Earnings Call Transcript - HUYA Q3 2024

Operator, Operator

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 soon. Participants of management on today's call will be Mr. Junhong Huang, our Acting Co-CEO and Senior Vice President; and Mr. Raymond Peng Lei, our acting Co-CEO and CFO. 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 on 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 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. 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 SVP

Okay. Hello, everyone. Thank you for joining our earnings conference today. We were pleased to make significant strides in developing our game-related services business during the third quarter. Game-related services, advertising and other revenues reached a new record high, contributing 26.7% of our total net revenues. To drive this progress, we continue to enhance content and upgrade product features on our platform, to improve users' experience while exploring new partnerships and business opportunities to expand our user reach and unlock our growth potential. Moreover, despite the ongoing challenges in the macroeconomic and industry environment, we maintained a relatively stable year-over-year operating performance and achieved a non-GAAP net income of RMB 78 million. Now let's take a detailed look at our recent operational and strategic achievements. First, our users. The engagement across our high-quality user base remained stable during the third quarter with mobile MAUs improving slightly sequentially to 84 million. While we maintained our disciplined approach to marketing and promotion spending, we also enriched our content and service offerings as well as product features to reinforce our users' engagement. Furthermore, we continue to strengthen our cooperation with various content platforms, joining hands with these partners to conduct cross-platform streaming and co-produce premium professional content. We also selectively distributed our game live streaming and video content to product lines within Tencent's ecosystem and other content channels. Thanks to these initiatives, we estimate that HUYA's content reached a total of over 140 million users in September, taking into account users from other platforms as well as our own mobile users. We believe our productive platform collaborations will continue to broaden our reach among gamer users, empowering us to explore more commercialization opportunities around game-related services and live streaming. Moving on to game-related services. Our game distribution, in-game item sales, and game advertising business continued to grow robustly. Revenues from game-related services, advertising and others reached RMB 410.2 million for the third quarter of 2024, up by 209.3% year-over-year and 32.9% quarter-over-quarter. For game distribution, we work closely with game studios on new game releases, version updates, and related operational activities and incentivized our broadcasters to participate in game distribution. These efforts effectively promoted our growth this summer with total gross receipts generated through HUYA's game distribution channel in the third quarter rising to more than 20 times that of the year-ago period. The quarter's top titles included Honor of Kings, Demi-Gods and Semi-Devils Mobile, D&F Mobile, QQ Speed Mobile, and Peacekeeper Elite. We are confident in further developing our game distribution service as we expand our reach in the vast game market by offering distribution for a wider range of titles, including both mobile and PC games, and collaborating with additional game studios. What's more, we plan to implement targeted initiatives for broadcasters to enable them to provide more tailored user services and drive users' interest in exploring and engaging with the games distributed via our platform. We have also strengthened our collaboration with major game titles in-game item sales, broadening the scope of our coverage in this area. In particular, we were promoting exclusive or customized in-game items for our platform and broadcasters and holding sales events for the initial release of new in-game items. For instance, during the third quarter, we held a cross-fire workshop offering exclusive Weapon Skins as well as an exclusive initial release of co-branded outfit skins featuring a well-known broadcaster on our platform, sold on that broadcaster's channel. Both initiatives garnered great interest from our users. Notably, the total value of the co-branded outfit skins sold on the broadcaster's channel during this initial release activity exceeded RMB 50 million, validating the growth potential of our in-game item sales business. In terms of game advertising, we responded to the summer's increased game marketing demand with various new game launch promotions and anniversary events for the existing games. In the third quarter, we collaborated with a number of game companies promoting popular games such as Arena Breakout, World of Warcraft, and Naruto Mobile. Going forward, we will continue to diversify our advertiser base and enhance our game promotion and marketing capabilities through HUYA streamer-created content and in-house produced events. Moving on to our professional content enrichment efforts on our platform, including licensed and in-house content. In the third quarter, we broadcasted over 90 licensed e-sports tournaments. The LPL, Veterans Champions, and Esports World Cup were among the most watched events during the quarter. In addition to the tournament of more proven e-sports game titles, which continue to attract user attention, Veterans tournaments have become increasingly popular since the game's launch in China last year. This year's Veterans Champions increased its viewership by approximately 160% compared to the previous edition, further boosting the popularity of the game's content on our platform. We also broadcasted the recently concluded LoL Worlds 2024, one of the year's most important e-sports events. We prepared comprehensively for LoL Worlds, and we are pleased to see our hard work drive positive outcomes. We optimized our tournament broadcast audio and video technology for the event, providing a variety of HDR video quality options to suit users' various devices and network environments, which brought our users industry-leading image quality effects and viewing experiences. We also introduced a competition data analysis system for this event that instantly captured each data point and converted the data into a visual presentation, allowing viewers to see real-time changes in teams and players' win rates while they watched the competition. Additionally, in addition to our official streams, popular broadcasters and professional players on our platform created secondary live commentary for the event, providing our users with a more diverse and entertaining tournament viewing experience unique to HUYA. Based on our initial statistics, we maintained our leading market share of this event's viewership and further increased our market share year-over-year, significantly ahead of other live streaming platforms. In terms of in-house content, we broadcasted over 20 self-organized e-sports tournaments and entertainment PGC shows in the third quarter. For example, we successfully hosted the HoK Streamers League in collaboration with two other major live streaming platforms to reach audiences across platforms. We also continued our Village Games series for community participation and hosted the Zhejiang Village Games for Honor of Kings. Additionally, we collaborated with a well-known TV program to produce Streamer Rush Forward, a reality show featuring our game and entertainment broadcasters, which attracted strong user interest. For competing to the end, our interactive game play variety show integrates game promotion and entertainment content has covered more hot and new games in this quarter, such as HoK's New Mode and Naruto Mobile. Given that our in-house content generally delivers good ROI performance, we are strengthening our investment in this area to create more influential and commercially valuable event IPs. As our range of in-house content expands and becomes more diverse, we will also focus on scheduling these programs to seamlessly integrate with our licensed events to better complement and enrich our professional content library. For example, following the conclusion of LoL Worlds 2024, we commenced Season 2 of our LoL Legend Cup, building on the success of its inaugural season in May. Finally, we continue to explore innovative features to engage users and enhance interaction while differentiating HUYA's live streaming experiences, including product cooperation with leading game titles. For example, in the third quarter, HUYA became the first platform in the industry to integrate Honor of Kings bullet-chatting gameplay mode in live broadcast, adding both a native feature and platform exclusive modification developed by HUYA using Honor of Kings tools. In this mode, viewers can activate special skill cards that impact the live game by sending bullet chats or visual gifts to the channel, creating a unique gameplay situation that drives more interesting live streaming content. Given these features' promise, we will continue to leverage HUYA's expertise in creating engaging game live streaming content to bring entertaining exclusive features to our streamers and users. Looking ahead, we will remain focused on fostering our in-house content initiatives. We are especially excited about Season 2 of our self-produced Legend Cup and look forward to amplifying this series' success and influence. We will also deepen collaboration with content creators and industry partners to extend our content reach beyond the HUYA platform and explore broader cooperation with more game developers and publishers to expand our presence in the game market. We are confident these efforts will unleash new commercialization opportunities, propelling our long-term business development. With that, I will now turn the call over to our acting Co-CEO and CFO, Raymond Lei, who has been with us for a few months. He will share more details on our results.

Raymond Peng Lei, Acting Co-CEO and CFO

Thank you, Huang, and hello, everyone. I'm delighted to be part of HUYA's management team and to speak with you for the first time. I will start with an overview of our financial performance. Our total net revenues were RMB 1.54 billion in the third quarter of 2024; the soft macro and industry environment, which impacted users' willingness to pay for live streaming, continued to weigh on our live streaming revenues. Meanwhile, we proactively adjusted our business structure to support our strategic transformation and maintained prudent operations. Game-related services, advertising, and other businesses showed strong momentum and made a more meaningful contribution to our top line, increasing by 209.3% year-over-year and 32.9% quarter-over-quarter, primarily due to increased revenue from game distribution, advertising services, and in-game item sales. We are pleased to see more users paying for our game-related services, driving growth of 9.5% year-over-year in paying users to reach 4.6 million in the third quarter. Also, our continuous efforts to improve operational efficiency paid off with total operating expenses decreasing by 20.9% year-over-year. I'd also like to review our recent progress in optimizing our content. We continue to refine our strict procurement strategy for licensed content, striving for better commercial terms. As we disclosed in September, we entered into a second supplemental license agreement for a series of League of Legends matches that decreased the license fee, which we believe will help us further reduce our overall e-sports license costs this year and in 2025. Let's move on to more details of our Q3 financial results. Our total net revenues were RMB 1.54 billion for Q3, of which live streaming revenues were RMB 1.13 billion and game-related services, advertising and other business and other revenues were RMB 410 million compared with total net revenue of RMB 1.66 billion for the same period last year. Cost of revenues decreased by 6% year-over-year to RMB 1.33 billion for Q3, primarily due to decreased revenue sharing fees and content costs as well as bandwidth and server custody fees. Revenue sharing fees and content costs decreased by 5% year-over-year to RMB 1.17 billion for Q3, primarily due to decreased live streaming revenue sharing fees associated with the decline in live streaming revenues as well as lower costs related to licensed e-sports content, partially offset by increased game-related services, advertising, and other revenue sharing fees. Bandwidth and server custody fees decreased by 26% year-over-year to RMB 61 million for Q3, primarily due to continued technology and management enhancement efforts as well as favorable pricing terms. Gross profit was RMB 204 million for Q3 compared with RMB 243 million for the same period last year. Gross margin was 13.2% for Q3 compared with 14.6% for the same period last year. The change was primarily attributable to increased revenue sharing fees and content costs as a percentage of total net revenues, which rose mainly because the decrease in live streaming revenues outpaced the decrease in content costs. Excluding share-based compensation expenses, non-GAAP gross profit was RMB 207 million, and the non-GAAP gross margin was 13.5% for Q3. Research and development expenses decreased by 12% year-over-year to RMB 126 million for Q3, primarily due to decreased personnel-related expenses and share-based compensation expenses. Sales and marketing expenses decreased by 30% year-over-year to RMB 73 million for Q3, primarily due to decreased marketing and promotion fees as well as personnel-related expenses. General and administrative expenses decreased by 25% year-over-year to RMB 50 million for Q3, primarily due to decreased professional service fees and personnel-related expenses. Other income was RMB 13 million for Q3 compared with RMB 40 million for the same period last year, primarily due to realized damages received in the third quarter of 2023 from a favorable outcome in a broadcaster-related lawsuit and lower government subsidies. As a result, operating loss was stable at RMB 32 million for Q3 compared with the same period last year. Excluding share-based compensation expenses and amortization of intangible assets from business acquisition, non-GAAP operating loss was RMB 13 million for Q3 compared with RMB 15 million for the same period last year. Non-GAAP operating margin was negative 0.9% for Q3. Interest income was RMB 97 million for Q3 compared with RMB 128 million for the same period last year, which was primarily attributable to the special cash dividends paid in May and October 2024. Net income attributable to HUYA Inc. was RMB 24 million for Q3 compared with RMB 11 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 profit attributable to HUYA Inc. was RMB 78 million for Q3 compared with RMB 107 million for the same period last year. Non-GAAP net margin was 5.1% for Q3. Diluted net income per ADS was RMB 0.1 for Q3. Non-GAAP diluted net income per ADS was RMB 0.34 for Q3. As of September 30, 2024, the company had cash and cash equivalents, short-term deposits, short-term investments, and long-term deposits of RMB 8.1 billion compared with RMB 8.2 billion as of June 30, 2024. Finally, an update on our shareholder returns. As of the end of September 2024, we had repurchased USD 61.1 million of HUYA shares through our share repurchase program. The two special cash dividends we paid this year also returned an aggregate value of approximately USD 400 million to our shareholders. We remain committed to consolidating our financial and operating performance and creating more value for shareholders. With that, I'd like to open the call to your questions.

Operator, Operator

Thank you, Raymond. Today's first question comes from Nelson Cheung from Citibank.

Fuk Lung Cheung, Analyst

So let me rephrase the question. I would like to know about the updates on the game-related services for the third quarter and any new information for the fourth quarter. Additionally, what are the upcoming development plans for this business up to 2025, and what competitive advantage does HUYA have?

Junhong Huang, Acting Co-CEO and SVP

In the third quarter, our game-related business saw significant growth, with revenues from game-related services, advertising, and others amounting to RMB 410 million, reflecting an increase of 209.3% year-over-year and 32.9% quarter-over-quarter. This represents a record high of 26.7% of our total revenue. Regarding game distribution, we have worked closely with game developers on new launches and updates, while also encouraging broadcasters to engage in distribution services. Currently, distribution revenue constitutes the largest part of our game-related services income, although it's important to note that this revenue is recognized net of revenue sharing with game developers, meaning the actual business volume and growth are considerably higher. During the third quarter, the total gross receipts from games distributed via HUYA's channel surged to over 20 times compared to the same period last year. Looking ahead, we will continue to enhance distribution services for a broader range of games, including both mobile and PC platforms, and will strengthen our collaborations with more game developers. Additionally, we will implement targeted initiatives for broadcasters to promote more personalized user services, which will boost users' interest in interacting with the games available through our platform.

Unknown Executive, Unknown

We have strengthened our cooperation with major games and in-game item sales by launching exclusive and customized in-game items for our platform and broadcasters, alongside promoting initial release events for these items. For example, in the third quarter, we held a cross-fire event offering exclusive game schemes. We also had an initial exclusive release of co-branded game schemes featuring a well-known broadcaster, which were sold during that broadcaster's stream. Both initiatives received an enthusiastic response from our users, particularly during the initial release event where the total value of co-branded skins sold exceeded RMB 50 million, validating the growth potential of our in-game item sales business. Regarding game advertising, we responded to the increase in marketing demand during the summer with promotional activities for new game launches and anniversary events for existing games. We enhanced our game promotion and marketing capabilities through streamer-created and in-house produced content while continuing to expand our advertiser base.

Junhong Huang, Acting Co-CEO and SVP

Overall, we believe HUYA has several key advantages in the continued development of game-related services. First, our platform has a high-quality gaming user base, with the average revenue per user for several games we distribute being higher than the overall gaming market, which indicates significant commercial potential. Second, our broadcasters actively promote game-related services, understand users' gaming needs, and participate in revenue sharing, leading to mutual benefits. Third, HUYA has established long-term partnerships with various game developers through our live-stream business, laying a solid foundation for deeper collaboration on game distribution and in-game item sales. Additionally, we are enhancing our collaboration with multiple content platforms and selectively distributing HUYA's game live streams and video content across the Tencent ecosystem and other platforms. As of September this year, HUYA's content ecosystem reached over 140 million users, including our mobile users and those from other platforms, and we expect it to continue growing. By effectively collaborating to reach a broader game audience, we can explore more commercialization opportunities.

Unknown Executive, Unknown

Finally, I want to mention that since revenue from game-related services, particularly distribution, is closely tied to gaming revenue, the income from this area may be influenced by the seasonal trends of the gaming industry as we gradually expand this business. For instance, peak seasons typically occur during holidays, and there can be variations between quarters. According to public statistics, the domestic gaming market sales revenue surpassed RMB 300 billion in 2023. Overall, the market potential for HUYA remains vast. We will continue to seek various forms of collaboration with more game developers to drive business growth.

Operator, Operator

And our next question comes from Thomas Chong from Jefferies.

Thomas Chong, Analyst

In the third quarter, our live streaming revenue continued to be affected by the current macroeconomic conditions and the industry environment, with users showing a reluctance to spend on tipping. At the same time, as part of our strategic transformation, we actively adjusted our business structure and adopted a cautious operational strategy. Nevertheless, we have seen significant growth in revenues from game advertising. User behavior indicates that the engagement levels of our core users in live streaming have remained fairly stable.

Junhong Huang, Acting Co-CEO and SVP

Due to external factors, we currently expect live streaming revenue to face short-term pressure. However, we believe that an improvement in the external economic environment will occur in the future, and the business will still have some flexibility. We will closely monitor market conditions to adjust our operational activities accordingly. Additionally, we will continue to invest in live streaming content, optimize the broadcaster and user ecosystem, and constantly improve our technology and products to create a differentiated HUYA live streaming experience. We aim to maintain and enhance user engagement to prepare for more diversified commercialization forms in the future. In the long run, we expect that with the expansion of game-related services, advertising, and other revenue streams, the overall business will achieve relatively stable development.

Operator, Operator

Now we will take our next question. It's from Lei Zhang from Bank of America.

Lei Zhang, Analyst

Can you provide more insight into what caused the change in margins for Q3? Additionally, how should we view our margin trend moving forward?

Raymond Peng Lei, Acting Co-CEO and CFO

In the third quarter, our gross profit margin was 13.2%, which is a slight decrease from both the second quarter and the same period last year. During this quarter, we focused on optimizing our content costs, reducing broadcaster signing expenses compared to last year. We also enhanced our licensed content procurement strategy to secure better commercial terms, leading to savings on unlicensed content costs. Despite these efforts, the cost savings this quarter weren't enough to counterbalance the decline in live streaming revenue. Regarding operating expenses, we have made continuous strides to improve operational efficiency, particularly by better managing our sales expenses, resulting in a total operating expenses reduction of 20.9% year-over-year. Overall, our operational performance remained relatively stable, with a non-GAAP net profit of RMB 78 million. Regarding future profit trends, we believe several factors will be important. We must consider changes in overall revenue scale, including seasonal fluctuations in various businesses. Additionally, we will continue to adjust our cost structure to improve the synergy between broadcaster costs and revenues. On the professional content side, we signed a second supplemental licensing agreement for a series of League of Legends matches in September, which reduced related licensing fees. We believe this will further optimize overall licensed e-sports events costs this year and in 2025. However, quarter-to-quarter, since the major S14 event will mainly occur in the fourth quarter, the licensing costs for this event are expected to be higher in the fourth quarter than in the third. For self-produced content that yields good investment returns, we plan to increase investment in this area to create more impactful and commercially valuable event IPs, such as hosting the second season of the League of Legends Cup this month, building on the success of its inaugural season. Nevertheless, we expect that the gross profit margin in the fourth quarter will show a noticeable improvement compared to the low base from the same period last year. Therefore, we anticipate that the non-GAAP results for Q4 and the entire year will also show significant year-over-year growth.

Operator, Operator

Now we will take our last question today from CICC.

Unknown Analyst, Analyst

My question is about our shareholder return strategy. Could management provide an update on our capital allocation strategy and the shareholder return plan moving forward?

Raymond Peng Lei, Acting Co-CEO and CFO

As of the end of September, HUYA held approximately RMB 8.1 billion, about USD 1.15 billion in cash and cash equivalents, which remained stable compared to the end of June, partially influenced by the fluctuations in the U.S. dollar exchange rate. In October, we paid a special cash dividend of USD 215 million. Currently, the company still has approximately USD 900 million in cash and cash deposits, with about half of it held overseas, and the company has no debt. The overall strategy for cash usage is similar to what we mentioned in the last earnings call. We have sufficient cash to fund our daily operations and business development. While consolidating our financial fundamentals, the company will continue to allocate some funds for potential business development and as a reserve under uncertain external conditions. We will also remain open to suitable opportunities and investment projects related to the industry chain to seize industry development opportunities. At the same time, we will continue to emphasize shareholder returns. This year, we have returned approximately USD 400 million to our shareholders through a special cash dividend. In the future, we intend to share the company's profits and surplus cash with our shareholders. Future dividend plans, including amounts and timing, will depend on further review and approval by the company's Board of Directors. Regarding share repurchases, based on our up to USD 100 million repurchase plan as of the end of September, we had repurchased USD 61.1 million worth of HUYA's shares. In the future, we will comprehensively consider market conditions and stock liquidity when formulating our execution strategies.

Operator, Operator

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 with you again next quarter. Thank you.