Earnings Call: Q2 2021

Aug 17, 2021

Earnings release

Hello, ladies and gentlemen. Thank you for standing by for the Q2 2021 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. Dana Cheng, Company Investor Relations. Please go ahead. Hello, everyone, and welcome to Huya's 2021 Q2 earnings conference call. The company's financial and operational results were issued earlier today and are posted online. You can also view the earnings Please 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. Katherine Liu, Chief Financial Officer. Management will begin with prepared remarks and the call will conclude with a Q and 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 press 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. 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. Rongjedong. Please go ahead. Hello, everyone. Thank you all for joining our conference call today. In the Q2, We amplified our efforts to enrich content offerings and attract users, which drove steady top line growth along with mobile user base expansion. To illustrate, total net revenues for Q2 increased to Approximately RMB 3,000,000,000 up 10% year over year and 14% quarter over quarter. Huya Live Mobile MAs reached 77 RMB600,000 in the quarter, up slightly year over year and quarter over quarter. While the next month retention rate for our Huya Live app remained stable at over 70%. In this quarter, mobile users continued to contribute to over 85% of Huya Live's Live streaming revenues. With our relentless commitment to providing users and broadcasters With a better experience, we have always been deepening our Technology advanced FX and the focus on product optimization. In late May, we upgraded our Huya Live app to the version 9.0, which introduced new functions such as multi screen, Simultaneous, meaning and real time highlight editing. For example, in the latest version, a user has access to a multi screen viewing panel to watch different top broadcasters at the same time. Besides this, leveraging Huya's AI capability, the new version can now also Medically identify the highlight momentum of our streaming engine and generate video clipers, Making video production easier and more efficient. In the Q2, average MAUs Huya videos on our platform increased to approximately 30,000,000. Our open platform for 3rd party applications developers also continued to expand In the Q2, by the end of June, more than 250 tools had been developed on our open platform and those tools were used by over 740,000 broadcasters. On a quarter over quarter basis, The daily active broadcasters who use the 33rd party applications on our open platform grew more than 0.6%. Moving on to our collaboration with 10¢. In the Q2, average annuals who watched Huya live streaming content across Tencent's Platforms, which are not counted in our reported MAs, were around 10,300,000, nearly doubling year over year. Notably, our live streaming content related to the QQ Celebrity All Star Tournament attracted a large number of users for viewing on QQ Mobile. Lastly, I would like to provide more context Around our strategies after the merger termination with Douyu we announced last month, According to the announcement posted by the State Administration for Market, Regulation of the People's Republic of China on July 10, 2021, the proposed merger between Huya and Douyu was Following FAMR's antitrust Review. We fully respect and we are abide by the FA and R decision And we'll comply with all regulatory requirements and conduct our businesses in accordance with applicable Laws and Regulations. As we remain committed to further expanding our use base and strengthening our leading position in the game live streaming market. We are focused on effectively implementing our growth strategy. Huya will continue its investments in content, including acquiring, Cultivating and maintaining qualified broadcasters, obtaining broadcasting rights for popular Esports tournaments and developing attractive self generated content. Meanwhile, we will endeavor to advance product optimization and deliver SuperRare user experience. We also expect to further deepen our cooperation with Tencent. We are confident that our capabilities in fostering and retaining streaming talents, Enriching and producing quality content as well as our expertise In Technology and Product Innovations, we will continue to attain Huya's core competitiveness in the game live streaming industry. With that, I will now turn the call over to our CFO, Catherine, to share he insights On the operating metrics and the financial details, Katherine, 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 In the Q2, we broadcasted 122 third party esports tournaments, among which the top tournaments included and Champions League Spring. Total viewership for this tournament reached around 673,000,000 in the quarter. On the front of our self produced content, we organized 45 e sports tournaments and entertainment shows and generated total viewership of RMB116 1,000,000. In particular, our self branded tournament, the 6th Huya mobile game arena, or HMA has hit outstanding viewership in the quarter, covering 14 popular mobile games, including HOK, CFM, Battle of Balls and CODM. HMA is now a leading comprehensive mobile game tournament in China. Additionally, following the traction from LPL, We produced a commentary show, Huya Game Watch Room, Huya Guangcai Ta, to provide professional gameplay analysis for game lovers. The show went viral during the LPL season and became a major alternative channel for LPL fans to watch the game. In terms of entertainment PGC shows, Huya Kungfu Carnival Season 4, Huya Gong Shijian Hwa, Dixi, a mixed martial arts competition joined by Huya's outdoor broadcasters and celebrities was the leading example of the season. Besides this, in June, we also introduced the golf player, hao huda mishi, a live action role playing show to capture the younger generation's growing interest in such categories. Since we took the initiatives to introduce more video content last year, there has been a clear trend of development and diversification on our platform, particularly in the sectors such as food video, animation video and fun moments sharing videos. Moving on to our overseas business. In June, the overseas MAU up to close to RMB27 1,000,000, mainly driven by local esports events. As we discussed previously, We have been focusing on monetization driven growth. Our overseas revenues increased by approximately 200% year over year and then the contribution from overseas revenue is also climbing up with the margin drag from overseas business declining. Next, I will walk you through our financial highlights. In the Q2, our total net revenues grew by 10% year over year to approximately RMB3 1,000,000,000. Our live streaming revenues were close to RMB2.6 1,000,000,000 in the quarter, up slightly from the same period last year. The number of paying users for Huya Live in the 2nd quarter came in at RMB5.6 million, lower than the same period last year, mainly due to the pandemic lockdown last year, setting a higher base. Advertising and other revenues increased by 190% year over year to almost RMB383 1,000,000 in the Q2. On 2nd quarter profitability, our non GAAP gross profit was RMB594 1,000,000 and non GAAP gross margin was 20.1%. Our non GAAP operating profit was RMB249 1,000,000 and non GAAP operating margin was 8.4%. Our non GAAP net profit was RMB250 1,000,000 and our non GAAP net margin was 8.4%. Now moving on to our financial details. Unless otherwise specified, all the growth rates are on year over year terms. Cost of revenues increased by 12.2 percent to RMB2.4 billion for the 2nd quarter, primarily attributable to the increase in revenue sharing fees and content costs. Revenue sharing fees and content costs increased by 21.2 percent to RMB2 1,000,000,000 for the 2nd quarter, primarily due to the increase in revenue sharing fees and the increase in spending in esports content and our content creators. Bandwidth costs decreased by 35.3% to RMB171 1,000,000 for the 2nd quarter, primarily due to improved bandwidth cost management and continued technology enhancement Gross profit increased by 1.1 percent to RMB581 1,000,000 for the 2nd quarter and gross margin was 19.6% for the 2nd quarter. Research and development expenses increased by 15.6 percent to RMB208 1,000,000 for the 2nd quarter, mainly attributable to increased personnel related expenses. Sales and marketing expenses increased by 45.9 percent to RMB 167 1,000,000 for the Q2, primarily attributable to increased marketing expenses to promote the company's content, products, services and brand name. General and administrative expenses decreased by 48.5 percent to rmb72 1,000,000 for the 2nd quarter, mainly due to lower share based compensation expenses. Operating income increased by 0.3 percent to RMB182 1,000,000 for the 2nd quarter and operating margin was 6.1% for the 2nd quarter. Interest and short term investments income was RMB58 1,000,000 for the 2nd quarter compared with RMB78 1,000,000 for the same period of 2020, primarily attributable to the decreased interest rates. Income tax expenses increased by 13.7 percent to RMB58 1,000,000 for the 2nd quarter. Net income attributable to HUYA Inc. For the 2nd quarter was RMB186 1,000,000 compared with RMB207 1,000,000 for the same period of 2020. Non GAAP net income attributable to HUYA Inc. For the Q2, which excludes share based compensation expenses, gain on fair value change of investments and Equity Investisse Investments and Equity Investe's partial disclosure of its investment, net of income taxes was RMB250 1,000,000 compared with RMB331 1,000,000 for the same period of 2020. Diluted net income per ADS was RMB0.77 for the 2nd quarter and non GAAP diluted net income per ADS was RMB1.04 for the 2nd quarter. As of June 30, 2021, We had cash and cash equivalents, short term deposits and short term investments of RMB10.7 billion compared with RMB7.6 billion as of March 31, 2021. The increase was primarily due to net cash provided by operating activities of RMB174 1,000,000 for the Q2. With that, I would now like to open the call to your questions. Certainly, ladies and gentlemen, we will now begin the question and answer session. You can press the pound or hash key. For the benefit of all participants on today's call, We have the first question coming from the line of Thomas Chong from Jefferies. Please go ahead. Thanks management for taking my questions. I have two questions. The first question is about our content strategies. Okay. Management comments about our thoughts in the second half as well as the spending that we are looking at? And my second question is about our key operating metrics. In terms of The MAU paying users as well as ARPU, how should we think about the trend as we come into the second half? Thank you. All right. I will transfer for Mr. Zhong regarding your first question on content strategy. So as for the since the beginning of this year, our management made 2 versions of the strategic As for this year, in different scenarios, whether the summer will pass or not pass the due, up until we received notification of Samir to prohibit the merger view, we still stick to the original plan in terms of content strategy. So now that we have heard the news from Samir about prohibiting the merger deal between HUYA and ZOUZYU. There won't be major adjustments to the strategy, especially the content strategy. And now that the competitive landscape compared with the 4 might be a little bit changed Given the summer productivity with you, so there might be a certain degree of growth for the content investments from our perspective. And Katherine will take your second question. And regarding your MAU questions, because we will continue to invest in our content and broadcasters in the second half. So in the second half, we do expect that our MAUs will continue to grow and probably reaccelerate the growth rate for mobile MAUs. And then I think in the second half, our focus main focus is still trying to grow our Mobile MAUs. And then this is still probably our key goal in the second half. Thank you. Thank you. We have our next question. This is coming from the line of Lei Zhang from Bank of America Securities. Please go ahead. Thanks management for taking my questions. Two questions here. First, Can you share with us the business strategy post the close of merger with Zouyu? Secondly, any more color on All right. I will translate for Mr. Dong. Regarding your bridge question for the post termination of the merger Impact on the strategic changes. Actually, there is not much to be changed for the strategic planning of Huya and we will speak to the original plan to, follow with our roadmap for the year end going forward, and we have confidence to strengthen our leadership position going forward. Secondly, I would like to mention that we do have confidence in the overseas market, especially for those countries and regions who performed better in building up the content ecosystem and a business model. And we feel they're going to have a brighter future, and we do have confidence in that. For your second question regarding the collaboration with Tencent, we're actually in close conversation with Tencent regarding to carry out more innovative, collaborative working method And more way to play out the business to play out the operational models of the 2 of the collaboration. So more things to be carried out going forward with Tencent. I hope that answers your question and that's it. And then to add regarding to the cooperation with Tencent, we have continued to Strengthen our cooperation with Tencent in various fronts and we believe that in the future there would be more cooperation between us and Tencent. And we will update investors if we have some major updates We have the next question. This is coming from the line of Yuan Zhang from China Renaissance. Please go ahead. I have two questions. The first is regarding overseas business. Investment overseas in the U. S. Have reached 27,000,000 and also this year we will ramp up the investment overseas. Could you share more color In terms of the user acquisition, content build up and monetization. And secondly is on the video content. I think this is well discussed in the past few quarters. Can you share some color in terms of how the video content helped the Thank you. Regarding our overseas business, we have seen a pretty good progress as we have Being emphasizing on monetization in the overseas market, we have seen significant results. In the Q2, our overseas revenues actually increased by approximately 200% year over year. And also The operating loss has also been narrowed down. So we are pretty confident in our overseas business and We do expect that the overseas business will contribute even much more significant revenue contribution to us in the next year. And in terms of our video business, we have been Developing sort of a new video content and then in the Q2, we also noticed that Our video content users have been increasing. And as Mr. Dong just mentioned, in the second quarter, Average MAUs who watch video on our platform actually increased to approximately 30,000,000. And in the second half, We do consider to also launching a new app specifically for our video product. Hope this answers your question. All right. As a translation, just To provide more color on our video business, Mr. Dong mentioned before, there is a certain form of video business on Huya's platform that is laying in between the traditional videos and the streaming sessions in the form of video core sell or in other words, ongoing replay of streaming. And from the statistics that we have, I think the growth rate of such category are quite high. And we believe in the form of doing streaming business, we can actually our video business prosper in the future. And as of now, we think the results that we The video business or the video core store business is actually quite satisfying. Thank you. Thank you. We have the next question from Richie Sun from HSBC. Please go ahead. I will translate the questions myself. So first question is about game video. Can management discuss the potential monetization model and also progress for monetization for game video? And what are the areas that we need to improve further for game video content? And the second question is on regulation. We see the heightened regulation risk of the industry. Can management discuss How live streaming regulation, online games as well as cybersecurity and data privacy regulations, the impact on the platform and especially on the profit and loss side from these regulations. And are we going to incur more costs to fulfill these regulations? Thank you. For your first question regarding the video business monetization method, Currently, the top priority for the company regarding the video business is to consider how to better integrate The live streaming business with the video business and just so that the video business can be extended. So probably currently, it's a little bit too early to talk about the business model. But Emma, What we can see right now for the video business, advertising is probably the top choice for the monetization method. Okay. And for your second question of the recent regulatory changes, We do believe that the recent regulatory changes, I think, will help the industry in the long term. And then we, as a company, will definitely abide for all the regulatory changes or guidance. And then so far, I think we have received and also are expecting some of the probably the details of the guidelines to come out. And so we will update with investors if we saw some of the detailed guidelines for potential regulatory guidelines. And I hope this answers your question. And next? Thank you. Thank you. We have the next question. This is coming from Tian Hou from T. H. Capital. Please go Yes. Good evening, management. The first question is about what management see the second half about the game content. Are there any major contents going to come out? The second one is, on the platform, What does management see the uses and the activity level as the students have less school work And also not much place to go to travel. The third one is regarding the cloud The company has been developing clocking for a while. So can management share some color about the So for your first question regarding the summer, usually from the seasonality that we have observed so far, During the summer school holidays, there will be a surge in growth of users. Since it's Coming to the school holidays in the summer again, we are seeing a growth of the users as well. But regarding the other So that you mentioned, we haven't really seen much. And for your second question regarding the new game titles, And we have been hoping that the 2 top box potential blockbuster games, The DNF Mobile and Legal Legends Mobile can be released soon because HUYA is quite excelled Because Huya is quite excited to promoting the mobile games and make sure that And make sure that promoting the mobile games on our live streaming platform can be a strength And maintain our leading position. Actually, the preparation for those 2 games has already been initiated. For example, for Legal Legends Mobile, it's been started in the first since the beginning of 2021. And For B and S Mobile, we have been preparing for the launch of that since last year. So we really we were really hoping that those 2 potential blockbuster games can be launched in the second half. And regarding Yes. Regarding to your question about the cloud game, actually, since we launched our cloud game platform, Yuwa, We have been covering over 200 games right now and then we have been improving our products since the launch. And currently, we believe that our product in terms of technology and then the user Friendliness is in the sort of the industry leading level. And Currently, we are still focusing on trying to reduce the bandwidth cost per user and increase Our MAUs and DAUs, actually since the since EULA launched, the users' growth is pretty fast. So currently, our focus is still on growing users, improving products and then trying to reduce the bandwidth cost for each user. And then probably next year, we will consider trying to do some commercialization for the cloud game, But currently still at early stage. Hope this answers your question. And next? Yes. Thank you. We have the next question from Vincent Yu from Needham and Company. Please go ahead. Thanks management for taking my question. My first question is about investment plans. So now the merger deal has been called off, will the company now look to acquire the other companies within like other verticals or overseas Considering we have a big cash balance, my second question is, will we see increase in content costs related to Purchase of tournaments broadcasting rights after this merger has been called off. Thank you. Regarding to your first question, in addition to our Operational cash needs, I. E, continue to invest in content and broadcasters. We do we will Consider the sort of the investments or potential acquisition along our value chain, Both domestically or in the overseas market. But currently, We haven't really done any significant investments or acquisition Yes. And then regarding to your second question, I will refer to Mr. Regarding your question on the Esports tournaments broadcast team rights, I think from our perspective, Acquiring the broadcast human rights of those tournaments is quite important in the sector of eSports. As we all know that Esports has become a professional game that has been And it is also included in the Asian Games for next year. And as we announced it 4, we have already got the exclusive broadcasting rights and for LTL and it's related to game broadcasting rights. So going forward, we believe Huya will continue the acquisition of Thank you. Thank you. As there are no further questions, I would like to hand the conference back to the company for any ending remarks. Thank you all for joining our conference call today. If you have further questions, feel free to contact ir.acola.com and we look forward to speaking with you in the next Thank you. That concludes our conference call for today. Thank you all for your participation. You may disconnect your lines now.