Earnings Call Transcript - HUYA Q4 2021

Hanyu Liu, Investor Relations

Hello, everyone, and welcome to Huya's fourth quarter and fiscal year 2021 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. Rongjie Dong, Chief Executive Officer of Huya, and Ms. Ashley Wu, 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 provision of the US 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 prospectors and other public filings as filed with the US 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 CEO, Mr. Rongjie Dong. Please go ahead.

Rongjie Dong, CEO

Hello, everyone. Thank you for joining our conference call today. 2021 was a solid year for Huya as we aimed to fortify our leadership position in China's game live streaming market. Amid macro headwinds related to the subsiding pandemic effects and the evolving regulatory landscape, we finished the fourth quarter with a record high mobile user base and net revenues of RMB 2.8 billion. For the full year 2021, we performed stably overall, generating RMB 11.4 billion total net revenues and RMB 454 million non-GAAP net income. Throughout the year, we expanded our investments in licensed E-sports tournaments, self-produced content, and content creators across our platform and continued to advance technology and product development, launching innovative and impactful features to further enhance user experience and boost user engagement. We also broadened our commitment to corporate social responsibility, fostering deeper bonds with our community, our users, and broadcasters, as we promoted positive social values nationwide. First, let's look at our user growth, driven by E-sports events and the new game launches in Q4. Our user base sustained healthy growth momentum, and Huya Live’s mobile MAUs reached 85.4 million during the quarter, up by 7% year-over-year. On an annual basis, Huya Live’s mobile MAUs were 88.9 million in 2021 compared with 76 million in 2020. And we remained focused on ramping up content investment and rolling out product innovations. We maintained our Huya Live app user retention rate above 70% on average in 2021. Next, I would like to provide some updates on our recent efforts to advance technology and product development. Let's begin with our open platform for third-party application developers, which is growing rapidly and gaining popularity with users, broadcasters, and developers alike. By the end of December 2021, more than 320 Huya mini-tools had been created and offered by developers through this open platform, extensively diversifying and enlarging our users' live streaming interactions with new formats. Furthermore, in the fourth quarter of 2021, the average number of broadcasters using mini-tools improved by approximately 160% year-over-year, and the sales force engaged more than 5 million daily active users during the quarter, up over 240% year-over-year. One noteworthy example is Battle of Lords, our recently added mini tool utilizing incremental game features to help streamers increase users' loyalty to their live broadcaster rooms by enticing users with virtual rewards when they visit. Also, to build on the successful launch of our service with inactive features, including gift droppers and one-click to join broadcasters' gameplay. Earlier in 2021, we introduced more innovative features in the fourth quarter, further enhancing game live streaming experiences. For instance, in December, we joined forces with Peacekeeper Elite to roll out a three-day campaign featuring our live streaming sales for in-game virtual items, inviting a few popular streamers to promote in-game skins and other virtual items during their live broadcasts. Notably, the campaign generated a record growth in billing for our live streaming sales on our platform with users viewing six game titles on our app during the week of the campaign, growing by 50% sequentially. On top of our general live streaming e-commerce functions, which allow users to place orders directly, the Peacekeeper Elite event included innovative features enabling users to receive virtual in-game purchases immediately in their game accounts by connecting their game ID with their Huya account. While greatly benefiting the game's operations, events like these also support new live streaming content creation and increased streamer engagement in the game value chain, thus potentially diversifying their income sources. Our initial success in this initiative also demonstrated the value of our enhanced cooperation with Tencent ecosystem and game studios. In a concerted effort to propel growth, while delivering a better experience to our users and broadcasters, we're also working to combine the aforementioned Huya mini-tools and the interactive features to re-enhance mutual benefits. As mini-tools connect us with application developers and interactive features link us with game companies, we can leverage those synergies to integrate upstream and downstream partners, raising our platform's profile as an industry leader. As for corporate social responsibility, we have ramped up our efforts by upgrading our risk control and compliance system, expanding our Huya volunteer team, and encouraging our broadcasters to create more content in pursuit of our positive social impact. In 2021, over 9,600 broadcasters on our platform joined our campaign to promote a healthier and more positive social environment and performed approximately 83,000 hours of related live streaming, covering a wide range of topics such as anti-fraud, education, volunteer social activities, and cultural heritage. We also made encouraging progress with our business diversification initiatives in the past year, providing game videos appealing to a wider range of audience demographics. Furthermore, our international product, NIMO TV, recorded further user expansion and significant revenue growth, driven by NIMO's solid performance. International business is emerging as a growth driver for our company. Ashley will elaborate on these two topics in just a moment. Last, but not least, although our revenue growth slowed in the fourth quarter, primarily due to a softer macro environment, we sustained our strategic efforts in content investment to expand our offering and drive continued user growth that we believe is key to our sustainable business development. This, however, caused higher costs and lower margins for the first quarter. Overall, we are proud of our accomplishments in 2021 and are ready to embrace the challenges and the opportunities the new year is likely to bring. As we enter 2022, macroeconomic uncertainties and regulatory changes continue to put pressure on us, thus we are experiencing a softer start compared with previous years. Nevertheless, we remain confident in our business fundamentals and operational capabilities given our leadership position in the game streaming industry and our strong value proposition in the massive game and the e-sports market. As the market evens out and user sentiment returns to more favorable levels, we expect to see a recovery in our financials with our investments paying off. Looking ahead, in order to deliver long-term value to our stakeholders, we will strategically focus on enriching the quality and diversity of our content, cultivating content creators, and advancing technology and product innovations, as well as further improving operational efficiency and exploring new business opportunities as we strive to support a better, happier community. Given that e-sports titles are now included in the official medal programs of the Asian Games, we see tremendous opportunities to leverage our strengths in e-sports content to enhance Huya's brand image and promote overall industry development. With that overview, I will now turn the call over to our VP of Finance, Ashley Wu, to share more details on our operating metrics and financial assessment. Ashley, please go ahead.

Ashley Wu, VP of Finance

Thank you, Mr. Dong, and hello everyone. To expand on Mr. Dong's remarks, I will start with updates on our content enrichment and diversification initiatives. Professional E-sports content remains viable on our platform. During the fourth quarter, we broadcasted 125 third-party E-sports tournaments, generating total viewership of approximately 605 million. Notably, the 2021 season of the League of Legends World Championship achieved record high viewership on our platform, with peak concurrent viewers of this event doubling compared with the previous year. KPL Autumn Demonstrated International 2021 and PEL Season 4 are also quite popular among our users. Furthermore, we have some exciting news to share about E-sports broadcasting rights. Following our agreement with TC Sports last year, through which we secured the 2021 to 2024 exclusive broadcasting rights in China for LPL, LTL, and LPL All-Star Weekend series, we are securing rights for a greater variety of licensed E-sports tournaments by forming multiyear partnerships with E-sports event organizers. In November, we signed an exclusive Chinese media rights agreement with ESL Gaming for a series of its key events in 2022 and 2023, including ESL Dota 2, ESL Mobile ecosystem, as well as the ESL Pro Tour for CS:GO and StarCraft II. This collaboration will help us enhance the license coverage for those games tournaments as well as bring high-quality international E-sports content to our platform. On the self-produced content front, we broadcasted 64 E-sports tournaments and entertainment PGC shows in the fourth quarter, for which total viewership reached 153 million in the fourth quarter, growing over 40% year-over-year: The Huya All-Star Cup final season, Huya Peacekeeper Elite, the Huya Jing's Cup for Honor of Kings, and other top-performing self-organized events. Going forward, we plan to proactively generate more Huya-branded programs and further increase the proportion of self-produced content in our content portfolio, as self-produced offerings are typically differentiated to gain user traction and deliver good return on investment. By leveraging our rich E-sports and game live streaming content resources, joining forces with our existing co-broadcasters, and establishing new cooperation with video content creators, we continue to enrich retail content offerings on our platform. As of now, the majority of the key broadcasters on our platform have already participated in retail content creation. As a result, the number of retail uploaded and radio viewership have both recorded double-digit sequential growth in the fourth quarter. We believe our efforts to build synergies between our video content and live streaming content will promote our user growth and content consumption, as well as provide more commercialization opportunities. In terms of our international business, Nimo TV's average MAUs increased to more than 30 million in the fourth quarter, highlighted by strong user growth in Indonesia, particularly by cooperating with game studios and broadcasting local hit E-sports tournaments. We solidified our leading position in that region. Within Nimo TV, we continue to add entertainment genres, such as live shows and voice chat, to build a more comprehensive content ecosystem, which also helps enhance its monetization capability. Our overseas revenues grew by over 110% year-over-year in the fourth quarter as we constantly refine our cooperation with local talent agencies to pursue more sustainable and healthy future revenue growth. Next, let me walk you through our Q4 financial results. Unless otherwise specified, the growth rates I will be reviewing are all on a year-over-year basis. For the fourth quarter of 2021, our total net revenues were approximately RMB 2.8 billion, decreasing by 6.1% year-over-year. Our live streaming revenues were RMB 2.6 billion for Q4, flat compared with Q3, but decreased from RMB 2.8 billion for the same period last year. The decline was mainly due to the lower number of paying users and average spending per paying user on Huya Live, partially offset by growth in overseas live streaming revenue. As macro conditions in Q4 adversely affected users' willingness to engage, we saw a decrease in paying users for Huya Live from RMB 6 million in Q4 of last year to RMB 5.6 million in this quarter, as well as a lower ARPU. Advertising and other revenues increased by 11.6% year-over-year to nearly RMB 196 million for Q4, primarily driven by revenues from content licensing. To provide more color on content licensing contribution, because our content licensing revenues are related to the licensing of E-sports tournament forecasting rights and are recognized according to event schedules, we often experience fluctuations in this category between quarters. Cost of revenues increased by 17.3% to RMB 2.8 billion for Q4, primarily due to the increase in revenue sharing fees and content costs as well as bandwidth costs. Revenue sharing fees and content costs increased by 20.5% to close to RMB 2.5 billion for Q4, primarily due to the increase in spending on E-sports content and the increase in revenue sharing fees in relation to certain broadcaster incentive programs. Particularly, the impact on content costs relating to League of Legends 2021 was greater than previous years, mainly because this last tournament occurred in Q4, and we booked the event for cost in one single quarter, whereas in the past it usually spanned two quarters Q3 and Q4. Bandwidth costs increased by 9.6% to RMB 183 million for Q4, primarily due to an increase in bandwidth usage as a result of our higher concurrent user base during the large E-sports events in the quarter. Gross profit was RMB 1.1 million and gross margin was approximately zero for Q4. Excluding share-based compensation expenses, non-GAAP gross profit was RMB 16.2 million and non-GAAP gross margin was 0.6% for Q4. Research and development expenses decreased by 4.6% to RMB 206 million for Q4, primarily due to decreased personnel-related expenses. Sales and marketing expenses increased by 13.1% to RMB 218 million for Q4, primarily due to increased marketing expenses to promote our content products, services, and branding, particularly in promotional activities for E-sports events, partially offset by decreased personnel-related expenses. General and administrative expenses decreased by 5.8% to RMB 90 million for Q4, primarily due to decreased professional service fees. Other income was RMB 58 million for Q4 compared with RMB 95 million for the same period of 2020, primarily attributable to lower tax responses and government services. As a result, operating loss was RMB 457 million for Q4, compared with operating income of RMB 187 million for the same period of 2020. Excluding share-based compensation expenses, non-GAAP operating loss was RMB 386 million and non-GAAP operating margin was negative 13.8% for Q4. Net loss attributable to HUYA Inc. was RMB 313 million for Q4 compared with net income attributable to HUYA Inc. of RMB 253 million for the same period of 2020. Non-GAAP net loss attributable to HUYA Inc. was RMB 242 million for Q4 compared with non-GAAP net income attributable to HUYA Inc. of RMB 306 million for the same period of 2020. Non-GAAP net loss margin was 8.6% for Q4. Diluted net loss per ADS was RMB 1.31 for Q4. Non-GAAP diluted net loss per ADS was RMB 1.01 for Q4. As of December 31, 2020, we had cash and cash equivalents, short-term deposits, and short-term investments of around RMB 11 billion compared with RMB 11.1 billion as of September 30, 2021. Moving on to our full year 2021 results. Total net revenue for 2021 increased by 4% to RMB 11.4 billion from RMB 10.9 billion for the prior year. Live streaming revenues were RMB 10.2 billion for 2021 compared with RMB 10.3 billion for the prior year. Advertising and other revenues increased by 93% to RMB 1.2 billion for 2021 from RMB 603 million for the prior year. Notably, advertising and others accounted for approximately 10% of our total revenue for 2021, improved from 5.5% in 2020. Non-GAAP gross profit was RMB 1.7 billion, and non-GAAP gross margin was 14.6% for 2021. Non-GAAP operating income was RMB 260 million, and non-GAAP operating margin was 2.3% for 2021. Non-GAAP net income attributable to HUYA Inc. was RMB 454 million, and non-GAAP net margin was 4% for 2021. Non-GAAP diluted net income per ADS was RMB 1.88 for 2021. To be mindful of the event of our earnings call for the other full year 2021 financial results, I encourage listeners to refer to our earnings press release for further details. With that, I would now like to open the call to your questions.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Our first question comes from Thomas Chong from Jefferies.

Thomas Chong, Analyst

Thanks management for taking my questions. My question is about the 2022 outlook. Can management share about the overall strategic direction as well as the trend for user and revenue? Thank you.

Rongjie Dong, CEO

Thank you for that question. This is Mr. Dong, CEO of the company. We always believe that users are the core of our business growth and we will continue to have user-driven growth for our long-term development strategy. For the year 2021, our user increased by 6.4%, with Q4 MAU reaching 85.4 million, further cementing our leading position in the game live streaming area. In 2022, Huya will continue to increase our market share in game live streaming and cement our leading position. Of course, Huya will continue to explore the diversification of our business and to enhance our monetization ability. In order to hit our user growth target, Huya in 2022 will continue to invest effectively in content and product to cover the mainstream tournaments and e-sports events, and also to enhance our ability to make self-produced tournaments and content and increase the proportion of self-produced content. On top of that, we will continue to acquire streamers to adjust our incentive schemes according to the market dynamics and also keep an eye on overseas live streaming and video businesses. In addition, Huya will continue to improve its technology and product, trying to enhance our audio and video technology to improve the users’ viewing experience and to promote interactive features on live streaming as well as Huya mini programs. Also, we will step up our effort in partnering with Tencent and explore new operating models and commercialization models for E-sports as a whole. In terms of operations, we will try to enhance and continue to be compliant on our platform, trying to adapt to regulatory changes and to realize long-term business development.

Ashley Wu, VP of Finance

As to the trend of user growth and revenue outlook for the year 2022, our target is to keep the mobile user number increase for the year by enriching our content on our platforms and also to enhance interactions with our users. It is worth noticing that user numbers have seasonal changes depending on the scheduling of big events as well as holidays and other seasonal issues. In terms of revenue, we've noticed that the paying behavior of our users in Q4 2021 was somehow affected by the macro economy. The negative impacts persist, and we expect that for the first half of 2022, our revenue will continue to be under some pressure. But generally speaking, the fluctuations in our revenue are mainly due to external forces. Our company will continue to work on and have the right confidence that our business will enjoy sustainable growth for the long-term. Generally speaking, the users are the key to our business development, and we will continue to have content-driven user growth. We believe that when the market situation turns around, our business will return to upward growth.

Hanyu Liu, Investor Relations

Okay. Next question please. Thank you.

Operator, Operator

Thank you. Our next question comes from Lei Zhang from Bank of America Merrill Lynch. Please ask your question.

Lei Zhang, Analyst

Thanks management for taking my question. My question is mainly regarding your content strategy, in particular, on the E-sports tournament set. I consider your competitors' adjustments in E-sports tournaments recently and would like to share your thoughts here? Yes. Thank you.

Rongjie Dong, CEO

Thank you for your question. This is from CEO Mr. Dong. In order to enhance our competitiveness and continue to provide attractive content for our users, we'll continue to purchase and establish high-quality content, including IP tournaments, self-produced events, as well as PGC programs and streaming content. To be more specific in terms of IP tournaments, we'll continue to provide popular tournaments and events in the mainstream games. For instance, in League of Legends in China, we have the LPL, as well as the only platform that provides LCK, LEC, LCS, and PCS. In terms of Honor of Kings and Peacekeeper Elite, we are also covering the main events and tournaments as well as the professional league in China. In terms of new games, for instance, for Mobile League, we established the professional league for it. I also mentioned that last year in November, we established a two-year exclusive IP agreement with ESL for Dota 2 and CS:GO, which helped us to improve our portfolio of games and make it a more complete platform that provides professional live streaming content. As of Q4 2021, we live-streamed 124 IP games with viewership of 605 million in total. We will continue to invest effectively in high-quality IP events while also considering cost efficiency when purchasing them. Even though some top events may be quite expensive, we believe these are very important for us to keep user traffic and provide better services for our existing users. In terms of self-produced content, the strategy is to increase the proportion of self-produced content by making better use of our program IP metrics and self-produced tournaments. For instance, right now, we have a Huya content program that covers mobile gaming arenas. We also have many seasons of Goldline entertainment programs as well. And gradually, we formed a solid user base for these events and programs. In Q4 2021, the total viewership for our self-produced content and PCG content reached 153 million, with a year-on-year growth of over 40%. Generally speaking, self-produced content can give us a better ROI and balance the costs for making the content overall.

Hanyu Liu, Investor Relations

Next please. Thank you.

Operator, Operator

Thank you. Our next question comes from Brian Gong from Citi Group. Please ask your question.

Unidentified Analyst, Analyst

Thank you, everyone, for taking my questions. This is Nelson asking on behalf of Brian. I have a question on margin and cost. Can management share your view on content cost and streamer cost outlook in 2022? And how about the margin trend outlook going forward?

Ashley Wu, VP of Finance

Thank you for that question. Ashley Wu, VP for Finance. In order to increase our attraction to streamers since Q3 last year, while maintaining the split policy stable, we have tried to provide more incentives for our streamers according to the market dynamics. And due to the year-end event in Q4 last year, the split ratio was slightly higher because of seasonal impacts. Based on our overall operation of the platform and monetization ability, I believe that our split policy for the streamers is now quite attractive. For now, we expect the total split ratio for the year 2022 to be at the same level as we had for the year 2021. We'll continue our investment in content and carry forward our split policy from the second half of 2021. We believe content costs as a percentage of our revenue for the year 2022 would be slightly higher than that in 2021, and therefore the overall gross margin rate will be affected a little bit. In terms of operating expenses, we'll try to continue to optimize our operating efficiency, but due to a slightly lower gross margin level, our operating margin will be lower than the year 2021. Given the major challenges facing the industry and macro economy, we believe it is necessary for us to continue to invest in content because it will help us to increase competitiveness and market share. Of course, we'll aim to optimize our operating efficiency, for instance, by analyzing content ROI and allocating our resources effectively. For instance, we will probably also try to optimize our bandwidth technology, and make it more efficient, and also optimize our operating expenses such as marketing expenses. Our content investment strategy has a certain level of flexibility, which can be adjusted to market situations. For a long time, Huya has been very healthy in our cash flow and financial performances, laying a good foundation for further investments in content. Right now, the revenue situation is subject to external impacts. As we mentioned before, we have a good foundation for user growth. Our users are loyal to our platform. The second month retention rate for our users on the application is 70%, and we have very nice commercialization capability. So when the market situation improves, we believe our revenue will continue to rebound and grow. On top of the gifting income, we would also actively explore other models for revenue and business, such as overseas live streaming with video advertisement income, and we could also earn from IP sales. Streaming revenue in the year of 2021 accounted for over 10% of our total revenue. We believe that for the mid and long term, our non-streaming revenue as a percentage will keep growing. In terms of profitability and margin, we will continue to optimize our costs and operating efficiency and make our resources more effective. We will also have a better evaluation of content ROI, and once the competitive landscape stabilizes, we would be able to address our split costs and other content producing costs. Our loss rates in the overseas business will continue to narrow down. For the longer term, I believe we are capable of driving a profit.

Hanyu Liu, Investor Relations

Thank you. Our last question, please.

Operator, Operator

Thank you. Last question comes from Yiwen Zhang from China Renaissance. Please go ahead.

Yiwen Zhang, Analyst

Thank you management for taking my question. So I have a quick question regarding overseas business. Can management share the latest update of overseas business and our target for 2022?

Ashley Wu, VP of Finance

In Q4, 2021, our overseas business achieved very nice positive progress with over an MAU exceeding 30 million, which is a new record high. Our revenue also showed year-on-year growth of 110%. The overseas business accounted for about 4% of our revenue for the company in 2021. In 2021, we allocated resources to Southeast Asia and other key areas. While optimizing our costs, we increased our user base. In terms of Nimo content, while providing popular games and tournaments that are popular on a regional level, we also increased pan-entertainment content on our platform, making our ecosystem more complete, which is also favorable for us to monetize our content. Based on our experience in 2021, we will continue this strategy for our overseas business in 2022, with a goal to further consolidate and increase user base and revenue while also trying to optimize and reduce losses.

Hanyu Liu, Investor Relations

Okay. We finished the answer.

Operator, Operator

Right. Thank you. So now I'd like to turn the call back to the company for closing remarks.

Hanyu Liu, Investor Relations

Yes. Thank you once again for joining us today. If you have further questions, please feel free to contact Huya's Investor Relations through the contact information provided on our website. Thank you.

Operator, Operator

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