Earnings Call Transcript - HUYA Q1 2022

Hanyu Liu, Company Investor Relations

Hello, everyone, and welcome to Huya's first quarter 2022 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.

Rongjie Dong, CEO

Hello, everyone. Thank you for joining our conference call today. Despite macro challenges that continued to impose near-term pressure on health and the entire industry, we delivered healthy user growth and strong financial performance in the first quarter of 2022. Total net revenues were RMB2.46 billion and non-GAAP net income reached approximately RMB47 million for the first quarter, in line with our expectations against the backdrop of the evolving market environment. First, let me give you some color on our user metrics. Our user base sustained its expansion trend with Huya Live, mobile, and mails increasing by 8.5 percent year-over-year to $81.9 million in the first quarter. The growth was mainly driven by the strong performance of E-sports tournaments as well as our enhanced cooperation with game studios. Meanwhile, our user engagement level also improved as we remained diligent in our efforts to provide quality content and optimize user experience through product innovations. Specifically in the first quarter, users' time spent on our platform recorded double-digit growth on both a year-over-year and quarter-over-quarter basis. In addition, Huya Live app's user retention rate remained stable at about 7 percent. Now, I would like to provide more details about our cooperation with game studios and our recent advancements in product innovation. Our interactive feature, gift droppers, has emerged as a very popular way to connect game streaming viewers directly with their game players. By participating in this task-type activity, users can claim virtual rewards from both game studios and our platform once they complete specific combinations of tasks, such as viewing game streaming for a certain period of time and sending certain voice chats. We introduced the feature during our live broadcast of Peacekeeper Elite late last year and have now added it to over 10 game titles such as Honor of Kings, LoL Wild Rift, Call of Duty Mobile, and Genshin Impact as we continue to deepen our relationships with a variety of game studios. Excitingly, more than 10 million users on our platform engaged with this interactive feature during the first quarter. In addition to improving user engagement metrics on our platform, our operating team noted that the feature encourages players to return to games, bolstering user activity rates. In another effort to expand our collaboration with gaming titles, we joined forces with CrossFire's mobile game studio to design and launch an event membership. During the 12-month period, users who produced Huya CFM championship long-term content could secure a free membership by connecting their CFM game ID with their Huya account. This initiative helped increase Huya’s exposure within the gaming community and also promoted gamers' activity levels. All long-term cup matches were live broadcasted on Huya’s platform and were also made available on the in-game tournament streaming channel, increasing the self-produced events' popularity and reflecting our continuous efforts to connect Huya’s live streaming content with the Tencent ecosystem. Building on these events’ success, we will forge ahead with additional endeavors in this area going forward. We are also looking beyond the world of gaming to innovate more interactive live streaming features. For example, at our January annual gala event, Huya Boom Night, we debuted an extraordinary online real-time interactive musical gameplay feature designed to make the event's broadcast distinctive and captivating. This new feature leveraged our in-house developed audio and beat detection technologies to engage users in a musical experience. Users were scored based on beat accuracy, allowing them to compete with other viewers while watching artists' live streamed stage performances. Merging live musical performances and interactive activities, this feature created a truly immersive viewing experience, bringing the unique feeling of live performance to users' fingertips and broadening the boundary between reality and virtuality. Before I conclude, I would like to provide some updates on our recent strategic initiatives in our overseas business. Given the rapidly changing business environment both domestically and internationally, we have strategically implemented some adjustments and refinements regarding Nimo TV's operations, concentrating our resources on future key geographic regions. While these adjustments could result in short-term contractions in overseas user expansion and revenue growth, as we downsize our overseas presence in certain areas, we expect to improve the overall efficiency of our international business by directing resources to regional markets with greater potential for profitable business growth at a lower cost. We believe this more focused approach will benefit our overseas operations in the long term. In summary, while the persistent macroeconomic and regulatory headwinds, along with the impact of the ongoing COVID-19 resurgence in China, could still create some challenges as we move ahead, we are confident in our strategy and will continue to focus on harnessing the strength of our business fundamentals to further improve operational efficiency, as we embrace the regulatory changes. We will continue to work closely with authorities to comply with the government's guidelines and leverage our operational and technology expertise spanning the game live streaming market. We also believe that the contraction will not impact the core needs of our users and that we are capable of continually innovating compliant products and features to offer users more choices and better experiences within live broadcasting. As our high-quality content portfolio, along with technology and product advancements, solidifies our leadership in the game live streaming market, we will remain committed to serving our growing user base and creating more value for our broadcasters, business partners, and all other stakeholders. 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 Wu, Vice President of Finance

Thank you, Mr. Dong, and hello everyone. To expand on Mr. Dong's remarks, I will now provide some updates on our content enrichment and diversification initiatives. On the professional E-sports content front, we broadcasted around 80 third-party E-sports tournaments in the first quarter. This year, we are deliberately being more selective in tournament procurement to ensure high-quality content offerings and improve ROI metrics. We were glad to see that during the first quarter, total viewership of licensed E-sports tournaments reached more than RMB700 million, exceeding the previous quarter's viewership, despite the fact that, due to seasonality, the first quarter of the year is typically not a strong period for E-sport events. In particular, CFPL Spring Season viewership reached a record high this quarter, more than doubling compared to the 2021 Spring Season. LPL Spring, KPL Spring, LCK Spring, and ESL Pro League also performed well during the period. Our comprehensive E-sports content continues to serve as the key driver of user traffic and provides a superior experience for all of our users. In addition to licensed E-sports content, we broadcasted 26 self-organized E-sport tournaments and entertainment PTC shows during the first quarter, generating approximately 86 million total viewership. During the Chinese New Year holidays, we held the Huya Live league event, featuring popular streamers from different categories as participants in several online games, offering our users closing content and an entertaining festival experience. The Huya CFM Championship Long Term Cup, which Mr. Dong mentioned earlier, and the Huya Super League, a tournament for PC and Solo games were also well-liked Huya branded E-sports events in the first quarter. Additionally, our commentary ratio for LPL, Huya Game Watch Room has become a major channel for game lovers to enjoy professional gameplay analysis during the LPL season. We strategically adjusted our investment in self-produced events this quarter, because we had abundant offerings of licensed events during the period. And in pandemic-related lockdowns in a few major cities caused some delays on in-house variety show production. Nevertheless, those events we broadcasted in the first quarter achieved satisfying results. Furthermore, we have been continuously improving our video production and viewing experience for users. On the product end, we are integrating video content with our newly added discussion forum in streaming channels. We've created specific game or tournament forums where users can upload videos of gameplay or tournament highlights to share, watch, and discuss with their peers, helping to create a dynamic content ecosystem on our platform. Encouragingly, in the first quarter, the number of uploads on our platform grew by 12 percent quarter-over-quarter and retail viewership recorded nearly 50 percent sequential growth. Next, let me walk you through our Q1 financial results. Unless otherwise specified, the growth rates I will be reviewing are all on a year-over-year basis. Our total net revenues were RMB2.46 billion for Q1, decreasing by 5.4 percent year-over-year. Live streaming revenues were RMB2.15 billion for Q1, compared with nearly RMB2.5 billion for the same period last year. The decline was mainly due to lower average spending per paying user on Huya Live, as the macro softness continued to adversely affect paying users' sentiment. The number of paying users for Huya Live was 5.9 million, relatively flat compared to the same period last year and representing a net addition of 0.3 million compared to Q4 last year. We believe the increased user engagement and time spent in Q1 contributed to the sequential increase in paying users. Advertising and other revenues increased by 47.2 percent year-over-year to RMB313 million for Q1, primarily driven by the increase in content licensing revenues. In this Q1, we were able to recognize more of our sub-licensing revenues according to the licensing event schedule. Cost of revenues increased by 1.9 percent to RMB2.1 billion for Q1, primarily due to the increase in revenue-sharing fees and content costs. Revenue sharing fees and content costs increased by 3.4 percent to RMB1.8 billion for Q1, 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. Bandwidth costs decreased by 7.3 percent to RMB168 million for Q1, primarily due to improved bandwidth cost management and continued technology enhancement efforts. Gross profit was RMB334 million for Q1 compared with RMB514 million for the same period of 2021, primarily due to lower revenues and increased costs of revenues, primarily driven by higher revenue-sharing fees and content costs. Gross margin was 13.5 percent for Q1. Excluding share-based compensation expenses, non-GAAP gross profit was RMB347 million, and non-GAAP gross margin was 14.1 percent for Q1. Research and development expenses decreased by 1.4 percent to RMB196 million for Q1, primarily due to the decrease in share-based compensation expenses. Sales and marketing expenses increased by 0.3 percent to RMB145 million for Q1. General and administrative expenses decreased by 3.9 percent to RMB81 million for Q1, primarily due to the decrease in share-based compensation expenses. Other income was RMB28 million for Q1 compared with RMB76 million for the same period of 2021, primarily attributable to realized damages received in the first quarter of 2021 from a favorable outcome in a broadcaster-related lawsuit. As a result, operating loss was RMB60 million for Q1 compared with operating income of RMB162 million for the same period of 2021. Excluding share-based compensation expenses, non-GAAP operating loss was RMB3 million, and non-GAAP operating margin was negative 0.1 percent for Q1. Interest and short-term investment income were RMB59 million for Q1 compared with RMB65 million for the same period of 2021, primarily due to decreased interest rates. Income tax expenses were RMB9 million for Q1 compared with RMB39 million for the same period of 2021, primarily due to lower taxable income. Net loss attributable to Huya Inc. was RMB3 million for Q1 compared with net income attributable to Huya Inc. of RMB186 million for the same period of 2021. Non-GAAP net income attributable to Huya Inc., which excludes share-based compensation expenses and gain on fair value change of investments, net of income taxes was RMB47 million for Q1 compared with RMB266 million for the same period of 2021. Non-GAAP net margin was 1.9 percent for Q1. Diluted net loss per ADS was RMB0.01 for Q1. Non-GAAP diluted net income per ADS was RMB0.19 for Q1. As of March 31, 2022, we had cash and cash equivalents, short-term deposits, and short-term investments of RMB10.47 billion, compared with RMB10.96 billion as of December 31, 2021, primarily due to the increase in investments and prepayments to content providers. With that, I would now like to open the call to your questions.

Operator, Operator

Thank you. Your first question comes from Thomas Chong from Jefferies. Please ask your question.

Thomas Chong, Analyst

So my question is about our overseas business. Just wondering, what will be the reason behind the adjustment, and what will be the impact on our business? Thanks.

Rongjie Dong, CEO

Given the rapidly changing business environment domestically and internationally, we have strategically implemented some adjustments and refinements regarding Nimo TV's operations, concentrating our resources on future key geographic regions. While these adjustments could result in short-term contractions in overseas user expansion and revenue growth as we downsize our overseas presence in certain areas, we expect to improve the overall efficiency of our international business by directing resources to regional markets with greater potential for profitable business growth at a lower cost. We believe that this more focused approach will benefit our overseas operations in the longer term.

Hanyu Liu, Company Investor Relations

Okay, let's have the next question.

Operator, Operator

Thank you. Your next question comes from Yiwen Zhang from China Renaissance. Please ask your question.

Yiwen Zhang, Analyst

So, thank you, management for taking my question. I have a quick question on the traffic side. So, game licensing in April and also COVID to some cities are expected to lockdown. So what are their impacts on our CapEx side? Thank you.

Rongjie Dong, CEO

Thank you for your question. For the longer term, the resumption of licensing of games is a positive development for the gaming industry. As a downstream player of the game industry, Huya believes this will help us to enrich our content for live streaming. Also at the same time, Huya has the best operating capacity in terms of new games. So, we stand in a more advantageous position when gaining traffic from those new games, which would be positive for our long-term user expansion. In addition, the resumption of licensing games will motivate advertisers on the games, which is a positive aspect for our advertisement business. In the short term, I think people will focus more on whether the new games released are suitable for live streaming and whether they will be well-received by users. We are also keeping an eye on the pulse of the market and given the fact that the resumption of licensing games only began in April, the impact of such on our business, especially advertisement business, is pretty much limited for now. As for the impact of COVID in terms of the traffic due to the lockdown measures, we experienced some positive impacts for our traffic as well as game live streaming. However, because these policies are normalizing, the positive impact on our traffic is relatively smaller compared to the beginning of 2020. In terms of revenue, we anticipate some pressure on the consumption behavior of our online users as well as the demand for advertisement from our advertisement merchants due to COVID. Therefore, in the short term, we expect an impact on revenue in this regard. We will continue to closely monitor the impact of COVID on our business and ensure that we can provide guarantees, protections, and great support to our colleagues who are affected by lockdown measures.

Hanyu Liu, Company Investor Relations

Okay, that's it. We can have the next question.

Operator, Operator

Thank you. Your next question comes from the line of Brian Gong from Citi. Please ask your question.

Unidentified Analyst, Analyst

Thanks management for taking my question. Can management assess the impact of the new regulation on minor protection rollout in May, especially the restriction on ranking and PK features? And also, what's our expectation for further detailed policy on other areas ahead? Thank you.

Ashley Wu, Vice President of Finance

Thank you. I'll take your question. Our industry has been under scrutiny by regulators over the past period. Recently, the regulators have released opinions on regulating keeping behaviors on live streaming and better protections for minors. We believe that these changes are to better regulate the industry to ensure its long-term and sustainable growth in a healthier way. We have been closely monitoring the latest changes in terms of regulations and guidance. For these latest opinions on protecting minors, we will make sure that we strictly abide by all the relevant regulations and guidance and earnestly implement them after more operating details become available. We will have to make some adjustments in our product and operations, and we will try to do that as soon as possible. This might mean some changes to our financial and operational metrics, and we are now evaluating the scale of the impact. We think that these possible changes and adjustments may have a very limited impact on the core demand of our core users on our platform. Of course, we will be dynamically adjusting our operation and monetization policies to minimize the impact from such regulation changes. At the same time, we continue to enhance our capacity to comply with the regulations and make relevant investments in our technology to be more responsive to regulation changes. We will also continue to invest in high-quality content, upgrade our products, and maintain our competitiveness in the market.

Hanyu Liu, Company Investor Relations

Okay, thank you. Let’s have the next question, please.

Operator, Operator

Thank you. Your next question comes from the line of Lei Zhang from Bank of America. Please ask your question.

Lei Zhang, Analyst

Thanks management for taking my question. My question is mainly regarding our cooperation with Tencent and any updates in terms of the new initiatives, and any changes in the regulatory environment? Thank you.

Rongjie Dong, CEO

Thank you for your question. The cooperation between Huya and Tencent is progressing very well. First of all, we maintain a strong synergetic relationship with Tencent in terms of games and tournaments. For instance, in the first quarter, in our self-produced CFM long-term cup, we collaborated with CFM Games for a joint membership. Users who participate in our activities can enjoy privileges and benefits on both Huya and in-game. This not only increases Huya's exposure among users but also encourages more active participation in both the game and live streaming platform. This feature has become very popular among users, and the results have been recognized by the game studio. We hope to expand such cooperation to more games and create more synergistic activities in terms of our product operation and communities. We are currently enjoying a leading market share in live streaming for LOL mobile. Furthermore, we have held two Zhanshen cups now, which are self-produced tournaments licensed officially by LOL Mobile. Huya has also implemented unique interactive features, such as gift dropping and live streaming e-commerce, which have been applied to more than 20 games in Q1 with over 10 million active users. For our games like Honor of Kings and Call of Duty Mobile, we've seen excellent results so far, and we plan to apply those interactive features to more games and categories. As a company that produces content through technology-driven innovations, we have made significant progress since 2021 in launching these interactive features and generating engaging content. Our content metrics can cater to the needs of users both before and after gameplay, promoting both game promotion and user retention. We will continue to enhance interactions through live streaming and create more active community features to foster stronger connections among our users, live streamers, game studios, and players, allowing us to have a greater role in the entire gaming ecosystem.

Hanyu Liu, Company Investor Relations

Okay, thank you. Let's have the next question, please.

Operator, Operator

Thank you. Your next question comes from the line of Ritchie Sun from HSBC. Please ask your question.

Ritchie Sun, Analyst

Thank you management for taking my questions. First of all, as we noted, some of our competitors are changing their content strategies or even exiting the business. How should we think about the long-term adjusted net margin profile under this new competitive landscape? And secondly, how should we view headcount and also budget allocation plans across R&D, sales and marketing, and G&A expenses for this year? Thank you.

Rongjie Dong, CEO

Thank you for your question. We have noticed the strategic changes made by our competitor, and from Huya's point of view, we think that this is a positive trend for us as it will alleviate the competition landscape.

Ashley Wu, Vice President of Finance

Given where we are right now in Huya, Inc., we will continue to maintain stringent control over our costs and expenses while optimizing our operating efficiencies. Overall, it is necessary to continue investing in high-quality content and products, as this is vital for ensuring that we can continue to serve our users well and consolidate our leading position in the market. In terms of revenue sharing fees with live streamers, the market dynamics have not changed significantly recently. Given our operation and monetization capabilities at Huya, we think that the current regime for revenue sharing is competitive and therefore, we will keep it status quo. Regarding licensed products and self-produced products, we will conduct a detailed analysis of the ROI of different types of content while allocating our resources to more effective content and adjusting according to market dynamics. For instance, in Q1, we adopted a more selective approach to investing in licensed tournaments and self-produced content. Simultaneously, we will optimize our technology on bandwidth, making it more efficient, and will implement optimizations in sales, marketing, and other operating expenses while exercising stringent control over labor costs and other expenses. We also mentioned making strategic adjustments to our overseas business, which will help in our cost-control efforts. In terms of the margin for the short term, these business adjustments may lead to some non-recurring expenses and costs during the quarter, impacting our margin level. However, looking at the entire year, in terms of investment and revenue, we expect content costs as a percentage of revenue in 2022 to be slightly higher than in 2021. Therefore, the overall gross margin rate for the year may be affected, and we believe that the operating margin in 2022 may be somewhat lower compared to 2021. However, we will continue our efforts in optimizing our costs and operational efficiency to set a solid foundation for our long-term development.

Hanyu Liu, Company Investor Relations

Okay, that’s it.

Operator, Operator

Thank you. As there are no further questions now, I'd like to turn the call back over to the Company for closing remarks.

Hanyu Liu, Company Investor Relations

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

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