HUYA Inc. (NYSE:HUYA) Q2 2023 Results Conference Call August 15, 2023 8:00 AM ET

Company Participants

Hanyu Liu - Investor Relations

Songtao Lin - Chairman

Junhong Huang - Senior Vice President and Acting Co-Chief Executive Officer

Ashley Wu - Acting Co-Chief Executive Officer and Vice President of Finance

Conference Call Participants

Thomas Chong - Jefferies

Daniel Jang - UBS

Lei Zhang - Bank of America Securities

Yiwen Zhang - China Renaissance

Operator

Hello, ladies and gentlemen, thank you for standing by for the Second Quarter 2023 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 will now turn the call over to Ms. Hanyu Liu, Company Investor Relations. Please go ahead.

Hanyu Liu

Hello, everyone, and welcome to HUYA'S second quarter 2023 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. Songtao Lin, Chairman of HUYA; Mr. Junhong Huang, Acting Co-CEO and Senior Vice President of HUYA; and Ms. Ashley Wu, Acting Co-CEO and 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 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 Chairman, Mr. Songtao Lin. Please go ahead.

Songtao Lin

[Technical Difficulty]

Hello, everyone. Thank you for joining our conference call today. It's my pleasure to participate in HUYA'S earnings call for the first time and to speak with all of you. We are celebrated our 7^th anniversary last week, a remarkable milestone in this industry.

Since I assumed my role as HUYA'S Chairman in May, I have conducted a comprehensive review of the company's business strategies with the company's management and business operations team.

As a leading game live streaming platform, we are having served a large number of games enthusiast, content concentrators and the partners in the industry by then, since its inception. Now we aim to build on HUYA'S success and the experience with - the company's role in the gaming industry.

We will be exploring more opportunities that completeness HUYA, whereas established user community and the company ecosystem to drive long-term, sustainable business development. We shared a brief strategy with you earlier this month and would like to take the opportunity today to elaborate on our latest plan.

Given we have the proven track record in the game live streaming market and close collaboration with industry partners, we are well-positioned to achieve this new goal. As a company enters the new phase of development, I’m confident that our upgraded vision is to promote sustainable vitality and propel HUYA'S future growth.

Now I would like to turn the call over to our Acting Co-CEO and SVP, Junhong Huang to discuss our strategies in greater detail. Thank you.

Junhong Huang

Okay. Thank you, Mr. Lin. And hi, everyone. I'm glad to speak with you today. To expand on our Chairman's remarks, let me share some specific about our current key objectives with respect to our new strategy.

First, we plan to shift our commercialization focus going forward exploring and increasing our users' value by integrating more game related service into our platform. Since we are inception, we have largely monetized our user base through our live streaming service, which primarily generate revenue by commissioning users visual gifts paid to broadcasters.

Converting regular users into paying users involves a relatively long process under our current core model. And conversion efficiency has yet to be improved. However, as most of you know, a significant part of our users are also gamers.

Based on our service and insight, the active gamer user on we are live are willing to spend both on game play and related in-game purchase. Also, the proportion and amount of in-game spending by this game users tend to be higher than death of general gamers.

Our rich game and export content offerings have already satisfied our game users content consumption needs, and we believe we can further capture this user group’s commercial value by meeting their broader game related needs with expansive service models such as game distribution in game item sales and game advertising.

Let's take in game item sales as an example. We have previously held several successful in-game sales of game tools, but these were one time event that functions mainly as marketing and promotional activities for those games.

Going forward, we plan to regularize in-game item sales and established a recurrent cooperation mechanism with various games to misuse ongoing demand for in-game purchase of schemes, weapons, and other items, especially when user watch broadcasters utilize these items during live games played on HUYA.

In addition to boosting monetization for our platform, this new service offering, we will provide additional channels for game publisher to promote their in-game products and expand our broadcasters income streams. We are currently discussing [commensal] (Ph) terms for this type of cooperation with an array of game studios and are looking forward to future partnerships with addition of games.

Furthermore, the technical support required to implement this business is already in place. Earlier this month, we completed development of our in-game item more function, which will be embedded into certain of our live channels yellow shopping cart items.

Once game users buy their game accounts with their HUYA account, they can seamlessly buy in game items when watching live streaming content for using related games. According to our plan, we will implement the function on small scale. Another priority is to expand income streams for our content creators and optimize our content cost structure.

At present, our broadcaster’s income mainly consisted of the [Xiom Fee] (Ph) we provide and their share visual gift revenue. For many game broadcasters, the relatively fixed Xiom fee is a major source of income.

As we explore and develop a wider range of game related service, we will work to optimize our content creator income structure by enabling them to earn a greater share of game related service revenue, including revenues from in-game item sales, game distribution and advertising among other service.

Diverse income streams will also increase HUYA value proposition to content creators attracting more broadcasters and their fan basis to our platform. We believe this adjustment to our content cost structure will boost the broadcasters financial while better aligning our content cost with our revenue.

To affect this transformation, we will first harness various technologies to upgrade the technical infrastructure required for our new service and products. As I mentioned above, our in-game item more function is already well underway.

We also plan to upgrade interest attacks across our live platform, which will allow users to earlier identify in-game items, meeting their personalized needs, as well as to discover new games or other content capturing to their interest.

In embracing the latest tech trends, we plan to actively explore the application of AI technologies, including large language model and AIGC to capture user interest, chance to, and help create more engaging interactive content and experiences.

In addition, we will further enhance our comprise capabilities by continuously investing in advanced technologies, including an AI powered content monitoring system to minimize operational risk and sustain a healthy community atmosphere on our platform.

We are proactively restructuring several aspects of our business for more targeted location of internal resource to advance our strategic transit toward a more balanced and sustainable development pathway.

To that end, we are planning to scale back certain less cost effective live streaming features, as well as financial incentives for live streaming revenue generating campaigns, and the proportion of our fixed spend on broadcasters.

Although, this adjustment may result in fluctuation in our operational and financial metrics in the near term, we believe our market leading position and strong execution capabilities will support our pursuit of long-term profitability improvement.

Our primary goal is to increase our game related service revenues to approximately 30% of total net revenues within three-years, creating a more balanced and diverse revenue to strengthen our foundation for long-term success.

We are confident with transformation initiatives. We will empower our sustainable growth as we remain committed to serving the needs and interest of more users, content creators and industry partners.

With that, I will now turn the call over to our Acting Co-CEO and VP of finance, Ashley Wu to share more details on our second quarter result. Ashley, please go ahead.

Ashley Wu

Thank you Junhong and hello everyone. I will provide some updates on our operating metrics and financial for the second quarter of 2023. On the user side, HUYA Live mobile MAUs which 82.9 million in the second quarter, compared with 82.1 million in the first quarter and 83.6 million for the same period last year.

This slight sequential improvement was mainly attributable to the increased e-sports content and entertainment programs we offer in the quarter, with the new game launches also enrich the platform's game content.

Meanwhile, users and broadcasters time spent on offline entertainment activities continue to affect us to some degree, especially given several short public holidays during the quarter. Overall, we maintained a stable user scale in the second quarter with the app next month's user retention rates staying above 70%.

Now, the content side. In terms of license e-sports event, we forecasted around 75 party professional e-sports tournaments in the second quarter of 2023, attracting a viewership of approximately 490 million.

We broadcasted a higher number of events in Q2 than in Q1, as more tournaments were scheduled, for fewer events than in the same period of last year, as we continue to implement stricter content procurement policies.

Domestic Professional Leagues for major game titles, such as the LPL Summer, KPL Spring, and CFPL Summer continue to deliver strong performances. Also, both the LOL mid-season Invitational and the CS:GO BLAST Paris and Asia proved very popular. In June, we broadcasted - Valorant’s Masters Tokyo, a tournament featuring professional teams from China and around the world.

Given the timing of this major event, just before the official China launch of Valorant in July, it attracted a passion from our users and serve as an engaging teacher for this new game on our platform.

Currently, Valorant is gradually cultivating its streamers and co-audience on to HUYA, and we expect to offer more related content, including self organized tournaments as its domestic e-sports system develops.

We also broadcasted more than 30 self organized e-sports tournaments and entertainment PGC shows in the second quarter with a total viewership of approximately 100 million. For self produced content, we aim to create a metric of high-quality in-house ITs. The new systems of our HUYA branded all-star cup for Peacekeeper Elite and [indiscernible] for Honor of King were among our most watched events during the quarter.

After multiple seasons, the funder series has become one of the most influential IPs for HOK tournaments on our platform, alongside the official KTL competitions. During the CS:GO BLAST Paris major event, we conducted our commentary program, [Indiscernible] Major live from a studio in Paris, remainder from the tournament audience and increasing our user community interaction with the event.

In addition, we held the eighth season of HUYA Kungfu Carnival during the quarter, extending these long run programs popularity is also worth mentioning that we recently leveraged its success to launch a series of carnival type programs, integrating both offline and online activities, such as Basketball Carnival and Billiards Carnival, capitalizing on the growing demand for entertaining sports content.

In line with our new strategies, we will continue to focus on developing our user community, and enhancing our content ecosystem across user generated content, professional user generated content, as well as licensed and self-produced professional programs. We are confident that our high-quality content and superior user experience will continue to support our business transformation.

In terms of financial performance, we achieve total net revenue of RMB1.82 billion, and non-GAAP net profit of RMB115 million for the second quarter of 2023. Despite the year-over-year revenue decrease amid a challenging micro and regulatory environment, we continue to make progress in optimizing costs and expenses.

In Q2, our growth margin improves both year-over-year and quarter-over-quarter, primarily driven by savings in content costs. As we continue to scrutinize content related spending, particularly content licensing and broadcaster related costs, along with the efficiency gains we maintain, we further narrow our operating loss with a non-GAAP operating loss of approximately RMB2 million in the second quarter.

Let's move on to our Q2 financial details. Our total net revenues were RMB1.82 billion for Q2 a decline from RMB2.28 billion for the same period last year. Live streaming revenues were RMB1.72 billion for Q2 compared with RMB2.05 billion for the same period last year, primarily due to a decrease in the number of quarterly paying users of HUYA life to 4.6 million for the second quarter of 2023 from 5.6 million for the same period of 2022.

The decline in the number of quarterly paying users was primarily attributable to the soft, micro and industry environment, as well as the increase in offline entertainment activities, which affected the time span by long tail users on our platform.

Advertising and other revenues were RMB 106 million for Q2 compared with RMB 223 million for the same period last year. This was primarily due to a significant decrease in content of licensing revenue. If we exclude the impact of the reduction in contents of licensing revenue as the result of our amended licensing agreement for LOL metrics in January.

The remaining portion of advertising and other revenues recorded single digit growth year-over-year. Cost of revenues decreased by 25% year-over-year through RMB1.55 billion for Q2, primarily due to decreased revenue sharing fees and content cost as well as bandwidth cost revenue sharing fees and content costs decreased by 25% year-over-year to RMB1.34 billion for Q2 primarily due to the decrease in revenue sharing fees associated with the decline in live streaming revenues and lower cost related to - content as well as content creators.

Service cost decreased by 34% year-over-year through RMB101 million for Q2, this was primarily due to improved bandwidth cost management and continued technology enhancement efforts. Gross profit was RMB273 million and growth margin was 15% for Q2.

Excluding share-based compensation expenses, non-GAAP gat gross profit was RMB278 million and non-GAAP gross margin was 15.3% for Q2. Research and development expenses decreased by 14% year-over-year to RMB144 million for Q2 primarily due to decreased personal related expenses.

Sales and marketing expenses increased by 6% year-over-year to RMB 106 million for Q2 primarily due to increased promotional fees. General and administrative expenses decreased by 9% year-over-year to RMB75 million for Q2 primary due to decreased personnel related expenses and share-based compensation expenses.

Other income was RMB24 million for Q2 compared with RMB50 million for the same period of 2022 primary due to lower indirect tax reform and government services. As the result, operating loss was RMB29 million for Q2 compared with RMB81 million for the same period of 2022. Interest and shorten investment income was RMB125 million for Q2 compared with RMB66 million for the same period of 2022, primarily due to increased interest rates and improved management of deposit products.

Net income attributable to HUYA Inc was RMB24 million, RMB23 million for Q2, compared with a net loss attributable to HUYA of RMB19 million for the same period of 2022. Excluding the share-based compensation expenses and impairment loss of investments, non-GAAP net income attributable to HUYA Inc was RMB115 million for Q2, compared with RMB6 million for the same period of 2022.

Non-GAAP net income margin was 6.3% for Q2. Diluted net income per ADS was RMB0.09 for Q2. Non-GAAP diluted net income per ADS was RMB0.47 for Q2. As of June 30, 2023, the company had cash and cash equivalents, short-term deposits and long-term deposits of RMB10.8 million, compared with RMB10.3 billion as of March 31, 2023.

Before we conclude, I'm pleased to announce that, HUYA'S Board of Directors has approved a share repurchase program, under which the company may repurchase up to 100 million of its ASCs or ordinary shares over the next 12-months. I believe this move further deepens our commitment to building long-term value for our shareholders.

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

Question-And-Answer Session

Operator

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

Thomas Chong

[Foreign Language]

My first question is about our new strategies. Can management, give us more details about the implementation? And secondly, talking about the target for our new strategies, are there any, short, medium and long-term targets that we can share? Thank you.

Junhong Huang

[Foreign Language]

Based on HUYA’s existing user community, and content ecosystem, we hope to further enhance the commercialization of game content and strengthen the industrial linkage, bring new breakthroughs to HUYA and improving our position in the game market, and develop long-term opportunities in a game value trend and promote the long-term sustainable development of the business. And our main goals and plans includes the following points.

We shift the focus of commercialization towards scam related services, such as scam distribution, game items sales, and game advertisements, so as to deeply explore the commercial value of game users. This is based on our significant gamer population.

Although, our users are willing and able to spend money on games, their related consumption on HUYA platform has been very limited due to our previous business model. And therefore, we plan to provide more game related services by strengthening corporation with the upstream game studios and broadcasters.

These cannot only meet the needs of the gamers to buy in-game items and discover and download new titles when watching live games, but also bring additional revenue channels for game manufacturers and increase the revenue stream for broadcasters, which is beneficial to all the parties in the industry chain.

At the same time, we strive to optimize the income structure of content creators on our platform and expand the income sources for broadcasters other than virtual gift revenue sharing and sign on fees, and let the broadcasters get more income from the sales, distribution, and advertising of game items. This is also conducive to enhancing the relevance between HUYA's content cost and income and reducing the fixed sign-on fee cost and improve the efficiency of the content cost we expand.

At this stage we're mainly engaged in the infrastructure building for new business, including the creation of functions and products needed to provide game related services, and also negotiating commercial terms with relevant game studios and publishers.

Earlier this month, we basically completed the development of the function of in-game items sales mall and plan to activate the process of in-game items sales and game distribution this year and make them available on several games.

Therefore, this part of business is expected to have a relatively small scale of income in the year 2023. At the same time, we are also making some adjustments to the live broadcast monetization business to reduce some inefficient resource investment. And next we will expand game related services to more games, including mainstream games and potential new titles, and further optimize the user experiences.

And our goal is to continuously increase the revenue proportion of game related services in the next three-years and strive to achieve a more balanced income structure for the company as a whole. By which we mean that we hope to make this part of gang related services income as about 30% of the total income.

Operator

Your next question comes from the line Daniel Jang from UBS.

Daniel Jang

[Foreign Language]

Let me translate myself. The company is going through a major strategic transformation. Given this, what is the outlook for the revenue and margins in the second half of this year?

Ashley Wu

[Foreign Language]

In transforming our business, in order to mobilize and allocate internal resources in a more targeted manner, we have begun to actively adjust various aspects of our existing business. For example, we are reducing some inefficient life broadcast functions, adjusting the incentive for live broadcaster activities, and the proportion of fixed sign-on fees.

These adjustments may cause fluctuations in our operational and financial indicators in the short-term, especially in the second half of this year, when the scale of the new business revenue is relatively small and the year-over-year decline of live broadcast business revenue may be larger, than that in the first half of this year, due to the impact of resource rate allocation. So this will have a more obvious impact on the overall revenue.

At the same time, we will continue to promote measures to reduce the costs and increase efficiency, and adopt stricter control over expenditures. Although there will be some new investments, such as further research and development and talent acquisition related to new businesses, we will continue to be cautious about the content expenses, such as copyrights and broadcasters.

And we will be cautious about channel promotion in terms of operating expenses. And in terms of the profit, we still maintain the expectation that, the gross profit margin will increase for the whole year and the non-GAAP net loss will be narrower than that in 2022.

In the medium and long-term, the GP margin of the game related business is expected to be higher than that of the existing live broadcast business, with a bigger mix of high gross margin business revenue and because of the content cost related to broadcasters more closer to income, we expect the overall profit situation will be improved and be maintained sustainably.

Operator

And the question comes from the line of Lei Zhang from Bank of America Securities. Please go ahead.

Lei Zhang

[Foreign Language]

My first question is regarding the updates on the recent regulatory enrolment, and any impact our business. Secondly, how should we look at the performance of Tencent's newly launched the game Valorant in our platform? Thank you.

Ashley Wu

[Foreign Language]

At present, the authority requirements on the content of a live broadcast platform, the behavior of broadcasters and users and the protection of miners are becoming more and more standardized and systematic.

And therefore, the overall management trend is also relatively standard and strict. We believe that the purpose is to better promote the standardization of the industry and promote the benign and sustainable development.

As a leader in our industry, HUYA has recently taken the initiative to upgrade and optimize the content and functions of our platform and refine the operation strategy and improve the efficiency and create a healthier platform environment.

We will also continue to maintain a more standardized and healthy development model for the content on our platform to guide broadcasters and guilds to strengthen their compliance awareness and pay attention to improving the compliance capability on the platform through technical investment.

Junhong Huang

[Foreign Language]

On the front of the new game, the live streaming performances of the new game is relatively stable as a whole, and we also expect that the game itself continues to be popular. It will attract more audiences of live and derivative content.

HUYA provides launch incentives and traffic support for the launch of the new games. And we will also organize activities and provide some prop products together with the game companies and with weighted supports according to the different game characteristics.

For example, Valorant, we have achieved a leading market share and for this popular e-sport scam, we will focus on establishing its advantages in the content ecology of events. And in addition to the official copyright events, we will launch more self-organized events for the scam, including events attended by the broadcasters and professional players to further enhance the activity of this scam sector.

Operator

Your next question comes from the line of Yiwen Zhang from China Renaissance.

Yiwen Zhang

[Foreign Language]

So thanks for taking my question. So with our commercialization focus, shifting with our view, our content strategy? Is there any change we plan to make?

Junhong Huang

[Foreign Language]

Our new strategic plan is deeply embedded in Who We Are’s, existing user groups and content ecology. The rich e-sports and game content on Who We Are helps to attract and maintain active core game users, which will also help to support our goal of providing more game services.

The broadcaster content will continue to be an important part of content on HUYA’s platform, especially our new commercial forms such as game distribution and prompt sales will also be achieved through cooperation with the broadcasters.

We will also provide more detailed content operation for potential and promising broadcasters and help create more popular content by combining event commentary with daily content and digging deep into the game content.

We will also bring technical support of products such as bullet chatting, interactive games, live interactive functions and virtual live broadcast technologies. At the same time, this will help us to improve the application of AIGC, which will also help to enhance the diversity of the content's presentation.

As for the content of copyright spots, we will also continue to implement cost reduction measures and cover the top tier events of major games on the basis of cost performance evaluation.

As for the self made content, due to its relatively high ROI, we will give more attention to self made content and create a high-quality, self organized IP metrics, such as HUYA Thunder Series, HUYA All-Star Cup, and Tianming Cup.

Through our own events, we will also better absorb the user traffic from large scale copyright events. In addition, we will continue to pay attention to the integration of live broadcast, video, game community and other content forms and continue to bring user quality experiences. Thank you.

Operator

Thank you. There seems to be no further questions. Now I would like to turn the call back over to the company for closing remarks.

Hanyu Liu

Thank you once again for joining us today. If you have further questions, please feel free to contact HUYA Investor Relations through the contact information provided on our website for Piacente Financial Communications.

Operator

This concludes this conference call. You may now disconnect your line. Thank you.