Earnings Call Transcript - HUYA Q2 2024

Hanyu Liu, Investor Relations Manager

Good day and good evening, and thank you for standing by. Welcome to Huya's Second Quarter 2024 Earnings Webinar. I am Hanyu Liu from Huya's Investor Relations. At this time, all participants are in 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 ir.huya.com. 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 Xin 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 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 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. With that, I'm pleased to turn the call over to our Co-CEO and SVP, Mr. Huang. Please go ahead.

Junhong Huang, Acting Co-CEO and Senior Vice President

Okay. Hello, everyone. Thank you for joining our earnings conference today, Against the backdrop of persistent uncertainty in the macro environment and industry landscape, we were pleased to resume quarter-over-quarter growth in total net revenues in the second quarter, up 2.5% from the previous quarter to reach RMB1.54 billion, driven by the rapid revenue growth of our game-related services, advertising and other businesses. Notably, game-related services, advertising and other revenues reached a milestone, contributing 20% of our total net revenues for the first time. We also sustained our profitability, with non-GAAP net income of approximately RMB97 million. Solid strategic execution across business and commercialization transformation, content and platform ecology upgrades, and technology and product advancement supported this quarter's positive outcomes. Now, let's take a detailed look at our recent operational and strategic progress. First, some user metrics for the second quarter of 2024. Huya Live's average mobile MAUs reached 83.5 million, up from 82.6 million for the previous quarter and 82.9 million for the same period last year. The growth was mainly driven by the success of several self-organized e-sports events. Various recent new game launches and our continuous user experience improvement also contributed to enhanced user engagement. As we mentioned on our last call, we are strengthening our cooperation with various platforms and products to enhance our platform ecology and reach a wider range of users. This includes professionally-generated content co-production, broadcaster cross-platform streaming and joint promotion in niche initiatives. As a barrier-breaking industry pioneer, we believe we can further increase the Huya platform's influence within this more open content ecosystem. We have already started to selectively bring our live streaming and video content to other content platforms as well as various product lines within the Tencent ecosystem. In June, Huya content reached a total of approximately 120 million mobile users. We are confident this broadened reach will facilitate the creation of more commercialization opportunities. Moving on to our strategic transformation. Our game-related services continue to expand rapidly as we collaborated with more game titles, leverage our live-streaming content and PGC programs, and employed innovative operational approaches to drive business development. In the second quarter, revenues from our game-related services, advertising and other segments increased by 152.7% year-over-year and 26.6% quarter-over-quarter to RMB308.5 million. In terms of game distribution, we continue to expand evergreen games coverage and drive improvement in the user return rates. We also participated in the promotion and distribution of newly launched DnF Mobile in the second quarter. Specifically, we set up a special pre-download area for this game being the Game Center section of Huya Live app, promoted the game with specially designed programs and exclusive props and gifts, and recruited broadcasters for the game's live streaming, all of which helped to increase the game's exposure and popularity on our platform. DnF Mobile not only ranked top among this year's new games in live streaming viewership indicators, but also achieved better-than-expected results in game distribution. In particular, early data shows that in-game spend per user of Huya distribution channel for this game was significantly higher than that of broader game channels, highlighting our platform's deeply engaged base of high-value gamer users. We also commenced in-game item sales for League of Legends (LoL): Wild Rift, and VALORANT in the second quarter, innovatively combining game prop sales with corresponding tournaments to fully leverage this game's rich e-sports content. For example, we sold LoL Champion Skins through our LoL Legend Cup live-streaming channel, which generated great purchase interest. In terms of game advertising, in addition to gearing up for the promotion of this summer's upcoming games, we recently produced Yijing Daoudi, or competing till the end, an interactive gameplay variety show that integrates game promotion and entertainment content under different game themes in each episode. The program successfully engages users on our platform and proves effective in driving active players to corresponding games. It is worth mentioning that our game-related services have also opened up new income sources for our content creators, gradually improving their income levels. In the first half of this year, several thousand of our broadcasters received revenue sharing and commissions from game distribution and prop sales. As e-sports content represents one of our core offerings, we continuously refine our approach via self-organized e-sports events. Our Legend Cup held in the second quarter is a perfect example of our progress in upgrading tournaments, products, and operational strategies. Legend Cup is our premium self-organized tournament in cooperation with League of Legends game. This event brought together outstanding retired and active professional players and introduced bold innovations in the competition format and schedule. We live-streamed the entire event beginning with player selection and team formation and distributed highlight videos across multiple platforms. This enhancement helped attract widespread interest from League of Legends gamers and e-sports viewers, both within and outside Huya's platform. We also introduced a number of special features for the Legend Cup on our Huya Live app. For example, we set up a designated discussion area to aggregate event hot topics, player news, short videos, and official tournament information. In addition, a new rating card function allowed viewers to comment on multiple aspects of players' performance, showcasing players' diverse characteristics and increasing user interaction and enjoyment. In terms of event presentation, we created a voice capture live broadcast room for this tournament. Powered by cutting-edge automatic speech recognition technology and an e-sport professional vocabulary library, this feature instantly converts oral communication between players into text, immersing the audience in the player's game experience. Furthermore, our Legend Cup was seamlessly integrated into LoL's professional league schedules to complement and enrich the LoL e-sports content ecosystem. Legend Cup also provided opportunities for retired professional players to return to the top arena and quickly attract attention, while its entertaining elements drew a diverse crowd of fresh viewers, expanding the e-sports audience. We were pleased to see this event's viewership set a new record for Huya's in-house produced content. Its popularity index on our platform was also comparable to that of top-tier licensed professional events. More importantly, through events like this one, we hope to enhance the influence and monetization of e-sports event IPs and promote sustainable development in the e-sports industry. Our successful sale of League of Legends Champion Skins at the Legend Cup demonstrated Huya's prowess in e-sports event monetization. Legend Cup's high popularity across platforms and sold-out live finals also underscore our self-organized events commercial value. Inspired by this success, we will continue to develop self-produced content and create more influential and commercially valuable event IPs. In summary, we have made solid progress despite some external challenges. We will continue to consolidate our foundation and actively develop our business as we explore the industry's long-term possibilities. While maintaining our core competitiveness in game live streaming, we will drive game-related services development with content and platform ecology upgrades, technology advancement, and product innovation, expanding Huya's presence in the game industry value chain. With that, I will turn the call over to our acting Co-CEO and VP of Finance, Ashley Wu, to share more details on our results. Ashley, please go ahead.

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

Thank you, Vincent, and hello, everyone. I'll start with an update on our professional content enrichment. In terms of licensed content, we broadcasted over 80 licensed professional e-sports tournaments in the second quarter of 2024. The LoL Mid-Season Invitational attracted great attention, and the LPL, KPL, and CFPL professional leagues remain among our most popular events. The VALORANT Champions and ESL Pro League Season 19 for Counter-Strike 2 were also welcomed by our users. In addition to covering extensive leading licensed e-sports events in China, we are expanding the range of international e-sports content available on our platform. For instance, we are broadcasting the inaugural Esports World Cup in Saudi Arabia starting in July, further enriching our high-quality e-sports content library. On the in-house content front, we broadcasted over 20 self-organized e-sports tournaments and entertainment PGC shows during the quarter. In addition to the LoL Legend Cup and the Yijing Daoudi program that we mentioned earlier, we also co-hosted the first Thunder Honor Cup for Honor of Kings with another game live-streaming platform in the second quarter. This event brought together professional teams from KPL to participate, capturing massive viewer attention and demonstrating Huya's increased cooperation with other industry players in professional content co-creation. For e-sports events targeting community participation, we successfully hosted the Lianghe village game for Honor of Kings and the Shandong village game for Peacekeeper Elite in the second quarter. By combining these e-sports events with local cultural elements, such as traditional costumes and food themes, we brought more immersive cultural experiences to a broader audience while also promoting e-sports popularity. Furthermore, we held our Annual Gala event, HUYA Boom Night, in April to recognize and reward our broadcasters. The year's event featured on-stage performances by renowned singers and our popular streamers, as well as an all-star e-sports competition. We also introduced upgraded interactive features for this event to engage both online and offline audiences. The number of viewers for this event on our platform once again set a new record. Turning to our financial performance. Despite the decline in live-streaming revenues, rapid growth in game-related services, advertising and other business revenues drove a quarter-over-quarter increase in our total revenues for the second quarter. This marks our first quarter of sequential revenue growth since the fourth quarter of 2022. Also, with more users paying for in-game items and other services as the game-related services business expanded, Huya Live paying users continued to grow in the second quarter, up quarter-over-quarter to 4.5 million. Our second quarter gross profit was affected by lower live-streaming revenues and higher content spending. However, with the increased contribution from our higher-margin game-related services business to total revenues as well as our continued operational efficiency improvements, we further enhanced our operating results and achieved a close to breakeven non-GAAP operating margin. Specifically, we effectively drove savings in sales and marketing expenses and labor costs, reducing our total operating expenses by 26.3% year-over-year. Let's move on to our Q2 financial details. Our total net revenues were RMB1.54 billion for Q2 compared with RMB1.84 billion for the same period last year. Live-streaming revenues were RMB1.23 billion for Q2 compared with RMB1.72 billion for the same period last year, primarily due to the continued soft macroeconomic and industry environment, as well as our proactive business adjustments to support our strategic transformation and prudent operations. Game-related services, advertising and other revenues were RMB309 million for Q2 compared with RMB122 million for the same period last year, primarily due to increased revenues from game distribution and advertising services and in-game item sales. Cost of revenues decreased by 14% year-over-year to RMB1.33 billion for Q2, primarily due to decreased revenue-sharing fees and content costs, as well as bandwidth costs. Revenue-sharing fees and content costs decreased by 13% year-over-year to RMB1.17 billion for Q2, primarily due to decreased live-streaming revenue sharing fees associated with the decline in live-streaming revenues, partially offset by increased game-related services, advertising and other revenue-sharing fees as well as content costs for in-house produced content. Bandwidth costs decreased by 40% year-over-year to RMB61 million for Q2. This was primarily due to improved bandwidth cost management, favorable pricing terms, and continued technology enhancement efforts. Gross profit was RMB215 million and gross margin was 13.9% for Q2. Excluding share-based compensation expenses, non-GAAP gross profit was RMB219 million and non-GAAP gross margin was 14.2% for Q2. Research and development expenses decreased by 11% year-over-year to RMB129 million for Q2, primarily due to decreased personnel-related expenses and share-based compensation expenses. Sales and marketing expenses decreased by 48% year-over-year to RMB62 million for Q2, primarily due to decreased marketing and promotion fees as well as personnel-related expenses. General and administrative expenses decreased by 21% year-over-year to RMB64 million for Q2, primarily due to decreased professional service fees, personnel-related expenses, and share-based compensation expenses. Other income was RMB13 million for Q2 compared with RMB24 million for the same period last year, primarily due to lower government subsidies. As a result, operating loss was RMB26 million for Q2 compared with RMB33 million for the same period last year. Excluding share-based compensation expenses and amortization of intangible assets from business acquisitions, non-GAAP operating loss was RMB3 million for Q2 and non-GAAP operating margin was negative 0.2% for Q2, close to breakeven. Interest income was RMB103 million for Q2 compared with RMB125 million for the same period last year. Net income attributable to HUYA Inc. was RMB30 million for Q2 compared with RMB20 million for the same period last year. Excluding share-based compensation expenses, impairment loss of investments and amortization of intangible assets from business acquisitions, net of income taxes, non-GAAP net income attributable to HUYA Inc. was RMB97 million for Q2 compared with RMB117 million for the same period last year. Non-GAAP net margin was 6.3% for Q2. Diluted net income per ADS was RMB0.13 for Q2. Non-GAAP diluted net income per ADS was RMB0.42 for Q2. As of June 30, 2024, the company had cash and cash equivalents, short-term deposits, short-term investments, and long-term deposits of RMB8.2 billion compared with RMB9.4 billion as of March 31, 2024. Finally, let me provide an update on our shareholder returns. Upon review of our financials, business plan, capital requirements, and cash position, we are pleased to declare a special cash dividend of US$1.08 per ordinary share or per ADS, totaling approximately US$250 million for our shareholders. Furthermore, under our up to US$100 million share repurchase program that began in August 2023, we have repurchased 17.1 million Huya shares with a total aggregate consideration of US$56.7 million as of the end of June 2024. Huya's Board of Directors has also authorized the renewal and continued usage of the unutilized quota under the existing share repurchase program of US$43.3 million until March 31, 2025. We believe that Huya's solid balance sheet and improving financial fundamentals will continue to support our ability to deliver shareholder returns going forward. With that, I'd like to open the call to your questions.

Hanyu Liu, Investor Relations Manager

Thank you, Ashley, and hello everyone. Today's first question comes from Thomas Chong from Jefferies. Thomas, your line is open. Please go ahead.

Unidentified Analyst, Analyst

Thank you to management for taking my question. My question is about our current user strategies as we observed this quarter year-over-year and sequential growth in mobile monthly active users and also in the number of paying users. Thank you.

Junhong Huang, Acting Co-CEO and Senior Vice President

Thank you for your question. In the second quarter of this year, Huya's mobile monthly active users reached 83.5 million, primarily driven by the strong performance of our self-produced e-sports events. Additionally, the introduction of new games and ongoing enhancements to user experience have contributed to increased user engagement. Consequently, even as we maintain a cautious approach to channel promotions, we have seen user growth compared to both the previous quarter and the same time last year. Regarding our user strategy, we aim to continue attracting and retaining users through high-quality content from streamers and professional sources. This includes our structured e-sports event system, which features self-organized events and extensive community participation. Furthermore, we will enhance interactions among game users through our platform's gaming and events communities to improve user retention. Utilizing the live broadcast and game data we have, along with AI capabilities, allows us to better promote high-quality content and engaging live broadcast experiences, thus enhancing overall user participation. Based on this foundation, we are prioritizing the development and enhancement of our platform ecosystem. In a more open industry context, Huya is leading the way in breaking down barriers and is bolstering collaborations across various platforms and products. This includes co-creating professional content, cross-platform live streaming, and commercialization efforts to reach a broader audience and extend Huya's influence. Currently, we have begun selectively sharing Huya's live broadcast and video content with other platforms, as well as multiple product lines within the Tencent ecosystem. In June, our content ecosystem's total mobile MAU reached around 120 million, with this number continuing to rise. Therefore, our services extend beyond just Huya users, incorporating users across a wider range of platforms within the industry. We are also positioned to engage in a larger market. We believe that enhancing our content and platform will unlock more commercial opportunities, especially as Huya transitions from a solely game-focused live broadcast service to offering a broader range of game-related services. Distributing game content across various platforms and broadcasting content will drive distribution, promote games, strengthen broadcaster influence, and create additional revenue opportunities in game distribution, advertising, and merchandise sales.

Hanyu Liu, Investor Relations Manager

Thank you. And our next question comes from Maggie Ye from CLSA. Maggie, please go ahead.

Maggie Ye, Analyst

Good evening, management. Thank you for the opportunity to ask a question. We declared a $250 million special cash dividend this time and also renewed the share repurchase program. Additionally, we still have cash deposits and short-term investments of RMB 8.2 billion as of the end of June. Could you please share with us the overall strategy for capital allocation and cash usage moving forward? Thank you.

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

As of the end of June this year, Huya held cash and cash equivalents and deposits totaling approximately RMB8.2 billion, which is equivalent to US$1.1 billion, with more than half of that still overseas. The decrease from the end of March was primarily due to a distribution of US$150 million in dividends, share repurchase expenses, and other payments. Following the announcement and payment of a new special cash dividend of US$250 million, it is estimated that the company will retain cash deposits of around US$900 million with no debt. Regarding cash usage, we currently have enough cash for daily operations and future growth while aiming for improved operating cash flow. The company will allocate a portion of funds for potential business development and as a reserve for uncertainties in the external environment. We are also open to investment projects within the industry chain to seize development opportunities, and we will reserve funds for those endeavors. Simultaneously, shareholder returns remain a priority, particularly cash returns. In addition to the special dividend of US$400 million announced this year, management plans to continue sharing profits and surpluses with our supportive shareholders in the future. However, specifics about the dividend policy, including amounts and payout timing, will require further review and approval from the Board of Directors. Regarding our share repurchase program, it has been extended to the end of March 2025, with an available repurchase quota of approximately US$43 million. The company will continue to consider various factors, such as market conditions and stock liquidity, to develop an implementation strategy for the repurchase.

Hanyu Liu, Investor Relations Manager

Okay, thank you. And our next question comes from Ritchie Sun from HSBC. Hi, Ritchie, please go ahead.

Ritchie Sun, Analyst

Thank you to management for addressing my questions. I would like to inquire about the games-related services sector. Can management provide an update on the recent developments and expectations for this business in the third quarter? Thank you.

Junhong Huang, Acting Co-CEO and Senior Vice President

In the second quarter, revenue from our game-related services, advertising, and other businesses increased by 152.7% year-over-year and 26.6% quarter-over-quarter, reaching approximately RMB310 million, marking for the first time that it accounted for 20% of our total revenue. The rapid growth of this segment is closely tied to our partnerships with additional game titles, enhanced use of live content and PGC programs, and the implementation of innovative operating methods to drive business growth. Regarding game distribution, we are continuing to expand our coverage of evergreen games to encourage the return of users. Recently, we focused on promoting and distributing the DnF Mobile game, which has ranked among the top new game live broadcasts on the Huya platform, yielding better-than-expected results in distribution. Notably, the in-game spending per user from the Huya distribution channel significantly surpasses the overall market average, highlighting the substantial business potential of Huya's game users. Our success in game distribution stems from our ongoing efforts to establish a unique distribution model based on game content. This allows us to reach users effectively through our broadcaster groups and enhance product design to boost conversion rates for game downloads and user registrations. In the second quarter, we also began selling items for games like League of Legends, League of Legends Mobile, and VALORANT. For these e-sports games, we creatively integrated item sales with corresponding events, like the popular League of Legends Champion Skins sales during the Legends Cup live broadcast, which received an enthusiastic response. In game advertising, we are exploring new directions, such as our recently launched interactive variety show, competing till the end, or Yijing Daoudi, which creatively combines game promotion with entertainment. Each episode features a different game theme and includes partnerships with games like Mingchao, Wuthering Waves, DnF Mobile, and Eggy Party. This program is well-received by users and effectively attracts active players to these games. It is also important to note that our game-related services have created new income sources for Huya's broadcasters, with thousands earning from game distribution and prop sales in the first half of the year. We believe this will help Huya attract and retain broadcasters and improve the correlation between content costs and revenue. Summer is typically a peak season for our industry, and we are making concerted efforts to capitalize on related opportunities. For games with distribution and prop sales, we will align our cooperation with game popularity and update schedules, promoting these through live broadcast content and other programs. With many new games launching this summer, we will broaden our cooperation across various game categories and partners. Overall, we are optimistic about the future growth of our game-related services business. We anticipate that revenue from game-related services, advertising, and other segments in Q3 will continue to show double-digit growth compared to Q2.

Hanyu Liu, Investor Relations Manager

Thank you. Now we will take our last question today from Yiwen Zhang from China Renaissance. Yiwen, your line is open.

Yiwen Zhang, Analyst

Thank you for taking my question. I'm curious about our margin trend, as we've observed some fluctuations in gross margin in Q2, both sequentially and year-over-year. Could you explain the reasons behind this and how we should anticipate future trends? Thank you.

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

The non-GAAP gross profit margin in the second quarter of this year was 14.2%, which is 0.7% lower than the first quarter and 1.8% lower than the same period last year. This slight decline in gross margin was primarily due to the decrease in live broadcast revenue and the rise in content production costs. While live broadcast revenue has begun to stabilize and the quarter-over-quarter decline has diminished, it remains significantly lower than the same period last year due to adjustments made to the live broadcast business in the second half of last year. Live broadcast revenue was still high in the first half of the year, but macroeconomic and industry factors have dampened user willingness to spend. Additionally, the significant investment in self-made content during the second quarter, particularly with high-profile events like the Legend Cup and Thunder Honor Cup, had an impact. The share of live broadcast revenue remained stable this quarter, and we are optimizing broadcaster contract costs. The revenue share from game-related services, advertising, and other sources increased from 6.2% in the second quarter last year to 20% in the second quarter of this year. As we are still in the early stages of business development, we have introduced some platform-specific incentives that might cause fluctuations in our gross margin, but the margin for this segment is still significantly higher than for the live broadcast business. This has a positive effect on our overall gross margin, though it is not enough to fully offset the impact of other factors this quarter. As a content-driven company, content investment is crucial for attracting and retaining users. While we are increasing investment in self-made content with positive outcomes, we have also dynamically adjusted sales expenses, resulting in a 26.3% year-over-year and a 6.4% quarter-over-quarter decrease in overall operating expenses. Thus, our operational performance has improved compared to before, with the operating loss narrowing both year-over-year and quarter-over-quarter, and non-GAAP operating profit approaching break-even. We believe that as live broadcast revenue stabilizes, its negative effect on the gross profit margin will lessen along with the improvement in overall revenue structure, leading to a significant reduction in the seasonal high costs associated with large-scale events in Q4. In the long term, we see potential for further improvement in our gross profit margin based on a more balanced revenue structure and optimized broadcaster and content costs. For this year, we continue to expect an increase in the full-year gross profit margin compared to 2023, along with higher overall profit levels.

Hanyu Liu, Investor Relations Manager

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