HUYA Inc. (NYSE:HUYA) Q3 2022 Earnings Conference Call November 15, 2022 7:00 AM ET
Company Participants
Hanyu Liu – Investor Relations
Ashley Wu – Vice President, Finance
Rongjie Dong – Chief Executive Officer
Conference Call Participants
Yiwen Zhang – China Renaissance
Thomas Chong – Jefferies
Lei Zhang – Bank of America Merrill Lynch
Ritchie Sun – HSBC
Brian Gong – Citi
Operator
Hello, ladies and gentlemen. Thank you for standing by for the Third 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 like to turn the call over to Ms. Hanyu Liu, Company Investor Relations. Please, go ahead.
Hanyu Liu
Hello, everyone, and welcome to HUYA’s third quarter 2022 earnings conference call. The company’s financial and the operational result 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. Participants, 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 then Ms. Ashley Wu, Vice President of Finance. Management will begin with prepared remarks, and the call will conclude with a Q&A session.
Before we continue, please note that today’s discussion will contain forward-looking statements made under the safe harbor provision of the US 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 US 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 VP of Finance, Mr. Ashley Wu, who will read today’s prepared remarks on behalf of Mr. Dong. Please, go ahead.
Ashley Wu
Hello, everyone. Thank you for joining our conference call today. I am pleased to deliver the following brief remarks on behalf of Mr. Dong. Although, micro headwinds continued to impact us during the third quarter of 2022, we managed to further grow our active user base year-over-year, and quarter-over-quarter and improved our top and bottom line on a sequential quarter basis.
Our total net revenues were approximately RMB 2.4 billion, and our non-GAAP net income was RMB 106 million for the third quarter. In terms of user growth, HUYA Live average mobile MAUs reached RMB 86 million for the first quarter, a low single digit increase from a relatively high base in the summer of last year due to the heavier promotions. This growth is encouraging, particularly as we have implemented more stringent marketing channel spending strategies to help contain costs. Also, our efforts to enhance user interactive experience and offer attractive gaming and entertainment content now only contributed to the increase in user scale, but also through user engagement across our platform. In the third quarter, users average daily [Audio Gap] and next month’s reducer retention rate stabilized at above 17%.
Next, let me share with you some updates about our product and technology advancement. We have been embracing the trend of virtual live streaming, including developing digital humans and providing a virtual live broadcasting tool on our platform.
In addition, we have recently focused on further integrating virtual streaming technologies with our broadcasting section. Our goal here is to create more massive viewing experiences and inspire more interesting interaction and high-quality content production for our users.
Specifically, we recently introduced a virtual light house to our Huya mainly open platform. It give streamers a new live team in which the image and actions of the streamers are automatically recognized. The background and the streamer can also be separated and cut out, which less streamers transform the live team to a pro forma stage, where they can sing, stand and play musical instruments on the virtual stage.
The audience also have their virtual characters that they can control and use to interact with the streamer. This feature has been well-received by our broadcasters and during the summer more than 100 virtual events were held on our platform, including live concerts and [indiscernible], which strengthens forms between broadcasters and users.
Moreover, by partnering with the game Crossfire and building on virtual reality technology, Huya launched the industry’s first virtual viewing feature for autonomous live broadcasting during the finals of Crossfire Pro League in August. After entering the virtual eSports venue, [indiscernible] for this game users were able to choose, which games they wanted to support create an Avatar, where the corresponding team uniform and get together with broader viewers.
In addition to watching the competition, users could also freely move their watches around the venue, and will just be in the game, just as you would in a live event. Additionally, users could express support for their favorite team by sending our virtual flower gifts. As the competition evolves, so does the background of the venue, bringing the audience an even more immersive competitive atmosphere. This new willing feature gained solid traction spurring a 30% increase in viewer’s engagement in interactive activities during the finals.
In the 2022 season of Legend world championship are worth 2022, which just ended earlier this month. We also initiated several industry-leading upgrades. First, building on our success in the Crossfire event we set-up an enhanced virtual venues, specifically designed for worth 2022, to provide an immersive virtual viewing option. We also extended the HDR-capable display, the pause for watch viewing, to improve our mobile app, webpage and PC clients for both live streaming and on-demand video, offering users more precise gaming across different devices.
Furthermore, we introduced a tournament assistant feature for the event that greatly simplifies user’s ability to obtain tournament related information. It allows users to assess the historical match data covering teams and players. Their SKU values and other key data in real-time without leaving the live page, users can simplify touch their mobile stream, or move the mouse over the player profile image or team name.
During the rows 2022, many matches were played either late night or early morning in China, due to the time zone differences. In addition to the right – the replay review of those competition were very popular among users. The review – of last year’s events, with those replaced picking top spots in our video ranking.
Meanwhile, we introduced incentive activities to encourage original video content creation in relation to the world’s 2022 theme. Those UGCs are available in this tournament discussion board of our Tiger Chit-chat community, allowing users to easily participate in event discussions and interactions, with all of our efforts and operational expertise in esports. HUYA continued to achieve market share for this highly anticipated events.
Following the domestic live streaming regulation, introduced in May.
Our tech product and operation adjustments impacted our live streaming revenues. As a result, our domestic live streaming revenues in Q3 slightly decreased by low-single-digits compared with the second quarter.
We have been working to mitigate the impact by dramatically adjusting our monetization strategy. We will also continue to comply with regulations and improve our corresponding technology and operating practices to support the healthy and sustainable development of our platform.
In summary, we believe our restless effort to improve live streaming technologies, explore new product features and in which our quality content will help us better engage with our users. These measures are designed to place us in a stronger position to capture future opportunities in the game and live streaming market.
In light of the persistent challenging market condition, it is also right to for us to continue to exercise prudent and strengthen our business and financial foundation. We will strive to further optimize our operations throughout the organization, and maintain our competitive edge while we continue to navigate the fluctuating market.
This concludes Mr. Dong’s remarks.
Now, I’ll continue with some updates on our content enrichment and diversification. In the first quarter of 2022, we broadcasted around 85 third-party professional e-sports tournaments. The most popular included the summer season of League of Legends Pro League, LPL; and King Pro League, KPL; and CrossFire Pro League, CFPL as well as the ESL Pro League Season 16. Notably, the number of peak concurrent user of the LPL Summer improved by 57% compared with the previous addition.
As we continue our ROI-led strategy for tournament procurement, we have fewer licensed e-sports tournaments in the first quarter of 2022, compared with the same period last year. However, total viewership of those events reached approximately 660 million, representing growth of 12% year-over-year.
On the front-end of our self-organized e-sports tournaments and entertainment PGC shows, we broadcasted 23 events during the third quarter, generating total viewership of approximately 100 million.
The first series of Honor of Kings and the Peacekeeper Elite of customer cost, both our major Huya branded tournaments, continued to perform well this summer, demonstrating the appeal of our mobile e-sports event.
It is also worth mentioning that, our long-standing Huya Kung-fu carnival; a mix-martial art competition held its sixth season and become an inferential IP for us, linking the live broadcasting industry and the physical work. This time, the event also future competition in the virtual setting of Honor of Kings, acting elements of Chinese traditional culture. It was well received by our audience. With the number of event on our platform, almost doubling compared with the period season.
Let me provide some updates on our operational optimization efforts. Beginning in April, we strategically adjusted our overseas business to allocate resources to key areas. These initiatives has been resulted in a more streamlined and efficient business, narrowing our operating loss in this segment. We are looking forward to further benefit from this adjustment in our overseas business.
Additionally, in the third quarter, our optimization initiative with broadcaster related costs, and bandwidth usage helped us to reduce the quarter’s total costs, driven by savings from sales and marketing expenses. We are encouraged by the decline in total operating expenses in Q3, saving approximately 37% year-on-year.
Next, moving on to our Q3 financial details. Our total net revenues were RMB 2.38 billion for Q3, a decline from RMB 2.98 billion for the same period last year. Live streaming revenues were RMB 2.02 billion for Q3, compared with RMB 2.6 billion for the same period last year. The decrease was primarily due to a decline in the number of paying users and average spending per paying user of Huya Live, as the recent micro and regulatory environment that worsely affected paying user sentiment.
Advertising and other revenues were RMB 361 million for Q3, compared with RMB 374 million for the same period last year, primarily due to soft demand for advertising services, resulting from the challenging micro environment. In Q3 2022, content sublicensing revenues made a relatively large contribution to advertising and other revenues, mainly due to the faster revenues from sublicensing of eSports tournament broadcasting rights are recognized according to event schedules and experience fluctuations between different periods.
Cost of revenue decreased by 17.6% year-over-year to RMB 2.04 billion for Q3, primarily due to revenue sharing fees and content costs as well as bandwidth costs. Revenue sharing fees and content costs decreased by 15.7% year-over-year to RMB 1.79 billion for Q3, primarily due to the decrease in revenue sharing fees associated with the decline in live streaming revenues and lower cost [Technical Difficulty] decreased by 35.4 year-over-year to RMB 115 million for Q3, primarily due to improved bandwidth cost management, [Technical Difficulty] I would like to [Technical Difficulty] 2022 broadcasting [Technical Difficulty] gross profit was [Technical Difficulty] Q3, primarily due to lower revenues. Gross margin was 14.4% for Q3.
Excluding share-based [Technical Difficulty] expense [Technical Difficulty] was RMB 351 million, and non-GAAP gross margin was [Technical Difficulty] for Q3. [Technical Difficulty] 79 million for Q3, primarily due to decreased personnel-related expenses and share-based compensation expenses.
Sales and marketing expenses decreased by 45.8% year-over-year to RMB 124 million for Q3, primarily due to decreased marketing and promotional fees as well as personnel-related expenses. General and administrative expenses decreased by 1.8% year-over-year to RMB 79 million for Q3. Other income was RMB 44 million for Q3 compared with RMB 95 million for the same period of 2021, primarily due to lower tax refunds and government subsidies. As a result, operating income was RMB 12 million for Q3 compared with RMB 83 million for the same period of 2021.
Interest and short-term investment income were RMB 72 million for Q3 compared with RMB 63 million for the same period of 2021. Income tax expenses were RMB 20 million for Q3 compared with RMB 41 million for the same period of 2021, primarily due to lower taxable income. Share of income in equity method investments, net of income taxes were RMB 0.05 million for Q3 compared with RMB 379 million for the same period of 2021, primarily due to the investment income, related to a disposal of equity investment in the third quarter of 2021.
Net income attributable to HUYA Inc. was RMB 60 million for Q3 compared with RMB 524 million for the same period of 2021. Non-GAAP net income attributable to HUYA Inc. was RMB 106 million for Q3 compared with RMB 180 million for the same period of 2021. Non-GAAP net margin was 4.5% for Q3. Diluted net income per ADS was RMB 0.25 for Q3. Non-GAAP diluted net income per ADS was RMB 0.44 for Q3. As of September 30, 2022, the company had cash and cash equivalents, short-term deposits, short-term investments and long-term deposits of approximately RMB 11 billion compared with RMB 10.7 billion as of June 30, 2022.
With that, I would now like to open the call to your questions.
Question-and-Answer Session
Operator
Thank you, management. We will now begin the question-and-answer session [Operator Instructions]We have our first question comes from the line of Yiwen Zhang of China Renaissance. Please proceed.
Yiwen Zhang
[Foreign Language] So, yeah, I have tough couple questions. Firstly, regarding the S-12 tournament performance. So how much the data has use the traffic side? And secondly, a related question would be how do we evaluate this tournament cost versus benefit? Thank you.
Rongjie Dong
[Foreign Language] S-12 ended in early November. During this year’s event, we once again maintained our leading market share throughout the entire tournament, although the event was held in the United States and the time zone differences between China and US had a certain impact on the users watching the live broadcast. The overall viewing data of our core users remained stable, especially some key data even improved. These achievements came as a result of our continuous optimization of the technical products and operations and our years of experience in cultivating the e-sports content.
[Foreign Language] More specifically, HUYA has brought several industry leading live broadcast technology product upgrades to this event and this differentiated services has further enhanced the users’ viewing experience. These include the establishment of S-12 exclusive virtual live house, the expansion of HDR capable display support for live broadcast and video-on-demand viewing on app, web pages and PCs, and the realization of users selected for its commentary through the online audio real-time analysis technology based on, the in-depth cooperation with TJ Sports, we have also added to the tournament assistance feature, which greatly simplified viewers access to historical match data.
[Foreign Language] In addition, our preparation with the legal legends and the legal legends e-book manager continues to be welcomed by users. At the same time, the Tiger Chit-chat community that we have launched earlier covers video and graphic communications, which is conducive to user participation in the event-related discussions and the creation of events-related videos and other content allow a more in-depth participation from the users.
[Foreign Language] As a top-tier tournament, S-12 has a positive effect on the user traffic of the overall Q4 platform but this year, due to the time difference of the event and other reasons, its effect on mobile MAU may not be as obvious as in previous years. And of course, the user level is also subject to other factors such as post-summer seasonality and other activities.
[Foreign Language] Let me answer the cost and revenue impact of the event. The cost of S-12 tournaments is indeed relatively high, and the competition took place mostly in Q4, so it brought about a significant increase in our Q4 content costs. This is similar to the seasonality impact of S11 on the content cost last year. So it might also affect our overall Q4 cost and margins.
In terms of revenue, the direct income from live events is still relatively small. Of course, this year, we have made more attempts in business promotion and cooperation and launched some innovative event-specific virtual gifts. In the future, we’ll continue to explore the diversified approach for monetization.
As we mentioned before, for some important content, we not only consider short-term direct cost and income, but also focused on its impact on user value, brand image, platform cooperation and et cetera. At the same time, we’ll continue to strive for better terms of cooperation to achieve long-term benefits
Hanyu Liu
Hi, [indiscernible]. Please take next question.
Operator
Thank you, management. One moment for the next question. I’d like to invite the next questions from Thomas Chong of Jefferies. Please proceed with your questions, Thomas.
Thomas Chong
[Foreign Language] Thanks management for taking my questions. My question is about the near-term outlook about our live streaming revenue. And on the other hand, given the macro backdrop these days, what are the measures that we will be taking to mitigate the impact coming from the reduced user spending. Thank you.
Rongjie Dong
[Foreign Language] Thank you for your question. Recently, the monetization of our domestic live broadcast business has been affected by the overall macro environment and adjustments based on the latest industry regulations. This relative weakness of the game industry and the lack of new major game titles for a long time have also had a certain impact on the game live broadcast businesses. So Q3’s live broadcast revenue declined at present due to the continuous impact of the above reasons, we will keep an eye on the trend of live streaming income changes.
Although, there are still some uncertainties in the macro environment we’ll pay more attention to the improvement of the company’s own capabilities to continue to optimize the content and technological products and serve our user well by providing rich content in games, e-sports and other entertainment, bringing users and content creators with better experiences. For example, in the third quarter, we further upgraded the application of virtual live broadcast technology on our platform through our virtual live house screen, these streamers can intensify their interactions with the users.
As we launched the industry’s first virtual tournament live house in August, which fully upgraded the experience of watching events. These technologies bring users a new viewing and interaction experience, making live broadcast content more interesting and are also conducive to the introduction of Noble Interactive game play and monetization scenarios. We are also optimizing the video content ecology of the platform and through the synergy between the live broadcasters and video content, we can prolong the duration and add to the richness of our user content consumption. In addition, we’ll also continue to strengthen the compliance capabilities of the platform and invest in corresponding technologies to establish a better foundation for the long-term healthy development of the platform.
On the whole, with users, streamers games at the core will continue to improve the user interaction indicators and retention rate through more intensive more community-based and more interactive product strategies so as to gradually increase the consumption power of the users on the platform.
Hanyu Liu
Thank you. Can we have the next question please.
Operator
Certainly. One moment for the next question. Our next question comes from the line of Lei Zhang from Bank of America Merrill Lynch. Please proceed.
Lei Zhang
[Foreign Language] Thanks management for taking my question. Two questions here. Firstly, can you share with us your e-sports content strategy for next year? So when we have investor allowed this year? And secondly, how should we look at our revenue sharing ratio trend? Thank you.
Rongjie Dong
[Foreign Language] As far as e-sports content strategy is concerned, overall, we’ll continue to strive for the copyright of mainstream, high-quality ESA events in the market in the year 2023. And at the same time, we’ll remain as selective as we have been this year. The ROI of the project is analyzed and evaluated in details that dynamically adjust our strategy according to the market situation.
At present, the acquisition of the copyright of the main events for the next year has not yet been decided. The specific form also depends on the decision of the copyright owner and in negotiation with each broadcasting platform. If there is any major update, we will also synchronize with the market in time.
The overall competitive landscape of game live streaming has not changed significantly recently. HUYA continues to maintain its leading market share in the field. Since the beginning of this year, our streamer revenue-sharing ratio remained relatively stable. And through more detailed data analysis, we have achieved some savings in a signing cost. We expect this trend to continue in the short-term. And of course, we will keep optimizing the cooperation fee structure with the streamers.
At the same time, by providing them with more comprehensive training, support and services such as providing operational analysis force, promoting diversified income channels for streamers and strengthening the binding partnership between live streamers and platforms in order to maintain and strengthen the competitiveness of HUYA platform for live broadcasters.
Hanyu Liu
Thank you. Let’s have next question, please.
Operator
One moment for the next questions. Our next question comes from Ritchie Sun of HSBC. Please ask your question.
Ritchie Sun
[Foreign Language]
So, I’ll translate myself. My question is about overseas business. So we have been treating the strategy recently. And can management update us on the progress and specifically on revenue and also the losses? And what is our goal into 2023 for this business? Thank you.
Rongjie Dong
[Foreign Language]
As we mentioned before, based on the changes in the domestic and foreign market environment, we have made strategic adjustments and optimize the Nimo TV business since April. With concentrated resources on the development of key overseas regions, it is hoped that by optimizing costs and expenses to reduce the loss of overseas business and achieve over this business sustainability.
Major adjustments are now largely completed with reduced business operations in some certain regions. So far, we have achieved some initial results, although overseas revenue and user scale have been affected to a certain extent. Overseas business has become more focused and the amount and proportion of losses have also significantly reduced.
[Foreign Language]
In addition to live game broadcasting, we also provide richer and entertainment content as well. At the same time, with more localization work, we can provide characteristic interactive features and operational activities targeting the local markets.
With this as our efforts, we hope that overseas business can achieve self-sufficiency business-wise as soon as possible. And moreover, we’ll also dynamically adjust the operation strategy according to the overall market environment. In the future, we hope to Nimo being able to broadcast live games around the world as a key participant in the market
Hanyu Liu
Thank you. Next, please.
Operator
One moment for the next question. Next question comes from Brian Gong from Citi. Please proceed.
Brian Gong
[Foreign Language] I will translate myself. Thanks management for taking my question. My question is regarding about cost and margin trend. Can management elaborate the progress on cost and expense optimization, how should we expect margin trend ahead? And also, can management share — give some updates on latest ratio with Tencent. Thank you.
Rongjie Dong
[Foreign Language] Since the beginning of this year, we have made continuous efforts to control costs and improve operational efficiency from overseas strategic adjustments to more focused strategy for domestic businesses and at the same time, increase the effective use of technical resources, we have achieved some financial results.
In the third quarter, streamlining-related costs as well as bandwidth costs were both optimized and the total operating expenses for the quarter were down approximately by 27% year-over-year, driven by sales expenses savings.
[Foreign Language] Therefore, on the premise of maintaining the stability and leading edge of our core businesses, we’ll continue to implement cost reduction measures including ROI optimization of streamers and event content and live streaming of operating expenses. This will also help us to better consolidate the company’s businesses and financial foundation in the current environment to support the long-term development. As mentioned earlier, due to the large-scale events, the margin level of Q4 this year might expect a loss, but we expect also that the subsequent profit margin level could gradually improve.
[Foreign Language] In addition to continuing to promote cost reductions, HUYA will also actively explore and upgrades to our business ecology, products and commercialization in the future based on but not limited to live broadcast. We’ll keep strengthening our profit level by enhancing the monetization ability.
[Foreign Language] The cooperation between HUYA and Tencent continues to be actively carried out, and there is close cooperation in games, events, content and products. Specifically, in terms of the combination of games and interactive futures by continuously deepening the interaction of the account data, users can interact and flow between the platforms.
[Foreign Language] In terms of in-depth cooperation in games and tournaments, HUYA and the legal pledges mobile games have collected products collaborated and product promotion as well as operation and community, including jointly building in-game live streaming and interactions and in the promotion of the League of Legends is manager game in corporation with LoL major tournaments such as LPL, interactions in the live broadcast room will lead to HUYA’S exclusive virtual products provided by the game owner, and all this will help us to improve the user experience and consolidate HUYA’S leading position in these games.
[Foreign Language]
A – Rongjie Dong
Our technology and operational know how and accumulation in the audio, video and game content industry is conducive to more and deeper collaboration with Tencent Group, which will also help promote an upgrade of our company’s business format and model.
A – Hanyu Liu
Yes. That’s all for our answers
Operator
Questions. If there are no further questions now, I would like to turn the call back over to the company for closing remarks.
Hanyu Liu
Yes. 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 or TPG Investor Relations. Thank you.
Operator
This concludes this conference call. You may now disconnect your lines. Thank you.
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