Earnings Call Transcript - HUYA Q4 2020

Operator, Operator

Hello, everyone, thank you for joining us for the Fourth Quarter and Full Year 2020 Earnings Conference Call for HUYA Inc. I would now like to hand the call over to Ms. Dana Cheng, Company Investor Relations. Please proceed.

Dana Cheng, Investor Relations

Hello, everyone, and welcome to Huya's 2020 Fourth Quarter and Full Year 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 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 these and other risks and uncertainties is included in the company's prospectus and other public filings as filed with the U.S. 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 CFO, Ms. Catherine Liu, who will read prepared remarks on behalf of our CEO, Mr. Rongjie Dong. Catherine, please go ahead.

Catherine Liu, CFO

Thank you, everyone, for participating in our conference call today. I am pleased to deliver today's opening remarks on behalf of Mr. Dong. We are very pleased to report another quarter of solid performance across our businesses, allowing us to finish 2020 on a strong note. Total net revenues for the fourth quarter of 2020 increased by 21% year-over-year to close to RMB3 billion, while full year revenues crossed the RMB10 billion mark for the first time. We believe our enhanced monetization capability sets a solid foundation for us to reinvest into the business and strengthen our future. Robust user growth and higher user engagement also continued to underline our ability to execute well. Mobile MAUs of Huya Live reached 79.5 million in the fourth quarter, a year-over-year growth of 29% and a net addition of 5 million compared to Q3, further reinforcing our leadership position on the mobile end. Strong mobile growth was driven by the continued buildup of our quality content library, especially with e-sports tournaments and entertainment programs, product improvements as well as marketing activities. Meanwhile, our Huya Live app's next month retention rate remained at over 70% in the fourth quarter. Driven by mobile growth, average MAUs of Huya Live in the fourth quarter increased by 19% year-over-year to 178.5 million. Paying users for Huya Live increased by 18% year-over-year to 6 million in the fourth quarter. Notably, around 80% of our paying users paid via mobile devices and mobile users contributed to more than 85% of our live streaming revenue this quarter. These results further endorse our mobile strategy focus as we continue to allocate resources to grow our mobile user base. The growth in both financial and operating metrics validates the strong appeal of our content. Achieving such sound results in the midst of a global pandemic proves the resilience of our business and represents an important milestone for our company as we move forward. We have also committed to creating more immersive experiences for our users. In the fourth quarter, our open platform for third-party application developers continued to gain popularity. By the end of fourth quarter, there have been around 200 tools available across the platform, and over 400,000 broadcasters have used these tools during their streaming sessions. Most of the tools are game-centric, offering smart assistance to broadcasters to better engage users. Since we officially launched our cloud gaming platform, Yowa, in November last year, we have been able to reduce latency to deliver an industry-leading level of user playing experience, thanks to our continuous technology advancements and our average daily time spent per user of Yowa has now reached around 90 minutes, indicating higher engagement. We have also started efforts in the integration of the cloud gaming functions into our core Huya Live streaming for broadcasters to better interact with users. Now moving on to our collaboration with Tencent. In the fourth quarter, average MAUs who watched Huya Live's streaming content from Tencent's platform, which are not counted in our reported MAUs, was around 20 million, with WeGame, WeChat, Game Center and LoL games remaining as the most popular channels. On the broadcaster front, Huya has collaborated with Tencent to help our broadcasters receive greater exposure within Tencent's game communities, further increasing their influence. For example, the Honor of Kings game studio recently cooperated with a celebrity broadcaster on Huya's platform to release the broadcaster's Voice Packet within the game. After the release, the broadcaster gained over 5 million fans in the in-game community, accessing a greater audience and expanding the potential streaming viewer base. Next, I will provide you some updates on the ongoing merger with DouYu. After we announced our potential merger with DouYu in October last year, we have made relevant filings with SEC. And in China, we have voluntarily submitted the Declaration of Concentration of Undertakings with the State Administration for Market Regulation, the relevant regulatory authority, and currently, the review is still in process. As we embrace 2021, we will continue to extend the breadth and diversity of our platform and invest in content ecosystem, product upgrades, and technologies to better serve our growing user base. This concludes Mr. Dong's remarks. Let's start with updates on content enrichment and diversification. In Q4, we broadcasted 149 third-party e-sports tournaments, among which the top tournaments included LoL Worlds 2020, i.e. S10, and Demacia Cup, Fall Season of KPL and PCL and exclusively broadcasted National Electronics Sports Tournament, NEST. Total viewership for these tournaments reached around 665 million in the fourth quarter, representing a 24% year-over-year growth. As far as our self-produced content, we organized 48 e-sports tournaments and entertainment shows and generated a total viewership of 109 million, representing 53% year-over-year growth. The top-performing self-produced e-sports content in the fourth quarter include our long-standing PUBG event, Huya TMC Season 8, and our commentary program for LoL Worlds Hushuo S10. In TMC S8, eight international teams also joined the competition for the first time and then the success of this global participation is a further testament to our ability to organize high-quality e-sports events. Among the entertainment PGC shows this quarter, Wake Up! Losers, an auto-chess themed reality show; The Voice of Huya, an outdoor talent show; and Huya Kungfu Carnival Season 3, a mixed martial arts competition have gained popularity, and we believe such shows will continue to improve user stickiness on Huya's platform. Turning to our overseas business. The MAUs of overseas business was around 30 million in the fourth quarter, representing a 50% year-over-year increase. We also achieved leading market position in certain countries and had some successful monetization attempts through our localized operational efforts. Next, I will walk you through our financial highlights. In the fourth quarter, our total net revenues grew by 21% year-over-year to close to RMB3 billion. Our live streaming revenues increased by 20% year-over-year to RMB2.8 billion in the fourth quarter. The growth was primarily due to the increased number of paying users and the increase in revenue per paying user, both of which have expanded year-over-year. Advertising and other revenues increased by 45% year-over-year to RMB175 million in the fourth quarter of 2020, primarily driven by the increasing and diversifying number of advertisers. Our profitability continues to improve this quarter, given the leverage we have in bandwidth cost and our operational efficiency. Our non-GAAP gross margin improved to 20.6% compared with 19.5% in the fourth quarter last year. Our non-GAAP operating margin was 9% compared with 7.4% in Q4 2019 and our non-GAAP net margin was 10.2% compared with 9.8% in Q4 2019. Now let me move on to our financial details. If not specified, all the growth rates are on year-over-year terms. Cost of revenues increased by 19.6% to RMB2.4 billion for the fourth quarter, primarily attributable to the increase in revenue sharing fees and content costs. Revenue sharing fees and content costs increased by 29.8% to RMB2 billion for the fourth quarter, primarily due to the increase in revenue sharing fees in relation to higher live streaming revenues and the increase in spending in e-sports and self-produced content as well as on content creators. Bandwidth cost decreased by 26.1% to RMB167 million for the fourth quarter, primarily due to improved management in bandwidth costs and continued technology enhancement efforts. Gross profit increased by 28.1% to RMB598 million in the fourth quarter and gross margin increased to 20% for the fourth quarter. Research and development expenses increased by 21% to RMB216 million for the fourth quarter, mainly attributable to increased personnel-related expenses. Sales and marketing expenses increased by 63.2% to RMB193 million for the fourth quarter, primarily attributable to the increased marketing expenses to promote the company's content, products, services and brand name as well as increased personnel-related expenses. General and administrative expenses decreased by 0.3% to RMB96 million for the fourth quarter, mainly due to improved management efficiency. Operating income increased by 84.4% to RMB187 million for the fourth quarter and operating margin increased to 6.3% for the fourth quarter. Non-GAAP operating income, which excludes share-based compensation expenses, increased by 46.5% to RMB269 million for the fourth quarter and non-GAAP operating margin increased to 9% for the fourth quarter. Net income attributable to HUYA Inc. for the fourth quarter increased by 58.6% to RMB253 million and non-GAAP net income attributable to HUYA Inc. for Q4, which excludes share-based compensation expenses, gain on fair value change of investments and equity investee's investments and equity investee's partial disposal of its investment, net of income taxes, increased by 26.5% to RMB306 million. Diluted net income per ADS was RMB1.05 for Q4 and non-GAAP diluted net income per ADS was RMB1.27 for Q4. As of December 31, 2020, the company had cash and cash equivalents, short-term deposits and short-term investments of RMB10.5 billion compared with RMB10.8 billion as of September 30, 2020. The decrease was primarily attributable to the land use right acquisition of approximately RMB310 million in Foshan City in November 2020. Net cash provided by operating activities was RMB459 million for the fourth quarter. Moving on to our full year 2020 results. Total net revenues in 2020 increased by 30.3% to RMB10.9 billion. Live streaming revenues increased by 29.3% to RMB10.3 billion in 2020, primarily due to the increase in the number of paying users and the average spending per paying user of Huya Live. The increase in the number of paying users was primarily driven by the company's overall user growth. The increase in the average spending per paying user was primarily driven by the enrichment and enhancement of content, products, and services. Advertising and other revenues increased by 51.3% to RMB603 million in 2020, primarily driven by the increasing and diversifying advertiser base, mainly attributable to strengthened recognition of Huya's brand name in China's online advertising market. Cost of revenues increased by 25.4% to RMB8.6 billion in 2020, primarily attributable to the increase in revenue sharing fees and content costs, bandwidth costs and personnel-related costs. Revenue sharing fees and content costs increased by 27.6% to RMB7.1 billion in 2020, primarily due to the increase in revenue-sharing fees in relation to higher live streaming revenues and then the increase in spending in e-sports and self-produced content as well as on content creators. Bandwidth costs increased by 9.8% to RMB879 million 2020, primarily due to an increase in bandwidth usage as a result of the company's larger user base, partially offset by improved management in bandwidth costs and continuous technology enhancement efforts. Gross profit increased by 53% to RMB2.3 billion in 2020 and gross margin increased to 20.8% in 2020. Research and development expenses increased by 44.3% to RMB734 million in 2020, mainly attributable to increases in personnel-related expenses. Sales and marketing expenses increased by 27.3% to RMB558 million in 2020, primarily attributable to the increased marketing expenses to promote the company's content, products, services, and brand name as well as increased personnel-related expenses. General and administrative expenses increased by 26.1% to RMB445 million in 2020, mainly due to the increase in personnel-related expenses. Operating income increased by 177.4% to RMB725 million in 2020 and operating margin increased to 6.6% in 2020. Non-GAAP operating income, which excludes share-based compensation expenses, increased by 108.6% to RMB1.1 billion in 2020 and non-GAAP operating margin increased to 10.4% in 2020. Net income attributable to HUYA Inc. increased by 88.9% to RMB884 million in 2020 and non-GAAP net income attributable to HUYA Inc. in 2020, which excludes share-based compensation expenses, gain on fair value change of investments and equity investee's investments and equity investee's partial disposal of its investment, net of income taxes, increased by 68.2% to RMB1.3 billion. Diluted net income per ADS was RMB3.71 in 2020 and non-GAAP diluted net income per ADS was RMB5.29 in 2020. Net cash provided by operating activities was RMB1.2 billion for the full year of 2020. With that, I would now like to open the call to your questions.

Operator, Operator

Your first question comes from Thomas Chong from Jefferies.

Thomas Chong, Analyst

My question is about our 2021 outlook. Can management comment about how we should think about the revenue and the user growth trend for this year? On the other hand, can management also comment about our strategies for the gaming and the long game segments?

Rongjie Dong, CEO

Regarding your first question, Mr. Dong has addressed the strategic focus. For 2021, we have several business priorities. First, in the live streaming sector, we will explore opportunities presented by potential new game releases to enhance our competitive edge. Additionally, we will focus on licensing e-sports tournaments and producing our own e-sports events to provide viewers with high-quality content. We will also invest in self-produced PGC shows to diversify our content library. Moving on to our video business, which we see as a long-term investment that may take time to monetize, we are starting to see positive results, with viewership growing by 40% year-over-year. Our goal is to enhance the on-demand viewing experience and integrate it better with our live streaming services, which we've already begun to test with successful outcomes. In terms of the gaming community, we plan to consolidate game-related information and services on our platform for a more comprehensive user experience. We will continue to focus on popular genres like outdoor activities, traditional sports, and ACG to improve content quality and attract new users. As for our international efforts with NIMO TV, our goal this year is to strengthen our market position in our current countries while developing a unified ecosystem. We will work towards reaching breakeven in each country and consider downsizing in unprofitable regions. Our focus will remain on solidifying our presence in Southeast Asia and certain Middle Eastern markets. That concludes my outlook for NIMO TV. Catherine will handle the other questions.

Catherine Liu, CFO

Thank you, Thomas. I think with Mr. Dong's remarks on our growth strategies in 2021, we believe the users and revenues will continue to increase this year. In terms of game versus non-game strategies, obviously, our focus is still on game content, as Mr. Dong just mentioned, but of course, non-game content is also an important part of our monetization. So we will continue to invest in game content to help us to grow more users and we will also invest in the non-game content for us to improve monetization. But of course, for some of the non-game content categories, if we see them grow to a certain large scale, we will also try to invest more in those content categories and potentially cultivate new users in the future from those content categories. Hope this answers your questions.

Operator, Operator

Next question comes from Lei Zhang of Bank of America Merrill Lynch.

Lei Zhang, Analyst

Two questions here. First is, can you give us some outlook on the competitive landscape in 2021, especially in the game-streaming space? Second is, since you mentioned your investments in e-sports weekly related content, can you give us more color on your content investment plan in 2021?

Rongjie Dong, CEO

All right. As a translation, regarding your competitive landscape question, especially with those new entrants in those video platforms, we would like to say that for those video platforms like Bilibili and Kuaishou, what we have been doing for the live streaming business is converting their existing VTubers and video users to the live streaming broadcasters and live streaming users, respectively. But the last benefit dropped by the conversion period has already come to an end, I would say. Going forward for games, I would say we will have to enter into the period, try to calculate a better and quality pool of the broadcasters and construct the DouYu acquisition for the live streaming business. And we believe we are in an industrial leading position compared with those video platforms, especially on the quality content and quality broadcasters, especially, our monetization capabilities. Those are areas we are superior to all those video platforms, I would say. So basically, we think the competitive landscape for the live streaming business hasn't really changed much. And Catherine will take your other questions.

Catherine Liu, CFO

Thank you, Lei. This year, we will continue to prioritize game content, especially with a significant focus on e-sports tournaments. We plan to cover most of the major e-sports events comprehensively. Additionally, we aim to enhance our self-produced content to further expand our user base. Regarding video, we intend to increase our investments in game video to drive future user growth. We believe that a successful video business will not only support user expansion but also create monetization opportunities down the line. I hope this answers your question.

Operator, Operator

Our next question comes from Alex Liu from China Renaissance.

Alex Liu, Analyst

In the prepared remarks, the management introduced that there is a sizable group of users that come from Tencent property right now, and this is not really in our reported MAU. Could the management share some color on how to further grow this group of users? And how should we think about the monetization road map and the monetization potential for these group of users?

Rongjie Dong, CEO

As a translation, I will provide some updates about our ongoing collaboration with Tencent. By the end of 2020, we connected through live streaming content across nearly 20 Tencent games, including League of Legends Pro League teams, Cross Fire, and products such as WeGame, the WeChat game live streaming mini program, and the mobile QQ gaming center. Earlier this year, during the spring festival, we collaborated with Tencent's leading platform. Currently, the traffic generated by these external Tencent wins is not included in our quarterly reported monthly active users. In the first quarter, external Tencent wins contributed around 20 million monthly active users, which is lower compared to Q3 during the school summer holidays. Regarding our gaming collaboration with Tencent, we have signed a 5-year licensing agreement with PG Sports for the broadcasting rights of the League of Legends Professional League. The agreement includes discussions with PG Sports about exploring more opportunities to better monetize e-sports tournaments. Historically, e-sports tournaments have driven significant user traffic but contributed little to monetization, which is why we are working with PG Sports, Tencent's e-sports tournament division, to capitalize on monetization opportunities. Additionally, we aim to integrate with Tencent to connect users through their Tencent and Huya accounts, providing better cross-functional or cross-platform experiences, personalized recommendations, and targeted user engagement to enhance their overall experience.

Operator, Operator

Our next question comes from Tian Hou from T.H. Capital.

Tian Hou, Analyst

Okay. I have two questions. First, I’m wondering if we can attract major users and extend our user growth by bringing in games from other vendors, both domestically and internationally. Second, while Huya experienced significant growth in recent years, it seems to have passed its peak. Given that the game broadcasting industry is still relatively young, in what areas does Huya plan to invest for further growth in 2021?

Rongjie Dong, CEO

All right. In response to your first question about the possibility of specifically broadcasting on Tencent, we currently do not see that as feasible because Tencent games are performing well in the market, particularly in domestic regions. This situation reflects the current industry landscape rather than our strategic intentions. Regarding our investments for this year, I'll begin with the overseas market. As always, we hope to reach breakeven in the overseas market someday, and we are optimistic given the current surge in revenue growth in that area. For the domestic market, we plan to strengthen our existing genres, especially in the video business. We view this as both a defensive and aggressive strategy to enhance the video segment's success and to capture a significant market share within the industry. Additionally, in both core gaming and other new initiatives, we are committing considerable resources to drive our efforts forward. It seems we are facing platform challenges.

Operator, Operator

Your next question comes from Vincent Yu from Needham & Company.

Vincent Yu, Analyst

My first question is about the 2021 game releases by Tencent. There are several flagship models scheduled to release by Tencent in 2021. Which game launches in 2021 does the company think will have the biggest impact on Huya? And second question is on the regulatory guidelines. Can management share some comments on the potential impact on our business with regards to the regulatory guidelines issued back in November 2020?

Rongjie Dong, CEO

For your first question about the new games, there are a few titles we believe could become major successes this year. The first is a mobile app, and the second is a mobile game with a legal license. Both are expected to launch in the third quarter of this year. We see ourselves as a leading platform in the industry, particularly excelling in promoting new games. We are well positioned to promote and operate these new games, attracting viewers both to our platform and to the games themselves. We are confident that the launch of these new titles will help us maintain our leading position in the industry. Although the launches are happening a bit later than anticipated, we began preparations as early as last year, which included recruiting new broadcasters and making strategic acquisitions related to game development. We look forward to the launch of these new games this year.

Catherine Liu, CFO

Thank you, Vincent. And for your question about the government regulatory changes, as you have probably been reading the news and since, I think, the beginning of 2020, there have been a lot of government attention on the industry, and Huya has been closely monitoring and following the regulatory guidelines. Currently, we are still waiting for the details of the potential new guidelines to come out. We will definitely follow the government's new guidelines and rules when it comes out. For the moment, we believe that the government's guidelines would better regulate the industry and potentially contribute to the long-term healthy growth of the industry. So we believe that even if there might be some short-term changes to follow the rules, the long-term impact should really be minimal. But of course, we will wait for the details of the new guidelines and update investors at that time. Hope this answers your questions.

Operator, Operator

Thank you all for your questions. I'd now like to turn the call back to the company for closing remarks.

Dana Cheng, Investor Relations

Thank you all for joining our conference call today. If you have further questions, feel free to contact ir@huya.com, and we look forward to speaking with you in the next quarter. Thank you.

Operator, Operator

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