HUYA Inc. (HUYA) Q2 2022 Earnings Call Transcript

HUYA Inc.  (NYSE: HUYA) Q2 2022 earnings call dated Aug. 16, 2022

Corporate Participants:

Hanyu Liu — Investor Relations

Rongjie Dong — Chief Executive Officer

Ashley Wu — Vice President, Finance

Analysts:

Yiwen Zhang — China Renaissance — Analyst

Ritchie Sun — HSBC — Analyst

Katrina Chiu — Citi — Analyst

Thomas Chong — Jefferies — Analyst

Lei Zhang — Bank of America — Analyst

Presentation:

 

Operator

Hello, ladies and gentlemen. Thank you for standing by for the Second Quarter 2022 Earnings Conference Call for HUYA Inc. [Operator Instructions] Today’s conference call is being recorded.

I will now turn the call over to Ms. Hanyu Liu, Company Investor Relations. Please go ahead.

Hanyu Liu — Investor Relations

Hello, everyone, and welcome to HUYA’s Second Quarter 2022 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 in 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 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.

Rongjie Dong — Chief Executive Officer

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 that the new domestic live streaming regulations which were introduced in May mainly focused on keeping 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 created a fairly immediate impact on 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 platform 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 games, 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 the aforementioned 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 investment of quality content as well as product upgrades and optimization, which leveled our platform’s 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 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 version 10.0 of Huya Live app further integrates community features and enhances the user interaction experience. More specifically, version 10.0 are live as a social community called Tiger Chit-chat, which features broader-based content ranging from videos, images, and the text post to Q&A strategies and events.

The community also serves as a discussion for 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 are also created, and official accounts operated by the game studios can join the community to provide the latest game information and strategies. In addition, based on the interactive one-click to join broadcaster’s gameplay feature, which is available in our live streaming channels, we launched a 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 [Indecipherable].

As a side note, I’d like to mention that our community features are not created at random. The foundation of communitization is deeply embedded on our platform through years of development. The features we institute are based in our understanding of community preferences, and most of our upgrades are born outright dictated by our users’ tastes. Our achievements in product upgrades and the value chain integration actively advance us toward our vision of becoming a nonstop destination for comprehensive game-related services as we worked and 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 the 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 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 Champion Korea, and sent out Huya designated virtual items to users participating in those impacted 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 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.

Ashley Wu — Vice President, Finance

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-led strategy, procuring autonomy more selectively to ensure our high-quality content offerings aligned more closely with our budget control goals. In particular, legacy tournaments, such as LPL, Mid-Season Invitational (MSI), and King Pro League (KPL), maintained their leading positions in viewership. Thanks to our strengthened cooperation with the Crossfire game, the Crossfire Pro League spring continues 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-sport content, we broadcasted 18 self-organized e-sport 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 channels included Honor of King from the Cup, Huya Tianming Cup, Huya division of Teamfight Tactics open championship in the seventh Huya mobile game arena. It is worth noting that the Thunder 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 the esports 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 meaningful 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 2.38 billion for the same period last year. The decline was mainly due to the recent micro and regulatory environment. We saw lower average spending per paying user on Huya Live on a year-over-year basis.

As the micro softness continues 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 were 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 scheduled. 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 1 — was RMB 290 million for Q2 compared with RMB 581 million for the same period of 2021, primarily due to lower revenues. The 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, the operating loss was RMB 81 million for Q2 compared with an operating income of RMB 182 million for the same period of 2021. Excluding share-based compensation expenses, the non-GAAP operating loss was RMB 56 million and the 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 90 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.

Questions and Answers:

 

Operator

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

Yiwen Zhang — China Renaissance — Analyst

My question is regarding the game community policy — added a recent update. So can you elaborate a bit more on the rationale behind the setting of this game community? And then what kind of opportunity does it provide — does it synergize with the rest of our business?

Rongjie Dong — Chief Executive Officer

Thank you for this question. Recently, we have officially launched the Tiger Chit-chat 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.

On the one hand, it provides a place for 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 non-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.

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 title. 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.

This version update comes as a natural upgrade of the function of the 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, and 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 the 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, and explore other monetization opportunities, in addition to live revenue income, advertising and games.

Operator

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

Ritchie Sun — HSBC — Analyst

Regarding the regulation titling towards tipping ranks in 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 on users due to the regulation?

Ashley Wu — Vice President, Finance

Since the regulatory authorities issued the opinions on standardizing the online live broadcast reward and minors 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 tipping ranking modification. We believe that this policy change will help us to better regulate the industry and promote long-term development.

[Technical Issues] — 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.

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 Q3 will reflect its impact on the whole quarter. We are also continually assessing the subsequent impact of these adjustments on financial and operational indicators.

Nevertheless, on the whole, we believe that these adjustments and changes have a 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.

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 shading 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.

Operator

The next question comes from the line of Thomas Chong of Jefferies.

Hanyu Liu — Investor Relations

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

Operator

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

Katrina Chiu — Citi — Analyst

Can management share with us the measures we have taken for cost optimization? And how we should expect the margin outlook in second half of ’22?

Ashley Wu — Vice President, Finance

At present, improving the company’s operational efficiency, taking more stringent budget control measures, and optimizing costs and expenses are important job of ours that will help us to better consolidate the company’s businesses and financial foundations under the current environment and support the long-term sustainable development.

First of all, our recent adjustment of overseas businesses is a measure of overall cost optimization, which can help us to reduce the margin jag of overseas business loss on the whole.

In terms of the cost in the second quarter, in addition to more stringent screening procedures for copyrighted and self-made content, it has been optimized in terms of the live streamer signing and bandwidth utilization efficiency. In terms of operating expenses, we are more cautious in channel and promotion expenses, and we also strengthened the internal processes for that matter. We also have made more control over the personnel-related costs and expenses.

Despite the decline in profit margin due to the decline in revenue in this quarter, we still made some achievements in improving the operational efficiency. The total operating expenses in the second quarter decreased by 21.6% year-over-year and 17% quarter-on-quarter.

We believe that these measures will continue to optimize the cost and expenses. However, due to seasonal factors, our profit margin level will be affected by the increase of event costs and the corresponding promotion expenses in the second half of the year.

From a longer-term perspective, by enhancing our monetization capability of ours, we continuously optimize the cost and expense structure, such as a more balanced tournament and self-produced content and streamer costs as well as continuous improvement of operational efficiency. We’re confident in improving the margin and maintaining a positive profit.

Hanyu Liu — Investor Relations

Okay. Let’s have the next question.

Operator

We will take the next questions from Thomas Chong from Jefferies.

Thomas Chong — Jefferies — Analyst

My question is about our content strategy. Can management comment on how we should think about the outlook in the second half as well as in the future?

Ashley Wu — Vice President, Finance

Thank you for your question. As we mentioned before, users are the core of our businesses, and it is the company’s long-term development strategy to continuously drive user growth. And therefore, quality content investment, it is still necessary because it helps us to continuously serve our users in consolidating the competitive position that we have. At the same time, we will also adopt a more cautious investment strategy and concentrate our resources on more effective content.

In terms of IP and self-made content, we carry out more targeted analysis and meticulous evaluation of the ROI of various planned purchases that we have and content production and make timely adjustments according to the market conditions. And since this year, we have had more strict choices in IP terminals and self-made content projects. So the total number may not be as many as before, but the overall quality is improved. This is also reflected in the size of the viewership watching these contents and the growth of the MAU on our platform.

Let me give you an example. In the second quarter, a total of about 100 million people watched 18 self-produced tournaments and PGC programs that we have. The year-on-year growth of mobile MAUs in Q1 and Q2 was at a high single-digit level.

Here, I would also like to mention that at present, we’ll continue to invest in some top-tier events at higher prices relatively. In the second half of the year, we’ll broadcast top-level professional leagues of various mainstream game titles, including S-12. We consider not only the short-term direct cost and revenue, but also the impact on user value, brand reputation, platform cooperation, and so on. At the same time, we also hope to negotiate better commercial terms in the future and realize long-term benefits.

In terms of live streamer content, we will also dynamically address the input of signing and tipping sharing that we have with the live streamers, through the upgrading of technology, we can help and encourage the users and live streamers of the platform to create videos and more interactive content to form a more complete matrix of content offering.

Operator

The next question comes from the line of Lei Zhang from Bank of America.

Lei Zhang — Bank of America — Analyst

My question is mainly about our long-term growth. What are the growth driver in the mid-to-long term that you can share with us?

Rongjie Dong — Chief Executive Officer

At present, our monetization result is mainly conditioned by the external environment. HUYA has a continuously growing user base and good user loyalty and commercial operation ability. With our commercialization model being further explored and optimized and the market situation improving, we expect that our live broadcast revenue will gradually return to a growing trajectory. And we believe that starting from here, we have a few mid to long-term development directions.

First, as mentioned before, HUYA, as a key part of the game industry chain, provides a lot of value for our game users and studios. For the category of long-tail game titles, more services can be provided from the operation to help the game obtain and retain users and expand its influence of the games. At present, our direct income is mainly coming from the user side, while from the game studios’ side, we also hope to achieve win-win cooperation through deeper cooperation with them and more services provided such as joint operation. In the mid-to-long term, I think this is a place with the potential for our business and revenue growth.

The second point, we hope to better link the video businesses with live streaming businesses, the community functions that we have now integrated into the video content, and we have also set up a vertical short-form video module. And through upgrading these products, about 30% of our daily users watch videos currently. With this data being further improved in the future, we hope to realize more monetization from the video, such as advertising revenue.

In addition, we believe that interactive games in the live streaming room as well as the forms of virtual streamer or virtual live room are gaining popularity. So we have explored and tied these forms and achieved some preliminary results. And it is expected that these forms will also present some opportunities to create more value in the future.

Operator

There are no further questions. Now I would like to turn the call back over to the company for closing remarks.

Hanyu Liu — Investor Relations

Thank you once again for joining us today. If you have further questions, please feel free to contact HUYA’s Investor Relations through the contact information provided by us today.

Operator

[Operator Closing Remarks]