Hello, ladies and gentlemen. Thank you for standing by for the 2020 third quarter 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'll now turn the call over to Ms. Dana Cheng, Company Investor Relations. Please go ahead.
Hello, everyone. Welcome to HUYA's 2020 third quarter earnings conference call. The company's financial and operational results were issued earlier today and are posted online. You can also view the earnings press release by visiting the IR website at ir.huya.com. A replay of the call will be available on the IR website in a few hours. Participants on today's call will be Mr. Rongjie Dong, Chief Executive Officer of HUYA, and Ms. Catherine Liu, Chief Financial Officer. Management will begin with prepared remarks, and the call will conclude with 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 involving 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 well as the U.S. SEC. The company does not assume any obligation to update any forward-looking statements except as required under applicable law. So please also note that HUYA's earnings press release and this conference call include discussions of non-GAAP financial information, as well as non-GAAP financial measures. HUYA's press release contains the reconciliation of the non-GAAP measures to the most directly comparable GAAP measures. I will now turn the call over to our CEO, Mr. Rongjie Dong. Please go ahead.
Hello, everyone. Thank you for joining our conference call today. We achieved solid results this quarter, and excitingly, the investments we have made in content, products, and services are continuing to drive the growth of HUYA's businesses and user communities. In Q3, our total revenues grew by 24% year over year to RMB 2.8 billion, while our gross profit increased by 53% year over year to RMB 621 million, keeping us in a strong position to fund our future growth and capture the opportunities ahead. Despite a relatively short summer vacation period due to the impact of COVID-19 in China, the average MAUs of Huya Live still grew to 173 million in Q3, a net addition of over four million from last quarter and up 18% year over year.
Additionally, an average of over 25 million users each month during the quarter watched HUYA's live streaming content across Tencent and other third-party platforms, nearly double last quarter. Altogether, we provided our compelling content to close to an average of 200 million users every month in Q3. The growth was mostly driven by the increase in eSports tournaments, as well as a deeper cooperation with Tencent. In Q3, our live streaming content was broadcasted on Tencent products such as QQ Mobile, WeGame, WeChat, Game Center, and LoL Game. Specifically, our live streaming content related to the QQ Celebrity All-Star Tournament attracted a large number of users to watch in QQ Mobile.
Our mobile MAUs of Huya Live reached 74.1 million in Q3, representing a year-over-year growth of 16%, but slightly lower than last quarter because of the relatively short summer vacation period and a higher base for the first half of the year due to the impact of COVID-19. However, our Huya Live efforts' next month's retention rate continuously stabilized at over 70% in Q3. Our success in delivering solid financial results and continuous user growth underscores our capabilities in driving monetization and user engagement. Our thriving community reflects our team's continuous efforts, along with deeper cooperation with Tencent to enrich content and make our products and services more innovative and attractive, delivering even greater value to ensure a superior user experience.
In September, we upgraded our Huya Live app to the 8.0 version, featuring novel functions such as live event instant playback, on-the-fly video clip generation and sharing, smart AI assistant, and a real-time monitoring panel. With these new functions, users are allowed to choose any specific time interval within a live streaming event to replay, mark the eSports event highlights, and generate video clippings from live streams to share with friends. Furthermore, there is a smart assistant on top of the app, featuring AI-enabled interactions to enhance users' viewing experience. Meanwhile, our technology cooperation with Tencent also allowed us to create a real-time monitoring panel for eSports tournament broadcasting. With this new panel, our hardcore viewers could obtain more information on the tournament and better analyze the game playing status.
We believe these upgrades represent an exciting opportunity to innovate, provide new experiences for our users, and grow our user base. In October, we formed a joint lab with Tencent to carry out joint technology efforts in various fields such as AI security applications, irregular activity detection, data security, and data annotation. We believe we can work together to improve AI-driven compliance on the platform and improve the health of the industry. Since we launched our open platform for third-party application developers in November last year, we have empowered a growing number of third-party developers to develop tools to be used in HUYA's products, mainly to improve interactions between broadcasters and users. It's been almost a year now, and we are glad that there have been around 160 tools developed, and over 300,000 broadcasters have used these tools by the end of Q3.
We are confident our open platform will level up the interactions between broadcasters and users with innovative and dynamic features. During the most recent LoL Awards 2020, that was concluded at the end of October, we introduced new features and functions to help make the S10 broadcasting on HUYA more innovative, immersive, and game-integrated. In addition to our upgraded 8.0 app, we also provide users high definition and latency-free viewing experience in 4K. We introduced a virtual broadcaster fully to interact with real person broadcasters and viewers to improve experience. We also launched a Tencent-supported S10 Live Viewer Passport. Having this Viewer Passport, users of HUYA will be able to gain awarded badges, game accessory items, or game skins within LoL once they have completed certain engagement activities during tournament viewing on HUYA, such as sending bullet chats, virtual gifting, or viewing time.
Lastly, I would like to share some of my thoughts on the ongoing merger with DouYu. On October 12, 2020, we announced with DouYu that we entered into a merger agreement where we plan to acquire all the outstanding shares of DouYu through a stock-for-stock merger. Once the merger is effective, each ordinary share of DouYu will be exchanged for 0.73 plus 0.08 ordinary shares of HUYA, and each DouYu ADS will be exchanged for 7.3 plus 0.8 HUYA ADS. If the merger is completed, the shareholders of HUYA and DouYu will each hold approximately 50% of the shares of the combined company on a fully diluted basis. Concurrent with the merger, DouYu will buy Shenzhen Esports from Tencent for $500 million. We believe the potential combination will allow us to build on our complementary strengths, achieve significant synergies, and create more value.
By joining together with DouYu and Shenzhen's professional team, we are solidifying our dedication to the pursuit of constructing a comprehensive online destination for game and eSports-related content. With that, I will now turn the call over to our CFO, Catherine, to share her insights on the operating metrics and financial details. Catherine, please go ahead.
Thank you, Mr. Dong, and hello, everyone. Following Mr. Dong's remarks, I will start from the updates on content enrichment and diversification. In Q3, we broadcasted 119 third-party eSports tournaments, among which the top tournaments included LoL World 2020, LPL 2020 Summer, HOK World Championship Cup, LCK, and KPL Fall 2020. Total viewership for these tournaments reached a historical high of around 785 million in the third quarter, representing 40% year-over-year growth. On the front of our self-produced content, we organized 34 eSports tournaments and entertainment shows and generated a total viewership of 100 million, representing 32% year-over-year growth. Following its success last quarter, HUYA's Destiny Cup Season 7 maintained its growth momentum and brought in more users than last season. Additionally, HUYA All-Star Cup Summer 2020 also performed well and built itself a signature event for Peacekeeper Elite on HUYA's platform.
On the entertainment PGC show side, GodLike Season 5, a long-standing Werewolf game show, All-Star Idol Academy, a talent show, and HUYA Kung Fu Carnival Season 2, a mixed martial arts competition, were the top-performing shows as we continued our dedicated steps in the non-game entertainment content. Talking about the traffic in this quarter, our average MAUs increased by 18% year-over-year to a record high of 173 million, and average mobile MAUs reached over 74 million, representing an increase of 16% year-over-year. The paying users for Huya Live increased by 13% year-over-year to 6 million in the third quarter, but decreased slightly compared with 6.2 million in the second quarter. The number of our paying users is typically directly associated with the number of our mobile MAUs.
The fluctuation in our mobile MAUs this quarter, which was due to the shortened summer vacation period from the COVID-19 impact, resulted in the quarterly fluctuation in our paying users. The live streaming revenue per paying user for Huya Live remained strong and increased both year-over-year and quarter-over-quarter. For our overseas business, we achieved over 30 million MAUs in the third quarter. The better-than-expected growth was mostly because we introduced more eSports tournaments, attracted more broadcasters, and deepened our relationship with local game developers. Next, I will walk you through our financial highlights. In Q3, our total net revenues grew by 24% year-over-year to over RMB 2.8 billion. Our live streaming revenues increased by 23% year-over-year to close to RMB 2.7 billion in Q3. The growth was primarily due to the increased number of paying users and the increase in revenue per paying user, both of which have expanded.
Advertising and other revenues increased by 45% year-over-year to close to RMB 158 million in the third quarter, primarily driven by the increasing and diversifying number of advertisers. Our profitability continued to improve this quarter, given the leverage we have in bandwidth cost and our operational efficiency. Our Non-GAAP gross margin improved to 22.7% compared with 18.3% in Q3 2019. Our Non-GAAP operating margin was 11.8% compared with 6.5% in Q3 last year, and our Non-GAAP net margin was 12.8% compared with 9.1% in Q3 last year. Now, let me move on to our financial details. Cost of revenues increased by 18% to RMB 2.2 billion for Q3, primarily attributable to the increase in revenue sharing fees and content costs, as well as personnel-related costs.
Revenue sharing fees and content costs increased by 21% to RMB 1.8 billion in the third quarter, primarily due to the increase in revenue sharing fees in relation to higher live streaming revenues and increased spending in content creators, eSports, and self-produced content. The year-over-year increase was partially offset by benefits from economies of scale. Bandwidth costs decreased by 1.4% to RMB 208 million for the third quarter, primarily due to improved management in bandwidth costs and continued technology enhancement efforts. Gross profit increased by 53% to RMB 621 million for the third quarter, and gross margin increased to 22% for the third quarter. Research and development expenses increased by 35% to RMB 183 million for the third quarter, mainly attributable to increased personnel-related expenses. Sales and marketing expenses increased by 18% to RMB 144 million for the third quarter.
The increase was primarily attributable to the increased marketing expenses in the summer to promote the company's content, products, services, and brand name, as well as increased personnel-related expenses. General and administrative expenses increased by 23% to RMB 119 million in the third quarter, mainly due to the increased professional fees associated with the company's ongoing merger process with DouYu. Operating income increased by 249% to RMB 223 million for the third quarter, and operating margin increased to 7.9% for the third quarter. Non-GAAP operating income, which excludes share-based compensation expenses, increased by 125% to RMB 331 million for the third quarter, and then the non-GAAP operating margin increased to 11.8%. Income tax expenses increased by 82% to RMB 51 million for the third quarter. Net income attributable to HUYA Inc. increased by 105% to RMB 253 million for the third quarter.
Non-GAAP net income attributable to HUYA Inc., which excludes share-based compensation expenses, increased by 75% to CNY 361 million for Q3. Diluted net income per ADS was CNY 1.05, and the non-GAAP diluted net income per ADS was CNY 1.5 in the third quarter. As of September 30, 2020, the company had cash and cash equivalents, short-term deposits, and short-term investments of CNY 10.8 billion. Along with the merger announcement that Mr. Dong mentioned earlier, our board of directors also approved a cash dividend in aggregate amount of $200 million to be paid on or around the date of the closing of the merger to the holders of ordinary shares of HUYA, including the holders of HUYA ADSs.
As of the close of the business on certain record dates after the date when the required DouYu shareholder approval is obtained and prior to the closing of the merger, such record date and payment date will be designated by HUYA's authorized officer and will be announced in due course. Here's another update that just happened today. We obtained the usage right today to a piece of land with an area of approximately 29,258 sq m in Foshan City, Guangdong Province, through a public auction. The company's winning bid price was approximately CNY 310 million. The company intends to develop office space on the land in order to accommodate future workforce expansion and reduce the long-term operating costs and expenses. With that, I would now like to open the call to your questions.
Thank you very much, ladies and gentlemen. We will now begin the question and answer session. To ask a question, please press star one on your telephone and wait for a name to be announced. To cancel, you can also press the pound or hash key. For the benefit of all participants on today's call, if you wish to ask your question to management in Chinese, please immediately repeat your question in English. And our first question comes from the line of Thomas Chong of Jefferies. Please go ahead.
[Foreign language] Thanks, Management, for taking my questions. My question is more about the 2021 outlook, in particular in terms of the user growth, revenue, and profitability trend, as well as how we should think about the synergies with Tencent and DouYu, if there's any color at this stage. Thank you.
Thank you, Thomas. I will answer your questions. Currently, we are still in the process of the ongoing merger, and we expect the merger could be possibly completed in the first half of next year. At this stage, it's still too early for us to tell the quantitative impact of the merger. So I think we probably would not be able to give you quantitative measures on this. But for the big direction, we still intend to grow our users and explore new monetization opportunities and grow revenues, and also improve our operational efficiencies. In terms of the potential synergies with DouYu and HUYA, we think there are several directions that could generate synergies, such as leveraging our content over a larger user base to attract users, and also to develop new products and together explore new monetization opportunities, and also to achieve some operational efficiencies. Thank you.
Thank you.
Thank you for the questions. Next questions come from the line of Vincent Yu of Needham and Company. Please go ahead.
Thank you, Management, for taking my question. My first question is about the content strategy. How should we think about HUYA's content strategy going forward, especially after the merger? Will we see a shift from our current gaming plus pan-entertainment content offering? Second question is on the users' willingness to pay. We are wondering, do we see any change in our top paying user cohorts or for the user cohort in different categories, like for gaming and for other entertainment categories? Are we seeing any change after considering that COVID has mostly gone in China? [Foreign language].
[Foreign language].
Okay. I will translate for Mr. Dong. Regarding our first question for our content strategy next year, actually, there are several respects to talk about. First one is that what we are aiming to do currently is we would like to construct a one-stop shopping concept for building up a gaming content-related family bucket. So not only do what we are good at, game live streaming, but also to include game videos and game community and game-related tools, adding that in total to our content and services offerings bucket so that viewers and the users can have a one-stop shopping experience on our platform. And secondly, specifically on the video strategy next year, actually, we have been doing our own research and roadmapping for the video business.
We have confidence that in the next two years, we will make the user base of our video business to a considerable level. My last point about the potential combination and its impact onto our content strategy is that actually, the two platforms, each of them has a very good pool of content quality, and the content are actually complementary to each other as each of us has its own competitive advantages. In the year of 2021, what we are targeting at is to better consolidate the content offerings on each platform and leverage the quality content to better serve the game developers, the broadcasters, the talent agencies, as well as the users, just so that game live streaming can play a better role across the industry value chain. That's for your first question.
I will answer the second question in terms of paying users. As you can see, in the third quarter, our paying users' output has increased both year over year and quarter over quarter. I think generally, we are seeing a recovery after the COVID-19 pandemic in China. We will still continue to enrich our content and improve our monetization opportunities to increase our output. But of course, as you mentioned, different content categories have different output, and also there is seasonality for our output. So generally, in the first quarter, our output would be relatively lower due to the Spring Festival. And in the fourth quarter, typically, the output would be higher given the annual monetization event. Hope I answered your questions.
Yeah. Thank you.
Thank you for the question. Next questions will come from the line of Binnie Wong of HSBC. Please go ahead.
Hello. Good evening, Management. My question is actually on the overseas, right? Overseas users on the Nimo TV. And then if you look at this quarter versus last quarter, you also added 3 million net add, which I think is actually achieving that 30 million target a quarter earlier than you might expect earlier. So if we look at it this way, what are the things that or maybe what are some of the strategies or user acquisitions that you have done this quarter to achieve this 30 million level? And also, what are some of the synergies that you might see with Douyu overseas in the future? Thank you.
[Foreign language].
Okay. I will translate for Mr. Chong. Regarding your first question on the overseas, yeah, it is noticeable that our overseas MAU user growth in this quarter is actually quite outstanding. And as I spoke last time in the earnings call, what we are focusing on in the overseas market this year is to better improve the ecosystem and to cultivate a better monetization model. So as with the last year's strategy, what we are doing this year is that for the channel buy to acquire the new users, we are actually cutting down the cost for that. So given that the channel buy has been cutting down, we still achieved considerable user growth for the overseas business. It actually proved our strategy to build up an ecosystem to be effective.
So going forward, what we will strategically focus on is not only just to focus on a substantial user growth blindly, but more focus on to build up and construct a healthy ecosystem. It actually has been the third year for us to develop the overseas business, and we are starting to get the sense to understand how we can better build up the business in the overseas market. And what we will be focusing on in future is more on constructing a healthy ecosystem and also improve the financial status of the overseas business. And regarding your second question for the potential synergies, we still use combination, especially on the overseas market. I think right now, whether it's for DouYu or for HUYA, the two parties are actually in a very early stage in terms of exploring the overseas market.
So what we will do more right now is to focus more on the collaboration rather than to compete with each other. So I would believe the potential combination will create synergies in the overseas business as well.
Sorry. May I just ask a very quick follow-up here? If you look at the margin side, right, how do you see the overseas, when at a certain point that it could become more profitable? And longer term, at a steady state, how do you see the overseas business margins compared to domestically?
For your question, I think in October, we start to see one single country to achieve sort of relatively break-even in terms of operating margin side. But we think for the entire overseas business, we probably still need to invest for the next few years because different countries have different, I would say, user behaviors. In some countries, the output or the paying ratio would be higher than the other countries. So we think that in the next few years, it will still be at investment stage, but as Mr. Chong just mentioned, we will be focusing on building the healthy ecosystem in each country by each country. Thank you.
Thank you.
Thank you for the questions. Next question comes from the line of Billy Leung of Haitong International. Please go ahead.
[Foreign language] Thank you, Management, for taking my questions. I have two questions. The first one is related to our Cloud Gaming progress. Can Management share any color on our latest developments in this part? And the second question is on our relatively new feature service, the Game Companion. Can Management share any latest developments here as well? Thank you.
[Foreign language].
Okay. Regarding your first question on Cloud Gaming, actually what we want to highlight here is that the technology platform of this Cloud Gaming platform, Yowa, is completely developed by our own R&D personnel. And we have been spending a lot of time and great endeavor has been made to reduce the latency and also optimize users' experience while we are playing the PC Portal games on mobile devices through our Yowa Cloud Gaming platform. Actually, it was only yesterday that we have officially launched this Yowa Cloud Gaming platform after almost four months of beta testing, and we have been covered as many as 100 hit game titles right now.
What we are trying to achieve is to optimize users' switching experience, for example, viewing angle switching, just so that they can better play the game seamlessly and smoothly through our Cloud Gaming platform and optimize their user experiences. As I said earlier, before yesterday, the Cloud Gaming platform was only on beta testing, which is why we didn't invest much into promoting this Cloud Gaming platform. For now, given that it has been officially launched and can be downloaded through many app stores, we will try to better promote the Cloud Gaming platform and see if the market is ready for the user base to experience this cutting-edge technology to play games. We believe there is a huge opportunity right ahead for this Cloud Gaming business, and we will take every effort to realize the Cloud Gaming opportunities for our own business.
But in the short term, probably we'll just wait for a little bit of time to see if the users are ready to massively switch their experiences and to try this Cloud Gaming platform to play games. And Catherine, we'll take your next question.
For your second question regarding Game Companion business, our Game Companion business is still experiencing fast growth, especially for our app Xiaolu. We think it's relatively a solid growth for the Game Companion business. However, Game Companion business, because the revenue recognition policy is different from our virtual casino, we are only recognizing net revenues for Game Companion business. So even though the chart of the Game Companion business is pretty significant, but then the revenue contribution is still relatively small. But then from the accounting perspective, the Game Companion business has much higher margins than the virtual casino from pure GAAP accounting perspective. Okay. Hope this answers your question. Next.
Thank you for the questions. Our next question comes from the line of--sorry. So we have lost the other request, and I'll just proceed to take the next questions from Daniel Chen of J.P. Morgan. Please go ahead.
[Foreign language] I have two questions. The first one is on what do management think are the key opportunities in game streaming and short video industry in the next two to three years in the product side and also on the monetization side? The second one is on the competition. So what's our key competitive advantage against Kuaishou and Bilibili as both of them are quite aggressive in obtaining top host, top agency game broadcasting rights? And also Kuaishou has reached over 200 million game streaming MAU, which is quite large and also very aggressive in the investment and use for video games. Thank you.
[Foreign language]
Okay. Regarding your question on the competitive landscape facing the entrance of Kuaishou and Bilibili, I will start with the competition with Bilibili. I think for Bilibili itself, the growth brought by transforming their VTubers to the broadcasters has already come to an end, which is why we think Bilibili's impact to the traditional players of the game live streaming industry is quite limited. Facing the competition with Kuaishou, I think from what we have monitored internally, especially on the year-over-year growth, I think their impact to the game live streaming business is also not so big, especially thinking about that, yes, of course, they're huge, but the impact and the relevance is quite different. Here is Huya's point facing this Kuaishou's competition.
What we are doing right now, especially on the game live streaming side, is that we focus more on the content, on building up the content library proactively. While Kuaishou, their short-form business kind of operation, are focusing more on constructing a community kind of ecosystem that they have their decentralized policies for running the operations. So historically, what we are good at is that Huya has been in a very good alliance with the industry players such as the talent agencies and the broadcasters. And this has been our advantage facing, especially facing Kuaishou's competition. I think we can leverage this kind of collaboration with industry players to better improve the operating efficiency, to drive user growth, and to improve our monetization capabilities. That's it.
Thank you for the questions. In the interest of time, the last questions come from the line of Lei Zhang of Bank of America. Please go ahead.
[Foreign language] I will translate myself. Thanks, Management, for taking my question. My first question is about League of Legends S10. Can you share any color on the Traffic or Engagement to our platform, and what's the drive to our gross margin in fourth quarter? And secondly, on regulatory change recently, especially on live streaming's new rule and impact, you can share with us. Thank you.
Thank you, Lei. As to the S10, we have noticed that the number of users brought by S10 compared to last year has increased, but the incremental growth, I think, in this year was relatively lower compared to last year. For S10, because most of the S10 was sold in the fourth quarter, so the cost for the S10 would be mostly recognized in the fourth quarter, which will have some impact on our gross margin compared to the third quarter. As to your second question in terms of the authorities' policies or guidelines, we are cooperating with the government, and we understand some authorities or governments are trying to implement new guidelines. We are actively discussing with the government, and of course, when the actual guideline is going to be issued, we will be cooperating and be in compliance with the guidelines.
So we think if the guidelines are going to be issued, then we will then value the impact of the business at that time. But we believe that the government or authorities are trying to help the live broadcasting to a better role in the long term. So we don't think the impact for our business would be long term. Thank you.
Thank you very much. I'd like to turn the call back over to the company for closing remarks.
All right. Thank you all for joining HUYA Earnings Conference call today. And if you have further questions, feel free to reach out to ir@huya.com. And we look forward to speaking with you in the next quarter. Thank you. Bye-bye.
Ladies and gentlemen, this concludes this conference call. You may now disconnect your line. Thank you.