Earnings Call Transcript - HUYA Q3 2023

Hanyu Liu, Investor Relations Representative

Good day, and good evening, and thank you for standing by. Welcome to HUYA's Third Quarter 2023 Earnings Webinar. I am Hanyu Liu from HUYA's Investor Relations. At this time, all participants are in a listen-only mode. Please be advised that today's webinar is being recorded. 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 [email protected]. A replay of the call will be available on the IR website in a few hours. Participants of management on today's call will be 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 on 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 by 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. With that, I'm pleased to turn the call over to our Acting Co-CEO and SVP Mr. Junhong Huang. Please go ahead.

Junhong Huang, Acting Co-CEO and Senior Vice President

Okay. Hello, everyone. Thank you for joining our earnings conference today. The third quarter of 2023 was a transition period for HUYA. Amid the soft industry environment and our proactive business adjustment, we achieved total net revenues of RMB 1.65 billion in the third quarter. We also reported positive net profit exceeding our expectations with non-GAAP net income reaching RMB 103 million in the quarter, as we continue to strengthen our user base. We are also beginning to make progress in our strategic transformation. As we discussed last quarter, our transformation targets are a shift in our commercialization focus building on our deep experience and success of HUYA's game live streaming business. We plan to provide more game-related services such as game distribution, in-game item sales, and game advertising. This will empower us to better capture our game users' commercial value by satisfying more of their game-related needs in addition to their content consumption needs. Our main goal this year is to build a business infrastructure required to support these new services while developing terms of cooperation with game studios. Let me share some details of our third quarter efforts. First, to enhance our game distribution capabilities, we recently upgraded the Huya Live app's existing game center, a one-stop shop where users can preorder and download new games, obtain Huya exclusive gift game keys, and view the latest game information. We enriched the game center's game library and improved the product download function, while also encouraging our consumers to participate in game promotion activities. During the quarter, we participated in the distribution of Demi-Gods and Semi-Devils 2 Mobile and promoted the game on both our game center and broadcasters' channel pages. This early game distribution cooperation's outcome was encouraging, with Huya's distribution channel achieving good initial results in terms of gross billings generated on the first day of the game's launch. While we continue to optimize our game distribution process and functions, we will also look to partner with more upcoming games for these services. As for the in-game item sales business, we have completed the development of our in-game item mall function and added it to our app. This mall function not only offers users a convenient overview of game products, but also allows us to prompt user check-ins and provide consumer rewards to maintain user purchase stickiness. So far, we have reached cooperation with eight game titles on in-game item sales, including Honor of Kings, CrossFire, and Demi-Gods and Semi-Devils 2 Mobile. As the first step, a small number of skin weapons from these games have been available in the mall and in the yellow shopping cart on selected broadcasters' live channels. Users can purchase them directly from the yellow shopping cart, while watching these broadcasters live content. Going forward, we will further refine the entire purchasing experience from buying game products on Huya and linking users' Huya accounts with their respective game accounts through planned purchases of virtual items within games. At the same time, we are exploring various operational activities around in-game item sales. For example, in September, one of Huya’s broadcasters held a live event showcasing the first wearing of a newly designed skin item and described the skin's characteristics and facts in detail during gameplay. The system not only attracted fans' attention but also gave players a unique opportunity to gain insight into the product before its official launch. Furthermore, in October, we collaborated with a game publisher to introduce a customized skin suite for a prominent broadcaster of their game on our platform. The skin suite limited-time exclusive sales on the broadcaster's channel proved quite successful with sales exceeding expectations. As activities like this gain traction, we will also develop and adopt operational strategies targeting different tiers of broadcasters, thus increasing broadcaster willingness and ability to participate in game item sales services. On the advertising services side, we have thoroughly analyzed our app's lows and highs and have begun adjusting our approach accordingly for brand advertising, which accounts for the majority of ours. We are deepening our collaboration with advertisers, especially on upcoming game promotions. For example, we work with a game studio to organize cross-platform campaigns involving our streamers to increase brand exposure for its new game. Meanwhile, we are increasing our emphasis on performance-based advertising, especially for the currently popular mini-games, and exploring other methods to increase its effectiveness on our platform. Along with these new strategic initiatives, we believe that the sustainable development of our platform's content ecosystem remains vital to HUYA's future growth and success. Game-related services will both complement and enhance our live streaming business as we realize the myriad of synergies emerging across content and operations. We are committed to solidifying Huya's user community and maintaining a healthy broadcasting ecology through high-quality broadcaster-generated content and professional e-sports content, while also leveraging new technologies such as AI-generated content. Let me give you an update on our latest progress on the AI front. We are actively exploring the application of AIGC across the entire broadcaster content production chain to further improve content creation quality and efficiency, as well as user engagement. For example, our recently developed AI assistant feature offers intelligent chat, game analysis, and a mini-game widget function, as well as a range of content creation tools. Powered by our tens of billions of parameters large language model trained on data from broadcasters streaming content on our platform, as well as natural language processing technologies, the AI assistant can imitate a broadcaster's style and tone while chatting with viewers during live sessions for an authentic and entertaining user experience. Furthermore, broadcasters can create customized digital avatars using AI-assisted 2D and 3D digital human technologies and AIGC technologies to satisfy various specific requirements. The AI assistant is also equipped with image recognition and AI listening capabilities for viewing and assessing game skins, empowering broadcasters to provide real-time analysis of gameplay. In addition, our intelligent editing and generation tools help broadcasters quickly generate high-quality video highlights of their live broadcast content and e-sports tournaments, significantly enhancing professionalism and production efficiency. In summary, the steady execution of our strategy and transformation plan this quarter lays a solid foundation for our future development. We are confident that we have strengthened our game live streaming content ecosystem and expanded our presence in the game value chain. We will drive more balanced and sustainable business growth in the long term. 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 third quarter results. Ashley, please go ahead.

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

Thank you, and hello, everyone. I'll continue with some updates on our operating metrics and financials. On the user front, although we continue to be affected to some extent by users and broadcasters' time spent on offline entertainment activities, our diversified e-sports tournaments and entertainment programming during the summer session boosted Huya's live mobile MAUs to 86 million for the third quarter of 2023, up 3.7% from 82.9 million for the previous quarter and flat year-over-year. Meanwhile, we maintained our strict marketing and channel spending policies to keep our expenses down. In the third quarter, the Huya live next month's user retention rate remained above 70%, demonstrating high user stickiness. Let me elaborate on our professional content enrichment. For licensed e-sports events, we broadcasted about 80 third-party professional e-sports channels in the third quarter of 2023, with total viewership of approximately 480 million. The summer seasons of LPL, KPL, and LCK were the most watched tournaments of the quarter. The Counter-Strike two events, ETL Season 18 and IEM columns, which are exclusive to Huya in China, were also quite popular among our users. Overall, we will continue to focus on implementing strict procurement processes for licensed e-sports tournaments and strengthening operational activities to improve the ROIs of the events or our self-produced content. We continue to enhance our own IP metric and increase our IP's market influence. In the third quarter, we broadcasted about 30 sales-organized e-sports tournaments and entertainment PGC shows with cumulative viewership of more than 110 million. The College's Hero Cup, the People’s Lease All-Star Cup summer, and Honor of Kings Streamer League were our top-performing self-produced events. We also hosted the Way Cup All-Star Invitational tournaments, raising the profile of this newly launched game on our platform. During the China Gaming Expo in Shanghai, we held a series of on-site competitions for HOK, LOL, LOLs, and Valorant, engaging our fans, professional players, and popular broadcasters to promote the integration of live content and offline activities. I also want to highlight that Huya broadcasted the Asian Games 2023 held in Hangzhou from late September to early October. This year's event featured the debut of e-sports competition as medal programs. Chinese e-sports teams performed well this year, which raised public awareness of e-sports nationwide. The Asian Games e-sports events also attracted broad attention from our users, with our League of Legends and Honor of Kings events ranking among the top five of all our tournaments this quarter in terms of concurrent users. Notably, our Asian Games e-sports broadcast showcased our advanced 4K HDR technology and our commitment to superior viewing experiences. We were the only broadcast platform to provide 4K HDR support across multiple devices, including Android and iOS app, website, and PC client, for both live streaming and on-demand video replay, enabling us to deliver more delicate detail and richer color to the e-sports game for our users. With our real-time, super-resolution image quality technology that supports various devices, we were also able to improve video quality under weak network environments to better meet users’ requirements for clarity and smoothness, optimizing their event viewing experience. In addition, we produced commentary programs tailored to the Asian Games' e-sports events to provide new e-sport viewers with competition-related background information, enhancing their understanding of the events while introducing them to Huya's high-quality, engaging content. Turning now to our financials. Our third-quarter revenues continued to decline due to the challenging market environment and our proactive business adjustments in support of our strategic transformation and prudent operations. Nevertheless, our gross margin remained resilient at 13.9% in Q3 as we continued to realize savings in content costs, particularly content licensing and broadcaster-related costs, as well as bandwidth usage. Our total operating expenses in the third quarter decreased 20.7% year-over-year and 8.7% quarter-over-quarter, reflecting our ongoing operational optimization efforts across the organization. Let's move on to our Q3 financial details. Our total net revenues were RMB 1.65 billion for Q3 compared with RMB 2.38 billion for the same period last year. Live streaming revenues were RMB 1.53 billion for Q3, compared with RMB 2.02 billion for the same period last year, primarily due to a decrease in the number of quarterly paying users of Huya Live to 4.2 million for Q3, from 5.5 million for the same period of 2022. The decline in the number of quarterly paying users was primarily attributable to the soft micro and industry environment and our proactive business adjustments, as well as the increase in offline entertainment activities, which affected the time spent by non-paying users on our platform. Advertising and other revenues were RMB 116 million for Q3, compared with RMB 361 million for the same period last year. This was primarily due to a significant decrease in content licensing revenues. If we exclude the impact of the reduction in content licensing revenues, as a result of our amended licensing agreement for LOL matches in January, the remaining portion of advertising and other revenues recorded single-digit growth year-over-year. Cost of revenues decreased by 30% year-over-year to RMB 1.42 billion for Q3, primarily due to decreased revenue sharing fees and content costs, as well as sales costs. Revenue sharing fees and content costs decreased by 31% year-over-year to RMB 1.23 billion for Q3, primarily due to the decrease in revenue sharing fees associated with the decline in live streaming revenues as well as lower costs related to e-sports content and content creators. Bandwidth costs decreased by 28% year-over-year to RMB 83 million for Q3. This was primarily due to improved bandwidth cost management, favorable pricing terms, and continued technology enhancement efforts. Gross profit was RMB 228 million and gross margin was 13.9% for Q3. Excluding share-based compensation expenses, non-GAAP gross profit was RMB 231 million and non-GAAP gross margin was 14% for Q3. Research and development expenses decreased by 17% year-over-year to RMB 142 million for Q3, primarily due to decreased personnel-related expenses and share-based compensation expenses. Sales and marketing expenses decreased by 24% year-over-year to RMB 95 million for Q3, primarily due to decreased marketing and promotional fees as well as personnel-related expenses. General and administrative expenses decreased by 23% year-over-year to RMB 60 million for Q3, primarily due to decreased share-based compensation expenses. Other income was RMB 40 million for Q3, compared with RMB 44 million for the same period last year, primarily due to lower indirect tax refunds and government subsidies. As a result, operating loss was RMB 39 million for Q3, compared with operating income of RMB 12 million for the same period last year. Interest and short-term investment income was RMB 128 million for Q3, compared with RMB 72 million for the same period last year, primarily due to increased interest rates and improved management of deposit products. Net income attributable to HUYA Inc. was RMB 12 million for Q3, compared with RMB 16 million for the same period last year. Excluding the share-based compensation expenses and impairment loss of investments, non-GAAP net income attributable to HUYA Inc. was RMB 103 million for Q3, compared with RMB 106 million for the same period last year. Non-GAAP net income margin was 6.3% for Q3. Diluted net income per ADS was RMB 0.05 for Q3. Non-GAAP diluted net income per ADS was RMB 0.42 for Q3. As of September 30, 2023, the company had cash and cash equivalents, short-term deposits, and long-term deposits of RMB 10.6 billion, compared with RMB 10.8 billion as of June 30, 2023. Finally, let me provide an update on our share repurchase program. We announced our share repurchase program of up to US$100 million over a 12-month period in mid-August 2023. Since then, we have repurchased a total of US$9 million of shares as of the end of Q3. We will continue to execute our share repurchase program, reinforcing our commitment to enhancing shareholder value. With that, I would now like to open the call to your questions.

Operator, Operator

Thanks, Ashley, and hello, everyone. Today's first question comes from Yiwen Zhang from China Renaissance. Yiwen, your line is open. Please go ahead.

Yiwen Zhang, Analyst

Thank you for taking my question. I would like to inquire about our strategic transformation, as it's been three months since we first introduced it in August. Could you provide an update on that? Thank you.

Junhong Huang, Acting Co-CEO and Senior Vice President

In August, we announced the key transformation of commercialization and plan to provide more game-related services, including game distribution, game prop sales, and game advertisements. In addition to meeting the needs of the game users on our platform and content consumption, it can also further meet the broader needs in game-related aspects, therefore obtaining higher commercial value for these users. We believe that the main advantage of HUYA in developing these businesses is the active game users and streamers on the platforms. The content output of the streamers and their interaction with users can help achieve more game-related services and a close cooperation relationship between HUYA and game manufacturers in terms of content.

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

According to our plan, our main goal this year is to build the infrastructure needed for the new business, including the development of relevant functions and products, and connecting users' HUYA accounts with their game accounts. At the same time, we also aim to establish new business collaborations with various game studios and titles to finalize cooperative business terms and optimize our business processes. For example, from the product and function perspective, we have introduced the in-game item mall feature for selling game props in HUYA's Live Broadcast App. Additionally, we have integrated the yellow shopping cart feature in the live broadcasting room. We have also upgraded the game center model to enhance distribution and improved the download function for in-game modals, while expanding our game library.

Junhong Huang, Acting Co-CEO and Senior Vice President

In terms of game cooperation, we have established partnerships with eight games, including Honor of Kings, CrossFire, and Demi-Gods and Semi-Devils 2 Mobile, focusing on the sale of game props and small-scale streamer sales. We have also begun to explore related activities for selling game props. For example, a streamer recently launched the Honor of Kings skin suits, which attracted significant attention from users on the platform. Additionally, we are experimenting with streamer-customized skin suits and other products. We have initiated initial collaborations with several games for distribution, including the new Demi-Gods and Semi-Devils mobile and MapleStory M!, which was launched in August. Regarding game advertising, we are looking into deeper forms of collaboration with game companies, such as having our streamers participate in cross-platform brand exposure events. We are also focusing on mini games and performance-based advertising for these popular titles. Overall, our progress is in line with expectations; however, the currently limited number of partnered games means that the cooperation remains small-scale. Consequently, the income and profit contributions from this new business will be modest this year. We hope that once all the preparatory work is complete, we can effectively expand the scale of our game-related services and generate more income next year.

Operator, Operator

Thank you. We will have the next question. The next question comes from Ritchie Sun from HSBC. Please go ahead.

Ritchie Sun, Analyst

I will quickly translate myself. Thank you to the management for taking my question. Can you break down the revenue impact from Huya's strategic transformation and the operational adjustments made for regulatory compliance? How do you view the future revenue trends? When can we expect to see new revenue streams develop a more favorable growth profile? Thank you.

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

Last quarter, we discussed the ongoing strategic transformation of our business aimed at optimizing internal resources. This includes making proactive adjustments to our existing live streaming operations. Additionally, to foster a healthier platform environment, we have recently upgraded and refined the content and functionalities on our platform. These changes led to a decline in our live streaming revenue during the third quarter. Furthermore, the overall industry climate and the willingness and affordability of users still require time for a full recovery, which has also impacted our income level to an extent. Notably, we are actively enhancing our content partnerships and user experience this quarter. The decline in live streaming revenue was slightly less than our previous expectations. In the fourth quarter, we anticipate that these factors will continue to affect us, and since it will be a full quarter impacted by our business adjustments, the year-over-year decline in live streaming revenue may be more significant than in the third quarter. We are hopeful that following these adjustments, our live streaming revenue will gradually stabilize. Regarding advertising and other income, the third quarter faced a decline in copyright income due to higher figures in the same period last year. Although new business income will be relatively modest in the latter half of this year, excluding the decline in copyright income, our advertising and other income levels have seen growth both year-over-year and quarter-over-quarter. Once we finalize our preparations for the new game-related services business, we expect a faster increase in revenue from this new segment next year, as well as a growing proportion of total income. Our ongoing objective is to achieve a more balanced income structure by 2025, with game-related services income making up about 30% of total revenue.

Operator, Operator

Thank you. We will now take the next question. The next question comes from Fiona Fan from Jefferies. Fiona, please go ahead.

Unidentified Analyst, Analyst

So I will translate myself. Thanks management for taking my questions. I asked a question on behalf of Thomas Chong from Jefferies. My question is what did Huya do for major events such as the Asian Games and S13, and how does it impact the Huya platform traffic? Thanks.

Junhong Huang, Acting Co-CEO and Senior Vice President

From the end of September to the beginning of October, the Huya platform broadcasted the e-sports events at the Hangzhou Asian Games, marking the first time e-sports was included as an official event in the Asian Games. We value this opportunity to broadcast the Asian Games e-sports events. To enhance the viewing experience, we offered 4K HDR support across various devices and implemented real-time super resolution technology to ensure clarity and smoothness even in weak network conditions. We also provided commentary and analysis of the e-sports events to help users understand the happenings. The e-sports events garnered significant attention from users on our platform, with peak concurrent viewers for League of Legends and Honor of Kings related to the Asian Games ranking among the top five in the third quarter. Moreover, the appeal of the Asian Games and its rich e-sports content has helped attract new users, and we aim to retain them through the high-quality and diverse content available on our platform. However, the brief duration of the Asian Games somewhat diluted its positive impact on quarterly monthly active users. The League of Legends World Championship is a major event in the fourth quarter. Huya has been broadcasting this event for six consecutive years, gradually building audience awareness and promoting the habit of watching it on the Huya platform among professional event users. We remain committed to enhancing user viewing and interactive experiences to deliver industry-leading broadcast quality. Additionally, we offer professional event services such as customized reservation options, game-watching assistance, MVP voting, and other interactive features. We aim to boost event engagement and user loyalty by integrating online and offline operations through Huya's own PGC programs. The S13 competition is still underway. We are pleased that one team from LPL has reached the finals and look forward to their performance. The overall viewing statistics for this event have been promising, with user numbers and other key metrics showing improvement compared to S12 in 2022. We will continue to maintain our leading market share and will assess the event's impact further once it concludes.

Operator, Operator

Thank you. We will take the next question. The next question comes from Lei Zhang from Bank of America. Please go ahead.

Lei Zhang, Analyst

Thank you for taking my question. I would like to ask about the margin trends, particularly regarding the seasonal impact we usually see in Q4. Can you provide more insights on the margin trends for this quarter? Additionally, any preliminary profit targets for 2024 would be appreciated. Thank you.

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

In the third quarter, we continued to work hard to control costs and improve efficiency. We optimized costs related to streamers and bandwidth. As a result, even with a decline in income, the gross profit rate remained resilient at 13.9%. We also maintained control over various operating expenses, particularly in sales and administrative costs. In the third quarter, total operating expenses decreased by 20% year-over-year and 8.7% quarter-over-quarter, achieving a net profit under both GAAP and non-GAAP. In the fourth quarter, due to a concentrated schedule of large events, especially the League of Legends S13, we expect event costs to rise significantly compared to the third quarter. These seasonal factors will persist and may contribute to a quarterly loss. However, because of the overall optimization of content costs and the ongoing streamlining of operating expenses throughout the year, we anticipate that the loss in the fourth quarter will be less than what we experienced during the same period last year. From what we can see currently, the company's profit level in the first three quarters has surpassed our previous expectations. We anticipate that the non-GAAP net profit for 2023 will be positive, resulting in a small profit, which is ahead of our earlier forecast of breaking even for the year. Looking ahead to 2024, we are optimistic that the growth in game-related services, which typically have a higher gross margin than our current live streaming business, along with careful and ongoing optimization of content costs and operating expenses, will enable us to further improve our company's profitability.

Operator, Operator

Thank you. Now we will take our last question today. It is from Ivan Su from Morningstar. Ivan, please go ahead.

Ivan Su, Analyst

Can you provide more insight into your thoughts on share buybacks? Are you planning to speed up your buyback in the coming quarters? Additionally, what is your strategy for utilizing your substantial net cash position? Thank you.

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

In mid-August, we announced a plan to buy back up to $100 million worth of shares in the next 12 months. We also aim to use cash more effectively and show the confidence of the Board of Directors and management in Huya and its future development. As of September 30, we had bought back shares worth $9 million. We will continue to implement the buyback plan as scheduled to enhance shareholder value. Regarding our usage of cash in the current macro environment and competitive landscape, we believe that maintaining sufficient cash is important for Huya's competitiveness. We will continue to invest in content technology, products, and international markets. Additionally, we will remain open to investments or mergers and acquisitions within our ecosystem and will carefully assess potential opportunities. We will also adjust our strategy based on the company's operating conditions and market trends. Furthermore, we will consider various forms of returning value to our shareholders, including buybacks or dividends, to acknowledge their long-term support and enhance cash efficiency.

Hanyu Liu, Investor Relations Representative

Okay. Thank you. 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 or Piacente Financial Communications.

Operator, Operator

This concludes today's call, and we look forward to speaking to you again next quarter. Thank you.