Earnings Call Transcript - HUYA Q1 2023

Operator, Operator

Hello, ladies and gentlemen, thank you for standing by for the First Quarter 2023 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 first quarter 2023 earnings conference call. The company's financial and operational results were issued earlier today and are posted online. You can also view the earnings press release by visiting the IR website at ir.huya.com. A replay of the call will be available on the IR website in a few hours. Participants on today's call will be Mr. Rongjie Dong, Chief Executive Officer of Huya, and Ms. Ashley Wu, Vice President of Finance. Management will begin with prepared remarks and the call will conclude with a Q&A session. Before we continue, please note that today's discussion will contain forward-looking statements made under the Safe Harbor 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. 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 we have 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, Ashley Wu, who will read today's prepared remarks on behalf of Mr. Dong. Please go ahead.

Ashley Wu, VP of Finance

Hello everyone. Thank you for joining our conference call today. I'm pleased to deliver the following brief remarks on behalf of Mr. Dong. In the first quarter of 2023, amidst the soft macro environment and seasonal headwinds, we achieved steady development, maintaining a stable user scale year-over-year and delivering total net revenues of RMB1.95 billion and non-GAAP net income of RMB 85.5 million. During the quarter, we continued to make improvements in our content offerings, product, and technology in preparation for a more favorable market environment ahead. On the user side, Huya Live mobile MAUs reached 82.1 million in the first quarter, up slightly compared with the same period last year. The first quarter is typically a low season for live streaming activities due to the Chinese New Year holidays. Furthermore, given China's reopening early in the first quarter this year, users and broadcasters dedicated more time to offline entertainment activities. With this in mind, we continue to spend prudently on promotional and marketing channels, reaching a 37% year-over-year decline in sales and marketing expenses in the first quarter. We believe our appealing e-sports and entertainment programs offering, as well as our continued efforts to enhance our process with interactive features help us sustain user engagement during the period. We have been closely monitoring changes in the dynamic market environment and striving to quickly and flexibly refine our content and operational strategies to better meet our users' needs. Next, let me share with you some updates on our recent product and technology development. In March, we held Huya Boom Night, our annual gala event and our first large-scale offline event after more than a year. Huya Boom Night recognizes and rewards our broadcasters, talent agencies, and various business partners, and our most popular streamers. This year, we also introduced a virtual stage for the gala's live broadcast for the first time, representing an upgrade from the virtual e-sports venue we launched last year. With this virtual stage, online viewers felt as if they were on-site in an immersive live atmosphere. We also added the greatest interaction features to make this viewing experience even more fun and exciting. For example, we were assessing the virtual screen and were able to join live performances, showing their support through their Avatar costumes and decorations and vote for their favorite team. Most of our viewers also had access to our interactive graffiti tools, which allow them to draw pictures and graffiti designs and simultaneously display them on the screen of the live stage for the on-site audience to enjoy. Encouragingly, the number of total online interactions and the popularity index of this event on our platform also increased significantly. We believe features like these help to promote the integration of online and offline performances and thus enable cooperation and interaction with users. Building on the success of this flagship event, we plan to bring these features to our broadcasters and users in more scenarios in the future. Recently, the interactive game category on our platform has been gaining more traction as interactive games allow viewers to directly engage with broadcasters and influence game outcomes in real-time, creating a highly interactive and engaging experience. In response, we have introduced several interactive games through our Huya mini tool open platform, enabling broadcasters to select and apply those tools during their streaming section. Currently, our most popular interactive game features streamers and relationships built while user participation in competition through gifting and bullet chatting. This offers real-time interaction between broadcasters and viewers from the platform. Although still at an early development stage, our interactive game category is gradually cultivating its core audience. We will continue to release upgrades to our existing tools and welcome additional high-quality interactive games to our platform in an effort to bring more monetization opportunities to our broadcasters. We are also focusing on further building gamification elements and integrating interactive content into live streaming sections for a more dynamic and engaging interaction effect, thereby increasing real-world engagement. As more game titles have received approval in China in recent months, we also plan to diversify our operational activities and deepen our core operation with game companies to seize the opportunities brought by new game launches. For example, through our Gift Drop feature, broadcasters and viewers can gift exclusive game tools and other free gifts for use in new games. We are also organizing platform-based competitions for new games, inviting popular broadcasters to participate, leveraging our strong ability to monitor new games and our proven success in game promotions. We are confident we can identify and offer attractive new game content and enhance new games' popularity, thus further solidifying our leading position in the game's live streaming market and increasing our presence in the game value chain. While we're still facing some external uncertainties in the near term, we remain positive about the overall market recovery process. Our efforts across content enrichment, product advancement, and exploration of commercial opportunities, as well as our cost improvements in operational efficiency, are setting the stage for our long-term development. Also, as Tencent recently increased its holding of Huya's shares, we look forward to deeper collaboration with Tencent Group and enjoy the synergies we can create together. We will continue to seek growth opportunities as the business environment rebounds with an eye to creating sustainable value for our users, broadcasters, and all other stakeholders. This concludes Mr. Dong's remarks. Now I will continue with some updates on our content enrichment and diversification initiatives. During the first quarter of 2023, we broadcasted around 35 third-party professional e-sports tournaments, attracting a viewership of over 400 million. While we experienced a gradual uptick in the number of professional talents, starting from the beginning of this year, the overall quantity of tournaments in the first quarter was lower than that of Q1 last year, primarily due to our stricter content procurement policies and some scheduling disruptions immediately following China's reopening. Our most popular events during the quarter included LPL Spring, KPL Spring and CFPL, as well as our exclusive broadcast of LCK Spring and CS:GO tournament, EPL Season 17, and IEM competitions. We also broadcasted around 15 self-organized e-sports channels and entertainment PGC shows in the first quarter, generating total viewership of approximately 77 million. Two stand-outs this quarter were Huya Zhanshen Cup for Peacekeeper Elite and other associated tournaments. Our partnership with CFM enabled our viewers to create a variety of Huya custom game tools while watching these cup matches, showcasing our cross-promotional capabilities. As we strive to enrich our content calendar, we launched Huya-related events that captured the attention of streamers across our platform. As always, we will dramatically adjust our offering of self-produced tournaments and programs according to users' interests in order to complement the licensed professional content supply on our platform. In addition, during our annual gala period in March, we hosted an e-sport event, Huya Boom Night, inviting popular streamers, celebrities, and professional players to compete among titles including League of Legends and Honor of Kings. These large e-sports events not only engage a wide audience, both online and on-site, but also help promote more e-sports culture exchanges among youth groups in the Guangdong, Hong Kong, and Macau Greater Bay area. Next, let me provide some color on our operational optimization efforts. In the first quarter, our content licensing costs decreased significantly year-over-year and quarter-over-quarter, primarily due to the pricing term adjustments following the amended licensing agreement for League of Legends matches in January, as well as our reduced procurement and production of licensed and self-organized content. We also continue to realize savings in broadcaster-related costs and bandwidth usage through detailed ROI analysis and efficient use of technical resources. As a result, we achieved a nice rebound in our gross margin, nearly reaching the first quarter of 2022's level despite lower total revenues this quarter. We also solidified our efficiency gains, reducing our total operating expenses in the first quarter by 26% year-over-year and 7% compared with the previous quarter. Therefore, we narrowed our operating loss and achieved a positive net profit this quarter. I also would like to point out that while we expect overall tournament content costs to decline this year compared to 2022, tournament content costs will still weigh more heavily in the second half of the year due to the seasonality of event schedules. This may create some ongoing fluctuations in our profit level. Next, moving on to our Q1 financial details. Our total net revenues were RMB1.95 billion for Q1, a decline from RMB2.46 billion for the same period last year. Live streaming revenues were RMB1.86 billion for Q1 compared with RMB2.15 billion for the same period last year. The decrease was primarily due to a decreased number of paying users on Huya Live as the macro and regulatory environment continue to adversely affect paying user sentiment. Advertising and other revenues were RMB89.3 million, a decline from RMB313 million for the same period last year. This was primarily due to a significant decrease in content sub-licensing revenues, as well as soft demand for advertising services resulting from the challenging macro environment. As we mentioned previously, following our amended licensing agreement for League of Legends matches in January, we no longer own the licensing rights for LPL matches during the 2023 to 2025 period. While the sub-licensing of those LPL matches was a primary contributor to our content sub-licensing revenues in 2022. Cost of revenues decreased by 25% year-over-year to RMB1.69 billion for Q1, primarily due to decreased revenue sharing fees and content costs, as well as bandwidth costs. Revenue sharing fees and content costs decreased by 18% year-over-year to RMB1.49 billion for Q1, primarily due to the decrease in revenue sharing fees associated with the decline in live streaming revenues and lower costs related to the e-sport content as well as content creators. Bandwidth costs decreased by 44% year-over-year to RMB94 million for Q1. This was primarily due to improved bandwidth cost management and continued technology enhancement efforts, as well as less bandwidth usage as a result of strategic adjustments in our overseas business to remain focused on key markets. Gross profit was RMB256 million for Q1, primarily due to lower revenues. Gross margin was 13.2% for Q1. Excluding share-based compensation expenses, non-GAAP gross profit was RMB265 million and non-GAAP gross margin was 14.6% for Q1. Research and development expenses decreased by 22% year-over-year to RMB152 million for Q1, primarily due to decreased personnel-related expenses and share-based compensation expenses. Sales and marketing expenses decreased by 37% year-over-year to RMB91 million for Q1, primarily due to decreased marketing and promotion fees, as well as personnel-related expenses. General and administrative expenses decreased by 16% year-over-year to RMB68 million for Q1, primarily due to decreased personnel-related expenses and share-based compensation expenses. Other income was RMB4 million for Q1 compared with RMB28 million for the same period of 2022, primarily due to lower tax refunds and government subsidies. As a result, operating loss was RMB51 million for Q1 compared with RMB60 million for the same period of 2022. Interest and short-term investment income were RMB96 million for Q1 compared with RMB59 million for the same period of 2022, primarily due to increased interest rates. Net income attributable to Huya Inc. was RMB45 million for Q1 compared with a net loss attributable to Huya of RMB3 million for the same period of 2022. Non-GAAP net income attributable to Huya Inc. was RMB86 million for Q1 compared with RMB47 million for the same period of 2022. Non-GAAP net income margin was 4.4% for Q1. Diluted net income per ADS was RMB0.18 for Q1. Non-GAAP diluted net income per ADS was RMB0.35 for Q1. As of March 31, 2023, the company had cash and cash equivalents, short-term deposits, short-term investments, and long-term deposits of RMB10.3 billion compared with RMB10.7 billion as of December 31, 2022. With that, I would now like to open the call to your questions.

Operator, Operator

Thank you. We will now start the question-and-answer session. The first question comes from Ritchie Sun from HSBC. Please go ahead.

Ritchie Sun, Analyst

Thank you management for taking my questions. I will translate it myself. So after reopening, we have seen more offline entertainment activities coming back. So how does the impact of these platforms, live streaming platforms like Huya, reflect in terms of user behavior as well as consumption? Thank you.

Rongjie Dong, CEO

In the first quarter of this year, the behavior of users and streamers on our platform was mainly affected by the following aspects. Generally speaking, the Chinese New Year period used to be the off season for live broadcast activities, and the frequency of the streamers was usually reduced with fewer corresponding events, thus affecting the viewing. In addition, the Chinese New Year this year was earlier than previous years, coupled with a high number of infections among streamers. Therefore, it affected the behaviors of users and streamers. With the optimization of prevention and control measures across the country, we noticed that some users and streamers shifted to offline entertainment activities in a compensatory manner, which affected the live streamers and the users' viewing in the short term, especially the viewing frequency and duration of the long-tail users. Thus affecting the users' consumption on the platform to a certain extent. We believe that these impacts are relatively temporary, and overall, we expect that our users' viewing will gradually recover and become more stable. In the second quarter of this year, there are some short vacations which have increased traveling and other entertainment activities among our users, causing some fluctuations in the viewing times on our platforms. Consequently, we will continue to monitor user and streamer behaviors and provide appropriate content and operational activities further. Despite these external influences, we continue to fine-tune our content and products in order to strive to increase user participation. Our aim is to maintain a steady growth of our user scale in the first quarter on a year-over-year basis, while maintaining prudent spending on promotion channels. For example, we have upgraded the virtual e-sports menu that was launched last year, bringing in more interactive virtual stages to the annual grand gala of Huya. The total number of online interactions of this activity also exceeded the records of previous parties. This feature is conducive to better integration of online and offline content within the context of increased offline activities. We also plan to further expand these applications and technologies and offer these functions to more live broadcasting scenarios. The video content and community functions provided on the platforms are also conducive to users' consumption of content during the non-live broadcast period.

Hanyu Liu, Investor Relations

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

Operator, Operator

Thank you for the questions. One moment for the next question. Next up, we have the line from Yiwen Zhang from China Renaissance. Please go ahead.

Yiwen Zhang, Analyst

Thanks for taking my question. My question is regarding this year's revenue trend. Can you discuss in detail regarding both live streaming and non-live streaming revenue? Thank you.

Ashley Wu, VP of Finance

We communicated this in the last quarter's earnings call. The live broadcast revenue in the first half of this year is still relatively weaker on a year-on-year basis, mainly because of the macroeconomic factors and the year-on-year impact of last year's live broadcast policy on the revenue. Although the live broadcast revenue in the first quarter still declined, our operational efforts have narrowed the decline compared to the previous quarter. As I mentioned earlier, we noticed that the recent increase in offline entertainment activities may also have some short-term influences on the revenue of live streaming activities. So we will continue to observe and monitor its impact. We remain very optimistic about the recovery of the overall economic environment and also remain positive about the future launch of more game titles. We also hope that by consolidating our position in the live game market and by seizing the opportunity with new games, we will be able to promote new forms of live broadcasting, such as live interactive games and also improve our monetization capability overseas from live broadcasting, aiming to gradually recover the revenue in subsequent quarters. Excluding the impact of the significant decline in copyright revenue caused by the revision of the copyright agreements, advertising revenue in the first quarter was also relatively low due to the seasonal and macroeconomic environment. However, we expect that the advertising business will benefit from the recovery of the market environment and increase the demand for game advertising brought by the new launch of games, so its revenue will have an opportunity to gradually recover. At the same time, we'll continue to optimize video content and the gaming community to lay a good foundation for future increases in advertisement and monetization on new games and continue to explore new revenue growth possibilities.

Hanyu Liu, Investor Relations

Thank you. Next question, please.

Operator, Operator

Thank you. One moment for the next question. Next question comes from the line of Lei Zhang from Bank of America. Please go ahead.

Lei Zhang, Analyst

Thanks management for taking my question. My first question is mainly regarding the impact from new game supply on our live streaming business this year. Secondly, can you give us an update on the cooperation with Tencent? Thank you.

Rongjie Dong, CEO

As a live platform for games, Huya is closely related to the game industry. So from the perspective of game players, the platform can provide opportunities for players to understand and discover new games and consume the relevant content after playing the game. And for the game companies, we can help them promote and expand their influence among existing game users and retain users returning with the normalization of game title approvals. New game titles will become available in the market, and we believe that this will bring more opportunities for user expansion and promote cooperative opportunities with big game companies because new games will bring an increase in the supply of live content. If this content and the new games become popular, it would greatly bolster our user growth and promote their activities on our platforms. We would also attract users and improve their viewing levels through diversified activities, including providing launch and viewing incentives and holding platform events. We can strengthen our cooperation with game companies, such as the joint launch of interactive play methods and platform-specific game props to help the users increase their participation and strengthen our role in the game industry. Compared with competitive games, those that are very attractive to users will also gain better live viewing experiences, which helps accumulate new users. For other types of games, we would allocate our resources accordingly according to the launch and viewing data to better meet users' demands. While the impact of new game titles will influence our revenue, it may take some time for live broadcasters to accumulate their core users and transition them into paying users. We will provide opportunities for them to cooperate and interact through our operational activities on the platform. Regarding our cooperation with Tencent, we have always been very close with Tencent on a business level, especially in games and events. Huya features live interactive functions in a number of Tencent-owned games, and we have dependent links between game accounts and platform accounts. This helps enhance the activity of the game while bringing users a better live viewing experience. With more games coming online, we can also promote the popularity of those new games and their relevant live content. For example, recently there's cooperation on several games that will soon be launched. We are actively cooperating with Tencent on these games. In terms of e-sports events, we've established a strategic cooperation relationship with Tencent for a number of game events. Together with our industry-leading live broadcast technologies and activities, we are able to reach a wider range of users. We have also held a number of officially licensed events and tournaments to enrich our self-organized events and content. We are exploring new cooperation opportunities by utilizing our technologies in audio, video streamers and game content, further fostering deeper cooperation and generating better synergy with Tencent.

Hanyu Liu, Investor Relations

Thank you. Next question, please.

Operator, Operator

One moment for the next question. Next question will come from the line of Jasmine Wang from Credit Suisse. Please proceed.

Jasmine Wang, Analyst

Thanks management for taking my question. After effective cost control in Q1, how should we think about cost savings in terms of COGS and operating expenses for the rest of the year? And what is the profitability trend this year? Thank you.

Ashley Wu, VP of Finance

In terms of streamer costs, the overall market competition environment has not changed significantly from the previous period, so we maintained a similar sharing ratio in the first quarter. Aside from this, we have also made some fine-tuning of the sharing policies, which enable us to provide different levels of earnings shares according to performance and demand in different categories. Specifically regarding signing fees, we have continued to conduct more stringent analysis and control on these costs. As a result, costs in the first quarter were reduced. At present, we expect that the future market trends will remain relatively stable and will continue to monitor trends among our competitors while making flexible adjustments to the streamer incentive policies. In terms of the cost of copyright events and self-organized content, we achieved effective savings in the first quarter. Firstly, the number of events was reduced due to stricter screening of event procurement and production. Simultaneously, we benefitted from better terms through the amendment of the copyright agreements. Consequently, we anticipate that costs for events and self-organized content in the whole year will be significantly lower than in 2022. It is important to note that events will be affected by rescheduling, resulting in more large-scale events and activities in the second quarter and in the second half of the year compared to the first quarter. This will likely introduce some fluctuations in our total costs associated with copyright events and content. Speaking generally, we made good progress in cost optimization during Q1. Even with a decrease in revenue, our gross profit margin significantly improved from the previous quarter, reaching levels similar to the same period last year. For the entire year, we believe our gross margin will improve compared to 2022. As for our operating costs, our total operating expenses decreased by 26% year-over-year and 7% quarter-over-quarter in Q1. Since we implemented stricter cost-cutting and efficiency improvement measures in the second half of last year, our Q1 total operating expenses have decreased by double digits for four consecutive quarters. We hope to consolidate the achievements that we've made thus far and aim for even better optimization of operating costs throughout the year. We reported a net profit in the first quarter of this year, and while profitability may experience fluctuations due to seasonality in later quarters, we are committed to narrowing losses and improving profitability capabilities throughout the year.

Hanyu Liu, Investor Relations

Okay. Thank you. Let’s have the next question please.

Operator, Operator

Certainly. One moment for the next question. Next up, we have the line from Thomas Chong from Jefferies. Please proceed.

Thomas Chong, Analyst

Thanks management for taking my question. How should we understand the current regulatory environment on live streaming and its impact? Thanks.

Ashley Wu, VP of Finance

As far as we understand, the overall live broadcast regulatory environment has not changed much compared with previous quarters. The requirements for the content, the behavior of streamers, and the protection of minors have always been relatively stringent from the government. Therefore, our industry continues to come under regulatory attention. I believe the purpose of this regulation is to better regulate the industry and promote healthy and sustainable development as a whole. Under the current environment, Huya will continue to strengthen our supervision and maintain an effective monitoring mechanism for the content on our platform. We aim to guide streamers and guilds to strengthen their compliance awareness and improve our platform's compliance capability through technical investments and operation. Last May, there was a new set of streaming-related policies from the government, and we adjusted our products and operations accordingly to ensure that we meet policy requirements, which caused some fluctuations in live broadcast revenue in subsequent quarters. We expect the impact of such policy changes on our revenue will gradually reduce after the second quarter of this year. At the same time, we will keep a close eye on policy changes by communicating regularly with our authorities and paying attention to relevant requirements, thereby better adapting our products and operations to meet policy requirements.

Hanyu Liu, Investor Relations

Okay. Thank you.

Operator, Operator

There's no further questions. Now I'd 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's Investor Relations through the contact information provided on our website. Thank you.

Operator, Operator

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