Earnings Call Transcript - HUYA Q3 2022

Operator, Operator

Hello, ladies and gentlemen. Thank you for standing by for the Third Quarter 2022 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. Hanyu Liu, Company Investor Relations. Please, go ahead.

Hanyu Liu, Investor Relations

Hello, everyone, and welcome to HUYA's third 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. Participants, 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 then 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 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 this 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. I will now turn the call over to our VP of Finance, Ms. Ashley Wu, who will read today's prepared remarks on behalf of Mr. Dong. Please, go ahead.

Ashley Wu, Vice President of Finance

Hello, everyone. Thank you for joining our conference call today. I am pleased to deliver the following brief remarks on behalf of Mr. Dong. Although micro headwinds continued to impact us during the third quarter of 2022, we managed to further grow our active user base year-over-year and quarter-over-quarter and improved our top and bottom line on a sequential quarter basis. Our total net revenues were approximately RMB 2.4 billion, and our non-GAAP net income was RMB 106 million for the third quarter. In terms of user growth, HUYA Live average mobile MAUs reached RMB 86 million for the first quarter, a low single-digit increase from a relatively high base in the summer of last year due to the heavier promotions. This growth is encouraging, particularly as we have implemented more stringent marketing channel spending strategies to help contain costs. Also, our efforts to enhance user interaction experience and offer attractive gaming and entertainment content not only contributed to the increase in user scale but also through user engagement across our platform. In the third quarter, our users' average daily engagement and retention rate stabilized above 17%. Next, let me share with you some updates about our product and technology advancement. We have been embracing the trend of virtual live streaming, including developing digital humans and providing a virtual live broadcasting tool on our platform. In addition, we have recently focused on further integrating virtual streaming technologies with our broadcasting section. Our goal here is to create more massive viewing experiences and inspire more interesting interaction and high-quality content production for our users. Specifically, we recently introduced a virtual live house to our Huya open platform. It gives streamers a new live theme in which the image and actions of the streamers are automatically recognized. The background and the streamer can also be separated and cut out, allowing streamers to transform the live theme into a professional stage, where they can sing, stand, and play musical instruments on the virtual stage. The audience also has their virtual characters that they can control and use to interact with the streamer. This feature has been well-received by our broadcasters, and during the summer, more than 100 virtual events were held on our platform, including live concerts, which strengthened interactions between broadcasters and users. Moreover, by partnering with the game Crossfire and building on virtual reality technology, Huya launched the industry's first virtual viewing feature for autonomous live broadcasting during the finals of the Crossfire Pro League in August. After entering the virtual esports venue, for this game, users were able to choose which games they wanted to support create an Avatar, wear the corresponding team uniform, and get together with other viewers. In addition to watching the competition, users could also freely move their avatars around the venue, fully engaging in the game, just as they would in a live event. Additionally, users could express support for their favorite team by sending virtual flower gifts. As the competition evolves, so does the backdrop of the venue, bringing the audience an even more immersive competitive atmosphere. This new viewing feature gained solid traction, spurring a 30% increase in viewers' engagement in interactive activities during the finals. In the 2022 season of the League of Legends World Championship, which just ended earlier this month, we also initiated several industry-leading upgrades. First, building on our success in the Crossfire event, we set up enhanced virtual venues, specifically designed for the World Championship, to provide an immersive virtual viewing option. We also extended HDR-capable display support for watching on our mobile app, webpage, and PC clients for both live streaming and on-demand video, offering users a more precise gaming experience across different devices. Furthermore, we introduced a tournament assistant feature for the event that greatly simplifies users' ability to obtain tournament-related information. It allows users to access historical match data covering teams, players, SKU values, and other key data in real-time without leaving the live page. Users can simply touch their mobile screen or move the mouse over the player profile image or team name. During the world championship, many matches were played either late at night or early morning in China due to time zone differences. In addition, the replay reviews of those competitions were immensely popular among users, with those replays ranking top spots in our video rankings. Meanwhile, we introduced incentive activities to encourage original video content creation related to the World Championship theme. Those user-generated contents are available in the tournament discussion board of our community, allowing users to easily participate in event discussions and interactions. With all of our efforts and operational expertise in esports, HUYA continued to secure market share for these highly anticipated events. Following the domestic live streaming regulation introduced in May, our tech product and operation adjustments impacted our live streaming revenues. As a result, our domestic live streaming revenues in Q3 slightly decreased by low single digits compared with the second quarter. We have been working to mitigate the impact by dramatically adjusting our monetization strategy. We will continue to comply with regulations and improve our corresponding technology and operating practices to support the healthy and sustainable development of our platform. In summary, we believe our relentless efforts to improve live streaming technologies, explore new product features, and enhance our quality content will help us better engage with our users. These measures are designed to position us strongly to capture future opportunities in the gaming and live streaming market. In light of the persistent challenging market conditions, it is prudent for us to continue to exercise caution and strengthen our business and financial foundation. We will strive to further optimize our operations throughout the organization and maintain our competitive edge while we continue to navigate the fluctuating market. This concludes Mr. Dong's remarks. Now, I'll continue with some updates on our content enrichment and diversification. In the first quarter of 2022, we broadcasted around 85 third-party professional esports tournaments. The most popular included the summer season of League of Legends Pro League, LPL; the King Pro League, KPL; and the CrossFire Pro League, CFPL, as well as the ESL Pro League Season 16. Notably, the number of peak concurrent users of the LPL Summer improved by 57% compared with the previous edition. As we continue our ROI-led strategy for tournament procurement, we have fewer licensed esports tournaments in the first quarter of 2022 compared with the same period last year. However, total viewership of those events reached approximately 660 million, representing growth of 12% year-over-year. On the front-end of our self-organized esports tournaments and entertainment shows, we broadcasted 23 events during the third quarter, generating total viewership of approximately 100 million. The first series of Honor of Kings and the Peacekeeper Elite tournaments, both major Huya branded events, continued to perform well this summer, demonstrating the appeal of our mobile esports events. It is also worth mentioning that our long-standing Huya Kung-fu carnival, a mixed martial arts competition, held its sixth season and became an influential IP for us, linking the live broadcasting industry and the physical world. This time, the event also featured competition in the virtual setting of Honor of Kings, incorporating elements of Chinese traditional culture. It was well received by our audience, with the number of events on our platform almost doubling compared with the previous season. Let me provide some updates on our operational optimization efforts. Beginning in April, we strategically adjusted our overseas business to allocate resources to key areas. These initiatives have resulted in a more streamlined and efficient business, narrowing our operating loss in this segment. We look forward to further benefits from this adjustment in our overseas business. Additionally, in the third quarter, our optimization initiatives regarding broadcaster related costs and bandwidth usage helped us to reduce total costs for the quarter, driven by savings from sales and marketing expenses. We are encouraged by the decline in total operating expenses in Q3, saving approximately 37% year-on-year. Next, moving on to our Q3 financial details. Our total net revenues were RMB 2.38 billion for Q3, a decline from RMB 2.98 billion for the same period last year. Live streaming revenues were RMB 2.02 billion for Q3, compared with RMB 2.6 billion for the same period last year. The decrease was primarily due to a decline in the number of paying users and average spending per paying user of Huya Live, as the recent micro and regulatory environment negatively affected paying user sentiment. Advertising and other revenues were RMB 361 million for Q3, compared with RMB 374 million for the same period last year, primarily due to soft demand for advertising services resulting from the challenging micro environment. In Q3 2022, content sublicensing revenues made a relatively large contribution to advertising and other revenues, mainly due to recognition of revenues from sublicensing esports tournament broadcasting rights according to event schedules, leading to fluctuations between different periods. Cost of revenue decreased by 17.6% year-over-year to RMB 2.04 billion for Q3, primarily due to revenue sharing fees, content costs, and bandwidth costs. Revenue sharing fees and content costs decreased by 15.7% year-over-year to RMB 1.79 billion for Q3, primarily due to the decrease in revenue sharing fees associated with the decline in live streaming revenues. Bandwidth costs decreased by 35.4% year-over-year to RMB 115 million for Q3, primarily due to improved bandwidth cost management. Our gross profit was negatively impacted by lower revenues. Gross margin was 14.4% for Q3. Excluding share-based compensation expense, non-GAAP gross margin was around 17%. Total operating expenses decreased, aided by decreased personnel-related expenses and share-based compensation expenses. Sales and marketing expenses decreased by 45.8% year-over-year to RMB 124 million for Q3, primarily due to decreased marketing and promotional fees as well as personnel-related expenses. General and administrative expenses decreased by 1.8% year-over-year to RMB 79 million for Q3. Other income was RMB 44 million for Q3 compared with RMB 95 million for the same period of 2021, primarily due to lower tax refunds and government subsidies. As a result, operating income was RMB 12 million for Q3 compared with RMB 83 million for the same period of 2021. Interest and short-term investment income were RMB 72 million for Q3 compared with RMB 63 million for the same period of 2021. Income tax expenses were RMB 20 million for Q3 compared with RMB 41 million for the same period of 2021, primarily due to lower taxable income. Share of income in equity method investments, net of income taxes, was RMB 0.05 million for Q3 compared with RMB 379 million for the same period of 2021, primarily due to the investment income related to a disposal of equity investment in the third quarter of 2021. Net income attributable to HUYA Inc. was RMB 60 million for Q3 compared with RMB 524 million for the same period of 2021. Non-GAAP net income attributable to HUYA Inc. was RMB 106 million for Q3 compared with RMB 180 million for the same period of 2021. Non-GAAP net margin was 4.5% for Q3. Diluted net income per ADS was RMB 0.25 for Q3. Non-GAAP diluted net income per ADS was RMB 0.44 for Q3. As of September 30, 2022, the company had cash and cash equivalents, short-term deposits, short-term investments, and long-term deposits of approximately RMB 11 billion compared with RMB 10.7 billion as of June 30, 2022. With that, I would now like to open the call to your questions.

Operator, Operator

Thank you, management. We will now begin the question-and-answer session. We have our first question coming from the line of Yiwen Zhang of China Renaissance. Please proceed.

Yiwen Zhang, Analyst

So, yeah, I have a couple of questions. Firstly, regarding the S-12 tournament performance. How much did the data use the traffic side? And secondly, a related question would be how do we evaluate this tournament cost versus benefit? Thank you.

Rongjie Dong, CEO

S-12 ended in early November. During this year's event, we once again maintained our leading market share throughout the entire tournament, although the event was held in the United States, and the time zone differences between China and the U.S. had a certain impact on the users watching the live broadcast. The overall viewing data of our core users remained stable, especially some key data even improved. These achievements came as a result of our continuous optimization of technical products and operations and our years of experience in cultivating esports content. More specifically, HUYA introduced several industry-leading live broadcast technology product upgrades to this event, and these differentiated services further enhanced the users' viewing experience. These include the establishment of the S-12 exclusive virtual live house, the expansion of HDR-capable display support for live broadcasts and video-on-demand viewing on app, web pages, and PCs, and the realization of users selecting commentary through the online audio real-time analysis technology based on in-depth cooperation with TJ Sports. We have also added to the tournament assistant feature, which greatly simplified viewers' access to historical match data. At the same time, the Tiger Chit-chat community we launched earlier covers video and graphic communications, which is conducive to user participation in event-related discussions and the creation of event-related videos and other content, allowing for more in-depth participation from users. As a top-tier tournament, S-12 has a positive effect on user traffic across the entire Q4 platform, but this year, due to the time difference of the event and other reasons, its effect on mobile MAU may not be as obvious as in previous years. Of course, the user level is also subject to other factors such as post-summer seasonality and other activities. Let me answer the cost and revenue impact of the event. The cost of S-12 tournaments is indeed relatively high, and the competition took place mostly in Q4, resulting in a significant increase in our Q4 content costs. This is similar to the seasonality impact of S11 on the content cost last year. It might also affect our overall Q4 cost and margins. In terms of revenue, the direct income from live events is still relatively small. However, this year, we made more attempts in business promotion and collaboration and launched some innovative event-specific virtual gifts. In the future, we'll continue to explore diversified monetization approaches. As we mentioned before, for some important content, we will not only consider short-term direct costs and income but also focus on its impact on user value, brand image, platform cooperation, etc. At the same time, we'll strive for better cooperation terms to achieve long-term benefits.

Hanyu Liu, Investor Relations

Hi, please take the next question.

Operator, Operator

Thank you, management. One moment for the next question. I'd like to invite the next question from Thomas Chong of Jefferies. Please proceed with your questions, Thomas.

Thomas Chong, Analyst

Thanks management for taking my questions. My question is about the near-term outlook about our live streaming revenue. And on the other hand, given the macro backdrop these days, what measures will we be taking to mitigate the impact coming from the reduced user spending? Thank you.

Rongjie Dong, CEO

Thank you for your question. Recently, the monetization of our domestic live broadcast business has been affected by the overall macro environment and adjustments based on the latest industry regulations. The relative weakness of the game industry and the lack of new major game titles for a long time have also impacted the game live broadcast businesses. So Q3's live broadcast revenue declined due to the continuous impact of the above reasons. We will keep an eye on the trend of live streaming income changes. Although there are uncertainties in the macro environment, we'll pay more attention to improving our company's own capabilities to continue optimizing content and technological products. We aim to serve our users well by providing rich content in games, esports, and other entertainment, bringing users and content creators better experiences. For example, in the third quarter, we further upgraded the application of virtual live broadcast technology on our platform through our virtual live house, which allows streamers to intensify their interactions with users. As we launched the industry's first virtual tournament live house in August, we fully upgraded the experience of watching events. These technologies provide users a new viewing and interaction experience, making live broadcast content more interesting and supporting the introduction of innovative gameplay and monetization scenarios. We are optimizing the video content ecology of the platform, and through the synergy between live broadcasters and video content, we can prolong the duration and add richness to our users' content consumption. In addition, we will continue to strengthen the compliance capabilities of the platform and invest in corresponding technologies to create a better foundation for the long-term healthy development of the platform. Overall, we will continue to improve user interaction indicators and retention rates through more intensive, community-based, and interactive product strategies to gradually increase users' spending power on the platform.

Hanyu Liu, Investor Relations

Thank you. Can we have the next question please?

Operator, Operator

Certainly. One moment for the next question. Our next question comes from the line of Lei Zhang from Bank of America Merrill Lynch. Please proceed.

Lei Zhang, Analyst

Thanks management for taking my question. Two questions here. Firstly, can you share with us your esports content strategy for next year? So when do we have investor updates this year? Secondly, how should we look at our revenue sharing ratio trend? Thank you.

Rongjie Dong, CEO

As far as esports content strategy is concerned, overall, we'll continue to strive for the copyright of mainstream, high-quality esports events in the market in 2023. At the same time, we will remain as selective as we have been this year, analyzing and evaluating the ROI of the project in detail, and dynamically adjusting our strategy according to the market situation. Currently, the acquisition of the copyright for the main events for next year has not yet been decided, as the specific form also depends on the decision of the copyright owner and negotiations with each broadcasting platform. If there is any major update, we will synchronize with the market in a timely manner. The competitive landscape of game live streaming has not changed significantly recently. HUYA continues to maintain its leading market share in the field. Since the beginning of this year, our streamer revenue-sharing ratio has remained relatively stable. Through more detailed data analysis, we have achieved some savings in signing costs, and we expect this trend to continue in the short term. Additionally, we will keep optimizing the cooperation fee structure with the streamers, providing them with more comprehensive training, support, and services such as operational analysis. This will help promote the diversified income channels for streamers and strengthen the binding partnership between live streamers and platforms to maintain and strengthen HUYA's competitiveness for live broadcasters.

Hanyu Liu, Investor Relations

Thank you. Let's have the next question, please.

Operator, Operator

One moment for the next questions. Our next question comes from Ritchie Sun of HSBC. Please ask your question.

Ritchie Sun, Analyst

So, I'll translate myself. My question is about our overseas business. We have been tweaking the strategy recently. Can management update us on the progress, specifically regarding revenue and losses? What is our goal for this business in 2023? Thank you.

Rongjie Dong, CEO

As we mentioned previously, based on the changes in the domestic and foreign market environment, we have made strategic adjustments and optimized the Nimo TV business since April 2022. With concentrated resources on the development of key overseas regions, we hope that by optimizing costs and expenses, we can minimize the losses in our overseas business and achieve sustainability. Major adjustments are now largely completed with reduced business operations in certain regions. So far, we have achieved some initial results, although overseas revenue and user scale have been affected to a certain extent. Our overseas business has become more focused, and the amount and proportion of losses have also significantly reduced. In addition to live game broadcasting, we also provide richer entertainment content. At the same time, we are focusing on more localization work, which allows us to provide characteristic interactive features and operational activities targeting the local markets. With these efforts, we hope Nimo can achieve self-sufficiency as soon as possible. Additionally, we'll dynamically adjust our operation strategy according to the overall market environment. In the future, we hope Nimo can broadcast live games around the world as a key participant in the market.

Hanyu Liu, Investor Relations

Thank you. Next, please.

Operator, Operator

One moment for the next question. Next question comes from Brian Gong from Citi. Please proceed.

Brian Gong, Analyst

Thanks management for taking my question. My question is regarding cost and margin trends. Can management elaborate on the progress in cost and expense optimization? How should we expect the margin trend ahead? Also, can management share some updates on the latest ratio with Tencent? Thank you.

Rongjie Dong, CEO

Since the beginning of this year, we have made continuous efforts to control costs and improve operational efficiency, from overseas strategic adjustments to a more focused strategy for domestic businesses, and at the same time increasing the effective use of technical resources, we have seen some financial results. In the third quarter, streamlining-related costs as well as bandwidth costs were both optimized, and total operating expenses for the quarter decreased by approximately 27% year-over-year, driven by savings from sales expenses. Therefore, while maintaining the stability and leading edge of our core businesses, we will continue to implement cost reduction measures including ROI optimization for streamers and event content, as well as operating expenses for live streaming. This will also help us better consolidate our businesses and financial foundation in the current environment, supporting long-term development. As mentioned earlier, due to large-scale events, the margin level of Q4 this year might be expected to show a loss, but we also expect that future profit margin levels could gradually improve. In addition to continuing to promote cost reductions, HUYA will actively explore and upgrade our business ecology, products, and commercialization in the future, not limited to live broadcasting. We will continue strengthening our profit level by enhancing monetization ability. Our cooperation with Tencent continues to be actively carried out, with close collaboration in games, events, content, and products. Specifically, in terms of the combination of games and interactive features, we are continuously deepening data interactions, allowing users to flow between platforms. Regarding in-depth cooperation in games and tournaments, HUYA continues to collaborate with major games such as League of Legends to promote community engagement and in-game live streaming interactions. Our technology and operational know-how in the audio, video, and game content industry will aid in deeper collaboration with Tencent Group, enhancing our business model.

Hanyu Liu, Investor Relations

Yes. That's all for our answers.

Operator, Operator

If there are no further questions now, I would like to turn the call back over to the company for closing remarks.

Hanyu Liu, Investor Relations

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

Operator, Operator

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