Earnings Call Transcript - HUYA Q2 2021

Operator, Operator

Hello, ladies and gentlemen. Thank you for standing by for the Second 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 will now 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 second 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 all for joining our conference call today. In the second quarter, we amplified our efforts to enrich content offerings and attract users, which drove steady top-line growth along with mobile user base expansion. To illustrate, total net revenues for Q2 increased to approximately RMB 3 billion, up 10% year-over-year and 14% quarter-over-quarter. Huya Live mobile MAUs reached 77.6 million in the quarter, up slightly year-over-year and quarter-over-quarter, while the next month's retention rate for our Huya Live app remained stable at over 70%. In this quarter, mobile users continued to contribute to over 85% of Huya Live's live streaming revenues. With our relentless commitment to providing users and broadcasters with a better experience, we have always been deepening our technology advancement efforts and focused on product optimization. In late May, we upgraded our Huya Live app to the version 9.0, which introduced new functions, such as multi-screen simultaneous viewing and real-time highlights editing. For example, in the latest version, a user has access to a multi-screen viewing panel towards different top broadcasters at the same time. Besides this, leveraging Huya's AI capability, the new version can now automatically identify the highlight momentum of a streaming session and generate video clips, making video production easier and more efficient. In the second quarter average MAUs who watch videos on our platform increased to approximately 30 million. Our open platform for third-party application developers also continued to expand in the second quarter. By the end of June, more than 250 tools had been developed on our open platform, and those tools were used by over 740,000 broadcasters. On a quarter-over-quarter basis, the daily active broadcasters who used third-party applications on our open platform grew more than 60%. Moving on to our collaboration with Tencent. In the second quarter, average MAUs who watch the Huya live streaming content across Tencent's platforms that are not counted in our reported MAUs were around 23 million, nearly doubling year-over-year. Notably, our live streaming content related to the QQ celebrity all-star tournament attracted a large number of users for viewing on QQ mobile. Lastly, I would like to provide more context around our strategies after the merger termination with DouYu we announced last month. According to the announcement posted by the State Administration for Market Regulation of the People's Republic of China on July 10, 2021, the proposed merger between Huya and DouYu was prohibited following SAMR's antitrust review. We fully respect and will abide by the SAMR decision and will comply with all regulatory requirements and conduct our businesses in accordance with the applicable laws and regulations. As we remain committed to further expanding our user base and strengthening our leading position in the game live streaming market, we are focused on effectively implementing our growth strategy. Huya will continue its investments in content including acquiring, cultivating and maintaining quality broadcasters obtaining broadcasting rights for popular e-sports tournaments and developing attractive self-generated content. Meanwhile, we will endeavor to advance product optimization and deliver a superior user experience. We also expect to further deepen our cooperation with Tencent. We are confident that our capabilities in fostering and retaining streaming talents enriching and producing quality content as well as our expertise in technology and product innovations will continue to underpin Huya's core competitiveness in the game live streaming industry.

Catherine Liu, CFO

Thank you, Mr. Dong, and hello everyone. Following Mr. Dong's remarks, I will start from the updates on content enrichment and diversification. In the second quarter, we broadcasted 122 third-party e-sports tournaments, among which the top tournaments included LPL Spring and Summer, KPL Spring, LoL Mid-Season Invitational, and PUBG Champions League Spring. Total viewership for these tournaments reached around 673 million in the quarter. On the front of our self-produced content, we organized 45 e-sports tournaments and entertainment shows and generated total viewership of 116 million. In particular, our self-branded tournament, The 6th Huya Mobile Game Arena, has hit outstanding viewership in the quarter, covering 14 popular mobile games including HOK, CFM, Battle of Balls, and CODM. HMA is now a leading comprehensive mobile game tournament in China. Additionally, following the traction from LPL, we produced a commentary show Huya Game Watch Room to provide professional gameplay analysis for game lovers. The show went viral during the LPL season and became a major alternative channel for LPL fans to watch the game. In terms of entertainment PGC shows, Huya Kungfu Carnival Season 4, a mixed martial arts competition joined by Huya's outdoor broadcasters and celebrities, was the leading example of the season. Besides this, in June, we also introduced God Player, a live-action role-playing show to capture the younger generation's growing interest in such categories. Since we took the initiatives to introduce more video content last year, there has been a clear trend of development and diversification on our platform, particularly in the sectors such as food videos, animation videos, and fun moments sharing videos. Moving on to our overseas business, in June, the overseas MAU picked up to close to 27 million, mainly driven by local e-sports events. As we discussed previously, we have been focusing on monetization-driven growth. Our overseas revenues increased by approximately 200% year-over-year, and the contribution from overseas revenue is also climbing up with the margin drag from overseas business declining. Next, I will walk you through our financial highlights. In the second quarter, our total net revenues grew by 10% year-over-year to approximately RMB 3 billion. Our live streaming revenues were close to RMB 2.6 billion in the quarter, up slightly from the same period last year. The number of paying users for Huya Live in the second quarter came in at 5.6 million, lower than the same period last year mainly due to the pandemic lockdown last year, setting a higher base. Advertising and other revenues increased by 190% year-over-year to almost RMB 383 million in the second quarter. On second quarter profitability, our non-GAAP gross profit was RMB 594 million, and non-GAAP gross margin was 20.1%. Our non-GAAP operating profit was RMB 249 million, and non-GAAP operating margin was 8.4%. Our non-GAAP net profit was RMB 250 million, and our non-GAAP net margin was 8.4%. Now moving on to our financial details. Unless otherwise specified, all the growth rates are on year-over-year terms. Cost of revenues increased by 12.2% to RMB 2.4 billion for the second quarter primarily attributable to the increase in revenue sharing fees and content costs. Revenue sharing fees and content costs increased by 21.2% to RMB 2 billion for the second quarter primarily due to the increase in revenue sharing fees and the increase in spending in e-sports content and on content creators. Bandwidth costs decreased by 35.3% to RMB 171 million for the second quarter, primarily due to improved bandwidth cost management and continued technology enhancement efforts. Gross profit increased by 1.1% to RMB 581 million for the second quarter, and gross margin was 19.6% for the second quarter. Research and development expenses increased by 15.6% to RMB 208 million for the second quarter primarily attributable to increased personnel-related expenses. Sales and marketing expenses increased by 45.9% to RMB 167 million for the second quarter primarily attributable to increased marketing expenses to promote the company's content, products, services, and brand name. General and administrative expenses decreased by 48.5% to RMB 72 million for the second quarter, mainly due to lower share-based compensation expenses. Operating income increased by 0.3% to RMB 182 million for the second quarter, and operating margin was 6.1% for the second quarter. Interest and short-term investments income was RMB 58 million for the second quarter compared with RMB 78 million for the same period of 2020, primarily attributable to the decreased interest rates. Income tax expenses increased by 13.7% to RMB 58 million for the second quarter. Net income attributable to HUYA Inc. for the second quarter was RMB 186 million compared with RMB 207 million for the same period of 2020. Non-GAAP net income attributable to HUYA Inc. for the second quarter, which excludes share-based compensation expenses, gain on fair value change of investments, and equity investee's partial disposal of its investment, net of income taxes, was RMB 250 million compared with RMB 331 million for the same period of 2020. Diluted net income per ADS was RMB 0.77 for the second quarter and non-GAAP diluted net income per ADS was RMB 1.04 for the second quarter. As of June 30, 2021, the company had cash and cash equivalents short-term deposits and short-term investments of RMB 10.7 billion compared with RMB 10.6 billion as of March 31, 2021. The increase was primarily due to net cash provided by operating activities of RMB 174 million for the second quarter. With that, I would now like to open the call to your questions.

Operator, Operator

Certainly. We will now begin the question-and-answer session. The first question comes from Thomas Chong from Jefferies. Please go ahead.

Thomas Chong, Analyst

Thanks management for taking my questions. I have two questions. The first question is about our content strategies. Can management comment about our thoughts in the second half as well as the spending that we are looking at? And my second question is about our key operating metrics in terms of the MAU paying users as well as ARPU. How should we think about the trend as we come into the second half? Thank you.

Rongjie Dong, CEO

All right. I will translate for Mr. Dong. Regarding your first question on content strategy, since the beginning of this year, our management created two versions of the strategic plans for this year in different scenarios, whether the SAMR will pass or not pass the deal. Up until we received the notification of SAMR to prohibit the merger deal, we still stick to the original plan in terms of content strategy. So now that we have heard the news from SAMR about prohibiting the merger deal between Huya and DouYu, there won't be major adjustments to the strategy, especially the content strategy. And now that the competitive landscape compared with before might be a little bit changed given the SAMR prohibited the deal. So there might be a certain degree of growth for the content investments from our perspective. And Catherine will take the second question.

Catherine Liu, CFO

Regarding your MAU questions, we will continue to invest in our content and broadcasters in the second half, so in the second half we do expect that our MAUs will continue to grow and probably reaccelerate the growth rate for mobile MAUs. I think in the second half our main focus is still trying to grow our mobile MAUs. This is still probably our key goal in the second half.

Operator, Operator

Thank you. We have our next question. This is coming from the line of Lei Zhang from Bank of America Securities. Please go ahead.

Lei Zhang, Analyst

Thanks management for taking the questions. Two questions here. First, can you share with us the business strategy post the close of the merger with DouYu? Secondly, any more color on the integration with Tencent recently? Thank you.

Rongjie Dong, CEO

Regarding your first question for the post-termination of the merger, impact on the strategic changes, there is not much to be changed for the strategic planning of HUYA. We will stick to the original plan to follow our roadmap for the year and going forward. We are confident in strengthening our leadership position going forward. Regarding the collaboration with Tencent, we are actually in close conversation with Tencent, regarding carrying out more innovative collaborative working methods and operational models of the collaboration, so more things to be carried out going forward with Tencent. I hope that answers your question.

Catherine Liu, CFO

To add to the cooperation with Tencent, we have continued to strengthen our cooperation with Tencent in various fronts. We believe that, in the future, there would be more cooperation between us and Tencent. We will update investors if we have some major updates on this one. I hope this answers your question. Next?

Operator, Operator

Thank you. We have the next question. This is coming from the line of Yiwen Zhang from China Renaissance. Please go ahead.

Yiwen Zhang, Analyst

Thanks for taking my question. I have two questions. The first is regarding overseas business. You mentioned the overseas MAU has reached 27 million. And also this year, we will ramp up the investment overseas. Could you share more color, in terms of user acquisition content build-up and monetization? And secondly is on the video content, I think this is well-discussed in the past few quarters. Can you share some color in terms of how the video content helped user acquisition, engagement, and retention? Thank you.

Catherine Liu, CFO

Regarding our overseas business, we have seen pretty good progress, as we have been emphasizing monetization in the overseas market. We have seen significant results. In the second quarter, our overseas revenues actually increased by approximately 200% year-over-year. Also, the operating loss has narrowed down. We are pretty confident in our overseas business, and we do expect that the overseas business will contribute even more significant revenue contribution to us in the next year. In terms of our video business, we have been developing a new video content. In the second quarter, we also noticed that our video content users have been increasing. Mr. Dong just mentioned that in the second quarter average MAUs who watch video on our platform increased to approximately 30 million. In the second half, we do consider launching a new app specifically for our video product. I hope this answers your question.

Dana Cheng, Investor Relations

To provide more color on our video business, Mr. Dong mentioned earlier that there is a certain form of video business on Huya's platform that lies between traditional videos and streaming sessions in the form of video cornerstone, or in other words ongoing with Huya's live streaming. From the statistics that we have, the growth rate of this category is quite high. We believe in the form of doing streaming business; we can actually make our video business prosper in the future. As of now, we find the results that we see in the video business quite satisfying.

Operator, Operator

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

Ritchie Sun, Analyst

I will translate the questions myself. So first question is about game video. Can management discuss the potential monetization model and also the progress of monetization for game video? And what are the areas that we need to improve further for game video content? The second question is on regulation. We see the heightened regulation risk of the industry. Can management discuss how live streaming regulation, online games as well as cybersecurity and data privacy regulations, impact the platform, especially on the profit and loss side from these regulations? Are we going to incur more costs to fulfill these regulations? Thank you.

Rongjie Dong, CEO

Regarding the video business monetization method, currently the top priority for the company is to consider how to better integrate live streaming business with video business, so that the video business can be extended. Currently, it's a little bit too early to talk about the business model. However, advertising is probably the top choice for the monetization method regarding the video business.

Catherine Liu, CFO

As for your second question on the recent regulatory changes, we believe that the recent regulatory changes will help the industry in the long term. We as a company will definitely abide by all the regulatory changes or guidance. So far, I think we have received and also are expecting some of the details of the guidelines to come out. We will update investors if we see some of the detailed guidelines for potential regulatory guidelines. I hope this answers your question.

Operator, Operator

Thank you. We have the next question. This is coming from Tian Hou from T.H. Capital. Please go ahead.

Tian Hou, Analyst

Yes. Good evening, management. Two small questions. The first question is about what management sees in the second half about the game content. Are there any major content going to come out? The second one is on the platform, what does management see the users and the activity level as the students have less school work and also not much place to go to travel? The third one is regarding cloud gaming. The company has been developing cloud gaming for a while. Can management share some color about the progress and the plan for the future? Thank you.

Rongjie Dong, CEO

Regarding the summer, usually from the seasonality that we have observed so far during the summer school holidays, there will be a certain growth of users. Since it's coming to the school holidays in this summer again, we are seeing a growth of users as well. For your second question regarding the new game titles that we hope will be released soon, we are expecting two potential blockbuster games: D&F Mobile and League of Legends Mobile. Huya excels at promoting mobile games, and promoting these mobile games on our live streaming platform is a strength that helps maintain our leading positions. The preparations for those two games have already been initiated. For League of Legends Mobile, it's been started since the beginning of 2021. For D&F Mobile, we have been preparing for the launch since last year. We are really hoping that those two potential blockbuster games can be launched in the second half.

Unidentified Company Speaker, Speaker

Regarding your question about cloud gaming, since we launched our cloud gaming platform Yowa, we have been covering over 200 games right now. We have been improving our products since the launch and currently we believe our product in terms of technology and user friendliness is at the industry-leading level. We are still focusing on reducing the bandwidth cost per user and increasing our MAUs and DAUs. Since Yowa launched, the user growth is pretty fast. Our focus remains on growing users, improving products, and trying to reduce the bandwidth cost for each user. Next year, we will consider trying to do some commercialization for cloud gaming. But currently, it's still at an early stage. Hope this answers your question.

Operator, Operator

Thank you. We have the next question from Vincent Yu from Needham & Company. Please go ahead.

Vincent Yu, Analyst

Thanks management for taking my question. My first question is about investment plans. Now that the merger deal has been called off, will the company look to acquire other companies within like other verticals or overseas considering we have a big cash balance? My second question is will we see an increase in content costs related to the purchase of tournament broadcasting rights after this merger has been called off? Thank you.

Catherine Liu, CFO

Regarding your first question, in addition to our operational cash needs, we will consider investments or potential acquisitions along our value chain both domestically and in the overseas market. Currently, we haven't really done any significant investments or acquisitions yet. Regarding your second question, I will refer to Mr. Dong.

Rongjie Dong, CEO

Regarding the e-sports tournaments' broadcasting rights, from our perspective, acquiring broadcasting rights for those tournaments is important in the sector of e-sports. E-sports has become a professional game that is included in the Asian Games for next year. As we announced before, we have already obtained the exclusive broadcasting license by LPL and related broadcasting rights. Going forward, we believe Huya will continue the acquisition of broadcasting rights in a mild way.

Operator, Operator

As there are no further questions, I would like to hand the conference back to the company for any ending 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. That concludes our conference call for today. Thank you all for your participation. You may disconnect your lines now.