Earnings Call Transcript - HUYA Q3 2021

Operator, Operator

Hello, ladies and gentlemen. Thank you for standing by for the Third Quarter 2021 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'll now 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 2021 Earnings Conference Call. The Company's financials and operating 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 these 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 our audited GAAP financial information, as well as our audited non-GAAP financial measures. Huya's press release contains a reconciliation of our audited non-GAAP measures to the audited most directly comparable GAAP measures. I will now turn the call over to our CEO, Mr. Rongjie Dong. Please go ahead.

Rongjie Dong, CEO

Hello, everyone. Thank you for joining our conference call today. In the Third Quarter of 2021, we achieved solid results together. Our mobile units reached record-high levels and we continue to steadily grow our topline. Huya Live's mobile MAUs reached 85.1 million in the Third Quarter, up 15% year-over-year and 10% quarter-over-quarter. Strong user growth was mainly driven by our comprehensive content offerings, operational activities, and continued promotion efforts during the summer E-sports events. The next segment retention rate for our Huya Live app also remained at over 70%. As a technology-driven platform, we have been continuously focused on product and service upgrades to deliver a more fun and immersive experience to our users. In particular, we actively promoted the development and application of more interactive features in live streaming, supporting broadcasters’ ability to produce quality content more conveniently, making it easier for our users to participate while viewing live streams. I will now provide you with some updates on those initiatives. Our open platform for third-party applications has been up and running for almost two years. By the end of September, more than 290 tools had been launched on this open platform, and over 888,000 broadcasters covering our core categories, including E-sports and gaming, had used it. In particular, the recently added data capabilities for more multi-user participation, like drawing and get-togethers, are now quite popular. More users can join the streaming and interaction, and the dollar chips sent by users can also yield better results, increasing the interactivity between broadcasters and helping users to effectively level up and strengthen the monetization capabilities of our broadcasters. In August, we introduced our feature called one-click to join broadcasters’ gameplay, which was first applied in PeaceKeeper Elite channels. With this interactive gaming function, users can team up with streamers to play games while launching live streaming sessions. The gift drop feature we released earlier this year is now available in more games, including the latest League of Legends: Wild Rift. Through our cooperation with game studios, gift drop will be triggered in a live channel for users to claim game items after downloading the new game, achieving a certain length of viewing time or when broadcasters hit a certain queue. It enhances engagement in the streaming while participating in the game itself. We believe the introduction of this interactive feature not only offers more innovative gameplay for our users and the broadcasters but also improves the uniqueness of Huya to game studios. More importantly, it opens up more opportunities for deep penetration into the game value chain. In terms of streaming technologies, we recently added HDR support to our E-sports tournament streaming, enabling users to enjoy more dedicated game scenes compared to the existing ultra HD experience. While leveraging our self-recognizing technology for game live streaming, the newly launched AI caption function identifies accurate game terms as well as player and team names, providing real-time subtitles for live events along with our live event instant playback. With simultaneous multi-screen viewing functions, we have been able to provide the best tournament viewing experience so far in the recently concluded 2021 season of the League of Legends World Championship. Supported by the above-mentioned data, technologies, and our operational expertise, we continued to hold our leading market share in broadcasting worldwide in 2021. In light of the dynamic business environment, it is pivotal for us to strengthen our competitive advantages. This primarily resides in fostering and retaining streaming talent, producing quality content, and delivering technology and product innovations. We are also confident that we can capture the opportunities brought by new game launches. In recent quarters, there has been more regulatory attention surrounding our industry. We believe that the intention is to better regulate the space and promote its healthy long-term development. We have been closely monitoring and following the regulatory guidelines, and we will continue to strengthen our operations in accordance with the regulatory requirements. Despite the potential impact of regulatory changes on our near-term growth, we believe in our agility and ability to remain competitive and relevant to create long-term value as we continue investing in quality content, upgrading products, increasing our growth, improving monetization, and solidifying our leading position in the game live streaming market. With that overview, I will now introduce our VP of Finance, Ashley Wu, who has been with Huya for years and has extensive Company and industry knowledge. She will provide you with our operating metrics in more detail and our financial assessment. Ashley, please go ahead.

Ashley Xin Wu, VP of Finance

Thank you, Mr. Dong, and hello everyone. Following Mr. Dong's remarks, I will start with an update on our content enrichment and diversification initiatives. E-sport is at the core of our content ecosystem, and we have been committed to bringing more high-quality and popular E-sport content to game enthusiasts. During the Third Quarter, we broadcasted 131 third-party E-sport events, generating total viewership of 590 million. LPL Summer, Honor of Kings World Champion Cup, and LCK Summer were among the most watched events in the Third Quarter. Our exclusively broadcast comprehensive regional tournament, including the national electronic sport tournament and E-sport Championships East Asia, were also well-received by users. Although some key licensed events were temporarily delayed during the season, we added more professional and comprehensive content in comparison with last year's schedule. In the Third Quarter, we broadcasted 58 self-produced E-sport tournaments and entertainment shows, with total viewership reaching 142 million, growing over 40% year-over-year. Among the E-sport tournaments that we produced, the Huya All-Star Cup has become a signature event for PeaceKeeper Elite. During this event's summer season, we invited top professional players and well-known broadcasters from multiple live streaming platforms in China as well as several international teams to team up and compete, making it especially popular. During this period, we also hosted the World Cup for CrossFire Mobile, CrossFire HD, and Naraka Bladepoint, all of which further complement the content for those game titles already on the Huya platform, gaining traction with game lovers. Notably, our cup for League of Legends held in August quickly attracted users' attention before the formal launch of this much anticipated game. In addition, during the period of HoK World Champion Cup, we produced a complementary program integrating professional gameplay analysis with a variety show. It is the first of its kind for this tournament. We believe it was a success, attaining a viewership of over 12 million during the Third Quarter. Regarding our long-standing shows, Huya Kungfu continues to be a top-performing program. In September, we introduced Huya Music Pub, our first music program. This program invites well-known musicians to share their stories, further enriching our pan-entertainment offerings. We continue to strengthen our efforts for videos by encouraging streamers to also become video content creators. In the Third Quarter, average MAUs who watched videos on our platform increased to approximately 14 million, representing quarter-over-quarter growth of 30%. Moving on to our international expansion progress, the average MAUs of Nimo TV, our overseas game live streaming platform, increased to more than 28 million in the Third Quarter, with overseas revenues seeing over 200% year-over-year growth. The sequential user growth was driven by certain regional E-sport tournaments, particularly in Southeast Asia. As we continue to deepen our relationships with local content providers and game companies, we are also refining our cooperation with local talent for more sustainable and healthy future revenue growth. Next, I will walk you through our financial highlights. In the Third Quarter, our total net revenues were approximately RMB 3 billion, up 6% year-over-year. Our live streaming revenue was RMB 2.6 billion for the quarter, a slight decrease from the same period last year, primarily due to lower average spending per paying user of Huya Live, which was partially offset by the increase in overseas live streaming revenues. The number of paying users for Huya Live reached 6 million, flat compared with the same period last year. Nevertheless, our paying user numbers improved compared with the Second Quarter and were in line with our mobile MAU expansion trends. The usual low spending from newly active paying users has resulted in a lower ARPPU in the Third Quarter. Advertising and other revenues increased by 137% year-over-year to almost RMB 374 million in the Third Quarter, primarily driven by revenues from content licensing. Profit levels in the Third Quarter were impacted as we invested in media content. Our non-GAAP gross profit was RMB 516 million, with a non-GAAP gross margin of 70.3%. Our non-GAAP operating profit was RMB 154 million, with a non-GAAP operating margin of 5.2%. Our non-GAAP net profit was RMB 180 million with a non-GAAP net margin of 6%. Cost of revenues increased by 12.6% to RMB 2.5 billion for Q3, primarily attributable to the increase in revenue sharing fees and content costs. Revenue sharing fees and content costs increased by 16.3% to RMB 2.12 billion for Q3. Bandwidth cost decreased by 14.2% to RMB 178 million for Q3, primarily due to improved management and technology enhancement efforts. Research and development expenses increased by 12.9% to RMB 206 million for Q3, primarily due to increased personnel-related expenses. Sales and marketing expenses increased by 59.5% to RMB 229 million for Q3, primarily attributable to increased marketing expenses to promote the Company's content, products, and brand name, particularly including marketing activities for E-sport events during the summer vacation. General and administrative expenses decreased by 32.6% to RMB 80 million for Q3, primarily due to lower share-based compensation. As a result, operating income decreased by 62.7% to RMB 83 million for Q3. Interest and short-term investments income was RMB 63 million for Q3, compared with RMB 76 million for the same period of 2020. Income tax expenses decreased by 90.9% to RMB 41 million for Q3. Share of income from equity investments, net of income taxes was RMB 379 million for Q3, primarily attributable to investment income related to a disposal of equity investments. Net income attributable to Huya Inc. was RMB 524 million for Q3, compared with RMB 253 million for the same period of 2020. Non-GAAP net income attributable to Huya Inc., which excludes share-based compensation and gains on fair value changes and disposals of equity investments, net of income taxes was RMB 180 million for Q3 compared with RMB 361 million for the same period of 2020. As of September 30, 2021, the Company has cash and cash equivalents, short-term deposits, and short-term investments of RMB 11.12 billion compared with RMB 10.74 billion as of June 30, 2021, primarily due to a cash inflow from the equity investment disposal mentioned above. With that, I would now like to open the call to questions.

Operator, Operator

Thank you, ladies and gentlemen. For the benefit of all participants in today's call, if you wish to ask a question to Management in Chinese, please immediately repeat your question in English. Once again, ladies and gentlemen, your first question comes from the line of Thomas Chong from Jefferies. Please go ahead.

Thomas Chong, Analyst

Thanks, Management, for taking my questions. I have two questions from my side. The first question is, can management comment on the performance of S11? And number two is about our expectations regarding the user trend and revenue expectations. Thank you.

Rongjie Dong, CEO

The S11 actually took place last weekend. We are very happy to see that this event has caused sensational outcomes in the world of games. We are thrilled to see that another LPL team entered into the final and took the title in the end. We believe that the influence of this event is expanding. During the entire S11 period, Huya continued to lead in market share. During this event, Huya saw new records for viewership, especially for peak concurrent users. This year, viewership is actually two times higher than last edition, and it has recorded the highest peak concurrent users in Huya’s history. During this tournament, we launched operational activities together with Tencent and also introduced a mobile game based on the tournament, both of which delivered outstanding results. We will continue to improve our live streaming technologies to optimize viewer experiences.

Ashley Xin Wu, VP of Finance

Now, I will talk about the users and revenue expectations in Q4 and next year. Overall speaking, we expect our users to continue growing. Despite some seasonal changes, we believe that our investment in content will help us to enhance our viewership. We also expect a positive impact from the recent new game launches, as well as tournament events. New games have always been an important source for our users. Winning the S11 title and E-sport becoming an official event in the Asian Games will both create a very positive impact for our viewers and help us reach a wider audience. Therefore, we believe that our potential user growth will continue to increase. Regarding revenue, we do believe that it is somewhat influenced by the micro-environment and the live streaming sector as a whole. Our target is to maintain a higher-than-average growth pace and continue growing in the years to come.

Operator, Operator

Thank you. Our next question comes from Yiwen Zhang from China Renaissance. Please go ahead.

Yiwen Zhang, Analyst

Thanks for taking my question. I have two questions regarding League of Legends mobile. Firstly, it's exactly one month since the game launched. Can you share more details on the new users from this title? Secondly, can you discuss the preparations made for League of Legends mobile, including streaming recommendations and self-organized tournaments?

Rongjie Dong, CEO

You're right by saying that League of Legends mobile was launched about one month ago, and Huya platform continued to take a significant market share. Currently, the user or viewership performance is better than other games such as PUBG. However, we will continue to monitor performance as we move forward. League of Legends mobile is not replacing users from League of Legends PC or Honor of Kings. We have the confidence to gain more viewers and users from live streaming for this mobile game. In preparation for the launch, we've done a lot of operational work. For instance, we signed several live streamers and partnered with talent agencies. Since the launch, we organized numerous tournaments and events to create opportunities for our live streamers to showcase their talents. Currently, we have signed over 1,000 streamers and partnered with numerous professional teams. We would also consider acquiring licensed tournaments in China for domestic leagues as well as other key tournaments on top of organizing our own events.

Hanyu Liu, Investor Relations

Next question, please.

Operator, Operator

Thank you. Next question comes from Lei Zhang from Bank of America Merrill Lynch. Please ask your question.

Lei Zhang, Analyst

Hi. Two questions here. First is on margin trends. Can you give us more insight on margin trends, especially any changes in revenue sharing and content costs? Secondly, what are your updates on your strategy regarding E-sports tournaments and how should we view the tournaments-related costs in the future?

Ashley Xin Wu, VP of Finance

In order to improve our competitiveness and better serve our users, we stepped up our efforts in putting more resources into content since Q3, including more investments for our content creators, as well as self-produced, high-quality content and licensed tournament content. Regarding revenue sharing with our live streamers, we are working to give more incentives for live streamers according to market dynamics while maintaining the basics of our revenue sharing mechanisms. As for margin levels, there are some seasonal changes due to the scheduling of our operational events and tournaments, especially in Q4, since a number of big events are scheduled towards the end of the year. This generates some impact on our tournament and operation costs related to content.

Rongjie Dong, CEO

Regarding tournaments and their IP costs, we believe that E-sports will remain quite popular moving forward, especially post the S11 final title and the Asian Games. Therefore, the costs for top-tier tournaments will likely increase in the future. On the other hand, long-tail or new tournaments really depend on the promotion by streaming platforms, thus those costs may remain relatively flat. We also recognize that self-produced content is a crucial source for Huya—this type of content creates better value and is unique to our platform. We will continue to invest in this area, hoping to raise the percentage of such content from the current level to around 10% to 20% in the coming years.

Hanyu Liu, Investor Relations

Next question, please.

Operator, Operator

Next question comes from Ritchie Sun from HSBC. Please go ahead.

Ritchie Sun, Analyst

I will translate my questions myself. Firstly, I want to ask about the competitive landscape dynamic. How has that been trending? Without M&A and with ongoing intense competition, how should we think about long-term net margin levels for the platform? Secondly, can you share the progress made in gaming video? You mentioned the MAUs of 40 million. How about user time spent, retention, and monetization plans?

Rongjie Dong, CEO

On the competition landscape, since we are not joining hands with DouYu and have become competitors again, we believe that, in recent quarters, the overall competitive landscape for game live streaming has not changed much. Compared with DouYu, we have much better operational efficiencies, outperforming in users and revenues. Although our peers are increasingly investing in live streaming for E-sports, we remain a professional platform for E-sports. We rely on our core competitiveness and will continue to strengthen our positioning. Over time, as we accumulate more professional know-hows and experiences in running E-sports, we also hope to diversify our business models, relying on self-produced content for instance.

Ashley Xin Wu, VP of Finance

On the question of video content production, our MAUs have reached 40 million since Q3, representing an increase of about 30% compared to Q2. We believe the video business is a natural extension of our live streaming business. A lot of video content originates from events and tournaments, focusing primarily on editing and reproducing the live streaming contents. Our significant advantage is that we have abundant content origins and a strong ability to edit and reproduce them into videos. We encourage live streamers and talent agencies to create video content, and we provide various new features, such as highly efficient editing tools. We can use AI technology to identify key moments and generate video clips automatically, which is a positive feature for producing content for short-form videos.

Hanyu Liu, Investor Relations

Next question, please.

Operator, Operator

Thank you. Next question comes from Bryan Gong from CTP. Please ask your question.

Bryan Gong, Analyst

Can management share your latest view on the impact from the regulation of gaming and game live streaming towards our operations and fundamentals? Has there been a change to our strategies following the latest regulation?

Ashley Xin Wu, VP of Finance

In recent months, our industry has received significant regulatory attention. We believe the purpose is to regulate the industry better and promote a healthy long-term growth. We've been keeping an eye on regulatory changes to ensure that our business operations are in full compliance. Although there may be some short-term changes in revenue or user growth due to regulatory changes, we are confident in our ability to mitigate the impact on our business and actively address our products and operations to cater to user demands while being compliant. We will continue to invest in quality content production, upgrade our products, and consolidate our competitiveness. For the long-term, we believe that this will help us better serve our users and generate long-term value.

Operator, Operator

Thank you. Our final question today comes from Tian Hou from T.H. Capital. Please go ahead.

Tian Hou, Analyst

Could management provide some insight on your overseas business development and your plans or thoughts regarding cooperation with Tencent going forward?

Ashley Xin Wu, VP of Finance

Thanks to tournaments and local operational activities, our MAU in overseas markets reached 28 million. Our revenue from overseas markets has increased by over 200% year-over-year, with stellar performance particularly in Indonesia. Our main strategy for overseas expansion is to cultivate our markets through local partners, expand our user base, and enhance monetization abilities. We are refining our cooperation with local talent agents for sustainable ecosystem building in overseas markets. In the short term, the overseas market will remain in the investment stage, but operational losses will decline as a percentage of our margin level. Our cooperation with Tencent remains strong, especially in areas concerning games. This year, we launched new features to improve interactivity between live streamers and users, and we had notable success with these new features.

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 on our website. Thank you.

Operator, Operator

Now this concludes the conference call. You may disconnect your line. Thank you.