HUYA Inc (HUYA) 2021 Q3 法說會逐字稿

Hello, ladies and gentlemen. Thank you for standing by for the Third Quarter 2021 Earnings Conference Call for Huya Inc. (Operator Instructions) Today's conference call is being recorded. I'll now turn the call over to Ms. Hanyu Liu, Company Investor Relations. Please go ahead.

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 the 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 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. I will now turn the call over to our CEO, Mr. Rongjie Dong. Please go ahead.

Hello, everyone. Thank you for joining our conference call today. In the third quarter of 2021, we achieved solid results. Our mobile users reached record-high levels, and we continued to steadily grow our top line.

Huya Live's mobile MAUs reached 85.1 million in the third quarter, up 15% year-over-year and 10% quarter-over-quarter. The 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 month retention rate for our Huya Live app also remained stable at over 70%.

As a technology-driven platform, we have been continuously focused on product and service upgrades to deliver more fun and immersive experiences 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 as well as make 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 application developers has been up and running for almost 2 years. By the end of September, more than 290 tools had been developed on this open platform and over 880,000 broadcasters covering our core categories, including e-sports tournaments, games and pan-entertainment, had used these tools.

In particular, the recently added capabilities for multi-user participation, such as Draw and Guess Together (foreign language) and Mecha Fights (foreign language), are now quite popular. More users can join the streaming interaction and gifting, and bullet chats sent by users can also influence battle results. This increases the interactivity between broadcasters, helping users to effectively level up and strengthen the monetization capabilities of broadcasters.

In August, we introduced a feature called "One Click to Join Broadcasters' Gameplay" (foreign language). It was first applied in Peacekeeper Elite channels. With this interactive gaming function, users can team up with streamers to play games while watching live streaming sessions. The Gift Drop feature we released earlier this year is now available in more games, including the latest LoL Wild Rift.

Through our cooperation with the game studio, Gift Drop will be triggered in a live channel for users to claim game tools and skins after downloading this new game, achieving a certain length of viewing time or when a broadcaster strikes a certain kill. It enhances the engagement in the streaming session as well as the participating -- participation of the game itself.

We believe the introduction of these interactive features not only offers more innovative gameplay for our users and broadcasters, it also improves the uniqueness of Huya to game studios. More importantly, it opens up more opportunities for our deeper penetration in 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 delicate game scenes compared to the existing Ultra HD experience. While leveraging our self-developed voice recognition technology for game live streaming, the newly launched AI caption function identifies accurate game terms as well as player and team names, and provides real-time subtitles for live events.

Together with our live event instant playback and simultaneous multi-screen viewing functions, we were able to provide the best tournament viewing experience so far in the recently concluded 2021 Season of League of Legends World Championship. Supported by the above-mentioned technologies and our operational expertise, we continued our leading market share in broadcasting Worlds 2021.

In light of the dynamic business environment, it is pivotal for us to strengthen our competitive advantages. These primarily reside in fostering and retaining streaming talent, enriching and producing quality content, and delivering technology and product innovations. We are also confident that we can capture opportunities brought by the 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 will continue to strengthen our operations in accordance with 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, driving user 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 operating metrics in more detail and our financial assessment. Ashley, please go ahead.

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-sports is at the core of our content ecosystem, and we have been committed to bringing more high-quality and popular e-sports content to game enthusiasts. During the third quarter, we broadcasted 131 third-party e-sports tournaments, 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 tournaments, including National Electronic Sports Tournament and E-sports Championships East Asia, were also welcomed by users.

Although some key licensed events were temporarily delayed during the season, we added more professional comprehensive content in comparison with last year's schedule. In the third quarter, we broadcasted 58 self-produced e-sports tournaments and entertainment PGC shows, and total viewership reached 142 million, growing over 40% year-over-year.

Among the e-sports tournaments that we produced, the Huya All-Star Cup (foreign language) has become a signature event for Peacekeeper Elite. In 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 the period, we also hosted The Roar Cup (foreign language) for CrossFire Mobile, CrossFire HD, Assault Fire and Naraka: Bladepoint, all of which further complement the content for those game titles already on the Huya platform, gaining even more traction with game lovers. Notably, our Zhanshen Cup for LoL Wild Rift (foreign language), held in August, greatly 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 commentary program (foreign language), integrating professional game play analysis with a variety show. It is the first of its kind for this HOK tournament. We believe it was a success, attaining a viewership of over 12 million during the third quarter.

On the entertainment PGC program front, our long-standing GodLie Season 6 (foreign language), a werewolf game show; and Huya Kungfu Carnival Season 5 (foreign language), a mixed martial arts competition, continued to be the top performing shows. In September, we introduced Huya Music Pub (foreign language), our first music-themed in-depth interview program. This program invites well-known musicians to share their stories, further enriching our pan-entertainment offerings.

We continued to strengthen our efforts for videos by encouraging streamers to also become video content creators. In addition to the popular video-on-demand format, the video-carousel format (foreign language), which supports ongoing replays, is also well liked on our platform, as it suits live streaming user habits. In the third quarter, average MAUs, who watched videos on our platform, increased to approximately 40 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, and the overseas revenues achieved over 200% year-over-year growth. The sequential user growth was mainly driven by certain regional e-sports tournaments, particularly in Southeast Asia, as we continued to deepen our relationship with local content providers and gaming companies. We are also refining our cooperation with local talent agencies 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 revenues were RMB 2.6 billion in the quarter, a slight decrease from the same period last year, primarily due to lower average spending per paying user on Huya Live, partially offset by the increase in the overseas live streaming revenues.

The number of paying users for Huya Live reached 6 million, which is 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 lower spending from newly added 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 stepped up investment in our content. Our non-GAAP gross profit was RMB 516 million. Non-GAAP gross margin was 17.3%. Our non-GAAP operating profit was RMB 154 million. And our non-GAAP operating margin was 5.2%. Our non-GAAP net profit was RMB 180 million with a non-GAAP net margin of 6%.

Now moving on to our financial details. Unless otherwise specified, the growth rates I will be reviewing are all on year-over-year terms. 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, primarily due to the increase in revenue sharing fees in relation to certain broadcaster incentive programs and the increase in spending on e-sports content and content creators.

Bandwidth costs decreased by 14.2% to RMB 178 million for Q3, primarily due to improved bandwidth cost management and continued technology enhancement efforts. Gross profit decreased by 18.8% to RMB 504 million for Q3, primarily due to the increased cost of revenues driven by higher revenue sharing fees and content costs. Gross profit (sic) margin was 16.9 % for Q3.

Research and development expenses increased by 12.9% to RMB 206 million for Q3, primarily attributable 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, services and brand name, particularly including promotional activities for e-sports events and cooperation with various marketing channels during the summer vacations.

General and administrative expenses decreased by 32.6% to RMB 80 million for Q3, primarily due to lower share-based compensation expenses. As a result, operating income decreased by 62.7% to RMB 83 million for Q3. Operating margin was 2.8% for Q3. Interest and short-term investments income were RMB 63 million for Q3, compared with RMB 76 million for the same period of 2020, primarily attributable to decreased interest rates.

Income tax expenses decreased by 19.9% to RMB 41 million for Q3. Share of income in equity method investments, net of income taxes was RMB 379 million for Q3, compared with RMB 0.2 million for the same period of 2020, primarily attributable to the investment income related to a disposal of equity investment. As we disclosed in July this year, a private equity fund that Huya invested in as one of the limited partners entered into a definitive agreement to sell its minority stake in a gaming company.

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 expenses, and gain on fair value change and disposal of equity investments, net of income taxes, was RMB 180 million for Q3 compared with RMB 361 million for the same period of 2020.

Diluted net income per ADS was RMB 2.17 for Q3. Non-GAAP diluted net income per ADS was RMB0.75 for Q3. As of September 30, 2021, the company had 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 attributable to a cash inflow from the equity investment disposal mentioned above.

With that, I would now like to open the call to your questions.

(Operator Instructions)

Your first question comes from the line of Thomas Chong from Jefferies.

(foreign language) I have 2 questions from my side. The first question is, can management comment about the performance for S11? And number 2 is about our expectation with regard to the user trend as well as the revenue expectation.

(foreign language)

[Interpreted] The S11 actually took place last weekend, and we are more than happy to see that this event has caused sensational outcomes in the world of games, and we are very happy to see that another LPL team entered into the final and got the title in the end. And we believe that the influence of this event is expanding.

(foreign language)

We're very happy to see that during this whole S11 period, Huya had continued our lead in the market shares.

(foreign language)

[Interpreted] During this event, Huya had sought a number of new records made for the viewership, especially for PCUs, this year actually is 2x of that from the last edition, and it has also recorded -- reported as the highest PCU for Huya platform in its history.

(foreign language)

[Interpreted] During this tournament, we had launched operational activities together with Tencent, and also we launched a mobile game based on the tournament. Both of those activities has delivered very nice results. And we will continue to improve our live streaming technologies to optimize the viewer experiences, the penetration rate of Huya and that event actually is the highest during the past three editions.

(foreign language)

[Interpreted] Now Ms. Wu will talk about the users and revenue expectations in Q4 next year. So overall speaking, we expect our users to grow continuously. And despite some seasonality changes, we believe that our investment in the content will help us to grow our viewership. And also, we expect some -- very positive impact from most recent new mobile launch -- new game launches as well as tournament events.

(foreign language)

[Interpreted] New games has always been an important source for our users and winning the title for S11 this time and also becoming -- for e-sports becoming an official item in Asian games will both create very positive impact for our viewers and will help us to enter into a wider audiences population. So for the longer term, we believe that our potential user growth will have -- will continue to increase.

(foreign language)

[Interpreted] In terms of revenue, we believe that revenue to some extent, is under the impact of the macro environment as well as the live streaming sector as a whole. So our target is to keep a higher-than-average growth pace and continue to grow in years to come.

Our next question comes from Yiwen Zhang from China Renaissance.

(foreign language) I have two questions regarding LoL mobile. Firstly, it's exactly 1 month since the game launch. Can you show more color on the new user growth from this title? And if we make a reference to Honor of Kings and also PeaceKeeper Elite. What is the gap between like the game downloads and the users coming into our platform? And then secondly, can you discuss the preparation we made for LoL mobile, including the stream recruitment and also our self-organized tournament? And additionally, how much incremental content cost do you expect to incur?

(foreign language)

[Interpreted] You're right by saying that LoL Mobile was launched about 1 month ago and Huya platform continued to take this significant market share. And right now, the user -- or viewership performance is better than other games such as PUBG. But of course, we will continue to monitor the performances going forward.

(foreign language)

[Interpreted] This LoL mobile is by no means replacing the users for LoL PC or HoK. Therefore, we have the right confidence of gaining more viewers and users from live streaming for this mobile game.

(foreign language)

[Interpreted] In preparation for the launch of this game, we've done a lot of things in operation. For instance, we had signed some live streamers as well as working together with tailored agencies in preparation for the launch.

(foreign language)

[Interpreted] Since the launch, we had organized a number of tournaments and events in order to give opportunities for live streamers to make their shows and make exposures. We have now signed over 1,000 streamers and also had signed a number of professional teams.

(foreign language)

[Interpreted] Going forward, we would consider acquiring licensed tournaments in China for domestic leagues as well as other key important tournaments on top of organizing our own tournament events.

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

(foreign language) Two questions here. First is on the margin trend. Can you give us more color on the margin trend, especially any change in revenue sharing costs in the content costs? Secondly, wondering your update on your strategy about e-sports tournaments and how should we think about the tournaments related costs in the future?

(foreign language)

[Interpreted] In order to improve our competitiveness and better serve our users, we had stepped up our effort in putting more resources in content since Q3, including by making more investment for content creators as well as self-produced high-quality content and licensed tournament content as well. In terms of revenue sharing with our live streamers, in order to improve our competitiveness while maintaining the basics of revenue-sharing mechanisms have changed, we will also address and trying to give more incentives for the live streamers according to the market dynamics.

(foreign language)

[Interpreted] In terms of margin levels, well, there is some seasonality changes according to the scheduling of our operational events as well as the tournament, especially in Q4 this year because there are a number of big events towards the end of the year. And also, there are some postpones of events and tournaments such as S11 all took place in Q4. So that has generated some impact on our tournament costs and also the operation costs with regard to content.

(foreign language)

[Interpreted] So Mr. Dong will take the question with regard to our tournament and its IP cost. Well, actually, we believe that e-sports will continue to be very popular in a few years to come, especially with the S11 final title as well as Asian games. So we believe that the costs for our top-tier tournaments will probably go higher in the future.

(foreign language)

[Interpreted] On the other hand, for some long tail tournaments where new tournaments really depend on the promotion of Live's streaming platforms, so the costs for these kinds of events will probably be quite flattish. On the other hand, we also noticed that self-produced content is also a very important source of content for Huya.

(foreign language)

[Interpreted] So for self-produced content as well as our own e-sports tournaments or even -- entertainment events, we believe that this kind of content create better valuable money and it's quite unique to our platform. So we will continue to invest in these kind of areas, and we hope to raise the percentage points from the current level to around 10% to 20% in years to come.

Next question comes from Ritchie Sun from HSBC.

(foreign language) So I would translate the questions myself. So firstly, I want to ask about the competitive landscape dynamic. How has that been trending? And without the M&A and also ongoing intense competition, how should we think about the long-term net margin level for the platform? Second question is, can you share about the progress made in game video? You mentioned MAU of 40 million. So what about the user time spend, retention as well as monetization plan?

(foreign language)

[Interpreted] Mr. Dong. On the question of competition landscape, well, since we are not doing hands with Douyu and became competitors again, we believe that in recent quarters, the overall competition landscape for game live streaming does not change a lot. Compared with Douyu, I think we have a much better operational efficiencies, and we have outperformed in terms of like users as well as our revenues.

(foreign language)

[Interpreted] Even though our peers are making more and more investment in live streaming for e-sports, however, we are a professional platform for e-sports and we rely on our core competitiveness and continue to strengthen our positioning in this regard.

(foreign language)

[Interpreted] As I said before, we will continue to gain our market share and also to keep strengthening our advantages in live streaming for e-sports. And over time, as we are accumulating more and more professional know-hows and experiences in running e-sports, we would love to have a more diversified business models and by relying on self-produced content, for instance.

(foreign language)

[Interpreted] This is Wu. On a question of video content production. Well, actually, for videos, the user actually had increased since Q3, our MAU reached 40 million compared with the previous quarter Q2, there is an increase of about 30%. We believe that video business is a natural extension to the live streaming business that we have. A lot of video content are originated from the events, tournaments basically about editing and reproduction of the live streaming content.

So I think one of our biggest advantage in this regard is that we have abundance resources in terms of content origins, and we have very good ability of editing and reproducing them into video. In terms of the video content production, we encourage our streamers and talent agencies to make content -- to make video content. And in terms of the product, we have launched a lot of new features. For instance, we have this highly efficient editing features and we can use AI technology to identify the key moments and points and generate video clips automatically. So this is a very positive feature that we have for producing content for videos.

Next question comes from Brian Gong from Citi.

(foreign language) I will translate myself. Can management share your latest view on the impact from the regulation of gaming and game live streaming toward our operation and the fundamentals? And is there any change to our strategies post the latest regulation?

(foreign language)

[Interpreted] As you rightly pointed out that in recent months, our industry has received quite a lot of attention from the regulators. And we believe the purpose of doing that is to better regulate the industry and to promote a healthy long-term growth. We've been keeping an eye on the latest regulatory changes and to make sure that our business operation is in full compliance with those regulations.

Even though there will be some short-term changes in terms of the revenue or user-based growth because of the regulatory changes for the short term, but we believe that for the longer term, we would be agile enough to mitigate the impact on our business and to actively address our product and operations to make sure that we can cater for the demand of the users and also at the same time, be compliant.

(foreign language)

[Interpreted] That said, we will continue to invest in high-quality content production to upgrade our product as well as to consolidate our competitiveness of the business as a whole. And for the longer term, we believe that this will help us to better serve our clients and generate long-term value.

Our final question today comes from Tian Hou from TH Capital.

(foreign language) So just want management give some color on your overseas business development as well as your plan or some thoughts about the cooperation with Tencent going forward?

(foreign language)

[Interpreted] Thank you Ms. Wu on overseas NIMO TV business. Well, thanks to the tournaments in overseas as well as local operational activities, our MAU in overseas market reached 28 million. And especially, we had a very stellar performance in the market of Indonesia. And our revenue from overseas market also continued to increase by over 200 percentage points year-over-year.

(foreign language)

[Interpreted] Our main strategy going overseas is to continue to use the local partners to cultivate our overseas markets, and to expand our user base and to enhance our monetization ability.

(foreign language)

[Interpreted] Since this quarter, we are redefining our cooperation with local talent agents and keep optimizing our cooperation with them, we believe that this will be positive for a healthy ecosystem building for the overseas market.

(foreign language)

[Interpreted] We believe that for the short term, the overseas market will continue to be in the investment stage, but the loss in overseas market, as a percentage point to margin level, will continue to be lowered.

(foreign language)

[Interpreted] So with our cooperation with Tencent, we truly hope that we can continue to deepen our cooperation with Tencent. And our businesses, especially in the area of games has been quite close.

(foreign language)

[Interpreted] This year, we had launched some new features such as gift dropping or One Click to Join Broadcasters' play games (sic) Gameplay (foreign language). And these are to improve the interactivity of the live streamers and its users. And we had first launched such interaction features in games by Tencent, such as PKE and others. And both from our side and from the game side, had seen very nice outcome.

(foreign language)

[Interpreted] In terms of tournament, we had a long-term relationship with Tencent, for instance, by signing a 5-year agreement for preparation for LPL, and this will help us to explore new ways of monetization.

I would like to turn the call back to the company for closing remarks.

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 TPG Investor Relations. Thank you.

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

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]