Earnings Call Transcript - HUYA Q1 2021

Operator, Operator

Hello, ladies and gentlemen. Thank you for standing by for the First Quarter 2021 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 would now like to turn the call over to Ms. Dana Cheng, Company Investor Relations. Please go ahead.

Dana Cheng, Investor Relations

Hello, everyone, and welcome to HUYA's 2021 first quarter 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. Catherine Liu, Chief Financial Officer. 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 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 prospectus and other public filings as filed with the US SEC. The company does not assume any obligation to update any forward-looking statements, except as required under applicable laws. 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. We are pleased with the continued momentum we saw across our business in the first quarter, which sets us on our solid path to begin the New Year. Total net revenues for Q1 increased to RMB 2.6 billion, demonstrating growth of 8% year-over-year. Despite the higher comparable revenue base associated with the pandemic lockdown period in Q1 2020, we continue to see new growth and believe that our relentless focus on content enrichment and product innovation will drive the future growth of our business and create more value for our users. The user growth that we enjoyed during the pandemic and lockdown period has persisted, and we continue to bolster our user community. In Q1, mobile MAUs of Huya Live reached 75.5 million, up slightly from the same period last year. Additionally, the retention rate of our Huya Live app remained stable at over 17% in Q1. Mobile users have been the pillars of our business and our primary focus. In the fourth quarter this year, mobile users contributed to over 85% of Huya Live's live streaming revenues and they also constituted close to 80% of our core daily active users on Huya Live. Our mobile-first strategy has enabled us to become the industry leader and we plan to further emphasize and grow this constituency, focusing on mobile users as our primary user metric. We believe our investments in content and products will gradually pay off. Our accumulated content has become the engine driving us forward, attracting new users and fulfilling more online needs as users are finding our platform to be more comprehensive, attractive, and convenient. In Q1, we continued to reinforce our product offerings and the content library with a number of successful initiatives. In March, we launched our open platform for interactive features to offer more innovative gameplay and improve the uniqueness of HUYA to game studios, broadcasters, and viewers. Our service of interactive features helps developers, including gifts, viewer-led interactive games, e-commerce, live streaming, one-click to join broadcasters' gameplay, one-click streaming, and real-time monitoring panel. We believe the new features will not only strengthen our value proposition in the industry value chain, but also help shape a new model for game operations and improve our capabilities in monetization diversity. As our first step, we cooperated with Peacekeeper Elite and embedded the interactive gameplay features within the game's live streaming and our Peacekeeper Elite channel. For example, when a game broadcaster verifies or refuses certain virtual gifts, the live streaming room will be triggered to send out designated in-game rewards for viewers to claim. The success of such new features has enabled Peacekeeper Elite to both acquire new traffic and retain existing users and can also provide our viewers and broadcasters with a more fun and immersive experience. Our open platform for third-party application developers also continued to expand in Q1. By the end of Q1, there were close to 210 developers and over 600,000 broadcasters that used these tools. On a quarter-over-quarter basis, the daily active users and daily active broadcasters, both of whom have used the third-party applications from the open platform, grew over 140% respectively. In April, we signed our licensing agreement with Tengjing Sports and secured exclusive broadcasting rights in China for the League of Legends Pro League, LPL; League of Legends Development League, LDL; and LPL All-Star weekend service, along with related licensing rights from 2021 to 2025. Acquiring these exclusive broadcasting rights will enrich our content offerings and strengthen our collaboration with Tengjing Sports to explore areas of opportunity. With that, I will now turn the call over to our CFO, Catherine, to share her insights on the operating metrics and the financial details. Catherine, please go ahead.

Catherine Liu, CFO

Thank you, Mr. Dong. And hello, everyone. Following Mr. Dong's remarks, I will start with updates on content enrichment and diversification. In Q1, we broadcasted 92 third-party e-sports tournaments, among which the top tournaments included LPL spring, PGIS, and KPL spring. Total viewership for these tournaments reached around 535 million in Q1, representing a 41% year-over-year growth. On the front of our self-produced content, we organized 36 e-sports tournaments and entertainment shows and generated a total viewership of 195 million, representing a 73% year-over-year growth. Recall that in Q1 last year, COVID-19 impacted the schedule of third-party e-sports tournaments and the hosting of our own offline events. We're glad that tournaments and events are back, which is also reflected in the higher viewership. HUYA's game events are the top-performing self-produced events in Q1 that have leveraged the influence of HUYA's celebrity broadcasters to compete with professional gamers. Additionally, we organized the regional tournament for team fight tactics within HUYA's community and hosted a rising game event. Moving on to our overseas business, the MAUs of our overseas business were around 25 million in the first quarter, slightly higher than the same period last year. Our strategy has shifted to focus on regions and countries with higher monetization potential. As a result, our overseas revenues almost doubled year-over-year and our overseas loss also narrowed down. Next, I will walk you through our financial highlights. In Q1, our total net revenues grew by 8% year-over-year to over RMB 2.6 billion. Our live streaming revenues increased by 5.2%, close to RMB 2.4 billion. The growth was primarily due to the increased revenue from paying users. The number of paying users that was realized in Q1 reached 5.9 million compared with 6.1 million for the same period last year, mainly because users spent more time per day and were more willing to pay on our platform during the pandemic lockdown period last year. Advertising and other revenues increased by 55% year-over-year to close to RMB 230 million in Q1, primarily driven by revenues from content licensing. Our profits continued to improve in Q1. Our non-GAAP gross profit increased by 8% to RMB 531 million. Non-GAAP gross margin was 20.4%. Our non-GAAP operating profit increased by 7% to RMB 242 million. Non-GAAP operating margin was 9.3%. Our non-GAAP net profit increased by 1% to RMB 266 million, and our non-GAAP net margin was 10.2%. Now, let me move on to our financial details. If not specified, all growth rates are on year-over-year terms. Cost of revenues increased by 7.9% to RMB 2.1 billion for Q1, primarily attributable to the increase in revenue sharing fees and content costs. Revenue sharing fees and content costs increased by 14.1% to RMB 1.7 billion for Q1, primarily due to the increase in revenue sharing fees relating to higher live streaming revenues and the increase in spending on e-sports content. Bandwidth costs decreased by 24.4% to RMB 182 million for Q1, primarily due to improved management in bandwidth costs and continued technology enhancement efforts. Gross profit increased by 8.2% to RMB 514 million for Q1. Gross margin was 19.7% for Q1. Research and development expenses increased by 27.6% to RMB 199 million for Q1, mainly attributable to increased personnel-related expenses. Sales and marketing expenses increased by 35.7% to RMB 145 million for Q1, primarily attributable to the increased marketing expenses to promote the company's content, products, services, and branding. General and administrative expenses decreased by 6.8% to RMB 84 million for Q1, mainly due to lower share-based compensation expenses. Operating income increased by 21.6% to RMB 162 million for Q1 and operating margin was 6.2% for Q1. Non-GAAP operating income, which excludes share-based compensation expenses, increased by 6.7% to RMB 242 million for Q1 and non-GAAP operating margin was 9.3% for Q1. Income tax expenses increased by 4.9% to RMB 39 million for Q1. Net income attributable to HUYA, Inc. for Q1 increased by 8.4% to RMB 186 million. Non-GAAP net income attributable to HUYA, Inc. for Q1, which excludes share-based compensation expenses, gain on fair value change of investments and equity investees’ partial disposal of this investment, net of income taxes, increased by 0.9% to RMB 266 million. Diluted net income per ADS was RMB 0.77 for Q1 and non-GAAP diluted net income per ADS was RMB 1.1 for Q1. As of March 31, 2021, the company had cash and cash equivalents, short-term deposits, and short-term investments of RMB 10.7 billion compared with RMB 10.5 billion as of December 31, 2020. The increase was primarily due to net cash provided by operating activities of RMB 166 million for Q1. With that, I would now like to open the call to your questions.

Operator, Operator

Your first question comes from Lei Zhang from Bank of America Merrill Lynch.

Lei Zhang, Analyst

Two questions here. First, can you provide an update on the competitive landscape, particularly regarding the competition with Bilibili, which has experienced strong growth in live streaming in recent quarters? Secondly, could you share some insights on the growth of our advertising and other revenue? What are the main drivers behind this? Thank you.

Rongjie Dong, CEO

Regarding your first question, for Bilibili, as a new entrant to the game live streaming industry, it is quite natural for them to experience relatively higher year-over-year growth as they are still in the growth phase. Especially considering that both JOYY and HUYA also enjoyed outstanding year-over-year growth as well. So, it is quite a natural occurrence. And from our internal perspective, we don't really feel pressured or threatened by the entrance of Bilibili. Regarding the competitive landscape, there has been almost no change compared to the situation in the last quarter. What we can do is strengthen our capabilities to face the current competitive landscape. We see more opportunities in the second half of this year because if you look back at the past one-and-a-half years, there haven't really been many of the big games, especially the blockbuster games in the industry. This is why we are more optimistic and expecting more opportunities from the new game launches in the second half of this year. And Catherine will take your next question.

Catherine Liu, CFO

As for your question about the fast growth of advertising and other revenues, this is mainly driven by revenues from licensing of content. Hope this answers your question.

Operator, Operator

We'll proceed to the next question from Vincent Yu of Needham & Company.

Vincent Yu, Analyst

I have two questions. First, what is our strategy for the international market this year? How much revenue contribution are we expecting from this market in 2021? Will we reach breakeven on a standalone basis in 2021? Second, can management clarify our strategy regarding content investments in 2021? Will we prioritize acquiring licenses for e-sport tournaments to develop PDC content in-house? Are we able to disclose the size of the investments we plan to make? Lastly, how should we approach the recent waivers of antitrust investigations by regulators? Can management provide any information about our processes related to this situation?

Catherine Liu, CFO

Regarding our first question about the international business, we're still at the investment stage, and we still expect we will continue to invest in the overseas business for the next couple of years. But the good news is that this year, our strategy has been focused on improving our monetization. So in the first quarter, our overseas revenue doubled year-over-year, and we expect that the overseas business revenue contribution will be increasing this year. At the same time, the loss of overseas business has also narrowed down both in terms of absolute dollars and as a percentage of revenue. We think that in some countries, we will reach the breakeven point. However, overall, the overseas business will still be at the investment stage this year. For the next question, I will pass it over to Mr. Dong to answer.

Rongjie Dong, CEO

Regarding your questions about content investment, since we have already discussed the progress of the ongoing merger with DouYu, we expect to reach a conclusion and see progress in the future. Given these circumstances, we may adjust our current strategy regarding content investment. In terms of balancing self-produced content and purchasing third-party e-sports tournament rights, we believe HUYA has been performing well in producing its own branded content, whether through non-gaming or game e-sports tournaments. For instance, we recently hosted a new series of the Huya Kungfu Carnival, which has garnered significant attention from internet users. Therefore, we will not only focus on acquiring quality e-sports tournaments from third parties but will also strengthen our ability to produce our own branded content.

Operator, Operator

Your next question is from Thomas Chong of Jeffries.

Thomas Chong, Analyst

Thank you, management, for taking my question. My first question is, could management provide an update about the cooperation with Tencent? The second is, could management comment on the strategy this year regarding game and non-game broadcasting?

Catherine Liu, CFO

Regarding your first question, this quarter, we have continued the collaboration with Tencent. For example, we also launched the open platform for our interactive features to offer more innovative gameplay. The first game that we cooperated on was Peacekeeper Elite, and the result was successful in terms of increasing the user base and enhancing interactions between the users and the platform. At the same time, we continue to collaborate with Tencent in various ways for games and other major Tencent products as well. We expect the collaboration with Tencent to continue and to bring us more users and monetization opportunities.

Rongjie Dong, CEO

Mr. Dong has addressed your question regarding our content strategy. First, we want to highlight that Huya has secured the majority of third-party e-sports tournament rights in the game live streaming industry. Additionally, we possess leading production capabilities for professional generated content among industry players. Second, from a gaming standpoint, the second half of this year is expected to present many new opportunities with the anticipated release of several potential blockbuster games during that period. User interactions are expected to rise, and given Huya's inherent strengths and robust capabilities in promoting new games and live streaming for these titles, we anticipate numerous opportunities in the latter half of this year. As for non-gaming content, its growth rate has historically outpaced that of gaming content. Our non-gaming content pool has experienced substantial growth over the past few quarters, with traditional sports performing particularly well lately. Consequently, we are contemplating investments in acquiring third-party broadcasting rights for non-gaming content in the future, as this area also shows considerable potential.

Operator, Operator

The next question is from Richie Fan of HSBC.

Unidentified Participant, Analyst

I have a question about the game video strategy. How is the traction of the game video strategy? Any operating metrics to update us? With the growing number of game video users, how will that affect the paying ratio and ARPU trends going forward? Can we assume game video users are less hardcore and hence the paying ratio and ARPU will be lower?

Rongjie Dong, CEO

I will translate for Mr. Dong regarding your question about our video business. Our video operations have been running for one or two quarters and have prompted new strategic considerations for the future. Previously, we concentrated on creating on-demand videos to attract new users, which can be time-consuming. However, given Huya's focus on live streaming, we believe that rolling streaming sessions offer a more natural approach to engaging in the video sector. This is why we experimented with a new video format, the carousel streaming business, in selected gaming categories during the first quarter. The feedback we received from both users and industry experts has been positive. In the second quarter, we plan to broaden the content categories beyond these initial gaming sectors to encompass more game titles. We are confident that the substantial growth of our video business will increase our attractiveness to advertisers and enhance our advertising monetization capabilities.

Operator, Operator

We will take the final question from Tian Hou of T.H. Capital.

Tian Hou, Analyst

What's the management's expectation for League of Legends to go online? Once that gets started, what is the potential impact on our game streaming business? Thank you.

Rongjie Dong, CEO

For the mobile version of League of Legends, we began preparations at the start of this year. We have identified all the potential professional leagues for our platform. We are prioritizing communication with the developers and top players of the new game. We are optimistic—and it seems likely—that the mobile version of League of Legends will be launched in the latter half of this year. From our viewpoint, releasing this game during the summer school holiday season would be particularly advantageous for us.

Operator, Operator

There are no further questions now. I'd like to turn the call back over to the company for closing remarks.

Dana Cheng, Investor Relations

Thank you all for joining our conference call today. If you have further questions, feel free to contact [email protected], and we look forward to speaking with you in the next quarter. Thank you.

Operator, Operator

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