HUYA Inc (HUYA) 2018 Q2 法說會逐字稿

Good day. Hello, ladies and gentlemen. Thank you for standing by for the second-quarter 2018 earnings conference call for HUYA Inc. (Operator Instructions). Today's conference call is being recorded.

I will now turn the call over to Ms. [Hiye Lil], Investor Relations Manager for the Company. Please go ahead, Hiye.

Hello, everyone, and welcome to the second-quarter 2018 earnings conference call of HUYA Inc. 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 include Mr. David Xueling Li, Chairman of Huya, and Founder, Chairman, and Acting CEO of YY; Mr. Rongjie Dong, Chief Executive Officer of Huya; and Mr. Henry Sha, 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 US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the Company's results may be materially different from the views expressed today.

Further information regarding these and other risks and uncertainties is included in the Company's prospectus and other public filings, as filed with the US Securities and Exchange Commission. The Company does not assume any obligation to update any forward-looking statements except as required under applicable law.

Please also note that we have earnings press release and this conference call includes 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 Chairman, Mr. David Li. Please go ahead.

Hello, everyone. Thank you for joining Huya's 2018 second-quarter earnings conference call, our second earnings call as a public company. Strong results in the second quarter reflect the effective execution of our [content-driven strategy] and we are prominent position in the gaming live streaming market in China. Global e-sports has also grown into a phenomenon, attracting millions of new gamers and feeding a large base of viewership with unparalleled (inaudible) resulted and the pod from YY, the live streaming leader, and Tencent, the gaming giant. We are confident that Huya will continue to capitalize on the booming e-sports popularity, both domestically and internationally, to solidify its market leadership.

During the quarter, the management team continued to drive robust growth in the domestic market and start exploring overseas gaming live streaming market. With our superior content and growing brand recognition across a wide user base, Huya has built a powerful platform and sustainable growth. Congratulations to Rongjie, Henry, and the rest of the team for delivering another strong quarter and [making many equally] progress to position the Company for long-term success.

Now I would like to pass the call over to our CEO, Rongjie, to go through the second-quarter results in more details.

Thank you, David, and hello, everyone. I am Rongjie Dong. We delivered strong financial and operational results in the quarter, and we are encouraged by the momentum we carried into the second half of the year. Revenue in the quarter grew [125.1%] year-over-year to over RMB1 billion, exceeding our expectation. The growth came from continued increase in mobile MAUs, which reached 42.7 million in the quarter, up 24.7% year-over-year. This solid growth came despite the temporary impact of the competition for [land] share from the FIFA World Cup in June.

Currently mobile users are now generate 50% of our total MAUs, and generated over 80% of our revenue in the quarter. We focus on improving user experience on our mobile application, and we wage more campaigns to encourage users to shift from PC to mobile devices. Compelling content delivered on our differentiated and user-friendly platform has enabled us to attract new users and retain our existing users. We are confident that we will see continued growth in both mobile MAUs and the paying users over for the rest of the year.

In March, we entered into a strategic partnership with Tencent, with an expectation that we would benefit from access to Tencent's content resources, particularly in the game and e-sports area. In May, we launched NIMO TV, a separate live streaming platform with both PC and mobile, [trending] to the Southeast Asia markets. We are confident in the potential of overseas markets. Entering into the Southeast Asia market is a natural [post] step for us to tap into the international opportunities.

Within Southeast Asia, the popularity of e-sports is rising quickly. And the networks [in the future] is being improved rapidly, leveraging our first-mover advantage, along with our cooperation with Tencent. Again, we are committed to seeing further growth of [unit base] in the region and making prudent investments to establish our overseas game live streaming business.

We expect to increase spending in overseas expansion, with the aim to be one of the leading game live streaming platforms in Southeast Asia within next 12 months. We see tremendous opportunity in the development and the expansion of the e-sports market in both China and overseas, and we expect to partner with the key players in the e-sports industry to enhance our ecosystem.

In the second quarter, we broadcasted major e-sports events such as LoL midseason invitational and League of Legends professional leaders. And the tournaments we broadcasted in the quarter attracted approximately 460 million viewers. In the meantime, we are making progress in organization of our own e-sports tournaments. Notably, in the second quarter, we successfully organized Destiny Cup PUBG Spring invitational. It is one of the largest online [MMORPG] tournaments in China, with 110 participating teams. We will continue promoting our self-organized tournaments in the coming areas, covering major e-sports games.

In [land], we are confident in the opportunities presented by game live streaming and the e-sports markets, which are massive and fast-growing in both China and overseas markets. We are well positioned to execute our core business strategy with our strong competitive position and loyal and expanding user base. And we remain focused on building our innovative and content-rich platform to bring more value to our users.

With that, I will now turn the call over to our CFO, Henry, to share the financial details of the quarter.

Thank you, Mr. Dong. Hello, everyone. This is Henry from Huya. As Mr. Li and Mr. Dong described, we delivered strong results in the second quarter that reflects the growing game live streaming and e-sports market. Our strong competitive position and the successful execution of our strategy with an established foundation for delivering strong revenue growth. We are also pleased to report an increase in gross margin in the second quarter, primarily as a result of [economic] scale. With continued adoption of [P2P knowledge], we are also able to see more operating leverage on our bandwidth costs.

Going forward, controlling bandwidth costs will remain our focus, if the increase of peak concurrent new active user base and improving the new quality will continue to put pressure on bandwidth usage. This benefit improvement to gross margin was slightly offset by our spending in constant costs in the quarter. We chose to invest more in e-sports content and content creators to get prepared for the coming summer season. We also expect to benefit from these investments in future periods. While we remain diligent in our efforts to control operating costs, we are also focused on investing in our brand and improving our influence across the industry.

To that end, we expect marketing expense to increase later in the year as we roll out new content to drive brand awareness. As Mr. Dong mentioned, our overseas expansion [judged earlier] the incremental spending in our overseas business may pressure our margin slightly in the near term. But we believe we are well positioned to seize the overseas market opportunities in order to generate long-term success. Meanwhile, we will closely monitor the progress and make adjustments along the way.

Now to the details. For the second quarter of 2018, our financial results are as follows. Total revenues for the second quarter of 2018 increased by 125.1% to RMB1,038.3 million from RMB461.4 million in the same period of 2017. Live streaming revenues increased by 124.5% to RMB991.8 million in the second quarter of 2018 from RMB441.8 million in the same period of 2017, primarily due to the increase in spending per paying user and an increase in the number of paying users on Huya's platform. The increase in the number of paying users was primarily driven by higher paying ratio on our mobile app, diversification of content offerings on our platform, and our continued efforts in converting active users into paying users.

Advertising and other revenues increased by 138.1% to RMB46.5 million in the second quarter of 2018 from RMB19.5 million in the same period of 2017. This increase reflected our continued efforts to expand the advertising service business and monetize traffic and streaming content with our business partner. We streamlined the other product lines to concentrate on the advertising business, which has been keeping growing, quarter over quarter.

Cost of revenues increased by 115.9% to RMB872 million for the second quarter of 2018 from RMB403.9 million for the second quarter of 2017, primarily driven by increases in revenue sharing fees and content costs, as well as bandwidth costs.

With the cost of revenues in the second quarter of 18, revenue sharing fees and content costs increased by 130.3% to RMB661.2 million from RMB287.1 million in the same period of 2017, primarily due to the increase in sales of virtual items on Huya's platform and the continued spending in e-sports content, and content creators.

Bandwidth costs increased by 78.4% to RMB161 million in the second quarter 2018 from RMB90.3 million in the same period of 2017, primarily due to an increase in bandwidth usage as a result of increased average MAUs on Huya's platform and enhanced live streaming video quality, partially offset by our improved efficiency in bandwidth utilization by deploying new technologies in content distribution.

Gross profit increased by 189.5% to RMB166.4 million for the second quarter of 2018 from RMB57.5 million in the same period of 2017. Gross margin increased to 16% in the second quarter of 2018 from 12.5% in the same period of 2017, primarily due to our enhanced monetization efforts and better economies of scale.

Research and development expenses increased by 70.7% to RMB60 million for the second quarter of 2018 from RMB35.1 million for the second quarter of 2017, mainly attributable to increases in the salaries and welfare of research and development personnel.

Sales and marketing expenses increased by 95.6% to RMB41.7 million for the second quarter of 2018 from RMB21.3 million for the second quarter of 2017, mainly attributable to the increase of marketing and promotion expenses due to enhanced efforts in promoting our brand name and cooperating with various marketing channels.

General and administrative expenses increased by 395.2% to RMB88.5 million for the second quarter of 2018 from RMB17.9 million for the second quarter of 2017, mainly due to the increase in share-based compensation expenses related to the share awards newly granted in the first quarter of 2018, and increase in salaries and welfare of management personnel.

Operating loss was RMB17.3 million for the second quarter of 2018 compared with an operating loss of RMB16.8 million in the same period of 2017. Non-GAAP operating income, which excludes share-based compensation expenses, was RMB56.8 million for the second quarter of 2018 compared with a non-GAAP operating loss of RMB11.1 million in the same period of 2017.

Net loss attributable to Huya in the second quarter of 2018 was RMB2,125.4 million compared with a net loss of RMB15 million in the same period of 2017. As anticipated, and as identified in our second-quarter guidance back in June, we recorded a fair value loss of RMB2,273.4 million on derivatives liabilities of preferred shares that existed before for our initial public offering, resulting from the increase in HUYA Inc.'s enterprise value, as indicated by the price of its initial public offering.

Such fair value loss on derivatives liabilities is related to the commercial features which needed to be bifurcated and accounted for as derivative liabilities in the second quarter of 2018. Upon completion of initial public offering, the derivative liabilities was derecognized, and all of the balances were reclassified into additional paid-in capital.

Non-GAAP net income attributable to Huya in the second quarter of 2018 -- which excludes share-based compensation expenses and a fair value loss on derivatives liabilities, and a gain on fair value change of investments and equity investee's investments -- was RMB105.4 million compared with a net loss of RMB9.3 million in the same period of 2017.

Diluted net loss per ADS was RMB13.7 for the second quarter of 2018 compared with diluted net loss per ADS of RMB0.15 for the same period of 2017. Each ADS represents one Class A ordinary share.

Non-GAAP diluted net income per ADS was RMB0.37 for the second quarter of 2018 compared with a non-GAAP diluted net loss per ADS of RMB0.09 for the same period of 2017.

As of June 30, 2018, the Company's had cash, cash equivalents, short-term deposits, and short-term investments of RMB5,514.7 million compared with RMB1,035.8 million as of December 31, 2017. The increase was primarily due to net proceeds raised in the Company's initial public offering in May 2018, and from the series B round financing in March 2018.

Net cash provided by operating activities was RMB105.6 million for the second quarter of 2018 compared with net cash used in operating activities of RMB79.8 million in the same period of 2017.

Now to our business outlook. For the third quarter of 2018, we are currently expect total revenue to be between RMB1,190 million and RMB1,220 million, representing a year-over-year growth of 103.9% to 109.1%. This forecast reflects our current and preliminary views on the market and operational conditions, which are subject to change.

This concludes our prepared remarks. We will now open the call to questions. Operator, please go ahead.

(Operator Instructions). Thomas Chong, Credit Suisse.

(spoken in Chinese) I have two questions. My first question is about the overseas expansion strategy. Can management give us some color about what's the KPI over the next couple of years?

And my second question about the comparison between China and US [gameboard] casting, given we see there's a lot of potential in China and of development in the US. Can management briefly compare about how we embrace the opportunities? Thank you.

Thanks, Thomas, for asking the question. I'll help the management team and Mr. Dong's answers to be translated to English for the benefit of others on the call.

(interpreted) So, if we look at it at a macro level, it is a natural step for a lot of Chinese player to enter into the overseas market. It's just happening to the growing potential in that -- in those markets. So as a leading player [such as] Huya in China in the game live streaming platform, we will definitely take that step. And so that's why we established our new independent game live streaming market called -- app -- called NIMO TV, which was launched in May this year to tap into the Southeast Asia market.

We see a huge potential in the Southeast Asia market. And we will work with Tencent closely, and Tencent Games closely, to tap into -- [expect] to grow our business and see --and share more results with you guys in due course. Overall, our goal and target is to become one of the leading players in the Southeastern market over the next 12 months.

Thanks. Again I will help translate the Chinese answers to English for the benefit of others.

(interpreted) If we compare the China and US gaming live streaming markets, broadly speaking, we believe there are three differences. One briefly is on the business model. Most of the players in the overseas market, they adopted a subscription [C] model; whereas in China most of the players actually work in the [contained and] endorsement business model, with a small portion of advertising revenue. So that's kind of the major difference.

So not only is on the use of behavior. In China, we see a really strong phenomenon on the mobile side, as you can probably see from our data as well. 50% of the MAU -- almost 50% of the MAUs coming from our mobile side. And that's quite different from the behavior in the US, where people still tend to watch the game live streaming or e-sports tournaments on PC, TV, and large monitors. So [display] on the gaming content, again, is on the user behaviors.

In China, we see most people have the preference for multiplayer online battle arena, so [known] as the mobile game, and also multiplayer online games and [OG] type of games. That's quite different from the US users' behavior. They tend to prefer more of the racing games, sports-related, and shooter games. Again, the mobile games in China is definitely more popular than mobile games in overseas.

Thank you.

Piyush Mubayi, Goldman Sachs.

Thank you for taking my questions. I have two questions. First is on ARPU per paying user. We noticed that was exceptionally strong in the quarter, and this is despite the World Cup point that you made initially. Could you just take us through the quarter, the three months in the quarter, and tell us how much of a dent did the World Cup make on a normalized basis? That's the first point. And related to that, if you could just give us a sense of what the numbers would have been like, were the World Cup not to have taken place? That's question one.

And the second is, we saw that your cost of services line was fairly stable despite the strength we saw in the revenue side. Could you just take us through the dynamics within [these plugs]? Thank you very much.

Thanks. We -- I'll help translate the question to Chinese first, and then the management team will answer.

Hi, Piyush. Thanks for the questions. So we are glad to see our ARPU growth in the second quarter. ARPU had been increasing in past quarters, although there are fluctuations because of the seasonality. Our ARPU was above the RMB290 for live streaming business in the second quarter. We believe our ARPU will benefit from our user stickiness and the retention rates. We are still at the initial expansion phase. Our priority is still to grow our user base and enhance the user experience we deliver, instead of the monetization on our users in the short term.

Upon your second question, so we believe our paying users will continue to grow; and the influence from the World Cup, we believe, is limited. We still achieved MAU growth in the mobile side, and we have [been foreseeing] the user continue to grow in the interim period.

Okay.

The question upon the cost -- changing the trend on the cost of sales. So we believe that, in the near term, we are still -- the content costs will still increase alongside with our revenue growth. And we have some leverage on bandwidth costs, so we apply the [P2P] technologies to control the bandwidth costs. And those, it's partially offset by our user growth and higher resolution of the video live streaming. But we have a confidence in the leverage of the bandwidth costs. And the revenue sharing [season] ratio of the paying ratio to the broadcasters and content creators will keep them stable.

Thank you, thank you.

Jerry Liu, UBS.

I have two questions as well. The first one is still on the World Cup. Do we factor some impact into the month of July as part of our 3Q guidance in revenues? And then secondarily, the impact -- can we maybe roughly estimate if the World Cup is mainly impacting users or even just the paying ratio or ARPU? That's the first part.

And then the second part is on the operating margins. Given some of the things we went through in the prepared remarks, especially about investment in Southeast Asia and in content, how do we see operating margins trending over the next, say, 2 to 3 quarters? Do we expect margin expansion due to leverage? Or could we reinvest most of that so margins are flat or even down sequentially? I'll translate it. (Spoken in Chinese)

(Spoken in Chinese)

Thanks. Again, I'll help translate that (inaudible) answers to English.

(interpreted) If we talk about the use of behavior like such as the user time spends or MAU, we still see the growing trend with -- despite (inaudible) [work cuts]. In terms of revenue, we do see some slight pressure on the revenue in terms of people's paying amounts on a daily or monthly basis has been trending down a little bit. But I think we personally believe that was probably due to the [webcast] spending. That's all we can share for now. Thank you.

And to comment (inaudible) answer, Jerry -- this is Henry. So we have seen the -- as I mentioned, the influence from the World Cup is very limited. Recently in July we -- we have seen the MAU growth as well as the paying user growth. And as I mentioned the [jury] in my remarks, the ARPU was a record high in the second quarter. So we haven't seen -- the financial impact from the World Cup is very limited.

So upon your second question upon the operating margin, so we believe the investments, the expansion in overseas markets will mainly consist of the content costs and some like such marketing expenses. So, we believe there will be some slightly pressure on the margins in near term.

But again, as [Dong-do] mentioned, the expansion -- the overseas business, we're still in very early stage. So it's hard to give -- very accurately predict. But we will follow and make adjustments according to the progress. Thank you.

Thank you.

Eileen Deng, Deutsche Bank.

(spoken in Chinese)

My first question is also regarding the user trend. As we see the trend for the active users and the paying user in the second quarter, management commented that we also target a growth in the future. So, I'm wondering what was the strategies around the marketing or product innovation that we are planning to re-boost the user? And how should we expect the trend in the following quarter?

And my second question is regarding the advertising business. Management just mentioned that we're focusing on the advertising revenue in other business segments. So wondering that could management give us more color around these strategies; and how should we take the product to cope with the advertising and the revenue growth expectation, if possible. Thank you.

(Spoken in Chinese)

Thanks. I will help translate the answers to English.

(interpreted) In terms of the user growth, again, the management team is confident about the future growth trajectory, especially on the mobile end. As you can probably see from the results this quarter as well, we see a quite strong growth on the mobile end in terms of MAUs. And we also see the growth in terms of conversion ratio to paying users.

We believe that trend will continue in the near future. Again, this is probably due to our focus on the mobile strategy, where we see it's easier to convert people into paying users, and that is also the growth and the focus of the market, as well, in the future.

Thanks. And to your second question upon the advertising business: so in the first and the second quarter of this year, we issued more than 100% growth year-over-year on advertisement revenue. So, actually we have already established a sales team with around 60 salespeople together in total to have that very in-depth cooperation and collaboration with the advertiser and merchants, actually.

So the change for the first half, by comparing with like that last year, we have seen a very strong growth and a significant change on the advertiser's industry. There are quite a few gaming developer and publisher who'd like to put their advertisements on our mobile app and the website. So we have been very confident in the advertisement revenue growth in the near term and the rest of the year.

Hillman Chan, Citigroup.

(spoken in Chinese)

So, I have two questions. The first one is on the e-sport initiative, and, in particular, our self-organized e-sports tournaments. Could management share more on the current scale of them right now? And also some of the tournaments that we are planning in the pipeline, focus on the game titles and (inaudible), and to help us understand the monetization model and the profitability of them.

And my second question is on the update with Tencent on the game publishing cooperation. Thank you.

Just wait a moment. We are preparing.

(Spoken in Chinese)

Thanks. I'll again help translate to English.

(interpreted) So speaking of our self-organized (inaudible) tournaments, what we can share with you is that we organized our Huya Destiny Cup Spring invitational e-sports tournament. That's one of the largest online [top 2] tournaments in China, with some -- over 110 participating teams. And also we broadcasted over 90 e-sports events; attracted over 400 million viewership, including MSI and LPL, those big e-sports tournaments. Speaking of [were] second half of the year, we have some -- obtained some exclusive rights to broadcast e-sports tournaments such as the LCK. Those are the data we can share with you for now.

To comment and to give you some more color about the progress on our e-sports business: so actually for the second quarter of this year, we broadcasted more than, like, 90 e-sports tournaments and events by attracting more than 460 million viewers in total. So we are very confident in the popularity of the e-sports business in domestic and the overseas market.

Secondly, we are also trying to penetrate into the upstream and downstream of the e-sports business by equity investments, [earned] investments. If we can ratify that, it will be a unique IP, unique e-sports tournament. We will purchase the common broadcasting rights, as well as, if possible, we can make some investments. Yes, thank you.

We are preparing answer to the second question.

(Spoken in Chinese)

Thanks. I'll help translate that to English.

(interpreted) Overall, we have been exploring different business opportunities with Tencent, particularly in the areas to enrich our game and [online] entertainment content. My plan to cooperate with Tencent to enhance our monetization capability and diversify our monetization channels, especially in the area of [as pricing] and game distribution.

Also by having Tencent as one of our significant shareholders, we can benefit from exclusive rights and resources such as what we mentioned before, the exclusivity to broadcast the e-sports tournament, LCK. We believe this will further enhance our content offering on the platform, and improve our monetization capability in the near future.

Lastly but not the least, we are cooperating with Tencent Games in our overseas market expansion, as we mentioned about the NIMO TV earlier in the Southeast Asia.

(Spoken in Chinese) Thank you very much.

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

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

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

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.