Earnings Call Transcript - HUYA Q2 2022

Hanyu Liu, Investor Relations

Hello, everyone, and welcome to HUYA's Second Quarter 2022 Earnings Conference Call. The company's financial and operational results were issued earlier today and are posted online. You can also view the earnings press release by visiting the IR website at ir.huya.com. A replay of the call will be available on the IR website in a few hours. Participants on today's call will be Mr. Rongjie Dong, Chief Executive Officer of HUYA; and Ms. Ashley Wu, Vice President of Finance. Management will begin with prepared remarks, and the call will conclude with a Q&A session. Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provision of the 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 this, 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 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. I will now turn the call over to our CEO, Mr. Rongjie Dong.

Rongjie Dong, CEO

Hello, everyone. Thank you all for joining our conference call today. Our 2022 second quarter was largely conditioned by the turbulence in the macro and regulatory environment. We mentioned in our previous earnings that the new domestic live streaming regulations which were introduced in May mainly focused on keeping behavior and protecting minors. Accordingly, we adjusted the associated products and operations on our platform. We will continue to closely follow policy updates and make timely adjustments to ensure compliance. The prudent adjustments we undertook in Q2 had a fairly immediate impact on certain facets of our business. Together with the macro headwinds, Q2 domestic live streaming revenue increased by mid-single digits on a quarter-over-quarter basis. Despite the impact, we still managed to grow our user base and achieved approximately RMB 2.3 billion in revenues and approximately RMB 6 million in non-GAAP net income in the second quarter of 2022. We will work to mitigate the effect on our business by dynamically adjusting our monetization strategies across our platform's operations. Our strong foundation and business fundamentals will carry us through the long term. We are confident that we have leverage in our business as we scale further in the game live streaming industry through consistent investments in quality content and retail products, while continuing to provide attractive game, e-sports, and entertainment content to satisfy the core needs of our users. Our business is a resilient one, which we expect to rebound and prosper as market conditions stabilize. With that in mind, we remain focused on future opportunities. In spite of all the external factors, our Q2 results marked another quarter of user expansion. We sustained growth in mobile MAUs and instituted aforementioned measures across our product upgrades and the game industry value chain integration. Now let me walk you through some of our key metrics. Starting with user growth. Huya Live mobile MAUs reached 83.6 million in the second quarter, representing encouraging growth of 7.7% from the year-over-year period. This growth was mainly due to the continuous investment in quality content as well as product upgrades and optimization, which leveled our platform's user appeal. Additionally, it highlights both the necessity and the efficiency of our content investment strategies and product improvements. User stickiness also improved, with total user time spent on our platform in the quarter growing by about 12% year-over-year, and our Huya Live app next month user retention rate remained above 70%, in addition to our growing active user base. With respect to product upgrades, we have made positive strides in utilizing product innovations for our users. Our newest version 10.0 of the Huya Live app further integrates community features and enhances the user interaction experience. More specifically, version 10.0 is live as a social community called Tiger Chit-chat, which features broader-based content ranging from videos, images, and text posts to Q&A strategies and events. The community also serves as a discussion forum between users and their favorite broadcasters, promoting better interaction between broadcasters and their fans to cultivate deeper bonds during livestreaming. Engaged in community interactions and activities, users are more motivated to produce high-quality user-generated content in the video category through our algorithm-driven recommendations and operations. Furthermore, segments for different game titles and tournaments are created, and official accounts operated by the game studios can join the community to provide the latest game information and strategies. In addition, based on the interactive one-click to join broadcaster's gameplay feature, which is available in our live streaming channels, we launched a competition function called Community Contest, enabling users to participate in our game competition with guests and we are initiating battles in the matching system with just one click. Here, users can win prizes offered by the platform and also have the chance to compete with celebrity game broadcasters. This new feature is another testament to our ability to recognize and fulfill user needs. As a side note, I'd like to mention that our community features are not created at random. The foundation of community engagement is deeply embedded in our platform through years of development. The features we institute are based on our understanding of community preferences, and most of our upgrades are driven by our users' tastes. Our achievements in product upgrades and the value chain integration actively advance us toward our vision of becoming a nonstop destination for comprehensive game-related services as we worked and collaborated with our partners to capture more opportunities across the industry value chain. Along with a more comprehensive offering, we aim to unlock more monetization opportunities going forward. By leveraging our long-term initiatives in game operations, we deepened our collaboration with game titles in recent months. Taking LOL Wild Rift as an example, we teamed the app with the game studio across product function development and community operations. Excitingly, Huya has contributed to the content and interactive features of the Wild Rift in-game streaming function. Additionally, Huya's community is linked to and presented with additional League of Legends Companion app for popular Wild Rift-related videos and posts. On the tournament front, we are among the first to stream The Wild Rift League, WRL, the games in more general professional leader in China. We also produced our self-branded tournaments for these titles such as the Huya Zhanshen Cup, which has become officially recognized as the Wild Rift League. These types of initiatives help improve users' viewing experience and bring Huya a first-mover advantage in the Wild Rift mobile e-sports tournament system while strengthening Huya's leading position in this e-sports game. In promoting the newly launched League of Legends eSports Manager game, in addition to our work on general operational activities such as recruiting broadcasters and providing streaming incentives, we have also integrated some game features in the broadcasting sessions of League of Legends' major events, including League of Legends Pro League and League of Legends Champion Korea, and sent out Huya designated virtual items to users participating in those interactive activities. We are glad to see the game quickly gaining traction on our platform during the summer tournament season. Lastly, I would like to point out that on top of our continuous efforts in growing our user base and the game industry integration, at the corporate level we have been focused on improving our operational efficiency and adopting more stringent budget control measures. We see these initiatives as necessary to help us navigate macro headwinds and other uncertainties. We are already seeing some early encouraging results from our operational optimization efforts, which Ashley will cover in great detail in just a moment. Going forward, we aim to further strengthen our monetization capabilities, optimize our cost and expense structure, and fortify our business fundamentals to achieve sustainable business development over the long term.

Ashley Wu, VP of Finance

Thank you, Mr. Dong, and hello, everyone. To expand on Mr. Dong's remarks, I will now provide some updates on our content enrichment and diversification initiatives. On the professional e-sports content front, we broadcasted around 90 third-party e-sports tournaments in the second quarter of 2022, with the total viewership of those licensed tournaments reaching 608 million. During the quarter, we pursued our ROI-led strategy, procuring autonomously and more selectively to ensure our high-quality content offerings aligned more closely with our budget control goals. In particular, legacy tournaments, such as LPL, Mid-Season Invitational (MSI), and King Pro League (KPL), maintained their leading positions in viewership. Thanks to our strengthened cooperation with the Crossfire game, the Crossfire Pro League spring continued to attract high user attention. I'd like to highlight that in 2022, Huya became one of Crossfire’s top-level partners. Our cooperation now spans the game viewing experience, e-sports content, and virtual privileges. We expect our broader alliance with Crossfire to help further expand our market reach in the first-person shooter game genre, giving us another competitive advantage. In addition to licensed e-sport content, we broadcasted 18 self-organized e-sport tournaments and entertainment PGC shows during the second quarter, generating total viewership of approximately 100 million. This was a particularly remarkable achievement, given the pandemic-related lockdowns in a few major cities in Q2 as well as our stricter project selection process. During the quarter, outstanding self-organized channels included Honor of King from the Cup, Huya Tianming Cup, Huya division of Teamfight Tactics Open Championship, and the seventh Huya mobile game arena. It is worth noting that the Thunder series, a phenomenal Huya IP tournament created for Honor of Kings, integrated online and offline gaming sessions, promoting the influence of popular broadcasters on our platform. Such efforts are assisting Huya in building its proprietary comprehensive tournament system around Honor of Kings, which will help sustain the stable and healthy development of the e-sports ecosystem on our platform. Beyond adopting a more selective approach and allocating our resources to more effective content, as Mr. Dong mentioned earlier, we remain diligent in improving our operational efficiency and optimizing our business expenses in a meaningful way. Our recent efforts in adjusting our overseas business, fine-tuning marketing channels, and streamlining internal processes have led to a reduction of our Q2 total operating expenses by 17% quarter-over-quarter and 21.6% year-over-year. Next, moving on to our Q2 financial details. Unless otherwise specified, the percentage changes I'll be reviewing are all on a year-over-year basis. Our total net revenues were RMB 2.28 billion for Q2 compared with RMB 2.96 billion for the same period last year. Live streaming revenues were RMB 2.05 billion for Q2 compared with RMB 2.38 billion for the same period last year. The decline was mainly due to the recent macro and regulatory environment. We saw lower average spending per paying user on Huya Live on a year-over-year basis. As the macro softness continues to adversely affect paying users' sentiment, the number of paying users for Huya Live was 5.6 million, flat compared with the same period last year. Advertising and other revenues was RMB 223 million for Q2 compared with RMB 383 million for the same period last year, primarily due to lower content sublicensing revenues as a result of fewer sessions for licensing according to the licensing event scheduled. The demand for advertising services was also soft due to the ongoing challenging macro environment. Cost of revenues decreased by 13.6% to RMB 2.06 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 13.3% to nearly RMB 1.77 billion for Q2, primarily due to the decrease in revenue sharing fees associated with declined live streaming revenues. Bandwidth costs decreased by 9.9% to RMB 154 million for Q2, primarily due to improved bandwidth cost management and continued technology enhancement efforts. Gross profit was RMB 290 million for Q2 compared with RMB 581 million for the same period in 2021, primarily due to lower revenues. Gross margin was 9.6% for Q2. Excluding share-based compensation expenses, non-GAAP gross profit was RMB 223 million and non-GAAP gross margin was 9.8% for Q2. Research and development expenses decreased by 19% to RMB 168 million for Q2, primarily due to the decrease in share-based compensation expenses. Sales and marketing expenses decreased by 40% to RMB 100 million for Q2, primarily due to decreased marketing and promotion fees as well as personnel-related expenses. General and administrative expenses increased by 13.5% to RMB 82 million for Q2, primarily due to the increase in professional service fees and personnel-related expenses. Other income was RMB 50 million for Q2 compared with RMB 48 million for the same period in 2021. As a result, operating loss was RMB 81 million for Q2 compared with operating income of RMB 182 million for the same period in 2021. Excluding share-based compensation expenses, non-GAAP operating loss was RMB 56 million and non-GAAP operating margin was negative 2.5% for Q2. Interest and short-term investment income were RMB 66 million for Q2 compared with RMB 58 million for the same period in 2021. Income tax expenses were RMB 1 million for Q2 compared with RMB 58 million for the same period in 2021, primarily due to lower taxable income. Net loss attributable to HUYA Inc. was RMB 90 million for Q2 compared with net income attributable to HUYA Inc. of RMB 186 million for the same period in 2021. Non-GAAP net income attributable to HUYA Inc. was RMB 6 million for Q2 compared with RMB 250 million for the same period in 2021. Non-GAAP net margin was 0.3% for Q2. Diluted net loss per ADS was RMB 0.08 for Q2. Non-GAAP diluted net income per ADS was RMB 0.02 for Q2. As of June 30, 2022, the company had cash and cash equivalents, short-term deposits, and short-term investments of RMB 10.72 billion compared with RMB 10.47 billion as of March 31, 2022. With that, I would now like to open the call to your questions.

Yiwen Zhang, Analyst

My question is about the recent update to the game community policy. Could you provide more details on the reasoning behind this community setting? Additionally, what opportunities does it present, and does it align with the rest of our business?

Rongjie Dong, CEO

Thank you for this question. Recently, we have officially launched the Tiger Chit-chat community in Huya's application version 10.0, which covers video and graphic communications. Users can initiate discussions on game Q&A, strategy tips, as well as tournaments, etc. On the one hand, it provides a place for communication between users and live streamers. Users can also discuss interesting content with their peers. The live streamers can better interact with their fans during non-streaming hours, which is also conducive to consolidating their fan base. On the other hand, the recommendations and operating screening can stimulate users' enthusiasm to produce video UGC and increase the sense of user participation and help to improve the high-quality content output on our Huya platform. Additionally, we have also set up zones for some major game titles and tournaments and invited the official operating accounts of the games to settle in to provide more accurate consultation and related video and live content for the corresponding game title. At the same time, it can also help the game studios optimize their operations for a better effect and enhance their cooperation relations with Huya. This version update comes as a natural upgrade of community functionality. Huya's community has been gradually built over the past several years. Therefore, it is necessary to upgrade the product to make an organic combination of live streaming, video, and community in a one-stop manner, meeting the users' various needs for watching game live, sharing and communicating, and joining the game at any time. The content metrics of Huya meet the needs of players to understand and discover the game before play, consume the derived content after the game, and also address the players' needs.

Ritchie Sun, Analyst

Regarding the regulation tightening towards tipping ranks in PK since May, could you please quantify the revenue MAU and paying user impact on our platform? And what are the alternative solutions for us to recoup the loss of revenue on users due to the regulation?

Ashley Wu, VP of Finance

Since the regulatory authorities issued the opinions on standardizing the online live broadcast reward and minors protection in May, we have implemented the requirements on schedule after the policy change accordingly. This policy mainly focuses on minor protection and strengthening the management during peak hours, such as the adjustment of PK playing sessions and key functions such as the tipping ranking modification. We believe that this policy change will help us better regulate the industry and promote long-term development. We have made more stringent management on live content and behaviors of the live streamers. We will closely monitor the policy updates and timely improve product and operation practices, creating a healthier platform atmosphere and content supply. At present, these adjustments have been impacting live broadcast revenue for a certain period. The impact in Q2 is mainly in June, and it is expected that Q3 will reflect its impact for the whole quarter. We continuously assess the subsequent impact of these adjustments on financial and operational indicators. Nevertheless, we believe that these adjustments and changes have a limited impact on the demand of the core users on Huya. We will still serve the core users by providing high-quality games, videos, and other entertainment content. Simultaneously, we will better optimize our strategy in operation and monetization for balanced development of our product and subscription businesses. We will continue to strengthen the compliance capability of Huya and invest in corresponding technologies. For example, an AI real-time sound silencing system, which is the industry's first, launched recently. This can assist us in realizing real-time shading of audio transmission of potentially risky content and effectively improve our review ability of live content. The establishment of a better platform compliance system is conducive to helping us achieve longer-term growth at Huya.

Katrina Chiu, Analyst

Can management share with us the measures we have taken for cost optimization? And how should we expect the margin outlook in the second half of '22?

Ashley Wu, VP of Finance

To improve the company's operational efficiency, taking more stringent budget control measures and optimizing cost and expenses are important tasks for us, which will help us better consolidate the company's businesses and financial foundations under the current environment and support long-term sustainable development. Our recent adjustment of overseas businesses is a measure of overall cost optimization, which can help reduce the margin gap of overseas business loss on the whole. Regarding Q2 costs, in addition to stricter screening procedures for copyrighted and self-made content, we have optimized streaming agreements and bandwidth utilization efficiency. We are cautious about channel and promotion expenses and have strengthened internal processes for that matter. We've also made more control over personnel-related costs and expenses. Despite the decline in profit margin due to decreased revenue in this quarter, we still achieved improvements in operational efficiency. Our total operating expenses in Q2 decreased by 21.6% year-over-year and 17% quarter-on-quarter. We believe that these measures will continue to optimize costs and expenses. However, due to seasonal factors, our profit margin level will be affected by increased event costs and corresponding promotion expenses in the second half of the year. From a long-term perspective, by enhancing our monetization capabilities, we continuously optimize our cost and expense structure, such as balancing tournament and self-produced content and streamer costs, and consistently improving operational efficiency. We are confident in improving margins and maintaining positive profits.

Thomas Chong, Analyst

My question is about our content strategy. Can management comment about how we should think about the outlook in the second half as well as in the future?

Ashley Wu, VP of Finance

As we mentioned before, users are the core of our businesses, and it is the company's long-term development strategy to continuously drive user growth. Therefore, quality content investment remains necessary as it helps us consistently serve our users while consolidating our competitive position. At the same time, we will adopt a more cautious investment strategy and concentrate resources on more effective content. Regarding IP and self-made content, we will conduct more targeted analysis and meticulous evaluation on the ROI of various planned purchases and content production, making timely adjustments according to market conditions. Since this year, we have stricter quality criteria for IP terminals and self-made content projects. The total number may not be as many as before, but the overall quality has improved. This is also reflected in the size of the viewership of these contents and the growth of MAUs on our platform. In the second quarter, about 100 million people watched the 18 self-produced tournaments and PGC programs we had. The year-on-year growth of mobile MAUs in Q1 and Q2 remained at a high single-digit level. We will continue to invest in some top-tier events with higher pricing. In the second half of the year, we will broadcast top-level professional leagues of various mainstream game titles, including S-12. We consider the short-term direct costs and revenues, as well as the impact on user value, brand reputation, and platform cooperation. We also hope to negotiate better commercial terms in the future and realize long-term benefits. In terms of live streamer content, we will also dynamically address the input of signing and tipping sharing with the live streamers, through the upgrading of technology, to encourage users and live streamers to create videos and more interactive content to form a complete content offering matrix.

Lei Zhang, Analyst

My question is mainly about our long-term growth. What are the growth drivers in mid- to long-term that you can share with us?

Rongjie Dong, CEO

At present, our monetization results are mainly conditioned by the external environment. HUYA has a consistently growing user base and good user loyalty and commercial operation ability. With our commercialization model further explored and optimized and the market situation improves, we expect our live broadcast revenue to gradually return to a growing trajectory. We believe that starting from here, we have several mid to long-term development directions. First, HUYA, as a key part of the game industry chain, provides substantial value for our game users and studios. For the category of long-tail game titles, more services can be provided from operations to help the games obtain and retain users and enhance their influence. Our direct income currently mainly comes from users, while from game studios, we hope to achieve win-win cooperation through deeper collaboration with them and offering more services such as joint operations. In the mid- to long-term, this holds potential for our business and revenue growth. Secondly, we hope to better link our video businesses with live streaming businesses. The community functions integrated into video content, and we have established a vertical short-form video module. Approximately 30% of our daily users currently watch videos. With this data expected to improve, we hope to realize more monetization from video, such as advertising revenue. Furthermore, we believe that interactive games in the live streaming room, as well as forms like virtual streamers or virtual live rooms, are gaining popularity. We have begun to explore these forms and have achieved some preliminary results. These forms are expected to provide more opportunities for value creation in the future.

Hanyu Liu, Investor Relations

Thank you once again for joining us today. If you have further questions, please feel free to contact HUYA's Investor Relations through the contact information provided by us today.

Operator, Operator

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