HUYA Inc. (HUYA) Q1 2023 Earnings Call

HUYA Inc. (NYSE:HUYA) Q1 2023 Earnings Conference Call May 16, 2023 8:00 AM ET

Company Participants

Hanyu Liu - IR Director

Rongjie Dong - CEO & Director

Ashley Wu - VP, Finance

Conference Call Participants

Ritchie Sun - HSBC

Yiwen Zhang - China Renaissance Securities

Lei Zhang - Bank of America

Jasmine Wang - Credit Suisse

Thomas Chong - Jefferies

Operator

Hello, ladies and gentlemen, thank you for standing by for the First 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'll now turn the call over to Ms. Hanyu Liu, Company Investor Relations. Please go ahead.

Hanyu Liu

Hello, everyone, and welcome to Huya's first 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. Rongjie Dong, Chief Executive Officer of Huya and Ms. Ashley Wu, Vice President of Finance. Management will begin with prepared remarks and the call will conclude with a Q&A session.

Before we continue, please note that today's discussion will contain forward-looking statements made under the Safe Harbor Provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties, as such the company's results may be materially different from the views expressed today. Further information regarding 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 we have 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, 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'm pleased to deliver the following brief remarks on behalf of Mr. Dong.

In the first quarter of 2023, amidst the soft microenvironment and seasonal headwinds, we achieved steady development, maintaining a stable user scale year-over-year and delivering total net revenues of RMB1.95 billion and non-GAAP net income of RMB 85.5 million. During the quarter, we continued to make improvements in our content offerings, product and technology in preparation for a more favorable market environment ahead.

On the user side, Huya Live mobile MAUs reached 82.1 million in the first quarter, up slightly compared with the same period last year. The first quarter is typically a low season for live-streaming activities due to the Chinese New Year holidays. Furthermore, given China's reopening early in the first quarter this year, users and broadcasters dedicated more time to offline entertainment activities. With this in mind, we continue to spend prudently on promotional and marketing channel, reaching 37% year-over-year decline in sales and marketing expenses in the first quarter.

We believe our appealing e-sports and entertainment programs offering, as well as our continued efforts to enhance our process with interactive features help us sustain user engagement during the period. We have been closely monitoring changes in the dynamic market environment and striving to quickly and flexibly refine our content and operational strategies to better meet our users' need.

Next let me share with you some updates on our recent product and technology development. In March, we held Huya Boom Night, our annual gala event and our first large-scale offline event after more than a year. Huya Boom Night recognizes and rewards our broadcasters, talent agencies and various business partners and [indiscernible] streamers and our most popular streamers. This year, we also introduced a virtual stage for the galas live broadcast for the first time, representing an upgrade from the virtual e-sports venue we launched last year. With this virtual stage, online viewers felt as if they were on-site in an immersive live atmosphere. We also add the greatest interaction features to make this viewing experience even more fun and exciting.

For example, we were assessing the virtual screen were able to join live performance [indiscernible] showing their support through their Avatar costumes and decoration and vote for their favorite team. Most of our viewers also had access to our [indiscernible] graffiti tools which allow them to draw pictures and graffiti designs and simultaneously display them on the screen of the live stage for the on-site audience to enjoy. Encouragingly, the number of total online interaction and the popularity index of this event on our platform also less cost [indiscernible]. We believe features like these help to promote the integration of online and offline performances and thus enables cooperation and interaction with users.

Building on the success of this flagship event, we plan to bring these features to our broadcasters and users in more scenarios in the future. Recently, the interactive game category on our platform has been gaining more traction as interactive games allow viewers to directly engage with broadcasters and influence game outcomes in real-time, creating a highly interactive and engaging experience. In response to the [indiscernible] we have introduced several interactive games through our Huya mini tool open platform. Enable broadcasters to select and apply those tools during their streaming section. Currently, our most popular interactive game, [indiscernible] feature streamers and relationships built while user participation in competition through gifting and bullet chatting. [indiscernible] offers real-time interaction between broadcasters and viewers from [indiscernible].

Although still at an early development stage, our interactive game category is gradually calculating its core audience. We will continue to release upgrades to our existing tools and welcome additional good quality interactive games to our platform in an effort to bring more monetization opportunities to our broadcasters. We are also focusing on further building gamification elements and integrating interactive content into live streaming sections for a more dynamic [indiscernible] and interaction effect, thereby increasing real-world engagement.

As more game titles has received approval in China in recent months, we also plan to diversify our operational activities and deepen our core operation with game companies to seize the opportunities brought by new game launches. For example, through our Gift Drop feature, broadcasters and viewers can gift the exclusive game tools and other free gifts [indiscernible]for use in new games such as [indiscernible]. We are also organizing platform-based competition for new games, inviting popular broadcasters to participate, leveraging our strong ability to monitor new games and our proven success in game promotions. We are confident we can identify and offer attractive new game content and enhance new games popularity, thus further solidifying our leading position in games live streaming market and increasing our presence in the game value chain.

While we're still facing some external uncertainties in the near-term, we remain positive about the overall market recovery process. Our efforts across content enrichment, product advancement and exploration of commercial opportunities, as well as our cost improvements in operational efficiency, assessing the stage for our long-term development. Also, as Tencent recently increased its holding of Huya's share, we look forward to deeper collaboration with Tencent Group and enjoy the synergies we can create together. We will continue to seek growth opportunities as the business environment rebounds with an eye to creating sustainable value for our users, broadcasters and all other stakeholders.

This concludes Mr. Dong's remarks. Now I will continue with some updates on our content enrichment and diversification initiatives.

During the first quarter of 2023, we broadcasted around 35 third-party professional e-sports tournaments, attracting a viewership of over 400 million. While we experienced a gradual uptick in the number of professional talents, starting from the beginning of this year, the overall quantity of tournaments in the first quarter was lower than that of Q1 last year, primarily due to our stricter content procurement policies and some scheduling disruptions immediately following China's reopening.

Our most popular events during the quarter included LPL Spring, KPL Spring and CFPL, as well as our exclusive broadcast of LCK Spring and CS:GO tournament, EPL Season 17, and IEM [indiscernible]. We also broadcasted around 15 self-organized e-sports channels and entertainment PGC shows in the first quarter, generating total viewership of approximately 77 million. Two stand-outs this quarter were Huya Zhanshen Cup for Peacekeeper Elite and [indiscernible] Cup for Crossfire Mobile. Our partnership with CFM enable our viewers to create a variety of Huya custom game tools while watching [indiscernible] cup matches, showcasing our cross-promotional capabilities also, as we strive to enrich our content calenderer, we launched Huya [indiscernible] capturing the attention of [indiscernible] across our platform. As always, we will dramatically adjust our offering of self-produced tournaments and programs according to users' interest as we seek to complement the licensed professional content supply on our platform.

In addition, during our annual gala period in March, we hosted an e-sport event Huya Boom Night, inviting popular streamers, celebrities and [indiscernible] player to enjoy competition among the game titles, including the League of Legends, Honor of King and Identity 5 held in Macau. These large e-sports events not only engage a wide audience, both online and on-site, it also helped more e-sports culture exchange among youth group in the Guangdong, Hong Kong, Macau, Greater Bay area.

Next, let me provide some color on our operational optimization efforts. In the first quarter, our content licensing costs decreased significantly year-over-year and quarter-over-quarter, primarily due to the pricing term adjustments following the amended licensing agreement for LoL matches in January, as well as our reduced procurement and production of license and self-organized content. We also continue to realize saving of broadcaster related costs and bandwidth usage through detailed ROI analysis and efficient use of technical resources. As a result, we achieved a nice rebound in our gross margin, nearly reaching the first quarter of 2022's level despite lower total revenues this quarter.

We also solidified our efficiency gain, reducing our total operating expenses in the first quarter by 26% year-over-year and 7% compared with the previous quarter. Therefore, we narrow our operating loss and achieved a positive net profit this quarter. I also would like to point out that while we expect overall tournament content costs to decline this year compared to 2022, tournament content costs will still weigh more heavily in the second half of the year due to the seasonality of event schedule. This may create some ongoing fluctuations in our profit level.

Next, moving on to our Q1 financial details. Our total net revenues were RMB1.95 billion for Q1, a decline from RMB2.46 billion for the same period last year. Live streaming revenues were RMB1.86 billion for Q1 compared with RMB2.15 billion for the same period last year. The decrease was primarily due to a decreased number of paying users on Huya Live. As the micro and regulatory environment continue to adversely affect paying user sentiment.

Advertising and other revenues were RMB89.3 million [indiscernible] RMB313 million for the same period last year. This was primarily due to a significant decrease in content sub-licensing revenues, as well as soft demand for advertising services resulting from the challenging macro environment. As we mentioned previously, following our amended licensing agreement for LoL matches in January, we no longer own the licensing rights for LPL matches during the 2023 to 2025 period. While the sub-licensing of those LPL matches was a primary contributor to our content sub-licensing revenues in 2022.

Cost of revenues decreased by 25% year-over-year to RMB1.69 billion for Q1, primarily due to decreased revenue sharing fees and content costs, as well as bandwidth costs. Revenue sharing fees and content costs decreased by 18% year-over-year to RMB1.49 billion for Q1, primarily due to the decrease in revenue sharing fees associated with the decline in live streaming revenues and lower costs related to the e-sport content, as well as content creators. Bandwidth costs decreased by 44% year-over-year to RMB94 million for Q1. This was primarily due to improved bandwidth cost management and continued technology enhancement efforts, as well as less bandwidth usage as a result of strategic adjustments in our overseas business to remain focused on key markets.

Gross profit was RMB256 million for Q1, primarily due to lower revenues. Gross margin was 13.2% for Q1. Excluding share-based compensation expenses, non-GAAP gross profit was RMB265 million and non-GAAP gross margin was 14.6% for Q1. Research and development expenses decreased by 22% year-over-year to RMB152 million for Q1, primarily due to decreased personnel-related expenses and share-based compensation expenses.

Sales and marketing expenses decreased by 37% year-over-year to RMB91 million for Q1, primarily due to decreased marketing and promotion fees, as well as personnel-related expenses. General and administrative expenses decreased by 16% year-over-year to RMB68 million for Q1, primarily due to decreased personnel-related expenses and share-based compensation expenses. Other income was RMB4 million for Q1 compared with RMB28 million for the same period of 2022, primarily due to lower tax refunds and government subsidies. As a result, operating loss was RMB51 million for Q1 compared with RMB60 million for the same period of 2022.

Interest and short-term investment income were RMB96 million for Q1 compared with RMB59 million for the same period of 2022, primarily due to increased interest rates. Net income attributable to Huya Inc. was RMB45 million for Q1 compared with a net loss attributable to Huya of RMB3 million for the same period of 2022. Non-GAAP net income attributable to Huya Inc. was RMB86 million for Q1 compared with RMB47 million for the same period of 2022. Non-GAAP net income margin was 4.4% for Q1.

Diluted net income per ADS was RMB0.18 for Q1. Non-GAAP diluted net income per ADS was RMB0.35 for Q1. As of March 31, 2023, the company had cash and cash equivalents, short-term deposits, short-term investments and long-term deposits of RMB10.3 billion compared with RMB10.7 billion as of December 31, 2022.

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

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and -answer session. [Operator Instructions] First question comes from the line of Ritchie Sun from HSBC. Please go ahead.

Ritchie Sun

[Foreign Language] Thank you management for taking my questions. I will translate it myself. So after reopening and we've seen more offline entertainment activities coming back. So how does the impact [indiscernible] platforms, live streaming platforms like Huya, in terms of the user behavior as well as the consumption? Thank you.

Rongjie Dong

[Foreign Language] [interrupted] In the first quarter of this year, the behavior of users and streamers on our platform was mainly affected by the following aspects. Generally speaking, the Chinese New Year period used to be the off season for live broadcast activities and the frequency of the streamers are usually reduced with less corresponding -- as well as less corresponding events. So the viewing was affected.

In addition, the Chinese New Year this year was earlier than previous years, coupled with huge infection numbers of the streamers. Therefore, it affected the behaviors of users and streamers. With the optimization of prevention and control measures across the country, we noticed that some users and streamers shifted to offline entertainment activities in a compensatory manner, which affected the live streamers, as well as the users viewing in the short term, especially the viewing frequency and duration of the long tail uses. Thus affected the uses consumption on the platform to a certain extend.

We believe that these impacts are relatively temporary and also on the whole, we expect that our users viewing will gradually recover and become more stable. In the second quarter of this year, there are some short vacations, and these vacations had increased traveling’s and other entertainment activities taking place to our uses and causing some fluctuations to the viewing times on our platforms. So in the future, we'll continue to monitor the users and streamers behaviors and to provide appropriate content and operational activities further.

Despite these external influences, we continue to fine tune our content and product in order to strive to increase the user participation. And so that will be able to maintain a steady growth of our user scale in the first quarter on a year-over-year basis, maintain a prudent spending on promotion in channels. For example, we have upgraded the virtual e-sports menu launched last year in March, bringing -- last March, bringing in more interactive virtual stage to the annual grand gala of Huya. The total number of online interactions of this activity also exceeded the record of previous parties. This function is also conducive to better integration of online and offline content in the context of an increased offline activities. We also plan to further expand these application and technologies and offer this function to more live broadcasting scenario. The video content and community functions provided -- platforms are also conducive to users consumption of content during the non-live broadcast period during the speaker of the streamer.

Hanyu Liu

Thank you. Let's have the next question please.

Operator

Thank you for the questions. One1 moment for the next question. Next up, we have the line from Yiwen Zhang from China Renaissance. Please go ahead.

Yiwen Zhang

[Foreign Language] Thanks for taking my question. For my question is regarding this year's revenue trend, Can you discuss in details including about live streaming and then non-live streaming revenue? Thank you.

Ashley Wu

[Foreign Language] [interrupted] We communicated this in the last quarter's earnings call. The live broadcast revenue in the first half of this year is still relatively weaker on a year-on-year basis, mainly because of the macroeconomic factors and the year-on-year impact of last year's live broadcast policy on the revenue. Although the live broadcast revenue in the first quarter is still declined through our operational efforts, the decline was narrowing down than the previous quarter. And as I mentioned earlier, we noticed that the recent increase in offline entertainment activities may also have some short term influences over the revenue of live streaming activities. So we will continue to observe and monitor its impact.

We are still really optimistic about the recovery of the overall economic environment and also we remain positive about the future launch of more game titles. We also hope that by consolidating our position in the live game market and by seizing the opportunity of new games we will be able to promote new forms of live broadcasting, such as live interactive games and also improve our monetization capability in overseas from live broadcasting, so that we'll be able to gradually recover the revenue in subsequent quarters.

In terms of advertising and other revenue, if we exclude the impact of the significant decline in copyright revenue caused by the revision of -- the amendment of LoL copyright agreements, advertising revenue in the first quarter was also relatively low due to seasonal and macroeconomic environment. However, we expect that advertising business will benefit from the recovery of the market environment and increase the demand for game advertising brought by the new launch of games. So its revenue will have an opportunity to gradually recover. At the same time, we'll continue to optimize the video content and game community so as to lay the good foundation for future and subsequent increases of advertisement and monetization on new games and continue to explore new revenue growth possibilities.

Hanyu Liu

Thank you. Next question, please.

Operator

Thank you. One moment for the next question. Next question comes from the line of Lei Zhang from Bank of America. Please go ahead.

Lei Zhang

[Foreign Language] Thanks management for taking my question. My first question is mainly regarding the impact from new game supply to our live streaming business this year? Secondly, can you give us an update on the cooperation with Tencent? Thank you.

Rongjie Dong

[Foreign Language] [interrupted] As a live platform for games, Huya is closely related to the game industry. So from the perspective of game players, the platform can provide opportunity for the players to understand and discover new games and consume the relevant content after playing the game. And for the game companies, we are able to help them promote and expand their influence for existing game users to retain and to help the old uses to return with the normalization of game title approval, new game titles will become available in the market. And we believe that this will help us to bring more opportunities for user expansion and promotion cooperation opportunities with big game companies.

Because the new games will bring increased supply of live content and if these content and new games become popular, it would be very conducive to increase the users and to promote their activities on our platforms. We would also like to attract users and improve their viewing levels through diversified activities, including providing launch and viewing incentives, holding platform events. And we can also strengthen our cooperation with the game companies such as joint launch of interactive play methods and platform specific game props. So that we can help the users increase their participation and to strengthen our role in the game industry.

Compared with competitive games such as [indiscernible]. Well, these probably would have better live viewing experiences for the users and would be very conducive to accumulating new users. But for other types of games, especially those that are really attractive to users, we would also allocate our resources accordingly according to the launch and viewing data to better meet the demands of our users. And the impact of new game titles would have an impact on our revenue as well even though it's a little bit slower, because they take some time for their live broadcasters to accumulate their core users and transform them into paying users. And of course, we would provide some opportunities for them to cooperate and interact with one another through our operational activities on the platform.

As for our corporation with Tencent, we have always been very close with Tencent on the business level, especially in games and events. And so, Huya featured live interactive function in a number of Tencent owned games, we have dependent links between game accounts and platform accounts. We help to enhance the activity of the game, while bringing users to a better live viewing experiences. And with more games coming online we could also promote the popularity of those new games and their relevant live content. And for example, recently there's [indiscernible] and Metal Slug as well as [indiscernible] that will soon be launched. We are actively cooperating with Tencent on these games.

In terms of e-sports events, we have established a strategic corporation relationship with a member of Tencent game events together with our industry leading live broadcast technologies and activities, we are able to touch and reach a wider range of users. And also at the same time, we held a number of officially licensed events and tournament, so as to enrich our self-organized events and contents. And we are also exploring new ways of cooperation by utilizing our technologies in audio and video streamers and game content and et cetera, so as to have deeper corporation and generate better synergy with Tencent.

Hanyu Liu

Thank you. Next question, please.

Operator

One moment for the next question. Next question will come from the line of Jasmine Wang from Credit Suisse. Please proceed.

Jasmine Wang

[Foreign Language] Thanks management for taking my question. After effective cost control in 1Q, how should we think about cost saving in terms of COGS and [OPAS] (ph) for the rest of the year? And what is the profitability trend this year? Thank you.

Ashley Wu

[Foreign Language] [interrupted] In terms of the streamer costs, the overall market competition environment has not changed too much from the previous period and so we maintained a similar sharing ratio in the first quarter. At present, we had also made some fine tuning of the sharing policies. These can enable us to provide different levels of first sharers according to the performance and demand in different categories. In terms of the signing fees, we continue to conduct a more strict analysis and control of the cost of the signing fees. So the cost in the first quarter was reduced. And at present, we expect that the future market trends will remain relatively stable and will continue to pay attention to the trend of our competitors and make flexible adjustments to the streamer incentive policy.

In terms of the cost of copyright events and self-organized content, we had also achieved very effective savings in the first quarter. On one hand, the number of events was reduced due to more strict screening of event procurement and production. At the same time, the prices of some of our events, especially the LPL enjoyed better terms through the amendment of the copyright agreement. So we're expecting that the cost of events and self-organized content in the whole year will be significantly lower than that in the year of 2022. And of course, because of events will be affected by rescheduling of events. So there will be more large scale events and activities in the second quarter and in the second half of the year compared with first quarter. So this will probably bring some fluctuations to the total cost of our copyright events and content.

Also speaking, we made very good progress in cost optimization in the first quarter. Even though with the decrease in the revenue, our gross profit margin in the first quarter had significantly improves from quarter-over-quarter basis and reached level similar to the same period last year. And from the perspective of the whole year, we believe that the gross margin will improve compared with 20 22.

And in terms of the operating costs, our Q1 total operating expenses decreased by 26% year-over-year and 7% quarter-over-quarter. And since we strengthened our cost cutting and efficiency improvement measures in the second half of -- in the second quarter of last year, our Q1 total operating expenses has decreased by double digits for four consecutive quarters. And we are hoping to further consolidate the achievements that we had got so far and efficiency improvement and to look forward to have an even better optimization of operating costs for the whole year.

We made a net profit in the first quarter of this year. And even though the profit rates probably would be subject to subsequent fluctuations due to seasonality in later quarters, we will aim to further narrow the losses and improve the profitability capability from the perspective of the whole year.

Hanyu Liu

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

Operator

Certainly. One moment for the next question. Next up, we have the line from Thomas Chong from Jefferies. Please proceed.

Thomas Chong

[Foreign Language] So I translate myself. Thanks management for taking my question. My question is, how should we think of the current regulation environment on the live streaming and its impact? Thanks.

Ashley Wu

[Foreign Language] [interrupted] As far as we understand, the overall live broadcast regulatory environment has not changed much compared with previous quarters. And the requirement for the content for the behavior of streamers and users and the protection of minors have always been relatively stringent from the government. So our industry continues to come under regulatory attention. I believe that the purpose of doing so is to better regulate the industry and to promote healthy and sustainable development as a whole. So under current environment climate Huya will continue to strengthen our supervision and maintain an effective monitoring mechanism for the content on our platform and to guide the streamers and the guild to strengthen their compliance awareness and improve our platform's compliance capability through technical investments and operation.

As you know that in May last year, there was a new set of streaming related policies from the government and we made adjustment accordingly on our products and operations on time in order to make sure that we meet the policy requirements and therefore cost some fluctuations in the live broadcast revenue in subsequent quarters. So we expect that the impact of such policy changes in our revenue will gradually be reduced after the second quarter of this year. And at the same time, we will keep an close eye on the policy changes by communicating regularly with our authorities and pay close attention to relevant requirements and better adapt our product and operations to make sure that we can meet the policy requirements.

Hanyu Liu

Okay. Thank you.

Operator

There's no further questions. Now I'd 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's Investor Relations through the contact information provided on our website or the Piacente Group Investor Relations. Thank you.

Operator

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