HUYA Inc. (HUYA) Earnings Call Transcript & Summary

Hello, ladies and gentlemen. Thank you for standing by for the First Quarter 2021 Earnings Conference Call for HUYA Inc. [Operator Instructions] Today's conference call is being recorded. I will now turn the call over to Ms. Dana Cheng, Company Investor Relations. Please go ahead.

Hello, everyone, and welcome to HUYA's 2021 First Quarter 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. Catherine Liu, Chief Financial Officer. Management will begin with prepared remarks, and the call will conclude with the 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. SEC. The company does not assume any obligation to update any forward-looking statements except as required under applicable laws. Please also note that Huya's earnings press release and this conference call include discussion 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 all for joining our conference call today. We are pleased with the continued momentum we saw across our business in the first quarter, which sets us on a solid path to begin the new year. Total net revenues for Q1 increased to RMB 2.6 billion, demonstrating growth of 8% year-over-year despite the higher comparable revenue basis associated with pandemic lockdown period in Q1 2020. We continue to see new growth and believe that our relentless focus on content enrichment and product innovation will drive the future growth of our business and create more value for our users. The user growth that we enjoyed during the pandemic lockdown period has persisted, and we continue to bolster our user community. In Q1, mobile MAUs of Huya Live reached 75.5 million, up slightly from the same period last year. Additionally, the next month's retention rate of our Huya Live app remained stable at over 70% in Q1. Mobile users have been the pillars of our business and our primary focus. In the fourth quarter this year, mobile users contributed to over 85% of Huya Live's live streaming revenues, and they also constitute close to 80% of our core daily active users on Huya Live. Our mobile-first strategy has enabled us to become the industry leader, and we plan to further emphasize and grow this [ console ], focusing on mobile users as our primary user metric. We believe our investments in content and products will gradually pay off. Our cumulated content has become the engine driving us forward, attracting new users and fulfilling more online needs as users are funding our platform to be progressively, more comprehensive, attractive and convenient. In Q1, we continued to reinforce our product offerings and the content elaborate with a number of successful initial tailwinds. In March, we launched an open platform for interactive features to offer more innovative game play and improve the uniqueness of Huya to game studios, broadcasters and the viewers. At [indiscernible] our interactive features have been developed, including gift dropping, gift droppers, [Foreign Language] broadcaster game betas to bolt-on. Viewer-led interactive games to [Foreign language] e-commerce, live streaming, both, when collected to join broadcasters game play, [Foreign Language], one-click streaming, [Foreign Language] and real-time monitoring panel, [Foreign language]. We believe the new features will not only generate our value proposition in the industry value chain, but to also help shape a new model for gaming operations and improve our capabilities in monetization diversity. As a first step, we cooperated with Peacekeeper Elite and embedded the interactive game-play features within the game's live streaming. And our Peacekeeper Elite channel. For example, when a game broadcaster strikes checking in or receives certain virtual gift, the live streaming room will be triggered to send -- to send out designated in-game reward for viewers to claim. The success of such new features has assisted Peacekeeper Elite to both acquire new traffic and retain existing users and can also provide our viewers and broadcasters with more fun and emotive experience. Our open platform for third-party application developers, also continued to expand in Q1. By the end of Q1, there are close to 220 tools to [ help ] and over 600,000 broadcasters have used these tools. On a quarter-over-quarter basis, the daily active users and daily active broadcasters both who have used the third-party applications from the open platform grew over 148%, respectively. In April, we signed a licensing agreement with Tencent sport and locked down the exclusive broadcasting rights in China for League of Legends for all leaguers, LTL. League of Legends developed the league LTL and LTL All Star weekend service as well as related licensing rights from 2021 to 2025. Securing this exclusive broadcasting rights will enrich our content offerings and strengthen our collaboration with Tencent sports to explore [ well ] rights opportunities. With that, I will now turn the call over to our CFO, Catherine, to share her insights on the operating metrics and the financial details. Catherine, please go ahead.

Thank you, Mr. Dong, and hello, everyone. Following Mr. Dong's remarks, I will start from the updates on content enrichment and diversification. In Q1, we broadcasted 92 third-party e-sports tournaments, among which the top tournaments included LPL Spring, PGIS, i.e., PUBG Global Invitationals, and KPL Spring. Total viewership for these tournaments reached around 535 million in Q1, representing 41% year-over-year growth. On the front of our self-produced content, we organized the 36 e-sports tournaments and entertainment shows and generated a total viewership of 195 million, representing 73% year-over-year growth. Recall that in Q1 last year, COVID-19 impacted the schedule of third-party e-sports tournament and the hosting of our own offline events. We are glad that tournaments and events are back, which is also reflected in the higher viewership. We are keen for key spring events i.e., [Foreign language], Chinese, [indiscernible], [Foreign Language] is the top-performing self-produced event in Q1 that has leveraged the influence of Huya's celebrity broadcasters to compete with professional gamers. Additionally, we organized the regional tournament for Teamfight Tactics within Huya's community and helped the rising game accomplished another signature event. On the entertainment, PGC shows aside. In the styling team, i.e. [Foreign Language] and Fashion Styling competition show and Last Winter, a role-playing detective show are the leading examples of Q1. Moving on to our overseas business. The MAUs of our overseas business was around 25 million in the first quarter, slightly higher than the same period last year. Our strategy has been shifted to focus on regions and countries with higher monetization potential, and as a result, our overseas revenues almost doubled year-over-year, and our overseas loss also narrowed down. Next, I will walk you through our financial highlights. In Q1, our total net revenues grew by 8% year-over-year to over RMB 2.6 billion. Our live streaming revenues increased by 5% year-over-year, close to RMB 2.4 billion in Q1. The growth was primarily due to increased revenue for paying user. The number of paying users for Huya Live in Q1 reached 5.9 million compared with 6.1 million for the same period last year, mainly because the users spent more time per day and are more willing to pay on our platform during the pandemic lock down period last year. Advertising and other revenues increased by 55% year-over-year to close to RMB 213 million in Q1, primarily driven by revenues from content licensing. Our profit continued to improve in Q1. Our non-GAAP gross profit increased by 8% to RMB 531 million. Non-GAAP gross margin was 20.4%. Our non-GAAP operating profit increased by 7% to RMB 242 million. Non-GAAP operating margin was 9.3%. Our non-GAAP net profit increased by 1% to RMB 266 million, and our non-GAAP net margin was 10.2%. Now let me move on to our financial details. If not specified, all growth rates are on year-over-year terms. Cost of revenues increased by 7.9% to RMB 2.1 billion for Q1, primarily attributable to the increase in revenue sharing fees and content costs. Revenue share increase and content costs increased by 14.1% to RMB 1.7 billion for Q1, primarily due to the increase in revenue sharing fees in relation to higher live streaming revenues and the increase in spending in e-sports content. Bandwidth costs decreased by 24.4% to RMB 182 million for Q1, primarily due to improved management in bandwidth costs, and continued technology enhancement efforts. Gross profit increased by 8.2% to RMB 514 million for Q1. Gross margin was 19.7% for Q1. Research and development expenses increased by 27.6% to RMB 199 million for Q1, mainly attributable to increased personnel-related expenses. Sales and marketing expenses increased by 35.7% to RMB 145 million for Q1, primarily attributable to the increased marketing expenses to promote the company's content, products, services and branding. General and administrative expenses decreased by 6.8% to RMB 84 million for Q1, mainly due to lower share-based compensation expenses. Operating income increased by 21.6% to RMB 162 million for Q1, and operating margin was 6.2% for Q1. Non-GAAP operating income, which excludes share-based compensation expenses, increased by 6.7% to RMB 242 million for Q1. And non-GAAP operating margin was 9.3% for Q1. Income tax expenses increased by 4.9% to RMB 39 million for Q1. Net income attributable to HUYA Inc. for Q1 increased by 8.4% to RMB 186 million. Non-GAAP net income attributable to HUYA Inc. for Q1, which excludes share-based compensation expenses, gain on fair value change of investments and equity investees' investments and equity investees' partial disposal of this investment, net of income taxes, increased by 0.9% to RMB 266 million. Diluted net income per ADS was RMB 0.77 for Q1. And non-GAAP diluted net income per ADS was RMB 1.1 for Q1. As of March 31, 2021, the company had cash and cash equivalents, short-term deposits and short-term investments of RMB 10.7 billion compared with RMB 10.5 billion as of December 31, 2020. The increase was primarily due to net cash provided by operating activities of RMB 166 million for Q1. With that, I would now like to open the call to your questions.[Operator Instructions] Your first question comes from the line of Lei Zhang from Bank of America Merrill Lynch.

[Foreign Language] 2 questions here. First, can you give us some update real in competitive landscape, especially the competition with [ GDP ], which saw a good growth in live streaming in recent quarter. Secondly, any color on growth of our advertising and other revenue? What's the major driver here?

Hello. [Foreign Language]

All right. I will translate for Mr. Dong. [Interpreted] Regarding your first question, for -- with the way as you enter into the game live streaming industry it is pretty natural for them to being a relatively higher the earlier growth as it's due in the growth phase for them, especially thinking about that in the old days, both JOYY or Huya also enjoyed an outstanding year-over-year growth as well. So it is quite a natural thing to happen. And from our internal perspective, we don't really feel pressured or threatened by the entrance of them, [ at least that's ] still the attitude. And talking from the perspective of competition landscape, there is almost a no change compared from the situation in the last quarter. And what we can do is to strengthen our own capabilities. Facing recurring competitive landscape. And we see more opportunities in the second half of this year. Because if you look back at the past 1.5 years, we weren't really many of the [indiscernible] and always the broadcaster teams in the industry, which is why we are more optimistic and expecting more opportunities from the new game launches in the second half of this year. And Catherine will take your next question.

As for your question of the faster growth of advertising and other revenues, this is mainly driven by revenues from licensing of content. Okay. I hope this answers your question.

We will proceed to the next question from Vincent Yu of Needham & Company.

[Foreign Language] I have few questions. First is about what is our strategy for international market for this year, how much top line contribution will we see in these markets will bring in 2021? And will we see breakeven on a stand-alone basis in 2021? Second is, can management help us understand more on the strategy around content investments in 2021, where we focus on acquiring license for e-sports tournament or in-house investment activities and content. And can we share the size of investments we are ready to deploy? The third question is, how should we think about the recent waves of anti-trust protests brought by regulators? Can management share any process that we have for our current merger with [ Sony ]?

Regarding your first question, for the international business, we are still at the investment stage, and we still expect we probably will continue to invest in overseas business for the next couple of years. But the good news is that this year, our strategy has been focused on monetizing -- improve our monetization. So in the first quarter, our overseas revenue has doubled year-over-year. And we also expected that the overseas business revenue contribution will be increasing this year. At the same time, the loss of overseas business has also narrowed down, both in terms of absolute dollar or as a percentage of revenue. We think in some country, we will be able to make breakeven point. But overall, the overseas business is still going to be at the investment stage this year. And then for your next question, I will relate to Mr. Dong to answer this.

[Foreign Language]

All right. I will translate for Mr. Dong. [Interpreted] Regarding your questions for the content investment. We have already been asked about the progress of the current ongoing merger is still mixed. From what we can see right now, it is quite likely that in the third quarter this year, the deal will reach some sort of conclusion and second [ power ] in the near-term -- in the future. And given these circumstances, we think we might adjust the current strategy in terms of the content investment. And in terms of the balance rate between the self-produced content and purchasing the third-party is for tournament. And we think Huya has been doing quite well in terms of self producing its own branded content whether in the form of non-gaming or in the form of gaming for tournament. For example, we have just recently closed the new series of the HUYA Kungfu Carnival. And it has been a lot of attraction among the Internet users, which is why we will not only focus purchasing the quality e-sports tournament from the third parties but we will also solidify our capabilities to produce our own branding content.

Your next question is from Thomas Chong of Jefferies.

[Foreign Language] My first question is could management provide some updates about the cooperation with Tencent? The second one is, could management comment on the strategy this year in-game -- in the non-game broadcasting?

Regarding to your first question, this quarter, we have continued the collaboration with Tencent. For example, in March, we also launched a booking platform for interactive features to offer more innovative game play. The first game that we have cooperated with is Peacekeeper Elite and the results with us in terms of increasing the users and also increasing the interactive features, interaction between the users and then the platforms. At the same time, we continue to collaborate with Tencent in various ways such as games and also some of the major Tencent products as well. So we expect the collaboration with Tencent will continue to go on. And in the future, it will also bring us more users and also monetization opportunities.

[Foreign Language]

Mr. Dong has answered your question. [Interpreted] Regarding the content strategy. Firstly, I would like to strengthen that Huya is actually one -- Huya is actually the platform in the game live streaming industry that has gained the vast majority of the third-party e-sports tournaments broadcasting rights. That is for the e-sports tournament. And for the professionally generated content, we also have gained the leading production capabilities among in the industry players. And secondly, from the gaming perspective, we have to say that a lot of the new opportunities will be there for the new games in the second half of this year. As it quite likely that some of the new potential broadcasters will be releasing in the second half of the year. And it's quite expected by the users to gain tractions. And thinking about that Huya has a natural advantage and a strong capability to promote new games and operate the new game live streaming sections on our platform. We will say the opportunities are last of the year in the second half of this year, which is why we're going to invest some of our resources until the promoting those new games. And on the front of the non-gaming content, looking at the data in the past, the growth rate for the non-gaming content is actually higher than the growth rate of the gaming content. And our content pool for the non-gaming sectors are actually enjoying a prosperous growth over the past few quarters. For example, traditional sports is actually quite outstanding in the past. And that makes us think whether we will need to invest into gaining with the third-party non-gaming content broadcasting wise in the future. That is also quite -- there is also quite potential for us. So these are our current strategy for the rest of the year.

So for the next question, it's from Ritchie Sun of HSBC.

[Foreign Language] I have a question about game video strategy. So how is the traction of game video strategies? Any operating metrics to update us? And with more and more game video users, how would that affect the paying ratio and ARPU trends going forward? Do we assume game video users are less hardcore and hence, the paying ratio and ARPU would be lower?

[Foreign Language]

I will translate for Mr. Dong. [Interpreted] Regarding your question for our video business. Our video business has been running for 1 or 2 quarters already, and we have already some new thoughts in terms of how to develop the new strategy for the video business. As I said before, previously, we have been focusing on the on-demand videos to be involved with acquiring new users for the video business. That actually requires a longer time. But thinking about the nature of Huya platform as a live streaming platform, we feel like the core is like rolling streaming sessions will be more natural forms for Huya to engage in the video business, which is why we have already tested this new form of video business. The core is winning streaming business in the first quarter, within 1 or 2 content categories of our gaming sectors. And we have received a positive fee that, whether from the data users or from the figures of the industry value chain. And in the second quarter, we will extend the content category coverage from those 1 to 2 gaming sectors to more in titles in the second quarter. And we believe we see growth of our video business, that will actually help us strengthen our attractiveness as the, I say, platform to attract those advertisers. And that will also help us to strengthen our monetization capability of the advertising business.

We will take the final question from Tian Hou of TH Capital.

[Foreign Language] So what's the management's expectation for lord of legends -- League of Legends to be online? And also, once that gets started, what is the potential impact to our game live streaming business?

[Foreign Language]

[Interpreted] For [ Legends ] versions, mobile version, we actually started the preparation for that beginning from earlier this year. And we have already sorted out our potential professional leads and the broadcasters that we can gain on our platform. And we also quite emphasize the communication with the related institutes and we repeat for years of the new game. And hopefully, and if -- it's quite likely that the League of Legends mobile version will be releasing in the second half of this year. Well from our own perspective and thinking about seasonality, it is just quite favorable for us if the game can be launched in the summer school holiday season.

There are no further questions now. I'd like to turn the call back over to the company for closing remarks.

All right. Thank you all for joining our conference call today. If you have further questions, feel free to contact [email protected], and we look forward to speaking with you in the next quarter. Thank you.

This concludes this conference call. You may now disconnect your lines. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]