Earnings Call Transcript - HUYA Q2 2023

Operator, Operator

Hello, ladies and gentlemen, thank you for standing by for the Second Quarter 2023 Earnings Conference Call for HUYA Inc. At this time, all participants are in a listen-only mode. Today's conference call is being recorded. I will now turn the call over to Ms. Hanyu Liu, Company Investor Relations. Please go ahead.

Hanyu Liu, Investor Relations

Hello, everyone, and welcome to HUYA'S second quarter 2023 earnings conference call. The company's financial and operational results were issued earlier today and are posted online. You can also view the earnings press release by visiting the IR website at ir.huya.com. A replay of the call will be available on the IR website in a few hours. Participants on today's call will be Mr. Songtao Lin, Chairman of HUYA; Mr. Junhong Huang, Acting Co-CEO and Senior Vice President of HUYA; and Ms. Ashley Wu, Acting Co-CEO and Vice President of Finance. Management will begin with prepared remarks and the call will conclude with a Q&A session. Before we continue, please note that today's discussion will contain forward-looking statements made under the Safe Harbor Provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties, as such the company's results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the company's prospectus and other public filings as filed with the U.S. Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law. Please also note that HUYA'S earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures, HUYA'S press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures. I will now turn the call over to our Chairman, Mr. Songtao Lin. Please go ahead.

Songtao Lin, Chairman

Hello, everyone. Thank you for joining our conference call today. It's my pleasure to participate in HUYA'S earnings call for the first time and to speak with all of you. We celebrated our 7th anniversary last week, which is a remarkable milestone in this industry. Since assuming my role as HUYA'S Chairman in May, I have conducted a comprehensive review of the company's business strategies alongside the management and business operations team. As a leading game live streaming platform, we have catered to numerous game enthusiasts, content creators, and industry partners since our inception. Our goal now is to build on HUYA'S success and experience in the gaming industry. We will explore more opportunities that enhance HUYA's established user community and company ecosystem to drive long-term, sustainable business development. We shared a brief strategy with you earlier this month and would like to take this opportunity to elaborate on our latest plan. With our proven track record in the game live streaming market and strong collaboration with industry partners, we are well-positioned to achieve this new goal. As the company enters a new phase of development, I’m confident that our upgraded vision will promote sustainable vitality and foster HUYA'S future growth. Now, I’d like to turn the call over to our Acting Co-CEO and SVP, Junhong Huang, to discuss our strategies in greater detail. Thank you.

Junhong Huang, Acting Co-CEO and Senior Vice President

Okay. Thank you, Mr. Lin. And hi, everyone. I'm glad to speak with you today. To expand on our Chairman's remarks, let me share some specifics about our current key objectives regarding our new strategy. First, we plan to shift our commercialization focus going forward by exploring and increasing our users' value by integrating more game-related services into our platform. Since our inception, we have largely monetized our user base through our live streaming service, which primarily generates revenue by commissioning users' visual gifts paid to broadcasters. Converting regular users into paying users involves a relatively long process under our current core model, and conversion efficiency has yet to be improved. However, as most of you know, a significant part of our users are also gamers. Based on our services and insights, active gamer users on our live platform are willing to spend both on gameplay and related in-game purchases. Also, the proportion and amount of in-game spending by these gamer users tend to be higher than those of general gamers. Our rich game and expert content offerings have already satisfied our game users' content consumption needs, and we believe we can further capture this user group’s commercial value by meeting their broader game-related needs with expanded service models such as game distribution, in-game item sales, and game advertising. Let's take in-game item sales as an example. We have previously held several successful in-game sales of game tools, but these were one-time events that primarily functioned as marketing and promotional activities for those games. Going forward, we plan to regularize in-game item sales and establish a recurrent cooperation mechanism with various games to meet ongoing demand for in-game purchases of schemes, weapons, and other items, especially when users watch broadcasters utilize these items during live games played on HUYA. In addition to boosting monetization for our platform, this new service offering will provide additional channels for game publishers to promote their in-game products and expand our broadcasters' income streams. We are currently discussing commercial terms for this type of cooperation with various game studios and look forward to future partnerships with additional games. Furthermore, the technical support required to implement this business is already in place. Earlier this month, we completed the development of our in-game item sales function, which will be embedded into certain of our live channels as shopping cart items. Once game users link their game accounts with their HUYA accounts, they can seamlessly buy in-game items while watching live streaming content related to those games. According to our plan, we will implement this function on a small scale. Another priority is to expand income streams for our content creators and optimize our content cost structure. Currently, our broadcasters' income mainly consists of the fees we provide and their share of visual gift revenue. For many game broadcasters, the relatively fixed fee is a major source of income. As we explore and develop a wider range of game-related services, we will work to optimize our content creators' income structure by enabling them to earn a greater share of revenue from game-related services, including revenues from in-game item sales, game distribution, and advertising among other services. Diverse income streams will also increase HUYA's value proposition to content creators, attracting more broadcasters and their fan bases to our platform. We believe this adjustment to our content cost structure will boost broadcasters' financial health while better aligning our content costs with our revenue. To affect this transformation, we will first harness various technologies to upgrade the technical infrastructure required for our new services and products. As I mentioned above, our in-game item sales function is already well underway. We also plan to upgrade interactive tools across our live platform, which will allow users to better identify in-game items that meet their personalized needs, as well as discover new games or other content that captures their interest. In embracing the latest tech trends, we plan to actively explore the application of AI technologies, including large language models and AIGC, to capture user interest and help create more engaging interactive content and experiences. Additionally, we will further enhance our compliance capabilities by continuously investing in advanced technologies, including an AI-powered content monitoring system to minimize operational risk and sustain a healthy community atmosphere on our platform. We are proactively restructuring several aspects of our business for more targeted allocation of internal resources to advance our strategic transition toward a more balanced and sustainable development pathway. To that end, we are planning to scale back certain less cost-effective live streaming features, as well as financial incentives for live streaming revenue-generating campaigns, and the proportion of our fixed spend on broadcasters. Although this adjustment may result in fluctuations in our operational and financial metrics in the near term, we believe our market-leading position and strong execution capabilities will support our pursuit of long-term profitability improvement. Our primary goal is to increase our game-related service revenues to approximately 30% of total net revenues within three years, creating a more balanced and diverse revenue stream to strengthen our foundation for long-term success. We are confident that with our transformation initiatives, we will empower sustainable growth as we remain committed to serving the needs and interests of more users, content creators, and industry partners. With that, I will now turn the call over to our Acting Co-CEO and VP of Finance, Ashley Wu, to share more details on our second-quarter results. Ashley, please go ahead.

Ashley Wu, Acting Co-CEO and Vice President of Finance

Thank you, Junhong, and hello everyone. I will provide some updates on our operating metrics and financials for the second quarter of 2023. On the user side, HUYA Live mobile MAUs were 82.9 million in the second quarter, compared with 82.1 million in the first quarter and 83.6 million for the same period last year. This slight sequential improvement was mainly attributable to the increased e-sports content and entertainment programs we offered in the quarter, along with new game launches that enriched the platform's game content. Meanwhile, users' and broadcasters' time spent on offline entertainment activities continued to affect us to some degree, especially given several short public holidays during the quarter. Overall, we maintained a stable user base in the second quarter, with the app's next month's user retention rates staying above 70%. Now, on the content side. Regarding licensed e-sports events, we forecasted around 75 professional e-sports tournaments in the second quarter of 2023, attracting a viewership of approximately 490 million. We broadcasted a higher number of events in Q2 than in Q1, with more tournaments scheduled, though we had fewer events than in the same period last year as we continue to implement stricter content procurement policies. Domestic Professional Leagues for major game titles, such as the LPL Summer, KPL Spring, and CFPL Summer continue to deliver strong performances. Also, both the LOL mid-season Invitational and the CS:GO BLAST Paris and Asia proved very popular. In June, we broadcasted Valorant's Masters Tokyo, a tournament featuring professional teams from China and around the world. Given the timing of this major event just before the official China launch of Valorant in July, it attracted significant attention from our users and served as an engaging introduction for this new game on our platform. Currently, Valorant is gradually cultivating its streamers and core audience on HUYA, and we expect to offer more related content, including self-organized tournaments as its domestic e-sports system develops. We also broadcasted more than 30 self-organized e-sports tournaments and entertainment shows in the second quarter, with a total viewership of approximately 100 million. For self-produced content, we aim to create a metric of high-quality in-house IPs. The new seasons of our HUYA branded all-star cup for Peacekeeper Elite and our events for Honor of Kings were among our most-watched during the quarter. After multiple seasons, the Funder Series has become one of the most influential IPs for Honor of Kings tournaments on our platform, alongside the official KTL competitions. During the CS:GO BLAST Paris major event, we conducted our commentary program live from a studio in Paris, interacting with the tournament audience and enhancing our user community engagement with the event. In addition, we held the eighth season of HUYA Kungfu Carnival during the quarter, and extending this long-running program's popularity is also worth mentioning, as we recently leveraged its success to launch a series of carnival-type programs, integrating both offline and online activities such as Basketball Carnival and Billiards Carnival, capitalizing on the growing demand for entertaining sports content. In line with our new strategies, we will continue to focus on developing our user community and enhancing our content ecosystem across user-generated content, professional user-generated content, licensed content, and self-produced professional programs. We are confident that our high-quality content and superior user experience will continue to support our business transformation. In terms of financial performance, we achieved total net revenue of RMB1.82 billion and a non-GAAP net profit of RMB115 million for the second quarter of 2023. Despite the year-over-year revenue decrease amid a challenging macro and regulatory environment, we continue to make progress in optimizing costs and expenses. In Q2, our gross margin improved both year-over-year and quarter-over-quarter, primarily driven by savings in content costs. As we continue to scrutinize content-related spending, particularly content licensing and broadcaster-related costs, along with the efficiency gains we maintain, we further narrowed our operating loss with a non-GAAP operating loss of approximately RMB2 million in the second quarter. Let's move on to our Q2 financial details. Our total net revenues were RMB1.82 billion for Q2, a decline from RMB2.28 billion for the same period last year. Live streaming revenues were RMB1.72 billion for Q2, compared with RMB2.05 billion for the same period last year, primarily due to a decrease in the number of quarterly paying users of HUYA Live to 4.6 million for the second quarter of 2023 from 5.6 million for the same period of 2022. The decline in the number of quarterly paying users was attributed to the soft macro and industry environment, as well as the increase in offline entertainment activities, which affected the time spent by long-tail users on our platform. Advertising and other revenues were RMB106 million for Q2 compared with RMB223 million for the same period last year. This was primarily due to a significant decrease in content licensing revenue. If we exclude the impact of the reduction in content licensing revenue due to our amended licensing agreement for League of Legends metrics in January, the remaining portion of advertising and other revenues recorded single-digit growth year-over-year. Cost of revenues decreased by 25% year-over-year to RMB1.55 billion for Q2, primarily due to decreased revenue sharing fees, content costs, and lower bandwidth costs. Revenue sharing fees and content costs decreased by 25% year-over-year to RMB1.34 billion for Q2, primarily due to the decrease in revenue sharing fees associated with the decline in live streaming revenues and lower costs related to content creators. Service costs decreased by 34% year-over-year to RMB101 million for Q2, mainly due to improved bandwidth cost management and continued technology enhancement efforts. Gross profit was RMB273 million and gross margin was 15% for Q2. Excluding share-based compensation expenses, non-GAAP gross profit was RMB278 million and non-GAAP gross margin was 15.3% for Q2. Research and development expenses decreased by 14% year-over-year to RMB144 million for Q2, primarily due to decreased personnel-related expenses. Sales and marketing expenses increased by 6% year-over-year to RMB106 million for Q2, mainly due to increased promotional fees. General and administrative expenses decreased by 9% year-over-year to RMB75 million for Q2 primarily due to decreased personnel-related expenses and share-based compensation expenses. Other income was RMB24 million for Q2 compared with RMB50 million for the same period of 2022, primarily due to a lower indirect tax reform and government services. As a result, our operating loss was RMB29 million for Q2 compared with RMB81 million for the same period of 2022. Interest and short-term investment income was RMB125 million for Q2 compared with RMB66 million for 2022, primarily due to increased interest rates and improved management of deposit products. Net income attributable to HUYA Inc was RMB24 million, compared to a net loss attributable to HUYA of RMB19 million for the same period of 2022. Excluding share-based compensation expenses and impairment loss of investments, non-GAAP net income attributable to HUYA Inc was RMB115 million for Q2, compared with RMB6 million for the same period of 2022. Non-GAAP net income margin was 6.3% for Q2. Diluted net income per ADS was RMB0.09 for Q2. Non-GAAP diluted net income per ADS was RMB0.47 for Q2. As of June 30, 2023, the company had cash and cash equivalents, short-term deposits, and long-term deposits of RMB10.8 billion, compared with RMB10.3 billion as of March 31, 2023. Before we conclude, I'm pleased to announce that HUYA'S Board of Directors has approved a share repurchase program under which the company may repurchase up to 100 million of its ADSs or ordinary shares over the next 12 months. I believe this move further deepens our commitment to building long-term value for our shareholders. With that, I would now like to open the call to your questions.

Operator, Operator

Your first question comes from the line of Thomas Chong from Jefferies.

Thomas Chong, Analyst

My first question is about our new strategies. Can management provide more details on the implementation? Additionally, regarding our new strategies, are there any short, medium, and long-term targets that we can discuss? Thank you.

Junhong Huang, Acting Co-CEO and Senior Vice President

Based on HUYA’s existing user community and content ecosystem, we aim to enhance the commercialization of game content and strengthen industry connections to achieve new breakthroughs, improve our market position, and develop long-term opportunities in gaming. Our key objectives include shifting the focus of commercialization towards game-related services such as game distribution, in-game item sales, and game advertisements, allowing us to explore the commercial value of our significant gamer population. While our users are willing to spend on games, their consumption on the HUYA platform has been limited due to our previous business model. Thus, we plan to provide more game-related services by collaborating closely with upstream game studios and broadcasters. This approach will satisfy gamers' needs to purchase in-game items and discover new titles while watching live games, creating additional revenue channels for game developers and increasing income for broadcasters, benefiting the entire industry chain. We aim to optimize the income structure of content creators on our platform, expanding income sources for broadcasters beyond virtual gift revenue sharing and sign-on fees, allowing them to earn more from sales, distribution, and advertising of game items. This will also enhance the connection between HUYA's content costs and income and reduce fixed sign-on fees, improving content cost efficiency. Currently, we are focused on building the infrastructure for our new business, which includes developing functions and products necessary for game-related services and negotiating terms with relevant game studios and publishers. Earlier this month, we completed the development of the in-game item sales mall function and plan to initiate in-game item sales and game distribution this year for several games. Therefore, we anticipate that this segment will generate a relatively small amount of income in 2023. We are also adjusting our live broadcast monetization to minimize inefficient resource allocation. Moving forward, we will expand game-related services to more titles, including mainstream and emerging games, and further enhance user experiences. Our goal is to steadily increase the revenue share from game-related services over the next three years, targeting approximately 30% of total income from these services.

Operator, Operator

Your next question comes from the line of Daniel Jang from UBS.

Daniel Jang, Analyst

Let me translate myself. The company is undergoing a significant strategic transformation. Given this, what is the outlook for revenue and margins in the second half of this year?

Ashley Wu, Acting Co-CEO and Vice President of Finance

In transforming our business to better mobilize and allocate internal resources, we have started to make active adjustments to various aspects of our existing operations. This includes reducing some inefficient live broadcast functions, modifying the incentives for live broadcaster activities, and changing the proportion of fixed sign-on fees. These adjustments may lead to fluctuations in our operational and financial indicators in the short term, especially in the latter half of this year. The revenue from new business is comparatively small, and we might see a larger year-over-year decline in live broadcast revenue than in the first half of the year due to resource allocation changes. This will significantly influence overall revenue. At the same time, we will continue efforts to reduce costs and increase efficiency, with stricter controls over expenses. While there will be some new investments in areas like research and development and talent acquisition related to new businesses, we will remain cautious regarding content expenses, including copyrights and broadcaster fees. We will also ensure careful promotion strategies for operational expenses. We still anticipate that the gross profit margin will increase for the year and that the non-GAAP net loss will be smaller than in 2022. Looking at the medium and long-term, we expect the gross profit margin from the game-related business to be higher than that of the current live broadcast business, resulting in a larger proportion of high gross margin business revenue. Given the cost structure associated with broadcasters being closer to income, we foresee an overall improvement in profit that will be sustainable.

Operator, Operator

And the question comes from the line of Lei Zhang from Bank of America Securities. Please go ahead.

Lei Zhang, Analyst

My first question is about the recent updates in the regulatory environment and how they might affect our business. Additionally, I would like to know how we should evaluate the performance of Tencent's newly launched game Valorant on our platform. Thank you.

Ashley Wu, Acting Co-CEO and Vice President of Finance

Currently, the authority's requirements concerning the content of live broadcast platforms, as well as the behavior of broadcasters and users, and the protection of minors are becoming more standardized and systematic. Consequently, the overall management approach is also becoming more standardized and strict. We believe this aims to enhance the standardization of the industry and support healthy and sustainable development. As a leader in our sector, HUYA has recently taken the initiative to upgrade and optimize the content and features of our platform, refine our operational strategies, improve efficiency, and foster a healthier platform environment. We will continue to uphold a more standardized and healthy development model for the content on our platform to help broadcasters and guilds strengthen their compliance awareness and enhance compliance capabilities through technical investments.

Junhong Huang, Acting Co-CEO and Senior Vice President

On the front of the new game, the live streaming performances of the new game are relatively stable overall, and we expect that the game will continue to be popular. It will attract more audiences to live and derivative content. HUYA provides launch incentives and traffic support for the launch of the new games. We will also organize activities and provide some promotional products together with game companies, offering support based on different game characteristics. For example, regarding Valorant, we have achieved a leading market share, and for this popular e-sport game, we will focus on establishing its advantages in the content ecosystem of events. In addition to the official copyright events, we will launch more self-organized events for the game, including events attended by broadcasters and professional players to further enhance the activity within this game sector.

Operator, Operator

Your next question comes from the line of Yiwen Zhang from China Renaissance.

Yiwen Zhang, Analyst

Thank you for my question. As we shift our focus towards commercialization, how will this impact our content strategy? Are there any changes we plan to implement?

Junhong Huang, Acting Co-CEO and Senior Vice President

Our new strategic plan is firmly integrated into HUYA's current user base and content ecosystem. The extensive e-sports and game offerings on HUYA play a crucial role in attracting and retaining core game users, which aligns with our objective of enhancing game services. Content from broadcasters will remain significant on HUYA's platform, especially as new commercial avenues like game distribution and in-game sales will rely on collaborations with these broadcasters. We intend to provide comprehensive content operations for promising broadcasters, fostering the creation of engaging content that merges event commentary with regular content while exploring game intricacies. Additionally, we will offer technical assistance for products such as bullet chatting, interactive games, live interactivity features, and virtual broadcasting technologies. This approach will also enhance the use of AIGC, increasing content diversity. In terms of content licensing, we will persist with cost-reduction strategies and focus on major events in terms of cost-effectiveness. With self-produced content yielding a higher return on investment, we will emphasize this area and develop high-quality, self-organized intellectual properties, such as the HUYA Thunder Series, HUYA All-Star Cup, and Tianming Cup. Through our events, we aim to better capture user engagement from large-scale copyright events. Furthermore, we will continue to merge live broadcasting, video, game communities, and other content types to elevate user experience quality.

Operator, Operator

Thank you. There seems to be no further questions. Now I would like to turn the call back over to the company for closing remarks.

Hanyu Liu, Investor Relations

Thank you once again for joining us today. If you have further questions, please feel free to contact HUYA Investor Relations through the contact information provided on our website for Piacente Financial Communications.

Operator, Operator

This concludes this conference call. You may now disconnect your line. Thank you.