Shares of Chinese social media company YY (NASDAQ: YY) soared 25% on Wednesday after it reported third-quarter earnings that smashed analysts' expectations. The live-streaming platform operator's revenue rose 48% annually to $464.8 million, which topped estimates by $42 million.

Non-GAAP net income rose 47% to $96.1 million, or $1.59 per ADS, which beat expectations by $0.14. per ADS. Its GAAP net income rose 59% to $95.6 million.

The key facts

YY was an early mover in China's live-streaming video market. Its live streaming revenues, which come from YY Live and Huya, rose 60% annually and accounted for 93% of its top line. Mobile live-streaming monthly active users (MAUs) rose 37% annually to 73 million, while paid live-streaming users grew 47% to 6.3 million. Paid users gain access to premium broadcasts and can purchase virtual gifts for their favorite content creators.

The rest of YY's revenues come from online games and membership fees. Both of those areas suffered double-digit percentage revenue declines year over year, but those were expected due to YY's strategic shift toward live streaming.

The road ahead

YY expects its momentum to continue in the fourth quarter, forecasting growth between 37% and 41%, which tops analysts' consensus expectation. However, China's live-streaming space is  getting crowded, with social media players Tencent, Weibo (NASDAQ: WB), and Momo (NASDAQ: MOMO) all offering similar  platforms.

Operating expenses at all these platforms could rise if they sweeten their revenue-sharing deals to win over top broadcasters. All the live-streaming platforms also remain vulnerable to changes in China's internet regulations.

This means that more intense licensing enforcement (of the type which temporarily shut down Weibo's live-streaming services earlier this year) or case-by-case crackdowns on individual users' accounts could cause YY's growth to grind to a halt. However, analysts still expect YY to finish the year with 36% sales growth and 40% earnings growth -- so the rewards could outweigh the risks.

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The author(s) may have a position in any stocks mentioned.


Leo Sun owns shares of Tencent Holdings.

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