for live streaming and do not expect any major investments in the short-term. We are committed to driving our top line growth while maintaining our margins. We believe that by leveraging our content ecosystem to further improve the products and services offerings across our platform. We are able to capture opportunities in our markets and will continue to fortify our positions as China’s leading and active live streaming platform.

Now, I will turn to our quarterly financial results. 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 third quarter 2016 increased by 40.3% to RMB2.09 billion. This increase was primarily driven by increase in live streaming revenues. Live streaming revenues increased by 54.5% to RMB1.79 billion, which was mainly driven by the strong growth of paying users among different business lines. Revenues from online games were RMB149.5 million as compared to RMB168.3 million in the corresponding period of 2015, which primarily reflects the continued softness in China’s web game markets. Revenue from membership was RMB68.8 million in the third quarter of 2016, as compared to RMB76.3 million in the corresponding period of 2015. Other revenues, mainly included – including revenue from our online education platform and online advertising revenues were RMB81.1 million in the third quarter of 2016 compared with RMB86.2 million in the corresponding period of 2015.

Cost of revenues increased by 40.8% to RMB1.28 billion, which was primarily attributable to an increase in revenue sharing fee and content costs to RMB967.4 million in third quarter of 2016. The increase in revenue sharing fee and content costs paid to performer, channel owners and content providers was in line with the increase in revenue and was primarily due to higher level of user engagement and spending driven by promotional activities, such as – as well as company’s investment in expanding the amount of new and innovative content it provides to the users. In addition, bandwidth costs slightly increased to RMB149.2 million in the third quarter of 2016, primarily reflecting the continued user base expansion and the video quality improvement, but partially offset by our improved efficiency and pricing terms.

Gross profit increased by 39.4% to RMB814.8 million in the third quarter of 2016. Gross margin was 39% in the third quarter of 2016 as compared to 39.2% in the prior year period. Our non-GAAP operating income increased by 80.9% to RMB508.4 million in the third quarter of 2016. The non-GAAP operating margin increased to 24.3% from 18.9% in the prior year period. GAAP net income attributable to YY increased by 155.8% to RMB400 million in the third quarter. Net margin in the third quarter of 2016 increased to 19.1% from 10.5% in the corresponding period of 2015. Excluding the government subsidies of RMB18.7 million, net income attributable to YY Inc. was RMB381.3 million, representing an increase of 143.8% year-over-year.

Non-GAAP net income attributable to YY Inc. increased by 83.7% to RMB435.6 million from RMB237.1 million in the prior year period. Non-GAAP net margin increased to 20.8% in the third quarter of 2016 from 15.9% in the prior year period. Diluted net income per ADS in the third quarter of 2016 increased by 150.9% to $6.90 from $2.75 in the prior year period. Non-GAAP diluted net income per ADS increased by 79.4% to $7.48 from $4.17 in the prior year period.

Finally, looking at our business outlook for the fourth quarter of 2016, the company expects its net revenues to be between RMB2.4 billion to RMB2.5 billion representing a year-over-year growth of approximately 26.3% to 31.6%. These forecasts we expect the company’s current and preliminary view on the market and operational conditions, which are subject to change.

This concludes our prepared remarks. We will now start our Q&A session.

Question-and-Answer Session

Operator

Ladies and gentlemen, we will now begin the Question-and-Answer Session. [Operator Instructions] And your first question comes from the line of Zoe Zhao from Credit Suisse. Please ask your question.

Zoe Zhao

Hi management, thank you for taking my question. I will translate the question myself. The first question is on the use of growth trend as well as the ARPU transfer at YY Music specifically. And the second question is, what is our content investment plan, while preserving the margin and what should we would expect for next year’s margins? Thank you.

Eric He

With regard to the user growth rate, we believe that over the past couple of months and quarters, we have experienced minor increase in our user base, both in MAU basis across the different business lines. I think in this release, we particularly point out mobile MAU from all the live streaming business lines and which is about 53 million as we indicated before. I think moving forward, we will continue to release this type of numbers on a quarterly basis, so that there is no guessing or mistakes as we progress our business. In terms of ARPU, I think we indicated that our paying user numbers has experienced increase, our ARPU actually is somewhat flat, because our user numbers, our entire revenue growth as indicated is about 40% overall and 55% for the live broadcasting business. And our paying users – it’s about 4.6 million, which is greater than last quarter’s and a year ago. So I think the total revenue growth is the contribution of the increase in paying user as well as the ARPU. But I think the ARPU’s increase is minor, is smaller than our payee user numbers increase.

I think as we indicated on our script, prepared remarks, our PUGCs and professional content will continue to be executed. As we indicated, our relationship episode and the sessions, we – despite the fact that we have invited several well-known speakers and we added sports, the basketball, is CBA, both are the new content and innovative contents on YY platform. However, our investments, our money spent on those two types of contents are minimum, we continue to believe that in the near future, our input or our investment into the content creation in terms of PUGC and PGC will be limited, which is not going to affect our margin moving forward in the short-term. Next question, please?

Operator

Thank you. The next question comes from the line of Jialong Shi from Nomura. Please ask your questions.

Jialong Shi

Hi, good evening Chen Zhou and Eric. Thanks for taking my question. I was very encouraged to see the continued improvement on the margin for a live broadcasting business. So, I just wonder if management can share any updates on the competition landscape for China’s game live broadcasting industry. And if the company has any estimated top line for this – top line when this business – when this live broadcasting business may become profitable level on operating level? I will translate the question myself.

Eric He

Jialong, thank you for the questions. Yes, I think you can – actually you look at our financial statements, because we separated who we are, our game broadcasting business in a single unit. As you can see that in terms of year-over-year number and Q-over-Q numbers not only that revenue has grown significantly, our user number is very much compatible with the revenue number as well. We believe that the improvement of its margin pictures is the result of excellent business execution. Because in recent quarters, we have actually regained our leading positions in game broadcasting arena, we believe that we are number one in this field. As we actually indicated that in recent quarters, we have gained lot of market shares in game broadcasting business, specifically on mobile game broadcasting. And so that is one area that we have done outstanding jobs with regard to our competitors and we believe that we will continue to do so and lead the market shares.

And in terms of the final profitability, I think I indicated before to all of you, it is management team’s goal to reach cash flow breakeven at the end of 2016. So, as you can see that in the third quarters, it’s margin pictures term a little better, but still it’s losing money with all the allocation from headquarters overheads. So, if we exclude overhead from headquarters, we believe that in December 2016, we have a chance to reach cash flow breakeven, of course, it’s no guarantee. For 2017, our confidence level is a little bit higher. I think in 2017, if we can continue to grow our revenue and user base, our Huya operations will turn breakeven in 2017 sometimes. Hopefully, the whole year, it will contribute profits to YY’s as a whole. So that’s all management’s goal in the next couple of quarters and to 2017. Next question, please?

Jialong Shi

Thank you for that color, Eric.

Eric He

Thank you. Next question please.

Operator

Your next question comes from the line of Natalie Wu from CICC. Please ask your questions.

Natalie Wu

Hi, good evening, Chen Zhou and Eric. Thanks for taking my questions. A couple of questions here. First of all, it’s a regarding your 4.6 million paying users, can management share with us how many can be attributable to YY Live and how many can be attributable to online trading? And what kind of ARPU in paying conversion ratio patent have you witnessed in terms of those three different segments? And regarding active users, is there any overlap that to your reported PC and mobile? That’s the first question.

Eric He

Okay, thank you, Natalie, for your questions. The question number one is with regard to our paying users, 4.6 million, I think we do mention this 4.6 million I don’t want to be too specific as to the paying users. All I can do is music and Huya accounts for the bulk of this 4.6 million. For music, it’s close to 3 million. For Huya, it contains more than 1 million. So, those two adding together is bulk of the numbers. As to the number that you are interesting in other business, I don’t think those paying users are significant. But overall, I think music and Huya’s are the most important pillars for the paying users. In both lines, paying users has increased in the third quarter 2016.

As to the ARPU, I can tell you that we did not actually specific disclose ARPU in the past. I don’t think we are going to break that rule now. All I can say is everybody knows that our dating business has highest ARPU on our platform. It could be as high as $700, $800 – RMB800 per quarter in the past. So this is very peculiar. And then the next highest one, I would say, it’s perhaps music and entertainment. And the third one is the game broadcasting business. So I think the ARPU numbers and especially, the sequence and the order has not changed that much, it’s pretty much the same. As I indicated before that our revenue is really can be attributable, not only the paying user number increased and also the ARPU increase as well. But ARPU increase is less than the impact of the user number, paying user numbers increase. As to the MAU number for PC and mobile yes, you are right. Those two numbers seems to be very big. But I think we have done a preliminary redundancy check. So we have actually as much as we want to get rid of the redundancy. But as you know that, the redundancy is not that easy to find one new person. I would say, I suspect, there is some sort of a redundancy on those two numbers. But we have done a preliminary check, so we have taken out the very obvious one. The very obvious redundancy overlapped users on the PC and mobile side. So that’s the answer for the MAU numbers and metrics.

Natalie Wu

Great, very helpful, Eric. And the second question is given that there is similar business model alighting on other social platforms recently, so wondering whether management noticed any kind of inactiveness of efforts among those existing agents on the music platform?

Eric He

Well, with regard to the second question, I think the guild and with regards to the guilt and the competition, in our last earnings release, we actually had extensive discussions in terms of the different types and different competition. I think for the sake of your timing, I am not going to elaborate this time again. But as far as I can observe, in terms of our performers, singers and the youth, they have been very dedicated working on YY platform. I don’t see that, our ecosystem has any problem to keep them. In fact, we think our ecosystem has been maintained very robust. And those youth and performers has been very diligently and enthusiastically performed on our platform.

Natalie Wu

Great. Thanks.

Eric He

Next question? Thank you.

Operator

And your next question comes from line of Alex Yao from JPMorgan. Please ask your question.

Alex Yao

So I have two quick questions. One is regarding core live broadcasting activities in China’s mobile Internet, we understand that you guys are actually in different local areas of live broadcasting compared to a lot of peers in the market, who is engaged in privately or reality type of a show, while we do observe that over the past 12 months or so, those are privately or realty type of live broadcasting has gained a lot of attraction among the consumers, so the consumption in terms of the time spend of this type of the live broadcasting has increased pretty meaningfully in China mobile Internet space over the past 12 months, how do you guys view the relatively mid-term, longer term sustainability of the PUGC model, which YY engages versus the privacy or reality show type of the live broadcasting, which is adopted by vast majority of the mobile live broadcasting platforms. The second question is regarding your investment strategy, we noticed that on the prepared remarks that you guys mentioned, you will slowdown the investments activities since over the next couple of quarters, but that meaning you guys are optimizing the existing investments or as I remind you guys will step back from the future investments, how that goes if new investment strategy affect your financials? Thank you.

Eric He

Okay. I think with regard to the first question, we discussed in our last earnings release. Yes, there has been very – there has been many websites, which drawdown accompanying type of the live broadcasting. However, this accompanying type of the live broadcasting is neither real company, because we think that we have seen lot of growth. We have seen phenomenal business momentums for this accompanying type of live broadcasting is mainly due to the curiosity from the people who are in the Tier 2, Tier 3 or lower tier cities who wants to know the lifestyle of Tier 1 city’s celebrities. So, we believe this type of the curiosity could be very much a fad. Once the fad is gone, you will see that this growth momentum will wean down. Now, we actually have seen this phenomenon start to happen right now.

Well, having said what I have just said, we believe that so-called accompanying type of the live broadcasting is a very interesting product. We believe that some of the company actually has done a great job and we believe if we can surely make live broadcasting product become a real accompanying product and this should actually create a great market. Especially, it provides a way to socialize, to get to know people. We think this is a very interesting path and we believe we would like to give you a shot. Especially on our platform, we have a product called ME, which is completely mobile-based. And this product, we will actually shape this product towards so-called socialized and accompanying type of the live broadcasting services and product in the future.

With regard to your second question, I think we would like to emphasize we would be very cautiously invest into our content investments. We did not mention any other investments. I think what we would like to point out is YY Live and on YY platform, we do have a very interesting ecosystem. This ecosystem is that as we make these services become inactive, our performers in guilt in fact will share some of our revenue and this could be deemed as our input and investment for this content. So, as I actually mentioned it before, this ratio that we shared with the guilt and the performers has been pretty constant in the past years and we will take that as the reference for our future spending in terms of getting our content. As you all know that for the so-called long form video website, such as YouTube, their cost of content is very different from so-called interactive live streaming type of the platform as YY. So, I think because of this difference, we just want to indicate that we will not follow those so-called long form type of the video platform to spend tremendous amount of money into the content investments. So, we just want to clarify that. Next question, please?

Operator

Next question comes from the line of Thomas Chong from Bank of China International. Please ask your question.

Thomas Chong

Hi. Thanks gentlemen for picking my questions. I have two questions regarding Huya. May I know about the key things that contribute to Huya revenue? Are we talking about which mainly contribute from [indiscernible] or some other games? And my second question is about the long-term margin trends for Huya, is there any guidance how we should think about the margin in 2 to 3 years’ time?

Eric He

Thank you, Thomas. Well, as you now that on our online game broadcasting business, which is a very different service than so-called music and entertainment. Because music and entertainment, you can sing thousands or tens of thousands of different songs. There are so many well-established IP and contents that people can use. But in the gaming business, the selection and the choices are somewhat limited. And our key games on our game broadcasting business, no question, it should be Legal Legend, because Legal Legend is such a great game, it’s such a big game. It actually occupies a big chunk of our revenue. You mentioned mobile games. I think our mobile game business is growing very fast. But I don’t think at this point of time, for the competitive reasons we would not actually disclose too much about the mobile game content at this point. We would like to see this business continue to grow even bigger before we discuss details of our mobile game. In terms of margin for this business, I indicated before, now our loss is narrowing. So it is management’s goal to reach cash flow breakeven by the end of the year in the month of December, single month, not the whole quarter. And by 2017, I think there is a good chance that we will reach financial breakeven or even a little bit of the profit. This obviously will be determined by the future developments, such as if our revenue can continue to grow, if the market competition stay as it is right now. So far, I think next year, Huya is going to be – the business is going to be very promising. We think this is a great business moving forward.

Thomas Chong

Thanks Eric.

Eric He

Next question, please.

Operator

Your next question comes from Benny Wong from Merrill Lynch. Please ask your question.

Benny Wong

Hi, good evening Zhou Chen and Eric. Thank you for taking my question. I have two questions here. First is on the strategy on your new content and your new strategy, do you see that we plan to use more of the new content to drive higher ARPU or that those new content are more like traffic driver, which brought in our user base to our border platform and yet monetization will be mostly in our core music and entertainment business?

Eric He

Let me mute this a little bit, because I think I want to discuss with Chen Zhou on your question, because we are not 100% sure what do you mean in terms of your questions. So just hold for about 10 seconds, 20 seconds.

Benny Wong

Okay.

Eric He

Okay. Let me try to translate the answer. I believe that the real purpose of our PUGC strategy is to enhance the quality of our content on our platform. By doing so, we believe, it will actually attract even more bigger user base. As the user base grow or increase, this user base will actually – some of the user base will be turning into paying users, of course this will increase our revenue and ARPU and can be increased as well. So as we actually develop this new strategy, we never exclude any possible new business model. It’s not going to be item based only. It could be actually of advertisement driven type of business or even sponsorship by any business on our platform. This type of the business model is going to be further away. It’s not going to be happening next quarter. But we just want to point out, these are all the possibilities in the future.

Alex Yao

So which content or which monetization models do you think has the greatest potential?

Eric He

I think what I believe is that currently, our revenue scores will be coming from the current content that already being displayed on our platform. As to those new contents, we are going to give it a shot and try an arrow and to see which one will create the biggest benefits. So at this point of time, it will be difficult for us to pinpoint, which one has the biggest potential.

Alex Yao

Okay. Thank you.

Eric He

Next question, please?

Operator

Next question comes from Alicia Yap from Citigroup. Please ask your question.

Alicia Yap

Hi, good evening management. Thanks for taking my questions. I will ask in English first and I will translate. So I have two quick questions. One is regarding your margin improvement that you showed this quarter and your expenses actually becoming smaller than expected. So do you plan to retain similar efficiency on your cost control going forward and should we expect continued margins improvement into the 4Q and next year, especially given your Huya become profitable next year. So the second question is on the 4Q guidance, should we expect or assume the growth on the live broadcasting to continue offset by the declining growth in the online games and the membership revenue? Thank you.

Eric He

Thank you, Alicia. I think with regard to the cost of service, as I indicated many, many, many times in the past, I have told you guys that our revenue sharing cost has been very consistent over the course of last 4, 5 years, because many people believe that because of the competition, we will have to raise the payout ratios to the guilt and the performers. But I tell you it’s not the case. But specifically, I think one of the elements for the cost of services is the bandwidth cost. As you guys – if you follow us for a long time, you will see that the second quarter, our cost of bandwidth actually has dropped a little bit. That is because of our negotiation with our datacenters and carrier. So, we got a very good price. And this quarter, we bump it up a little bit from a very low base. I think that’s very understandable. So, I think our cost increase is well under control, as I indicated before that for this year we will still believe that margin is going to be relatively healthy. For 2017, there are several factors will affect the margin pictures. But I think let me just summarize by telling you that if everything goes as we expected, for example, our Huya business turning into profit or turning into breakeven and our revenue continue to grow in across the platform, I think our margin is going to be even healthier in 2017. So, that’s the question with regard to the cost and the margin. And the number two question is with regard to the online game and advertising and education. Online game and advertising, I think is relatively weak. Especially online game, it was down year-over-year basis, Q-over-Q basis, I think it very well be that Q4 will be the trend. Advertising, it’s somewhat weak, but I don’t know if it’s going to be that weak as online game business. So, it’s going to be flat. But our education business, actually in this quarter, it had more than 50% year-over-year growth. We just didn’t actually specify that number. I think our education business continues to be very strong. But unfortunately, that number is not very big, but very significant. So, I personally believe that our education business is going to be growing very strongly in the fourth quarter and even into 2017. Thank you.

Alicia Yap

So Eric, I actually wanted to ask you about the sales and marketing expenses, because I see some efficiency. So, I was just wondering if these take a smaller than expected expense, you actually continue to help us on the operating margin improvement?

Eric He

I think sales and marketing right now is somewhere between 4% to 5% of the total revenue. These numbers, I don’t think, it’s going to – this ratio, the 4% to 5% is not going to change that much. I think as we grow our business, we hope that sales and marketing share actually accompany with the growth of revenue. Because that, as we grow our platform, we are going to see more of the business, more of business lines. So, I think to spend money to promote our business and innovative content is a necessary spending. So I don’t see that’s going to be too big, and I don’t see that expenses in costs, it’s going to drop too much either.

Alicia Yap

I see. Thank you.

Operator

Next question comes from the line of Wayne Wang from HSBC. Please ask your question.

Wayne Wang

Alright, hi thank you for management for taking the question. And I have two questions. Firstly, it’s about regulation as we can see that recently same type of regulator has more stricter regulation on live broadcasting sector. We understand that maybe the impact on YY is limited. Could management provide more color on what’s their impact on YY and on its competitor? And second question is about Huya, as management has mentioned that Huya is gaining market share recently, could management add more color on why Huya has outperformed peers or what’s Huya is doing about compared with past?

Eric He

Yes, I think you are right. Most recently, the regular agency actually has promulgated some of the policies. But as we are one of the pioneers in this field, I don’t think we have been negatively impacted by all this regulatory promulgation. The reason is that, specifically for example, it requires certain license to operate our business. And YY has all the license that is required by the government. So, we are confident that we are not violating any of those regulatory regulations. And secondly, I think for those regulatory announcements, it also contains some of the required technology system, which being in place implemented on the platform and those required systems or the computer systems, we already implemented on our platform. In fact, in the past, they have actually discussed all those details before they announced this policy with YY. So, we are well-informed. That’s the policy we are going to face or that is the system we are going to face. So, on that aspect, we are fine as well.

We believe all those regulatory regulations will impact some of the smaller companies, especially that the startups just started in the beginning of 2016 or even some of the companies, which started up within 12 months say the second half of last year, because among all these regulations, it requires you to have army of administrators to curate the content, which will require a lot of people and cost and as well as some of the technology platform to filter some of those contents. And all of this will represent a huge burden for smaller companies. Secondly, as indicated is regarding the licenses. For those licenses for as far as I know, we had a few years ago, 4 years, 5 years, 6 years ago, at that time, it was not that difficult. But now for small companies to get all those licenses, it’s almost impossible. And then with regard to the second question of Huya’s business, I think all we can say that our policy has been executed very well in terms of developing our user numbers and revenues. One is, in terms of user numbers, we have created so many different line of business. We have indicated that we are pretty good on mobile game broadcasting. And those are the things that we have done very well. And secondly, I think we also brought in our content to include music and entertainment, which actually helped us to monetize even better than the original game broadcasting business. So I would like to summarize in two ways. One is we actually deepened and focused on the game broadcasting business, which allow us to penetrate into our competitor’s market shares. Secondly is, we broadened our line of business for Huya, so that their revenues has been enhanced by this new line of business. And both of our strategies are very successful, that’s why Huya is doing very well.

Wayne Wang

Thank you very much.

Eric He

Next question, please?

Operator

And your next question comes from the line of Ronnie Ho from CCB International. Kindly, ask just one question please.

Ronnie Ho

Yes. Thanks Chen Zhou and Eric. Just cut it short actually, the online education can embrace from last quarter, can you give us some guidelines about the traction is coming better than expected or should you expect the trend to continue and how about the breakeven point actually in the fourth quarter and also in the next year for online education?

Eric He

First of all yes, thank you, Ronnie. For online education, as I indicated, for third quarter, its revenue actually is more than Q1, Q2 combined, because Q3 is their strongest seasons. So there is a little bit of recent. In Q4, it’s going to be the second strongest seasons for online education. We believe that online education business will actually reach breakeven points for the whole year 2016. And for next year, I expect online education business will continue to grow and grow very strongly. But unfortunately, this business is not going to be impactful, because the total revenue amount compared with our entire size is relatively small, but the growth trajectory is very encouraging.

Ronnie Ho

Okay. Thank you, Eric.

Operator

Thank you. And ladies and gentlemen...

Eric He

Go ahead, sorry.

Operator

Ladies and gentlemen that concludes the conference for today. Thank you for participating. You may all disconnect.

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