HUYA Inc. (HUYA) Q1 2022 Earnings Call Transcript

HUYA Inc.  (NYSE: HUYA) Q1 2022 earnings call dated May. 17, 2022

Corporate Participants:

Hanyu Liu — Investor Relations

Rongjie Dong — Director, Chief Executive Officer

Ashley Xin Wu — Vice President of Finance

Analysts:

Thomas Chong — Jefferies — Analyst

Yiwen Zhang — China Renaissance — Analyst

Katrina Cho — Citi — Analyst

Lei Zhang — Bank of America Merrill Lynch — Analyst

Ritchie Sun — HSBC — Analyst

Presentation:

Operator

Hello, ladies and gentlemen. Thank you for standing by for the First 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.

Hanyu Liu — Investor Relations

Hello, everyone, and welcome to HUYA’s first quarter of 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 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 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 — Director, Chief Executive Officer

Hello everyone. Thank you for joining our conference call today. Despite macro challenges that continued to impose near-term pressure on us and the entire industry. We delivered healthy user growth and standard financial performance in the first quarter of 2022. Total net revenues were RMB2.46 billion and non-GAAP net income reached approximately RMB 47 million RMB for the first quarter, in line with our expectations against the backdrop of the involving marketer environment.

First, let me give you some color on our user metrics. Our user base sustained its expansion trend with HUYA Live’s mobile MAUs increasing by 8.5% year-over-year to RMB 81.9 million in the first quarter. The growth was mainly driven by the strong performance of e-sports tournaments this quarter, as well as our enhanced cooperation with game studios. Meanwhile, our user engagement level also improved as we remained diligent in our efforts to provide quality content and optimize user experience through product innovations. Specifically, in the first quarter, users’ time spent on our platform recorded double-digit growth on both our year-over-year and quarter-over-quarter basis. In addition, HUYA Live apps maximum [Phonetic] user retention rate remained stable at about 70%.

Now, I would like to provide more details about our cooperation with game studios and our recent advancements in product innovation. Our interactive feature [Foreign Speech] has emerged as well a popular way to connect game streaming viewers directly with their game players. By participating in these task type activity, users can claim virtual rewards from both game studios and our platform once they complete specific combinations of tasks, such as viewing game streaming for certain period of time and sending certain bullet chats. We introduced the feature during our live broadcaster of Peacekeeper Elite last year and have now added it to over 10 game titles such as Honor of Kings, LOL, Wild Rift, Call of Duty mobile and Genshin Impact as we continue to deepen our relationship with variety of game studios.

Excitingly, more than 10 million users on our platform engaged with this interactive feature during the first quarter. In addition to improving user interacting metrics on our platform, more game operating teams have noted that the feature encourages some of the players to return to games, bolstering user activation rates. In another effort to expand our in depth cooperation with game titles, we joined forces with crossfire mobiles game studio to design and launch an event membership during the tournament tailored to our self-produced HUYA CFM Championship Longteng Cup, HUYA CFM [Indecipherable] by connecting their CFM game ID with HUYA account, users secured a free membership, which allowed them to complete gameplay and tournament related tasks to unlock an array of privileges on both the game operators and HUYA’s platforms.

This instructive helped increase HUYA’s exposure within the gaming community and also promoted gamers’ activity level. In addition, all Longteng matches were live broadcasted on HUYA’s platform and were also made available on the CFM in-game tournament streaming channel, increasing self-produced events popularity and refracting our continuous efforts to connect HUYA’s live streaming content with Tencent ecosystem. Building on these events success, we will forge ahead with additional endeavors in key area going forward.

We are also looking beyond toward our gaming to innovate more interactive live streaming features. For example, at our January Annual Gala event, via Boom Night, we debated as extraordinary music movement [Foreign Speech] and online real time interactive musical game play feature designed to make the event broadcast distinctive and captivating. This new feature leveraged our in-house developed audio and advancing technologies in growth users in the musical experience with our fun simple game, collecting bubbles on their screen along with the music with them.

Users who have scored based on better accuracy, allowing them to compete with other viewers, while watching artists livestreamed stage performance. Merging live musical performances and interactive activities. This new feature created a truly immersive viewing experience, bringing the unique feeling of live performance to users fingertips and broadening the boundary between reality and virtuality.

Before I conclude, I would like to provide some updates on our recent strategic initiatives in our overseas business. Given the luxury changing business involvement, both domestically and internationally, we have strategically implemented some adjustments and the refinements with respect to Nemo TV’s operations concentrating our resources on future key geographic regions. While these adjustments for the resulting short-term contracts streams in overseas, user expansion and revenue growth as we downside our overseas presence in certain areas. We expect to improve the overall efficiency of our international business by directing resources to regional markets with greater potential for profitable business growth at a low cost.

We believe this more focused approach will benefit our overseas operations in the long term. In summary, the persistent macroeconomic and regulatory headwinds, along with the impact on the ongoing COVID-19 resurgence in China, but there are still quite some challenges as we move ahead. Nevertheless, we are confident in our strategy and we will continue to focus on harnessing and sustain our business in the main course to further improve operational efficiency as we embrace the regulatory changes.

We will continue to work closely with authorities and directly comply with the government’s guidelines and the laws by leveraging our operational and technology expertise, sustaining ideas in the game live streaming market. We also believe that the restriction will not impact the core needs of our users and that we are capable or continually innovating compliant products and features to offer users more choices and better experiences in the world of live broadcasting. As our high quality content portfolio and the technology and the product advancements solidify our leadership in the game live streaming market. We will remain committed to serving our growing user base and creating more value for our broadcasters, business partners and all other stakeholders.

With that over to you. I will now turn the call over to our VP of Financial, Ashley Wu, to share more details on our operating metrics and financial assessment. Ashly, please go ahead?

Ashley Xin Wu — Vice President of 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 fronts, we broadcasted around 80 third-party e-sports turnovers in the first quarter. This year we are deliberately being more selective in tournament procurement to ensure high-quality content offerings and improved ROI metrics. We were glad to see that first quarter, total viewership of licensed e-sports tournaments reached more than 700 million exceeding the previous quarters viewership, despite the fact that due to seasonality, the first quarter of the year is typically not a strong period for e-sport events. In, particular CFPL spring seasons viewership reached a record high this quarter, more than doubling compared to the 2021 spring season. LPL Spring, KPL Spring, LCK Spring and ESL Pro League S15 were also top performing tournaments during the period.

Our comprehensive e-sports content continue to serve as the key drivers of our — of user traffic and through a superior experience for all of our users. In addition to licensed e-sports content, we broadcasted 26 self-organized e-sport tournaments and entertainment PTC shows during the first quarter, generating approximately 86 million total viewership. During the Chinese New Year holidays, we have our HUYA [Indecipherable] event, which feature popular streamers from different categories as participants in several online games offering our users engrossing content and entertaining festival experience.

The HUYA CFM Championship Longteng Cup, which Mr. Dong mentioned earlier and HUYA Super League, a tournament for PC and Solo games were also were like HUYA’s branded e-sports events in the first quarter. Additionally, our commentary show for LPL HUYA’s Game Watch Room [Foreign Speech] has become a major channel for game lovers to enjoy professional gameplay analysis during the LPL season. We strategically adjusted our investment in self-produced events this quarter because we had abundant offerings of license events during the period and encountered pandemic related lockdowns in a few major cities, which imposed some delays on in-house variety show productions. Nevertheless, those events we broadcasted in the first quarter achieved satisfying results.

Furthermore, we have been continuously improving our video production and viewing experience for users. On the product end, we are integrating video content with our newly added discussion forum in streaming channels. We’ve been a specific game or tournament forum. Users can upload videos of game play or tournament highlights to share, watch and discuss with their peers, helping to create a dynamic content ecosystem on our platform. Encouragingly, in the first quarter, the number of videos uploaded on our platform grew by 12% quarter-over-quarter and retail viewership recorded nearly 50% sequential growth.

Next, let me walk you through our Q1 financial results. Unless otherwise specified, the growth rate, I will be reviewing, are all on a year-over-year basis. Our total net revenues were RMB 2.46 billion for Q1, decreasing by 5.4% year-over-year. Live streaming revenues were RMB 2.15 billion for Q1, compared with nearly RMB 2.5 billion for the same period last year. The decline was mainly due to lower average spending per paying user on HUYA Live.

As the macro softness continue to adversely affect paying users sentiment, the number of paying users for HUYA Live was 5.9 million, relatively flat compared to the same period last year and representing a net addition of 0.3 million compared to Q4 last year. We believe the increased user engagement level and time spent in Q1 contributed to the sequential increase in paying users.

Advertising and other revenues increased by 47.2% year-over-year to RMB 313 million for Q1, primarily driven by the increase in content sub-licensing revenues. In this Q1, we were able to recognize more sub-licensing revenues according to the licensing event schedule. Cost of revenues increased by 1.9% to RMB 2.1 billion for Q1, primarily due to the increase in revenue sharing fees and content costs. Revenue sharing fees and content costs increased by 3.4% to RMB 1.8 billion for Q1, primarily due to the increase in spending on e-sports content and the increase in revenue sharing fees in relation to certain broadcaster incentive programs.

Bandwidth costs decreased by 7.3% to RMB 168 million for Q1, primarily due to improved bandwidth cost management and continued technology enhancement efforts. Gross profit was RMB 334 million for Q1 compared with RMB 514 million for the same period of 2021, primarily due to lower revenues and increased cost of revenues, primarily driven by higher revenue sharing fees and content costs. Gross margin was 13.5% for Q1.

Excluding share-based compensation expenses, non-GAAP gross profit was RMB 347 million, and non-GAAP gross margin was 14.1% for Q1. Research and development expenses decreased by 1.4% to RMB 196 million for Q1, primarily due to the decrease in share-based compensation expenses. Sales and marketing expenses increased by 0.3% to RMB 145 million for Q1.

General and administrative expenses decreased by 3.9% to RMB 81 million for Q1, primarily due to the decrease in share-based compensation expenses. Other income was RMB 28 million for Q1 compared with RMB 76 million for the same period of 2021, primarily attributable to realized damages received in the first quarter of 2021 from a favorable outcome in a broadcaster-related lawsuit. As a result, operating loss was RMB 60 million for Q1 compared with operating income of RMB 162 million for the same period of 2021.

Excluding share-based compensation expenses, non-GAAP operating loss was RMB 3 million and non-GAAP operating margin was negative 0.1% for Q1. Interest and short-term investments income were RMB 59 million for Q1 compared with RMB 65 million for the same period of 2021, primarily due to decreased interest rates. Income tax expenses were RMB 9 million for Q1 compared with RMB 39 million for the same period of 2021, primarily due to lower taxable income.

Net loss attributable to HUYA Inc. was RMB 3 million for Q1 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., which excludes share-based compensation expenses and gain on fair value change of investments, net of income taxes was RMB 47 million for Q1 compared with RMB 266 million for the same period of 2021. Non-GAAP net margin was 1.9% for Q1.

Diluted net loss per ADS was RMB 0.01 for Q1. Non-GAAP diluted net income per ADS was RMB 0.19 for Q1. As of March 31, 2022, we had cash and cash equivalents, short-term deposits and short-term investments of RMB 10.47 billion, compared with RMB 10.96 billion as of December 31, 2021, primarily due to the increase in investments and prepayments to content providers.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] Your first question comes from the line of Thomas Chong from Jefferies. Please ask your question.

Thomas Chong — Jefferies — Analyst

[Foreign Speech] So my question is about our overseas business. Just wondering, what will be the reason behind the adjustment and what will be the impact on our business? Thanks.

Rongjie Dong — Director, Chief Executive Officer

[Foreign Speech] Given the rapidly changing business environment, both domestically and internationally, we have strategically implemented some adjustments and refinements with respect to Nimo TV’s operations, concentrating our resources on future key geographic regions, while these adjustments could result in short-term contractions in overseas user expansions and revenue growth as we downsize our overseas presence in certain areas and might have some non-reoccurring expenses, but we expect to improve the overall efficiency of our international business by directing resources to regional markets with greater potential for profitable business growth at a lower cost. We believe that this more focused approach will benefit our overseas operations in the longer term.

Hanyu Liu — Investor Relations

Okay. Let’s have the next question.

Operator

Thank you. Your next question comes from Yiwen Zhang from China Renaissance. Please ask your question.

Yiwen Zhang — China Renaissance — Analyst

[Foreign Speech] So, thank you, management for taking my questions. So, I have a quick question on the traffic side. So, game license, there is some change in April and also COVID to some cities back to lockdown. So what are their impacts to our capex side? Thank you.

Rongjie Dong — Director, Chief Executive Officer

[Foreign Speech] Thank you for your question. For the longer term, the resumption of licensing of games is positive development for the gaming industry. As a downstream player of the game industry, HUYA, we believe that this will be helping us to enrich our content for live streaming. Also at the same time, HUYA has the best operating capacity in terms of new games. So, we stand in a more advantageous position when gaining traffic from those new games, and it would be positive for our long-term user expansion.

In addition, the resumption of licensing games will be motivating the advertisers on the games, which is positive on our advertisement business and the platform. In the short-term, I think our people will be looking more at the business side, whether or not the new games are being released, are suitable for our live streaming and whether or not the new games are well received in the users. And we are also keeping an eye on the pulse of the market. And given the fact that the resumption of licensing games only began in April, the impact of such on our business, especially advertisement business, is pretty much limited for now.

[Foreign Speech] As for the impact of COVID, in terms of the traffic, because some cities they implemented these lockdown measures or stay-at-home measures, well, there are some positive impacts for our traffic, as well as game live streaming, but because these policies somehow normalizing, so compared with the beginning of 2020, the positive impact on our traffic is relatively smaller versus that time in 2020.

In terms of revenue, for the consuming behaviors for our online users, as well as the demand for advertisement from our advertisement merchants, there will be some pressures because of the COVID. And therefore, in the short-term, we expect to have some impacts on the revenue in this regard. We will continue to keep a close eye on the impact of COVID on our business. And we will also ensure that we can provide very good guarantee. And we could provide protections and great support to our colleagues, who are under the impact of lockdown measures.

Hanyu Liu — Investor Relations

Okay. That’s it. We can have the next question.

Operator

Thank you. Your next question comes from the line of Brian Gong from Citi. Please ask your question.

Katrina Cho — Citi — Analyst

[Foreign Speech] Thanks management for taking my question. This is Katrina Cho from Citi asking on behalf of Brian. Can management have assessed the impact of the new regulation on minor protection rolled out in May, especially the restriction on ranking and [Indecipherable] those features? And also, what’s our expectation for further detailed policy on other areas ahead? Thank you.

Ashley Xin Wu — Vice President of Finance

[Foreign Speech] Thank you. I’ll take your question. Our industry has been under scrutinizing of the regulators over the past period. And recently, the regulators has released opinions on regulating peeping behaviors on live streaming and better protections for miners. And we believe that these changes are to better regulate the industry so as to make sure that its long-term and sustainable growth in a more healthy way.

[Foreign Speech] We have been keeping a very close eye on the latest changes in terms of regulations and guidance. For these latest opinions on protecting the miners, we would make sure that we strictly abide by all the relevant regulations and guidance and earnestly implementing them after more operating details became available. We will have to make some adjustments in terms of our product and operations and we will try to do that as soon as possible.

This might mean some changes to our financial and operational metrics and we are now evaluating the scale of the impact. We think that these possible changes and adjustments may have a very limited impact on the core — on the demand of the core users on our platform. And we would, of course, dynamically addressing our operation and monetization policies, so as to minimize the impact from such regulation changes.

[Foreign Speech] At the same time, we continue to enhance our capacity in complying with the regulations and make relevant investments in our technology, so as to be more addressable to the regulation changes. At the same time, we’ll continue to invest in good quality content, upgrading our product and keep our competitiveness in the market.

Hanyu Liu — Investor Relations

Okay. Thank you. Let’s have the next question, please.

Operator

Thank you. Your next question comes from the line of Lei Zhang from Bank of America. Please ask your question.

Lei Zhang — Bank of America Merrill Lynch — Analyst

[Foreign Speech] Thanks management for taking my question. My question is mainly regarding our cooperation with Tencent and any updates in terms of the new initiatives, any change in regulatory environment? Thank you.

Rongjie Dong — Director, Chief Executive Officer

[Foreign Speech] Thank you for your question. The cooperation between HUYA and Tencent are progressing very well. First of all, we keep a very close synergy relationship with Tencent in terms of games and tournaments. For instance, in the first quarter, in our self-produced CFM Longteng cup, we have worked together with CFM Games for a joint membership. Users can participate in our activities and will be able to enjoy the privileges and benefits both on HUYA and in-game. On one hand, it increases the exposures of HUYA platform and users, and also at the same time, they would become active — more active in both the game and live stream platform. And this feature become very popular amongst the users and the results have been recognized by the game studio.

[Foreign Speech] We hope to expand such cooperation to more games and we could have more synergetic activities in terms of LOL mobile, in terms of our product, operation as well as communities. So, they will be able to enrich the user experience for our users on top of the live streaming content. And right now, we are having a leading market share in terms of live streaming for LOL mobile. And at the same time, we had held two [Indecipherable] cup for now, which is a self-produced tournament license officially by LOL Mobile.

[Foreign Speech] At the same time, HUYA had some very special interactive features, for instance, gift dropping or live streaming e-commerce that have been applied to video — that have applied to games in Tencent. For instance, for the gift dropping, it has been applied to more than 20 games in Q1 with over 10 million active users. And for Honor of King and Peacekeeper Elite, as well as the CODM, they’ve got very nice results so far and we plan to apply those interactive features to more games and more categories.

[Foreign Speech] As a company that produce content by — that produced technology-driven content, since 2021, we have been making some very nice progress in having these interactive features and also to generate some interactive content. Our content metrics are able to cater for the needs for the users, both before and after the game play, and that is positive for the promotion of games, as well as retention of players and users. We will continue to do it by giving more interactions on the live streaming and having some more active community features so as to retain our users and to have better connections of our users, live streamers, as well as game studios and players, so as to play a bigger role in the entire industry of game.

Hanyu Liu — Investor Relations

Okay. Thank you. Let’s have the next question, please.

Operator

Thank you. Your next question comes from the line of Ritchie Sun from HSBC. Please ask your question.

Ritchie Sun — HSBC — Analyst

[Foreign Speech] Thank you management for taking my questions. So, first of all, as we noted, some of your competitors are changing their content strategies or even exit the business, so how should we think about the long-term adjusted net margin profile under this new competitive landscape? And secondly, how should we think about the headcount and also budget allocation plans across R&D, sales and marketing and G&A expenses for this year? Thank you.

Rongjie Dong — Director, Chief Executive Officer

[Foreign Speech] Thank you for your question. We noticed the strategic change by our competitor and from HUYA’s point of view, we think that it is a positive trend for us as this will alleviate the competition landscape.

Ashley Xin Wu — Vice President of Finance

[Foreign Speech] Given where we are right now in HUYA, Inc., we will continue to have more stringent control over our cost and expenses and optimize our operating efficiencies. Overall speaking, it is necessary to continue to invest in high-quality content and product because that is positive to make sure that we will continue to serve our users well and to consolidate our leading position in a competition.

[Foreign Speech] In terms of revenue sharing fees with the live streamers, recently, the market layout has not changed a lot. So, given our operation and monetization capabilities on HUYA, we think that the current regime for revenue sharing is competitive and therefore, we will keep that way unchanged.

[Foreign Speech] In terms of licensed product and self-produced products, we will have more detailed analysis as to the ROIs of different kind of content, and we will allocate our resources to more effective content and make adjustment according to the market dynamic. For instance, in Q1, we have made a more selective approach in investing in licensed tournaments and self-produced content.

[Foreign Speech] At the same time, we’ll continue to optimize our technology on the bandwidth and make it more efficient. And we would also make more optimizations in terms of sales and marketing and other operating expenses and to have more stringent control in terms of labor costs and other expenses. [Foreign Speech] We had also mentioned that we are making some strategic adjustments to our overseas business, which in a way, constitute as the method to control our cost.

[Foreign Speech] In terms of the margin for the short-term, because of business adjustment for the quarter, there might be some non-recurring expenses and costs for the quarter and that would send some turbulences to our margin level. However, if you look at the entire trajectory for the whole year, in terms of investment and revenue, we expect that the content cost as a percentage to revenue in 2022 will be slightly higher than 2021.

And therefore, the overall gross margin rate for the whole year might be affected. And due to that, we believe that operating margin in 2022 versus 2021, will be slightly lower. But of course, we will continue our effort in optimizing our cost and operation efficiency, so as to lay down a good foundation for our long-term development.

Hanyu Liu — Investor Relations

Okay. That’s it.

Operator

Thank you. As there are no further questions now, I’d 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 on our website or the TPG Investor Relations. Thank you.

Operator

[Operator Closing Remarks]