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HUYA Inc. (NYSE:HUYA)
Q3 2020 Earnings Call
Nov 11, 2020, 7:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Hello, ladies and gentlemen. Thank you for standing by for the 2020 third-quarter earnings conference call for HUYA Inc. [Operator instructions] I will now turn the call over to Ms. Dana Cheng, company investor relations.

Please go ahead.

Dana Cheng -- Investor Relations

Hello, everyone and 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 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. 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 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. Rongjie Dong. Please go ahead.

Rongjie Dong -- Chief Executive Officer

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 shorter 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 4 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 e-sports tournaments as well as a deeper cooperation with Tencent.

In Q3, our live streaming content was broadcasted in Tencent's various products such as QQ mobile, WeGame, WeChat, gaming 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 million in Q3, representing a year-over-year growth of 16%, but slightly lower than last quarter because of the relatively shorter 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 app's next month 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 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 e-sports event highlights and generate video clips 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 experiences. Meanwhile, our technology cooperation with Tencent also allowed us to create a real-time monitoring panel for e-sports tournament broadcasting. With this new panel, our hard-core 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 the 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 the 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 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 Worlds 2020 that was concluded 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, Huli, to interact with real-person broadcasters and viewers to improve experience.

We also launched 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 have 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 7.3 Class A ordinary shares of Huya, and each DouYu ADS will be exchanged for 0.73 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 Penguin e-Sports from Tencent for USD 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 Penguin's professional team, we are solidifying our dedication to the pursuit of constructing a comprehensive online destination for game- and e-sports-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.

Catherine Liu -- Chief Financial Officer

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 e-sports tournaments, among which the top tournaments included LoL Worlds 2020, LPL 2020 Summer, HoK World Champion 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 e-sports tournaments and entertainment shows and generated a total viewership of 100 million, representing 32% year-over-year growth. Following its success last quarter, Huya 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 shows side, GodLie Season 5, a long-standing Werewolf game show; All-Star Idol Academy, a talent showk and Huya Kungfu Carnival Season 2, a mixed martial arts competition were the top-performing shows as we continued our dedicated steps in the nongaming 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 e-sports 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, e-sports 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 profits 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 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 RMB 361 million for Q3. Diluted net income per ADS was RMB 1.05 and non-GAAP diluted net income per ADS was RMB 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 RMB 10.8 billion.

Along with the merger announcement that Mr. Dong mentioned earlier, our board of directors also approved a cash dividend in an aggregate amount of USD 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 ADS -- Huya ADS holders, as of the business -- as of the close of the business on certain record date 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 square meters in Foshan City, Guangdong Province, through a public auction. The company's winning bid price was approximately RMB 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.

Questions & Answers:


Operator

[Operator instructions] And our first questions comes from the line of Thomas Chong of Jefferies. Please go ahead.

Thomas Chong -- Jefferies -- Analyst

[Foreign language] 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.

Catherine Liu -- Chief Financial Officer

Thank you, Thomas. I will answer your questions. As 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 Penguin, we think there are several directions that could generate synergies such as leveraging our content over a larger user base to attract the users and also to develop new products and together explore new monetization opportunities and also to achieve some operational efficiencies. Thank you.

Rongjie Dong -- Chief Executive Officer

Thank you.

Operator

Thank you for the questions. Next question comes from the line of Vincent Yu of Needham & Co. Please go ahead.

Vincent Yu -- Needham and Company -- Analyst

Thank you. Thank you managemetn 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 that 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 category, so are we seeing any change after -- like considering the COVID has mostly, like, gone in China? [Foreign language]

Rongjie Dong -- Chief Executive Officer

[Foreign language]

Dana Cheng -- Investor Relations

OK. I will translate for Mr. Dong. Regarding your 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 road mapping for the video business.

And we have confidence that in two years -- in the next two years, we will make the user base of our video business to a considerable level. And my last point about the potential combination and its impact on to our content strategy is that, actually, the two platforms each of them has a very good pool of content quality. And the contents are actually complementary to each other as we -- each of us has its own competitive advantages. And in the year of 2021, what we are targeting at is to better consolidate the content offerings on each platforms and leverage the quality content to better serve the game developers, the broadcasters, the talent agencies as well as the users, so that game live streaming can play a better role across the industry value chain.

So that's for your first question.

Catherine Liu -- Chief Financial Officer

Vincent, I will answer your second question in terms of paying users. As you can see, in the third quarter, our paying users ARPU has increased, both year over year and quarter over quarter. I think, generally, we are seeing recover from the -- after the COVID-19 has wind down in China. We will still continue to enrich our content and improve our monetization opportunities to increase our ARPU, but of course, as you mentioned, different content categories have different ARPU.

And also, there is seasonality for our ARPU. So generally, in the first quarter, our ARPU would be relatively lower due to the spring festival, and in the fourth quarter, typically, the ARPU would be higher given the annual monetization event. Hope I answered your questions?

Vincent Yu -- Needham and Company -- Analyst

Yeah, thank you.

Operator

Thank you for the question. Next questions will come from the line of Binnie Wong of HSBC. Please go ahead.

Binnie Wong -- HSBC -- Analyst

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, right, versus last quarter, you also had a 3 million net add which I think is actually achieving that 30 million target a quarter earlier than I might expect earlier.

So if we look at it that 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.

Rongjie Dong -- Chief Executive Officer

[Foreign language]

Catherine Liu -- Chief Financial Officer

[Foreign language]

Dana Cheng -- Investor Relations

OK. I will translate for Mr. Dong. Regarding your first question on the overseas, yes, it is noticeable that our overseas MAU user growth in this quarter is actually quite outstanding.

And as we 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 a considerable user growth for the overseas business. It's actually proof that 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 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 markets. And what we will focusing on in future is more 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 thus far.

Binnie Wong -- HSBC -- Analyst

Sorry, may I just ask a very quick follow-up here. If you look at the margin side, right, like how do you see the overseas win at a certain point that it could become more profitable? And longer term, at a steady state, how will you see the overseas business margins compared to domestically?

Catherine Liu -- Chief Financial Officer

For your question, I think in October, we start to see one single country to achieve sort of relatively breakeven as of the 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 ARPU 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. Dong just mentioned, we will be focusing on building the eco -- the healthy ecosystem in each country by each country. Thank you.

Binnie Wong -- HSBC -- Analyst

Thank you.

Operator

Thank you for the questions. Next questions comes from the line of Billy Leung of Haitong International. Please go ahead.

Billy Leung -- Haitong International -- Analyst

[Foreign language] I have two questions. The first one is related to our cloud gaining progress. Can management share any color on our latest developments in this part? And the second question is on our relatively new speech service, the game companion, can management share any latest developments here as well? Thank you.

Rongjie Dong -- Chief Executive Officer

[Foreign language]

Dana Cheng -- Investor Relations

OK. 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 covering as much -- as many as 100 hit game titles right now. And what we are trying to achieve is that to optimize users' regime experience, for example, viewing angles regime just so that they can better play the game seamlessly and smoothly through our cloud gaming platform and optimize their user experiences. And as I said earlier, before yesterday, the cloud gaming platform was only on beta testing which is why we didn't spend -- we didn't invest much into promoting this cloud gaming platform. But 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-based experiences cutting-edge technology to play games.

We believe there is huge opportunities lie ahead for those 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 another time to see if the users are ready to massively switching their experiences and to try this cloud gaming platforms to play games. And Catherine will take your next question.

Catherine Liu -- Chief Financial Officer

And for your second question regarding game companion business. Our game companion business is still experiencing faster growth, especially for our [Foreign language]. So we think it's relatively a solid growth for the game companion business. However, in game companion business because the revenue recognition policy is different from our virtual gifting, 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 the -- from the accounting perspective, the game companion business has much higher margins than the virtual gifting from pure GAAP accounting perspective. OK. I hope this answers your question.

Next?

Operator

Thank you for the questions. Our next questions comes from the line of -- sorry, we have lost the request. I'll just proceed to take the next questions from Daniel Chen of JP Morgan. Please go ahead.

Daniel Chen -- J.P. Morgan -- Analyst

[Foreign language] I have two questions. The first one is on the -- what the management saying 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 hosts, top agencies, 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. Thank you.

Rongjie Dong -- Chief Executive Officer

[Foreign language]

Dana Cheng -- Investor Relations

OK. 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 game live streaming industry is quite limited. And facing the competition with Kuaishou, I think from what we have monitored internally, especially on the year-over-year growth, I think viewer impacts 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 viewer short-form business kind of operation of 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 advantages 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 capability tactics.

Operator

Thank you for the questions. In the interest of time, the last question comes from the line of Lei Zhang of Bank of America. Please go ahead.

Lei Zhang -- Bank of America Merrill Lynch -- Analyst

[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 traffic or engagement to our platform? And what's the drive to our gross margin in the fourth quarter? And secondly, on regulatory changes in place especially on live streaming's new rule and impact you can share with us?

Catherine Liu -- Chief Financial Officer

Thank you, Lei. As to the S10, we have noticed the -- sort of the user brought by S10 compared to last year has increased. But then the incremental, I think the growth in this year was relatively lower compared to last year. And for S10 because most of the S10 would hold 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 margins compared to the third quarter.

And as to your second question in terms of the authority's policies or guidelines, we are cooperating with the government, and we understand some authorities or government 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 is 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 better role in the long term. So we don't think the impact for our business would be long term. Thank you.

Operator

Thank you very much. I would like to turn the call back over to the company for closing remarks.

Dana Cheng -- Investor Relations

All right. Thank you all for joining our 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.

Operator

[Operator signoff]

Duration: 58 minutes

Call participants:

Dana Cheng -- Investor Relations

Rongjie Dong -- Chief Executive Officer

Catherine Liu -- Chief Financial Officer

Thomas Chong -- Jefferies -- Analyst

Vincent Yu -- Needham and Company -- Analyst

Binnie Wong -- HSBC -- Analyst

Billy Leung -- Haitong International -- Analyst

Daniel Chen -- J.P. Morgan -- Analyst

Lei Zhang -- Bank of America Merrill Lynch -- Analyst

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