HUYA Inc. (HUYA) Earnings Call Transcript & Summary

Hello, ladies and gentlemen, thank you for standing by for the Second Quarter 2022 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 would now turn the call over to Ms. Hanyu Liu, Company Investor Relations. Please go ahead.

Hello, everyone, and welcome to HUYA's Second Quarter 2022 Earnings Conference Call. The company's financial and the 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 on the 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. Hello, everyone. Thank you all for joining our conference call today. Our 2022 second quarter was largely conditioned by the turbulence in the macro and regulatory environment. We mentioned in our previous earnings after the new domestic live streaming regulations which were introduced in May mainly focused on tipping behavior and protection for minors. Accordingly, we adjusted the associated products and operations on our platform. And we will continue to closely follow policy updates and make timely adjustments to ensure compliance. The prudent adjustments we undertook in Q2 create a fairly immediate impact to certain facets of our business. And together with the macro headwinds, Q2 domestic live streaming revenue increased by mid-single digits on a quarter-over-quarter basis. Despite the impact, we still managed to grow our user base as well as achieve approximately RMB 2.3 billion in revenues and approximately RMB 6 million in non-GAAP net income in the second quarter of 2022. We will work to mitigate the effect on our business by dynamically adjusting our monetization strategies across our platforms' operations. Essentially, our strong foundation and the business fundamentals will carry us through the long term. We are confident we have leverage in our business as we scale further in the game live streaming industry through consistent investments in quality content and in retail products, while continuing to provide attractive game, e-sports and the entertainment content satisfies the core needs of our users. Our business is a resilient one, which we expect to rebound and prosper as market conditions stabilize. With that in mind, we remain focused on future opportunities. In spite of all the external factors, our Q2 results marked another quarter of user expansion. We sustained growth in mobile MAUs and instituted affirmative measures across our product upgrades and the game industry value chain integration. Now let me walk you through some of our key metrics. Starting with user growth. Huya Live mobile MAUs reached 83.6 million in the second quarter, representing encouraging growth of 7.7% from the year-over-year period. This growth was mainly due to the continuous enrichment of quality content as well as product upgrades and optimization, which leveled our platforms user appeal. Additionally, it further highlights both the necessity and the efficiency of our content investment strategies and product improvements. User stickiness also improved, with total user time spent on our platform in the quarter growing by about 12% year-over-year. Our Huya Live app's next month user retention rate remained above 70% in addition to our growing active user base. With respect to product upgrades, we have found positive strides in product, using product innovations for our users. Our newest Weixin 10.0, our Huya Live app further integrates community features and enhances the user interaction experience. More specifically, Weixin 10.0, our Huya Live as a social community called Tiger Chit Chat, which features broader-based content ranging from videos, images and the text post to game Q&A, strategies and events. The community also serves as a discussion board between users and their favorite broadcasters, promoting better interaction between broadcasters and their fans to cultivate deeper bonds during live streaming hours, engaged in community interactions and activities, users are more motivated to produce high-quality UGC in the video category through our algorithm-driven recommendations and operations. Furthermore, segments for different game titles and tournaments have also been created in the official accounts to operate by game studios can join the community to provide us their latest game information and strategies. In addition, based on the interactive one click to join broadcasters' gameplay feature, which is available in our live streaming channels. We launched competition function called Community Contest, enabling users to participate in our game competition with guests. And we are initiating battles in the matching system with just one click. Here, users can win prices offered by the platform and also have the chance to compete with celebrity game broadcasters. This new feature is another testament to our ability to recognize and fulfill user taste. As a side note, I'd like to mention that our community features are not created at random, the foundation of our communitization is deeply embedded on our platform through continuing development. The features we institute are based in our understanding of community preferences. And most of our upgrades upon our trend dictated by our users' tastes. Our achievements in product upgrades and the value chain integration actively advance us toward our vision of becoming a one-stop destination for comprehensive game-related services as we work, collaborated with our partners to capture more opportunities across the industry value chain. Along with a more comprehensive offering, we aim to unlock more monetization opportunities going forward. In addition, by leveraging our long-term initiatives in game operations, we deepened our collaboration with game titles in recent months. Taking LoL: Wild Rift, as an example, we will team the app with its game studio across product function development and the game and community operations. Excitingly, Huya has contributed to the content and the interactive features of Wild Rift in game streaming function. Additionally, Huya's community is linked too and since with additional LoL Companion app for popular Wild Rift-related videos and posts. On the tournament front, we are with among the first to stream The Wild Rift League, WRL, the games in more general professional leader in China. We also produced a service our self-branded tournaments for these titles such as Huya Zhanshen Cup, which has become the Weixin as the official Wild Rift League. These types of linkers help improve users' viewing experience and they bring Huya first-mover advantage in Wild Rift mobile e-sports tournament system while strengthening Huya's leading position in this e-sports game. In promoting the newly launched, the LoL Esports Manager game, in addition to our work on general operational activities, such as recruiting broadcasters and providing streaming incentives, by working with its game studio, we also integrated some game features in the broadcasting sessions of LoL's major events, LoL Pro League and LoL Champions Korea, and sent out Huya-designated virtual items to users participating in those interactive activities. We are glad to see the game quickly gaining traction on our platform during the summer tournament season. Lastly, I would like to point out that on top of our continuous efforts in growing our user base and the game industry integration, at the corporate level, we have been focused on improving our operational efficiency and adopting more stringent budget control measures. We see these initiatives as necessary to help us navigate macro headwinds and other -- and external uncertainties. We are already seeing some early encouraging results from our operation optimization efforts, which Ashley will cover in great detail in just a moment. Going forward, we aim to further strengthen our monetization capabilities, optimize our cost and expense structure, and fortify our business fundamentals to achieve sustainable business development over the long term. With that overview, I will now turn the call over to our VP of financial -- Finance, Ashley Wu, to share more details on our operating metrics and financials. Ashley, please go ahead.

Thank you, Mr. Dong, and hello, everyone. To expand on Mr. Dong's remarks, I will now provide some updates on our content enrichment and diversification initiatives. On the professional e-sports content front, we broadcasted around 90 third-party e-sports tournaments in the second quarter of 2022, with the total viewership of those licensed tournaments reaching 608 million. During the quarter, we pursue our ROI less strategy, procuring autonomous more selectively to ensure our high-quality content offerings, align more closely with our budget control goals. In particular, legacy tournaments, such as LPL, Mid-Season Invitational and King Pro League, maintained their leading positions in viewership. Thanks to our strengthened cooperation with the CrossFire game. The CrossFire Pro League Spring continue to attract high user attention. I'd like to highlight that in 2022, Huya became one of CrossFire's top-level partners. Our cooperation now spans the game viewing experience, e-sports content and virtual privilege. We expect our broader alliance with CrossFire to help further expand our market reach in the first-person shooter game genre, giving us another competitive advantage. In addition to licensed e-sports content, we broadcasted 18 self-organized e-sports tournaments and entertainment PGC shows during the second quarter, generating total viewership of approximately 100 million. This was a particularly remarkable achievement, given the pandemic-related lockdowns in a few major cities in Q2 as well as our stricter project selection process. During the quarter, outstanding self-organized tournaments included Honor of Kings from the cup, Huya Tianming Cup, Huya Division of [indiscernible] Open Championship, and the 7th Huya Mobile Game Arena. It is worth noting that the fan-based series, a phenomenal Huya IP tournament, created for Honor of Kings, integrated online and offline gaming sessions, promoting the influence of popular broadcasters on our platform. Such efforts are assisting Huya in building its proprietary comprehensive tournament system around Honor of Kings, which will help sustain the stable and healthy development of e-sports ecosystem on our platform. Beyond adopting a more selective approach and allocating our resources to more effective content, as Mr. Dong mentioned earlier, we remain diligent in improving our operational efficiency and optimizing our business expenses in a nimble way. Our recent efforts in adjusting our overseas business, fine-tuning marketing channels and streamlining internal processes have led to a reduction of our Q2 total operating expenses by 17% quarter-over-quarter and 21.6% year-over-year. Next, moving on to our Q2 financial details. Unless otherwise specified, the percentage changes I'll be reviewing are all on a year-over-year basis. Our total net revenues were RMB 2.28 billion for Q2 compared with RMB 2.96 billion for the same period last year. Live streaming revenues were RMB 2.05 billion for Q2 compared with RMB 2.58 billion for the same period last year. The decline was mainly due to recent macro and regulatory environment. We saw lower average spending per paying user on Huya Live on a year-over-year basis, as the macro softness continue to adversely affect paying users sentiment. The number of paying users for Huya Live was 5.6 million, flat compared with the same period last year. Advertising and other revenues was RMB 223 million for Q2 compared with RMB 383 million for the same period last year, primarily due to lower content sublicensing revenues as the result of fewer sessions for licensing according to the licensing event schedule. The demand for advertising services was also soft due to the ongoing challenging macro environment. Cost of revenues decreased by 13.6% to RMB 2.06 billion for Q2, primarily due to decreased revenue sharing fees and content costs as well as bandwidth costs. Revenue sharing fees and content costs decreased by 13.3% to nearly RMB 1.77 billion for Q2, primarily due to the decrease in revenue sharing fees associated with declined live streaming revenues. Bandwidth costs decreased by 9.9% to RMB 154 million for Q2, primarily due to improved bandwidth cost management and continued technology enhancement efforts. Gross profit was RMB 290 million for Q2 compared with RMB 581 million for the same period of 2021, primarily due to lower revenues. Gross margin was 9.6% for Q2. Excluding share-based compensation expenses, non-GAAP gross profit was RMB 223 million and non-GAAP gross margin was 9.8% for Q2. Research and development expenses decreased by 19% to RMB 168 million for Q2, primarily due to the decrease in share-based compensation expenses. Sales and marketing expenses decreased by 40% to RMB 100 million for Q2, primarily due to decreased marketing and promotion fees as well as personnel-related expenses. General and administrative expenses increased by 13.5% to RMB 82 million for Q2, primarily due to the increase in professional service fees and personnel-related expenses. Other income was RMB 50 million for Q2 compared with RMB 48 million for the same period of 2021. As a result, operating loss was RMB 81 million for Q2 compared with operating income of RMB 182 million for the same period of 2021. Excluding share-based compensation expenses, non-GAAP operating loss was RMB 56 million and non-GAAP operating margin was negative 2.5% for Q2. Interest and short-term investment income were RMB 66 million for Q2 compared with RMB 58 million for the same period of 2021. Income tax expenses were RMB 1 million for Q2 compared with RMB 58 million for the same period of 2021, primarily due to lower taxable income. Net loss attributable to HUYA Inc. was RMB 19 million for Q2 compared with net income attributable to HUYA Inc. of RMB 186 million for the same period of 2021. Non-GAAP net income attributable to HUYA Inc. was RMB 6 million for Q2 compared with RMB 250 million for the same period of 2021. Non-GAAP net margin was 0.3% for Q2. Diluted net loss per ADS was RMB 0.08 for Q2. Non-GAAP diluted net income per ADS was RMB 0.02 for Q2. As of June 30, 2022, the company had cash and cash equivalent, short-term deposits and short-term investments of RMB 10.72 billion compared with RMB 10.47 billion as of March 31, 2022. With that, I would now like to open the call to your questions.

[Operator Instructions] The first question now comes from the line of Yiwen Zhang from China Renaissance.

[Foreign Language] My question will be regarding the gaming community policy update. So can you elaborate a bit more about the rationale behind the setting of this gaming committee? And then what kind of vouching does it provide, does it synergize with the rest of our business?

[Interpreted] Thank you for this question. Recently, we have officially launched the Tiger chitchat community in Huya's application version 10.0, which covers video and graphic communications. Users can initiate discussions on game Q&A, strategy tips, as well as tournaments and et cetera. [Interpreted] On the one hand, it provides a place for a communication between users and live streamers. Users can also discuss interesting content with their peers. The live streamers can better interact with their fans during live streaming hours, which is also conducive to consolidating their fan base. And on the other hand, the recommendations and operating screening, it can stimulate the enthusiasm of the users to produce video UGC and increase the sense of user participation and help to improve the high-quality content output on our Huya platform. [Interpreted] In addition, we also set up zones for some major game titles and tournaments and invited the official operating accounts of the games to settle in so as to provide more accurate consultation and related video and live content of the corresponding game titles. At the same time, it can also help the game studios to optimize their operation for a better effect and enhance their cooperation relations with Huya. [Interpreted] This version update comes as a natural upgrade of function of community. Huya's community has been gradually built over the past several years. And therefore, it is necessary to upgrade the product to make an organic combination of live streaming, plus video, plus community in a one-stop manner, meet the users' various needs for watching the game live, sharing and communicating, and joining the game at any time. The content metrics of Huya meets the needs of the players to understand and discover the game before they play, consume the derived content after the game and also precipitate the needs of the players. We hope to generate greater value in the game industry chain, explore other monetization opportunities, in addition to live revenue income, advertising and games.

For the question, our next questions comes from the line of Ritchie Sun from HSBC.

[Foreign Language] Regarding the regulation titling towards restriction ranks and PK since May, could you please quantify the revenue, MAU and paying user impact on our platform? And what are the alternative solutions for us to recruit the loss of revenue or users due to the regulation?

[Interpreted] Towards the regulatory authorities, usually the opinions on standardizing the online live broadcast reward and minus protection in May, we have implemented the requirements on schedule after the policy change accordingly. And this policy mainly focuses on minor protection and strengthening the management during the peak hours, such as the adjustment of PK playing sessions and key functions such as the ranking modification. We believe that this policy change will help us to better regulate the industry and promote long-term development. [Interpreted] To some products and operations on the platform. And meanwhile, we have also made some more stringent management on the live content and behaviors of the live streamers. We will also closely monitor the policy updates and timely improve the product and operation practices and create a more healthy platform, atmosphere and content supply. [Interpreted] At present, these adjustments have been casting some impact on live broadcast revenue that we have in a certain period of time. Amongst which, the impact in Q2 is mainly in June, and it is expected that the Q3 will reflect its impact on the whole quarter. We are also continuously assessing the subsequent impact of these adjustments on financial and operational indicators. [Interpreted] Nevertheless, on the whole, we believe that these adjustment and changes have limited impact on the demand of the core users on Huya. We'll still serve the core users by providing high-quality games, videos as well as other entertainment content. And at the same time, we'll better optimize our strategy in operation and monetization for a balanced development of our product and subscription businesses. [Interpreted] At the same time, we'll continue to strengthen the compliance capability of Huya and invest in corresponding technologies. For example, here, there is this AI real-time sound silencing system, which is the industry's first, launched recently. This can help us to realize real-time sodding of audio transmission of potentially risky content and effectively improve our review ability of live content. The establishment of a better platform compliance system is conducive to help us in the longer term growth in Huya.

Next questions comes from the line of Thomas Chong of Jefferies.

Thomas, are you there? How about we move to next question, please, first? Thank you.

No problem. Certainly. [Operator Instructions] We will now move to the next question first from the line of [ Katrina Cho ] of Citi.